AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 23, 1998
REGISTRATION STATEMENT NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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CHS ELECTRONICS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Florida 5045 87-0435376
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
CLAUDIO OSORIO
CHIEF EXECUTIVE OFFICER, PRESIDENT
AND CHAIRMAN OF THE BOARD
CHS ELECTRONICS, INC.
2000 N.W. 84TH AVENUE
2000 N.W. 84TH AVENUE
MIAMI, FLORIDA 33122
MIAMI, FLORIDA 33122
(305) 908-7200
(305) 908-7200
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) INCLUDING AREA CODE, OF AGENT FOR SERVICE)
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COPY TO:
PAUL BERKOWITZ, ESQ.
GREENBERG TRAURIG HOFFMAN LIPOFF
ROSEN & QUENTEL, P.A.
1221 BRICKELL AVENUE
MIAMI, FLORIDA 33131
(305) 579-0685
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EXACT NAME JURISDICTION PRIMARY STANDARD I.R.S. EMPLOYER
OF OF INDUSTRIAL CLASSIFICATION IDENTIFICATION
ADDITIONAL REGISTRANTS* ORGANIZATION CODE NUMBER NUMBER
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CHS Electronics, Inc. ......... Nevada 5045 77-0357031
CHS Delaware, Inc. ............ Delaware 5045 65-0795878
CHS Americas, Inc. ............ Florida 5045 65-0793642
CHS Delaware L.L.C. ........... Delaware 5045 N/A
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* Address and telephone number of principal executive offices are the same as
those of CHS Electronics, Inc.
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
OF SECURITIES TO BE REGISTERED REGISTERED PER UNIT(1) OFFERING PRICE(1) REGISTRATION FEE
97/8% Senior Notes due 2005 ....... $200,000,000 100% $200,000,000 $59,000
Guarantees of 97/8% Senior
Notes due 2005 ................... $200,000,000 (2) (2) None
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(1) Estimated pursuant to Rule 457 solely for the purpose of calculating the
registration fee.
(2) No further fee is payable pursuant to Rule 457(n).
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THE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS
SHALL FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED APRIL 23, 1998
PROSPECTUS
CHS ELECTRONICS, INC.
OFFER TO EXCHANGE ITS
9 7/8% SENIOR NOTES DUE 2005
FOR ANY AND ALL OF ITS OUTSTANDING
9 7/8% SENIOR NOTES DUE 2005
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE
AT 5:00 P.M., NEW YORK CITY TIME,
ON , 1998, UNLESS EXTENDED
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CHS Electronics, Inc., a Florida corporation (the "Company"), hereby
offers, upon the terms and subject to the conditions set forth in this
Prospectus (as the same may be amended or supplemented from time to time, the
"Prospectus") and in the accompanying Letter of Transmittal (which together
constitute the "Exchange Offer"), to exchange up to $200,000,000 aggregate
principal amount of its 9 7/8% Senior Notes due 2005 (the "New Notes") for a
like principal amount of its outstanding 9 7/8% Senior Notes due 2005 (the "Old
Notes", and together with the New Notes, the "Notes"), of which $200,000,000
aggregate principal amount are outstanding.
The New Notes are being offered in order to satisfy certain obligations of
the Company under the Registration Rights Agreement, dated as of April 9, 1998
(the "Registration Rights Agreement"), among the Company and SBC Warburg Dillon
Read, Inc., Barclays Capital, acting through BZW Securities Limited, ScotiaBank
Capital Markets (USA) Inc. and Raymond James & Associates, Inc. (the "Initial
Purchasers"). The terms of the New Notes are identical in all material respects
to the respective terms of the Old Notes, except that (i) the New Notes have
been registered under the Securities Act of 1933, as amended (the "Securities
Act"), and therefore will not be subject to certain restrictions on transfer
applicable to the Old Notes and (ii) holders of the New Notes will generally
not be entitled to certain rights, including the payment of Liquidated Damages
(as defined), pursuant to the Registration Rights Agreement. In the event that
the Exchange Offer is consummated, any Old Notes which remain outstanding after
consummation of the Exchange Offer and the New Notes issued in the Exchange
Offer will vote together as a single class for purposes of determining whether
holders of the requisite percentage in outstanding principal amount thereof
have taken certain actions or exercised certain rights under the Indenture (as
defined herein).
The New Notes will bear interest at the rate of 9 7/8% per annum, payable
semi-annually on April 15 and October 15 of each year, commencing on August 15,
1998. The New Notes will mature on April 15, 2005. The New Notes will be
redeemable at the option of the Company, in whole or in part, at any time on or
after April 15, 2002, at the redemption prices set forth herein, plus accrued
and unpaid interest to the redemption date. In addition, at any time on or
prior to April 15, 2001, the Company may redeem up to 35% of the original
principal amount of Notes at a redemption price equal to 109.875% of the
principal amount thereof, plus accrued and unpaid interest and Liquidated
Damages, if any, to the redemption date, with the net cash proceeds of one or
more Equity Offerings (as defined); provided that at least $125.0 million
aggregate principal amount of Notes remain outstanding immediately following
any such redemption. Upon a Change of Control (as defined), the Company will be
required to offer to purchase all outstanding Notes at a purchase price equal
to 101% of the principal amount thereof, plus accrued and unpaid interest and
Liquidated Damages, if any, to the purchase date. See "Description of the
Notes--Repurchase of Notes upon a Change of Control."
The Indebtedness (as defined herein) evidenced by the New Notes will rank
senior to all subordinated Indebtedness of the Company and PARI PASSU in right
of payment with all other unsubordinated Indebtedness of the Company, including
a guarantee by the Company of all indebtedness under the New Credit Facility
(as defined herein, see "Certain Indebtedness"). The Indebtedness evidenced by
the New Notes will be guaranteed on an unsecured basis by certain subsidiaries
of the Company as described below (the "Subsidiary Guarantors"). Such
guarantees (the "Subsidiary Guarantees") will rank senior to all subordinated
Indebtedness of the Subsidiary Guarantors and PARI PASSU in right of payment
with other unsubordinated Indebtedness of the Subsidiary Guarantors; HOWEVER,
in those cases where future Subsidiary Guarantors also become guarantors or
borrowers of Indebtedness under the New Credit Facility or certain other
Indebtedness, such Subsidiary Guarantees may be subordinated thereto. The
initial Subsidiary Guarantors, all of which are giving senior and
unsubordinated Subsidiary Guarantees, will be certain direct and indirect U.S.
Subsidiaries of the Company listed herein. See "Description of the
Notes--Ranking and Guarantees." The indenture governing the issue of the Notes
(the "Indenture") requires future Restricted Subsidiaries incorporated under
the laws of any state or territory of the United States to become Subsidiary
Guarantors.
This Prospectus and the Letter of Transmittal are first being mailed to
all holders of Old Notes on , 1998.
SEE "RISK FACTORS" BEGINNING ON PAGE 14 FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BY HOLDERS IN DECIDING WHETHER TO TENDER OLD
NOTES IN THE EXCHANGE OFFER.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE. ---------------
THE DATE OF THIS PROSPECTUS IS , 1998
The Company is making the Exchange Offer of the New Notes in reliance on
the position of the staff of the Division of Corporation Finance of the
Securities and Exchange Commission (the "Commission") as set forth in certain
interpretive letters addressed to third parties in other transactions. However,
the Company has not sought its own interpretive letter and there can be no
assurance that the staff of the Division of Corporation Finance of the
Commission would make a similar determination with respect to the Exchange
Offer as it has in such interpretive letters to third parties. Based on these
interpretations by the staff of the Division of Corporation Finance of the
Commission, and subject to the two immediately following sentences, the Company
believes that New Notes issued pursuant to this Exchange Offer in exchange for
Old Notes may be offered for resale, resold and otherwise transferred by a
holder thereof (other than a holder who is a broker-dealer) without further
compliance with the registration and prospectus delivery requirements of the
Securities Act, provided that such New Notes are acquired in the ordinary
course of such holder's business and that such holder is not participating, and
has no arrangement or understanding with any person to participate, in a
distribution (within the meaning of the Securities Act) of such New Notes.
However, any holder of Old Notes who is an "affiliate" of the Company or who
intends to participate in the Exchange Offer for the purpose of distributing
New Notes, or any broker-dealer who purchased Old Notes from the Company to
resell pursuant to Rule 144A under the Securities Act ("Rule 144A") or any
other available exemption under the Securities Act, (a) will not be able to
rely on the interpretations of the staff of the Division of Corporation Finance
of the Commission set forth in the above-mentioned interpretive letters, (b)
will not be permitted or entitled to tender such Old Notes in the Exchange
Offer and (c) must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any sale or other
transfer of such Old Notes unless such sale is made pursuant to an exemption
from such requirements. In addition, as described below, if any broker-dealer
holds Old Notes acquired for its own account as a result of market-making or
other trading activities and exchanges such Old Notes for New Notes, then such
broker-dealer must deliver a prospectus meeting the requirements of the
Securities Act in connection with any resales of such New Notes.
Each holder of Old Notes who wishes to exchange Old Notes for New Notes in
the Exchange Offer will be required to represent that (i) it is not an
"affiliate" of the Company, (ii) any New Notes to be received by it are being
acquired in the ordinary course of its business, (iii) it has no arrangement or
understanding with any person to participate in a distribution (within the
meaning of the Securities Act) of such New Notes, and (iv) if such holder is
not a broker-dealer, such holder is not engaged in, and does not intend to
engage in, a distribution (within the meaning of the Securities Act) of such
New Notes. In addition, the Company may require such holder, as a condition to
such holder's eligibility to participate in the Exchange Offer, to furnish to
the Company (or an agent thereof) in writing information as to the number of
"beneficial owners" (within the meaning of Rule 13d-3 under the Securities
Exchange Act of 1934, as amended (the "Exchange Act")) on behalf of whom such
holder holds the Notes to be exchanged in the Exchange Offer. Each
broker-dealer that receives New Notes for its own account pursuant to the
Exchange Offer must acknowledge that it acquired the Old Notes for its own
account as the result of market-making activities or other trading activities
and must agree that it will deliver a prospectus meeting the requirements of
the Securities Act in connection with any resale of such New Notes. The Letter
of Transmittal states that by so acknowledging and by delivering a prospectus,
a broker-dealer will not be deemed to admit that it is an "underwriter" within
the meaning of the Securities Act. Based on the position taken by the staff of
the Division of Corporation Finance of the Commission in the interpretive
letters referred to above, the Company believes that broker-dealers who
acquired Old Notes for their own accounts, as a result of market-making
activities or other trading activities ("Participating Broker-Dealers"), may
fulfill their prospectus delivery requirements with respect to the New Notes
received upon exchange of such Old Notes (other than Old Notes which represent
an unsold allotment from the original sale of the Old Notes) with a prospectus
meeting the requirements of the Securities Act, which may be the prospectus
prepared for an exchange offer so long as it contains a description of the plan
of distribution with respect to the resale of such New Notes. Accordingly, this
Prospectus, as it may be amended or supplemented from time to time, may be used
by a Participating Broker-Dealer during the period referred to below in
connection with resales of New Notes received in exchange for Old Notes where
such Old Notes were acquired by such Participating Broker-Dealer for its own
account as a result of market-making or other
i
trading activities. A Participating Broker-Dealer who intends to use this
Prospectus in connection with the resale of New Notes received in exchange for
Old Notes pursuant to the Exchange Offer must notify the Company, or cause the
Company to be notified, on or prior to the Expiration Date, that it is a
Participating Broker-Dealer. Such notice may be given in the space provided for
that purpose in the Letter of Transmittal or may be delivered to the Exchange
Agent at one of the addresses set forth herein under "The Exchange
Offer--Exchange Agent." Any Participating Broker-Dealer who is an "affiliate"
of the Company may not rely on such interpretive letters and must comply with
the registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction. See "The Exchange Offer--Resales of New
Notes."
In that regard, each Participating Broker-Dealer who surrenders Old Notes
pursuant to the Exchange Offer will be deemed to have agreed, by execution of
the Letter of Transmittal, that, upon receipt of notice from the Company of the
occurrence of any event or the discovery of any fact which makes any statement
contained or incorporated by reference in this Prospectus untrue in any
material respect or which causes this Prospectus to omit to state a material
fact necessary in order to make the statements contained or incorporated by
reference herein, in light of the circumstances under which they were made, not
misleading or of the occurrence of certain other events specified in the
Registration Rights Agreement, such Participating Broker-Dealer will suspend
the sale of New Notes pursuant to this Prospectus until the Company has amended
or supplemented this Prospectus to correct such misstatement or omission and
has furnished copies of the amended or supplemented Prospectus to such
Participating Broker-Dealer or the Company has given notice that the sale of
the New Notes may be resumed, as the case may be.
Prior to the Exchange Offer, there has been only a limited secondary
market and no public market for the Old Notes. The New Notes will be a new
issue of securities for which there currently is no market. Although the
Initial Purchasers have informed the Company that they currently intend to make
a market in the New Notes, they are not obligated to do so, and any such market
making may be discontinued at any time without notice. Accordingly, there can
be no assurance as to the development or liquidity of any market for the New
Notes. The Company currently does not intend to apply for listing of the New
Notes on any securities exchange or for quotation through the National
Association of Securities Dealers Automated Quotation System.
Any Old Notes not tendered and accepted in the Exchange Offer will remain
outstanding and will be entitled to all the same rights and will be subject to
the same limitations applicable thereto under the Indenture (except for those
rights which terminate upon consummation of the Exchange Offer). Following
consummation of the Exchange Offer, the holders of Old Notes will continue to
be subject to all of the existing restrictions upon transfer thereof and the
Company will not have any further obligation to such holders (other than under
certain limited circumstances) to provide for registration under the Securities
Act of the Old Notes held by them. To the extent that Old Notes are tendered
and accepted in the Exchange Offer, a holder's ability to sell untendered Old
Notes could be adversely affected. See "Risk Factors--Consequences of a Failure
to Exchange Old Notes."
THIS PROSPECTUS AND THE RELATED LETTER OF TRANSMITTAL CONTAIN IMPORTANT
INFORMATION. HOLDERS OF OLD NOTES ARE URGED TO READ THIS PROSPECTUS AND THE
RELATED LETTER OF TRANSMITTAL CAREFULLY BEFORE DECIDING WHETHER TO TENDER THEIR
OLD NOTES PURSUANT TO THE EXCHANGE OFFER.
Old Notes may be tendered for exchange on or prior to 5:00 p.m., New York
City time, on , 1998 (such time on such date being hereinafter called
the "Expiration Date"), unless the Exchange Offer is extended by the Company
(in which case the term "Expiration Date" shall mean the latest date and time
to which the Exchange Offer is extended). Tenders of Old Notes may be withdrawn
at any time on or prior to the Expiration Date. The Exchange Offer is not
conditioned upon any minimum principal
ii
amount of Old Notes being tendered for exchange. However, the Exchange Offer is
subject to certain events and conditions which may be waived by the Company and
to the terms and provisions of the Registration Rights Agreement. Old Notes may
be tendered in whole or in part in denominations of $1,000 and integral
multiples thereof. The Company has agreed to pay all expenses of the Exchange
Offer. See "The Exchange Offer--Fees and Expenses." Holders of the Old Notes
whose Old Notes are accepted for exchange will not receive interest on such Old
Notes and will be deemed to have waived the right to receive any interest on
such Old Notes accrued from and after April 9, 1998. See "The Exchange
Offer--Interest on New Notes."
The Company will not receive any cash proceeds from the issuance of the
New Notes offered hereby. No dealer-manager is being used in connection with
this Exchange Offer. See "Use of Proceeds" and "Plan of Distribution."
THIS PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH ARE NOT
PRESENTED HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS ARE AVAILABLE UPON
REQUEST FROM CRAIG TOLL, CHIEF FINANCIAL OFFICER, CHS ELECTRONICS, INC., 2000
N.W. 84TH AVENUE, MIAMI, FLORIDA 33122, TELEPHONE NUMBER (305) 908-7200. IN
ORDER TO ENSURE TIMELY DELIVERY OF THE DOCUMENTS, ANY REQUEST SHOULD BE MADE BY
, 1998.
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iii
SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND THE FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO,
APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, ALL
FINANCIAL INFORMATION AND SHARE DATA IN THIS PROSPECTUS HAVE BEEN ADJUSTED TO
REFLECT A ONE-FOR-TWO REVERSE STOCK SPLIT OF THE COMPANY'S COMMON STOCK, PAR
VALUE $.001 PER SHARE (THE "COMMON STOCK"), IN MARCH 1996 AND A THREE-FOR-TWO
STOCK SPLIT OF THE COMMON STOCK IN SEPTEMBER 1997.
THE COMPANY
CHS Electronics, Inc. ("CHS" or the "Company") is a leading international
distributor of microcomputer products, including personal computers,
peripherals, networking products and software. As of December 31, 1997, CHS
operated in 39 countries, primarily in Western Europe, Eastern Europe and Latin
America, and serviced an active customer base of more than 102,000 resellers.
In 1997, approximately 90% of the products sold by the Company were
manufactured by 60 equipment and software vendors, including such market
leaders as Hewlett-Packard, Microsoft, IBM, Seagate, Compaq, Quantum, Western
Digital, Intel, 3Com, Toshiba, Epson, Sun and Creative Labs. The Company is a
focused distributor, as opposed to a broadline distributor, and seeks to
represent leading vendors within specific product categories. CHS believes that
it is the third largest distributor of microcomputer products in the world and
the largest distributor in Western Europe, Latin America and Eastern Europe.
The Company has no significant sales in the United States.
The Company has pursued an aggressive strategy of growth through
acquisitions which, together with growth in its existing business, has enabled
the Company to significantly increase net sales and achieve strong operating
results. From 1993 to 1997, the Company's net sales increased from $146.4
million to $4.8 billion and EBITDA increased from $1.0 million to $119.8
million, reflecting compound annual growth rates of 139% and 230%,
respectively. Pursuant to its growth strategy, between January 1995 and
December 1997, the Company made 26 acquisitions, four of which have had a
significant impact on the Company based upon their contribution of revenues to
the Company. On October 3, 1997, the Company completed the acquisition of 97.4%
of the outstanding capital stock of Santech Micro Group ASA ("Santech"), the
largest distributor of microcomputer products in Scandinavia, with operations
in Norway, Sweden and Denmark, for approximately $125 million (the "Santech
Acquisition"). The Company expects to acquire the remainder of the shares at
the same per share price. On August 4, 1997, the Company purchased all of the
outstanding capital stock of Karma International S.A. ("Karma"), a distributor
of personal computer components to over 10,000 customers in 18 countries in
Europe, the Middle East and Asia through 28 offices, for $160 million (the
"Karma Acquisition"). In March 1997, the Company acquired all of the
outstanding capital stock of Frank & Walter Computer GmbH ("Frank & Walter"),
which the Company believes was, at the time of acquisition, the fourth largest
distributor of microcomputer products in Germany, for 3.3 million shares of
Common Stock (the "Frank & Walter Acquisition"). In October 1996, the Company
acquired seven European and Latin American distribution businesses
(collectively, the "Merisel Companies") from Merisel, Inc. for $148 million
(the "Merisel Acquisition").
The large number and diversity of resellers make it cost efficient for
manufacturers to outsource a portion of their distribution, credit, inventory,
marketing and customer support requirements to distributors such as the
Company. Similarly, due to the large number of product manufacturers, resellers
generally cannot efficiently establish direct purchasing relationships with
each manufacturer and instead rely on distributors to satisfy their product,
financing, marketing and technical support needs. The Company believes that the
computer distribution industry is consolidating as access to financial
resources and economies of scale become more critical and as certain
manufacturers authorize fewer distributors.
1
The Company's Pan-European and Pan-Latin American presence strategically
positions the Company to take advantage of worldwide growth trends in the
microcomputer products distribution industry. According to the November 1997
Dataquest report, the total number of personal computers sold in Western Europe
and Latin America will grow at compound annual rates of 12.5% and 16.8%,
respectively, from 1998 to 2001. Dataquest also predicts that the total number
of personal computers sold in Eastern Europe, the Middle East, the
Mediterranean region and Africa, referred to by Dataquest as the "rest of the
world," will grow at a compound annual rate of 14.3% from 1998 to 2001. Based
on data from the COMPUTER INDUSTRY ALMANAC, the penetration rate with respect
to personal computers (defined as computers in use as a percentage of
population) for 1995 (for only those countries in which the Company operates)
was 2.1% in Latin America, 17.6% in Western Europe and 2.3% in Eastern Europe,
as compared to a 36.4% penetration rate in the United States.
CHS operates under a decentralized structure in which managers familiar
with the customs and needs of a particular country are delegated the authority
to make daily decisions necessary to satisfy the particular demands of their
respective markets. Unlike certain competitors which operate under a more
centralized structure, the Company believes that its business model of focused
distribution through locally managed full service facilities integrating
warehousing, purchasing, sales, credit and accounting functions provides
competitive and operating advantages.
The Company's decentralized operating structure is complemented by
centralized financial reporting which provide the Company's senior managers
with frequent and regular status reports for each of the Company's operating
subsidiaries. Each operating subsidiary, prior to the commencement of each
fiscal year, prepares a detailed operating budget which is subject to the
review of the Company's senior management. Thereafter, the performance of each
operating subsidiary is reported to management and reviewed against the budget
on a monthly basis. In addition, each subsidiary electronically provides to
senior management, on a weekly basis, its sales, gross margins, inventory,
accounts receivable and cash collections. These reports are reviewed weekly
against the budget and discussed with regional managers on a bi-weekly basis or
more frequently, if needed. The reporting procedures are supplemented by an
internal audit function with a staff of eight internal auditors, as well as two
auditors that specialize in inventory audits. The Company's goal is to have its
internal auditors visit each of the Company's operating subsidiaries at least
twice each year. During 1997, there were 83 internal audits and 31 inventory
audits performed with respect to the Company.
The Company believes that the geographic diversity of its customer base
provides it with certain protection against localized economic downturns.
Although Germany accounted for 29% of the Company's sales during the year ended
December 31, 1997, sales in no other country exceeded 10% of total net sales.
In addition, no customer during the year ended December 31, 1997 accounted for
more than one percent of the Company's net sales. The Company attempts to limit
its exposure to currency fluctuations through hedging where possible. CHS
Finance, S.A. ("CHS Finance"), a wholly owned subsidiary, acts as the Company's
finance company for distribution activities and engages in central treasury
functions including hedging activities related to foreign currency. Through the
hedging activities of CHS Finance and, in certain cases, the individual
operating subsidiaries, the Company makes forward purchases of United States
dollars in an attempt to hedge certain European currencies and reduce exposure
to fluctuations in exchange rates. Additionally, in certain countries in
Eastern Europe and in Latin America where it is not practical to make forward
purchases, to minimize exposure to currency devaluations, the Company has
adopted a policy of attempting to match accounts receivable with accounts
payable and to limit holdings of local currencies.
2
The Company's objectives are to strengthen its position as a leading
distributor of microcomputer products in Western Europe, Eastern Europe and
Latin America and to expand its operations in the regions of Asia, the Middle
East and Africa. In order to achieve these objectives, CHS intends to continue
to implement the following strategies:
/bullet/ OPERATE A FOCUSED DISTRIBUTION MODEL IN FRAGMENTED MARKETS. The
Company's strategy is to operate as a focused distributor in fragmented
markets by dealing in such markets with a limited and select group of high
quality branded manufacturers in each major product category, such as
Hewlett-Packard for printers, Microsoft for software and networking,
Seagate, Quantum and Western Digital for mass storage and Hewlett-Packard,
Compaq and IBM for personal computers. The Company believes that the
markets for its products outside of the United States are fragmented.
Additionally, the Company seeks to be a significant distributor for each
of its major vendors and establish a partnering relationship with them.
The Company believes that its strategy of focused distribution in
fragmented markets enables it to respond more quickly to customer requests
and gives it greater availability of products, access to new products and
improved pricing. The Company believes this strategy also enables it to
develop greater expertise in the sale and servicing of the products of
these manufacturers. The Company also believes that its focused
distribution model results in more effective asset management. Generally,
products from leading manufacturers are in greater demand, resulting in
more efficient inventory management, including greater inventory turns,
lower working capital requirements and fewer stock keeping units ("SKUs").
The largest CHS operating subsidiaries maintain between 10,000 and 14,000
SKUs per location while broadline distributors typically carry more than
40,000 SKUs.
/bullet/ PENETRATE AND FURTHER DEVELOP SELECTED MARKETS. The Company has
focused its activities on the distribution of microcomputer products in
Western Europe and the emerging markets of Eastern Europe and Latin
America. Additionally, the Company intends to expand its operations in
Asia, the Middle East and Africa. The Company believes that these regions
are underserved with respect to the distribution of microcomputer products
and therefore provide significant growth opportunities. The Company
further believes that these markets are complex due to the diversity of
language, regulatory, technical and other factors and provide attractive
opportunities for CHS to add value to its relationships with its vendors
and customers through the presence of its knowledgeable local management.
The Company is considering entering the United States market in a way that
would provide the economies of scale which the Company believes are
necessary to operate effectively in this market. The Company believes that
entering the United States market may provide benefits to its existing
operations by increasing the volume of purchases which the Company makes
from its vendors, thus assisting the Company in obtaining enhanced volume
discounts and other opportunities available to large volume purchasers.
There can be no assurance that the Company will be able to enter the
United States market or that any operations in such market would be
profitable. The Company attempts to limit its exposure to declines in any
one area or economy by its presence in a large number of markets.
/bullet/ OPERATE WITH A DECENTRALIZED OPERATING STRUCTURE. CHS operates
through a decentralized structure, under which each subsidiary is managed
autonomously. Local operating procedures are utilized as they were
developed in response to local market conditions. The founders and
managers of acquired companies typically remain in place to continue
management of operations and maintenance of local customer relationships.
This decentralized operating structure is complemented by centralized
financial controls, which provide the Company's senior managers with
frequent and regular status reports for each of the Company's operating
subsidiaries. Management believes that this structure provides the Company
with significant operating advantages including locally-refined procedures
within each of the Company's geographic markets which have been developed
to most effectively address the heterogeneous commercial and cultural
characteristics of such markets.
3
/bullet/ GROW THROUGH ACQUISITIONS. A major portion of the Company's growth
is attributable to acquisitions, and the Company intends to continue its
practice of making targeted purchases of high quality distributors in
selected markets. During the period which began January 1, 1995 and ended
December 31, 1997, the Company made 26 acquisitions, the most significant
of which were the Merisel Companies, Frank & Walter, Karma and Santech.
The Company generally seeks companies that have strong entrepreneurial
management teams and experience in the local market and that could benefit
from the economies of scale that the Company provides through its focused
product lines. In order to reduce financial risk and enhance operating
performance, in many cases the Company structures an acquisition with an
earnout component based on the performance of the acquired company and
generally payable in shares of common stock one year subsequent to the
acquisition. The Company also makes select acquisitions using cash or
stock without an earnout component. These local distributors generally are
attracted to combining with CHS in order to gain personal financial
liquidity, access to key product lines provided by CHS and enhanced vendor
credit facilities. After an acquisition, the new CHS subsidiary adopts the
policies and financial reporting procedures of the Company but operates as
a relatively autonomous business unit, consistent with the Company's
decentralized structure. The Company believes its acquisition strategy is
advantageous to its vendors because, through their relationship with CHS,
vendors may gain entry into new markets with established local
distribution companies and can substitute the creditworthiness of CHS for
that of the local distributor. The Company continuously evaluates
acquisition opportunities, and announcements concerning potential
acquisitions could be made by the Company at any time, including prior to
or shortly after the completion of the Offering. See "Recent
Developments--Potential Acquisitions."
CHS commenced its operations as an international distributor of
microcomputer products in December 1993. The world headquarters of the Company
are located at 2000 N.W. 84th Avenue, Miami, Florida 33122, where its telephone
number is (305) 908-7200. The Company's common stock is listed on the Nasdaq
National Market under the symbol "CHSE".
4
THE EXCHANGE OFFER
The Exchange Offer......... Up to $200,000,000 aggregate principal amount of
New Notes are being offered in exchange for a like
aggregate principal amount of Old Notes. Old Notes
may be tendered for exchange in whole or in part
in denominations of $1,000 or any integral
multiple thereof. The Company is making the
Exchange Offer in order to satisfy its obligations
under the Registration Rights Agreement relating
to the Old Notes. For a description of the
procedures for tendering Old Notes, see "The
Exchange Offer--Procedures for Tendering Old
Notes."
Expiration Date............ 5:00 p.m., New York City time, on ,
1998, unless the Exchange Offer is extended by the
Company (in which case the Expiration Date will be
the latest date and time to which the Exchange
Offer is extended). See "The Exchange Offer--Terms
of the Exchange Offer."
Conditions to the
Exchange Offer............. The Exchange Offer is subject to certain
conditions, which may be waived by the Company in
its sole discretion. The Exchange Offer is not
conditioned upon any minimum principal amount of
Old Notes being tendered. See "The Exchange
Offer--Conditions to the Exchange Offer."
Offer...................... The Company reserves the right in its sole and
absolute discretion, subject to applicable law, at
any time and from time to time, (i) to delay the
acceptance of the Old Notes for exchange, (ii) to
terminate the Exchange Offer if certain specified
conditions have not been satisfied, (iii) to
extend the Expiration Date of the Exchange Offer
and retain all Old Notes tendered pursuant to the
Exchange Offer, subject, however, to the right of
holders of Old Notes to withdraw their tendered
Old Notes, or (iv) to waive any condition or
otherwise amend the terms of the Exchange Offer in
any respect. See "The Exchange Offer--Terms of the
Exchange Offer."
Withdrawal Rights.......... Tenders of Old Notes may be withdrawn at any
time on or prior to the Expiration Date by
delivering a written notice of such withdrawal to
the Exchange Agent (as defined herein) in
conformity with certain procedures set forth below
under "The Exchange Offer--Withdrawal Rights."
Procedures for Tendering
Old Notes................. Brokers, dealers, commercial banks, trust
companies and other nominees who hold Old Notes
through DTC (as defined herein) may effect tenders
by book-entry transfer in accordance with DTC's
Automated Tender Offer Program ("ATOP"). Holders
of such Old Notes registered in the name of a
broker, dealer, commercial bank, trust company or
other nominee are urged to contact such person
promptly if they wish to tender Old Notes. In
order for Old Notes to be tendered by a means
other than by book-entry transfer, a Letter of
Transmittal must be completed
5
and signed in accordance with the instructions
contained herein. The Letter of Transmittal and
any other documents required by the Letter of
Transmittal must be delivered to the Exchange
Agent by mail, facsimile, hand delivery or
overnight carrier and either such Old Notes must
be delivered to the Exchange Agent or specified
procedures for guaranteed delivery must be
complied with. See "The Exchange
Offer--Procedures for Tendering Old Notes."
Letters of Transmittal and certificates
representing Old Notes should not be sent to the
Company. Such documents should only be sent to
the Exchange Agent. See "The Exchange
Offer--Exchange Agent."
Resales of New Notes....... The Company is making the Exchange Offer in
reliance on the position of the staff of the
Division of Corporation Finance of the Commission
as set forth in certain interpretive letters
addressed to third parties in other transactions.
The Company has not sought its own interpretive
letter and there can be no assurance that the
staff of the Division of Corporation Finance of
the Commission would make a similar determination
with respect to the Exchange Offer as it has in
such interpretive letters to third parties. Based
on these interpretations by the staff of the
Division of Corporation Finance of the Commission,
and subject to the two immediately following
sentences, the Company believes that New Notes
issued pursuant to this Exchange Offer in exchange
for Old Notes may be offered for resale, resold
and otherwise transferred by a holder thereof
(other than a holder who is a broker-dealer)
without further compliance with the registration
and prospectus delivery requirements of the
Securities Act, provided that such New Notes are
acquired in the ordinary course of such holder's
business and that such holder is not
participating, and has no arrangement or
understanding with any person to participate, in a
distribution (within the meaning of the Securities
Act) of such New Notes. However, any holder of Old
Notes who is an "affiliate" of the Company or who
intends to participate in the Exchange Offer for
the purpose of distributing the New Notes, or any
broker-dealer who purchased the Old Notes from the
Company to resell pursuant to Rule 144A or any
other available exemption under the Securities
Act, (a) will not be able to rely on the
interpretations of the staff of the Division of
Corporation Finance of the Commission set forth in
the above-mentioned interpretive letters, (b) will
not be permitted or entitled to tender such Old
Notes in the Exchange Offer and (c) must comply
with the registration and prospectus delivery
requirements of the Securities Act in connection
with any sale or other transfer of such Old Notes
unless such sale is made pursuant to an exemption
from such requirements. In addition, as described
below, if any broker-dealer holds Old Notes
acquired for its own account as a result of
market-making or other trading activities and
exchanges such Old Notes for New
6
Notes, then such broker-dealer must deliver a
prospectus meeting the requirements of the
Securities Act in connection with any resales of
such New Notes.
Each holder of Old Notes who wishes to exchange
Old Notes for New Notes in the Exchange Offer
will be required to represent that (i) it is not
an "affiliate" of the Company, (ii) any New Notes
to be received by it are being acquired in the
ordinary course of its business, (iii) it has no
arrangement or understanding with any person to
participate in a distribution (within the meaning
of the Securities Act) of such New Notes, and
(iv) if such holder is not a broker-dealer, such
holder is not engaged in, and does not intend to
engage in, a distribution (within the meaning of
the Securities Act) of such New Notes. Each
broker-dealer that receives New Notes for its own
account pursuant to the Exchange Offer must
acknowledge that it acquired the Old Notes for
its own account as the result of market-making
activities or other trading activities and must
agree that it will deliver a prospectus meeting
the requirements of the Securities Act in
connection with any resale of such New Notes. The
Letter of Transmittal states that, by so
acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it
is an "underwriter" within the meaning of the
Securities Act. Based on the position taken by
the staff of the Division of Corporation Finance
of the Commission in the interpretive letters
referred to above, the Company believes that
Participating Broker-Dealers who acquired Old
Notes for their own accounts as a result of
market-making activities or other trading
activities may fulfill their prospectus delivery
requirements with respect to the New Notes
received upon exchange of such Old Notes (other
than Old Notes which represent an unsold
allotment from the original sale of the Old
Notes) with a prospectus meeting the requirements
of the Securities Act, which may be the
prospectus prepared for an exchange offer so long
as it contains a description of the plan of
distribution with respect to the resale of such
New Notes. Accordingly, this Prospectus, as it
may be amended or supplemented from time to time,
may be used by a Participating Broker-Dealer in
connection with resales of New Notes received in
exchange for Old Notes where such Old Notes were
acquired by such Participating Broker-Dealer for
its own account as a result of market-making or
other trading activities. Any Participating
Broker-Dealer who is an "affiliate" of the
Company may not rely on such interpretive letters
and must comply with the registration and
prospectus delivery requirements of the
Securities Act in connection with any resale
transaction. See "The Exchange Offer--Resales of
New Notes."
Exchange Agent............. The exchange agent with respect to the Exchange
Offer is The Chase Manhattan Bank (the "Exchange
Agent", and in its capacity as trustee under the
terms of the Indenture, the "Trustee"). The
addresses, and telephone and facsimile
7
numbers, of the Exchange Agent are set forth in
"The Exchange Offer--Exchange Agent" and in the
Letter of Transmittal.
Use of Proceeds............ The Company will not receive any cash proceeds
from the issuance of the New Notes offered hereby.
See "Use of Proceeds."
Certain Federal Income Tax
Considerations............ Holders of Old Notes should review the
information set forth under "Certain Federal
Income Tax Consequences" prior to tendering Old
Notes in the Exchange Offer.
THE OFFERING
Issuer..................... CHS Electronics, Inc.
The Notes.................. $200 million principal amount of 9 7/8% Senior
Notes due 2005.
Interest Rate and
Payment Dates.............. 9 7/8% per annum calculated from the original
issuance date payable semi-annually (to Holders of
record at the close of business on the April 1 or
October 1 immediately preceding the Interest
Payment Date) on April 15 and October 15 of each
year, commencing October 15, 1998.
Maturity Date.............. April 15, 2005.
Optional Redemption........ The Notes are redeemable, at the Company's
option, in whole or in part, at any time on or
after April 15, 2002 at the redemption prices set
forth herein, plus accrued and unpaid interest to
the date of redemption. In addition, at any time
or from time to time prior to April 15, 2001, the
Company may redeem up to 35% of the aggregate
principal amount of the Notes originally issued
with the net cash proceeds of one or more Public
Equity Offerings (as defined herein) by the
Company, at a redemption price equal to 109.875%
of the principal amount thereof, together with
accrued and unpaid interest, if any, to the date
of redemption; PROVIDED that after giving effect
to any such redemption, at least $125 million of
the original aggregate principal amount of the
Notes remains outstanding. See "Description of the
Notes--Optional Redemption."
Change of Control.......... Upon a Change of Control (as defined herein),
the Company will be required to make an offer to
purchase the Notes at a price of 101% of their
principal amount, plus accrued and unpaid
interest, if any, to the date of purchase. There
can be no assurance that the Company will have the
financial resources necessary to purchase the
Notes upon a Change of Control. See "Description
of the Notes--Repurchase of Notes upon a Change of
Control."
8
Ranking and Guarantees..... The Indebtedness evidenced by the New Notes will
rank senior to all subordinated Indebtedness of
the Company and PARI PASSU in right of payment
with all other unsubordinated Indebtedness of the
Company, including a guarantee by the Company of
all Indebtedness under the New Credit Facility.
See "Certain Indebtedness."
Payment of principal, premium, if any, and
interest on the New Notes will be guaranteed on
an unsecured basis by certain of the Company's
direct and indirect U.S. Restricted Subsidiaries
(as defined in the Indenture). The initial
Subsidiary Guarantors are CHS Electronics, Inc.
(Nevada), CHS Delaware, Inc., CHS Delaware L.L.C.
and CHS Americas, Inc. (the "Initial Subsidiary
Guarantors"), each of whose Subsidiary Guarantee
will be unsubordinated. The Indenture requires
future Restricted Subsidiaries incorporated under
the laws of any state or territory of the United
States to become Subsidiary Guarantors; PROVIDED
that in those cases where Subsidiary Guarantors
are also guarantors or borrowers of Indebtedness
under the New Credit Facility, refinancing
thereof or certain other Indebtedness, such
Subsidiary Guarantees will be subordinated
thereto.
The Indebtedness evidenced by the Subsidiary
Guarantees will rank senior to all subordinated
Indebtedness of the Subsidiary Guarantors and
PARI PASSU in right of payment with other
unsubordinated Indebtedness of the Subsidiary
Guarantors. The New Notes will be effectively
subordinated to all existing and future
liabilities of the Company's subsidiaries that
are not Subsidiary Guarantors. Certain of such
liabilities have been guaranteed by the Company.
After giving pro forma effect to the sale of the
Old Notes and the application of the net proceeds
therefrom, as of December 31, 1997, the Company,
on a consolidated basis, would have had $485.7
million of outstanding Indebtedness and the
Company's subsidiaries that are not Subsidiary
Guarantors would have had $285.7 million of
outstanding Indebtedness.
The Company is a holding company which conducts
substantially all of its business through
subsidiaries. The Company and the Subsidiary
Guarantors will be dependent upon access to the
earnings, if any, or assets of the Company's
operating subsidiaries to make payments on the
Notes and on the Subsidiary Guarantees, as the
case may be. The terms of indebtedness of certain
of the Company's subsidiaries limit the ability
of such subsidiaries to pay dividends or make
loans or other distributions. For the year ended
December 31, 1997, EBITDA of such subsidiaries
represented 16.6% of the Company's consolidated
EBITDA. In addition, CHS Finance, or another
subsidiary of the Company, will be the borrower
under the New Credit Facility, and Indebtedness
thereunder will be guaranteed by substantially
all of the Company's European
9
and Latin American subsidiaries as well as CHS
Latin America Holding Corp., and certain other
subsidiaries of the Company incorporated in the
U.S. The New Credit Facility will contain certain
financial and other covenants and will require,
among other things, maintenance of certain
leverage, income and net worth tests and, under
certain circumstances, prohibit dividend
distributions by CHS Finance and the Company's
other subsidiaries; PROVIDED that so long as
there is no event of default existing under the
New Credit Facility, such subsidiaries will be
permitted to issue dividends and make other
payments as necessary to pay interest on the
Notes as and when due subject to compliance with
the provisions of the New Credit Facility. The
New Credit Facility will prohibit optional
payments on the Notes without the consent of the
lenders thereunder. In addition, the ability of
the Company and the Subsidiary Guarantors to
access the earnings of the Company's operating
subsidiaries may also be limited by law. See
"Risk Factors--Holding Company Structure,"
"--Substantial Leverage; Ability to Service Debt;
Restrictive Covenants," "Management's Discussion
and Analysis of Financial Condition and Results
of Operations--Liquidity and Capital Resources"
and "Certain Indebtedness."
Pursuant to the terms of the Indenture, the
Company and the appropriate Restricted
Subsidiaries provided Negative Pledges with
respect to 100% of the total partnership
interests in and any assets of CHS Cayman L.P.
("CHS Cayman"), other than CHS Cayman's shares in
CHS Logistic Services B.V. ("CHS Logistics")
which will be pledged only as security for the
New Credit Facility or any refinancing thereof.
Such shares currently comprise all of the assets
of CHS Cayman. See "Description of the
Notes--Ranking and Guarantees--The Negative
Pledge."
Certain Covenants.......... The Indenture contains certain covenants which,
among other things, restrict the ability of the
Company and certain of its subsidiaries to incur
additional indebtedness; pay dividends or make
distributions in respect of their capital stock;
enter into certain transactions with shareholders
and Affiliates (as defined herein); make certain
investments and other restricted payments; create
liens; enter into certain sale and leaseback
transactions and sell assets. The Indenture also
creates restrictions on the ability of the
subsidiaries to make certain payments and require
that newly acquired or created U.S. Restricted
Subsidiaries execute a Subsidiary Guarantee for
the benefit of the holders of the Notes, as
appropriate. In addition, the Indenture limits the
ability of the Company to consolidate, merge or
sell all or substantially all of its assets. The
covenants are, however, subject to a number of
important exceptions and qualifications. See
"Description of the Notes--Covenants" and
"--Consolidation, Merger and Sale of Assets."
10
Use of Proceeds............ The Company will not receive any cash proceeds
in the Exchange Offer. The Company used the net
proceeds of the offering of the Old Notes to repay
Indebtedness outstanding under its subsidiaries'
Revolving Credit Facilities (as defined herein)
and to repay the Short Term Loan (as defined
herein). The remainder of the net proceeds from
the offering of the Old Notes was added to the
Company's working capital to be available for
earnout obligations relating to prior
acquisitions, general corporate purposes and
possible future acquisitions. See "Use of
Proceeds."
For more complete information regarding the New Notes, including
definitions of certain capitalized terms used above, see "Description of
Notes."
RISK FACTORS
Prospective participants in the Exchange Offer should consider carefully
all of the information set forth in this Prospectus and, in particular, the
information set forth under "Risk Factors" before making an investment in the
New Notes.
11
SUMMARY CONSOLIDATED FINANCIAL DATA
(DOLLARS IN THOUSANDS)
The following tables set forth certain financial data for each year in the
three-year period ended December 31, 1997. The information presented as of and
for the years ended December 31, 1995, 1996 and 1997 is derived from the
audited consolidated financial statements of the Company, which statements have
been audited by Grant Thornton LLP, independent certified public accountants.
The pro forma information presented below has been prepared based upon the
historical financial statements of the Company and the acquired subsidiaries
for the periods stated above. Such pro forma information may not be indicative
of the results that would have occurred if the acquisitions had been
consummated on January 1, 1997, or of the operating results that may be
achieved by the combined companies in the future. The following data should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations", the Company's Pro Forma Condensed
Financial Statements (Unaudited) and the Notes thereto and the Company's
Consolidated Financial Statements and Notes thereto contained elsewhere in this
Prospectus.
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------
1995 1996 1997
----------- ------------- --------------------------------------------
PRO FORMA
ACTUAL PRO FORMA(1) AS ADJUSTED(2)
------------- -------------- ---------------
INCOME STATEMENT DATA:
Net sales ................................... $936,703 $1,855,540 $4,756,383 $5,708,679 $6,055,515
Cost of sales ............................... 868,716 1,724,432 4,409,714 5,318,551 5,640,569
-------- ---------- ---------- ---------- ----------
Gross profit ................................ 67,987 131,108 346,669 390,128 414,946
Operating expenses .......................... 57,188 102,235 257,508 325,604 346,357
-------- ---------- ---------- ---------- ----------
Operating income ............................ 10,799 28,873 89,161 64,524 68,589
Interest (income) ........................... (1,757) (3,199) (11,470) (11,470) (11,470)
Interest expense ............................ 6,454 11,712 35,618 39,073 50,452
-------- ---------- ---------- ---------- ----------
Earnings before income taxes and minority
interest ................................... 6,102 20,360 65,013 36,921 29,607
Provision for income taxes .................. 1,797 6,086 13,988 14,734 13,644
Minority interest ........................... -- 2,108 2,634 2,634 3,527
-------- ---------- ---------- ---------- ----------
Net earnings ................................ $ 4,305 $ 12,166 $ 48,391 $ 19,553 $ 12,436
======== ========== ========== ========== ==========
OTHER FINANCIAL DATA:
EBITDA(3) ................................... $ 15,160 $ 36,596 $ 119,786 $ 106,179 $ 112,979
Ratio of EBITDA to interest expense ......... 2.3x 3.1x 3.4x 2.7x 2.2x
Ratio of total debt to EBITDA ............... 3.6x 5.5x 3.1x 3.5x 4.3x
Ratio of net debt to EBITDA ................. -- -- -- -- 3.4x
Ratio of earnings to fixed charges(4) ....... 1.8x 2.5x 2.6x 1.8x 1.5x
AS OF DECEMBER 31, 1997
------------------------------
1995 1996 ACTUAL AS ADJUSTED(5)
---------- ---------- ------------ ---------------
BALANCE SHEET DATA:
Cash and cash equivalents ......... $ 11,171 $ 35,137 $ 68,806 $ 99,062
Working capital ................... 9,843 31,506 278,771 393,565
Total assets ...................... 265,804 861,949 1,968,822 2,160,001
Total debt ........................ 55,239 201,259 371,066 485,653
Shareholders' equity .............. 29,892 104,533 667,764 667,764
- ----------------
(1) Gives effect to the Karma and Santech Acquisitions as if such transactions
had occurred as of January 1, 1997. The results of Frank & Walter have
been included in actual results since January 1, 1997. Santech's
operations during 1997 prior to its acquisition by the Company reflected
net sales of $405.5 million and negative EBITDA of $17.8 million. The
losses of Santech are the result of reducing staff from 450 to 320 people,
difficulty in installing a computer system in February 1997 and costs
12
incurred to reduce the number of vendors to under 100. The entire decrease
in EBITDA from actual 1997 results to pro forma 1997 results is due to
losses incurred by Santech prior to acquisition by the Company. Subsequent
to its acquisition by the Company, in the fourth quarter of 1997, Santech
contributed $4.6 million in incremental EBITDA.
(2) Gives effect to the Karma and Santech Acquisitions as if such transactions
had occurred as of January 1, 1997, and the issuance and sale of the Old
Notes at a rate of 9.875% as if such Notes had been outstanding since
January 1, 1997. Furthermore, the Pro Forma As Adjusted figures give
effect to the application of the estimated net proceeds from such Notes,
specifically, (i) the repayment of approximately $100 million of
indebtedness with a weighted average interest rate of 10.4%, and (ii) the
acquisition of SiS as if such acquisition had occurred on January 1, 1997.
(3) EBITDA represents earnings before interest, income taxes, depreciation and
amortization. EBITDA is not presented as an alternative measure of net
income or cash flow from operations (both as determined in accordance with
generally accepted accounting principles), but because it is an accepted
financial indicator of a company's ability to service debt.
(4) The ratio of earnings to fixed charges is computed by dividing earnings
before income taxes and minority interest before fixed charges by fixed
charges. Fixed charges are defined as interest, whether expensed or
capitalized, amortization of debt expense and discount or premiums
relating to indebtedness, whether expensed or capitalized, and such
portion of rental expense that represents the interest factor (assumed to
be one-third of the total rental expense).
(5) Gives effect to the acquisition of SiS, the issuance and sale of the Old
Notes, and the application of the estimated net proceeds therefrom. See
"Use of Proceeds."
13
RISK FACTORS
AN INVESTMENT IN THE NEW NOTES OFFERED HEREBY INVOLVES A HIGH DEGREE OF
RISK, INCLUDING THE RISKS DESCRIBED BELOW. PROSPECTIVE INVESTORS SHOULD
CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS IN ADDITION TO THE OTHER
INFORMATION CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH AN INVESTMENT IN
THE NOTES OFFERED HEREBY.
THIS PROSPECTUS CONTAINS CERTAIN "FORWARD-LOOKING STATEMENTS" WITHIN THE
MEANING OF SECTION 27A OF THE SECURITIES ACT, WHICH REPRESENT THE COMPANY'S
EXPECTATIONS OR BELIEFS, INCLUDING, BUT NOT LIMITED TO, STATEMENTS CONCERNING
GROSS MARGINS AND SALES OF THE COMPANY'S PRODUCTS. THESE STATEMENTS BY THEIR
NATURE INVOLVE SUBSTANTIAL RISKS AND UNCERTAINTIES, CERTAIN OF WHICH ARE BEYOND
THE COMPANY'S CONTROL, AND ACTUAL RESULTS MAY DIFFER MATERIALLY DEPENDING ON A
VARIETY OF IMPORTANT FACTORS, INCLUDING THE LEVEL OF ACQUISITION OPPORTUNITIES
AVAILABLE TO THE COMPANY AND THE COMPANY'S ABILITY TO EFFICIENTLY PRICE AND
NEGOTIATE SUCH ACQUISITIONS ON A FAVORABLE BASIS, THE FINANCIAL CONDITION OF
THE COMPANY'S CUSTOMERS, THE FAILURE TO MANAGE GROWTH PROPERLY AND INTEGRATE
ACQUIRED COMPANIES AND OPERATIONS SUCCESSFULLY, CHANGES IN ECONOMIC CONDITIONS,
DEMAND FOR THE COMPANY'S PRODUCTS AND CHANGES IN COMPETITIVE ENVIRONMENT.
THE COMPANY CAUTIONS THAT THE FACTORS DESCRIBED ABOVE COULD CAUSE ACTUAL
RESULTS OR OUTCOMES TO DIFFER MATERIALLY FROM THOSE EXPRESSED IN ANY
FORWARD-LOOKING STATEMENTS OF THE COMPANY MADE BY OR ON BEHALF OF THE COMPANY.
ANY FORWARD-LOOKING STATEMENT SPEAKS ONLY AS OF THE DATE ON WHICH SUCH
STATEMENT IS MADE, AND THE COMPANY UNDERTAKES NO OBLIGATION TO UPDATE ANY
FORWARD-LOOKING STATEMENT OR STATEMENTS TO REFLECT EVENTS OR CIRCUMSTANCES
AFTER THE DATE ON WHICH SUCH STATEMENT IS MADE OR TO REFLECT THE OCCURRENCE OF
UNANTICIPATED EVENTS. NEW FACTORS EMERGE FROM TIME TO TIME, AND IT IS NOT
POSSIBLE FOR MANAGEMENT TO PREDICT ALL OF SUCH FACTORS. FURTHER, MANAGEMENT
CANNOT ASSESS THE IMPACT OF EACH SUCH FACTOR ON THE BUSINESS OR THE EXTENT TO
WHICH ANY FACTOR, OR COMBINATION OF FACTORS, MAY CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THOSE CONTAINED IN ANY FORWARD-LOOKING STATEMENTS.
ABSENCE OF PUBLIC MARKET FOR NOTES
The Old Notes have not been registered under the Securities Act or any
state securities law and, unless so registered, may not be offered or sold
except pursuant to an exemption from, or in a transaction not subject to, the
registration requirements of the Securities Act and any applicable state
securities laws.
Although the New Notes may be resold or otherwise by the holders (who are
not affiliates of the Company) without compliance with the registration
requirements under the Securities Act, they will be new securities for which
there is currently no established trading market. The Company does not intend
to apply for listing of the New Notes on a national securities exchange or for
quotation of the New Notes on an automated dealer quotation system. Although
the Initial Purchasers have informed the Company that they currently intend to
make a market in the New Notes, they are not obligated to do so, and any such
market-making, if initiated, may be discontinued at any time without notice.
The liquidity of any market for the New Notes will depend upon the number of
holders of the Notes, the interest of securities dealers in making a market in
the New Notes and other factors. Accordingly, there can be no assurance as to
the development or liquidity of any market for the New Notes. If an active
trading market for the New Notes does not develop, the market price and
liquidity of the New Notes may be adversely affected. If the New Notes are
traded, they may trade at a discount from their face value, depending upon
prevailing interest rates, the market for similar securities, the performance
of the Company and certain other factors. The liquidity of, and trading markets
for, the New Notes may also be adversely affected by general declines in the
market for non-investment grade debt. Such declines may adversely affect the
liquidity of, and trading markets for, the New Notes independent of the
financial performance of, or prospects for, the Company.
Notwithstanding the registration of the New Notes in the Exchange Offer,
holders who are "affiliates" (as defined under Rule 405 of the Securities Act)
of the Company may publicly offer for sale or resell the New Notes only in
compliance with provisions of Rule 144 under the Securities Act.
14
Historically, the market for non-investment grade debt has been subject to
disruptions that have caused substantial volatility in the prices of securities
similar to the New Notes. There can be no assurance that the market, if any,
for the New Notes will not be subject to similar disruptions. Any such
disruptions may have an adverse effect on the holders of the New Notes.
CONSEQUENCES OF A FAILURE TO EXCHANGE OLD NOTES
The Old Notes have not been registered under the Securities Act or any
state securities laws and therefore may not be offered, sold or otherwise
transferred except in compliance with the registration requirements of the
Securities Act and any other applicable securities laws, or pursuant to an
exemption therefrom or in a transaction not subject thereto, and in each case
in compliance with certain other conditions and restrictions. Old Notes which
remain outstanding after consummation of the Exchange Offer will continue to
bear a legend reflecting such restrictions on transfer. In addition, upon
consummation of the Exchange Offer, holders of Old Notes which remain
outstanding will not be entitled to any rights to have such Old Notes
registered under the Securities Act or to any similar rights under the
Registration Rights Agreement (subject to certain limited exceptions). The
Company does not intend to register under the Securities Act any Old Notes
which remain outstanding after consummation of the Exchange Offer (subject to
such limited exceptions, if applicable). To the extent that Old Notes are
tendered and accepted in the Exchange Offer, a holder's ability to sell
untendered Old Notes could be adversely affected.
The New Notes and any Old Notes which remain outstanding after
consummation of the Exchange Offer will vote together as a single class for
purposes of determining whether holders of the requisite percentage in
outstanding principal amount thereof have taken certain actions or exercised
certain rights under the Indenture.
EXCHANGE OFFER PROCEDURES
Subject to the conditions set forth under "The Exchange Offer--Conditions
to the Exchange Offer," delivery of New Notes in exchange for Old Notes
tendered and accepted for exchange pursuant to the Exchange Offer will be made
only after timely receipt by the Exchange Agent of (i) certificates for Old
Notes or a book-entry confirmation of a book-entry transfer of Old Notes into
the Exchange Agent's account at DTC, including an Agent's Message (as defined
under "The Exchange Offer--Acceptance for Exchange and Issuance of New Notes")
if the tendering holder does not deliver a Letter of Transmittal, (ii) a
completed and signed Letter of Transmittal (or facsimile thereof), with any
required signature guarantees or, in the case of a book-entry transfer, an
Agent's Message in lieu of the Letter of Transmittal, and (iii) any other
documents required by the Letter of Transmittal. Therefore, holders of Old
Notes desiring to tender such Old Notes in exchange for New Notes should allow
sufficient time to ensure timely delivery. The Company is not under a duty to
give notification of defects or irregularities with respect to the tenders of
Old Notes for exchange.
HOLDING COMPANY STRUCTURE
The Company is a holding company with no material business operations,
sources of income or assets of its own other than the stock of, or
distributions from, its subsidiaries. The Notes are obligations of the Company,
and the Indebtedness evidenced by the Notes ranks senior to all subordinated
Indebtedness of the Company and PARI PASSU in right of payment with all other
unsubordinated Indebtedness of the Company, including a guarantee by the
Company of Indebtedness under the New Credit Facility. See "Certain
Indebtedness." Payment of principal, premium, if any, and interest on the Notes
is guaranteed by the Subsidiary Guarantors. The Indenture requires future
Restricted Subsidiaries incorporated under the laws of any state or territory
of the United States to become Subsidiary Guarantors.
The Indebtedness evidenced by the Subsidiary Guarantees ranks senior to
all subordinated Indebtedness of the Subsidiary Guarantors and PARI PASSU in
right of payment with other
15
unsubordinated Indebtedness of the Subsidiary Guarantors; PROVIDED that in
those cases where the Subsidiary Guarantors are also guarantors or borrowers of
Indebtedness under the New Credit Facility, refinancings thereof or other
indebtedness, the Subsidiary Guarantees will be subordinated thereto. Because
substantially all of the Company's operations are conducted through
subsidiaries, the Company's cash flow and, consequently, its ability to meet
its debt service obligations, including payment of principal, premium, if any,
and interest on the Notes, is dependent upon the cash flow of its subsidiaries
and the payment of funds by those subsidiaries to the Company in the form of
loans, dividends, payments on Subsidiary Guarantees, fees or otherwise. The
subsidiaries are separate and distinct legal entities and, except for the
Subsidiary Guarantors, will have no obligation, contingent or otherwise, to pay
any amounts due pursuant to the Notes or to make any funds available therefor,
whether in the form of loans, dividends or otherwise. See "Description of the
Notes--Ranking and Guarantees." Applicable law of the jurisdictions in which
the Company has organized or may organize subsidiaries may limit such
subsidiaries' ability to pay dividends. Such limitations may include the
prohibition of dividend payments to the extent net assets are or would fall
below subscribed share capital, to the extent the subsidiary lacks available
profits or to the extent the subsidiary fails to meet certain capital and
reserve requirements.
Certain of the Company's subsidiaries are parties to financing agreements
that limit the ability of such subsidiaries to make payments to the Company.
There can be no assurance that funds from these subsidiaries will be available
to make payments of principal, premium, if any, and interest on the Notes. For
the year ended December 31, 1997, the contribution of such subsidiaries to the
Company's consolidated EBITDA was 16.6% of total EBITDA. In addition, CHS
Finance (or another subsidiary of the Company) will be the borrower under the
New Credit Facility, and Indebtedness thereunder will be guaranteed by certain
of the Company's European and Latin American operating subsidiaries as well as
by certain other subsidiaries of the Company incorporated in the U.S. The New
Credit Facility will contain certain financial and other covenants and will
require, among other things, maintenance of certain leverage, income and net
worth tests and, under certain circumstances, prohibit dividend distributions
by CHS Finance and the Company's subsidiaries; PROVIDED that so long as there
is no event of default existing under the New Credit Facility, such
subsidiaries will be permitted to issue dividends and make other payments as
necessary to pay interest on the Notes as and when due subject to compliance
with the provisions thereof. The New Credit Facility will prohibit optional
payments on the Notes without the consent of the lenders thereunder. Any right
of the Company to receive assets of any of its subsidiaries that are not
Subsidiary Guarantors upon its liquidation or reorganization (and the
consequent right of the holders of the Notes to participate in the distribution
of proceeds from those assets) will be effectively subordinated to the claims
of such subsidiaries' creditors (including tax authorities, trade creditors and
lenders to those subsidiaries), except to the extent that the Company is itself
a creditor of such a subsidiary, in which case the Company's claims would still
be subordinated to any security interests in the assets of such subsidiary and
indebtedness of such subsidiary senior to the indebtedness held by the Company.
After giving pro forma effect to the sale of the Old Notes and the application
of the net proceeds therefrom, as of December 31, 1997, the Company's
subsidiaries that are not Subsidiary Guarantors would have had approximately
$285.7 million of indebtedness (excluding intercompany liabilities). In
addition, the Company has guaranteed certain indebtedness and obligations of
its operating subsidiaries with respect to which the Notes will be PARI PASSU.
SUBSTANTIAL LEVERAGE; ABILITY TO SERVICE DEBT; RESTRICTIVE COVENANTS
At December 31, 1997, the Company's total consolidated indebtedness was
$371.1 million, and on a pro forma basis after giving effect to the Offering
and the application of the net proceeds from the Offering, the Company's total
consolidated indebtedness at that date would have been $485.7 million. The
level of the Company's indebtedness could have a material adverse effect upon
the Company such as, without limitation: (i) limiting the Company's ability to
obtain additional financing in the future for capital expenditures,
acquisitions, working capital or other general corporate purposes, (ii)
requiring a substantial portion of the Company's cash flow from operations for
the payment of principal and interest on its debt, (iii) making the Company
more vulnerable to economic downturns, limiting its
16
ability to withstand competitive pressures and reducing its flexibility in
responding to changing business and economic conditions, and (iv) restricting
its ability to take advantage of business opportunities.
The ability of the Company to meet its debt service obligations will be
dependent upon the future performance of the Company, which, in turn, will be
subject to the Company's successful implementation of its strategy, as well as
to financial, competitive, business, regulatory, technical and other factors,
including factors beyond the Company's control. If the Company is at any time
unable to generate sufficient cash flow from operations to meet its debt
service requirements, it may be required to refinance all or a portion of its
indebtedness. The Company anticipates that cash flows from operations may be
insufficient to repay the Notes in full at maturity in 2005, and that the Notes
may need to be refinanced. The Company's ability to do so will depend on, among
other things, its financial condition at the time, the restrictions in the
agreements governing its indebtedness and other factors, including market
conditions. There can be no assurance that any such refinancing would be
possible on terms that would be acceptable to the Company or that any
additional financing could be obtained.
The Indenture contains certain restrictive covenants, which will affect,
and in some cases significantly limit or prohibit, among other things, the
ability of the Company and its subsidiaries to incur indebtedness, make
prepayments of certain indebtedness, pay dividends or make distributions in
respect of their capital stock, engage in transactions with shareholders and
Affiliates, make investments, issue capital stock, enter into certain sale and
leaseback transactions, create liens, sell assets and engage in mergers and
consolidations and require that newly acquired or created Restricted
Subsidiaries shall execute a Subsidiary Guarantee for the benefit of the
holders of the Notes, as appropriate. However, the limitations set forth in the
Indenture are subject to a number of important qualifications and exceptions.
The Indenture restricts the Company's ability to incur additional indebtedness
by mandating compliance with a ratio of Total Debt to EBITDA (as defined in the
Indenture) to be no greater than 5 to 1, with certain exceptions. See
"Description of the Notes--Covenants--Limitation on Indebtedness."
The terms of the New Credit Facility will include events of default and
restrictive covenants, including covenants that will restrict, INTER ALIA, the
Company's and its subsidiaries' ability to incur additional indebtedness or
provide guarantees, merge, consolidate or dispose of assets other than in the
ordinary course of its business, enter into transactions other than on a
commercial basis and grant liens on its properties. See "Certain
Indebtedness--The New Credit Facility."
ACQUISITIONS
A major portion of the Company's growth has been attributable to
acquisitions, and the Company intends to continue its practice of making
targeted purchases of high quality distributors, assets or product lines that
the Company believes would complement or expand its existing business.
Acquisitions involve a number of risks that could adversely affect the
Company's operating results, including: (i) the diversion of management's
attention; (ii) the assimilation of the operations and personnel of the
acquired companies; (iii) the assumption of potential liabilities, disclosed or
undisclosed, associated with the businesses acquired, which liabilities may
exceed the amount of indemnification available from the seller; (iv) the risk
that the financial and accounting systems utilized by the businesses acquired
will not meet the Company's standards; (v) the risk that the businesses
acquired will not maintain the quality of services that the Company has
historically provided; and (vi) the inability to attract and retain qualified
local management. There can be no assurance (a) that the Company will be able
to consummate future acquisitions on satisfactory terms, if at all, (b) that
adequate financing will be available on terms acceptable to the Company, if at
all, or (c) that any acquired operations will be successfully integrated or
that such operations will ultimately have a positive impact on the Company. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" and "Business--Strategy." The
Company continuously evaluates acquisition opportunities, and announcements
concerning potential acquisitions could be made by the Company at any time,
including prior to or shortly after the completion of the Exchange Offer. See
"Recent Developments--Potential Acquisitions."
17
MANAGEMENT OF GROWTH
The Company has rapidly expanded its operations in recent years. Between
January 1, 1995 and December 31, 1997, the Company made 26 acquisitions,
primarily in Western Europe, Latin America, the Middle East and Asia. The
Company intends to continue its acquisition strategy. The Company's significant
growth and recent acquisitions have placed, and are expected to continue to
place, substantial demands on the Company's managerial, operational, financial,
and other resources, including information systems. There can be no assurance
that the Company will be able to integrate the operations and management of
these acquired businesses successfully. Further acquisitions will require the
Company to continue to invest in its operations, including its financial and
management information systems, and to increase its efforts to retain, motivate
and effectively manage its employees, all of which may significantly increase
the Company's operating expenses. There can be no assurance that the management
skills and systems currently in place will be adequate to implement its
strategy. In addition, there can be no assurance that the Company will be able
to expand and improve its information systems, or that the information systems
of acquired companies will be sufficient to meet the Company's standards or can
be successfully converted into an acceptable information system on a timely and
cost-effective basis. Any failure by the Company to achieve and manage its
growth as planned could have a material adverse effect on the Company. See
"Business--Strategy."
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS
Substantially all of the Company's sales are to customers outside of the
United States. Approximately 88% of the Company's net sales were denominated in
currencies other than the United States dollar during the year ended December
31, 1997. Changes in the value of foreign currencies relative to the United
States dollar could adversely affect the Company's results of operations and
financial position, and transaction gains and losses could contribute to
fluctuations in the Company's results of operations. When possible, the Company
engages in currency hedging transactions and certain other practices to reduce
these risks. There can be no assurance that fluctuations in foreign currency
rates will not have a material adverse effect on the Company. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--Asset
Management, "--Currency Risk Management" and "Business--Competition."
The Company's existing and planned international operations are subject to
political and economic uncertainties, including among others, inflation,
hyperinflation, risk of renegotiation or modification of existing agreements or
arrangements with governmental authorities, transportation, tariffs, export
controls, foreign exchange restrictions which limit the repatriation of
investments and earnings therefrom, changes in taxation, changes in economic
stability including currency fluctuations (particularly in recent months with
respect to Asia), governmental challenges to the Company's tax reduction
strategies, hostilities and confiscation of property. Changes related to these
matters could have a material adverse effect on the Company.
RELIANCE ON KEY MANUFACTURERS
The Company obtains its products from its manufacturers under
non-exclusive distribution agreements which are subject to renewal annually and
may be canceled by either party on short notice. In 1997, 91% of the products
distributed by the Company were purchased from 60 vendors; 35%, 34% and 19% of
its net sales during the years ended December 31, 1995, 1996 and 1997,
respectively, were derived from the sale of products supplied by
Hewlett-Packard. An additional 12% of net sales during 1996 and 10% of net
sales during 1997 were derived from the Company's next largest supplier,
Microsoft. The above percentages are based upon an analysis of a representative
portion (over 90%) of the Company's total net sales. The loss of these
relationships would, and the loss of certain other relationships could, have a
material adverse effect on the Company. See "Business--Vendor Relations."
18
DEPENDENCE ON KEY PERSONNEL
The Company is highly dependent upon its ability to retain its current
personnel and to continue to attract and retain qualified personnel. The
Company is particularly dependent on the services of its Chairman of the Board,
Chief Executive Officer and President, Claudio Osorio. The Company does not
possess any key-man life insurance policies with respect to Mr. Osorio or any
other officer of the Company. There is intense competition for qualified
personnel, and there can be no assurance that the Company will be able to
continue to attract and retain the qualified personnel necessary for the
development of its business. Loss of the services of, or failure to recruit,
key personnel could have a material adverse effect on the Company.
COMPETITION; DECLINING GROSS PROFIT MARGINS
The Company's business is highly competitive. Certain of the Company's
competitors have greater financial, marketing, service and technical support
resources than the Company. There can be no assurance that the Company's
resources will be sufficient to allow the Company to compete effectively in the
future. Continued increases in competition could have a material adverse effect
on the Company's results of operations because of price reductions and
potential loss of market share. Certain of the Company's competitors may sell
products at prices below those charged by the Company. As a result of this
price competition, the Company and its competitors currently are experiencing
downward pressure on gross margins, which the Company expects to continue for
the foreseeable future. The Company intends to seek to offset the impact of
declines in its gross margins by reducing its operating expenses as a
percentage of net sales, although there can be no assurance of the success of
this strategy in future periods. See "Business--Competition."
RELIANCE ON CERTAIN MARKETS
Certain markets within which the Company operates represent a high
percentage of the Company's operating income and net sales. While net sales in
Eastern Europe represented only 11.6% and 8.2% of the Company's net sales for
the years ended December 31, 1996 and 1997, respectively, operating income
related to such sales accounted for 39.6% and 21.2%, respectively, of the
Company's operating income as a result of higher margins applicable to sales in
Eastern Europe. Additionally, sales in Germany represented 29% of net sales for
the year ended December 31, 1997 as a result of the Frank & Walter and Merisel
Acquisitions. Decreases in the volume of sales in such regions or declines in
operating margins could have a material adverse effect on the Company.
VARIABILITY OF CUSTOMER REQUIREMENTS; NATURE OF CUSTOMER COMMITMENTS ON ORDERS
The level and timing of orders placed by the Company's customers vary due
to a number of factors, including customer attempts to manage inventory,
changes in customers' strategies and variations in demand for products. The
Company relies on its estimate of anticipated future volumes when making
commitments regarding the quantities and the mix of products that it intends to
carry in inventory. The Company does not have long term contracts with its
customers and a variety of conditions could cause customers to reduce their
orders. Any significant reduction in customer orders could have a material
adverse effect on the Company. See "Business--Products and Customers."
EFFECTS OF TECHNOLOGICAL CHANGE
The products sold by the Company are characterized by rapidly changing
technology, frequent new product introductions and evolving industry standards
that can render the products marketed by the Company obsolete or unmarketable
in a relatively short period of time. The Company's future success will depend
upon its ability to limit its exposure to obsolescence in its inventory and to
gain access to its vendors' new product lines, as well as product lines of any
additional vendors that release new and desirable technology. Although the
Company attempts to enter into stock rotation agreements with its
19
vendors permitting the return of inventory, there can be no assurance that
these efforts will be successful. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Asset Management."
For the year ended December 31, 1997, approximately 10% of the Company's
net sales were attributable to sales of software products. The manner in which
microcomputer software is distributed and sold is changing, and new methods of
distribution and sale may emerge or expand. Software vendors have sold, and may
intensify their efforts to sell, their products directly to end-users. From
time to time, certain vendors have instituted programs for the direct sale of
large order quantities of software to certain major corporate accounts and
these types of programs may continue to be developed and used by various
vendors. In addition, certain major vendors have implemented programs for
master copy distribution (site licensing) of software. These programs generally
grant an organization the right to make any number of copies of software for
distribution within the organization provided that the organization pays a fee
to the vendor for each copy made. Also, vendors may attempt to increase the
volume of software products distributed electronically via the Internet or
through CD-ROM. Any of these competitive programs, if successful, could have a
material adverse effect on the Company's business, financial condition and
results of operations.
CHANGE OF CONTROL
Upon a Change of Control, each holder of Notes will have the right, at the
holder's option, to require the Company to repurchase all or a portion of such
holder's Notes. If a Change of Control were to occur, there can be no assurance
that the Company would have sufficient funds to pay the repurchase price for
all Notes tendered by the holders thereof. In addition, the Company's
repurchase of Notes as a result of the occurrence of a Change of Control may be
prohibited or limited by, or create an Event of Default under, the terms of
agreements related to borrowings which the Company may enter into from time to
time, including agreements relating to Senior Indebtedness. The agreement
relating to the Company's current Senior Indebtedness would limit the Company's
ability to repurchase the Notes. See "Description of the Notes--Repurchase of
Notes upon a Change of Control."
FRAUDULENT CONVEYANCE; POTENTIAL UNENFORCEABILITY OF SUBSIDIARY GUARANTEES
The Company believes that the indebtedness represented by the Subsidiary
Guarantees is being incurred for proper purposes and in good faith and that
each Subsidiary Guarantor has, and after the consummation of the Offering will
have, sufficient capital for carrying on its business and will be able to pay
its debts as they mature. Consolidated revenues of the Subsidiary Guarantors
accounted for approximately 100% of the Company's consolidated revenues for the
year ended December 31, 1997, and as of such date the consolidated assets of
such Subsidiary Guarantors were approximately 99% of the assets of the Company.
If a court of competent jurisdiction in a suit by a creditor or representative
of creditors of any Subsidiary Guarantor (such as a trustee in bankruptcy or a
debtor-in-possession) were to find that, at the time of the incurrence of the
indebtedness represented by the Subsidiary Guarantee, (i) such Subsidiary
Guarantor intended to hinder, delay or defraud its creditors, or (ii) the
indebtedness was incurred for less than fair consideration or reasonably
equivalent value, and the Subsidiary Guarantor was insolvent, was rendered
insolvent by reason of such incurrence of such guarantee, was engaged in a
business or transaction for which its remaining assets constituted unreasonably
small capital, or intended to incur, or believed that it would incur, debts
beyond its ability to pay as they matured, then such court could, among other
things, (a) void all or a portion of such Subsidiary Guarantor's obligations
to the holders of the Notes, the effect of which could be that the holders of
the Notes may not be repaid in full, (b) order the repayment to a Subsidiary
Guarantor of any sums paid by such Subsidiary Guarantor in reduction of the
indebtedness under the Notes; and/or (c) subordinate such Subsidiary
Guarantor's obligations to the holders of the Notes to other existing and
future indebtedness of such Subsidiary Guarantor, the effect of which would be
to entitle such other creditors to be paid in full before any payment could be
made on the Notes.
20
RECENT DEVELOPMENTS
ACQUISITIONS
On April 20, 1998, the Company announced that it had entered into an
agreement to acquire a majority interest in Metrologie International, a
distributor of hardware and software computer products to over 15,000 resellers
in France, the United Kingdom and Spain. Metrologie International, the shares
of which are traded on the Paris Bourse, had 1997 sales of approximately $880
million. The purchase, at approximately $3.31 per share, is subject to
regulatory approval and is expected to close before the end of May. Thereafter,
the Company intends to make a tender offer for the remaining outstanding shares
at the same price per share. The Company expects the total purchase price to be
approximately $87.7 million.
On March 9, 1998, the Company acquired an 80% interest in the Hong Kong,
Malaysia and Singapore subsidiaries of SiS for $70.4 million and paid $28.2
million of such amount on that date (representing 40% of the purchase price).
The Company has the option to pay the remaining portion of the purchase price
in cash or stock. Such amount will become payable on March 9, 1999. To fund the
portion of the purchase price paid at closing on March 9, 1998, the Company
entered into a $30 million short term loan (the "Short Term Loan") with Swiss
Bank Corporation as agent, which is the parent of SBC Warburg Dillon Read Inc.,
one of the Initial Purchasers in the Offering. The Short Term Loan matures on
September 9, 1998 and bears interest at an annual rate of four percent above
the prime rate of Swiss Bank Corporation or the London Interbank Offered Rate
("LIBOR"), increased by 0.5% for every three month period that a portion of the
loan remains outstanding. The Company intends to repay this loan from the
proceeds of this Offering. See "Use of Proceeds."
On November 17, 1997, the Company announced that it had entered into
agreements to acquire four Eastern European, one Western European and one Latin
American distribution companies with 1997 revenues totaling approximately $565
million. These acquisitions are expected to be completed by the end of the
second quarter of 1998. The companies to be acquired are: (i) TH' Systems,
which is based in the Czech Republic, distributes to 3,000 resellers in the
Czech Republic, Hungary, Poland and Slovakia and had 1997 sales of $143
million; (ii) Merisel Russia, which is a Moscow-based former subsidiary of
Merisel, Inc., distributes to 600 resellers and had 1997 sales of $57 million;
(iii) Arena and Armada, two distribution companies based in Istanbul, Turkey
serving over 3,000 resellers, which had combined sales in 1997 of $131 million;
(iv) ARC Spain, based in Madrid and which had 1997 sales of $100 million to
more than 4,000 resellers in Spain, and (v) Micro-Informatica, based in Miami,
Florida, with 1997 sales of $134 million to over 3,000 resellers in Latin
America.
On October 3, 1997, the Company completed the Santech Acquisition,
pursuant to which it acquired 97.4% of the outstanding capital stock of Santech
for approximately $125 million. The Company expects to acquire the remainder of
the shares at the same per share price. Santech was formed as a result of the
July 1996 merger of Santech ASA and Micro Software ASA. Santech is the largest
distributor of microcomputer products in Scandinavia with operations in Norway,
Sweden and Denmark and had revenues of $718 million and net losses of $11
million in 1996. The Company believes that the acquisition of Santech will more
than double the Company's sales in Scandinavia, thereby providing it with a
market leadership position in the region. Santech distributes the products of
the same vendors as other subsidiaries of the Company. The significant volume
of sales of Santech, when combined with the product purchases of the Company's
other subsidiaries in Europe, should enable the Company to negotiate more
favorable purchase terms from vendors.
Santech's operating results during 1996 and 1997 were adversely impacted
as a result of restructuring its operations after the July 1996 merger.
Operating results were also impacted adversely by the implementation of a new
computer system in the first six months of 1997. The adverse impact included
costs associated with a reduction in the number of its product lines to under
100 and in the number of employees from 450 to 320. The Company believes that
these factors have been addressed and therefore believes that these issues
should not have a material adverse impact on Santech's or the
21
Company's future operations. Since their acquisition by the Company, Santech's
operations have been profitable. In the fourth quarter of 1997, Santech
contributed $4.6 million in incremental EBITDA.
On August 4, 1997, the Company completed the Karma Acquisition. Karma is a
distributor of personal computer components to over 10,000 customers in Europe,
the Middle East and Asia. The purchase price for Karma was $160 million and was
funded through (i) $74 million in cash and (ii) 4,813,432 shares of
unregistered Common Stock. Karma's product line includes mass storage products,
CPUs, memory chips, motherboards, sound, video and other cards and monitors.
Karma is a focused distributor which carries approximately 500 SKUs from 14
vendors including Quantum, Western Digital, Maxtor, Cyrix and AMD. These
products represent the basic components of a personal computer and may be used
without regard to the specific language, regulatory and technical factors of
individual markets. As a result of the universal nature of these products,
Karma is able to centralize warehousing and ship approximately 75% of its
products from a single facility in Amsterdam, The Netherlands. Karma's
customers are primarily personal computer assemblers, systems integrators and
Value-Added Resellers ("VARs"). The Company believes that Karma's principal
competitive advantages are its low cost operating model and efficient
distribution system. Karma operates in 18 countries through 28 offices in
Europe, the Middle East and Asia. Karma was organized in July 1990 and, for the
twelve months ended December 31, 1996, had net sales of approximately $700
million, operating earnings of $18.5 million and net profits of $15.1 million.
The Karma Acquisition provided the Company entry into the high growth
emerging markets of Asia and the Middle East and enhanced its position as a
leading distributor of mass storage products throughout Europe. The acquisition
of Karma also provided the Company with additional economies of scale with
regard to purchasing and logistics and enabled it to further broaden its
customer base. As a result of the Karma Acquisition, the Company believes that
it is the largest distributor of mass storage products in the world. Karma's
existing management continues to operate Karma as a subsidiary of CHS. One
representative of Karma was elected to the Board of Directors of CHS with an
additional member to be nominated in 1998.
On March 20, 1997, the Company completed the Frank & Walter Acquisition
for 3.3 million unregistered shares of Common Stock. For the twelve months
ended December 31, 1996, Frank & Walter had net sales of approximately $686
million, operating earnings of $10.9 million and net profits of $3.5 million.
The results of operations of Frank & Walter have been included in the Company's
financial statements since January 1, 1997. The Company believes that Frank &
Walter was, at the time of acquisition, the fourth largest distributor of
microcomputer products in Germany with over 10,000 active dealers. As a result
of this acquisition, the Company believes it is the largest distributor of
microcomputer products in Germany. Carsten Frank, the founder of Frank &
Walter, has become a director of CHS and the CHS executive vice president
responsible for the Company's operations in Europe. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
POTENTIAL MERGER TRANSACTION
The Company is currently engaged in discussions with the shareholders of
Comtrad Holdings, Inc. ("CHI") concerning the possible merger of CHI and its
wholly owned subsidiary, Comtrad, Inc. ("Comtrad"), into the Company.
Substantially all of the consolidated assets of CHI and Comtrad are shares of
Common Stock of the Company (11.8% of the shares outstanding). Claudio Osorio,
the Chairman, Chief Executive Officer and President of the Company, is the
President and a director and, directly or indirectly, the principal shareholder
of Comtrad and CHI. The terms of the merger are still under negotiation, and
there can be no assurance that agreement on these or any other terms will be
reached. It is currently contemplated that the shareholders of CHI will receive
newly issued shares of the Company in an aggregate value equal to the
difference between the fair value of the assets of CHI and Comtrad at the time
of the merger and the fair value of the liabilities of CHI and Comtrad assumed
by the Company pursuant to the merger.
22
Upon the consummation of such transaction, the Company will assume
approximately $20 million of indebtedness of Comtrad. Of such indebtedness, $15
million is due on demand, but in any event by July 28, 1998, and bears interest
at the prime rate as announced in THE WALL STREET JOURNAL less 0.25%. The
balance bears interest at the prime rate of The Chase Manhattan Bank less 1%
and is due on November 16, 1998.
The Company believes that the transaction would be in the best interest of
the Company's shareholders as it would reduce the concentration of shareholder
ownership in the Company through the termination of Comtrad and CHI and the
corresponding payment of shares of Common Stock to the prior shareholders of
such entities. It is currently contemplated that conditions to the consummation
of the merger will include (i) the receipt by the Company of an opinion from
Raymond James & Associates, Inc., one of the Initial Purchasers, to the effect
that the terms of the merger are fair to the Company from a financial point of
view and (ii) completion by the Company of its tax and general due diligence
review which is currently in process. Approval by the shareholders of the
Company will not be required to effectuate the merger.
STOCK REPURCHASE PROGRAM
On December 18, 1997, the Company announced a program to repurchase up to
1 million of the approximately 48.6 million then outstanding shares of the
Company's common stock at market prices and in open market transactions. As of
April 1, 1998, 20,000 shares of Company common stock had been repurchased.
POTENTIAL ACQUISITIONS
A major portion of the Company's growth is attributable to acquisitions,
and the Company intends to continue its practice of making targeted purchases
of high quality distributors in selected markets. See "Risk Factors--Management
of Growth" and "Business--Strategy". The Company evaluates acquisition
opportunities on an ongoing basis, and is currently considering various
potential acquisitions certain of which are the subject of non-binding letters
of intent which are subject to, among other things, approval of the Board of
Directors of CHS. The Company does not believe that these transactions are
material to the Company's operations either individually or in the aggregate.
Announcements concerning these or other potential acquisitions could be made by
the Company at any time, including prior to or shortly after the completion of
this Offering.
NEW WORKING CAPITAL FACILITY
The Company has received a commitment letter, subject to final
documentation, for a new $325 million multi-currency revolving credit facility
from Barclays Bank PLC ("Barclays Bank") and The Bank of Nova Scotia
("Scotiabank"), which will also act as Initial Purchasers in the Offering (the
"New Credit Facility"). The Company believes that the New Credit Facility will
provide the Company with extended debt maturities, lower financing costs,
increased liquidity and overall increased operating and financial flexibility.
See "Certain Indebtedness."
RIGHTS PLAN
In January 1998, the Company implemented a Common Stock Purchase Rights
Plan and distributed one right (a "Right") for each share of the Company's
Common Stock outstanding. Each Right has an initial exercise price of $100 for
one-one thousandth of a share of the Company's Series A junior participating
preferred stock. The Rights are not exercisable or transferable, apart from the
Company's Common Stock, until after a person or group acquires, or has the
right to acquire, beneficial ownership of 15% or more of the Company's Common
Stock (which threshold may, under certain circumstances, be reduced to 10%) or
announces a tender or exchange offer to acquire such percentage of the
Company's Common Stock. Upon such occurrence, each Right (other than Rights
owned by such person or group) will entitle the holder to purchase from the
Company, or the particular acquiring
23
person or group under certain circumstances and conditions, the number of
shares of the Company's, or such person's or group's, Common Stock having a
market value equal to twice the exercise price of the Right. The Rights are
redeemable by the Company's Board of Directors under certain circumstances.
24
THE EXCHANGE OFFER
PURPOSE OF THE EXCHANGE OFFER
In connection with the sale of the Old Notes, the Company entered into the
Registration Rights Agreement with the Initial Purchasers, pursuant to which
the Company agreed to file and to use its commercially reasonable efforts to
cause to become effective with the Commission a registration statement with
respect to the exchange of the Old Notes for notes with terms identical in all
material respects to the terms of the Old Notes. A copy of the Registration
Rights Agreement has been filed as an exhibit to the Registration Statement of
which this Prospectus is a part.
The Exchange Offer is being made to satisfy the contractual obligations of
the Company under the Registration Rights Agreement. The form and terms of the
New Notes are the same as the form and terms of the Old Notes except that the
New Notes have been registered under the Securities Act and will not provide
for any increase in the interest rate thereon. In that regard, the Old Notes
provide, among other things, that, if a registration statement relating to the
Exchange Offer has not been filed by June 8, 1998 and declared effective by
August 7, 1998, Liquidated Damages will be payable on the Old Notes. Upon
consummation of the Exchange Offer, holders of Old Notes will not be entitled
to any Liquidated Damages thereon or any further registration rights under the
Registration Rights Agreement, except under limited circumstances. See "Risk
Factors--Consequences of a Failure to Exchange Old Notes" and "Description of
Notes."
The Exchange Offer is not being made to, nor will the Company accept
tenders for exchange from, holders of Old Notes in any jurisdiction in which
the Exchange Offer or the acceptance thereof would not be in compliance with
the securities or blue sky laws of such jurisdiction.
Unless the context requires otherwise, the term "holder" with respect to
the Exchange Offer means any person in whose name the Old Notes are registered
on the books of the Company or any other person who has obtained a properly
completed bond power from the registered holder, or any person whose Old Notes
are held of record by The Depository Trust Company ("DTC") who desires to
deliver such Old Notes by book-entry transfer at DTC.
TERMS OF THE EXCHANGE OFFER
The Company hereby offers, upon the terms and subject to the conditions
set forth in this Prospectus and in the accompanying Letter of Transmittal, to
exchange up to $200,000,000 aggregate principal amount of New Notes for a like
aggregate principal amount of Old Notes properly tendered on or prior to the
Expiration Date and not properly withdrawn in accordance with the procedures
described below. The Company will issue, promptly after the Expiration Date, an
aggregate principal amount of up to $200,000,000 of New Notes in exchange for a
like principal amount of outstanding Old Notes tendered and accepted in
connection with the Exchange Offer. Holders may tender their Old Notes in whole
or in part in denominations of $1,000 or any integral multiple thereof.
The Exchange Offer is not conditioned upon any minimum principal amount of
Old Notes being tendered. As of the date of this Prospectus, $200,000,000
aggregate principal amount of the Old Notes are outstanding.
Holders of Old Notes do not have any appraisal or dissenters' rights in
connection with the Exchange Offer. Old Notes which are not tendered for or are
tendered but not accepted in connection with the Exchange Offer will remain
outstanding and be entitled to the benefits of the Indenture, but will not be
entitled to any further registration rights under the Registration Rights
Agreement, except under limited circumstances. See "Risk Factors--Consequences
of a Failure to Exchange Old Notes."
If any tendered Old Notes are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein or
otherwise, certificates for any such unaccepted Old Notes will be returned,
without expense, to the tendering holder thereof promptly after the Expiration
Date.
25
Holders who tender Old Notes in connection with the Exchange Offer will
not be required to pay brokerage commissions or fees or, subject to the
instructions in the Letter of Transmittal, transfer taxes with respect to the
exchange of Old Notes in connection with the Exchange Offer. The Company will
pay all charges and expenses, other than certain applicable taxes described
below, in connection with the Exchange Offer. See "--Fees and Expenses."
NEITHER THE COMPANY NOR THE BOARD OF DIRECTORS OF THE COMPANY MAKES ANY
RECOMMENDATION TO HOLDERS OF OLD NOTES AS TO WHETHER TO TENDER OR REFRAIN FROM
TENDERING ALL OR ANY PORTION OF THEIR OLD NOTES PURSUANT TO THE EXCHANGE OFFER.
IN ADDITION, NO ONE HAS BEEN AUTHORIZED TO MAKE ANY SUCH RECOMMENDATION.
HOLDERS OF OLD NOTES MUST MAKE THEIR OWN DECISIONS WHETHER TO TENDER PURSUANT
TO THE EXCHANGE OFFER AND, IF SO, THE AGGREGATE AMOUNT OF OLD NOTES TO TENDER
BASED ON SUCH HOLDERS OWN FINANCIAL POSITIONS AND REQUIREMENTS.
The term "Expiration Date" means 5:00 p.m., New York City time, on
, 1998 unless the Exchange Offer is extended by the Company (in which case
the term "Expiration Date" shall mean the latest date and time to which the
Exchange Offer is extended).
The Company expressly reserves the right in its sole and absolute
discretion, subject to applicable law, at any time and from time to time, (i)
to delay the acceptance of the Old Notes for exchange, (ii) to terminate the
Exchange Offer (whether or not any Old Notes have theretofore been accepted for
exchange) if the Company determines, in its sole and absolute discretion, that
any of the events or conditions referred to under "--Conditions to the Exchange
Offer" have occurred or exist or have not been satisfied, (iii) to extend the
Expiration Date of the Exchange Offer and retain all Old Notes tendered
pursuant to the Exchange Offer, subject, however, to the right of holders of
Old Notes to withdraw their tendered Old Notes as described under "--Withdrawal
Rights," and (iv) to waive any condition or otherwise amend the terms of the
Exchange Offer in any respect. If the Exchange Offer is amended in a manner
determined by the Company to constitute a material change, or if the Company
waives a material condition of the Exchange Offer, the Company will promptly
disclose such amendment by means of a prospectus supplement that will be
distributed to the holders of the Old Notes, and the Company will extend the
Exchange Offer to the extent required by Rule 14e-1 under the Exchange Act.
Any such delay in acceptance, extension, termination or amendment will be
followed promptly by oral or written notice thereof to the Exchange Agent and
by making a public announcement thereof, and such announcement in the case of
an extension will be made no later than 9:00 a.m., New York City time, on the
next business day after the previously scheduled Expiration Date. Without
limiting the manner in which the Company may choose to make any public
announcement and subject to applicable law, the Company shall have no
obligation to publish, advertise or otherwise communicate any such public
announcement other than by issuing a release to an appropriate news agency.
ACCEPTANCE FOR EXCHANGE AND ISSUANCE OF NEW NOTES
Upon the terms and subject to the conditions of the Exchange Offer, the
Company will exchange, and will issue to the Exchange Agent, New Notes for Old
Notes validly tendered and not withdrawn (pursuant to the withdrawal rights
described under "--Withdrawal Rights") promptly after the Expiration Date.
Subject to the conditions set forth under "--Conditions to the Exchange
Offer," delivery of New Notes in exchange for Old Notes tendered and accepted
for exchange pursuant to the Exchange Offer will be made only after timely
receipt by the Exchange Agent of (i) certificates for Old Notes or a book-entry
confirmation of a book-entry transfer of Old Notes into the Exchange Agent's
account at DTC, including an Agent's Message if the tendering holder does not
deliver a Letter of Transmittal,
26
(ii) a completed and signed Letter of Transmittal (or facsimile thereof), with
any required signature guarantees, or, in the case of a book-entry transfer, an
Agent's Message in lieu of the Letter of Transmittal, and (iii) any other
documents required by the Letter of Transmittal. Accordingly, the delivery of
New Notes might not be made to all tendering holders at the same time, and will
depend upon when certificates for Old Notes, book-entry confirmations with
respect to Old Notes and other required documents are received by the Exchange
Agent.
The term "book-entry confirmation" means a timely confirmation of a
book-entry transfer of Old Notes into the Exchange Agent's account at DTC. See
"--Procedures for Tendering Old Notes--Book-Entry Transfer." The term "Agent's
Message" means a message transmitted by DTC to and received by the Exchange
Agent and forming a part of a book-entry confirmation, which states that DTC
has received an express acknowledgment from the tendering participant, which
acknowledgment states that such participant has received and agrees to be bound
by the Letter of Transmittal and that the Company may enforce such Letter of
Transmittal against such participant.
Subject to the terms and conditions of the Exchange Offer, the Company
will be deemed to have accepted for exchange, and thereby exchanged, Old Notes
validly tendered and not withdrawn as, if and when the Company gives oral or
written notice to the Exchange Agent of the Company's acceptance of such Old
Notes for exchange pursuant to the Exchange Offer. The Exchange Agent will act
as agent for the Company for the purpose of receiving tenders of Old Notes,
Letters of Transmittal and related documents, and as agent for tendering
holders for the purpose of receiving Old Notes, Letters of Transmittal and
related documents and transmitting New Notes to validly tendering holders. Such
exchange will be made promptly after the Expiration Date. If for any reason
whatsoever, acceptance for exchange or the exchange of any Old Notes tendered
pursuant to the Exchange Offer is delayed (whether before or after the
Company's acceptance for exchange of Old Notes) or the Company extends the
Exchange Offer or is unable to accept for exchange or exchange Old Notes
tendered pursuant to the Exchange Offer, then, without prejudice to the
Company's rights set forth herein, the Exchange Agent may, nevertheless, on
behalf of the Company and subject to Rule 14e-1(c) under the Exchange Act,
retain tendered Old Notes and such Old Notes may not be withdrawn except to the
extent tendering holders are entitled to withdrawal rights as described under
"--Withdrawal Rights."
Pursuant to the Letter of Transmittal, or the Agent's Message, as the case
may be, a holder of Old Notes will warrant and agree in the Letter of
Transmittal or pursuant to the Agent's Message that it has full power and
authority to tender, exchange, sell, assign and transfer Old Notes, that the
Company will acquire good, marketable and unencumbered title to the tendered
Old Notes, free and clear of all liens, restrictions, charges and encumbrances,
and the Old Notes tendered for exchange are not subject to any adverse claims
or proxies. The holder also will warrant and agree that it will, upon request,
execute and deliver any additional documents deemed by the Company or the
Exchange Agent to be necessary or desirable to complete the exchange, sale,
assignment, and transfer of the Old Notes tendered pursuant to the Exchange
Offer.
PROCEDURES FOR TENDERING OLD NOTES
VALID TENDER
Except as set forth below, in order for Old Notes to be validly tendered
by book-entry transfer, an Agent's Message or a completed and signed Letter of
Transmittal (or facsimile thereof), with any required signature guarantees and
in either case any other documents required by the Letter of Transmittal, must
be delivered to the Exchange Agent by mail, facsimile, hand delivery or
overnight carrier at one of the Exchange Agent's addresses set forth under
"--Exchange Agent" on or prior to the Expiration Date and either (i) such Old
Notes must be tendered pursuant to the procedures for book-entry transfer set
forth below or (ii) the guaranteed delivery procedures set forth below must be
complied with.
Except as set forth below, in order for Old Notes to be validly tendered
by a means other than by book-entry transfer, a completed and signed Letter of
Transmittal (or facsimile thereof), with any
27
required signature guarantees and any other documents required by the Letter of
Transmittal, must be delivered to the Exchange Agent by mail, facsimile, hand
delivery or overnight courier at one of the Exchange Agent's addresses set
forth under "--Exchange Agent" on or prior to the Expiration Date and either
(i) such Old Notes must be delivered to the Exchange Agent on or prior to the
Expiration Date or (ii) guaranteed delivery procedures set forth below must be
complied with.
If less than all of the Old Notes are tendered, a tendering holder must
fill in the amount of Old Notes being tendered in the appropriate box on the
Letter of Transmittal. The entire amount of Old Notes delivered to the Exchange
Agent will be deemed to have been tendered unless otherwise indicated.
THE METHOD OF DELIVERY OF CERTIFICATES, THE LETTER OF TRANSMITTAL AND ALL
OTHER REQUIRED DOCUMENTS IS AT THE OPTION AND SOLE RISK OF THE TENDERING
HOLDER, AND DELIVERY WILL BE DEEMED MADE ONLY WHEN ACTUALLY RECEIVED BY THE
EXCHANGE AGENT. IF DELIVERY IS BY MAIL, REGISTERED MAIL, RETURN RECEIPT
REQUESTED, PROPERLY INSURED, OR AN OVERNIGHT DELIVERY SERVICE IS RECOMMENDED.
IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ENSURE TIMELY DELIVERY.
BOOK-ENTRY TRANSFER
The Exchange Agent and DTC have confirmed that any Direct Participant (as
defined in "Description of Notes--Book-Entry, Delivery and Form") in DTC's
book-entry transfer facility system may utilize DTC's ATOP procedures to tender
Old Notes. The Exchange Agent will establish an account with respect to the Old
Notes at DTC for purposes of the Exchange Offer within two business days after
the date of this Prospectus. Any Direct Participant may make a book-entry
delivery of the Old Notes by causing DTC to transfer such Old Notes into the
Exchange Agent's account at DTC in accordance with DTC's book entry procedures
for transfer. However, although delivery of Old Notes may be effected through
book-entry transfer into the Exchange Agent's account at DTC, an Agent's
Message or a completed and signed Letter of Transmittal (or facsimile thereof),
with any required signature guarantees and any other documents required by the
Letter of Transmittal must in any case be delivered to and received by the
Exchange Agent at one of its addresses set forth under "--Exchange Agent" on or
prior to the Expiration Date, or the guaranteed delivery procedure set forth
below must be complied with.
DELIVERY OF DOCUMENTS TO DTC IN ACCORDANCE WITH DTC'S PROCEDURES DOES NOT
CONSTITUTE DELIVERY TO THE EXCHANGE AGENT.
SIGNATURE GUARANTEES
Certificates for the Old Notes need not be endorsed and signature
guarantees on the Letter of Transmittal are unnecessary unless (a) a
certificate for the Old Notes is registered in a name other than that of the
person surrendering the certificate or (b) such holder completes the box
entitled "Special Issuance Instructions" or "Special Delivery Instructions" in
the Letter of Transmittal. In the case of (a) or (b) above, such certificates
for Old Notes must be duly endorsed or accompanied by a properly executed bond
power, with the endorsement or signature on the bond power and on the Letter of
Transmittal guaranteed by a firm or other entity identified in Rule 17Ad-15
under the Exchange Act as an "eligible guarantor institution," including (as
such terms are defined therein): (i) a bank; (ii) a broker, dealer, municipal
securities broker or dealer or government securities broker or dealer; (iii) a
credit union; (iv) a national securities exchange, registered securities
association or clearing agency; or (v) a savings association that is a
participant in a Securities Transfer Association (an "Eligible Institution"),
unless surrendered on behalf of such Eligible Institution. See Instruction 1 to
the Letter of Transmittal.
GUARANTEED DELIVERY
If a holder desires to tender Old Notes pursuant to the Exchange Offer and
the certificates for such Old Notes are not immediately available or time will
not permit all required documents to reach the
28
Exchange Agent on or prior to the Expiration Date, or the procedure for
book-entry transfer cannot be completed on a timely basis, such Old Notes may
nevertheless be tendered, provided that all of the following guaranteed
delivery procedures are complied with:
(a) such tenders are made by or through an Eligible Institution;
(b) a properly completed and duly executed Notice of Guaranteed Delivery,
substantially in the form accompanying the Letter of Transmittal, is received
by the Exchange Agent, as provided below, on or prior to the Expiration Date;
and
(c) the certificates (or a book-entry confirmation) representing all
tendered Old Notes, in proper form for transfer, together with a properly
completed and duly executed Letter of Transmittal (or facsimile thereof or an
Agent's Message in lieu thereof), with any required signature guarantees and
any other documents required by the Letter of Transmittal, are received by the
Exchange Agent within three New York Stock Exchange trading days after the date
of execution of such Notice of Guaranteed Delivery.
The Notice of Guaranteed Delivery may be delivered by hand, or transmitted
by facsimile or mail to the Exchange Agent and must include a guarantee by an
Eligible Institution in the form set forth in such notice.
Notwithstanding any other provision hereof, the delivery of New Notes in
exchange for Old Notes tendered and accepted for exchange pursuant to the
Exchange Offer will in all cases be made only after timely receipt by the
Exchange Agent of Old Notes, or of a book-entry confirmation with respect to
such Old Notes, and a properly completed and duly executed Letter of
Transmittal (or facsimile thereof or an Agent's Message in lieu thereof),
together with any required signature guarantees and any other documents
required by the Letter of Transmittal. Accordingly, the delivery of New Notes
might not be made to all tendering holders at the same time, and will depend
upon when Old Notes, book-entry confirmations with respect to Old Notes and
other required documents are received by the Exchange Agent.
The Company's acceptance for exchange of Old Notes tendered pursuant to
any of the procedures described above will constitute a binding agreement
between the tendering holder and the Company upon the terms and subject to the
conditions of the Exchange Offer.
DETERMINATION OF VALIDITY
All questions as to the form of documents, validity, eligibility
(including time of receipt) and acceptance for exchange of any tendered Old
Notes will be determined by the Company, in its sole discretion, whose
determination shall be final and binding on all parties. The Company reserves
the absolute right, in its sole and absolute discretion, to reject any and all
tenders determined by it not to be in proper form or the acceptance of which,
or exchange for, may, in the opinion of counsel to the Company, be unlawful.
The Company also reserves the absolute right, subject to applicable law, to
waive any of the conditions of the Exchange Offer as set forth under
"--Conditions to the Exchange Offer" or any condition or irregularity in any
tender of Old Notes of any particular holder whether or not similar conditions
or irregularities are waived in the case of other holders.
The interpretation by the Company of the terms and conditions of the
Exchange Offer (including the Letter of Transmittal and the instructions
thereto) will be final and binding. No tender of Old Notes will be deemed to
have been validly made until all irregularities with respect to such tender
have been cured or waived. Neither the Company, any affiliates or assigns of
the Company, the Exchange Agent nor any other person shall be under any duty to
give any notification of any irregularities in tenders or incur any liability
for failure to give any such notification.
If any Letter of Transmittal, endorsement, bond power, power of attorney,
or any other document required by the Letter of Transmittal is signed by a
trustee, executor, administrator, guardian, attorney-in-fact, officer of a
corporation or other person acting in a fiduciary or representative capacity,
such
29
person should so indicate when signing, and unless waived by the Company,
proper evidence satisfactory to the Company, in its sole discretion, of such
person's authority to so act must be submitted.
A beneficial owner of Old Notes that are held by or registered in the name
of a broker, dealer, commercial bank, trust company or other nominee or
custodian is urged to contact such entity promptly if such beneficial holder
wishes to participate in the Exchange Offer.
RESALES OF NEW NOTES
The Company is making the Exchange Offer for the New Notes in reliance on
the position of the staff of the Division of Corporation Finance of the
Commission as set forth in certain interpretive letters addressed to third
parties in other transactions. However, the Company has not sought its own
interpretive letter and there can be no assurance that the staff of the
Division of Corporation Finance of the Commission would make a similar
determination with respect to the Exchange Offer as it has in such interpretive
letters to third parties. Based on these interpretations by the staff of the
Division of Corporation Finance of the Commission, and subject to the two
immediately following sentences, the Company believes that New Notes issued
pursuant to this Exchange Offer in exchange for Old Notes may be offered for
resale, resold and otherwise transferred by a holder thereof (other than a
holder who is a broker-dealer) without further compliance with the registration
and prospectus delivery requirements of the Securities Act, provided that such
New Notes are acquired in the ordinary course of such holder's business and
that such holder is not participating, and has no arrangement or understanding
with any person to participate, in a distribution (within the meaning of the
Securities Act) of such New Notes. However, any holder of Old Notes who is an
"affiliate" of the Company or who intends to participate in the Exchange Offer
for the purpose of distributing New Notes, or any broker-dealer who purchased
Old Notes from the Company to resell pursuant to Rule 144A or any other
available exemption under the Securities Act, (a) will not be able to rely on
the interpretations of the staff of the Division of Corporation Finance of the
Commission set forth in the above-mentioned interpretive letters, (b) will not
be permitted or entitled to tender such Old Notes in the Exchange Offer and (c)
must comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any sale or other transfer of such Old Notes
unless such sale is made pursuant to an exemption from such requirements. In
addition, as described below, if any broker-dealer holds Old Notes acquired for
its own account as a result of market-making or other trading activities and
exchanges such Old Notes for New Notes, then such broker-dealer must deliver a
prospectus meeting the requirements of the Securities Act in connection with
any resales of such New Notes.
Each holder of Old Notes who wishes to exchange Old Notes for New Notes in
the Exchange Offer will be required to represent that (i) it is not an
"affiliate" of the Company, (ii) any New Notes to be received by it are being
acquired in the ordinary course of its business, (iii) it has no arrangement or
understanding with any person to participate in a distribution (within the
meaning of the Securities Act) of such New Notes, and (iv) if such holder is
not a broker-dealer, such holder is not engaged in, and does not intend to
engage in, a distribution (within the meaning of the Securities Act) of such
New Notes. In addition, the Company may require such holder, as a condition to
such holder's eligibility to participate in the Exchange Offer, to furnish to
the Company (or an agent thereof) in writing information as to the number of
"beneficial owners" (within the meaning of Rule 13d-3 under the Exchange Act)
on behalf of whom such holder holds the Notes to be exchanged in the Exchange
Offer. Each broker-dealer that receives New Notes for its own account pursuant
to the Exchange Offer must acknowledge that it acquired the Old Notes for its
own account as the result of market-making activities or other trading
activities and must agree that it will deliver a prospectus meeting the
requirements of the Securities Act in connection with any resale of such New
Notes. The Letter of Transmittal states that by so acknowledging and by
delivering a prospectus, a broker-dealer will not be deemed to admit that it is
an "underwriter" within the meaning of the Securities Act. Based on the
position taken by the staff of the Division of Corporation Finance of the
Commission in the interpretive letters referred to above, the Company believes
that Participating Broker-Dealers who acquired Old Notes for their own accounts
as a result of market-making activities or other trading activities may fulfill
their prospectus
30
delivery requirements with respect to the New Notes received upon exchange of
such Old Notes (other than Old Notes which represent an unsold allotment from
the original sale of the Old Notes) with a prospectus meeting the requirements
of the Securities Act, which may be the prospectus prepared for an exchange
offer so long as it contains a description of the plan of distribution with
respect to the resale of such New Notes. Accordingly, this Prospectus, as it
may be amended or supplemented from time to time, may be used by a
Participating Broker-Dealer during the period referred to below in connection
with resales of New Notes received in exchange for Old Notes where such Old
Notes were acquired by such Participating Broker-Dealer for its own account as
a result of market-making or other trading activities. A Participating
Broker-Dealer who intends to use this Prospectus in connection with the resale
of New Notes received in exchange for Old Notes pursuant to the Exchange Offer
must notify the Company, or cause the Company to be notified, on or prior to
the Expiration Date, that it is a Participating Broker-Dealer. Such notice may
be given in the space provided for that purpose in the Letter of Transmittal or
may be delivered to the Exchange Agent at one of the addresses set forth herein
under "--Exchange Agent." Any Participating Broker-Dealer who is an "affiliate"
of the Company may not rely on such interpretive letters and must comply with
the registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction.
In that regard, each Participating Broker-Dealer who surrenders Old Notes
pursuant to the Exchange Offer will be deemed to have agreed, by execution of
the Letter of Transmittal, that, upon receipt of notice from the Company of the
occurrence of any event or the discovery of any fact which makes any statement
contained or incorporated by reference in this Prospectus untrue in any
material respect or which causes this Prospectus to omit to state a material
fact necessary in order to make the statements contained or incorporated by
reference herein, in light of the circumstances under which they were made, not
misleading or of the occurrence of certain other events specified in the
Registration Rights Agreement, such Participating Broker-Dealer will suspend
the sale of New Notes pursuant to this Prospectus until the Company has amended
or supplemented this Prospectus to correct such misstatement or omission and
has furnished copies of the amended or supplemented Prospectus to such
Participating Broker-Dealer or the Company has given notice that the sale of
the New Notes may be resumed, as the case may be.
WITHDRAWAL RIGHTS
Except as otherwise provided herein, tenders of Old Notes may be withdrawn
at any time on or prior to the Expiration Date.
In order for a withdrawal to be effective a written, telegraphic or
facsimile transmission of such notice of withdrawal must be timely received by
the Exchange Agent at one of its addresses set forth under "--Exchange Agent"
on or prior to the Expiration Date. Any such notice of withdrawal must specify
the name of the person who tendered the Old Notes to be withdrawn, the
aggregate principal amount of Old Notes to be withdrawn, and (if certificates
for such Old Notes have been tendered) the name of the registered holder of the
Old Notes as set forth on the Old Notes, if different from that of the person
who tendered such Old Notes. If Old Notes have been delivered or otherwise
identified to the Exchange Agent, then prior to the physical release of such
Old Notes, the tendering holder must submit the serial numbers shown on the
particular Old Notes to be withdrawn and the signature on the notice of
withdrawal must be guaranteed by an Eligible Institution, except in the case of
Old Notes tendered for the account of an Eligible Institution. If Old Notes
have been tendered pursuant to the procedures for book-entry transfer set forth
in "--Procedures for Tendering Old Notes," the notice of withdrawal must
specify the name and number of the account at DTC to be credited with the
withdrawal of Old Notes, in which case a notice of withdrawal will be effective
if delivered to the Exchange Agent by written, telegraphic or facsimile
transmission. Withdrawals of tenders of Old Notes may not be rescinded. Old
Notes properly withdrawn will not be deemed validly tendered for purposes of
the Exchange Offer, but may be retendered at any subsequent time on or prior to
the Expiration Date by following any of the procedures described above under
"--Procedures for Tendering Old Notes."
31
All questions as to the validity, form and eligibility (including time of
receipt) of such withdrawal notices will be determined by the Company, in its
sole discretion, whose determination shall be final and binding on all parties.
Neither the Company, any affiliate or assign of the Company, the Exchange Agent
nor any other person shall be under any duty to give any notification of any
irregularities in any notice of withdrawal or incur any liability for failure
to give any such notification. Any Old Notes which have been tendered but which
are withdrawn will be returned to the holder thereof promptly after withdrawal.
INTEREST ON NEW NOTES
Holders of Old Notes whose Old Notes are accepted for exchange will not
receive interest on such Old Notes and will be deemed to have waived the right
to receive any interest on such Old Notes accrued from and after April 9, 1998.
Accordingly, such holders of Old Notes as of the record date for the payment of
interest on August 15, 1998 will be entitled to receive interest on the New
Notes issued in exchange therefor accrued from and after April 9, 1998.
CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provisions of the Exchange Offer, or any
extension of the Exchange Offer, the Company will not be required to accept for
exchange, or to exchange, any Old Notes for any New Notes, and, as described
below, may terminate the Exchange Offer (whether or not any Old Notes have
theretofore been accepted for exchange) or may waive any conditions to or amend
the Exchange Offer, if any of the following conditions have occurred or exist
or have not been satisfied:
(a) there shall occur a change in the current interpretation by the staff
of the Commission which permits the New Notes issued pursuant to the Exchange
Offer in exchange for Old Notes to be offered for resale, resold and otherwise
transferred by holders thereof (other than broker-dealers and any such holder
which is an "affiliate" of the Company within the meaning of Rule 405 under the
Securities Act) without compliance with the registration and prospectus
delivery provisions of the Securities Act provided that such New Notes are
acquired in the ordinary course of such holders' business and such holders have
no arrangement or understanding with any person to participate in the
distribution of such New Notes; or
(b) any law, statute, rule or regulation shall have been adopted or
enacted which, in the judgment of the Company, would reasonably be expected to
impair its ability to proceed with the Exchange Offer; or
(c) a stop order shall have been issued by the Commission or any state
securities authority suspending the effectiveness of the Registration Statement
or proceedings shall have been initiated or, to the knowledge of the Company,
threatened for that purpose or any governmental approval has not been obtained,
which approval the Company shall, in its sole discretion, deem necessary for
the consummation of the Exchange Offer as contemplated hereby.
If the Company determines in its sole and absolute discretion that any of
the foregoing events or conditions has occurred or exists or has not been
satisfied, it may, subject to applicable law, terminate the Exchange Offer
(whether or not any Old Notes have theretofore been accepted for exchange) or
may waive any such condition or otherwise amend the terms of the Exchange Offer
in any respect. If such waiver or amendment constitutes a material change to
the Exchange Offer, the Company will promptly disclose such waiver or amendment
by means of a prospectus supplement that will be distributed to the registered
holders of the Old Notes and will extend the Exchange Offer to the extent
required by Rule 14e-1 under the Exchange Act.
32
EXCHANGE AGENT
The Chase Manhattan Bank has been appointed as Exchange Agent for the
Exchange Offer. Delivery of the Letters of Transmittal and any other required
documents, questions, requests for assistance, and requests for additional
copies of this Prospectus or of the Letter of Transmittal should be directed to
the Exchange Agent as follows:
By Mail or Hand Delivery:
The Chase Manhattan Bank
55 Water Street, 2nd Floor, Room 234
New York, New York 10041
Confirm by Telephone:
(212) 946-3009
Facsimile Transmissions: (Eligible Institutions Only)
(212) 946-8177/8178
Delivery to other than the above addresses or facsimile number will not
constitute a valid delivery.
FEES AND EXPENSES
The Company has agreed to pay the Exchange Agent reasonable and customary
fees for its services and will reimburse it for its reasonable out-of-pocket
expenses in connection therewith. The Company will also pay brokerage houses
and other custodians, nominees and fiduciaries the reasonable out-of-pocket
expenses incurred by them in forwarding copies of this Prospectus and related
documents to the beneficial owners of Old Notes, and in handling or tendering
for their customers.
Holders who tender their Old Notes for exchange will not be obligated to
pay any transfer taxes in connection therewith. If, however, New Notes are to
be delivered to, or are to be issued in the name of, any person other than the
registered holder of the Old Notes tendered, or if a transfer tax is imposed
for any reason other than the exchange of Old Notes in connection with the
Exchange Offer, then the amount of any such transfer taxes (whether imposed on
the registered holder or any other persons) will be payable by the tendering
holder. If satisfactory evidence of payment of such taxes or exemption
therefrom is not submitted with the Letter of Transmittal, the amount of such
transfer taxes will be billed directly to such tendering holder.
The Company will not make any payment to brokers, dealers or other
nominees soliciting acceptances of the Exchange Offer.
33
UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
For U.S. federal income tax purposes, the exchange of an Old Note for a
New Note pursuant to the Exchange Offer should not be treated as a taxable
exchange for U.S. federal income tax purposes. In that event, holders who
exchange their Old Notes for New Notes would not recognize income, gain or loss
for U.S. federal income tax purposes. In addition, a holder's tax basis in the
New Notes would be equal to its adjusted basis in the Old Notes, and its
holding period would include the period during which it held the Old Notes.
Persons considering the exchange of Old Notes for New Notes pursuant to the
Exchange Offer should consult their own tax advisors concerning the application
of the U.S. federal tax laws to their particular situations as well as any
consequences arising under the laws of any other taxing jurisdiction.
The following summary sets forth certain United States federal tax
consequences resulting from the purchase, ownership and disposition of a Note,
whether an Old Note or a New Note. It does not purport to consider all the
possible tax consequences of the purchase, ownership or disposition of the
Notes, and it is not intended to reflect the individual tax position of any
holder. It deals only with Notes held as capital assets. Except as expressly
indicated, it is addressed only to initial holders who purchased Old Notes at
their issue price (as defined below) and does not deal with holders with a
special tax status or special tax situation, such as financial institutions or
dealers in securities or currencies, Notes held as a hedge against currency
risks or as part of a straddle with other investments or as part of a
"synthetic security" or other integrated investment (including a "conversion
transaction") consisting of a Note and one or more other investments, or
situations in which the functional currency of the Noteholder is not the U.S.
dollar. This discussion is based upon the United States federal tax laws and
regulations as now in effect and as currently interpreted, and does not take
into account possible changes in such tax laws or such interpretations, all of
which may be applied retroactively. This discussion does not include any
description of the tax laws of any state or local government within the United
States, or of any foreign government, that may be applicable to the Notes or
holders thereof.
TAXATION OF U.S. HOLDERS
For purposes of the discussion below, (i) "U.S. Holder" means a beneficial
owner of a Note that is for United States federal income tax purposes a citizen
or resident of the United States, a corporation, partnership or any of certain
other entities created or organized in or under the laws of the United States,
or any political subdivision thereof, or an estate or trust the income of which
is subject to United States federal income taxation regardless of its source,
and (ii) "Non-U.S. Holder" generally means a person other than a U.S. Holder.
The "issue price" of the Old Notes is the first price to the public (not
including bond houses, brokers or similar persons or organizations acting in
the capacity of underwriters, placement agents or wholesalers) at which a
substantial amount of Old Notes was sold for money.
INTEREST PAYMENTS. Interest on a Note will be includible in a U.S.
Holder's gross income as ordinary U.S. source interest income at the time it is
accrued or received in accordance with the U.S. Holder's method of accounting
for United States federal income tax purposes.
SALE, EXCHANGE OR RETIREMENT. A U.S. Holder's tax basis in a Note
generally will be the U.S. dollar cost of the Old Note to such U.S. Holder
reduced by any principal payments received by the U.S. Holder on the Old Note
or the New Note.
Upon sale, exchange or retirement of a Note, a U.S. Holder generally will
recognize gain or loss equal to the difference between the U.S. Holder's tax
basis in the Note and the amount realized on such sale, exchange or retirement,
except to the extent such amount is attributable to accrued interest. Gain or
loss so recognized will be capital gain or loss and will be long-term capital
gain or loss if, at the time of the sale, exchange or retirement, the Note was
held for more than one year. Under current law, net capital gains of
individuals are, under certain circumstances, taxed at lower rates than items
of ordinary income.
34
TAXATION OF NON-U.S. HOLDERS
Payments of interest (including original issue discount, if any) and
premium, if any, on a Note to a Non-U.S. Holder will not be subject to United
States federal witholding tax, provided that, in the case of interest, such
person (i) does not own, actually or constructively, 10% or more of the total
combined voting power of all classes of stock entitled to vote in the Company,
(ii) is not a controlled foreign corporation related, directly or indirectly,
to the issuer through stock ownership and (iii) is not a bank receiving
interest described in Section 881(c)(3)(A) of the Code, and provided that the
statement described in the next sentence has been provided. Sections 871(h) and
881(c) of the Code require that, in order to obtain the exemption from
witholding tax described in the previous sentence, either the beneficial owner
of the Note, or a securities clearing organization, bank or other financial
institution that holds customers' securities in the ordinary course of its
trade or business (a "Financial Institution") and that is holding the Note on
behalf of such beneficial owner, file a statement with the witholding agent to
the effect that the beneficial owner of the Note is not a United States person.
Under temporary United States Treasury Regulations which apply to both stated
interest and sale or exchange proceeds if either is paid with respect to a Note
on or before December 31, 1999, the statement may be made by (i) the beneficial
owner of a Note certifying on Internal Revenue Service ("IRS") Form W-8, under
penalties of perjury, that it is not a United States person and provides its
name and address or (ii) any Financial Institution holding the Note on behalf
of the beneficial owner files a statement with the witholding agent to the
effect that it has received such a statement from the Noteholder (and
furnishing the witholding agent with a copy thereof). Recently issued final
Treasury Regulations (the "Final Regulations"), which apply to interest
(including original issue discount) and sale or exchange proceeds paid with
respect to a Note after December 31, 1999, also provide that the requirement of
Section 871(h) and 881(c) generally will be satisfied if beneficial owners
(including partners of certain foreign partnerships), as well as certain
foreign partnerships, meet the two conditions set forth in the preceding
sentence. However, a beneficial owner that is a foreign estate or trust (or
fiduciary thereof), a foreign partnership that has entered into a witholding
agreement with the IRS, or a Non-U.S. Holder holding a Note through its United
States branch will be required to provide its "taxpayer identification number"
in addition to its name and address on Form W-8. Foreign partnerhips and their
partners should consult their tax advisors regarding possible addtional
reporting requirements.
Notwithstanding the foregoing, if interest or other income received with
respect to the Note is effectively connected with a United States trade or
business conducted by a Non-U.S. Holder (and, in the case of a non-U.S. Holder
to whom an income tax treaty applies, is attributable to a U.S. permanent
establishment of the non-U.S. Holder), such Noteholder, although exempt from
the witholding tax described in the preceding paragraph, will be subject to
United States federal income tax on such interest in the same manner as if it
were a United States person. In addition, if such Noteholder is a corporation,
it may be subject to a branch profits tax at a rate of 30% (or a lower treaty
rate) of its effectively connected earnings and profits that are treated as
repatriated during the taxable year.
A Non-U.S. Holder will not be subject to United States federal income tax
on gain realized on the sale, exchange or other disposition of a Note, unless
(i) such Noteholder is an individual who is present in the United States for
183 days or more in the taxable year of disposition, and either (a) such
individual has a "tax home" (as defined in Section 911(d)(3) of the Code) in
the United States (unless such gain is attributable to a fixed place of
business in a foreign country maintained by such individual and has been
subject to foreign tax of at least 10%) or (b) the gain is attributable to an
office or other fixed place of business maintained by such individual in the
United States or (ii) such gain is effectively connected with the conduct by
such Noteholder of a trade or business in the United States.
INFORMATION REPORTING AND BACKUP WITHOLDING
U.S. HOLDERS. Information reporting and backup withholding may apply to
payments of interest on or the proceeds from a sale or other disposition of a
Note in the case of certain non-corporate U.S. Holders. Such U.S. Holders
generally will be subject to backup withholding at a rate of 31% unless the
recipient of such payment supplies a taxpayer identification number, certified
under penalty of perjury,
35
as well as certain other information, or otherwise establishes, in the manner
prescribed by law, an exemption from backup withholding. Any amount withheld
under the backup withholding rules is allowable as credit against the U.S.
Holder's federal income tax upon furnishing the required information.
NON-U.S. HOLDERS. Generally, information reporting and backup withholding
of federal income tax at a rate of 31% may apply to payments of principal of
and interest and premium, if any, on a Note to a Non-U.S. Holder if the payee
fails to certify that the beneficial owner is a Non-U.S. Holder. The payment of
the proceeds of a disposition of a Note to or through the U.S. office of a U.S.
or foreign broker will be subject to information reporting and backup
withholding, unless the owner provides the certification described above or
otherwise establishes an exemption. The proceeds of a disposition by a Non-U.S.
Holder of a Note to or through a foreign office of a broker will not be subject
to backup withholding. However, if such broker is a U.S. person, a controlled
foreign corporation for federal income tax purposes or a foreign person 50% or
more of whose gross income from all sources for certain periods is from
activities that are effectively connected with a U.S. trade or business,
information reporting will apply unless such broker has documentary evidence in
its files of the owner's foreign status and has no actual knowledge to the
contrary or unless the owner otherwise establishes an exemption. Both backup
withholding and information reporting will apply to the proceeds from such
disposition if the broker has actual knowledge that the payee is a U.S. Holder.
The Final Regulations modify the backup withholding and information
reporting requirements in certain respects for payments made after December 31,
1999. Holders are urged to consult their tax advisors regarding the application
of the backup withholding and information reporting rules.
USE OF PROCEEDS
The Company will not receive any cash proceeds from the issuance of the
New Notes transferred hereby. In consideration for issuing the New Notes in
exchange for the Old Notes as described in the Prospectus, the Company will
receive Old Notes in like principal amount. The Old Notes surrendered in
exchange for the New Notes will be retired and cancelled.
The net proceeds to the Company from the sale of the Old Notes were
approximately $192.8 million. The Company intends to either loan $100 million
of such proceeds to CHS Finance which intends to loan such proceeds to certain
of the Company's operating subsidiaries or loan the funds directly to the
operating subsidiaries. In either case the subsidiaries will use such proceeds
to repay a portion of their respective credit arrangements with financial
institutions in their countries of operations (the "Revolving Credit
Facilities"). As of December 31, 1997, $348.3 million was outstanding under
these facilities, bearing a weighted average interest rate of 10.4% and
maturing at various times through October 1999. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources", "Certain Indebtedness" and Note F to the Company's
Consolidated Financial Statements.
Of the remaining proceeds, $30 million has been used to repay the Short
Term Loan incurred in connection with the SiS acquisition. See "Recent
Developments." The remainder of the net proceeds were added to the Company's
working capital and will be available for earnout obligations relating to prior
acquisitions, general corporate purposes and possible future acquisitions. See
"Recent Developments--Possible Acquisitions", "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources" and "Business--Strategy."
Pending utilization as described above, the net proceeds of the sale of
the Old Notes are invested in Temporary Cash Investments (as defined).
36
CAPITALIZATION
The following table sets forth as of December 31, 1997 the capitalization
of the Company (i) on an actual basis and (ii) as adjusted to give effect to
the sale by the Company of the Old Notes, the application of the net proceeds
therefrom as described under "Use of Proceeds" and the assumption by the
Company of indebtedness in connection with the acquisition of SiS. This table
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Company's Consolidated
Financial Statements and the Notes thereto contained elsewhere in this
Prospectus.
DECEMBER 31, 1997
-------------------------------
ACTUAL AS ADJUSTED
-------------- --------------
(IN THOUSANDS)
Notes payable(1) ....................................................... $ 309,510 $ 245,769
Senior Notes due 2005 .................................................. -- 200,000
Other long-term debt ................................................... 61,556 39,884
---------- ----------
Total Debt ............................................................. 371,066 485,653
========== ==========
Shareholders' equity:
Preferred Stock, $.001 par value, 5,000,000 shares authorized; no shares
outstanding .......................................................... -- --
Common Stock, $.001 par value, 100,000,000 shares authorized; 48,910,999
shares outstanding(2) ................................................ 49 49
Additional paid-in capital ............................................. 621,021 621,021
Retained earnings ...................................................... 65,115 65,115
Cumulative foreign currency translation adjustment ..................... (18,421) (18,421)
---------- ----------
Total shareholders' equity ............................................. 667,764 667,764
---------- ----------
Total capitalization ................................................... $1,038,830 $1,153,417
========== ==========
- ----------------
(1) Represents short term debt maintained by certain of the Company's operating
subsidiaries for working capital purposes. See Note F to the Company's
Consolidated Financial Statements.
(2) Does not include 4,617,813 shares of Common Stock reserved for issuance
upon exercise of currently outstanding options, 76,144 shares reserved for
issuance pursuant to remaining options which may be granted under the
Company's stock option plans and 450,000 shares reserved for issuance upon
exercise of outstanding warrants.
For a discussion of the New Credit Facility expected to be entered into
shortly after the commencement of the Exchange Offer, see "Certain
Indebtedness."
37
SELECTED CONSOLIDATED FINANCIAL DATA
(DOLLARS IN THOUSANDS)
The following tables set forth certain financial data for each year in the
five-year period ended December 31, 1997. The Selected Consolidated Financial
Data as of and for the years ended December 31, 1993, 1994, 1995, 1996 and 1997
is derived from the audited consolidated financial statements of the Company,
which statements have been audited by Grant Thornton LLP, independent certified
public accountants. The pro forma information presented below has been prepared
based upon the historical financial statements of the Company and the acquired
subsidiaries for the periods stated above. Such pro forma information may not
be indicative of the results that would have occurred if the acquisitions had
been consummated on January 1, 1997, or of the operating results that may be
achieved by the combined companies in the future. The following data should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations", the Company's Pro Forma Condensed
Consolidated Financial Statements (Unaudited) and the Notes thereto and the
Company's Consolidated Financial Statements and Notes thereto contained
elsewhere in this Prospectus.
YEARS ENDED DECEMBER 31,
-------------------------------------------------
1993 1994 1995 1996
----------- ----------- ----------- -------------
INCOME STATEMENT DATA:
Net sales ................................... $146,408 $359,169 $936,703 $1,855,540
Cost of sales ............................... 136,968 333,983 868,716 1,724,432
-------- -------- -------- ----------
Gross Profit ................................ 9,440 25,186 67,987 131,108
Operating expenses .......................... 9,075 21,798 57,188 102,235
-------- -------- -------- ----------
Operating income ............................ 365 3,388 10,799 28,873
Interest (income) ........................... (229) (250) (1,757) (3,199)
Interest expense ............................ 1,076 2,070 6,454 11,712
-------- -------- -------- ----------
Earnings (loss) before income taxes and
minority interest .......................... (482) 1,568 6,102 20,360
Provision for income taxes .................. 241 603 1,797 6,086
Minority interest ........................... -- -- -- 2,108
-------- -------- -------- ----------
Net earnings (loss) ......................... $ (723) $ 965 $ 4,305 $ 12,166
======== ======== ======== ==========
OTHER FINANCIAL DATA:
EBITDA(3) ................................... $ 1,004 $ 4,650 $ 15,160 $ 36,596
Ratio of EBITDA to
interest expense ........................... 0.9x 2.2x 2.3x 3.1x
Ratio of total debt to EBITDA ............... 6.9x 5.0x 3.6x 5.5x
Ratio of net debt to EBITDA ................. -- -- -- --
Ratio of earnings to fixed charges(4) ....... 0.7x 1.6x 1.8x 2.5x
YEAR ENDED DECEMBER 31,
--------------------------------------------
1997
--------------------------------------------
PRO FORMA
ACTUAL PRO FORMA(1) AS ADJUSTED(2)
------------- -------------- ---------------
INCOME STATEMENT DATA:
Net sales ................................... $4,756,383 $5,708,679 $6,055,515
Cost of sales ............................... 4,409,714 5,318,551 5,640,569
---------- ---------- ----------
Gross Profit ................................ 346,669 390,128 414,946
Operating expenses .......................... 257,508 325,604 346,357
---------- ---------- ----------
Operating income ............................ 89,161 64,524 68,589
Interest (income) ........................... (11,470) (11,470) (11,470)
Interest expense ............................ 35,618 39,073 50,452
---------- ---------- ----------
Earnings (loss) before income taxes and
minority interest .......................... 65,013 36,921 29,607
Provision for income taxes .................. 13,988 14,734 13,644
Minority interest ........................... 2,634 2,634 3,527
---------- ---------- ----------
Net earnings (loss) ......................... $ 48,391 $ 19,553 $ 12,436
========== ========== ==========
OTHER FINANCIAL DATA:
EBITDA(3) ................................... $ 119,786 $ 106,179 $ 112,979
Ratio of EBITDA to
interest expense ........................... 3.4x 2.7x 2.2x
Ratio of total debt to EBITDA ............... 3.1x 3.5x 4.3x
Ratio of net debt to EBITDA ................. -- -- 3.4x
Ratio of earnings to fixed charges(4) ....... 2.6x 1.8x 1.5x
AS OF DECEMBER 31, 1997
------------------------------
1993 1994 1995 1996 ACTUAL AS ADJUSTED(5)
----------- ---------- ---------- ---------- ------------ ---------------
BALANCE SHEET DATA:
Cash and cash equivalents ......... $ 603 $ 8,368 $ 11,171 $ 35,137 $ 68,806 $ 99,062
Working capital (deficit) ......... (1,426) 14,004 9,843 31,506 278,771 393,565
Total assets ...................... 29,058 164,468 265,804 861,949 1,968,822 2,160,001
Total debt ........................ 6,949 23,302 55,239 201,259 371,066 485,653
Shareholders' equity .............. 1,930 19,870 29,892 104,533 667,764 667,764
- ----------------
(1) Gives effect to the Karma and Santech Acquisitions as if such transactions
had occurred as of January 1, 1997. The results of Frank & Walter have
been included in actual results since January 1, 1997. Santech's
operations during 1997 prior to its acquisition by the Company reflected
net sales of $405.5 million and negative EBITDA of $17.8 million. The
losses of Santech are the result of reducing staff from 450 to 320 people,
difficulty in installing a computer system in February 1997 and costs
incurred to reduce the number of vendors to under 100. The entire decrease
in EBITDA from actual 1997 results to pro
38
forma 1997 results is due to losses incurred by Santech prior to its
acquisition by the Company. Subsequent to its acquisition by the Company, in
the fourth quarter of 1997, Santech contributed $4.6 million in incremental
EBITDA.
(2) Gives effect to the Karma and Santech Acquisitions as if such transactions
had occurred as of January 1, 1997, and the issuance and sale of the Old
Notes at a rate of 9.875% as if such Notes had been outstanding since
January 1, 1997. Furthermore, the Pro Forma As Adjusted figures give
effect to the application of the estimated net proceeds from such Notes,
specifically, (i) the repayment of certain indebtedness of approximately
$100 million with a weighted average interest rate of 10.4%, and (ii) the
acquisition of SiS as if such acquisition had occurred on January 1, 1997.
(3) EBITDA represents earnings before interest, income taxes, depreciation and
amortization. EBITDA is not presented as an alternative measure of net
income or cash flow from operations (both as determined in accordance with
generally accepted accounting principles), but because it is an accepted
financial indicator of a company's ability to service debt.
(4) The ratio of earnings to fixed charges is computed by dividing earnings
before income taxes and minority interest before fixed charges by fixed
charges. Fixed charges are defined as interest, whether expensed or
capitalized, amortization of debt expense and discount or premiums
relating to indebtedness, whether expensed or capitalized, and such
portion of rental expense that represents the interest factor (assumed to
be one-third of the total rental expense).
(5) Gives effect to the acquisition of SiS, issuance and sale of the Old Notes
and the application of the estimated net proceeds therefrom. See "Use of
Proceeds."
39
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING INFORMATION SHOULD BE READ IN CONJUNCTION WITH THE
CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY AND THE NOTES THERETO AND THE
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) AND THE NOTES
THERETO INCORPORATED HEREIN BY REFERENCE.
OVERVIEW
CHS distributes microcomputer products, including personal computers,
peripherals, networking products and software in 39 countries, primarily in
Western Europe, Eastern Europe and Latin America. The Company has pursued and
expects to continue to pursue an aggressive strategy of growth through
acquisitions of distributors in these and other regions. Together with growth
in its existing business, such acquisitions have enabled the Company to
significantly increase net sales and achieve strong operating results. From
1993 to 1997, the Company's net sales increased from $146.4 million to $4.8
billion and EBITDA increased from $1.0 million to $119.8 million, reflecting
compound annual growth rates of 139% and 230%, respectively. The Company
attributes these increases in sales to its acquisitions, increased consumer
demand for the Company's products and an expansion of the range of products
offered.
The Company derives all of its operating income and cash flow from its
operating subsidiaries, most of which are organized and operated outside the
United States. Generally, the Company purchases its inventory with a
combination of United States dollars and local currency and sells in local
currency. The Company seeks to limit its exposure to the risk of currency
fluctuations through hedging. See "--Currency Risk Management."
The following table sets forth acquisitions made by the Company, the
service areas of the operations acquired and the dates as of which the results
of operations of the acquired company were included in the Company's financial
statements during 1995 to 1997.
DATE INCLUDED IN
SUBSIDIARY(1) SERVICE AREA FINANCIAL STATEMENTS
- ----------------------------------------------- ------------------------------ ---------------------
CHS Nexsys(2) ................................. Colombia December 1997
CHS Ledakon ................................... Colombia November 1997
CHS Romak ..................................... Ireland October 1997
CompExpress ................................... Brazil October 1997
Santech ....................................... Norway, Sweden, Denmark October 1997
Ameritech Argentina(3) ........................ Argentina August 1997
Ameritech Exports(3) .......................... Latin America August 1997
Atlantis Skupina(4) ........................... Slovenia August 1997
Karma ......................................... Europe, Middle East and Asia August 1997
Lars Krull .................................... Denmark, Norway, Sweden August 1997
CHS Dinexim ................................... Latin America May 1997
CHS Access and Agora .......................... Czech Republic May 1997
CHS International High Tech Marketing ......... Africa April 1997
Frank & Walter ................................ Germany January 1997
CHS Estonia ................................... Estonia January 1997
Infocentro de Chile(4) ........................ Chile January 1997
CHS Merisel United Kingdom(5) ................. United Kingdom October 1996
CHS Merisel France(5) ......................... France October 1996
CHS Merisel Switzerland(5) .................... Switzerland October 1996
CHS Merisel Germany(5) ........................ Germany October 1996
CHS Merisel Austria(5) ........................ Austria October 1996
CHS Merisel Latin America(5) .................. Latin America October 1996
CHS Merisel Mexico(5) ......................... Mexico October 1996
40
DATE INCLUDED IN
SUBSIDIARY(1) SERVICE AREA FINANCIAL STATEMENTS
- ------------------------- ---------------- ---------------------
CHS Ecuador(4) .......... Ecuador June 1996
CHS Russia .............. Russia June 1996
CHS Switzerland ......... Switzerland April 1996
CHS Peru ................ Peru March 1996
CHS Hungary(4) .......... Hungary February 1996
CHS Poland .............. Poland November 1995
CHS Czechia(6) .......... Czech Republic October 1995
CHS Sweden .............. Sweden July 1995
CHS Finland ............. Finland July 1995
CHS BEK ................. Latin America July 1995
- ----------------
(1) The names are those by which the Company refers to its subsidiaries and are
not necessarily the legal names of the entities.
(2) The Company owns 65% of this company.
(3) Deemed by the Company to be part of a single acquisition.
(4) The Company owns 51% of this company.
(5) Deemed by the Company to be part of a single acquisition.
(6) The Company acquired a 16% interest in CHS Czechia in January 1993 and
acquired the remaining 84% in October 1995.
RESULTS OF OPERATIONS
The following table sets forth, for the periods presented, the percentage
of net sales represented by certain items in the Company's Consolidated
Statements of Earnings:
YEARS ENDED DECEMBER 31,
-------------------------------
1995 1996 1997
-------- -------- ---------
Net sales ............................ 100.0% 100.0% 100.0%
Cost of goods sold ................... 92.7 92.9 92.7
Gross profit ......................... 7.3 7.1 7.3
Operating expenses ................... 6.1 5.5 5.4
Operating earnings ................... 1.2 1.6 1.9
Interest income ...................... (.2) (.1) (.2)
Interest expense ..................... .7 .6 .7
Earnings before income taxes ......... .7 1.1 1.4
Income taxes ......................... .2 .3 .3
Minority interest .................... -- .1 .1
Net earnings ......................... .5% .7% 1.0%
1997 COMPARED TO 1996
NET SALES. Net sales increased $2.9 billion, or 156.3%, from $1.9 billion
in 1996 to $4.8 billion in 1997 due principally to acquisitions and, to a
lesser extent, internal growth. Of the increase in net sales, newly acquired
subsidiaries (including existing CHS companies for the first nine months of
1997 which were integrated with companies acquired from Merisel) contributed
$2.5 billion. Net comparable sales of subsidiaries consolidated for both 1996
and 1997 grew $371.3 million or 28.0%. This growth is attributed to increased
consumer demand for microcomputer products offered by the Company.
GROSS PROFIT. Gross profit increased $215.6 million, or 164.4%, from
$131.1 million in 1996 to $346.7 million in 1997 due principally to
acquisitions and, to a lesser extent, internal growth. Gross profit on a
comparable basis for subsidiaries consolidated for both 1996 and 1997 increased
$42.8 million, or 48.8%. Newly acquired subsidiaries (including existing CHS
companies for the first nine months of 1997 which were integrated with
companies acquired from Merisel) contributed $173.1 million of increased gross
profit. For purposes of determining the increase in gross profit, the Company
allocated manufacturers' rebates to its more significant subsidiaries.
41
Gross margin increased from 7.1% in 1996 to 7.3% in 1997. The change in
gross margin was due to increased early payment discounts and vendor rebates
offset to some extent by lower gross margins of the recently acquired Karma
operations. The Company utilized more early payment discount opportunities as a
result of the cash generated by its public equity offering in July 1997.
Additionally, the Company's growth has resulted in more favorable volume
rebates with certain key vendors. The increase in gross margin attributable to
early payment discounts (0.2%) and volume rebates (1.4%) was offset by the fact
that the Karma operation has a lower gross margin due to the nature of the
products sold. The Company expects that 1998 gross margins will be lower than
in 1997 due to the impact of having the Karma operations included in the entire
year and due to continued competitive pressures. Although the Company has been
achieving higher gross margins (10.5% and 9.3% in 1996 and 1997, respectively)
in its Eastern European operations than in other areas, the Company expects
gross margins in Eastern Europe to continue to decline due to increased
competition and a Company strategy to increase sales through more competitive
pricing. The Company expects that the impact on gross profit due to decreased
gross margins in this geographic area will be fully offset by increased sales.
OPERATING EXPENSES. Operating expenses as a percentage of net sales
declined from 5.5% in 1996 to 5.4% in 1997. Included were the expenses of
maintaining a minimally utilized warehouse in The Netherlands in 1997 and $1.4
million in Merisel restructuring expenses in 1996. In 1998, such warehouse is
expected to be utilized for the distribution of universal products (such as
mass storage and components). The comparative operating expense ratios without
these items would have been 5.4% for 1997 and 5.4% for 1996. The Company
expects that the inclusion of Karma's results for a full year will result in
operating expenses being a lower percentage of net sales based on the lower
operating expenses of Karma. Operating expenses for both periods include the
results of foreign currency transactions. Such results were a net gain of $1.2
million in 1997 and $1.6 million in 1996.
NET INTEREST EXPENSE. Net interest expense increased $15.6 million, or
183.7%, from $8.5 million in 1996 to $24.1 million in 1997. The increase is
directly related to the increase in average loan amounts outstanding.
INCOME TAXES. Income taxes as a percentage of earnings before income taxes
and minority interest in subsidiaries decreased from 29.9% in 1996 to 21.5% in
1997. The change is due to a higher proportion of income earned in
jurisdictions with lower tax rates and the use of net operating loss
carryforwards, offset, to a certain extent, by losses in subsidiaries with no
tax benefit and non deductible goodwill amortization. The Company expects to
have an effective tax rate lower than the statutory United States tax rate in
1998 principally due to its ability to use remaining net operating loss
carryforwards from certain subsidiaries and the proportion of income expected
in jurisdictions with lower tax rates.
1996 COMPARED TO 1995
NET SALES. Net sales increased $918.8 million, or 98.1%, from $936.7
million in 1995 to $1.9 billion in 1996 due principally to acquisitions and, to
a lesser extent, internal growth. Of the increase in net sales, subsidiaries
not included in both 1995 and 1996 contributed $640.7 million. Net comparable
sales of subsidiaries consolidated for both 1995 and 1996 grew $278.1 million
or 29.7%. This growth is attributed to increased consumer demand for
microcomputer products offered by the Company and the expansion of sales by the
Company's subsidiaries to include a full range of products.
GROSS PROFIT. Gross profit increased $63.1 million, or 92.8%, from $68.0
million in 1995 to $131.1 million in 1996 due principally to acquisitions and,
to a lesser extent, internal growth. Gross profit on a comparable basis for
subsidiaries consolidated for both 1995 and 1996 increased $13.6 million, or
20.0%. Subsidiaries not included in both 1995 and 1996 contributed $49.5
million of gross profit.
Gross margin decreased from 7.3% in 1995 to 7.1% in 1996. The decrease was
due to lower gross margins from subsidiaries located in Western Europe,
particularly those operations acquired from Merisel, which, as a result of high
volumes of sales by those entities, had a significant impact on the
42
Company's gross margin as a whole. The Company attributes the decrease in gross
margins to competitive pressures in this region, especially in Germany. The
Company's subsidiaries in Germany had the lowest gross margins of all its
European subsidiaries in 1996. The Company expects that overall gross margins
may continue to decline in 1997 due to continued competitive pricing pressures
and the fact that the gross margins of the acquired Merisel Companies have been
generally lower than that of the Company and will be included in the
consolidation for the full year. In addition, the acquisition of Frank &
Walter, which operates in Germany, where gross margins are generally lower,
will also impact overall gross margins. The gross margin of the combined
Merisel Companies for the nine months ended September 30, 1996 was 7.0%.
OPERATING EXPENSES. Operating expenses as a percentage of net sales
declined from 6.1% in 1995 to 5.5% in 1996. The decline was due to efficiencies
gained through increased sales volume and the Company's efforts to control
costs. The reduction was achieved even though a provision of $1.4 million was
made for restructuring costs incurred by CHS (consisting of severance costs for
CHS employees, write-off of CHS leasehold improvements and lease termination
costs of CHS closed facilities) to implement consolidation in markets in which
a CHS company previously existed and to acquire a company was acquired from
Merisel. The operating expense ratio without such charge would have been 5.4%
for the year.
NET INTEREST EXPENSE. Net interest expense increased $3.8 million, or
81.2%, from $4.7 million in 1995 to $8.5 million in 1996. The increase is
directly related to the increase in average loan amounts outstanding.
INCOME TAXES. Income taxes as a percentage of earnings before income taxes
and minority interest in subsidiaries increased slightly from 29.4% in 1995 to
29.9% in 1996. Management does not believe this change is significant. The
difference between this tax rate and the statutory United States tax rate is
due to the utilization of net operating loss carryforwards and lower foreign
tax rates, offset to some extent by losses in subsidiaries with no tax benefit
and non-deductible goodwill amortization.
SEASONALITY
The Company typically experiences variability in its net sales and net
income on a quarterly basis as a result of many factors, including the
condition of the microcomputer industry in general, shifts in demand for
software and hardware products and industry announcements of new products or
upgrades. Sales in Europe in the first and fourth quarters of each year are
typically higher than in the second and third quarters. In Latin America, sales
in the third and fourth quarters of each year are typically higher than in the
first and second quarters.
LIQUIDITY AND CAPITAL RESOURCES
Net cash of $248.5 million and $99.1 million was used in operating
activities in the years ended December 31, 1997 and 1996, respectively. In both
years, cash was used principally due to increases in inventories, trade
accounts receivable and amounts due from affiliates offset in 1996 by increases
in accounts payable. In 1997, cash was also used to lower accounts payable and
accrued expenses. Net cash used in investing activities in 1997 and 1996
included $19.5 million and $11.6 million, respectively, related to fixed asset
additions. In addition, $201.5 million and $26.9 million were used in
acquisitions during the years ended December 31, 1997 and 1996, respectively.
Net cash of $507.2 million and $163.3 million was provided by financing
activities in the years ended December 31, 1997 and 1996, respectively, due
principally to proceeds of equity public offerings totalling $428.2 million in
1997 and $50.6 million in 1996. Furthermore, net borrowings from banks totalled
$74.7 million and $112.5 million in the years ended December 31, 1997 and 1996,
respectively.
Certain of the Company's United States based subsidiaries are parties to a
Loan and Security Agreement providing for revolving credit advances and the
issuance of letters of credit against eligible accounts receivable and
inventory up to a maximum of $60 million. Amounts outstanding bear interest,
43
at the election of the borrowers, at either a variable market rate based on the
prime rate of the lender or LIBOR. The agreement limits the ability of the
borrowers to pay dividends to the Company. The agreement matures in October
1999 and is secured by a lien on essentially all of the borrowers' assets. The
agreement contains certain restrictive covenants. During November and December
1997, the borrowers were in violation of requirements to deposit receipts in
specified accounts. The lender has waived these violations. The Company has
guaranteed this indebtedness.
The Company's subsidiaries typically enter into revolving credit
agreements with financial institutions in their countries of operations. At
December 31, 1997, the aggregate amount available under these agreements was
$445.4 million and $348.3 million was then outstanding. Such agreements are
usually for a term of one year and are secured by the receivables of the
borrower. The weighted average interest rate at December 31, 1997 was 7.3%. The
Company typically guarantees these loans. The Company has also guaranteed the
obligations of certain of its subsidiaries to manufacturers.
The Company has received a commitment letter for a new $325 million
multi-currency revolving credit facility from Barclays Capital and ScotiaBank
Capital Markets (USA) Inc. as joint arrangers, with CHS Finance (or another
subsidiary of the Company) as the borrower. See "Certain Indebtedness."
The Company has completed a risk assessment of the ability of its
information systems to operate in light of the "year 2000 problem." Based on
the assessment, the Company has developed an action plan, which principally
consists of replacing existing non-compliant systems with new systems. The
Company believes it is feasible to acquire such new systems before the year
2000 and that the cost of such systems are within its capital cost budget and
financing capabilities.
The Company's principal need for additional cash in 1998 will be for the
purchase of additional inventory to support growth and to take greater
advantage of available cash discounts offered by certain of the Company's
vendors for early payment and to pay amounts due to sellers of businesses. The
Company anticipates funding this cash requirement partially through this
Offering and its subsidiaries' existing bank credit lines and through
additional credit facilities, but there can be no assurance that financing will
be available on terms acceptable to the Company. The unavailability of such
financing could adversely affect the growth of the Company.
The Company derives all of its operating income and cash flow from its
subsidiaries and relies on payments from, and intercompany borrowings with, its
subsidiaries to generate the funds necessary to meet its obligations. In
certain countries, exchange controls may limit the ability of the Company's
subsidiaries to make payments to the Company. Restrictions in financing or
credit arrangements may also limit access to such earnings. Certain of the
Company's subsidiaries are parties to financing agreements that limit the
ability of such subsidiaries to make payments to the Company. In the year ended
December 31, 1997, the contribution of such subsidiaries to the Company's
consolidated EBITDA was 16.6%. Claims of creditors of the Company's
subsidiaries will generally have priority as to the assets and cash flow of
such subsidiaries over the claims of the Company or its creditors. See Note F
to the Consolidated Financial Statements.
INFLATION
The Company operates in certain countries that have experienced high rates
of inflation and hyperinflation. However, inflation did not have any meaningful
impact on the Company's results of operations during the year ended December
31, 1997 nor during the three-year period ended December 31, 1997, and the
Company does not expect that it will have a material impact during 1998.
ASSET MANAGEMENT
INVENTORY. The Company's goal is to achieve high inventory turns and
maintain a low number of SKUs and thereby reduce the Company's working capital
requirements and improve return on equity. The Company's strategy to achieve
this goal is to both manage its inventory effectively and achieve high order
fill rates.
44
To reduce the risk of loss to the Company due to vendor price reductions
and slow moving or obsolete inventory, the Company's contracts with its vendors
generally provide price protection and stock rotation privileges, subject to
certain limitations. Price protection allows the Company to offset the accounts
payable owed to a particular vendor if such vendor reduces the price of
products the Company has purchased within a specified period of time and which
remain in inventory. Stock rotation permits the Company to return to the vendor
for full credit, with an offsetting purchase order for new products,
predetermined amounts of inventory purchased within a specified period of time.
Such credit is typically used to offset existing invoices due without incurring
re-stocking fees.
ACCOUNTS RECEIVABLE. The Company manages its accounts receivable to
balance the needs of its customers to purchase on credit with its desire to
minimize its credit losses. Bad debt expense as a percentage of the Company's
net sales for each of the years ended 1996 and 1997 was 0.2%. The Company's
credit losses have been minimized by its extensive credit approval process and
the use of credit insurance and factoring by its Western European subsidiaries.
In its sales to customers in Latin America, the Company often receives
post-dated checks at the time of sale. Customers who qualify for credit are
typically granted payment terms appropriate to the customs of each country.
CURRENCY RISK MANAGEMENT
FUNCTIONAL CURRENCY. The Company's functional currency, as defined by
Statement of Financial Accounting Standards ("SFAS") No. 52, is the United
States dollar. Most of the Company's subsidiaries use their respective local
currencies as their functional currency and translate assets and liabilities
using the exchange rates in effect at the balance sheet date and results of
operations using the average exchange rates prevailing during the year.
Translation effects are reflected in the cumulative foreign currency
translation adjustment in equity. The Company's exposure under these
translation rules, which is unhedged, may affect the carrying value of its
foreign net assets and therefore its equity and net tangible book value, but
not its net income or cash flow. Exchange differences arising from transactions
and balances in currencies other than the functional currency are recorded as
expense or income in the subsidiaries and the Company and affect the Statements
of Earnings.
HEDGING AND CURRENCY MANAGEMENT ACTIVITIES. The Company attempts to limit
its risk of currency fluctuations through hedging where possible. In the year
ended December 31, 1997, a significant amount of the purchases of products by
the Company were made in United States dollars and approximately 88% of Company
sales were made in currencies other than the United States dollar. The primary
currencies in which sales were made were the German mark (29% of sales), the
French franc (9%) and the British pound (9%). At December 31, 1997,
approximately $271.6 million of accounts payable were attributable to foreign
currency liabilities denominated in currencies other than the subsidiaries'
functional currencies. Of these, $229.3 million were denominated in United
States dollars and $26.2 million were denominated in German marks.
Approximately 39% of these liabilities were unhedged. The most significant
unhedged amounts were recorded in Czech korunas ($24.7 million), Hong Kong
dollars ($21.7 million), Polish zlotys ($14.2 million), Argentine pesos ($13.6
million) and Mexican pesos ($10.6 million).
CHS Finance, a wholly owned subsidiary of the Company, engages in central
treasury functions, including hedging activities related to foreign currency
for the Company and short-term working capital loans to the Company's
subsidiaries to enable them to take advantage of early payment discounts
offered by certain vendors. These loans are denominated in the functional
currency of the borrowing subsidiary or United States dollars. Generally, CHS
Finance hedges its receivables denominated in currencies other than its
functional currency, the Swiss franc. It attempts to limit the amount of
unhedged receivables to an amount which approximates the total unhedged
liabilities. The Company intends to review this policy periodically and may
modify it in the future.
Through both hedging activities coordinated by CHS Finance and subsidiary
hedging activities, the Company makes forward purchases of United States
dollars in an attempt to hedge certain European currencies and reduce exposure
to fluctuations in exchange rates. Additionally, in certain countries in
45
Eastern Europe and in Latin America where it is not practical to make forward
purchases, to minimize exposure to currency devaluations, the Company has
adopted a policy of attempting to match accounts receivable with accounts
payable and to limit holdings of local currencies. In these countries, the
Company attempts to sell products at the United States dollar equivalent rate.
Factors which affect exchange rates are varied and no reliable prediction
methods are available for definitively determining future exchange rates. In
general, countries make an effort to maintain stability in rates for trade
purposes. There can be no assurance that these asset management programs will
be effective in limiting the Company's exposure to these risks.
NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Sstandards Board issued SFAS No. 130,
"Comprehensive Income", in June 1997. SFAS No. 130 requires that changes in the
amounts of items that bypass the income statement and are only reported within
a balance in shareholders' equity be included in a separate financial
statement. The only item that currently qualifies for the Company as a
component of comprehensive income bypassing the statement of income is the
foreign currency translation adjustment. SFAS No. 130 becomes effective for
fiscal years beginning after December 15, 1997. The Company believes that the
adoption of this standard will not have an effect on the Company's financial
position or results of operations.
46
BUSINESS
OVERVIEW
CHS is a leading international distributor of microcomputer products,
including personal computers, peripherals, networking products and software. As
of December 31, 1997, CHS operated in 39 countries primarily in Western Europe,
Eastern Europe and Latin America, and serviced an active customer base of more
than 102,000 resellers. In 1997, approximately 91% of the products sold by the
Company were manufactured by 60 equipment and software vendors, including such
market leaders as Hewlett-Packard, Microsoft, IBM, Seagate, Compaq, Quantum,
Western Digital, Intel, 3Com, Toshiba, Epson, Sun and Creative Labs. The
Company is a focused distributor, as opposed to a broadline distributor, and
seeks to represent leading vendors within specific product categories. CHS
believes that it is the third largest distributor of microcomputer products in
the world and the largest distributor in Western Europe, Latin America and
Eastern Europe. The Company has no significant sales in the United States.
The Company has pursued an aggressive strategy of growth through
acquisitions which, together with growth in its existing business, has enabled
the Company to increase net sales significantly and achieve strong operating
results. From 1993 to 1997, the Company's net sales increased from $146.4
million to $4.8 billion and EBITDA increased from $1.0 million to $119.8
million, reflecting compound annual growth rates of 139% and 230%,
respectively. Pursuant to its growth strategy, between January 1995 and
December 1997, the Company made 26 acquisitions, four of which have had a
significant impact on the Company based upon their contribution of revenues to
the Company. On October 3, 1997, the Company completed the Santech Acquisition
pursuant to which it acquired 97.4% of the outstanding capital stock of
Santech, the largest distributor of microcomputer products in Scandinavia, with
operations in Norway, Sweden and Denmark, for approximately $125 million.
Santech had sales of $718 million in 1996. The Company expects to acquire the
remainder of the shares at the same per share price. On August 4, 1997, the
Company completed the Karma Acquisition for $160 million. Karma is a
distributor of personal computer components to over 10,000 customers in 18
countries in Europe, the Middle East and Asia, operating through 28 offices.
Net sales, operating earnings and net income of Karma in 1996 were $700
million, $18.5 million and $15.1 million, respectively. In March 1997, the
Company completed the Frank & Walter Acquisition. Frank & Walter, which the
Company believes was, at the time of the acquisition, the fourth largest
distributor of microcomputer products in Germany, was acquired for 3.3 million
shares of Common Stock. Frank & Walter had $686 million in sales in 1997. In
October 1996, the Company acquired the Merisel Companies for $148 million.
Sales for the Merisel companies for the first nine months of 1996 were $1.1
billion. See "Recent Developments."
CHS operates under a decentralized structure in which managers familiar
with the customs and needs of a particular country are delegated the authority
to make daily decisions necessary to satisfy the particular demands of their
respective markets. Unlike certain competitors which operate under a more
centralized system, the Company believes that its business model of focused
distribution through locally managed full service facilities integrating
warehousing, purchasing, sales, credit and accounting services, provides
competitive and operating advantages.
The Company's decentralized operating structure is complemented by
centralized financial reporting which provide the Company's senior managers
with frequent and regular status reports for each of the Company's operating
subsidiaries. Each operating subsidiary, prior to the commencement of each
fiscal year, prepares a detailed operating budget which is subject to the
review of the Company's senior management. Thereafter, the performance of each
operating subsidiary is reported to management and reviewed against the budget
on a monthly basis. In addition, each subsidiary electronically provides to
senior management, on a weekly basis, its sales, gross margins, inventory,
accounts receivable and cash collections. These reports are reviewed weekly
against the budget and discussed with regional managers on a bi-weekly basis,
or more frequently if needed. The reporting procedures are supplemented by an
internal audit function through a staff of eight internal auditors, as well as
two auditors that specialize in inventory audits. The Company's goal is to have
its internal
47
auditors visit each of the Company's operating subsidiaries at least twice each
year. During 1997, there were 83 internal and 31 inventory audits performed
with respect to the Company. See "--Internal Audit."
The Company believes that the geographic diversity of its customer base
provides it with certain protection against localized economic downturns.
Although Germany accounted for 29% of the Company's sales during the year ended
December 31, 1997, sales in no other country exceeded 10% of total net sales.
In addition, no customer, during the year ended December 31, 1997, accounted
for more than one percent of the Company's net sales. The following chart
provides net sales and operating income information for the Company's
operations in Western Europe, Eastern Europe and Latin America:
WESTERN EASTERN LATIN
EUROPE EUROPE AMERICA CONSOLIDATED
-------------- ------------ -------------- -------------
(DOLLARS IN THOUSANDS)
1995
Net sales ........................................... $ 542,438 $ 65,320 $ 328,945 $ 936,703
Percentage of consolidated net sales ................ 57.9% 7.0% 35.1% 100.0%
---------- -------- ---------- ----------
Operating income .................................... $ 7,358 $ 252 $ 3,934 $ 11,544
Percentage of consolidated operating income ......... 63.7% 2.2% 34.1% 100.0%
---------- -------- ---------- ----------
1996
Net sales ........................................... $1,063,997 $215,518 $ 576,025 $1,855,540
Percentage of consolidated net sales ................ 57.3% 11.6% 31.1% 100.0%
---------- -------- ---------- ----------
Operating income .................................... $ 9,559 $ 11,440 $ 10,663 $ 31,662
Percentage of consolidated operating income ......... 30.2% 36.1% 33.7% 100.0%
---------- -------- ---------- ----------
1997(1)
Net sales ........................................... $3,248,326 $389,553 $1,118,504 $4,756,383
Percentage of consolidated net sales ................ 68.3% 8.2% 23.5% 100.0%
---------- -------- ---------- ----------
Operating income .................................... $ 57,368 $ 18,871 $ 17,891 $ 94,130
Percentage of consolidated operating income ......... 61.0% 20.0% 19.0% 100.0%
---------- -------- ---------- ----------
- ----------------
(1) Includes Karma's operations since its acquisition by the Company in August
1997. Karma's net sales are in Western Europe (77%), in Eastern Europe
(12%) and in Asia and the Middle East (11%). For purposes of the above
chart, Karma's net sales of $571.4 million and operating income of $14.5
million are attributed entirely to Western Europe.
48
CORPORATE STRUCTURE
The Company, which has no significant sales in the United States, is
currently revising its subsidiary structure to permit greater efficiency in tax
planning and to attempt to minimize the Company's overall tax expense. The new
structure, set forth in the following chart, is expected to be substantially
implemented by June 30, 1998 and completed in its entirety by December 1998. As
of the date of this Offering Memorandum, all of the Subsidiary Guarantors and
several operating subsidiaries (including CHS Americas, Inc. and all Latin
American operating subsidiaries) accounting for 41.2% of the Company's 1997
operating income already are in the new structure. The Company expects that, by
April 30, 1998, three additional subsidiaries that are currently held directly
by CHS (including CHS Finance, the borrower under the New Credit Facility)
representing an additional 31.2% of the Company's 1997 operating income will
become part of the new structure. The remaining subsidiaries are currently
direct subsidiaries of CHS.
[GRAPHIC OMITTED]
- ----------------
1 The Company and CHS Delaware, Inc. have general partnership interests in CHS
Cayman L.P.
2 These subsidiaries contribute less than 1% of the Company's operating income.
INDUSTRY
The microcomputer products distribution industry has grown significantly
in recent years, primarily due to increasing demand worldwide for computer
products and the use of distribution channels by vendors for the distribution
of their products. Historically, there have been two types of companies within
the distribution industry: those that sell directly to the end-user
("resellers") and those that sell to resellers ("distributors"). Distributors
generally purchase a wide range of products in bulk directly from vendors and
then ship products in smaller quantities to many different types of resellers,
which typically include dealers, VARs, system integrators, mail order
resellers, computer products superstores and mass merchants.
The Company believes that the microcomputer products industry is
well-suited for distribution. The large number and diversity of resellers make
it cost efficient for vendors to outsource a portion of their distribution,
credit, inventory, marketing and customer support requirements to distributors
such as the Company. Similarly, due to the large number of vendors, resellers
generally cannot efficiently establish direct purchasing relationships with
each vendor and instead rely on distributors to satisfy a significant portion
of their product, financing, marketing and technical support needs.
The Company believes the distribution segment of the microcomputer
products industry will continue to grow. More vendors are using the
distribution channel as declining hardware prices, coupled
49
with rising selling costs, make it difficult for vendors to deal directly with
resellers efficiently. The Company believes that resellers are increasingly
relying on distributors for inventory management and credit rather than
stocking large inventories themselves and maintaining credit lines to finance
resellers' working capital needs. The Company also believes the distribution
industry is consolidating as access to financial resources and economies of
scale become more critical and as certain manufacturers authorize fewer
distributors.
The Company's Pan-European and Pan-Latin American presence strategically
positions the Company to take advantage of worldwide growth trends in the
microcomputer products distribution industry. According to the November 1997
Dataquest report, the total number of personal computers sold in Western Europe
and Latin America will grow at compound annual rates of 12.5% and 16.8%,
respectively, from 1998 to 2001. Dataquest also predicts that the total number
of personal computers sold in Eastern Europe, the Middle East, the
Mediterranean region and Africa, referred to by Dataquest as the "rest of the
world," will grow at a compound annual rate of 14.3% from 1998 to 2001. Based
on data from COMPUTER INDUSTRY ALMANAC, the penetration rate with respect to
personal computers (defined as PCs in use as a percentage of population) for
1995 (for only those countries in which the Company operates) was 2.1% in Latin
America, 17.6% in Western Europe and 2.3% in Eastern Europe, as compared to a
36.4% penetration rate in the United States.
The Western European, Eastern European and Latin American markets are each
highly fragmented. Different languages, cultures and technological factors
require experienced local management teams and products which meet the
requirements of the specific area. Requirements that are unique to an area
include customized manuals, approvals of safety factors by local authorities,
microcode which permits the generation of characters in local languages, and
voltage standards. These factors require distributors in these markets to carry
a variety of different SKUs to meet such demands. As a result, manufacturers
depend heavily on distributors such as the Company to meet the differing
demands of each locale.
STRATEGY
To achieve its objectives of strengthening its position as a leading
distributor of microcomputer products in Western Europe, Eastern Europe and
Latin America and expanding its operations in Asia, the Middle East and Africa,
the Company has adopted the following strategies:
/bullet/ OPERATE A FOCUSED DISTRIBUTION MODEL IN FRAGMENTED MARKETS. The
Company's strategy is to operate as a focused distributor in fragmented
markets by dealing in such markets with a limited and select group of high
quality branded manufacturers in each major product category, such as
Hewlett-Packard for printers, Microsoft for software and networking,
Seagate, Quantum and Western Digital for mass storage and Hewlett-Packard,
Compaq and IBM for personal computers. The Company believes that the
markets for its products outside of the United States are fragmented.
Additionally, the Company seeks to be a significant distributor for each
of its major vendors and establish a partnering relationship with them.
The Company believes that its strategy of focused distribution in
fragmented markets enables it to respond more quickly to customer requests
and gives it greater availability of products, access to new products and
improved pricing. The Company believes this strategy also enables it to
develop greater expertise in the sale and servicing of the products of
these manufacturers. The Company also believes that its focused
distribution model results in more effective asset management. Generally,
products from leading manufacturers are in greater demand, resulting in
more efficient inventory management, including greater inventory turns,
lower working capital requirements and fewer SKUs. The largest CHS
operating subsidiaries maintain between 10,000 and 14,000 SKUs per
location while broadline distributors typically carry more than 40,000
SKUs.
/bullet/ PENETRATE AND FURTHER DEVELOP SELECTED MARKETS. The Company has
focused its activities on the distribution of microcomputer products in
Western Europe and the emerging markets of Eastern Europe and Latin
America. Additionally, the Company intends to expand its operations in
Asia,
50
the Middle East and Africa. The Company believes that these regions are
underserved with respect to the distribution of microcomputer products and
therefore provide significant growth opportunities. The Company further
believes that these markets are complex due to the diversity of language,
regulatory, technical and other factors and provide attractive
opportunities for CHS to add value to its relationships with its vendors
and customers through the presence of its knowledgeable local management.
The Company is considering entering the United States market in a way that
would provide the economies of scale which the Company believes are
necessary to operate effectively in this market. The Company believes that
entering the United States market may provide benefits to its existing
operations by increasing the volume of purchases which the Company makes
from its vendors, thus assisting the Company in obtaining enhanced volume
discounts and other opportunities available to large volume purchasers.
There can be no assurance that the Company will be able to enter the
United States market or that any operations in such market would be
profitable. The Company attempts to limit its exposure to declines in any
one area or economy by its presence in a large number of markets.
/bullet/ OPERATE WITH A DECENTRALIZED OPERATING STRUCTURE. CHS operates
through a decentralized structure, under which each subsidiary is managed
autonomously. Local operating procedures are utilized as they were
developed in response to local market conditions. The founders and
managers of acquired companies typically remain in place to continue
management of operations and maintenance of local customer relationships.
This decentralized operating structure is complemented by centralized
financial controls, which provide the Company's senior managers with
frequent and regular status reports for each of the Company's operating
subsidiaries. Management believes that this structure provides the Company
with significant operating advantages including locally-refined procedures
within each of the Company's geographic markets which have been developed
to most effectively address the heterogeneous commercial and cultural
characteristics of such markets.
/bullet/ GROW THROUGH ACQUISITIONS. A major portion of the Company's growth
is attributable to acquisitions, and the Company intends to continue its
practice of making targeted purchases of high quality distributors in
selected markets. During the period which began January 1, 1995 and ended
December 31, 1997, the Company made 26 acquisitions, the most significant
of which were the Merisel Companies, Frank & Walter, Karma and Santech.
The Company generally seeks companies that have strong entrepreneurial
management teams and experience in the local market and that could benefit
from the economies of scale that the Company provides through its focused
product lines. In order to reduce financial risk and enhance operating
performance, in many cases the Company structures an acquisition with an
earnout component based on the performance of the acquired company and
generally payable in shares of common stock one year subsequent to the
acquisition. The Company also makes select acquisitions using cash or
stock without an earnout component. These local distributors generally are
attracted to combining with CHS in order to gain personal financial
liquidity, access to key product lines provided by CHS and enhanced vendor
credit facilities. After an acquisition, the new CHS subsidiary adopts the
policies and financial reporting procedures of the Company but operates as
a relatively autonomous business unit, consistent with the Company's
decentralized structure. The Company believes its acquisition strategy is
advantageous to its vendors because, through their relationship with CHS,
vendors may gain entry into new markets with established local
distribution companies and can substitute the creditworthiness of CHS for
that of the local distributor. The Company continuously evaluates
acquisition opportunities, and announcements concerning potential
acquisitions could be made by the Company at any time, including prior to,
or shortly after, the completion of the Offering. See "Recent
Developments--Potential Acquisitions."
PRODUCTS AND CUSTOMERS
The Company's sales consist of hardware and software products such as
local area networks, disk drives, personal computers and printers to an active
customer base, as of December 31, 1997, of more than 102,000 VARs and computer
retailers. The Company's products also include components such as
51
random access memory chips, central processing units and integrated circuit
boards. For the year ended December 31, 1997, the Company's product mix by
category was mass storage (21%), personal computers (17%), printers (15%),
software (10%), components (10%), networking and multimedia (10%), peripherals
(9%) and other (8%). Such percentages are based upon an analysis of a
representative portion (over 90%) of the Company's total net sales.
The Company purchases its products directly from hardware manufacturers
and software publishers in large quantities. As a focused distributor, the
Company focuses on a small number of leading vendors in each product category
and on a small number of high volume items of that manufacturer or publisher.
As a result, the Company carries fewer individual products than broadline
distributors and works with fewer vendors. The largest CHS operating
subsidiaries maintain between 10,000 and 14,000 SKUs per location while
broadline distributors typically carry more than 40,000 SKUs.
The Company's customers typically rely on distributors as their principal
source of microcomputer products and financing. The Company's backlog of orders
is not considered material to an understanding of its business. No single
customer accounted for more than one percent of the Company's net sales in the
year ended December 31, 1997.
VENDOR RELATIONS
The Company obtains its products from its vendors under non-exclusive
distribution agreements, which are subject to renewal annually and may be
canceled by either party on short notice. Under these agreements, the Company
has the right to purchase products at discounts from the list prices. The
amounts of the discounts are determined each year at the time of renewal on the
basis of the projected sales of the Company for the following year and vary for
each vendor. The Company is not required to make additional product payments if
it fails to achieve its projected sales level for the year, but its product
discounts in the following year may be reduced because of the lower sales
levels. In 1997, 91% of the products distributed by the Company were purchased
from 60 vendors; 35%, 34% and 19% of its net sales during the years ended
December 31, 1995, 1996 and 1997, respectively, were derived from the sale of
products supplied by Hewlett-Packard. An additional 12% of net sales during
1996 and 10% of net sales during the year ended 1997 were derived from the
Company's next largest supplier, Microsoft. The above percentages are based
upon an analysis of a representative portion (over 90%) of the Company's total
net sales. The Company's agreements with vendors provide a form of price
protection specifying that if the list price of a product is reduced by the
vendor, the Company will typically receive a credit in the amount of the
reduction in distributor cost for each item of the product in inventory.
The Company also has stock rotation arrangements with substantially all of
its vendors. Stock rotation permits the Company to return inventory for full
credit in an amount equal to a certain percentage of the Company's purchases
from the supplier over a specific period. In certain cases, the Company must
purchase inventory at least equal in value to that returned. These agreements
permit the Company to maintain higher inventory levels while limiting the
amount of committed working capital related to slow-moving items.
Vendors deliver products against purchase orders tendered by the Company.
The Company will often request specific delivery dates in its purchase orders
and lead times for delivery from vendors are typically short. Delivery is,
however, subject to availability, and vendors have no liability to the Company
for failure to meet a delivery date. The Company experiences delivery delays
and inventory shortages from time to time. In the opinion of management, these
delays and shortages are common to other distributors of microcomputer products
in general, and do not have a significant adverse impact on the Company's
operations.
The Company's vendors have increased available credit to the Company
commensurate with its growth. Many of the Company's vendors provide discounts
for prompt payment. Generally, the Company is required to make payment within
14 to 90 days following delivery of products. With some vendors, the Company
can earn a discount for early payment of between 1.5% and 3% of the invoice
amount. To the extent sufficient funds are available, the Company attempts to
take advantage of these discounts.
52
Several of the Company's vendors also provide for volume rebates based on
achieving a predetermined goal of products sold during a quarter period. The
Company has experienced increases in such amounts in recent periods in
connection with its growth.
Generally, the Company's vendors have the right to terminate their
respective distribution agreements on short notice to the Company. In some
cases, the Company must be given a reasonable opportunity to cure any violation
of the agreement before it may be terminated. The Company similarly has the
right to terminate its distribution agreements on short notice to the vendor.
The Company is of the opinion that its relationships with its vendors are good,
and has no reason to believe that its current material distribution agreements
will be terminated or not renewed in the foreseeable future.
SALES, MARKETING AND CUSTOMER SUPPORT
In order to address the individual customs, practices and business
conventions within countries effectively, each operating subsidiary of the
Company maintains general autonomy with respect to sales, marketing and
customer support. Oversight and strategic direction are provided by senior
management of the Company.
SALES. The Company markets its products to resellers, who either package
the Company's products with other computer equipment or sell the products on an
individual basis to end-users. As of December 31, 1997, the Company distributed
products to approximately 69,000 active resellers in Western Europe, 22,000 in
Latin America and 11,000 in Eastern Europe.
Each operating subsidiary maintains a sales staff organized to interface
effectively with its respective customer base. As of December 31, 1997,
approximately 41% of the Company's employees were involved in sales activities.
The Company's customers typically place orders with a sales
representative. Almost all orders are for pick-up or next day delivery. The
Company's computer systems generally allow the representative to check customer
credit limits, current inventory levels and pricing.
MARKETING. The Company utilizes a variety of programs to market its major
vendors' products, including direct mailings, periodic advertising by
facsimile, advertisements in industry trade publications, product brochures,
seminars and participation in selected trade shows. Marketing programs are
effectuated at the subsidiary level and are designed to build awareness of the
Company, its products and their collective capability. Each operating
subsidiary maintains staff to provide marketing support.
Funds for the Company's advertising budget generally are obtained from
cooperative advertising reimbursements and market development funds provided by
vendors. Cooperative reimbursements have typically represented approximately 1%
to 2% of the dollar amount of products purchased from those major vendors.
Marketing programs designed for cooperative reimbursement are vendor and
product specific and are designed with vendor approval. Market development
funds are provided to create market awareness of vendors' products. Cooperative
advertising reimbursements and market development funds are recorded in the
Company's financial statements as a reduction of selling, general and
administrative expenses.
CUSTOMER SUPPORT. Under several vendor agreements, the Company is required
to maintain a staff of qualified and trained sales, repair, and support
employees who are able to provide information and advice to resellers, provide
warranty repair service and train resellers on the vendor's products, their
applications, configurations with other computer products, and installation and
support requirements. The employees of the Company fulfilling these functions
are required to complete training courses provided by the vendor.
In addition, the Company supports all products with a full manufacturer's
warranty and maintains an industry standard return policy, similar to that of
its competitors.
53
INTERNAL AUDIT
The Company currently maintains 8 internal auditors on its staff; six for
Europe and Karma, one for Latin America, and the Director of Internal Audit.
The Company also has two auditors that specialize in inventory audits. The
inventory auditors report directly to the President. The other auditors report
directly to the director of internal audit who reports to the Chief Financial
Officer of the Company and to the Audit Committee of the Board of Directors.
The Company intends to expand its internal audit staff consistent with its
growth. During 1997, there were 83 internal and 31 inventory audits performed
with respect to the Company.
COMPETITION
The Company operates in an industry which is characterized by intense
competition based on price, product availability, provision of credit to
customers, delivery time, customer support services and breadth of product
line. Competition exists in a variety of forms including direct sales by
vendors, mail order sales, international distributors, and local distributors.
Some of the Company's competitors have greater financial and administrative
resources than the Company. The Company believes availability of products is a
key element of competitiveness and attempts to differentiate itself from its
competition by providing a select number of name brands in each product line
and maintaining a sufficient inventory of select products to meet demand. The
Company enhances its competitive position by providing responsive customer
service through support and employee training programs. The Company believes
that its vendors and their products are respected in the industry for high
quality and performance.
Vendor contracts frequently limit sales of their products to specific
geographic areas. Although these restrictions limit the ability of the
Company's subsidiaries to sell outside of their jurisdictions, competition in
the subsidiary's area is also reduced.
EMPLOYEES
At December 31, 1997, the Company employed approximately 4,260 full-time
employees of whom 400 were located in the United States. Of the total number of
employees, approximately 1,760 worked in marketing and sales, 800 worked in
warehousing and delivery and 1,700 were employed in other positions, including
administration. Employees in certain countries are represented by labor
councils mandated by government regulations which determine compensation and
benefits. With these exceptions, none of the Company's employees are
represented by unions. Severance costs associated with termination of
employment in many countries are higher than in the United States. There has
been no disruption of operations due to a labor dispute. Management considers
its employee relations to be good.
FACILITIES
The corporate headquarters of the Company is located at 2000 N.W. 84th
Avenue, Miami, Florida, which is also the principal operational facility for
its Latin American regional operations and the operations of CHS Latin America.
The Company's subsidiaries operate through approximately 70 locations
totalling approximately three million square feet. Most locations consist of an
administrative office utilized by the subsidiary and an adjoining or nearby
warehouse and distribution facility.
LEGAL PROCEEDINGS
The Company is involved in litigation relating to claims arising out of
its operations in the normal course of business. The Company is not currently
engaged in any legal proceedings that are expected, individually or in the
aggregate, to have a material adverse effect on the Company.
54
MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
The executive officers and directors of the Company, as well as certain
key employees, and their ages as of December 31, 1997, are as follows:
NAME AGE POSITION
- -------------------------------- ----- -------------------------------------------------------------
Claudio Osorio ................ 39 Chairman of the Board, Chief Executive Officer and President
Alvin Perlman ................. 70 Executive Vice President--Vendor and Banking Relations
and Director
Carsten Frank ................. 34 Executive Vice President--Asian Region and Director
Clifford Dyer ................. 59 Executive Vice President--Latin American Region
Craig Toll .................... 49 Vice President of Finance and Chief Financial Officer
Antonio Boccalandro ........... 30 Chief Officer of Mergers and Acquisitions, Secretary
and Director
Pasquale Giordano(1) .......... 47 Executive Vice President--European Region
Arturo Osorio(1) .............. 28 Chief Operating Officer--Latin American Region
Alvi Mazon(1) ................. 31 Chief Operating Officer--Karma Operations
Zbynek Kraus .................. 44 General Manager of Czech Republic Operations and Director
Otto Gerlach .................. 70 Director
Bernd Karre ................... 53 Director
Pierino Lardi ................. 49 Director
Donald D. Winstead ............ 60 Director
- ----------------
(1) Each of these persons is a key employee, but not an executive officer of
the Company.
CLAUDIO OSORIO (full name--Claudio Eleazar Osorio Rodriguez), the founder
of the Company's current business and operations, has served as the Chairman of
the Board, President and Chief Executive Officer of the Company since 1993. Mr.
Osorio has served as President of Comtrad since 1988. He is a director of
Comtrad and the President and a director of CHI.
ALVIN PERLMAN has been a director of the Company since 1993 and Executive
Vice President--
Vendor and Banking Relations since August 1997. From 1994 until August 1997 he
was the Executive Vice President--Latin American Region of the Company. He has
served for the past five years as the Chief Executive Officer of Zemex
Electronics, Inc., d/b/a CHS Promark, and was the sole owner of CHS Promark
prior to its acquisition by the Company in June 1994. Mr. Perlman served as a
director of CHI from November 1994 until October 1997.
CARSTEN FRANK has been a director of the Company since May 1997 and has
been Executive Vice President--Asian Region of the Company since March 1, 1998.
From March 1997 until February 28, 1998, he was the Executive Vice
President--European Region of the Company. Mr. Frank founded Frank & Walter in
1988 and has served as such company's Managing Director since its formation.
Frank & Walter was acquired by the Company in March 1997.
CLIFFORD DYER has been the Executive Vice President--Latin American Region
of the Company since August 1997. From January 1997 until July 1997 he was the
Chief Operating Officer--Latin American Region. From February 1987 until it was
acquired by the Company in October 1996, Mr. Dyer was President of Merisel
Latin America, Inc. and was responsible for all Latin American operations. He
was the founder in 1982 of the predecessor company to Merisel Latin America,
Inc. Prior to 1982, Mr. Dyer was President of GTE Venezuela and held
directorships in various companies.
CRAIG TOLL has been the Vice President of Finance of the Company since
August 1997 and has been the Chief Financial Officer of the Company since July
1994. Mr. Toll was self-employed as a consultant
55
to CHS Promark from April 1994 to June 1994. For over five years prior to April
1994, Mr. Toll was a partner in the accounting firm of Deloitte & Touche.
ANTONIO BOCCALANDRO has been the Chief Officer of Mergers and Acquisitions
of the Company since August 1997 and has been a director and the Secretary of
the Company since 1993. He was Treasurer of the Company from December 1993 to
June 1995. He has also been employed in various capacities by Comtrad since
1988. Mr. Boccalandro became a director of Comtrad in 1990 and he has been a
director of CHI since June 1994.
PASQUALE GIORDANO has been the Executive Vice President--European Region
of the Company since March 1, 1998. From January 1, 1997 until February 28,
1998 he was Chief Operating Officer--European Region. From January 1989 through
December 31, 1996, Mr. Giordano was the President and Chief Operating Officer
of CHS Promark. Prior to such service, he was a Vice President of CHS Promark
in charge of its New York office. From 1988 until he joined CHS Promark in
1989, Mr. Giordano was Vice President of the electronics division of Abraham &
Strauss, a division of Federated Department Stores, Inc.
ARTURO OSORIO has been the Chief Operating Officer of the Latin American
Region since September 1997. Mr. Osorio was the General Manager and Northern
Regional Director for CHS Promark from 1994 to 1996 and Director of Sales from
1996 to August 1997. Mr. Osorio occupied various positions in sales and
management for Comtrad from 1988 to 1994.
ALVI MAZON has been the Chief Operating Officer--Karma Operations of the
Company since August 1997. From September 1990 through July 1997, Mr. Mazon was
the Managing Director of Karma.
ZBYNEK KRAUS has been a director of the Company since March 1996 and,
since 1993, the General Manager of the Company's Czech Republic operation. From
January to December 1996, Mr. Kraus served as Vice President--East European
Region of the Company. From 1990 to 1993, he was an owner and the sales
director of the Czech Republic operation.
OTTO GERLACH has been a director of the Company since August 1994, and is
a principal owner and has served for over five years as the President of Larco,
C.A., a privately-owned wholesale import/export and manufacturing company based
in Caracas, Venezuela.
BERND KARRE has been a director of the Company since November 1997. Mr.
Karre has been Chief Executive Officer and President of Karma International AG
since October 1995. From 1990 through October 1995, Mr. Karre served as
Managing Director of Karma's United Kingdom and France operations.
PIERINO LARDI has been a director of the Company since May 1997. Mr. Lardi
has been Chief Executive Officer and President of Banca Commerciale Lugano
since 1995. Mr. Lardi served as Executive Vice President of United Overseas
Bank from 1985 through 1995.
DONALD W. WINSTEAD has been a director of the Company since 1993 and,
except for the periods indicated below, was self-employed as a business
consultant from June 1991 through February 1997. Since March 1997, Mr. Winstead
has been Chairman and Chief Executive Officer and Chief Financial Officer of
Puris, Inc., the shares of which are listed on Nasdaq. Mr. Winstead served from
October 1993 through July 1996 as the Chief Executive Officer and a director of
Medical Resource Group Inc., a closely held Nevada corporation engaged in the
business of medical equipment leasing and rental. For over three years prior to
June 1991, Mr. Winstead was the Chairman of the Board and Chief Executive
Officer of Netcor Inc., a company engaged in the manufacture and sale of
communications equipment.
The term of office of each director of the Company ends at the next annual
meeting of the Company's shareholders or when his successor is elected and
qualified. Officers of the Company serve
56
at the discretion of the Board of Directors, subject to the terms of any
employment agreements with the Company. Other than Claudio Osorio and Arturo
Osorio, who are brothers, there are no family relationships among any of the
Company's executive officers, directors and significant employees. Comtrad and
CHI have agreed to continue to vote their shares of Common Stock in favor of
Mr. Frank's election to the Company's Board of Directors for so long as Mr.
Frank continues to own at least 5% of the outstanding shares of the Common
Stock. Comtrad and CHI have also agreed to vote their shares of Common Stock in
favor of the election to the board of the Company of two nominees of the former
owners of Karma for so long as such owners continue to own at least 5% of the
outstanding shares of the Common Stock. All of the Company's directors who are
not employees of the Company receive $250 for attendance at each Board of
Directors meeting and are reimbursed for travel expenses incurred to attend
such meetings. Directors who are employees of the Company do not receive
separate compensation for their service as directors. No separate payment is
made for attending committee meetings. The Chairmen of the Audit Committee and
the Compensation Committee each receive $25,000 per year.
The Company has an Audit Committee and a Compensation Committee. The Audit
Committee is responsible for reviewing and making recommendations regarding the
Company's employment of independent auditors, the annual audit of the Company's
financial statements and the Company's internal accounting practices and
policies. The Compensation Committee is responsible for making recommendations
to the Board of Directors regarding compensation arrangements for senior
management, recommendations concerning the adoption of any compensation plans
in which management is eligible to participate and grants of stock options or
other benefits under such plans. The members of both committees are Messrs.
Gerlach, Lardi and Winstead. Mr. Winstead currently serves as chairman of both
committees.
Each director serving on January 22, 1997 was granted an option to
purchase 45,000 shares of Common Stock at the market price on that date. The
right to exercise these options vests over three years. In July 1997, Messrs.
Frank and Lardi were each granted options to purchase 45,000 shares under the
same terms at the market price on the date of grant.
57
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth the compensation paid during the years
indicated to the Company's Chief Executive Officer and to the other four most
highly paid executive officers of the Company who were serving as such as of
December 31, 1997 (collectively, the "Named Executive Officers").
ALL OTHER
COMPENSATION
ANNUAL COMPENSATION LONG-TERM COMPENSATION ($)
----------------------- ------------------------ -------------
SECURITIES
UNDERLYING ALL OTHER
SALARY BONUS OPTIONS/SARS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) (#) ($)
- -------------------------------- ------ --------- ----------- ------------------------ -------------
Claudio Osorio, 1997 750,000 1,030,180 1,526,259 63,850
Chief Executive Officer and 1996 350,000 324,375 648,741 50,000
President 1995 366,402 -- -- 139,240
Alvin Perlman, 1997 500,000 117,805 120,000 --
Executive Vice President-- 1996 345,666 150,000 -- --
Vendor and Banking Relations 1995 500,000 -- -- 1,000
Craig Toll, 1997 225,000 279,000 60,000 --
Vice President of Finance and 1996 191,567 75,000 30,000 --
Chief Financial Officer 1995 110,000 -- -- --
Carsten Frank,
Executive Vice President--
Asian Region 1997 350,000 159,293 120,000 --
Clifford Dyer
Executive Vice President-- 1997 391,966 17,500 45,000 --
Latin American Region 1996 46,154(1) 7,500(1) -- --
- ----------
(1) Represents compensation received from the Company for the three month period
commencing October 1, 1996, the date Mr. Dyer became employed by the
Company.
EMPLOYMENT ARRANGEMENTS
The Company has entered into three-year employment agreements with Messrs.
Osorio, Toll and Frank. Mr. Osorio's agreement was effective January 1, 1996,
Mr. Toll's agreement was effective July 1, 1996 and Mr. Frank's agreement was
effective as of January 1, 1997. The agreements for Messrs. Osorio (as
amended), Toll (as amended) and Frank (as amended) provide for annual salaries
of $750,000, $350,000 and $350,000, respectively, and in the case of Mr.
Osorio, requires him to devote substantially all of his time and attention to
the business and affairs of the Company, and, in the case of Messrs. Toll and
Frank, requires them to devote their full time and attention to the business
and affairs of the Company. Mr. Osorio's bonus arrangement provides for a bonus
of up to $1,250,000 based upon the Company's earnings per share and debt to
equity ratio. Mr. Frank's arrangement provides for a bonus up to $700,000 (with
a minimum bonus of $150,000) based upon the results of the European operations
of the Company. The agreements also provide that upon termination of employment
without "cause" or termination by the executive for "good reason" (which
includes a change of control of the Company), the executive is entitled to
receive, in addition to all accrued or earned but unpaid salary, bonus or
benefits, an amount equal to two and one-half times base salary paid to the
executive during the last full year prior to termination of employment,
together with an amount equal to the bonus paid to the executive in the prior
year multiplied by a fraction, the numerator of which is the number of days
elapsed in the then current year through termination and the denominator of
which is 365. The agreements also provide that the executive will not compete
with the Company during his employment and for two years thereafter unless the
Company terminates the executive without "cause" or the executive terminates
his employment for "good reason."
Under the terms of the Company's employment agreement with Alvin Perlman
(as amended), Mr. Perlman is employed as an Executive Vice President of the
Company through June 30, 1999 at an
58
annual salary of $500,000. Under a program adopted by the Board of Directors,
Mr. Perlman is eligible for a cash bonus of up to $550,000 based on the results
of the Company. Mr. Perlman's employment agreement includes other benefits
commensurate with his position, and Mr. Perlman is also entitled to participate
in any group or employee benefit or insurance plans offered by the Company.
Upon termination of Mr. Perlman's employment as a result of death or
disability, he (or his estate) receives 50% of his compensation for the balance
of the term of the agreement. Mr. Perlman may terminate the agreement upon a
change in more than 50% of the ownership of CHS Promark, in which case he is to
receive his full compensation for the balance of the term of the agreement.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Compensation Committee during 1997 were Donald D.
Winstead, Chairman, Otto Gerlach and Pierino Lardi. None of these persons has
previously served as an officer or employee of the Company or any of its
subsidiaries.
Otto Gerlach holds, indirectly, 11.8% of the outstanding common stock of
CHI and 16.7% of the shares of Class A common stock of CHI which, subject to
the claims of certain creditors, have a liquidation preference on the 1,447,500
shares of Company stock owned by Comtrad. In the past, the Company has engaged
in numerous transactions with Comtrad.
OPTION GRANTS DURING 1997
OPTION GRANTS TABLE. The following table sets forth certain information
concerning grants of stock options made during 1997 to each of the Named
Executive Officers. The Company did not grant any stock appreciation rights in
1997.
INDIVIDUAL OPTION GRANTS IN 1997
SHARES OF
COMMON STOCK % OF TOTAL ALTERNATIVE
UNDERLYING OPTION EXPIRATION GRANTED TO GRANT DATE
NAME OPTIONS GRANTED PRICE($) DATE EMPLOYEES VALUE(1)($)
- ------------------------ ----------------- ---------- ------------ ------------ ------------
Claudio Osorio ......... 300,000 12.00 1/22/07 9.4 2,136,000
101,261 15.75 3/07/07 3.2 947,803
375,000 16.67 5/12/07 11.8 3,720,000
30,755 16.59 5/30/07 1.0 303,859
491,427 17.17 6/20/07 15.4 5,002,727
34,465 25.46 7/31/07 1.1 516,630
193,355 24.67 8/20/07 6.1 2,821,049
Alvin Perlman .......... 120,000 12.00 1/22/07 3.8 854,400
Craig Toll ............. 45,000 12.00 1/22/07 1.4 320,400
15,000 25.46 7/31/07 0.5 224,850
Carsten Frank .......... 75,000 12.00 1/22/07 2.4 534,000
45,000 25.46 7/31/07 1.4 674,550
Clifford Dyer .......... 45,000 12.00 1/22/07 1.4 320,400
- ----------------
(1) Based on the Black-Scholes option pricing model adapted for use in valuing
executive stock options. The estimated values under that model are based
on certain assumptions as to variables such as interest rates, stock price
volatility and future dividend yields. The actual value, if any, that an
executive may realize will depend on the excess of the stock price over
the exercise price on the date the option is exercised, so that there is
no assurance that the value realized by an executive will be at or near
the value estimated by the Black-Scholes model.
59
AGGREGATED OPTION EXERCISES IN 1997 AND YEAR END OPTION VALUES
The following table sets forth information with respect to: (i) the
exercise in 1997 of options to purchase Common Stock by the named Executive
Officers, (ii) the number of unexercised options held by the Named Executive
Officers as of December 31, 1997 and (iii) the value as of December 31, 1997 of
unexercised in-the-money options.
VALUE
REALIZED NUMBER OF SECURITIES
(MARKET UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
PRICE AND OPTIONS AT IN-THE-MONEY OPTIONS AT
SHARES EXERCISE LESS DECEMBER 31, 1997 DECEMBER 31, 1997($)(1)
ACQUIRED EXERCISE ------------------------------- ------------------------------
ON EXERCISE PRICE)($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
------------ -------------- ------------- --------------- ------------- --------------
Claudio Osorio ......... 409,169 5,488,308 738,502 1,111,455 1,273,599 2,738,798
Alvin Perlman .......... -- -- -- 120,000 -- 615,000
Craig Toll ............. 80,000 749,002 58,750 82,500 721,669 377,663
Carsten Frank .......... -- -- -- 120,000 -- 384,375
Clifford Dyer .......... -- -- 4,500 45,000 29,408 230,625
- ----------------
(1) Based on a December 31, 1997 value of $17.13 per share. Value is calculated
by multiplying: (a) the difference between $17.13 and the option exercise
price by (b) the number of Common Shares underlying the options. Market
value of shares covered by in-the-money options on December 31, 1997, less
option exercise price.
DIRECTOR SERVICE AND COMPENSATION
The term of office of each director of the Company ends at the next annual
meeting of the Company's shareholders or when his successor is elected and
qualified. Officers of the Company serve at the discretion of the Board of
Directors, subject to the terms of any employment agreements with the Company.
Other than Claudio Osorio and Arturo Osorio, the Chief Operating Officer of the
Latin American Region of the Company, who are brothers, there are no family
relationships among any of the Company's executive officers, directors and
significant employees. Comtrad and CHI have agreed to continue to vote their
shares of Common Stock in favor of Mr. Frank's election to the Company's Board
of Directors for so long as Mr. Frank continues to own at least 5% of the
outstanding shares of the Common Stock. Comtrad and CHI have also agreed to
vote their shares of Common Stock in favor of the election to the board of the
Company of two nominees of the former owners of Karma International S.A., which
was acquired by the Company on August 14, 1997, for so long as such owners
continue to own at least 5% of the outstanding shares of the Common Stock. All
of the Company's directors who are not employees of the Company receive $250
for attendance at each Board of Directors meeting and are reimbursed for travel
expenses incurred to attend such meetings. Directors who are employees of the
Company do not receive separate compensation for their service as directors. No
separate payment is made for attending committee meetings.
The Company has an Audit Committee and a Compensation Committee. The Audit
Committee is responsible for reviewing and making recommendations regarding the
Company's employment of independent auditors, the annual audit of the Company's
financial statements and the Company's internal accounting practices and
policies. The Compensation Committee is responsible for making recommendations
to the Board of Directors regarding compensation arrangements for senior
management, recommendations concerning the adoption of any compensation plans
in which management is eligible to participate and grants of stock options or
other benefits under such plans. The Chairman of the Audit Committee and the
Compensation Committee each receive $25,000 per year. The members of both
committees are Messrs. Gerlach, Lardi and Winstead. Mr. Winstead currently
serves as Chairman of both committees. The Company does not have a Nominating
Committee.
Each director other than Claudio Osorio serving on January 22, 1997 was
granted an option under the Company's Directors and Officers 1997 Stock Option
Plan to purchase 45,000 shares of Common Stock at the market price on that
date. The right to exercise these options vests over three years. In July 1997,
Messrs. Frank and Lardi were each granted options to purchase 45,000 shares
under the same terms at the market price on the date of grant.
60
CERTAIN TRANSACTIONS
At December 31, 1996 and 1997, the Company carried a receivable from
Comtrad and CHI in an amount of $3.2 million and $17.4 million, respectively.
In 1997 this receivable was evidenced by a promissory note which Comtrad and
CHI collateralized with 5,487,203 shares of CHS common stock owned by Comtrad
and CHI. The interest rate charged on the promissory note is the prime rate.
The amount is due upon demand. Interest charged to Comtrad was $438,000,
$86,000 and $684,000 in 1995, 1996 and 1997, respectively. In 1995, the Company
owed amounts to Comtrad which were subsequently extinguished. Interest paid to
Comtrad was $126,000 in 1995.
In 1996, the Company purchased a company in Romania from Comtrad for
$375,000. Subsequently, the Company loaned $800,000 to the subsidiary to enable
it to purchase an office building. In December 1996, the Company sold this
subsidiary back to Comtrad for the original purchase price plus an amount equal
to the losses from April to date of sale ($200,000). No gain was recognized on
the sale, which had the impact of increasing the amount due from Comtrad by
$1.4 million.
In 1995, the Company billed Comtrad $495,000 for actual costs of salaries,
space and other administrative costs it incurred on Comtrad's behalf. In 1995,
Comtrad billed the Company $887,000 for the Company's share of actual costs
incurred by Comtrad for salaries, space and other administrative expenses for
shared employees.
Until the end of 1996, Donald W. Winstead, a director of the Company,
served the Company as a management consultant under an agreement specifying
payments of $4,000 per month. In each of 1995 and 1996, $48,000 was paid under
this agreement.
Carsten Frank, a director, officer and shareholder of the Company also
serves as a member of the Board of Directors of a company which supplies
products to the Company. This company also has ownership interests in other
companies which do business with the Company. In 1997, sales to, purchases
from, commissions paid to and rebates received from such parties were $102.7
million, $57.4 million, $10.1 million and $11.2 million, respectively.
61
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information as of April 17, 1998
concerning the beneficial ownership of Common Stock by (i) each person known by
the Company to be the beneficial owner of more than 5% of the outstanding
Common Stock, (ii) each director and executive officer of the Company, and
(iii) all executive officers and directors of the Company as a group. Except as
otherwise indicated, the Company believes that all beneficial owners named
below have sole voting and investment power with respect to all shares of
Common Stock beneficially owned by them.
PERCENTAGE
NUMBER OF SHARES BENEFICIALLY
NAME OF BENEFICIAL OWNER(1)(2)(3) BENEFICIALLY OWNED OWNED
- ------------------------------------------------------------ -------------------- -------------
Claudio Osorio(4)(5) ....................................... 6,225,706 12.5%
Alvin Perlman(6) ........................................... 83,556 *
Carsten Frank(7) ........................................... 2,575,000 5.3%
Antonio Boccalandro(5) ..................................... 18,113 *
Otto Gerlach(8) ............................................ 15,000 *
Zbynek Kraus(9) ............................................ 15,000 *
Pierino Lardi .............................................. -- *
Donald D. Winstead(10) ..................................... 48,750 *
Bernd Karre ................................................ 512,247 1.1
Craig Toll(11) ............................................. 123,750 *
Clifford Dyer(12) .......................................... 20,400 *
All officers and directors as a group (12 persons) ......... 9,669,282 19.4%
Comtrad(4)(13) ............................................. 6,225,706 12.5%
- ----------------
* Less than 1%
(1) The address for each of the executive officers and directors is 2000 N.W.
84th Avenue, Miami, Florida 33122, except for Carsten Frank which is
Hansestrasse 47, 38112 Braunschweig, Germany.
(2) Except as noted, all shares are held beneficially and of record.
(3) Under Rule 13d-3 of the Exchange Act, certain shares may be deemed to be
beneficially owned by more than one person (if, for example, persons share
the power to vote or the power to dispose of the shares). In addition,
shares are deemed to be beneficially owned by a person if the person has
the right to acquire the shares (for example, upon exercise of an option)
within 60 days of the date as of which the information is provided. In
computing the percentage ownership of any person, the amount of shares
outstanding is deemed to include the amount of shares beneficially owned
by such person (and only such person) by reason of these acquisition
rights. As a result, the percentage of outstanding shares of any person as
shown in this table does not necessarily reflect the person's actual
ownership or voting power with respect to the number of shares of Common
Stock actually outstanding as of April 17, 1998.
(4) Includes 2,141,543 shares held of record by Comtrad, a wholly-owned
subsidiary of CHI, 2,882,000 shares held of record by CHI, 463,660 shares
held of record by Penrose Trading Co. S.A. (a shareholder of CHI and of
which Mr. Osorio has effective control) and currently exercisable options
to purchase 738,503 shares held by Mr. Osorio. Claudio Osorio owns and
controls a majority of the issued and outstanding capital stock of CHI.
Subject to the claims of certain creditors, the holders of CHI Class A
common stock (which includes Penrose Trading Co. S.A.) have a liquidation
preference on the 1,447,500 shares of Company common stock owned by CHI.
Further, subject to the claims of certain creditors and subject to the
rights of holders of CHI Class A common stock, the holders of CHI Class B
common stock have a liquidation preference on 431,250 shares of Company
Common Stock held by CHI or any subsidiary thereof. Based on the foregoing
relationships and agreements, Claudio Osorio, CHI, and Comtrad may be
deemed to have shared voting and investment control over the
above-indicated aggregate number of shares of Common Stock. Such shares
exclude 150,000 shares of Common Stock which Comtrad is obligated to
deliver to the sellers of three entities purchased by Comtrad and
subsequently sold to the Company. (5) Mr. Boccalandro holds currently
exercisable options to purchase 17,813 shares of Common Stock. Mr.
Boccalandro is a director of CHI, who serves at the discretion of Mr.
Osorio as the controlling shareholder of CHI. Accordingly, Mr. Boccalandro
disclaims any investment or voting control with respect to the Common
Stock owned and controlled by CHI.
(5) Mr. Boccalandro holds currently exercisable options to purchase 17,813
shares of Common Stock. Mr. Boccalandro is a director of CHI, who serves
at the discretion of Mr. Osorio as the controlling shareholder of CHI.
Accordingly, Mr. Boccalandro disclaims any investment or voting control
with respect to the Common Stock owned and controlled by CHI.
(6) Mr. Perlman holds currently exercisable options to purchase 40,000 shares
of Common Stock.
(7) Mr. Frank holds currently exercisable options to purchase 25,000 shares of
Common Stock.
(8) Mr. Gerlach owns approximately 11.8% of the outstanding common stock of
CHI and 16.7% of the shares of Class A common stock of CHI which, subject
to the claims of certain creditors, have a liquidation preference on
1,447,500 shares of Common Stock owned by CHI. Mr. Gerlach disclaims
beneficial ownership of the shares of Common Stock held by CHI and
Comtrad.
62
(9) Mr. Kraus is a shareholder of Penrose Trading Co. S.A. which is a
shareholder of CHI and the Company. Mr. Kraus disclaims beneficial
ownership of the shares of the Company held by Penrose Trading Co. S.A.
and CHI. Mr. Kraus holds currently exercisable options to purchase 15,000
shares of Common Stock.
(10) Mr. Winstead is the holder of currently exercisable options to purchase
48,750 shares of Common Stock.
(11) Mr. Toll is the holder of currently exercisable options to purchase a
total of 73,750 shares of Common Stock.
(12) Mr. Dyer is the holder of currently exercisable options to purchase a
total of 20,400 shares of Common Stock.
(13) The address for Comtrad and CHI is P.O. Box 660708, Miami Springs, Florida
33266.
63
CERTAIN INDEBTEDNESS
THE NEW CREDIT FACILITY
The Company has received a commitment letter, subject to final
documentation, for a new $325 million multi-currency revolving credit facility
(the "New Credit Facility") from Barclays Bank and Scotiabank as joint
arrangers. Barclays Bank and Scotiabank will also act as Initial Purchasers in
the Offering. CHS Finance (or CHS Logistics, should it be determined that the
same is more tax advantageous for the Company) will be the borrower under the
New Credit Facility, which will mature on the third anniversary of the date it
is executed. The Company intends to use the New Credit Facility to refinance
existing indebtedness and to fund the working capital needs of its operating
subsidiaries. Amounts borrowed under the New Credit Facility will bear interest
at a fluctuating rate equal to LIBOR plus a margin ranging from 1.25% to 1.75%,
depending on the Company's ratio from time to time of all senior indebtedness
to EBITDA. The New Credit Facility will be secured by pledges of the capital
stock of CHS Logistics, which holds directly or indirectly the stock of the
Company's European operating subsidiaries, and CHS Latin America Holding Corp.,
which holds directly or indirectly the stock of the Company's Latin American
subsidiaries. The Company, together with certain of the Company's European and
Latin American subsidiaries, as well as CHS Latin America Holding Corp., and
certain other subsidiaries of the Company incorporated in the U.S. will
guarantee the obligations of CHS Finance under the New Credit Facility.
The Company's guarantee of the New Credit Facility will rank PARI PASSU
with other senior indebtedness of the Company, including the Notes. The New
Credit Facility will contain certain financial covenants applicable to the
Company and its subsidiaries that, among other things, require maintenance of
leverage, income and net worth tests and, under certain circumstances, prohibit
dividend distributions by the Company's subsidiaries and restrict the Company's
subsidiaries from incurring additional indebtedness. The Company believes that
the New Credit Facility will provide the Company with extended debt maturities,
lower interest rates, increased liquidity and less restrictive financial
covenants, which will give it increased operating and financial flexibility.
The description of the New Credit Facility in this Prospectus is based on
the commitment letter. There can be no assurance that definitive agreements
will be executed or that the terms of such agreements will not contain
provisions in addition to or differing from those contained in the commitment
letter.
THE EXISTING FACILITIES
The Company's subsidiaries typically enter into revolving credit
agreements with financial institutions in their countries of operations. At
December 31, 1997, the aggregate amount available under these agreements was
$445.4 million, and $348.3 million was then outstanding. Such agreements are
usually for a term of one year and are secured by the receivables and, in
certain instances, inventory of the borrower. The weighted average interest
rate at December 31, 1997 was 7.3%. The Company typically guarantees these
loans.
Certain of these revolving credit agreements limit the ability of the
respective subsidiaries to pay dividends, make loans or provide other
distributions to the Company. EBITDA of all subsidiaries with such limitations
amounted to 16.6% of the Company's consolidated EBITDA for the year ended
December 31, 1997. The subsidiaries with such agreements are CHS U.K., CHS
Deutschland, CHS France, BEK International, and CHS Latin America, together
with CHS Promark. Such credit agreements have maximum available amounts of
$65.6 million, $22.2 million, $24.9 million, $15 million and $60 million,
respectively. Except for the CHS Latin America and CHS Promark agreement which
matures in October 1999, all such agreements mature in 1998. CHS U.K., CHS
Deutschland and CHS France are the Company's operating subsidiaries in the
United Kingdom, Germany (along with Frank & Walter) and France, respectively.
BEK International is a subsidiary located in Miami, Florida that distributes to
customers in Latin America. CHS Latin America, Inc. and CHS Promark are
subsidiaries
64
of CHS Americas, Inc., which also owns CHS Latin America Holding Corp. (the
holding company for the Company's Latin American subsidiaries). These credit
agreements are generally secured by a lien on substantially all of the
borrower's assets and contain financial covenants requiring, among other
things, the maintenance of certain net worth and loan-to-collateral value
tests.
The Company will repay $100 million of the outstanding indebtedness under
these facilities with the net proceeds from the Offering. Assuming the New
Credit Facility is completed, the Company intends to repay an additional amount
of approximately $200 million under these facilities. The Company expects that
its subsidiaries (other than the borrower under the New Credit Facility) will
continue to incur indebtedness under their existing credit agreements after the
implementation of the New Credit Facility.
The Company has also guaranteed the obligations of certain of its
subsidiaries to manufacturers.
65
DESCRIPTION OF NOTES
The Old Notes were, and the New Notes will be, issued under an Indenture,
dated as of April 9, 1998, among the Company, the Initial Subsidiary Guarantors
and The Chase Manhattan Bank (the "Trustee") with offices at 450 West 33rd
Street, New York, New York 10001-2697. The following summary contains a
description of the material provisions of the Indenture but does not purport to
be complete and is subject to, and is qualified in its entirety by reference
to, all provisions of the Indenture, including the definitions of certain terms
therein and those terms made a part thereof by the Trust Indenture Act of 1939,
as amended (the "Trust Indenture Act"). For definitions of certain capitalized
terms used in the following summary, see "--Certain Definitions."
GENERAL
The Old Notes are, and the New Notes will be, senior unsubordinated
obligations of the Company, limited to $200 million aggregate principal amount,
and will mature on April 15, 2005. Interest on the Notes will accrue at the
rate shown on the front cover of this Prospectus from the original issuance
date or from the most recent interest payment date to which interest has been
paid or provided for, payable semiannually (to Holders of record at the close
of business on the April 1 or October 1 immediately preceding the Interest
Payment Date) on April 15 and October 15 of each year, commencing October 15,
1998. Payment of principal, premium, if any, and interest on the Notes will be
guaranteed by the Subsidiary Guarantors. See "--Ranking and Guarantees." In
addition, the Company will provide, or will ensure that the appropriate
Restricted Subsidiaries will provide, as the case may be, a Negative Pledge
with respect to 100% of the total partnership interests in and all of the
assets of CHS Cayman, the limited partnership that owns the Company's European
subsidiaries, except for its shares in CHS Logistics, which will be pledged
only as security for the New Credit Facility or any refinancing thereof. See
"--Ranking and Guarantees."
The Company reserves the right to issue up to an additional $100 million
aggregate principal amount of Notes under the Indenture, which Notes will have
terms identical to the Notes initially issued under the Indenture and form part
of the same class of Notes for purposes of the Indenture.
A paying agent will be maintained for the Notes in the Borough of
Manhattan, City of New York at all times that payments are to be made in
respect of the Notes. See "--Payment."
OPTIONAL REDEMPTION
The Notes will be redeemable, at the Company's option, in whole or in
part, at any time or from time to time, on or after April 15, 2002 and prior to
maturity, upon not less than 30 nor more than 60 days' prior notice mailed by
first class mail to each Holder's last address, as it appears in the Security
Register, at the following redemption prices (expressed in percentages of
principal amount at maturity), plus accrued and unpaid interest, if any, to the
redemption date (subject to the right of Holders of record on the relevant
regular record date that is prior to the redemption date to receive interest
due on an interest payment date), if redeemed during the 12-month period
commencing April 15, of the years set forth below:
NOTE
YEAR REDEMPTION PRICE
- ----------------------------------------- -----------------
2002 ........................ 104.938%
2003 ........................ 102.469%
2004 and thereafter ......... 100.000%
In addition, at any time prior to April 15, 2001 the Company may redeem up
to 35% of the aggregate principal amount of Notes originally issued (Notes
issued in connection with any increase in aggregate principal amount from $200
million to up to $300 million will be deemed Notes "originally issued" for the
purposes of this paragraph) with the net cash proceeds of one or more Public
Equity
66
Offerings at a redemption price equal to 109.875% of the principal amount
thereof, together with accrued and unpaid interest, if any, to the date of
redemption; PROVIDED that immediately after giving effect to any such
redemptions, at least $125 million of the aggregate principal amount of the
Notes originally issued remains outstanding; PROVIDED FURTHER that any such
redemption occurs within 30 days of the date of closing of each such Public
Equity Offering.
If less than all of the Notes are to be redeemed at any time, the Trustee
will select the Notes, or portions thereof, for redemption in compliance with
the requirements of the principal U.S. national securities exchange, if any, on
which the Notes are listed or, if the Notes are not listed on a U.S. national
securities exchange, on a pro rata basis, by lot or by such other method as the
Trustee in its sole discretion shall deem to be fair and appropriate; PROVIDED
that no Note of $1,000 or less in principal amount at maturity shall be
redeemed in part. If any Note is to be redeemed in part only, the notice of
redemption relating to such Note shall state the portion of the principal
amount at maturity thereof to be redeemed. A new Note in principal amount equal
to the unredeemed portion thereof will be issued in the name of the Holder
thereof upon cancellation of the original Note.
RANKING AND GUARANTEES
THE NOTES. The Indebtedness evidenced by the Notes ranks senior to all
subordinated Indebtedness of the Company and PARI PASSU in right of payment
with all other unsubordinated Indebtedness of the Company, including a
guarantee by the Company of all Indebtedness under the New Credit Facility.
SUBSIDIARY GUARANTEES. The Indebtedness evidenced by the Subsidiary
Guarantees will rank senior to all subordinated Indebtedness of the Subsidiary
Guarantors and PARI PASSU in right of payment with all other unsubordinated
Indebtedness of the Subsidiary Guarantors; PROVIDED that in those cases where
future Subsidiary Guarantors also become guarantors or borrowers of
Indebtedness under the New Credit Facility, refinancings thereof or certain
other Indebtedness, the Subsidiary Guarantees of such future Subsidiary
Guarantors will be subordinated thereto. The initial Subsidiary Guarantors are
certain of the direct and indirect U.S. Subsidiaries of the Company: CHS
Electronics, Inc. (Nevada), CHS Delaware, Inc., CHS Delaware L.L.C. and CHS
Americas, Inc. Each of the Initial Subsidiary Guarantees is senior and
unsubordinated. The Indenture requires future Restricted Subsidiaries
incorporated under the laws of any state or territory of the United States to
become Subsidiary Guarantors; PROVIDED, HOWEVER, that the Lenders under the New
Credit Facility may require that such guarantees be subordinated in right of
payment to Indebtedness under the New Credit Facility or any refinancings
thereof. See "--The Guarantees."
The Notes will be effectively subordinated to all existing and future
liabilities of the Company's Subsidiaries that are not Subsidiary Guarantors.
After giving pro forma effect to the Offering and the application of the
estimated net proceeds from the Offering, as of December 31, 1997, the
Company's Subsidiaries that are not Subsidiary Guarantors would have had $285.7
million of indebtedness outstanding (excluding intercompany liabilities). The
Company will be dependent upon access to the earnings, if any, or assets of its
Subsidiaries to make payments on the Notes. Restrictions in financing or credit
arrangements may also limit access to such earnings. Certain of the Company's
subsidiaries are parties to financing agreements that limit the ability of such
subsidiaries to make payments to the Company. There can be no assurance that
funds from these subsidiaries will be available to make payments of principal,
premium, if any, and interest on the Notes. In the year ended December 31,
1997, the contribution of such subsidiaries to the Company's consolidated
EBITDA was 16.6%. The ability of the Company to access the earnings of its
Subsidiaries may also be limited by law. See "Risk Factors--Substantial
Leverage; Ability to Service Debt; Restrictive Covenants."
THE NEGATIVE PLEDGE. Pursuant to the terms of the Indenture, the Company
and the appropriate Restricted Subsidiaries have provided, as appropriate,
Negative Pledges with respect to 100% of the total partnership interests in and
any assets of CHS Cayman, other than its shares in CHS Logistics, which will be
pledged only as security for the New Credit Facility or any refinancing
thereof. Such shares currently comprise all of the assets of CHS Cayman.
67
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
covenants and other provisions of the Indenture. Reference is made to the
Indenture for the definition of any other capitalized term used herein for
which no definition is provided.
"Acquired Indebtedness" means (a) with respect to any Person that becomes
a direct or indirect Restricted Subsidiary of the Company after the date of the
Indenture, Indebtedness of such Person and its Restricted Subsidiaries existing
at the time such Person becomes a Restricted Subsidiary of the Company that was
not Incurred in connection with, or in contemplation of, such Person becoming a
Restricted Subsidiary of the Company and (b) with respect to the Company or any
of its Restricted Subsidiaries, any Indebtedness assumed by the Company or any
of its Restricted Subsidiaries in connection with the acquisition of an asset
from another Person that was not Incurred by such other Person in connection
with, or in contemplation of, such acquisition.
"Adjusted Consolidated Net Income" means, for any period, the aggregate
net income (or loss) of the Company and its Restricted Subsidiaries for such
period determined in conformity with GAAP; PROVIDED that the following items
shall be excluded in computing Adjusted Consolidated Net Income (without
duplication): (i) the net income of any Person (other than net income
attributable to a Restricted Subsidiary) in which any Person (other than the
Company or any of its Restricted Subsidiaries) has a joint interest and the net
income of any Unrestricted Subsidiary, except to the extent of the amount of
dividends or other distributions actually paid to the Company or any of its
Restricted Subsidiaries by such other Person or such Unrestricted Subsidiary
during such period; (ii) solely for the purposes of calculating the amount of
Restricted Payments that may be made pursuant to clause (iv) (C) of the first
paragraph of the "Limitation on Restricted Payments" covenant described below
(and in such case, except to the extent includable pursuant to clause (i)
above), the net income (or loss) of any Person accrued prior to the date it
becomes a Restricted Subsidiary or is merged into or consolidated with the
Company or any of its Restricted Subsidiaries or all or substantially all of
the property and assets of such Person are acquired by the Company or any of
its Restricted Subsidiaries; (iii) except in the case of any restriction or
encumbrance permitted under clause (ii) of the "Limitation on Dividends and
Other Payment Restrictions Affecting Restricted Subsidiaries" covenant, the net
income of any Restricted Subsidiary if the declaration or payment of dividends
or similar distributions or advances by such Restricted Subsidiary as necessary
to make interest payments on the Notes when due is prohibited at the time of
such determination by the operation of the terms of its charter or any
agreement, instrument, judgment, decree, order, statute, rule or governmental
regulation applicable to such Restricted Subsidiary; (iv) any gains or losses
(on an after-tax basis) attributable to Asset Sales; (v) except for purposes of
calculating the amount of Restricted Payments that may be made pursuant to
clause (iv) (C) of the first paragraph of the "Limitation on Restricted
Payments" covenant described below, any amount paid or accrued as dividends on
Preferred Stock of the Company or any Restricted Subsidiary owned by Persons
other than the Company and any of its Restricted Subsidiaries; and (vi) all
extraordinary gains and extraordinary losses.
"Adjusted Consolidated Net Tangible Assets" means the total amount of
assets of the Company and its Restricted Subsidiaries (less applicable
depreciation, amortization and other valuation reserves), except to the extent
resulting from write-ups of capital assets (excluding write-ups in connection
with accounting for acquisitions in conformity with GAAP), after deducting
therefrom (i) all current liabilities of the Company and its Restricted
Subsidiaries (excluding intercompany items) and (ii) all goodwill, trade names,
trademarks, patents, unamortized debt discount and expense and other like
intangibles, all as set forth on the most recent quarterly or annual
consolidated balance sheet of the Company and its Restricted Subsidiaries,
prepared in conformity with GAAP and filed with the Commission pursuant to the
"Commission Reports and Reports to Holders" covenant.
"Affiliate" means, as applied to any Person, any other Person directly or
indirectly controlling, controlled by, or under direct or indirect common
control with, such Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and
68
"under common control with"), as applied to any Person, means the possession,
directly or indirectly, of the power to direct or cause the direction of the
management and policies of such Person, whether through the ownership of voting
securities, by contract or otherwise.
"Asset Acquisition" means (i) an investment by the Company or any of its
Restricted Subsidiaries in any other Person pursuant to which such Person shall
become a Restricted Subsidiary or shall be merged into or consolidated with the
Company or any of its Restricted Subsidiaries; PROVIDED that such Person's
primary business is related, ancillary or complementary to the businesses of
the Company and its Restricted Subsidiaries on the date of such investment or
(ii) an acquisition by the Company or any of its Restricted Subsidiaries of the
property and assets of any Person other than the Company or any of its
Restricted Subsidiaries that constitute substantially all of a division or line
of business of such Person; PROVIDED that the property and assets acquired are
related, ancillary or complementary to the businesses of the Company and its
Restricted Subsidiaries on the date of such acquisition.
"Asset Disposition" means the sale or other disposition by the Company or
any of its Restricted Subsidiaries (other than to the Company or another
Restricted Subsidiary) of (i) all or substantially all of the Capital Stock of
any Restricted Subsidiary or (ii) all or substantially all of the assets that
constitute a division or line of business of the Company or any of its
Restricted Subsidiaries.
"Asset Sale" means any sale, transfer or other disposition (including by
way of merger, consolidation or sale-leaseback transaction) in one transaction
or a series of related transactions by the Company or any of its Restricted
Subsidiaries to any Person other than the Company or any of its Restricted
Subsidiaries of (i) all or any of the Capital Stock of any Restricted
Subsidiary, (ii) all or substantially all of the property and assets of an
operating unit or business of the Company or any of its Restricted Subsidiaries
or (iii) any other property and assets (other than the Capital Stock or other
Investment in an Unrestricted Subsidiary) of the Company or any of its
Restricted Subsidiaries outside the ordinary course of business of the Company
or such Restricted Subsidiary and, in each case, that is not governed by the
provisions of the Indenture applicable to mergers, consolidations and sales of
all or substantially all of the assets of the Company; PROVIDED that "Asset
Sale" shall not include (a) sales or other dispositions of inventory,
receivables and other current assets, (b) sales or other dispositions of assets
with a Fair Market Value (as certified in an Officers' Certificate) not in
excess of $1 million or (c) sales or other dispositions of assets to the extent
the consideration received has a Fair Market Value at least equal to the Fair
Market Value of the assets sold or disposed of, provided that the consideration
received would satisfy clause (i) (B) of the second paragraph of the
"Limitation on Asset Sales" covenant.
"Attributable Indebtedness," when used with respect to any Sale and
Leaseback Transaction, means, as at the time of determination, property subject
to such Sale and Leaseback Transaction and the present value (discounted at a
rate equivalent to the Company's then-current weighted average cost of funds
for borrowed money as at the time of determination, compounded on a semiannual
basis) of the total obligations of the lessee for rental payments during the
remaining term of the lease included in any such Sale and Leaseback
Transaction.
"Average Life" means, at any date of determination with respect to any
debt security, the quotient obtained by dividing (i) the sum of the products of
(a) the number of years from such date of determination to the dates of each
successive scheduled principal payment of such debt security and (b) the amount
of such principal payment by (ii) the sum of all such principal payments.
"Capitalized Lease" means, as applied to any Person, any lease of any
property (whether real, personal or mixed) of which the discounted present
value of the rental obligations of such Person as lessee, in conformity with
GAAP, is required to be capitalized on the balance sheet of such Person.
"Capitalized Lease Obligations" means the discounted present value of the
rental obligations under a Capitalized Lease.
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"Capital Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated, whether
voting or non-voting) in equity of such Person, whether now outstanding or
issued after the Closing Date, including, without limitation, all Common Stock
and Preferred Stock.
"Change of Control" means such time as (i) a "person" or "group" (within
the meaning of Sections 13(d) and 14(d)(2) of the Exchange Act) becomes the
ultimate "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act)
of more than 50% of the total voting power of the Voting Stock of the Company
on a fully diluted basis; or (ii) individuals who on the Closing Date
constitute the Board of Directors (together with any new directors whose
election by the Board of Directors or whose nomination by the Board of
Directors for election by the Company's shareholders was approved by a vote of
at least two-thirds of the members of the Board of Directors then in office who
either were members of the Board of Directors on the Closing Date or whose
election or nomination for election was previously so approved) cease for any
reason to constitute a majority of the members of the Board of Directors then
in office.
"Closing Date" means the date on which the Notes are originally issued
under the Indenture.
"Common Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated, whether
voting or non-voting) of such Person's equity, other than Preferred Stock of
such Person, whether now outstanding or issued after the Closing Date,
including without limitation, all series and classes of such common stock.
"Consolidated EBITDA" means, for any period, the sum of the amounts for
such period of (i) Adjusted Consolidated Net Income, (ii) Consolidated Interest
Expense to the extent such amount was deducted in calculating Adjusted
Consolidated Net Income, (iii) income taxes, to the extent such amount was
deducted in calculating Adjusted Consolidated Net Income (other than income
taxes (either positive or negative) attributable to extraordinary and
non-recurring gains or losses or sales of assets), (iv) depreciation expense,
to the extent such amount was deducted in calculating Adjusted Consolidated Net
Income, (v) amortization expense, to the extent such amount was deducted in
calculating Adjusted Consolidated Net Income, and (vi) all other non-cash items
reducing Adjusted Consolidated Net Income (other than items that will require
cash payments and for which an accrual or reserve is, or is required by GAAP to
be, made), less all non-cash items increasing Adjusted Consolidated Net Income,
all as determined on a consolidated basis for the Company and its Restricted
Subsidiaries in conformity with GAAP; PROVIDED that, if any Restricted
Subsidiary is not a Wholly Owned Restricted Subsidiary, Consolidated EBITDA
shall be reduced (to the extent not otherwise reduced in accordance with GAAP)
by an amount equal to (A) the amount of the Adjusted Consolidated Net Income
attributable to such Restricted Subsidiary multiplied by (B) the quotient of
(1) the number of shares of outstanding Common Stock of such Restricted
Subsidiary not owned on the last day of such period by the Company or any of
its Restricted Subsidiaries divided by (2) the total number of shares of
outstanding Common Stock of such Restricted Subsidiary on the last day of such
period.
"Consolidated Interest Expense" means, for any period, the aggregate
amount of interest in respect of Indebtedness (including, without limitation,
amortization of original issue discount on any Indebtedness and the interest
portion of any deferred payment obligation, calculated in accordance with the
effective interest method of accounting; all commissions, discounts and other
fees and charges owed with respect to letters of credit and bankers' acceptance
financing; the net costs associated with Interest Rate Agreements; and
Indebtedness that is Guaranteed or secured by the Company or any of its
Restricted Subsidiaries) and all but the principal component of rentals in
respect of Capitalized Lease Obligations paid, accrued or scheduled to be paid
or to be accrued by the Company and its Restricted Subsidiaries during such
period; EXCLUDING, HOWEVER, (i) any amount of such interest of any Restricted
Subsidiary if the net income of such Restricted Subsidiary is excluded in the
calculation of Adjusted Consolidated Net Income pursuant to clause (iii) of the
definition thereof (but only in the same proportion as the net income of such
Restricted Subsidiary is excluded from the calculation of Adjusted
70
Consolidated Net Income pursuant to clause (iii) of the definition thereof) and
(ii) any premiums, fees and expenses (and any amortization thereof) payable in
connection with the Offering, all as determined on a consolidated basis
(without taking into account Unrestricted Subsidiaries) in conformity with
GAAP.
"Consolidated Leverage Ratio" means, on any Transaction Date, the ratio of
(i) the aggregate amount of Indebtedness of the Company and its Restricted
Subsidiaries on a consolidated basis outstanding on such Transaction Date to
(ii) the aggregate amount of Consolidated EBITDA for the then most recent four
fiscal quarters for which financial statements of the Company have been filed
with the Commission pursuant to the "Commission Reports and Reports to Holders"
covenant described below (such four fiscal quarter period being the "Four
Quarter Period"); PROVIDED that (A) pro forma effect shall be given to (x) any
Indebtedness Incurred from the beginning of the Four Quarter Period through the
Transaction Date (the "Reference Period"), to the extent such Indebtedness is
outstanding on the Transaction Date and (y) any Indebtedness that was
outstanding during such Reference Period but that is not outstanding or is to
be repaid on the Transaction Date; (B) pro forma effect shall not be given to
Asset Dispositions and Asset Acquisitions having a total consideration less
than or equal to $5 million individually, not to exceed $20 million in the
aggregate, (including giving pro forma effect to the application of proceeds of
any Asset Disposition) that occur during such Reference Period, as if they had
occurred and such proceeds had been applied on the first day of such Reference
Period; and (C) pro forma effect shall be given to asset dispositions and asset
acquisitions (including giving pro forma effect to the application of proceeds
of any asset disposition) that have been made by any Person that has become a
Restricted Subsidiary or has been merged with or into the Company or any
Restricted Subsidiary during such Reference Period and that would have
constituted Asset Dispositions or Asset Acquisitions had such transactions
occurred when such Person was a Restricted Subsidiary as if such asset
dispositions or asset acquisitions were Asset Dispositions or Asset
Acquisitions that occurred on the first day of such Reference Period; PROVIDED
that to the extent that clause (B) or (C) of this sentence requires that pro
forma effect be given to an Asset Acquisition or Asset Disposition, such pro
forma calculation shall be based upon the four full fiscal quarters immediately
preceding the Transaction Date of the Person, or division or line of business
of the Person, that is acquired or disposed for which financial information is
available and (D) the aggregate amount of Indebtedness outstanding as of the
end of the Reference Period will be deemed to include the total amount of funds
outstanding on the Transaction Date under any revolving credit or similar
facilities of the Company or its Restricted Subsidiaries.
"Consolidated Net Worth" means, at any date of determination,
shareholders' equity as set forth on the most recently available quarterly or
annual consolidated balance sheet of the Company and its Restricted
Subsidiaries (which shall be as of a date not more than 90 days prior to the
date of such computation and which shall not take into account Unrestricted
Subsidiaries), less any amounts attributable to Redeemable Stock or any equity
security convertible into or exchangeable for Indebtedness, the cost of
treasury stock and the principal amount of any promissory notes receivable from
the sale of the Capital Stock of the Company or any of its Restricted
Subsidiaries, each item to be determined in conformity with GAAP (excluding the
effects of foreign currency exchange adjustments).
"Currency Agreement" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement.
"Default" means any event that is, or after notice or passage of time or
both would be, an Event of Default.
"EU Country" means any of the following countries: Austria; Belgium;
Denmark; France; Finland; Germany; Greece; Ireland; Italy; Luxembourg; The
Netherlands; Portugal; Spain; Sweden; and the United Kingdom.
"Event of Default" means any of the Events of Default specified in
"--Events of Default" herein.
"Fair Market Value" means the price that would be paid in an arm's-length
transaction between an informed and willing seller under no compulsion to sell
and an informed and willing buyer under no
71
compulsion to buy, as determined in good faith by the Board of Directors, whose
determination shall be conclusive if evidenced by a Board Resolution.
"GAAP" means generally accepted accounting principles in the United States
as in effect as of the Closing Date.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness of any other Person and,
without limiting the generality of the foregoing, any obligation, direct or
indirect, contingent or otherwise, of such Person (i) to purchase or pay (or
advance or supply funds for the purchase or payment of) such Indebtedness of
such other Person (whether arising by virtue of partnership arrangements, or by
agreements to keep-well, to purchase assets, goods, securities or services, to
take-or-pay, or to maintain financial statement conditions or otherwise) or
(ii) entered into for purposes of assuring in any other manner the obligee of
such Indebtedness of the payment thereof or to protect such obligee against
loss in respect thereof (in whole or in part); PROVIDED that the term
"Guarantee" shall not include endorsements for collection or deposit in the
ordinary course of business. The term "Guarantee" used as a verb has a
corresponding meaning.
"Holder" means the registered holder of (i) the Rule 144A Global Note,
which on the Closing Date will be DTC or its nominee; and (ii) the Regulation S
Global Note which on the Closing Date will be DTC or its nominee.
"Incur" means, with respect to any Indebtedness, to incur, create, issue,
assume, Guarantee or otherwise become liable for or with respect to, or become
responsible for, the payment of, contingently or otherwise, such Indebtedness,
including an Incurrence of Indebtedness by reason of a Person becoming a
Restricted Subsidiary; PROVIDED that neither the accrual of interest nor the
accretion of original issue discount shall be considered an Incurrence of
Indebtedness.
"Indebtedness" means, with respect to any Person at any date of
determination (without duplication), (i) all indebtedness of such Person for
borrowed money, (ii) all obligations of such Person evidenced by bonds,
debentures, notes or other similar instruments, (iii) all obligations of such
Person in respect of letters of credit (except Trade Payables) or other similar
instruments (including reimbursement obligations with respect thereto), (iv)
all obligations of such Person to pay the deferred and unpaid purchase price of
property or services, which purchase price is due more than six months after
the date of placing such property in service or taking delivery and title
thereto or the completion of such services, except Trade Payables, in each case
determined in accordance with GAAP, (v) all Capitalized Lease Obligations and
Redeemable Stock of such Person, (vi) all Indebtedness of other Persons secured
by a Lien on any asset of such Person, whether or not such Indebtedness is
assumed by such Person; PROVIDED that the amount of such Indebtedness shall be
the lesser of (A) the Fair Market Value of such asset at such date of
determination and (B) the amount of such Indebtedness, (vii) all Indebtedness
of other Persons Guaranteed by such Person to the extent such Indebtedness is
Guaranteed by such Person and (viii) to the extent not otherwise included in
this definition, obligations under Currency Agreements and Interest Rate
Agreements. The amount of Indebtedness of any Person at any date shall be the
outstanding balance at such date of all unconditional obligations as described
above and, with respect to contingent obligations, the maximum liability upon
the occurrence of the contingency giving rise to the obligation, PROVIDED (i)
that the amount outstanding at any time of any Indebtedness issued with
original issue discount is the face amount of such Indebtedness less the
remaining unamortized portion of the original issue discount of such
Indebtedness at such time as determined in conformity with GAAP and (ii) that
Indebtedness shall not include any liability for federal, state, local or other
taxes.
"Interest Rate Agreement" means any interest rate protection agreement,
interest rate future agreement, interest rate option agreement, interest rate
swap agreement, interest rate cap agreement, interest rate collar agreement,
interest rate hedge agreement, option or future contract or other similar
agreement or arrangement.
72
"Interest Payment Date" means each semi-annual interest payment date on
April 15 and October 15 of each year, commencing October 15, 1998.
"Investment" in any Person means any direct or indirect advance, loan or
other extension of credit (including, without limitation, by way of Guarantee
or similar arrangement; but excluding advances to customers in the ordinary
course of business that are, in conformity with GAAP, recorded as accounts
receivable on the balance sheet of the Company or its Restricted Subsidiaries)
or capital contribution to (by means of any transfer of cash or other property
to others or any payment for property or services for the account or use of
others), or any purchase or acquisition of Capital Stock, bonds, notes,
debentures or other similar instruments issued by, such Person and shall
include (i) the designation of a Restricted Subsidiary as an Unrestricted
Subsidiary and (ii) the Fair Market Value of the Capital Stock (or any other
Investment), held by the Company or any of its Restricted Subsidiaries, of (or
in) any Person that has ceased to be a Restricted Subsidiary, including,
without limitation, by reason of any transaction permitted by clause (iii) of
the "Limitation on the Issuance and Sale of Capital Stock of Restricted
Subsidiaries" covenant. For purposes of the definition of "Unrestricted
Subsidiary" and the "Limitation on Restricted Payments" covenant described
below, (i) "Investment" shall include the Fair Market Value of the assets (net
of liabilities (other than liabilities to the Company or its Subsidiaries)) of
any Restricted Subsidiary of the Company at the time that such Restricted
Subsidiary is designated an Unrestricted Subsidiary, (ii) the Fair Market Value
of the assets (net of liabilities (other than liabilities to the Company or its
Subsidiaries)) of any Unrestricted Subsidiary at the time that such
Unrestricted Subsidiary is designated a Restricted Subsidiary shall be
considered a reduction in outstanding Investments and (iii) any property
transferred to or from any Person shall be valued at its Fair Market Value at
the time of such transfer.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including, without limitation, any conditional sale or
other title retention agreement or lease in the nature thereof, any sale with
recourse against the seller or any Affiliate of the seller, or any agreement to
give any security interest).
"Microcomputer Products Distribution Business" means the sale, lease or
other distribution of personal computers, peripherals, networking products and
software, including but not limited to, local area networks, disk drives,
printers, random access memory chips, mass storage, central processing units,
integrated circuit boards and supplies and the provision of services related
thereto.
"Negative Pledge" means, with respect to any Subsidiary of the Company, a
covenant by such Subsidiary to maintain that portion of its assets or total
partnership interests, as the case may be, that is subject to such Negative
Pledge free of all encumbrances or pledges to any other Person and a covenant
by the owner of a Subsidiary that is subject to a Negative Pledge to maintain
that portion of the capital stock of such Subsidiary that is subject to such
Negative Pledge free of all encumbrances or pledges to any other Person.
"Net Cash Proceeds" means, (a) with respect to any Asset Sale, the
proceeds of such Asset Sale in the form of cash or cash equivalents, including
payments in respect of deferred payment obligations (to the extent
corresponding to the principal, but not interest, component thereof) when
received in the form of cash or cash equivalents (except to the extent such
obligations are financed or sold with recourse to the Company or any Restricted
Subsidiary) and proceeds from the conversion of other property received when
converted to cash or cash equivalents, net of (i) brokerage commissions and
other fees and expenses (including fees and expenses of counsel and investment
bankers) related to such Asset Sale, (ii) provisions for all taxes (whether or
not such taxes will actually be paid or are payable) as a result of such Asset
Sale without regard to the consolidated results of operations of the Company
and its Restricted Subsidiaries, taken as a whole, (iii) payments made to repay
Indebtedness or any other obligation outstanding at the time of such Asset Sale
that either (A) is secured by a Lien on the property or assets sold or (B) is
required to be paid as a result of such sale and (iv) appropriate amounts to be
provided by the Company or any Restricted Subsidiary of the Company as a
reserve against any liabilities associated with such Asset Sale, including,
without limitation, pension and other
73
post-employment benefit liabilities, liabilities related to environmental
matters and liabilities under any indemnification obligations associated with
such Asset Sale, all as determined in conformity with GAAP and (b) with respect
to any issuance or sale of Capital Stock, the proceeds of such issuance or sale
in the form of cash or cash equivalents, including payments in respect of
deferred payment obligations (to the extent corresponding to the principal, but
not interest, component thereof) when received in the form of cash or cash
equivalents (except to the extent such obligations are financed or sold with
recourse to the Company or any Restricted Subsidiary of the Company) and
proceeds from the conversion of other property received when converted to cash
or cash equivalents, net of attorney's fees, accountants' fees, underwriters'
or placement agents' fees, discounts or commissions and brokerage, consultant
and other fees incurred in connection with such issuance or sale and net of
taxes paid or payable as a result thereof.
"New Credit Facility" means the $325 million revolving credit facility
with Barclays Bank and Scotiabank as joint arrangers, with CHS Finance, or
another subsidiary of the Company, as the borrower.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"Offer to Purchase" means an offer by the Company to purchase Notes from
the Holders commenced by mailing a notice to the Trustee and each Holder (and,
in the event the Rule 144A Global Notes are not held by DTC, by advertisement)
stating: (i) the covenant pursuant to which the offer is being made and that
all Notes validly tendered will be accepted for payment on a pro rata basis;
(ii) the purchase price and the date of purchase (which shall be a Business Day
no earlier than 30 days nor later than 60 days from the date such notice is
mailed) (the "Payment Date"); (iii) that any Note not tendered will continue to
accrue interest (or original issue discount) pursuant to its terms; (iv) that,
unless the Company defaults in the payment of the purchase price, any Note
accepted for payment pursuant to the Offer to Purchase shall cease to accrue
interest (or original issue discount) on and after the Payment Date; (v) that
Holders electing to have a Note purchased pursuant to the Offer to Purchase
will be required to surrender the Note, together with the form entitled "Option
of the Holder to Elect Purchase" on the reverse side of the Note completed, to
the Paying Agent at the address specified in the notice prior to the close of
business on the Business Day immediately preceding the Payment Date; (vi) that
Holders will be entitled to withdraw their election if the Paying Agent
receives, not later than the close of business on the third business day
immediately preceding the Payment Date, a facsimile transmission or letter
setting forth the name of such Holder, the principal amount at maturity of
Notes delivered for purchase and a statement that such Holder is withdrawing
his election to have such Notes purchased; and (vii) that Holders whose Notes
are being purchased only in part will be issued new Notes equal in principal
amount to the unpurchased portion of the Notes surrendered; PROVIDED that each
Note purchased and each new Note issued shall be in a principal amount at
maturity of $1,000 or integral multiples thereof. On the Payment Date, the
Company shall (i) accept for payment on a pro rata basis Notes or portions
thereof tendered pursuant to an Offer to Purchase; (ii) deposit with the Paying
Agent money sufficient to pay the purchase price of all Notes or portions
thereof so accepted; and (iii) deliver, or cause to be delivered, to the
Trustee all Notes or portions thereof so accepted together with an Officers'
Certificate specifying the Notes or portions thereof accepted for payment by
the Company. The Paying Agent shall promptly mail to the Holders of Notes so
accepted payment in an amount equal to the purchase price, and the Trustee
shall promptly authenticate and mail to such Holders a new Note equal in
principal amount at maturity to any unpurchased portion of the Note
surrendered; PROVIDED that each Note purchased and each new Note issued shall
be in a principal amount at maturity of $1,000 or integral multiples thereof.
The Company will publicly announce the results of an Offer to Purchase as soon
as practicable after the Payment Date. The Trustee shall act as the Paying
Agent for an Offer to Purchase. The Company will comply with Rule 14e-1 under
the Exchange Act and any other securities laws and regulations thereunder to
the extent such laws and regulations are applicable, in the event that the
Company is required to repurchase Notes pursuant to an Offer to Purchase.
74
"Permitted Investment" means (i) an Investment in the Company or a
Restricted Subsidiary or a Person which will, upon the making of such
Investment, become a Restricted Subsidiary or be merged or consolidated with or
into or transfer or convey all or substantially all its assets to, the Company
or a Restricted Subsidiary; provided that such Person's primary business is
related, ancillary or complementary to the businesses of the Company and its
Restricted Subsidiaries on the date of such Investment; (ii) a Temporary Cash
Investment; (iii) commission, payroll, travel and similar advances to cover
matters that are expected at the time of such advances ultimately to be treated
as expenses in accordance with GAAP; and (iv) stock, obligations or securities
received in satisfaction of judgments.
"Permitted Liens" means (i) Liens for taxes, assessments, governmental
charges or claims that are being contested in good faith by appropriate legal
proceeding promptly instituted and diligently conducted and for which a reserve
or other appropriate provisions, if any, as shall be required in conformity
with GAAP shall have been made; (ii) statutory and common law Liens of
landlords and carriers, warehousemen, mechanics, suppliers, materialmen,
repairmen or other similar Liens arising in the ordinary course of business and
with respect to amounts not yet delinquent or being contested in good faith by
appropriate legal proceedings promptly instituted and diligently conducted and
for which a reserve or other appropriate provision, if any, as shall be
required in conformity with GAAP shall have been made; (iii) Liens incurred or
deposits made in the ordinary course of business in connection with workers'
compensation, unemployment insurance and other types of social security; (iv)
Liens incurred or deposits made to secure the performance of tenders, bids,
leases, statutory or regulatory obligations, bankers' acceptances, surety and
appeal bonds, government contracts, performance and return-of-money bonds and
other obligations of a similar nature incurred in the ordinary course of
business (exclusive of obligations for the payment of borrowed money); (v)
easements, rights-of-way, municipal and zoning ordinances and similar charges,
encumbrances, title defects or other irregularities that do not materially
interfere with the ordinary course of business of the Company or any of its
Restricted Subsidiaries; (vi) Liens (including extensions and renewals thereof)
upon real or personal property acquired after the Closing Date; PROVIDED that
(a) such Lien is created solely for the purpose of securing Indebtedness
Incurred, in accordance with the "Limitation on Indebtedness" covenant
described below, (1) to finance the cost (including the cost of design,
development, construction, acquisition, installation or integration) of the
item of property or assets subject thereto and such Lien is created prior to,
at the time of or within six months after the later of the acquisition, the
completion of construction or the commencement of full operation of such
property or (2) to refinance any Indebtedness previously so secured, (b) the
principal amount of the Indebtedness secured by such Lien does not exceed 100%
of such cost and (c) any such Lien shall not extend to or cover any property or
assets other than such item of property or assets and any improvements on such
item and any proceeds thereof; (vii) leases or subleases granted to others that
do not materially interfere with the ordinary course of business of the Company
and its Restricted Subsidiaries, taken as a whole; (viii) Liens encumbering
property or assets under construction arising from progress or partial payments
by a customer of the Company or its Restricted Subsidiaries relating to such
property or assets; (ix) any interest or title of a lessor in the property
subject to any Capitalized Lease or operating lease; (x) Liens arising from
filing Uniform Commercial Code financing statements regarding leases; (xi)
Liens on property of, or on shares of Capital Stock or Indebtedness of, any
Person existing at the time such Person becomes, or becomes a part of, any
Restricted Subsidiary; PROVIDED that such Liens do not extend to or cover any
property or assets of the Company or any Restricted Subsidiary other than the
property or assets acquired and any proceeds thereof; (xii) Liens in favor of
the Company or any Restricted Subsidiary; (xiii) Liens arising from the
rendering of a final judgment or order against the Company or any Restricted
Subsidiary of the Company that does not give rise to an Event of Default; (xiv)
Liens securing reimbursement obligations with respect to letters of credit that
encumber documents and other property relating to such letters of credit and
the products and proceeds thereof; (xv) Liens in favor of customs and revenue
authorities arising as a matter of law to secure payment of customs duties in
connection with the importation of goods; (xvi) Liens encumbering customary
initial deposits and margin deposits, and other Liens that are either within
the general parameters customary in the industry and incurred in the ordinary
course of business, in each case securing Indebtedness under Interest Rate
Agreements and Currency Agreements and forward contracts, options, future
75
contracts, futures options or similar agreements or arrangements designed
solely to protect the Company or any of its Restricted Subsidiaries from
fluctuations in interest rates, currencies or the price of commodities; (xvii)
Liens arising out of conditional sale, title retention, consignment or similar
arrangements for the sale of goods entered into by the Company or any of its
Restricted Subsidiaries in the ordinary course of business in accordance with
the past practices of the Company and its Restricted Subsidiaries prior to the
Closing Date; and (xviii) Liens on or sales of receivables, including related
intangible assets and proceeds thereof.
"Person" means any individual, corporation, partnership, limited liability
company, joint venture, trust, unincorporated organization or government or any
agency or political subdivision thereof.
"Preferred Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated, whether
voting or non-voting) of such Person's preferred or preference equity, whether
now outstanding or issued after the Closing Date, including, without
limitation, all series and classes of such preferred stock or preference stock.
"Public Equity Offering" means a public offer and sale of Common Stock
(which is Qualified Capital Stock) of the Company or, in accordance with the
terms of the Indenture, a successor to the Company that owns, directly or
indirectly, all of the Capital Stock of the Subsidiaries of the Company
currently owned by the Company, pursuant to an effective registration statement
under the Securities Act.
"Qualified Capital Stock" of any Person means any and all Capital Stock of
such Person other than Redeemable Stock.
"Redeemable Stock" means any class or series of Capital Stock of any
Person that, by its terms or otherwise, is (i) required to be redeemed prior to
the Stated Maturity of the Notes, (ii) redeemable at the option of the holder
of such class or series of Capital Stock at any time prior to the Stated
Maturity of the Notes or (iii) convertible into or exchangeable for Capital
Stock referred to in clause (i) or (ii) above or Indebtedness having a
scheduled maturity prior to the Stated Maturity of the Notes; PROVIDED that any
Capital Stock that would not constitute Redeemable Stock but for provisions
thereof giving holders thereof the right to require such Person to repurchase
or redeem such Capital Stock upon the occurrence of an "asset sale" or "change
of control" occurring prior to the Stated Maturity of the Notes shall not
constitute Redeemable Stock if the "asset sale" or "change of control"
provisions applicable to such Capital Stock are no more favorable in any
material respect to the holders of such Capital Stock than the provisions
contained in "Limitation on Asset Sales" and "Repurchase of Notes Upon a Change
of Control" covenants described below and such Capital Stock specifically
provides that such Person will not repurchase or redeem any such stock pursuant
to such provision prior to the Company's repurchase of such Notes as are
required to be repurchased pursuant to the "Limitation on Asset Sales" and
"Repurchase of Notes upon a Change of Control" covenants described below.
"Restricted Subsidiary" means any Subsidiary of the Company other than an
Unrestricted Subsidiary.
"Sale and Leaseback Transaction" means with respect to any Person an
arrangement with any bank, insurance company or other lender or investor or to
which such lender or investor is a party, providing for the leasing by such
Person or any of its Restricted Subsidiaries of any property or asset of such
Person or any of its Restricted Subsidiaries which has been or is being sold or
transferred by such Person or such Restricted Subsidiary to such lender or
investor or to any Person to whom funds have been or are to be advanced by such
lender or investor on the security of such property or asset.
"Significant Subsidiary" means, at any date of determination, any
Restricted Subsidiary that, together with its Subsidiaries, (i) for the most
recent fiscal year of the Company, accounted for more than 10% of the
consolidated revenues of the Company and its Restricted Subsidiaries or (ii) as
of the end of such fiscal year, was the owner of more than 10% of the
consolidated assets of the Company and
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its Restricted Subsidiaries, all as set forth on the most recently available
consolidated financial statements of the Company for such fiscal year.
"Specified Date" means any redemption date, any Payment Date for an Offer
to Purchase pursuant to the "Limitation on Asset Sales" or "Repurchase of Notes
upon a Change of Control" covenants described below or any date on which the
Notes are due and payable after an Event of Default.
"Stated Maturity" means, (i) with respect to any debt security, the date
specified in such debt security as the fixed date on which the final
installment of principal of such debt security is due and payable and (ii) with
respect to any scheduled installment of principal of, or interest on, any debt
security, the date specified in such debt security as the fixed date on which
such installment is due and payable.
"Strategic Subordinated Indebtedness" means Indebtedness of the Company
Incurred to finance the acquisition of a Person engaged in the Microcomputer
Products Distribution Business that by its terms, or by the terms of any
agreement or instrument pursuant to which such Indebtedness is Incurred is (i)
expressly made subordinate in right of payment to the Notes and (ii) provides
that no payment of principal, premium or interest on, or any other payment with
respect to, such Indebtedness may be made prior to the payment in full of all
of the Company's scheduled obligations under the Notes; PROVIDED that such
Indebtedness may provide for and be repaid at any time from the proceeds of the
sale of Capital Stock (other than Redeemable Stock) of the Company after the
Incurrence of such Indebtedness.
"Subsidiary" means, with respect to any Person, any corporation,
association or other business entity of which more than 50% of the voting power
of the outstanding Voting Stock is owned, directly or indirectly, by such
Person and one or more other Subsidiaries of such Person.
"Subsidiary Guarantee" means any Guarantee of the Notes given by a
Subsidiary.
"Subsidiary Guarantors" means each of CHS Electronics, Inc. (Nevada), CHS
Delaware Inc., CHS Delaware L.L.C. and CHS Americas, Inc., and each other
Person who executes a Subsidiary Guarantee pursuant to the terms of the
Indenture.
"Target Company Consolidated EBITDA" means, for any Person acquired by the
Company for any period, the Consolidated EBITDA of such Person, calculated as
if such Person were the Company for purposes of the definition of Consolidated
EBITDA and other defined terms used or referred to therein.
"Target Company Consolidated Leverage Ratio" means, for any Person
acquired by the Company, on the date of acquisition of such Person by the
Company, the Consolidated Leverage Ratio of such Person, calculated as if such
Person were the Company for purposes of the definition of Consolidated Leverage
Ratio and other defined terms used or referred to therein.
"Temporary Cash Investment" means (i) any evidence of Indebtedness with a
maturity of three years or less issued or directly and fully guaranteed or
insured by the United States of America or any agency or instrumentality
thereof (PROVIDED that the full faith and credit of the United States of
America is pledged in support thereof); (ii) deposits, certificates of deposit
or acceptances with a maturity of three years or less of any financial
institution that is a member of the Federal Reserve System, in each case having
combined capital and surplus and undivided profits (or any similar capital
concept) of not less than $500 million or any commercial bank that is organized
under the laws of any country that is a member of the Organization for Economic
Cooperation and Development and has total assets in excess of U.S. $500
million; (iii) commercial paper with a maturity of three years or less issued
by a corporation (other than an Affiliate of the Company) organized under the
laws of the United States or any state thereof or the District of Columbia and
rated at least "A-1" by Standard & Poor's Ratings Group or "P-1" by Moody's
Investors Service, Inc.; and (iv) repurchase agreements and
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reverse repurchase agreements relating to marketable direct obligations issued
or unconditionally guaranteed by the United States Government, in each case
maturing within one year from the date of acquisition. For the avoidance of
doubt, an Investment in an investment fund which invests substantially all of
its assets in Investments described above in this definition or which is itself
rated at least "AAA" or "A-1" by Standard & Poor's Ratings Group or "Aaa" or
"P-1" by Moody's Investors Service, Inc. constitutes a Temporary Cash
Investment.
"Trade Payables" means, with respect to any Person, any accounts payable
or any other indebtedness or monetary obligation, including letters of credit,
to trade creditors created, assumed or Guaranteed by such Person or any of its
Subsidiaries arising in the ordinary course of business in connection with the
acquisition of goods or services.
"Transaction Date" means with respect to any Restricted Payment, the date
such Restricted Payment is to be made.
"Unrestricted Subsidiary" means (i) any Subsidiary of the Company that at
the time of determination shall be designated an Unrestricted Subsidiary by the
Board of Directors in the manner provided below and (ii) any Subsidiary of an
Unrestricted Subsidiary. The Board of Directors may designate any Restricted
Subsidiary (including any newly acquired or newly formed Subsidiary of the
Company) to be an Unrestricted Subsidiary unless such Subsidiary owns any
Capital Stock of, or owns or holds any Lien on any property of, the Company or
any Restricted Subsidiary; PROVIDED that either (A) the Subsidiary to be so
designated has total assets of $1,000 or less or (B) if such Subsidiary has
assets greater than $1,000, that such designation would be permitted under the
"Limitation on Restricted Payments" covenant described below. The Board of
Directors may designate any Unrestricted Subsidiary to be a Restricted
Subsidiary; PROVIDED that (i) no Default or Event of Default shall have
occurred and be continuing at the time of or after giving effect to such
designation and (ii) all Liens and Indebtedness of such Unrestricted Subsidiary
outstanding immediately after such designation would, if Incurred at such time,
have been permitted to be Incurred for all purposes of the Indentures. Any such
designation by the Board of Directors shall be evidenced to the Trustee by
promptly filing with the Trustee a copy of the Board Resolution giving effect
to such designation and an Officers' Certificate certifying that such
designation complied with the foregoing provisions. Subsidiary Guarantors will
not be permitted to be designated as Unrestricted Subsidiaries.
"Voting Stock" means with respect to any Person, Capital Stock of any
class or kind ordinarily having the power to vote for the election of
directors, managers or other voting members of the governing body of such
Person.
"Wholly Owned" means, with respect to any Subsidiary of any Person, the
ownership of all of the outstanding Capital Stock of such Subsidiary (other
than any director's qualifying shares or Investments by foreign nationals
mandated by applicable law) by such Person or one or more Wholly Owned
Subsidiaries of such Person.
COVENANTS
The Indenture contains, among others, the following covenants:
LIMITATION ON INDEBTEDNESS
(a) The Company will not, and will not permit any of its Restricted
Subsidiaries to, Incur any Indebtedness (other than the Notes, Indebtedness
existing on the Closing Date and Indebtedness under the New Credit Facility);
PROVIDED that the Company may Incur Indebtedness if, after giving effect to the
Incurrence of such Indebtedness and the receipt and application of the proceeds
thereof, the Company's Consolidated Leverage Ratio would be no greater than 5
to 1.
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Notwithstanding the foregoing, the Company, and (except as specified
below) any Restricted Subsidiary, may Incur each and all of the following:
(i) Indebtedness in an aggregate principal amount outstanding or
available at any time not to exceed $10 million, less any amount of such
Indebtedness permanently repaid as provided under the "Limitation on Asset
Sales" covenant described below;
(ii) Indebtedness (A) to the Company evidenced by an unsubordinated
promissory note or (B) to any of its Restricted Subsidiaries; PROVIDED that
any event which results in any such Restricted Subsidiary ceasing to be a
Restricted Subsidiary or any subsequent transfer of such Indebtedness
(other than to the Company or another Restricted Subsidiary) shall be
deemed, in each case, to constitute an Incurrence of such Indebtedness not
permitted by this clause (ii);
(iii) Indebtedness issued in exchange for, or the net proceeds of which
are used to refinance or refund, then outstanding Indebtedness, other than
Indebtedness Incurred under clause (i), (ii), (iv), (viii) or (ix) of this
paragraph, and any refinancings thereof in an amount not to exceed the
amount so refinanced or refunded (plus premiums, accrued interest, fees and
expenses); PROVIDED that Indebtedness the proceeds of which are used to
refinance or refund the Notes or Indebtedness that is pari passu with, or
subordinated in right of payment to, the Notes shall only be permitted
under this clause (iii) if (A) in case the Notes are refinanced in part or
the Indebtedness to be refinanced is pari passu with the Notes, such new
Indebtedness, by its terms or by the terms of any agreement or instrument
pursuant to which such new Indebtedness is outstanding, is expressly made
pari passu with, or subordinate in right of payment to, the remaining
Notes, (B) in case the Indebtedness to be refinanced is subordinated in
right of payment to the Notes, such new Indebtedness, by its terms or by
the terms of any agreement or instrument pursuant to which such new
Indebtedness is issued or remains outstanding, is expressly made
subordinate in right of payment to the Notes at least to the extent that
the Indebtedness to be refinanced is subordinated to the Notes and (C) such
new Indebtedness, determined as of the date of Incurrence of such new
Indebtedness, does not mature prior to the Stated Maturity of the
Indebtedness to be refinanced or refunded, and the Average Life of such new
Indebtedness is at least equal to the remaining Average Life of the
Indebtedness to be refinanced or refunded; and PROVIDED FURTHER that in no
event may Indebtedness of the Company be refinanced by means of any
Indebtedness of any Restricted Subsidiary of the Company pursuant to this
clause (iii);
(iv) Indebtedness (A) in respect of performance, surety or appeal bonds
provided in the ordinary course of business, (B) under Currency Agreements
and Interest Rate Agreements; PROVIDED that such agreements (a) are
designed solely to protect the Company or its Subsidiaries against
fluctuations in foreign currency exchange rates or interest rates and (b)
do not increase the Indebtedness of the obligor outstanding at any time
other than as a result of fluctuations in foreign currency exchange rates
or interest rates or by reason of fees, indemnities and compensation
payable thereunder and (C) arising from agreements providing for
indemnification, adjustment of purchase price or similar obligations, or
from Guarantees or letters of credit, surety bonds or performance bonds
securing any obligations of the Company or any of its Restricted
Subsidiaries pursuant to such agreements, in each case Incurred in
connection with the disposition of any business, assets or Restricted
Subsidiary of the Company (other than Guarantees of Indebtedness Incurred
by any Person acquiring all or any portion of such business, assets or
Restricted Subsidiary of the Company for the purpose of financing such
acquisition), in a principal amount not to exceed the gross proceeds
actually received by the Company or any Restricted Subsidiary in connection
with such disposition;
(v) Indebtedness of the Company, to the extent the net proceeds thereof
are promptly (A) used to purchase Notes tendered in an Offer to Purchase
made as a result of a Change in Control or (B) deposited to defease the
Notes as described below under "Defeasance;"
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(vi) Guarantees of the Notes and Guarantees of Indebtedness of the
Company by any Restricted Subsidiary provided the Guarantee of such
Indebtedness is permitted by and made in accordance with the "Limitation on
Issuance of Guarantees by Restricted Subsidiaries" covenant described
below;
(vii) Indebtedness of the Company, not to exceed $40 million at any time
outstanding, Incurred to finance the cost of acquisitions of companies or
assets engaged primarily in the Microcomputer Products Distribution
Business and Acquired Indebtedness relating thereto; PROVIDED that the
Target Company Consolidated Leverage Ratio of such acquired company is no
greater than 5 to 1;
(viii) Indebtedness of the Company or any Restricted Subsidiary Incurred
to provide working capital (but not to finance acquisitions), not to exceed
in aggregate at any one time outstanding, the sum of (A) 80% of the
accounts receivable and (B) 60% of the inventory of the Company and its
Restricted Subsidiaries on a consolidated basis as set forth on the balance
sheet of the Company most recently filed with the Commission pursuant to
the "Commission Reports and Reports to Holders" covenant; and
(ix) Strategic Subordinated Indebtedness.
(b) Notwithstanding any other provision of this "Limitation on
Indebtedness" covenant, the maximum amount of Indebtedness that the Company or
a Restricted Subsidiary may Incur pursuant to this "Limitation on Indebtedness"
covenant shall not be deemed to be exceeded due solely to the result of
fluctuations in the exchange rates of currencies.
(c) For purposes of determining any particular amount of Indebtedness
under this "Limitation on Indebtedness" covenant, (1) Guarantees, Liens or
obligations of a Person with respect to letters of credit supporting
Indebtedness of such Person otherwise included in the determination of such
particular amount shall not be included and (2) any Liens granted pursuant to
the equal and ratable provisions referred to in the "Limitation on Liens"
covenant described below shall not be treated as Indebtedness. For purposes of
determining compliance with this "Limitation on Indebtedness" covenant, in the
event that an item of Indebtedness meets the criteria of more than one of the
types of Indebtedness described in the above clauses, the Company, in its sole
discretion, shall classify such item of Indebtedness and only be required to
include the amount and type of such Indebtedness in one of such clauses.
LIMITATION ON RESTRICTED PAYMENTS
The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, (i) declare or pay any dividend or make any
distribution on or with respect to its Capital Stock (other than (x) dividends
or distributions payable solely in shares of its Capital Stock (other than
Redeemable Stock) or in options, warrants or other rights to acquire shares of
such Capital Stock and (y) pro rata dividends or distributions on Common Stock
of Restricted Subsidiaries held by minority stockholders, provided that such
dividends do not in the aggregate exceed the minority stockholders' pro rata
share of such Restricted Subsidiaries' net income from the first day of the
fiscal quarter beginning immediately following the Closing Date) held by
Persons other than the Company or any of its Restricted Subsidiaries, (ii)
purchase, redeem, retire or otherwise acquire for value any shares of Capital
Stock of (A) the Company or an Unrestricted Subsidiary (including options,
warrants or other rights to acquire such shares of Capital Stock) held by any
Person or (B) a Restricted Subsidiary (including options, warrants or other
rights to acquire such shares of Capital Stock) held by any Affiliate of the
Company (other than a Wholly Owned Restricted Subsidiary) or any holder (or any
Affiliate of such holder) of 5% or more of the Capital Stock of the Company,
(iii) make any voluntary or optional principal payment, or voluntary or
optional redemption, repurchase, defeasance, or other acquisition or retirement
for value, of Indebtedness of the Company that is subordinated in right of
payment to the Notes or (iv) make any Investment, other than a Permitted
Investment, in any Person (such payments or any other actions described in
clauses (i) through (iv) being collectively "Restricted Payments") if, at the
time of, and after giving effect to, the proposed Restricted Payment; (A) a
Default or Event of Default shall have occurred
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and be continuing, (B) the Company could not Incur at least $1.00 of
Indebtedness under the first paragraph of the "Limitation on Indebtedness"
covenant or (C) the aggregate amount of all Restricted Payments (the amount, if
other than in cash, to be determined in good faith by the Board of Directors,
whose determination shall be conclusive and evidenced by a Board Resolution)
made after the Closing Date shall exceed the sum of (1) 50% of the aggregate
amount of the Adjusted Consolidated Net Income (or, if the Adjusted
Consolidated Net Income is a loss, minus 100% of the amount of such loss)
(determined by excluding income resulting from transfers of assets by the
Company or a Restricted Subsidiary to an Unrestricted Subsidiary) accrued on a
cumulative basis during the period (taken as one accounting period) beginning
on the first day of the fiscal quarter immediately following the Closing Date
and ending on the last day of the last fiscal quarter preceding the Transaction
Date for which reports have been filed pursuant to the "Commission Reports and
Reports to Holders" covenant PLUS (2) the aggregate Net Cash Proceeds received
by the Company after the Closing Date from the issuance and sale permitted by
the Indenture to a Person who is not a Subsidiary of the Company of (a) its
Capital Stock (other than Redeemable Stock), (b) any options, warrants or other
rights to acquire Capital Stock of the Company (in each case, exclusive of any
Redeemable Stock or any options, warrants or other rights that are redeemable
at the option of the holder, or are required to be redeemed, prior to the
Stated Maturity of the Notes) and (c) Indebtedness of the Company that has been
exchanged for or converted into Capital Stock of the Company (other than
Redeemable Stock), in each case except to the extent such Net Cash Proceeds are
used to Incur Indebtedness pursuant to clause (vii) of the second paragraph
under the "Limitation on Indebtedness" covenant, PLUS (3) an amount equal to
the net reduction in Investments (other than reductions in Permitted
Investments and reductions in Investments made pursuant to clause (vi) of the
second paragraph of this "Limitation on Restricted Payments" covenant) in any
Person resulting from payments of interest on Indebtedness, dividends,
repayments of loans or advances, or other transfers of assets, in each case to
the Company or any Restricted Subsidiary or from the Net Cash Proceeds from the
sale of any such Investment (except, in each case, to the extent any such
payment or proceeds is included in the calculation of Adjusted Consolidated Net
Income), or from redesignations of Unrestricted Subsidiaries as Restricted
Subsidiaries (valued in each case as provided in the definition of
"Investments"), not to exceed, in each case, the amount of Investments
previously made by the Company or any Restricted Subsidiary in such Person or
Unrestricted Subsidiary.
The foregoing provision shall not be violated by reason of: (i) the
payment of any dividend within 60 days after the date of declaration thereof
if, at said date of declaration, such payment would comply with the foregoing
paragraph; (ii) the redemption, repurchase, defeasance or other acquisition or
retirement for value of Indebtedness that is subordinated in right of payment
to the Notes including premium, if any, and accrued and unpaid interest, with
the proceeds of, or in exchange for, Indebtedness Incurred under clause (iii)
of the second paragraph of part (a) of the "Limitation on Indebtedness"
covenant; (iii) the repurchase, redemption or other acquisition of Capital
Stock of the Company (or options, warrants or other rights to acquire such
Capital Stock) in exchange for, or out of the proceeds of a substantially
concurrent offering of, shares of Capital Stock (other than Redeemable Stock)
of the Company (or options, warrants or other rights to acquire such Capital
Stock); (iv) the making of any principal payment or the repurchase, redemption,
retirement, defeasance or other acquisition for value of Indebtedness of the
Company which is subordinated in right of payment to the Notes in exchange for,
or out of the proceeds of, a substantially concurrent offering of, shares of
the Capital Stock of the Company (other than Redeemable Stock); (v) payments or
distributions to dissenting stockholders pursuant to applicable law in
connection with a consolidation, merger or transfer of assets that complies
with the provisions of the Indenture applicable to mergers, consolidations and
transfers of all or substantially all of the property and assets of the
Company; (vi) Investments in any Person the primary business of which is
related, ancillary or complementary to the business of the Company and its
Restricted Subsidiaries on the date of such Investments; PROVIDED that the
aggregate amount of Investments made pursuant to this clause (vi) does not
exceed the sum of (x) $50 million plus (y) the net reduction in Investments
made pursuant to this clause (vi) resulting from distributions on or repayments
of such Investments or from the Net Cash Proceeds from the sale of any such
Investment (except in each case to the extent any such payment or proceeds is
included in the calculation of Adjusted Consolidated Net Income) or from such
Person becoming a Restricted Subsidiary (valued in
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each case as provided in the definition of "Investments"); provided that the
net reduction in any Investment shall not exceed the amount of such Investment.
Each Restricted Payment permitted pursuant to the preceding paragraph
(other than the Restricted Payment referred to in clause (ii) thereof and an
exchange of Capital Stock for Capital Stock or Indebtedness referred to in
clause (iii) or (iv) thereof), and the Net Cash Proceeds from any issuance of
Capital Stock referred to in clauses (iii), (iv) and (vi), shall be included in
calculating whether the conditions of clause (C) of the first paragraph of this
"Limitation on Restricted Payments" covenant have been met with respect to any
subsequent Restricted Payments. In the event the proceeds of an issuance of
Capital Stock of the Company are used for the redemption, repurchase or other
acquisition of the Notes, or Indebtedness that is pari passu with the Notes,
then the Net Cash Proceeds of such issuance shall be included in clause (C) of
the first paragraph of this "Limitation on Restricted Payments" covenant only
to the extent such proceeds are not used for such redemption, repurchase or
other acquisition of Indebtedness.
LIMITATION ON DIVIDENDS AND OTHER PAYMENT RESTRICTIONS AFFECTING RESTRICTED
SUBSIDIARIES
The Company will not, and will not permit any Restricted Subsidiary to,
create or otherwise cause or suffer to exist or become effective any consensual
encumbrance or restriction of any kind on the ability of any Restricted
Subsidiary to (i) pay dividends or make any other distributions permitted by
applicable law on any Capital Stock of such Restricted Subsidiary owned by the
Company or any other Restricted Subsidiary, (ii) pay any Indebtedness owed to
the Company or any other Restricted Subsidiary, (iii) make loans or advances to
the Company or any other Restricted Subsidiary or (iv) transfer any of its
property or assets to the Company or any other Restricted Subsidiary.
The foregoing provisions shall not restrict any encumbrances or
restrictions: (i) existing on the Closing Date in the Indenture or any other
agreements in effect on the Closing Date, and any extensions, refinancings,
renewals or replacements of such agreements; PROVIDED that the encumbrances and
restrictions in any such extensions, refinancings, renewals or replacements are
no less favorable in any material respect to the Holders than those
encumbrances or restrictions that are then in effect and that are being
extended, refinanced, renewed or replaced; (ii) existing under or by reason of
applicable law; (iii) existing with respect to any Person or the property or
assets of such Person acquired by the Company or any Restricted Subsidiary and
existing at the time of such acquisition and not incurred in contemplation
thereof, which encumbrances or restrictions are not applicable to any Person or
the property or assets of any Person other than such Person or the property or
assets of such Person so acquired; (iv) in the case of clause (iv) of the first
paragraph of this "Limitation on Dividend and Other Payment Restrictions
Affecting Restricted Subsidiaries" covenant, (A) that restrict in a customary
manner the subletting, assignment or transfer of any property or asset that is
a lease, license, conveyance or contract or similar property or asset, (B)
existing by virtue of any transfer of, agreement to transfer option or right
with respect to, or Lien on, any property or assets of the Company or any
Restricted Subsidiary not otherwise prohibited by the Indenture or (C) arising
or agreed to in the ordinary course of business, not relating to any
Indebtedness, and that do not, individually or in the aggregate, detract from
the value of property or assets of the Company or any Restricted Subsidiary in
any manner material to the Company or any Restricted Subsidiary; (v) with
respect to a Restricted Subsidiary and imposed pursuant to an agreement that
has been entered into for the sale or disposition of all or substantially all
of the Capital Stock of, or property and assets of, such Restricted Subsidiary;
or (vi) contained in the New Credit Facility or any other financing or credit
agreement entered into by any Restricted Subsidiary after the Closing Date;
PROVIDED that unless and until an event of default thereunder has occurred and
is continuing any such Restricted Subsidiaries are permitted thereunder to pay
dividends or otherwise make payments as necessary for the Company to make
interest payments on the Notes when due (subject to the conditions contained in
the New Credit Facility) and the Board of Directors of the Company determines
that such restrictions, together with restrictions contained in agreements
relating to other Indebtedness, will not materially affect the Company's
ability to make payments of principal, premium, if any, or interest on the
Notes when due. Nothing contained in this "Limitation on Dividends and Other
Payment Restrictions Affecting Restricted Subsidiaries" covenant
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shall prevent the Company or any Restricted Subsidiary from (1) creating,
incurring, assuming or suffering to exist any Liens otherwise permitted in the
"Limitation on Liens" covenant or (2) restricting the sale or other disposition
of property or assets of the Company or any of its Restricted Subsidiaries that
secure Indebtedness of the Company or any of its Restricted Subsidiaries.
For a description of contractual limitations on Restricted Subsidiary
dividends or distributions existing on the Closing Date, see "Risk Factors",
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" and "Certain Indebtedness."
LIMITATION ON THE ISSUANCE AND SALE OF CAPITAL STOCK OF RESTRICTED
SUBSIDIARIES
The Company will not sell, and will not permit any Restricted Subsidiary,
directly or indirectly, to issue or sell, any shares of Capital Stock of a
Restricted Subsidiary (including options, warrants or other rights to purchase
shares of such Capital Stock) except (i) to the Company or a Wholly Owned
Restricted Subsidiary, (ii) issuances of director's qualifying shares or sales
to foreign nationals of shares of Capital Stock of foreign Restricted
Subsidiaries, to the extent required by applicable law, (iii) if, immediately
after giving effect to such issuance or sale, such Restricted Subsidiary would
no longer constitute a Restricted Subsidiary and any Investment in such Person
remaining after giving effect to such issuance or sale would have been
permitted to be made under the "Limitation on Restricted Payments" covenant if
made on the date of such issuance or sale or (iv) issuances or sales of Common
Stock of a Restricted Subsidiary to minority investors, provided the Company or
such Restricted Subsidiary applies the Net Cash Proceeds, if any, of any such
sale in accordance with clause (A) or (B) of the "Limitation on Asset Sales"
covenant described below.
LIMITATION ON ISSUANCES OF GUARANTEES BY RESTRICTED SUBSIDIARIES
The Company will not permit any Restricted Subsidiary, directly or
indirectly, to Guarantee any Indebtedness of the Company which is pari passu
with or subordinate in right of payment to the Notes ("Guaranteed
Indebtedness"), unless (i) such Restricted Subsidiary simultaneously executes
and delivers a supplemental indenture to the Indenture providing for a
Guarantee (a "Subsidiary Guarantee") of payment of the Notes by such Restricted
Subsidiary and (ii) such Restricted Subsidiary waives and will not in any
manner whatsoever claim or take the benefit or advantage of, any rights of
reimbursement, indemnity or subrogation or any other rights against the Company
or any other Restricted Subsidiary as a result of any payment by such
Restricted Subsidiary under its Subsidiary Guarantee; PROVIDED that this
paragraph shall not be applicable to (x) any Guarantee of any Restricted
Subsidiary that existed at the time such Person became a Restricted Subsidiary
and was not Incurred in connection with, or in contemplation of, such Person
becoming a Restricted Subsidiary or (y) any Guarantee of any Restricted
Subsidiary of Indebtedness Incurred (I) under a revolving credit or working
capital facility pursuant to clause (i) of the second paragraph of the
"Limitation on Indebtedness" covenant or (II) pursuant to clause (vii) of the
second paragraph of the "Limitation on Indebtedness" covenant. If the
Guaranteed Indebtedness is (A) PARI PASSU with the Notes, then the Guarantee of
such Guaranteed Indebtedness shall be PARI PASSU with, or subordinated to, the
Subsidiary Guarantee or (B) subordinated to the Notes, then the Guarantee of
such Guaranteed Indebtedness shall be subordinated to the Subsidiary Guarantee
at least to the extent that the Guaranteed Indebtedness is subordinated to the
Notes.
Notwithstanding the foregoing, any Subsidiary Guarantee by a Restricted
Subsidiary shall provide by its terms that it shall be automatically and
unconditionally released and discharged upon (i) any sale, exchange or
transfer, to any Person not an Affiliate of the Company, of all of the
Company's and each Restricted Subsidiary's Capital Stock in, or all or
substantially all the assets of, such Restricted Subsidiary (which sale,
exchange or transfer is not prohibited by the Indenture) or (ii) the release or
discharge of the Guarantee which resulted in the creation of such Subsidiary
Guarantee, except a discharge or release by or as a result of payment under
such Guarantee.
Certain Restricted Subsidiaries may also be required to guarantee the New
Credit Facility. The Guarantees by such Restricted Subsidiaries of the Notes
will be subordinated to their guarantees of the New Credit Facility.
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LIMITATION ON TRANSACTIONS WITH STOCKHOLDERS AND AFFILIATES
The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, enter into, renew or extend any transaction (including,
without limitation, the purchase, sale, lease or exchange of property or
assets, or the rendering of any service) with any holder (or any Affiliate of
such holder) of 5% or more of any class of Capital Stock of the Company or with
any Affiliate of the Company or any Restricted Subsidiary, except upon fair and
reasonable terms no less favorable in any material respect to the Company or
such Restricted Subsidiary than could be obtained, at the time of such
transaction or, if such transaction is pursuant to a written agreement, at the
time of the execution of the agreement providing therefor, in a comparable
arm's-length transaction with a Person that is not such a holder or an
Affiliate.
The foregoing limitation does not limit, and shall not apply to (i)
transactions (A) approved by a majority of the disinterested members of the
Board of Directors or (B) for which the Company or a Restricted Subsidiary
delivers to the Trustee a written opinion of a nationally recognized investment
banking firm stating that the transaction is fair to the Company or such
Restricted Subsidiary from a financial point of view; (ii) any transaction
solely between the Company and any of its Wholly Owned Restricted Subsidiaries
or solely between Wholly Owned Restricted Subsidiaries; (iii) the payment of
reasonable and customary regular fees to directors of the Company who are not
employees of the Company; (iv) any payments or other transactions pursuant to
any tax-sharing agreement between the Company and any other Person with which
the Company files a consolidated tax return or with which the Company is part
of a consolidated group for tax purposes; or (v) any Restricted Payments not
prohibited by the "Limitation on Restricted Payments" covenant. Notwithstanding
the foregoing, any transaction covered by the first paragraph of this
"Limitation on Transactions with Stockholders and Affiliates" covenant and not
covered by clauses (ii) through (v) of this paragraph, the aggregate amount of
which exceeds $1.0 million in value, must be approved or determined to be fair
in the manner provided for in clause (i)(A) or (B) above.
LIMITATION ON LIENS; NEGATIVE PLEDGES
The Company will not, and will not permit any Restricted Subsidiary to,
create, incur, assume or suffer to exist any Lien on any of its assets or
properties of any character, or any shares of Capital Stock or Indebtedness of
any Restricted Subsidiary, without making effective provision for all of the
Notes and all other amounts due under the Indenture to be directly secured
equally and ratably with (or, if the obligation or liability to be secured by
such Lien is subordinated in right of payment to the Notes, prior to) the
obligation or liability secured by such Lien.
The foregoing limitation does not apply to (i) Liens existing on the
Closing Date or arising thereafter in connection with the New Credit Facility;
(ii) Liens granted after the Closing Date on any assets or Capital Stock of the
Company or its Restricted Subsidiaries created in favor of the Holders; (iii)
Liens with respect to the assets of a Restricted Subsidiary granted by such
Restricted Subsidiary to the Company or a Wholly Owned Restricted Subsidiary to
secure Indebtedness owing to the Company or such other Restricted Subsidiary;
(iv) Liens securing Indebtedness which is Incurred to refinance secured
Indebtedness which is permitted to be Incurred under clause (iii) of the second
paragraph of the "Limitation on Indebtedness" covenant; PROVIDED that such
Liens do not extend to or cover any property or assets of the Company or any
Restricted Subsidiary other than the property or assets securing the
Indebtedness being refinanced; (v) Liens securing Indebtedness Incurred under
clause (i), (iv), (viii) and (ix) of the second paragraph of the "Limitation on
Indebtedness" covenant; or (vi) Permitted Liens.
The Company and the relevant Restricted Subsidiaries, as the case may be,
shall provide Negative Pledges to the Trustee for the benefit of the Holders of
100% of the partnership interests in and all of the assets of CHS Cayman,
except for its shares in CHS Logistics, which will be pledged only as security
for the New Credit Facility.
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LIMITATION ON SALE AND LEASEBACK TRANSACTIONS
The Indenture provides that the Company will not, and will not permit any
of its Restricted Subsidiaries to, directly or indirectly, enter into, renew or
extend any Sale and Leaseback Transaction unless: (i) the Company or such
Restricted Subsidiary would be entitled under the covenant described under
"Limitation on Indebtedness" to Incur Indebtedness in an amount equal to the
Attributable Indebtedness with respect to such Sale and Leaseback Transaction,
(ii) such Sale and Leaseback Transaction would not result in a violation of the
covenant described under "Limitations on Liens; Negative Pledges"; and (iii)
the Net Cash Proceeds from any such Sale and Leaseback Transaction are applied
in a manner consistent with the provisions described under "Limitation on Asset
Sales."
LIMITATION ON ASSET SALES
The Company will not, and will not permit any Restricted Subsidiary to,
consummate any Asset Sale, unless (i) the consideration received by the Company
or such Restricted Subsidiary is at least equal to the Fair Market Value of the
assets sold or disposed of; PROVIDED that the aggregate Fair Market Value of
the consideration received from any Asset Sale that is not in the form of cash
or Temporary Cash Investments shall not, when aggregated with the Fair Market
Value of all other non-cash consideration received by the Company and its
Restricted Subsidiaries from all previous Asset Sales since the Closing Date
that have not, prior to such date, been converted to cash or Temporary Cash
Investments, exceed 5% of the Adjusted Consolidated Net Tangible Assets of the
Company at the time of the Asset Sale under consideration; and PROVIDED,
FURTHER that with respect to any Asset Sales to Affiliates the Company receives
consideration consisting of no less than 85% cash or Temporary Cash Investments
and (ii) the Company delivers to the Trustee an Officers' Certificate
certifying that such Asset Sale complies with clause (i). In the event and to
the extent that the Net Cash Proceeds received by the Company or any of its
Restricted Subsidiaries from one or more Asset Sales occurring on or after the
Closing Date in any period of 12 consecutive months exceed 5% of Adjusted
Consolidated Net Tangible Assets (determined as of the date closest to the
commencement of such 12-month period for which a consolidated balance sheet of
the Company and its Subsidiaries have been filed pursuant to the "Commission
Reports and Reports to Holders" covenant), then the Company shall or shall
cause the relevant Restricted Subsidiary to (i) within twelve months after the
date Net Cash Proceeds so received exceed 5% of Adjusted Consolidated Net
Tangible Assets (A) apply an amount equal to such excess Net Cash Proceeds to
permanently repay unsubordinated Indebtedness of the Company or any Restricted
Subsidiary providing a Subsidiary Guarantee pursuant to the "Limitation on
Issuances of Guarantees by Restricted Subsidiaries" covenant described above or
Indebtedness of any other Restricted Subsidiary, in each case owing to a Person
other than the Company or any of its Subsidiaries or (B) invest an equal
amount, or the amount not so applied pursuant to clause (A) (or enter into a
definitive agreement committing to so invest within twelve months after the
date of such agreement), in capital assets of a nature or type or that are used
in a business (or in a company having capital assets of a nature or type, or
engaged in a business) similar or related to the nature or type of the property
and assets of, or the business of, the Company and its Restricted Subsidiaries
existing on the date of such investment (as determined in good faith by the
Board of Directors, whose determination shall be conclusive and evidenced by a
Board Resolution) and (ii) apply (no later than the end of the twelve-month
period referred to in clause (i)) such excess Net Cash Proceeds (to the extent
not applied pursuant to clause (i)) as provided in the following paragraph of
this "Limitation on Asset Sales" covenant. The amount of such excess Net Cash
Proceeds required to be applied (or to be committed to be applied) during such
twelve-month period as set forth in clause (i) of the preceding sentence and
not applied as so required by the end of such period shall constitute "Excess
Proceeds."
If, as of the first day of any calendar month, the aggregate amount of
Excess Proceeds not theretofore subject to an Offer to Purchase pursuant to
this "Limitation on Asset Sales" covenant totals at least $5.0 million, the
Company must commence, not later than the fifteenth Business Day of such month,
and consummate an Offer to Purchase from the Holders on a pro rata basis an
aggregate principal amount of Notes on the relevant Payment Date equal to the
Excess Proceeds on such date, at a purchase price equal to 100% of the
principal amount of the Notes on the relevant Payment Date, plus, in each case,
accrued interest (if any) to the Payment Date.
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ADDITIONAL SUBSIDIARY GUARANTEES
The Indenture provides that if the Company or any of its Restricted
Subsidiaries shall acquire or create another Restricted Subsidiary that is
incorporated in any state or territory of the United States, then such newly
acquired or created Restricted Subsidiary will be required to execute a
Subsidiary Guarantee within 120 days after the date of such acquisition or
creation, in accordance with the terms of the Indenture, unless it has been
designated as an Unrestricted Subsidiary. Additionally, the parent company of
any such newly acquired or created non-U.S. Restricted Subsidiary shall give a
Negative Pledge with respect to the remainder of its capital stock. If the
lenders under the New Credit Facility require that the newly acquired or
created U.S. Subsidiary guarantee the borrowers' obligations under the New
Credit Facility, the Subsidiary Guarantees issued pursuant to this "Additional
Subsidiary Guarantees" covenant will be subordinated in right of payment to
Indebtedness under the New Credit Facility, Guarantees or refinancings thereof
and Indebtedness incurred pursuant to clause (viii) of the second paragraph of
the "Limitation on Indebtedness" covenant.
COMMISSION REPORTS AND REPORTS TO HOLDERS
The Company shall file with the Commission the annual, quarterly and other
reports and other information required by Section 13(a) or 15(d) of the
Exchange Act, regardless of whether such sections of the Exchange Act are
applicable to the Company, and shall mail or cause to be mailed copies of such
reports to Holders and the Trustee within 15 days after the date it would have
been required to file such reports with the Commission had it been subject to
such sections; PROVIDED, HOWEVER, that the copies of such reports mailed to
Holders may omit exhibits, which the Company will supply to any Holder at such
Holder's request. In addition, the Company and the Subsidiary Guarantors will
make such information available to prospective purchasers of the Notes,
securities analysts and broker-dealers who request it in writing. The Company
and the Subsidiary Guarantors have agreed that, for so long as any Notes remain
outstanding, they will furnish to the Holders and beneficial holders of Notes
and to prospective purchasers of Notes designated by the Holders and to
broker-dealers, upon their request, the information required to be delivered
pursuant to Rule 144A(d)(4) under the Securities Act.
REPURCHASE OF NOTES UPON A CHANGE OF CONTROL
The Company shall commence, within 30 days of the occurrence of a Change
of Control, and consummate an Offer to Purchase for all Notes then outstanding,
at a purchase price equal to 101% of the principal amount thereof, plus accrued
and unpaid interest (if any) to the Payment Date.
There can be no assurance that the Company will have sufficient funds
available at the time of any Change of Control to make any debt payment
(including repurchases of Notes) required by the foregoing covenant (as well as
may be contained in other securities of the Company which might be outstanding
at the time). The above covenant requiring the Company to repurchase the Notes
will, unless consents are obtained, require the Company to repay all
indebtedness then outstanding which by its terms would prohibit such Note
repurchase, either prior to, or concurrently with, such Note repurchase.
EVENTS OF DEFAULT
The following events are defined as "Events of Default" in the Indenture:
(a) defaults in the payment of principal of (or premium, if any, on) any Note
when the same becomes due and payable at maturity, upon acceleration,
redemption or otherwise; (b) defaults in the payment of interest on any Note
when the same becomes due and payable, and such default continues for a period
of 30 days; (c) defaults in the performance or breach of the provisions of the
Indenture applicable to mergers, consolidations and transfers of all or
substantially all of the assets of the Company or the failure to make or
consummate an Offer to Purchase in accordance with the "Limitation on Asset
Sales" or the "Repurchase of Notes upon a Change of Control" covenant; (d)
defaults in the performance of, or breaches of, any covenant or agreement of
the Company in the Indenture or under the Notes (other
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than a default specified in clause (a), (b) or (c) above) and such default or
breach continues for a period of 30 consecutive days after written notice by
the Trustee to the Company or by the Holders of 25% or more in aggregate
principal amount at maturity of the Notes to the Company and the Trustee; (e)
there occurs with respect to any issue or issues of Indebtedness of the Company
or any Significant Subsidiary having an outstanding principal amount of $10.0
million or more in the aggregate for all such issues of all such Persons,
whether such Indebtedness now exists or shall hereafter be created, (I) an
event of default that has caused the holder thereof to declare such
Indebtedness to be due and payable prior to its Stated Maturity and such
Indebtedness has not been discharged in full or such acceleration has not been
rescinded or annulled within 60 days of such acceleration and/or (II) the
failure to make a principal payment at the final (but not any interim) fixed
maturity and such defaulted payment shall not have been made, waived or
extended within 30 days of such payment default; (f) any final judgment or
order (not covered by insurance) for the payment of money in excess of $10.0
million in the aggregate for all such final judgments or orders against all
such Persons (treating any deductibles, self-insurance or retention as not so
covered) shall be rendered against the Company or any Significant Subsidiary
and shall not be paid or discharged, and there shall be any period of 30
consecutive days following entry of the final judgment or order that causes the
aggregate amount for all such final judgments or orders outstanding and not
paid or discharged against all such Persons to exceed $10.0 million during
which a stay of enforcement of such final judgment or order, by reason of a
pending appeal or otherwise, shall not be in effect; or (g) certain events of
bankruptcy, insolvency, reorganization or administration affecting the Company
or any Significant Subsidiary.
If an Event of Default (other than an Event of Default specified in clause
(f) or (g) above that occurs with respect to the Company) occurs and is
continuing under the Indenture, the Trustee or the Holders of at least 25% in
aggregate principal amount at maturity of the Notes then outstanding, by
written notice to the Company (and to the Trustee if such notice is given by
the Holders), may, and the Trustee at the request of such Holders shall,
declare the principal amount of, premium, if any, and accrued interest on the
Notes to be immediately due and payable. Upon a declaration of acceleration,
such principal amount of, premium, if any, and accrued interest shall be
immediately due and payable. In the event of a declaration of acceleration
because an Event of Default set forth in clause (d) above has occurred and is
continuing, such declaration of acceleration shall be automatically rescinded
and annulled if the event of default triggering such Event of Default pursuant
to clause (d) shall be remedied or cured by the Company or the relevant
Significant Subsidiary or waived by the holders of the relevant Indebtedness
within 60 days after the declaration of acceleration with respect thereto. If
an Event of Default specified in clause (f) or (g) above occurs with respect to
the Company, the principal amount of, premium, if any, and accrued interest on
the Notes then outstanding shall IPSO FACTO become and be immediately due and
payable without any declaration or other act on the part of the Trustee or any
Holder. The Holders of at least a majority in principal amount at maturity of
the outstanding Notes by written notice to the Company and to the Trustee, may
waive all past defaults and rescind and annul a declaration of acceleration and
its consequences if (i) all existing Events of Default, other than the
nonpayment of the principal amount of, premium, if any, and interest on the
Notes that have become due solely by such declaration of acceleration, have
been cured or waived, (ii) the rescission would not conflict with any judgment
or decree of a court of competent jurisdiction and (iii) all amounts due to the
Trustee have been paid. For information as to the waiver of defaults, see
"--Modification and Waiver."
The Holders of at least a majority in aggregate principal amount of the
outstanding Notes may direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee or exercising any trust or
power conferred on the Trustee. However, the Trustee may refuse to follow any
direction that conflicts with law or the Indenture, that may involve the
Trustee in personal liability, or that the Trustee determines in good faith may
be unduly prejudicial to the rights of Holders of Notes not joining in the
giving of such direction and may take any other action it deems proper that is
not inconsistent with any such direction received from Holders of Notes. A
Holder may not pursue any remedy with respect to the Indenture or the Notes
unless: (i) the Holder gives the Trustee written notice of a continuing Event
of Default; (ii) the Holders of at least 25% in aggregate principal amount at
maturity of outstanding Notes make a written request to the Trustee to pursue
the remedy; (iii) such Holder or Holders offer the Trustee indemnity
satisfactory to the Trustee against any costs, liability or
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expense; (iv) the Trustee does not comply with the request within 60 days after
receipt of request and the offer of indemnity; and (v) during such 60-day
period, the Holders of a majority in aggregate principal amount at maturity of
the outstanding Notes do not give the Trustee a direction that is inconsistent
with the request. However, such limitations do not apply to the right of any
Holder of a Note to receive payment of the principal of, premium, if any, or
interest on, such Note or to bring suit for the enforcement of any such
payment, on or after the due date expressed in the Notes, which right shall not
be impaired or affected without the consent of the Holder.
The Indenture requires certain officers of the Company and each Subsidiary
Guarantor to certify, on or before a date not more than 90 days after the end
of each fiscal year, that a review has been conducted of the activities of the
Company and its Restricted Subsidiaries and the Company's and its Restricted
Subsidiaries' performance under the Indenture and that the Company has
fulfilled all obligations thereunder, or, if there has been a default in the
fulfillment of any such obligation, specifying each such default and the nature
and status thereof. The Company will also be obligated to notify the Trustee of
any default or defaults in the performance of any covenants or agreements under
the Indenture.
CONSOLIDATION, MERGER AND SALE OF ASSETS
The Indenture provides that the Company may not consolidate with, merge
with or into, or sell, convey, transfer, lease or otherwise dispose of all or
substantially all of its property and assets (as an entirety or substantially
an entirety in one transaction or a series of related transactions) to, any
Person or permit any Person to merge with or into the Company unless: (i) the
Company shall be the continuing Person, or the Person (if other than the
Company) formed by such consolidation or into which the Company is merged or
that acquired or leased such property and assets of the Company shall be a
corporation organized and validly existing under the laws of any EU Country or
the United States of America, and shall expressly assume, by a supplemental
indenture, executed and delivered to the Trustee, all of the obligations of the
Company on all of the Notes and under the Indenture; (ii) immediately after
giving effect to such transaction, no Default or Event of Default shall have
occurred and be continuing; (iii) immediately after giving effect to such
transaction on a pro forma basis, the Company or any Person becoming the
successor obligor of the Notes shall have a Consolidated Net Worth equal to or
greater than the Consolidated Net Worth of the Company immediately prior to
such transaction; PROVIDED, HOWEVER, that this clause (iii) shall not apply to
an acquisition accounted for as a pooling of interests in accordance with GAAP;
(iv) immediately after giving effect to such transaction on a pro forma basis,
the Company or any Person becoming the successor obligor of the Notes, as the
case may be, could Incur at least $1.00 of Indebtedness under the first
paragraph of the "Limitation on Indebtedness" covenant (calculated, solely for
the purpose of this Consolidation, Merger and Sale of Assets covenant, without
any pro forma adjustment with respect to the Santech Acquisition for any period
prior to the acquisition thereof); PROVIDED, HOWEVER, that this clause (iv)
shall not apply to a consolidation or merger with or into a Wholly Owned
Restricted Subsidiary with a positive net worth; PROVIDED that, in connection
with any such merger or consolidation, no consideration (other than Common
Stock in the surviving Person or the Company (or a Person that owns directly or
indirectly all of the Capital Stock of the surviving Person or the Company
immediately following such transaction)) shall be issued or distributed to the
shareholders of the Company; and (v) the Company delivers to the Trustee an
Officers' Certificate (attaching the arithmetic computations to demonstrate
compliance with clauses (iii) and (iv)) and Opinion of Counsel, in each case
stating that such consolidation, merger or transfer and such supplemental
indenture comply with this provision, that all conditions precedent provided
for herein relating to such transaction have been complied with and, in the
event that the continuing Person is organized under the laws of an EU Country
other than England and Wales or Scotland, that the Indenture and the Notes
constitute legal, valid and binding obligations of the continuing Person,
enforceable in accordance with their terms; PROVIDED, HOWEVER, that clauses
(iii) and (iv) above do not apply if, in the good faith determination of the
Board of Directors of the Company, whose determination shall be evidenced by a
Board
88
Resolution, the principal purpose of such transaction is to change the state of
incorporation of the Company; and PROVIDED FURTHER that any such transaction
shall not have as one of its purposes the evasion of the foregoing limitations.
THE GUARANTEES
The Company's payment obligations under the Notes has been jointly and
severally guaranteed by the Subsidiary Guarantors. The Indenture provides that
no Subsidiary Guarantor may consolidate with or merge with or into (whether or
not such Guarantor is the surviving Person), another corporation, Person or
entity whether or not affiliated with such Subsidiary Guarantor (but excluding
any amalgamation, consolidation or merger if the surviving corporation is no
longer a Restricted Subsidiary of the Company in accordance with the provisions
of the Indenture) unless (i) subject to the provisions of the following
paragraph, the Person formed by or surviving any such consolidation or merger
(if other than such Subsidiary Guarantor) assumes all the obligations of such
Subsidiary Guarantor pursuant to a supplemental indenture in form and substance
reasonably satisfactory to the Trustee, under the Notes and the Indenture; (ii)
immediately after giving effect to such transaction, no Default or Event of
Default exists; (iii) such Subsidiary Guarantor, or any Person formed by or
surviving any such amalgamation, consolidation or merger, would have
consolidated net worth (immediately after giving effect to such transaction)
equal to or greater than the consolidated net worth of such Subsidiary
Guarantor immediately preceding the transaction; PROVIDED, HOWEVER, that this
clause shall not apply to an acquisition accounted for as a pooling of
interests in accordance with GAAP; and (iv) the Company would be permitted by
virtue of its pro forma Consolidated Leverage Ratio, immediately after giving
effect to such transaction, to incur at least US$1.00 of additional
Indebtedness pursuant to the Consolidated Leverage Ratio test set forth in the
covenant described under the caption "--Covenants--Limitation on Indebtedness."
This provision will not prohibit any amalgamation, consolidation or merger of a
Subsidiary Guarantor with or into the Company or any other Subsidiary Guarantor
or a Wholly Owned Restricted Subsidiary of a Subsidiary Guarantor.
The Subsidiary Guarantees of CHS Electronics, Inc. (Nevada), CHS Delaware,
Inc., CHS Delaware L.L.C. and CHS Americas, Inc. are senior and unsubordinated
obligations of such Subsidiary Guarantors. Any future Subsidiary Guarantees by
a Subsidiary Guarantor that (a) is required to be a guarantor of the New Credit
Facility or any refinancing thereof or (b) becomes a borrower or guarantor of
certain other Indebtedness (referred to herein as the "Subordinated Subsidiary
Guarantees") will be subordinated, as described below, in right of payment to
the prior fulfillment of such obligations of such Subordinated Subsidiary
Guarantors.
To the extent any payment of Senior Indebtedness (whether by or on behalf
of the Company, as proceeds of security or enforcement of any right of set off
or otherwise) is declared to be fraudulent or preferential, set aside or
required to be paid to any receiver, trustee in bankruptcy, liquidating
trustee, agent or other similar Person under any bankruptcy, insolvency,
receivership, fraudulent conveyance or similar law, then, if such payment is
recovered by, or paid over to, such receiver, trustee in bankruptcy,
liquidating trustee, agent or other similar Person, the Senior Indebtedness or
part thereof originally intended to be satisfied shall be deemed to be
reinstated and outstanding as if such payment has not occurred. To the extent
the obligation to repay any Senior Indebtedness is declared to be fraudulent,
invalid, or otherwise set aside under any bankruptcy, insolvency, receivership,
fraudulent conveyance or similar law, then the obligations so declared
fraudulent, invalid or otherwise set aside (and all other amounts that would
come due with respect thereto had such obligations not been so affected) shall
be deemed to be reinstated and outstanding as Senior Indebtedness for all
purposes of the Subsidiary Guarantees as if such declaration, invalidity or
setting aside had not occurred. Upon any payment or distribution of assets or
securities of the Company of any kind or character, whether in cash, property
or securities, upon any dissolution or winding-up or total or partial
liquidation or reorganization of the Company whether voluntary or involuntary
or in bankruptcy, insolvency, receivership or other proceedings, all amounts
due or to become due upon all Senior Indebtedness (including any interest
accruing subsequent to an event of bankruptcy, whether or not such interest is
an allowed claim enforceable against the debtor under applicable bankruptcy
laws) shall first be paid in full, in cash,
89
before the Noteholders or the Trustee on behalf of the Noteholders shall be
entitled to receive any payment by or on behalf of the Company on acccount of
the Subordinated Subsidiary Guarantees, or any payment to acquire any of the
Notes for cash, property or securities, or any distribution with respect to the
Notes of any cash, property or securities. Before any payment may be made by or
on behalf of the Company pursuant to the Subordinated Subsidiary Guarantees
upon any such dissolution, winding-up, liquidating or reorganization, any
payment or distribution of assets or securities of the Company of any kind or
character, whether in cash, property or securities, to which the Noteholders or
the Trustee on behalf of the Noteholders would be entitled, but for the
subordination of the Subordinated Subsidiary Guarantees, shall be made by the
Company or by any receiver, trustee in bankruptcy, liquidating trustee, agent
or other similar Person making such payment or distribution, or by the
Noteholders or the Trustee if received by them or it, directly to the holders
of the Senior Indebtedness (PRO RATA to such holders on the basis of the
respective amounts of Senior Indebtedness held by such holders), to the extent
necessary to pay all such Senior Indebtedness in full, in cash, after giving
effect to any concurrent payment distribution or provision therefor, to or for
the holders of such Senior Indebtedness.
No direct or indirect payment by or on behalf of the Company pursuant to
the Subordinated Subsidiary Guarantees shall be made, and no enforcement action
may be taken under any Subordinated Subsidiary Guarantee, whether pursuant to
the terms of the Notes or upon acceleration or otherwise, if, at the time of
such payment or action, there exists a default in the payment of all or any
portion of the obligations on any Senior Indebtedness and such default shall
not have been cured or waived or the benefits of this sentence waived by or on
behalf of the holders of such Senior Indebtedness. In addition, during the
continuance of any other event of default with respect to the New Credit
Facility pursuant to which the maturity thereof may be accelerated and (a) upon
receipt by the Trustee of written notice from the Representative under the New
Credit Facility or (b) if such event of default under the New Credit Facility
results from the acceleration of the Notes, from and after the date of such
acceleration, no payment pursuant to the Subordinated Subsidiary Guarantees may
be made by or on behalf of the Company upon or in respect of the Notes and no
enforcement action may be taken under any Subordinated Subsidiary Guarantee for
a period (a "Payment Blockage Period") commencing on the earlier of the date of
receipt of such notice or the date of such acceleration and ending 179 days
thereafter (unless such Payment Blockage Period shall be terminated by written
notice to the Trustee from the Representative under the New Credit Facility or
such event of default has been cured or waived). No more than one Payment
Blockage Period may be commenced with respect to the Notes during any period of
360 consecutive days. Notwithstanding anything in the Indenture to the
contrary, there must be 180 consecutive days in any 360-day period in which no
Payment Blockage Period is in effect. No event of default (other than an event
of default pursuant to the financial maintenance covenants under the New Credit
Facility) that existed or was continuing on the date of the commencement of any
Payment Blockage Period shall be, or be made, the basis for the commencement of
a second Payment Blockage Period by the Representative for, or the holders of,
Senior Indebtedness, whether or not within a period of 360 consecutive days,
unless such event of default shall have been cured or waived and shall have
occurred again.
Not later than five business days before a declaration of acceleration
being notified to the Company in accordance with the section "Events of
Default" or any other enforcement action being taken under a Subordinated
Subsidiary Guarantee, the Trustee shall send a written notice of such
declaration to the Representative of the lenders under the New Credit Facility.
"Representative" means the bank agent or other trustee, agent or
representative in respect of the lenders under the New Credit Facility;
PROVIDED that if, and for so long as, the lenders under the New Credit Facility
lack such a representative, then the Representative for the lenders under the
New Credit Facility shall at all times constitute the holders of a majority in
outstanding principal amount of indebtedness in respect of the New Credit
Facility.
"Senior Indebtedness" is defined to mean the obligation of the Company
and/or any of its subsidiaries (including, in the event the Company or any
subsidiary merges, or consolidates with,
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another Person in compliance with the "Consolidation, Merger and Sale of
Assets" covenant, obligations of the successor corporation) to pay all
Indebtedness and other monetary obligations of the Company under (or in respect
of) the New Credit Facility and any refinancing thereof and amounts permitted
under clause (viii) of the second paragraph of the "Limitations on
Indebtedness" covenant.
The Indenture provides that in the event of a sale or other disposition of
all of the assets of any Subsidiary Guarantor or a sale or other disposition of
all of the capital stock of any Subsidiary Guarantor, by way of amalgamation,
merger, consolidation or otherwise, then such Subsidiary Guarantor (in the
event of a sale or other disposition, by way of such an amalgamation, merger,
consolidation or otherwise, of all of the capital stock of such Subsidiary
Guarantor) or the corporation acquiring the property (in the event of a sale or
other disposition of all of the assets of such Subsidiary Guarantor) will be
released and relieved of any obligation under its guarantee of the Notes;
PROVIDED that the Net Cash Proceeds of such sale or other disposition are
applied in accordance with the applicable provisions of the Indenture.
DEFEASANCE
DEFEASANCE AND DISCHARGE. The Indenture provides that the Company will be
deemed to have paid and will be discharged from any and all obligations in
respect of the Notes on the first day following six months after the deposit
referred to below, and the provisions of the Indenture will no longer be in
effect with respect to the Notes (except for, among other matters, certain
obligations to register the transfer or exchange of the Notes, to replace
stolen, lost or mutilated Notes, to maintain paying agencies and to hold monies
for payment in trust) if, among other things, (A) the Company has deposited
with the Trustee, in trust, money and/or government obligations that through
the payment of interest and principal in respect thereof in accordance with
their terms will provide money in an amount sufficient to pay the principal of,
premium, if any, and accrued interest on the Notes on the Stated Maturity of
such payments in accordance with the terms of the Indenture and the Notes, (B)
the Company has delivered to the Trustee (i) either (x) an Opinion of Counsel
to the effect that Holders will not recognize income, gain or loss for U.S.
federal income tax purposes as a result of the Company's exercise of its option
under this "Defeasance" provision and will be subject to U.S. federal income
tax on the same amount and in the same manner and at the same times as would
have been the case if such deposit, defeasance and discharge had not occurred,
which Opinion of Counsel must be based upon (and accompanied by a copy of) a
ruling of the Internal Revenue Service to the same effect unless there has been
a change in applicable federal income tax law after the Closing Date such that
a ruling is no longer required or (y) a ruling directed to the Trustee received
from the Internal Revenue Service to the same effect as the aforementioned
Opinion of Counsel; and (ii) an Opinion of Counsel to the effect that the
creation of the defeasance trust does not violate the Investment Company Act of
1940, (C) immediately after giving effect to such deposit on a pro forma basis,
no Event of Default, or event that after the giving of notice or lapse of time
or both would become an Event of Default shall have occurred and be continuing
on the date of such deposit or during the period ending on the first day
following six months after the date of such deposit, and such deposit shall not
result in a breach or violation of, or constitute a default under, any other
agreement or instrument to which the Company or any of its Subsidiaries is a
party or by which the Company or any of its Subsidiaries is bound, and (D) if
at such time the Notes are listed on a national securities exchange, the
Company has delivered to the Trustee an Opinion of Counsel to the effect that
the Notes will not be delisted as a result of such deposit, defeasance and
discharge.
DEFEASANCE OF CERTAIN COVENANTS AND CERTAIN EVENTS OF DEFAULT. The
Indenture further provides that the provisions of the Indenture will no longer
be in effect with respect to clauses (iii) and (iv) under "--Consolidation,
Merger and Sale of Assets" and all the covenants described herein under
"--Covenants," clause (d) under "--Events of Default" with respect to such
covenants and clauses (iii) and (iv) under "--Consolidation, Merger and Sale of
Assets," and clauses (e) and (f) under "--Events of Default" shall be deemed
not to be Events of Default, upon, among other things, the deposit with the
Trustee, in trust, of money and/or government obligations that through the
payment of interest and principal in respect thereof in accordance with their
terms will provide money in an amount
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sufficient to pay the principal of, premium, if any, and accrued interest on
the Notes on the Stated Maturity of such payments in accordance with the terms
of the Indenture and the Notes, the satisfaction of the provisions described in
clauses (B)(iii), (C) and (D) of the preceding paragraph and the delivery by
the Company to the Trustee of an Opinion of Counsel to the effect that, among
other things, the Holders will not recognize income, gain or loss for United
States federal income tax purposes as a result of such deposit and defeasance
of certain covenants and Events of Default and will be subject to U.S. federal
income tax on the same amount and in the same manner and at the same times as
would have been the case if such deposit and defeasance had not occurred.
DEFEASANCE AND CERTAIN OTHER EVENTS OF DEFAULT. In the event the Company
exercises its option to omit compliance with certain covenants and provisions
of the Indenture with respect to the Notes as described in the immediately
preceding paragraph and the Notes are declared due and payable because of the
occurrence of an Event of Default that remains applicable, the amount of money
and/or government obligations on deposit with the Trustee will be sufficient to
pay amounts due on the Notes at the time of their Stated Maturity but may not
be sufficient to pay amounts due on the Notes at the time of the acceleration
resulting from such Event of Default. However, the Company will remain liable
for such payments.
MODIFICATION AND WAIVER
Modifications and amendments of the Indenture may be made by the Company
and the Trustee with the consent of the Holders of not less than a majority in
aggregate principal amount at maturity of the outstanding Notes, subject to
certain exceptions; PROVIDED, HOWEVER, that no such modification or amendment
may, without the consent of each Holder affected thereby, (i) change the Stated
Maturity of the principal of, or any installment of interest on, any Note, (ii)
reduce the principal amount of, or premium, if any, or interest on, any Note,
(iii) change the place or currency of payment of principal of, or premium, if
any, or interest on, any Note, (iv) impair the right to institute suit for the
enforcement of any payment on or after the Stated Maturity (or, in the case of
a redemption, on or after the Redemption Date) of any Note, (v) reduce the
above-stated percentage of outstanding Notes the consent of whose Holders is
necessary to modify or amend the Indenture, (vi) waive a default in the payment
of principal of, premium, if any, or interest on the Notes, or (vii) reduce the
percentage or aggregate principal amount at maturity of outstanding Notes the
consent of whose Holders is necessary for waiver of compliance with certain
provisions of the Indenture or for waiver of certain defaults.
GOVERNING LAW AND CONSENT TO JURISDICTION AND SERVICE
The Notes and the Indenture are governed by the laws of the State of New
York. The Company has appointed the Trustee, as its agent for service of
process in any suit, action or proceeding with respect to the Indenture or the
Notes and for actions brought under federal or state securities laws, in each
case brought in any federal or state court located in The City of New York and
has agreed to submit to the jurisdiction of such courts.
NO PERSONAL LIABILITY OF INCORPORATORS, STOCKHOLDERS, OFFICERS, DIRECTORS OR
EMPLOYEES
The Indenture provides that no recourse for the payment of the principal
of, premium, if any, or interest on any of the Notes or for any claim based
thereon or otherwise in respect thereof, and no recourse under or upon any
obligation, covenant or agreement of the Company in the Indenture or in any of
the Notes or because of the creation of any Indebtedness represented thereby,
shall be had against any incorporator, stockholder, officer, director, employee
or controlling person of the Company or of any successor Person thereof. Each
Holder, by accepting the Notes, waives and releases all such liability.
CONCERNING THE TRUSTEE
The Indenture provides that, except during the continuance of an Event of
Default, the Trustee will not be liable, except for the performance of such
duties as are specifically set forth in the Indenture. If
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an Event of Default has occurred and is continuing, the Trustee will use the
same degree of care and skill in its exercise as a prudent person would
exercise under the circumstances in the conduct of such person's own affairs.
The Indenture contains limitations on the rights of the Trustee, should it
become a creditor of the Company, to obtain payment of claims in certain cases
or to realize on certain property received by it in respect of any such claims,
as security or otherwise. The Trustee is permitted to engage in other
transactions; PROVIDED, HOWEVER, that if it acquires any conflicting interest,
it must eliminate such conflict or resign.
PAYMENT
Payment of principal of and interest on the Notes represented by the
Global Notes will be made by the Company in U.S. dollars through the Paying
Agent to Cede & Co., the nominee for DTC, as the registered holder of the
Global Notes.
Payments by DTC Participants and Indirect DTC Participants (as defined
herein) to owners of beneficial interests in the Global Notes will be governed
by standing instructions and customary practices, as is now the case with
securities held by the accounts of customers registered in "street name", and
will be the responsibility of the DTC Participants or Indirect DTC Participants
(as defined herein). Neither the Trustee nor the Paying Agent will have any
responsibility or liability for any aspect of the records of DTC relating to or
payments made by DTC on account of beneficial interests in the Global Notes or
for maintaining, supervising or reviewing any records of DTC relating to such
beneficial interests.
ADDITIONAL INFORMATION
Anyone who receives this Prospectus may obtain a copy of the Indenture and
Registration Rights Agreement without charge by writing to CHS Electronics,
Inc., 2000 N.W. 84th Avenue, Miami, Florida 33122, Attention: Craig Toll, Vice
President of Finance and Chief Executive Officer.
BOOK-ENTRY, DELIVERY AND FORM
The Old Notes sold to Qualified Institutional Buyers initially were in the
form of one or more registered global notes without interest coupons
(collectively, the "Rule 144A Global Notes"). Upon issuance, the Global Notes
were deposited with the Trustee, as custodian for DTC, and registered in the
name of DTC or its nominee for credit to the accounts of DTC's Direct and
Indirect Participants (as defined below). The Old Notes sold in offshore
transactions in reliance on Regulation S, initially were in the form of one or
more registered, global book-entry notes without interest coupons (the
"Regulation S Global Notes"). The Regulation S Global Notes were deposited with
the Trustee, as custodian for DTC, in New York, New York and registered in the
name of a nominee of DTC for credit to the accounts of Indirect Participants
participating in DTC through the Euroclear System ("Euroclear") and Cedel Bank,
societ- anonyme ("CEDEL"). All registered global notes are referred to herein
collectively as "Global Notes." DTC will maintain the Notes in denominations of
$1,000 and integral multiples thereof through its book-entry facilities.
Transfer of beneficial interests in any Global Notes will be subject to
the applicable rules and procedures of DTC and its Direct or Indirect
Participants (including, if applicable, those of Euroclear and CEDEL), which
may change from time to time. In addition, beneficial interests in the
Regulation S Global Notes and the 144A Notes are subject to restrictions on
transfer.
The Global Notes may be transferred, in whole and not in part, only to
another nominee of DTC or to a successor of DTC or its nominee in certain
limited circumstances. Beneficial interests in the Global Notes may be
exchanged for Notes in certificated form in certain limited circumstances. See
"--Transfers of Interests in Global Notes for Certificated Notes."
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Initially, the Trustee will act as Paying Agent and Registrar. The Notes
may be presented for registration of transfer and exchange at the offices of
the Registrar.
DTC has advised the Company and the Initial Purchasers as follows: It is a
limited-purpose trust company which was created to hold securities for its
participating organizations (the "Participants") and to facilitate the
clearance and settlement of transactions in such securities between
Participants through electronic book-entry changes in accounts of its
Participants. Participants include securities brokers and dealers (including
the Initial Purchasers), banks, trust companies, clearing corporations and
certain other organizations. Access to DTC's book-entry system is also
available to others, such as banks, brokers, dealers and trust companies that
clear through or maintain a custodial relationship with a Participant, either
directly or indirectly ("indirect participants"). Persons who are not
Participants may beneficially own securities held by DTC only through
Participants or indirect participants.
The Company expects that pursuant to procedures established by DTC (i)
upon the issuance by the Company of the Notes, DTC will credit the accounts of
Participants designated by the Initial Purchasers with the principal amount of
the Notes purchased by the Initial Purchasers and (ii) ownership of beneficial
interests in the Global Notes will be shown on, and the transfer of that
ownership will be effected only through, records maintained by DTC (with
respect to Participants' interest), the Participants and the indirect
participants.
The laws of some states require that certain persons take physical
delivery in definitive form of securities that they own. Consequently, the
ability to transfer beneficial interests in the Global Notes is limited to such
extent.
Investors in the Global Notes may hold their interests therein directly
through DTC, if they are Participants in such system, or indirectly through
organizations that are Participants in such system.
So long as a nominee of DTC is the registered owner of the Global Notes,
such nominee will be considered the sole owner or holder of the Notes for all
purposes under the Indenture. Except as provided below, owners of beneficial
interests in the Global Notes will not be entitled to have Notes registered in
their names, will not receive or be entitled to receive physical delivery of
Notes in definitive form and will not be considered the owners or holders
thereof under the Indenture, including with respect to the giving of any
directions, instructions or approvals to the Trustee thereunder.
Neither the Company nor the Trustee, the paying agent under the Indenture
(the "Paying Agent") or the registrar of the Notes under the Indenture (the
"Registrar") will have any responsibility or liability for any aspect of the
records relating to or payments made on account of beneficial ownership
interests in the Global Notes, or for maintaining, supervising or reviewing any
records relating to such beneficial ownership interests.
Principal and interest payments on the Global Notes registered in the name
of DTC's nominee will be made by the Company, either directly or through a
paying agent, to DTC's nominee as the registered owner of the Global Notes.
Under the terms of the Indenture, the Company and the Trustee will treat the
persons in whose names the Notes are registered as the owners of such Notes for
the purpose of receiving payments of principal and interest on such Notes to
owners of beneficial interests in the Global Notes. DTC has advised the Company
and the Trustee that its present practice is, upon receipt of any payment, to
credit immediately the accounts of the Participants with payments in amounts
proportionate to their respective holdings in principal amount of beneficial
interests in the Global Notes as shown on the records of DTC. Payments by
Participants and indirect participants to owners of beneficial interests in the
Global Notes will be governed by standing instructions and customary practices,
as is now the case with securities held for the accounts of customers in bearer
form or registered in "street name" and will be the responsibility of such
Participants or indirect participants.
As long as the Notes are represented by Global Notes, the Global Note
holder will be the holder of the Notes and therefore will be the only entity
that can exercise a right to repayment or repurchase of
94
the Notes. See "--Certain Covenants--Change of Control" and "--Limitation on
Asset Sales." Notice by Participants or indirect participants or by owners of
beneficial interests in a Global Note held through such Participants or
indirect participants or by owners of beneficial interests in a Global Note
held through such Participants or indirect participants of the exercise of the
option to elect repayment of beneficial interests in Notes represented by a
Global Note must be transmitted to DTC in accordance with its procedures on a
form required by DTC and provided to Participants. In order to ensure that
DTC's nominee will timely exercise a right to repayment with respect to a
particular Note, the beneficial owner of such Note must instruct the broker or
other Participant or indirect participant through which it holds an interest in
a Note in order to ascertain the cut-off time by which such an instruction must
be given in order for timely notice to be delivered to DTC. The Company will
not be liable for any delay in delivery of notices of the exercise of the
option to elect repayment.
Subject to certain conditions, any person having a beneficial interest in
the Notes may, upon request to the Trustee, exchange such beneficial interest
for Notes in definitive form. Upon any such exchange, the Trustee is required
to register such Notes in the name of, and cause the same to be delivered to,
such Person or Persons (or the nominee of any thereof). Such Notes would be
issued in fully registered form and would be subject to the legal requirements
described herein under "Transfer Restrictions." In addition, if the Company
notifies the Trustee in writing that it elects to cause the issuance of Notes
in definitive form under the Indenture, then, upon surrender by the relevant
Global Note holder of its Global Note, Notes in such form will be issued to
each person that such Global Note holder and DTC identifies as being the
beneficial owner of the related Notes.
Neither the Company nor the Trustee will be liable for any delay by the
Global Note holder or DTC in identifying the owners of beneficial interests in
the Notes and the Company and the Trustee may conclusively rely on, and will be
protected in relying on, instructions from the Global Note holder or DTC for
all purposes.
The Indenture requires that payments in respect of the Notes represented
by the Global Notes (including principal, premium, if any, interest and
Liquidated Damages) be made in same day funds. The interests in the Global
Notes trade in DTC's Same-Day Funds Settlement System, and any permitted
secondary market trading activity in the Notes is, therefore, required by DTC
to be settled in same-day funds. Transfers between Participants in DTC will be
effected in accordance with DTC procedures and will be settled in same-day
funds.
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EXCHANGE OFFER; REGISTRATION RIGHTS
The Company entered into a registration rights agreement with the Initial
Purchasers (the "Registration Rights Agreement"), pursuant to which the Company
agreed, for the benefit of the holders of the Old Notes, at the Company's cost,
(i) to file with the Commission the Exchange Offer Registration Statement
within 60 calendar days after the date of the original issue of the Old Notes
with respect to the Exchange Offer for the New Notes, which will have terms
identical in all material respects to the Old Notes (except that the New Notes
will not contain terms with respect to transfer restrictions or interest rate
increases as described herein), (ii) to use its best efforts to cause the
Exchange Offer Registration Statement to be declared effective under the
Securities Act within 120 calendar days after the date of the original issue of
the Old Notes and (iii) to use its best efforts to consummate the Exchange
Offer within 150 calendar days after the original issue of the Old Notes.
Promptly after the Exchange Offer Registration Statement has been declared
effective the Company will offer the Exchange Notes in exchange for surrender
of the Old Notes. The Company will keep the Exchange Offer open for not less
than 30 business days (or longer if required by applicable law) after the date
notice of the Exchange Offer is mailed to the holders of the Old Notes. For
each Old Note validly tendered to the Company pursuant to the Exchange Offer
and not withdrawn by the holder thereof, the holder of such Old Note will
receive a New Note having a principal amount equal to that of the tendered Old
Note. Interest on each New Note will accrue from the last interest payment date
on which interest was paid on the tendered Old Note in exchange therefor or, if
no interest has been paid on such Old Note, from the date of its original
issue.
Under existing interpretations of the Securities Act by the staff of the
Commission set forth in several no action letters to third parties, and subject
to the immediately following sentence, the Company believes that the New Notes
issued pursuant to the Exchange Offer may be offered for resale, resold and
otherwise transferred by holders thereof without further registration under the
Securities Act. However, any purchaser of New Notes who is an "affiliate" of
the Company or who intends to participate in the Exchange Offer for the purpose
of distributing the New Notes (i) will not be able to rely on the
interpretation by the staff of the Commission set forth in the above referenced
no action letters, (ii) will not be able to tender Old Notes in the Exchange
Offer and (iii) must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any sale or transfer of
the Old Notes, unless such sale or transfer is made pursuant to an exemption
from such requirements.
Each holder of the Old Notes (other than certain specified holders) who
wishes to exchange Old Notes for New Notes in the Exchange Offer will be
required to make certain representations, including that (i) it is not an
affiliate of the Company, (ii) any New Notes to be received by it will be
acquired in the ordinary course of its business and (iii) at the time of
commencement of the Exchange Offer, it has no arrangement with any person to
participate in the distribution (within the meaning of the Securities Act) of
the New Notes. In addition, in connection with any resales of New Notes, any
Participating Broker-Dealer who acquired the Notes for its own account as a
result of market-making activities or other trading activities must deliver a
prospectus meeting the requirements of the Securities Act in connection with
the resale of such New Notes. The Commission has taken the position that
Participating Broker-Dealers may fulfill their prospectus delivery requirements
with respect to the New Notes (other than a resale of an unsold allotment from
the original sale of the Notes) with the prospectus contained in the Exchange
Offer Registration Statement. Under the Registration Rights Agreement, the
Company is required to allow Participating Broker-Dealers and other persons, if
any, subject to similar prospectus delivery requirements to use the prospectus
contained in the Exchange Offer Registration Statement in connection with the
resale of such New Notes.
In the event that any changes in law or the applicable interpretations of
the staff of the Commission do not permit the Company to effect the Exchange
Offer or if for any other reason the Exchange Offer Registration Statement is
not declared effective within 120 calendar days after the original issue of the
Notes or the Exchange Offer is not consummated within 150 calendar days after
the original issue of the Notes or upon the request of the Initial Purchasers
under certain circumstances or
96
any holder of the Old Notes (other than the Initial Purchasers) is not eligible
to participate in the Exchange Offer, the Company will at its cost, (a) as
promptly as practicable, file with the Commission the Shelf Registration
Statement covering resales of the Old Notes, (b) use its best efforts to cause
the Shelf Registration Statement to be declared effective under the Securities
Act by the 150th day after the original issue of the Old Notes (or promptly in
the event of a request by any Initial Purchasers) and (c) use its best efforts
to keep effective the Shelf Registration Statement for a period of two years
after its effective date (or for a period of one year after such effective date
if such Shelf Registration Statement is filed at the request of the Initial
Purchasers or, for such shorter period, when all of the Notes covered by the
Shelf Registration Statement have been sold pursuant thereto). The Company
will, in the event of the filing of a Shelf Registration Statement, provide to
each holder of the Old Notes copies of the prospectus which is a part of the
Shelf Registration Statement, notify each such holder when the Shelf
Registration Statement for the Old Notes has become effective and take certain
other actions as are required to permit unrestricted resales of the Notes. A
holder of Old Notes who sells such Old Notes pursuant to the Shelf Registration
Statement generally will be required to be named as a selling securityholder in
the related prospectus and to deliver the prospectus to purchasers, will be
subject to certain of the civil liability provisions under the Securities Act
in connection with such sales and will be bound by the provisions of the
Registration Rights Agreement which are applicable to such a holder (including
certain indemnification obligations). In addition, each holder of the Old Notes
will be required to deliver information to be used in connection with the Shelf
Registration Statement and to provide comments on the Shelf Registration
Statement within the time periods set forth in the Registration Rights
Agreement in order to have their Old Notes included in the Shelf Registration
Statement and to benefit from the provisions regarding liquidated damages set
forth in the following paragraph.
In the event that either (i) the Exchange Offer Registration Statement is
not filed with the Commission on or prior to the 60th day after the date of
original issue of the Old Notes, (ii) the Exchange Offer Registration Statement
is not declared effective on or prior to the 120th day after the date of
original issue of the Old Notes or (iii) the Exchange Offer is not consummated
on or prior to the 150th day after the date of original issue of the Old Notes
or a Shelf Registration Statement is not declared effective on or prior to the
150th day after the date of the original issue of the Old Notes (each such
event referred to in clauses (i) through (iii) above a "Registration Default"),
then the Company will pay liquidated damages ("Liquidated Damages") to each
Holder, during the first 90-day period immediately following the occurrence of
such Registration Default in an amount equal to $.05 per week per $1,000
principal amount of Old Notes held by such Holder. The amount of the Liquidated
Damages will increase an additional $.05 per week per $1,000 principal amount
for each subsequent 90-day period until the applicable Registration Default has
been cured, up to a maximum amount of Liquidated Damages of $.30 per week per
$1,000 principal amount of Old Notes. All accrued Liquidated Damages will be
paid by the Company on each interest payment date to the Global Note Holder by
wire transfer of immediately available funds or by federal funds check and to
the Holders of certificated securities by mailing a check to such Holders'
registered addresses. Following the cure of all Registration Defaults, the
accrual of Liquidated Damages will cease.
The summary herein of certain provisions of the Registration Rights
Agreement does not purport to be complete and is subject to, and is qualified
in its entirety by reference to, all the provisions of the Registration Rights
Agreement, copies of which are available upon request to the Company.
Following the Exchange Offer, any Old Notes that have not been exchanged
for New Notes will not be transferable into the global certificates
representing the New Notes kept in custody for DTC. The liquidity of any such
Old Notes is therefore likely to be limited.
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PLAN OF DISTRIBUTION
Each broker-dealer that receives New Notes for its own account in
connection with the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such New Notes. This Prospectus, as
it may be amended or supplemented from time to time, may be used by
Participating Broker-Dealers during the period referred to below in connection
with resales of New Notes received in exchange for Old Notes if such Old Notes
were acquired by such Participating Broker-Dealers for their own accounts as a
result of market-making activities or other trading activities. A Participating
Broker-Dealer who intends to use this Prospectus in connection with the resale
of New Notes received in exchange for Old Notes pursuant to the Exchange Offer
must notify the Company, or cause the Company to be notified, on or prior to
the Expiration Date, that it is a Participating Broker-Dealer. Such notice may
be given in the space provided for that purpose in the Letter of Transmittal or
may be delivered to the Exchange Agent at one of the addresses set forth herein
under "The Exchange Offer--Exchange Agent." See "The Exchange Offer--Resales of
New Notes."
The Company will not receive any cash proceeds from the issuance of the
New Notes offered hereby. New Notes received by broker-dealers for their own
accounts in connection with the Exchange Offer may be sold from time to time in
one or more transactions in the over-the-counter market, in negotiated
transactions, through the writing of options on the New Notes or a combination
of such methods of resale, at market prices prevailing at the time of resale,
at prices related to such prevailing market prices or at negotiated prices. Any
such resale may be made directly to purchasers or to or through brokers or
dealers who may receive compensation in the form of commissions or concessions
from any such broker-dealer and/or the purchasers of any such New Notes.
Any broker-dealer that resells New Notes that were received by it for its
own account in connection with the Exchange Offer and any broker or dealer that
participates in a distribution of such New Notes may be deemed to be an
"underwriter" within the meaning of the Securities Act, and any profit on any
such resale of New Notes and any commissions or concessions received by any
such persons may be deemed to be underwriting compensation under the Securities
Act. The Letter of Transmittal states that by acknowledging that it will
deliver and by delivering a prospectus, a broker-dealer will not be deemed to
admit that it is an "underwriter" within the meaning of the Securities Act.
LEGAL MATTERS
The validity of the Notes offered hereby will be passed upon on behalf of
the Company by Greenberg Traurig Hoffman Lipoff Rosen & Quentel, P.A.
EXPERTS
The financial statements of the Company included in this Prospectus have
been audited by Grant Thornton LLP, independent certified public accountants, as
indicated in its report appearing herein, given on the authority of said firm as
experts in auditing and accounting. The financial statements incorporated in
this Prospectus by reference to the Company's Current Report on Form 8-K dated
October 13, 1997, as amended by Form 8-K/A dated October 31, 1997, have been so
incorporated in reliance on the reports of Coopers & Lybrand ANS, independent
accountants, given on the authority of said firm as experts in auditing and
accounting. The financial statements incorporated in this Prospectus by
reference to the Company's Current Report on Form 8-K dated July 21, 1997 have
been so incorporated in reliance on the reports of KPMG Coudet Suner Denetim ve
Yeminli Mali Musavirlik A.S., independent accountants, given on the authority of
said firm as experts in auditing and accounting.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange
Act, and in accordance therewith files reports, proxy statements and other
information with the Commission. These materials
98
can be inspected and copied at the public reference facilities maintained by
the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549 and
at the Commission's regional offices at Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661 and 7 World Trade Center, New York,
New York 10048. Copies of these materials can also be obtained from the
Commission at prescribed rates by writing to the Public Reference Section of
the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549. The Commission
maintains a Web site that contains reports, proxy and information statements
and other information regarding registrants that file electronically with the
Commission and that is located at http://www.sec.gov. In addition, the Common
Stock of the Company is listed on the Nasdaq National Market under the symbol
CHSE, and such reports, proxy statements and other information may be inspected
at the offices of the National Association of Securities Dealers, Inc., 1735 K
Street, N.W., Washington, D.C. 20006.
INCORPORATION BY REFERENCE
This Offering Memorandum incorporates by reference the Company's (i)
Annual Report on Form 10-K for the year ended December 31, 1997, (ii) Current
Report on Form 8-K dated October 13, 1997, as amended by Form 8-K/A dated
October 31, 1997, (iii) Current Report on Form 8-K dated July 21, 1997, and all
other documents filed by the Company pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Offering Memorandum
and prior to the termination of the Offering.
Any statement contained in a document incorporated by reference in this
Offering Memorandum will be deemed to be modified or superseded for purposes of
this Offering Memorandum to the extent that a statement contained in this
Offering Memorandum or in any other subsequently filed document which is also
incorporated by reference in this Offering Memorandum modifies or supersedes
such statement. Any statement so modified or superseded will not be deemed,
except as modified or superseded, to constitute a part of this Offering
Memorandum.
The Company will provide, without charge, to each person, including a
beneficial owner, to whom an Offering Memorandum is delivered, upon written or
oral request of such person, a copy of any and all of the information that has
been incorporated by reference in the Offering Memorandum, excluding exhibits
to such documents, unless such exhibits are specifically incorporated by
reference into the documents so incorporated. Requests for copies of such
documents should be addressed to the Company at its principal executive
offices: 2000 N.W. 84th Avenue, Miami, Florida 33122, Attention: Craig Toll,
Vice President of Finance and Chief Financial Officer (telephone: (305)
908-7200).
99
INDEX TO FINANCIAL STATEMENTS
PAGE
-----
CHS Electronics, Inc.--Pro Forma Financial Information
Basis of Presentation .................................................. F-2
Pro Forma Condensed Consolidated Statement of Operations ............... F-3
Notes to Pro Forma Condensed Consolidated Statement of Operations ...... F-4
CHS Electronics, Inc.--Historical Financial Statements
Report of Independent Certified Public Accountants ..................... F-5
Consolidated Balance Sheets ............................................ F-6
Consolidated Statements of Earnings .................................... F-7
Consolidated Statements of Shareholders' Equity ........................ F-8
Consolidated Statements of Cash Flows .................................. F-9
Notes to the Consolidated Financial Statements ......................... F-11
F-1
CHS ELECTRONICS, INC.
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
BASIS OF PRESENTATION
The following Pro Forma Condensed Consolidated Statement of Operations for
the year ended December 31, 1997 gives effect to the acquisition by the Company
of the operations of Karma International S.A. ("Karma") and the operations of
Santech Micro Group ASA ("Santech"), as if each acquisition occurred January 1,
1997. Each acquisition has been accounted for using the purchase method of
accounting. A pro forma condensed consolidated balance sheet as of December 31,
1997 is not presented since all acquisitions are already reflected in the
balance sheet at December 31, 1997. See the Company's Consolidated Financial
Statements and the Notes thereto.
The Pro Forma Condensed Consolidated Statement of Operations has been
prepared based upon the historical financial statements of the Company and the
acquired subsidiaries for the periods stated above. Such pro forma statement
may not be indicative of the results that would have occurred if the
acquisitions had been consummated on the indicated dates, or of the operating
results that may be achieved by the combined companies in the future. The Pro
Forma Condensed Consolidated Statement of Operations should be read in
conjunction with the Company's Consolidated Financial Statements and the Notes
thereto.
F-2
CHS ELECTRONICS, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
ACQUIRED PRO FORMA
CHS COMPANIES ADJUSTMENTS COMBINED
------------- ------------- ------------- -------------
Net sales ........................................ $4,756,383 $ 952,296 $ $5,708,679
Cost of sales .................................... 4,409,714 908,837 5,318,551
---------- ---------- ----------
Gross profit ..................................... 346,669 43,459 -- 390,128
Operating expenses ............................... 257,508 60,393 7,703 325,604
---------- ---------- -------- ----------
Operating income (loss) .......................... 89,161 (16,934) (7,703) 64,524
Interest expense ................................. 24,148 3,455 27,603
---------- ---------- ----------
Earnings (loss) before income taxes
and minority interest ........................... 65,013 (20,389) (7,703) 36,921
Provision for income taxes ....................... 13,988 746 14,734
---------- ---------- ----------
Earnings (loss) before minority interest ......... 51,025 (21,135) (7,703) 22,187
Minority interest ................................ 2,634 -- 2,634
---------- ---------- ----------
Net earnings (loss) .............................. $ 48,391 $ (21,135) $ (7,703) $ 19,553
========== ========== ======== ==========
Weighted average number of common
shares outstanding .............................. 36,592,368 8,154,292 44,746,660
Net earnings per share--diluted .................. $ 1.32 $ .44
========== ==========
F-3
CHS ELECTRONICS, INC.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
On October 3, 1997, the Company acquired 97.4% of the outstanding stock of
Santech Micro Group ASA ("Santech"), a distributor with operations in Norway,
Sweden and Denmark. Pursuant to Norwegian laws, the Company expects to acquire
the remaining 2.6% of Santech on terms commensurate with its initial purchase
of the 97.4% interest of Santech.
In August 1997, the Company purchased 100% of the outstanding stock of
Karma International S.A. ("Karma") for $74 million in cash and $86 million in
shares of unregistered common stock of the Company. Karma is engaged
principally in the distribution of computer components in 18 countries in
Europe, the Middle East and Asia.
Goodwill for these acquisitions is amortized over a period of 20 years.
Amortization was provided for Karma and Santech based on goodwill of $123.0
million and $109.1 million respectively, for the period of time each company
was added to the Pro Forma Condensed Consolidated Statement of Operations.
For purposes of the Pro Forma Condensed Consolidated Statement of
Operations for the year ended December 31, 1997, the purchase price of Karma
consists of the $74 million cash component added to the discounted value of the
unregistered shares delivered plus other costs. The discount used was 20%,
based on the large size and the restricted nature of the block of shares. Based
on the agreement, the Company delivered 4,813,432 shares. The goodwill was
computed as the difference between the $142.8 million purchase price and the
book value of acquisition of $19,816,000 and the goodwill of Santech was
computed based on the difference between the estimated price of the interest
purchased and to be purchased of $131,956,000 and the estimated fair value of
net assets acquired as of September 30, 1997 of $22,872,000.
Details of the Acquired Companies column in the accompanying Statement of
Operations for the year ended December 31, 1997 are as follows (in thousands):
KARMA SANTECH COMBINED
----------- ------------- -------------
Net sales .......................................................... $546,846 $ 405,450 $ 952,296
Cost of sales ...................................................... 522,224 386,613 908,837
-------- --------- ---------
Gross profit ....................................................... 24,622 18,837 43,459
Operating expenses ................................................. 20,669 39,724 60,393
-------- --------- ---------
Operating income (loss) ............................................ 3,953 (20,887) (16,934)
Interest expense ................................................... 2,656 799 3,455
-------- --------- ---------
Earnings (loss) before income taxes and minority interest .......... 1,297 (21,686) (20,389)
Provision for income taxes ......................................... 746 -- 746
-------- --------- ---------
Earnings (loss) before minority interest ........................... 551 (21,686) (21,135)
Minority interest .................................................. -- -- --
-------- --------- ---------
Net earnings (loss) ................................................ $ 551 $ (21,686) $ (21,135)
======== ========= =========
F-4
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Shareholders
CHS Electronics, Inc.
We have audited the accompanying consolidated balance sheets of CHS
Electronics, Inc. as of December 31, 1997 and 1996, and the related
consolidated statements of earnings, shareholders' equity, and cash flows for
each of the three years in the period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of CHS
Electronics, Inc. as of December 31, 1997 and 1996, and the consolidated
results of its operations and its consolidated cash flows for each of the three
years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
GRANT THORNTON LLP
Miami, Florida
March 12, 1998 (except for Note L, as to which the date is April 9, 1998)
F-5
CHS ELECTRONICS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
DECEMBER 31,
-----------------------------
1996 1997
------------ --------------
ASSETS
CURRENT ASSETS:
Cash .................................................................... $ 35,137 $ 68,806
Accounts receivable:
Trade, less allowance for doubtful accounts of $14,830 in 1996 and
$18,347 in 1997....................................................... 340,098 659,757
Affiliates ............................................................. 3,241 24,604
-------- ----------
343,339 684,361
Inventories ............................................................. 321,770 693,503
Prepaid expenses and other current assets ............................... 39,374 65,255
-------- ----------
Total current assets .................................................. 739,620 1,511,925
PROPERTY AND EQUIPMENT, NET .............................................. 30,947 61,468
COST IN EXCESS OF ASSETS ACQUIRED, NET ................................... 78,780 381,830
OTHER ASSETS ............................................................. 12,602 13,599
-------- ----------
$861,949 $1,968,822
======== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable ........................................................... $155,932 $ 309,510
Accounts payable, trade ................................................. 452,569 771,535
Accrued liabilities ..................................................... 44,873 83,309
Amounts due to sellers under acquisition agreements ..................... 49,200 54,866
Income taxes payable .................................................... 5,120 12,711
Deferred income taxes ................................................... 420 1,223
-------- ----------
Total current liabilities ............................................. 708,114 1,233,154
LONG TERM DEBT ........................................................... 45,327 61,556
MINORITY INTEREST ........................................................ 3,975 6,348
SHAREHOLDERS' EQUITY:
Preferred stock, authorized 5,000,000 shares; 0 shares outstanding ...... -- --
Common stock, authorized 100,000,000 shares at $.001 par value;
outstanding 18,600,576 shares at December 31, 1996 and 48,910,999
shares at December 31, 1997 ........................................... 19 49
Additional paid-in capital .............................................. 92,843 621,021
Retained earnings ....................................................... 16,724 65,115
Cumulative foreign currency translation adjustment ...................... (5,053) (18,421)
-------- ----------
TOTAL SHAREHOLDERS' EQUITY ............................................ 104,533 667,764
-------- ----------
$861,949 $1,968,822
======== ==========
The accompanying notes are an integral part of these statements.
F-6
CHS ELECTRONICS, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except share data)
YEAR ENDED DECEMBER 31,
-------------------------------------------
1995 1996 1997
----------- ------------- -------------
Net sales (including sales to affiliates of $21,063 in 1995) ......... $936,703 $1,855,540 $4,756,383
Cost of goods sold ................................................... 868,716 1,724,432 4,409,714
-------- ---------- ----------
Gross profit ....................................................... 67,987 131,108 346,669
Operating expenses ................................................... 57,188 102,235 257,508
-------- ---------- ----------
Operating income ................................................... 10,799 28,873 89,161
Other (income) expense:
Interest income ..................................................... (1,757) (3,199) (11,470)
Interest expense .................................................... 6,454 11,712 35,618
-------- ---------- ----------
4,697 8,513 24,148
-------- ---------- ----------
Earnings before income taxes and minority interest
in subsidiaries .................................................... 6,102 20,360 65,013
Income taxes ......................................................... 1,797 6,086 13,988
Minority interest in subsidiaries .................................... -- 2,108 2,634
-------- ---------- ----------
Net earnings ....................................................... $ 4,305 $ 12,166 $ 48,391
======== ========== ==========
Net earnings per common share--basic ................................. $ .41 $ .80 $ 1.44
======== ========== ==========
Net earnings per common share-diluted ................................ $ .37 $ .78 $ 1.32
======== ========== ==========
The accompanying notes are an integral part of these statements.
F-7
CHS ELECTRONICS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
THREE YEARS ENDED DECEMBER 31, 1997
(In thousands)
CUMULATIVE
FOREIGN
ADDITIONAL CURRENCY
COMMON PAID-IN RETAINED DEFERRED TRANSLATION
STOCK CAPITAL EARNINGS COMPENSATION ADJUSTMENT TOTAL
-------- ------------ ---------- -------------- ------------ ------------
Balance January 1, 1995 ..................... $ 7 $ 19,625 $ 253 $ (138) $ 123 $ 19,870
Adjustment 3 for 2 forward stock split ...... 3 (3) -- -- -- --
Deferred compensation recognized ............ -- -- -- 138 -- 138
Issuance of common stock
in acquisitions ........................... 1 5,351 -- -- -- 5,352
Net earnings ................................ -- -- 4,305 -- -- 4,305
Foreign currency translation
adjustment ................................ -- -- -- -- 227 227
--- -------- ------- ------ --------- ---------
Balance at December 31, 1995 ................ 11 24,973 4,558 -- 350 29,892
Common stock or other consideration
issued in acquisitions (Note B) ........... -- 16,982 -- -- -- 16,982
Common stock issued in public offering ...... 7 50,607 -- -- -- 50,614
Stock options exercised ..................... 1 281 -- -- -- 282
Net earnings ................................ -- -- 12,166 -- -- 12,166
Foreign currency translation
adjustment ................................ -- -- -- -- (5,403) (5,403)
--- -------- ------- ------ --------- ---------
Balance at December 31, 1996 ................ 19 92,843 16,724 -- (5,053) 104,533
Common stock issued in acquisitions
(Note B) .................................. 8 95,720 -- -- -- 95,728
Common stock issued in public offering ...... 21 428,195 -- -- -- 428,216
Stock options exercised ..................... 1 4,263 -- -- -- 4,264
Net earnings ................................ -- -- 48,391 -- -- 48,391
Foreign currency translation adjustment ..... -- -- -- -- (13,368) (13,368)
--- -------- ------- ------ --------- ---------
Balance at December 31, 1997 ................ $49 $621,021 $65,115 $ -- $ (18,421) $ 667,764
=== ======== ======= ====== ========= =========
The accompanying notes are an integral part of these statements.
F-8
CHS ELECTRONICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
YEAR ENDED DECEMBER 31,
--------------------------------------------
1995 1996 1997
------------ ------------- -------------
Increase in cash and cash equivalents:
Cash flows from operating activities:
Net earnings ........................................................ $ 4,305 $ 12,166 $ 48,391
Adjustments to reconcile net earnings to net cash (used in)
operating activities:
Depreciation and amortization ...................................... 2,456 6,632 21,789
Deferred compensation amortized .................................... 148 -- --
Minority interest in net earnings .................................. -- 2,108 2,634
Changes in assets and liabilities excluding effects of acquisitions:
Accounts receivable--trade, net ................................... (37,724) (118,694) (121,163)
Accounts receivable--affiliates, net .............................. (12,285) (2,398) (21,363)
Inventories ....................................................... (32,204) (129,357) (139,923)
Prepaid expenses and other current assets ......................... (1,742) (22,345) 5,404
Accounts payable, trade ........................................... 51,818 173,244 (10,773)
Accrued liabilities and income taxes .............................. 3,175 (20,481) (33,511)
--------- ---------- ----------
Net cash (used in) operating activities ............................ (22,053) (99,125) (248,515)
Cash flows from investing activities:
Purchase of fixed assets .......................................... (6,866) (11,624) (19,511)
Cash provided from (used in) acquisitions, net .................... 1,317 (26,876) (201,517)
--------- ---------- ----------
Net cash (used in) investing activities ............................ (5,549) (38,500) (221,028)
Cash flows from financing activities:
Proceeds from public offering ..................................... -- 50,614 428,216
Proceeds from stock options exercised ............................. -- 281 4,263
Net borrowing from banks .......................................... 29,855 112,453 74,699
--------- ---------- ----------
Net cash provided by financing activities .......................... 29,855 163,348 507,178
Effect of exchange rate changes on cash ............................. 550 (1,757) (3,966)
--------- ---------- ----------
INCREASE IN CASH AND CASH EQUIVALENTS ............................... 2,803 23,966 33,669
Cash at beginning of year ........................................... 8,368 11,171 35,137
--------- ---------- ----------
Cash at end of year ................................................. $ 11,171 $ 35,137 $ 68,806
========= ========== ==========
(CONTINUED)
F-9
CHS ELECTRONICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED)
(In thousands)
YEAR ENDED DECEMBER 31,
-----------------------------------
1995 1996 1997
--------- ---------- ----------
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest ...................................... $4,944 $10,064 $30,454
Income taxes .................................. $1,753 $ 3,892 $10,585
Non cash investing and financing activities:
These statements of cash flows do not include non-cash investing and financing
transactions associated with the common stock issued for various acquisitions.
The components of the transactions in each year are as follows:
YEAR ENDED DECEMBER 31,
-------------------------------------
1995 1996 1997
---------- ---------- -----------
Fair value of assets acquired including cash acquired ......... $19,216 $14,691 $689,550
Less: Common stock or other consideration issued .............. 7,152 3,278 232,748
------- ------- --------
Liabilities assumed ........................................... $12,064 $11,413 $456,802
======= ======= ========
In 1996, $13.7 million was credited to additional paid-in capital representing
additional consideration paid by Comtrad, Inc. under acquisition agreements for
subsidiaries now held by the Company.
In 1995, a $5.2 million reduction in receivable from affiliate was charged to
additional paid-in capital.
The accompanying notes are an integral part of these statements.
F-10
CHS ELECTRONICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1997
NOTE A--SUMMARY OF ACCOUNTING POLICIES
1. NATURE OF OPERATIONS
The Company is an international distributor of computer equipment,
peripherals and software. The products are sold, principally to resellers,
primarily in Western Europe, South America and Eastern Europe.
2. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its subsidiaries, wholly owned and majority owned. All significant
intercompany accounts and transactions have been eliminated in consolidation.
3. FOREIGN CURRENCY TRANSLATION
For purposes of preparation of its financial statements, the Company uses
local currencies as the functional currencies except in highly inflationary
countries. For subsidiaries where the local currency is the functional
currency, assets and liabilities are translated into United States dollars at
the exchange rate in effect at the end of the year. Revenues and expenses of
these subsidiaries are translated at the average exchange rate during the year.
The aggregate effect of translating the financial statements of foreign
subsidiaries is included in a separate component of shareholders' equity
entitled cumulative foreign currency translation adjustment. In the normal
course of business, the Company advances funds to certain of its foreign
subsidiaries, which are not expected to be repaid in the foreseeable future.
Translation adjustments resulting from these advances are included in
cumulative foreign currency translation adjustment. For entities in highly
inflationary countries, the U.S. dollar is considered the functional currency
and a combination of current and historical rates are used in translating
assets, liabilities, revenues and expenses. The related exchange adjustments
are included in earnings.
4. CASH EQUIVALENTS
For the purpose of the consolidated statements of cash flows, the Company
considers all highly liquid investments purchased with an original maturity of
three months or less to be cash equivalents.
5. CONCENTRATION OF CREDIT RISK
The Company's credit risk on trade receivables is diversified over a wide
geographic area and many customers. The largest customer accounts for less than
1% of sales. The Company performs ongoing credit evaluations of its customers.
In South America, the Company obtains guarantees from its customers in some
cases. The Company uses credit insurance in several locations (covering $281
million in receivables at December 31, 1997) and factoring without recourse in
other locations to mitigate risk. The Company provides for estimated credit
losses at time of sale based upon factors surrounding the credit risk of
specific customers, historical trends and other information.
6. INVENTORIES
Inventories, consisting of finished products, are stated at the lower of
cost or market, with cost being determined principally by current replacement
cost, which approximates the first-in first-out method.
F-11
CHS ELECTRONICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1997--(CONTINUED)
NOTE A--SUMMARY OF ACCOUNTING POLICIES--(CONTINUED)
7. PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization
are provided for in amounts sufficient to relate the cost of depreciable assets
to operations over their estimated service lives. Leasehold improvements and
capital leases are amortized over the lives of respective leases or the service
lives of the improvements whichever is shorter.
The straight-line and accelerated methods of depreciation are followed for
financial reporting purposes. The useful lives are as follows:
YEARS
------
Buildings ................................. 30-50
Leasehold improvements .................... 3-7
Computer equipment ........................ 2-5
Office equipment and furniture ............ 3-10
Expenditures for renewals and improvements that significantly extend the
useful life of an asset are capitalized. The costs of software used in business
operations are capitalized and amortized over their expected useful lives.
Expenditures for maintenance and repairs are charged to operations when
incurred. When assets are sold or retired, the cost of the asset and the
related accumulated depreciation are removed from the accounts and any gain or
loss is recognized at such time.
8. INCOME TAXES
The Company utilizes the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 109, ACCOUNTING FOR INCOME TAXES. Under the liability
method specified by SFAS No. 109, deferred tax assets and liabilities are
determined based on the difference between the financial statement and tax
bases of assets and liabilities as measured by the current enacted tax rates
which will be in effect when these differences reverse. Deferred tax expense is
the result of changes in deferred tax assets and liabilities.
The Company intends to invest the undistributed earnings of substantially
all of its foreign subsidiaries indefinitely. At December 31, 1996 and 1997,
the cumulative amount of undistributed earnings on which the Company has not
recognized United States income taxes was approximately $13 million and $53
million, respectively. However, it is anticipated that United States income
taxes on such amounts would be partially offset by available foreign income tax
credits.
9. REVENUE RECOGNITION
The Company recognizes sales upon shipment, as there is no significant
post-sale obligation and collectibility is reasonably assured. Income from
vendor rebates, discounts, and cooperative advertising is recognized when
earned, as a reduction of the cost of inventory sold or as a reduction of
operating expenses.
10. COST IN EXCESS OF ASSETS ACQUIRED, NET
The cost in excess of assets acquired is being amortized to earnings over
a 20 year period on a straight-line basis. The Company evaluates its goodwill
in accordance with SFAS No. 121, "Accounting
F-12
CHS ELECTRONICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1997--(CONTINUED)
NOTE A--SUMMARY OF ACCOUNTING POLICIES--(CONTINUED)
for Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of," to determine potential impairment by comparing the carrying value to
undiscounted future cash flows of the related assets. The Company modifies or
adjusts the value of a subsidiary's goodwill if an impairment is indicated by
the difference between the undiscounted cash flows and the carrying value. The
Company considers a history of operating losses to be a primary indicator of
potential impairment. Assets are grouped and evaluated for impairment at the
lowest level for which there are identifiable cash flows that are largely
independent of cash flows of other groups of assets. Assets are generally
grouped at the country level of operations. The Company deems an asset to be
impaired if a forecast of undiscounted future operating cash flows directly
related to the asset, including disposal value if any, is less than its
carrying amount. All of the Company's goodwill is identified with the assets
acquired and falls under the scope of SFAS No. 121. Accumulated amortization
was $2.2 million and $10.8 million at December 31, 1996 and 1997, respectively.
11. EARNINGS PER COMMON SHARE
The Company has adopted Statement of Accounting Standard No. 128 EARNINGS
PER SHARE. In accordance with this statement, basic earnings per share is
computed by dividing net earnings by the weighted averaged number of common
shares outstanding. Diluted earning per share includes the dilution caused by
common stock options and the shares that would be issued in existing earn outs
based upon applying the earn out multiple to annualized actual earnings and
dividing by the market price at period end. The weighted average number of
shares for basic earnings per share was 10,618,183, 15,243,672, and 33,527,256
in 1995, 1996, and 1997, respectively. The weighted average number of shares
used in the diluted computation was 11,521,859, 15,656,178, and 36,592,368 in
1995, 1996, and 1997, respectively. All share and per share information has
been restated for a three to two stock split effective in September 1997.
The following table illustrates the reconciliation of the income and
weighted average number of shares of the basic and diluted earnings per share
computations (amounts in thousands, except per share amounts):
YEAR ENDED DECEMBER 31, 1997
------------------------------------------
NET WEIGHTED PER SHARE
EARNINGS AVERAGE SHARES AMOUNT
---------- ---------------- ----------
Net earnings .............................. $48,391
=======
Net earnings per share--basic ........... 48,391 33,527 $1.44
=====
Effect of dilutive shares:
Stock options outstanding ................. -- 1,434
Earnout contingencies ..................... -- 1,631
------- ------
Net earnings per share--diluted ......... $48,391 36,592 $1.32
======= ====== =====
F-13
CHS ELECTRONICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1997--(CONTINUED)
NOTE A--SUMMARY OF ACCOUNTING POLICIES--(CONTINUED)
YEAR ENDED DECEMBER 31, 1996
------------------------------------------
NET WEIGHTED PER SHARE
EARNINGS AVERAGE SHARES AMOUNT
---------- ---------------- ----------
Net earnings .............................. $12,166
=======
Net earnings per share--basic ........... 12,166 15,244 $.80
====
Effect of dilutive shares:
Stock options outstanding ................. -- 412
======= ======
Net earnings per share--diluted ......... $12,166 15,656 $.78
======= ====== ====
YEAR ENDED DECEMBER 31, 1995
------------------------------------------
NET WEIGHTED PER SHARE
EARNINGS AVERAGE SHARES AMOUNTS
---------- ---------------- ----------
Net earnings .............................. $4,305
======
Net earnings per share--basic ........... 4,305 10,618 $.41
====
Effect of dilutive shares:
Stock options outstanding ................. -- 904
------ ------
Net earnings per share--diluted ......... $4,305 11,522 $.37
====== ====== ====
12. STOCK OPTIONS
Options granted under the Company's 1994 Stock Option Plan, the 1996 and
1997 Chief Executive Officer stock option plans and the 1996 Directors and
Officers stock option plan are accounted for under APB Opinion 25, ACCOUNTING
FOR STOCK ISSUED TO EMPLOYEES. As to grants requiring shareholder approval, the
Company considers the date of grant to be the date of action by the Board of
Directors when, on such date, shareholder approval is deemed to be perfunctory.
13. USE OF ESTIMATES
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure
of contingent assets and liabilities at the date of the financial statements
and revenues and expenses during the reported period. Actual results could
differ from those estimates.
NOTE B--ACQUISITIONS
In 1997 the Company made 15 acquisitions, of which three were significant.
On October 3, 1997, the Company completed the acquisition of Santech Micro
Group ASA ("Santech"), pursuant to which it acquired 97.4% of the capital stock
of Santech for approximately $125 million. The Company expects to acquire the
remainder of the shares at the same per share price. Santech is the largest
distributor of microcomputer products in Scandinavia with operations in Norway,
Sweden and Denmark and had
F-14
CHS ELECTRONICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1997--(CONTINUED)
NOTE B--ACQUISITIONS--(CONTINUED)
revenues of $718 million in 1996. Santech distributes the products of the same
vendors as other subsidiaries of the Company. The acquisition of Santech has
been accounted for under the purchase method and, accordingly the results of
Santech have been included in the consolidated operating results since the date
of acquisition. The acquisition of Santech resulted in the recognition of
$109.1 million of goodwill.
Santech's operating results during 1996 and 1997 were adversely impacted
as a result of restructuring its operations after a July 1996 merger. Operating
results were also impacted adversely by the implementation of a new computer
system in the first six months of 1997. The adverse impact included costs
associated with reduction in the number of its product lines and the number of
employees from 450 to 320. The Company believes that these factors have been
addressed and that these issues should not have a material adverse impact on
Santech's or the Company's future operations.
On August 4, 1997, the Company completed the acquisition of Karma
International S.A. ("Karma"). Karma is a distributor of personal computer
components to over 10,000 customers in Europe, the Middle East and Asia. The
purchase price for Karma was $160 million and was funded through (i) $74
million in cash and (ii) 4,813,432 shares of unregistered Common Stock. Karma's
product line includes mass storage products, CPUs, memory chips, motherboards,
sound, video and other cards and monitors. Karma operates in 18 countries
through 28 offices in Europe, the Middle East Asisa. Karma had net sales of
approximately $700 million in 1996. Karma existing management continues to
operate Karma as a subsidiary of CHS. One representative of Karma was elected
to the Board of Directors of CHS with an additional member to be nominated in
1998. The acquisition of Karma has been accounted for under the purchase method
and, accordingly the results of Karma have been included in the consolidated
operating results since the date of acquisition. The acquisition of Karma
resulted in the recognition of $123.0 million of goodwill.
On March 20, 1997, the Company completed the acquisition of Frank & Walter
Computer GmbH ("Frank & Walter") for 3,300,000 unregistered shares of Common
Stock. Frank & Walter had net sales of approximately $686 million in 1996. The
results of operations of Frank & Walter have been included in the Company's
financial statements since January 1, 1997. The Company believes that Frank &
Walter was, at the time of acquisition, the fourth largest computer distributor
in Germany with over 10,000 active dealers. As a result of this acquisition,
the Company believes it is the largest distributor of microcomputer products in
Germany. Carsten Frank, the founder of Frank & Walter, has become a director of
CHS and the CHS executive vice president responsible for the Company's European
operations. The acquisition of Frank & Walter has been accounted for under the
purchase method and, accordingly the results of Frank & Walter have been
included in the consolidated operating results since the date of acquisition.
The amounts preliminarily allocated to assets acquired and liabilities assumed
resulted in a recognition of $27.6 million of goodwill. During 1997 an
appraisal of certain acquired assets was performed. As a result of the
appraisal, goodwill was decreased by $1.0 million.
The Company completed other acquisitions during 1997 which were considered
not to be significant. Such acquisitions have been accounted for under the
purchase method and accordingly, the results of such acquired entities have
been included in the consolidated operating results since their acquisition
dates.
In 1996 the Company acquired eighteen companies in as many countries. The
largest acquisition was of seven companies comprising the European and Latin
American businesses of a competitor,
F-15
CHS ELECTRONICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1997--(CONTINUED)
NOTE B--ACQUISITIONS--(CONTINUED)
Merisel, Inc. These seven companies were acquired for cash and debt
assumptions. The total consideration paid was approximately $148 million
consisting of $30 million of cash and $118 million of debt assumed or
refinanced. The Company financed the acquisition primarily through borrowing or
factoring at each subsidiary acquired. Approximately $11 million was owed to
Merisel at December 31, 1996. The acquisition has been accounted for as a
purchase, effective as of September 30, 1996. Therefore, operations of these
companies are included only in the 1996 fourth quarter. The cost of the
acquisition has been allocated to the assets acquired based on their fair
values. This initially resulted in approximately $10.5 million of goodwill. In
the second and third quarters of 1997, certain reserves initially established
were determined not to be required, resulting in a reduction of goodwill to
$4.6 million.
The Company has now completed the consolidation of the former Merisel and
CHS operations in the five countries where each had operations. The Company
accrued approximately $12.8 million for the consolidation activities. The
reserve consists of severance costs--$0.4 million, lease termination--$4.1
million, writeoff of leasehold improvements and computer systems--$4.9 million,
and accounts receivable and other costs--$3.4 million. Through December 31,
1997, $8.8 million has been charged against this reserve. The Company's
original intent to dispose of the former Merisel warehouse located in the
Netherlands has been revised as a result of the Karma acquisition and the
Company now intends to relocate Karma's existing warehouse in the Netherlands
to the former Merisel warehouse.
In June 1996, the Company acquired 100% of an unaffiliated company in
Russia for consideration based on a multiple of that company's net income in
1996. The acquisition was initially recorded at no consideration, which
approximated the value of net assets acquired. Subsequently, the agreement was
modified to measure the value of the Company based 50% on 1996 results and 50%
on 1997 results. The 1996 portion is payable in cash and was paid in 1997 and
the 1997 portion is payable in cash or stock at the seller's option. In 1996
and 1997, $20.6 and $25.3 million was recorded as purchase price and goodwill.
In April 1996, the Company acquired 100% of an unaffiliated company in
Switzerland for consideration based on the acquired company's results in 1996.
The consideration was based on a multiple of 1996 net earnings but not less
than $1.7 million. The acquisition was initially recorded at $1.7 million
resulting in no goodwill. Subsequently, the agreement was modified to base the
price on results through September 30, 1996. In the 1996 fourth quarter,
274,855 shares of common stock were issued and goodwill of $870,000 was
recorded.
In March 1996, the Company acquired six companies from Comtrad, Inc., an
affiliate, for a reduction of indebtedness of $7.8 million. These acquisitions
have been accounted for as an exchange between entities under common control in
a manner similar to a pooling of interests. Accordingly, these acquisitions
have been included in the accompanying financial statements from the date
acquired by Comtrad. The companies in Bulgaria, Croatia, Lithuania and Romania
were started by Comtrad in 1993 and 1994 for a minimal investment and have
insignificant operations. They are treated as if Comtrad acquired them on
December 31, 1994. Sixty-five percent of a company in Slovakia was acquired in
early 1994 for a minimal investment and 1994 results were insignificant. The
remaining 35% was acquired by Comtrad for a contingent payment in shares of
common stock to be based on 1996 results. This acquisition has been recorded as
of December 31, 1994 based on the cost of the 65% interest acquired
F-16
CHS ELECTRONICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1997--(CONTINUED)
NOTE B--ACQUISITIONS--(CONTINUED)
with the remaining cost to be recorded as goodwill when known. The contingent
amount, which was insignificant, was recorded in 1997. Comtrad acquired the
Brazil company in November 1994 for Comtrad common shares valued at $762,000.
The acquisition was recorded by the Company as of December 31, 1994 at this
value, resulting in goodwill of $2.5 million. An additional amount of $240,000
was paid by Comtrad in 1996 to complete its acquisition of this company, which
had the effect of increasing goodwill to $2.8 million.
In February 1996, the Company acquired 51% of an unaffiliated company in
Hungary for consideration based on 51% of the book value of equity at December
31, 1996 plus a multiple of 51% of 1996 net earnings. Based on 1996 results,
the purchase price was fixed at $17.6 million resulting in goodwill of $15.8
million. The sellers elected to receive the proceeds in cash rather than stock.
In the second quarter of 1997 the agreement was modified to measure the value
of the company based 75% on 1996 results and 25% on 1997 results. The 1996
amount was paid in 1997. As a result, goodwill in 1996 was reduced by $3.8
million. The 1997 amount, estimated at $5.6 million, was recorded in 1997 and
increased goodwill.
In 1995, the Company acquired nine companies in as many countries. Eight
of these were acquired from Comtrad Holdings, Inc. ("CHI") or Comtrad (a wholly
owned subsidiary of CHI) and have been accounted for as an exchange between
entities under common control in a manner similar to a pooling of interests.
Accordingly, these acquisitions have been included in the accompanying
financial statements from the date acquired by Comtrad or CHI. The acquisition
of the company in the Czech Republic was partially (16%) from Comtrad and
partially from an individual. The portion from Comtrad was valued at Comtrad's
basis of $758,000. The portion purchased from the unrelated individual has been
accounted for as a purchase. Results of the remaining 84% of the Czech Republic
company have been included in the accompanying financial statements from
October 1, 1995. Information about the pooled acquisitions is shown below:
CHS COMTRAD OR CHI
COMPANY SERVICE AREA CONSIDERATION ACQUISITION DATE ACQUISITION DATE
- ---------------------- ---------------- ---------------- ------------------ -----------------
CHS England United Kingdom 2,625,000 April 1995 September 1994
CHS France France shares April 1995 September 1994
{
CHS Belgium Belgium
}
April 1995 September 1994
CHS Portugal Portugal April 1995 January 1993
CHS BEK South America 431,250 shares October 1995 July 1995
CHS Czechia (16%) Czech Republic 138,000 shares October 1995 January 1993
CHS Finland Finland $2,300,000 December 1995 July 1995
CHS Sweden Sweden $2,400,000 December 1995 July 1995
CHS ABC Data Poland $2,300,000 December 1995 November 1995
The Company acquired 84% of the Czech Republic company from an individual
by issuing 483,000 shares which were valued at their market value of
$3,246,000. This produced goodwill of $2.4 million.
F-17
CHS ELECTRONICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1997--(CONTINUED)
NOTE B--ACQUISITIONS--(CONTINUED)
The following represents the unaudited pro forma results of operations
assuming all significant 1997 and 1996 acquisitions had taken place on January
1, 1996:
YEAR ENDED DECEMBER 31,
-----------------------------
1996 1997
------------- -------------
(IN THOUSANDS EXCEPT PER SHARE
DATA)
Sales ................................... $4,996,399 $5,708,679
Net earnings ............................ 2,295 19,859
Net earnings per share--basic ........... $ .07 $ .47
Net earnings per share--diluted ......... $ .07 $ .44
Pro forma adjustments have been made to eliminate non-recurring loss in
the operations acquired from Merisel and to add goodwill amortization and
interest expense on the amounts payable to selling stockholders at 7.5%. The
pro forma information is not necessarily indicative of the actual results of
operation that would have occurred had the acquisitions taken place on January
1, 1996, or of results which may occur in the future.
NOTE C--ALLOWANCE FOR DOUBTFUL ACCOUNTS
YEAR ENDED DECEMBER 31,
----------------------------------------
1995 1996 1997
----------- ----------- ------------
(IN THOUSANDS)
Allowance for doubtful accounts:
Beginning balance .................... $ 3,358 $ 4,388 $ 14,830
Provision for bad debt ............... 3,035 3,412 11,636
Write-offs ........................... (2,161) (3,775) (14,162)
Acquired through acquisition ......... 156 10,805 6,043
-------- -------- ---------
Ending balance ....................... $ 4,388 $ 14,830 $ 18,347
======== ======== =========
F-18
CHS ELECTRONICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1997--(CONTINUED)
NOTE D--PROPERTY AND EQUIPMENT
DECEMBER 31,
----------------------
1996 1997
--------- ----------
(IN THOUSANDS)
Land and buildings ..................................... $ 3,167 $19,358
Furniture and fixtures ................................. 15,126 22,047
Leasehold improvements ................................. 4,914 7,330
Computers and office equipment ......................... 25,000 43,470
Vehicles and other ..................................... 5,414 3,497
------- -------
53,621 95,702
Less accumulated depreciation and amortization ......... 22,674 34,234
------- -------
$30,947 $61,468
======= =======
NOTE E--INCOME TAXES
The components of earnings before income taxes and minority interest in
subsidiaries consist of the following:
YEAR ENDED DECEMBER 31,
--------------------------------
1995 1996 1997
-------- --------- ---------
(IN THOUSANDS)
Domestic ......... $ 741 $ 1,361 $ 3,450
Foreign .......... 5,361 18,999 61,563
------ ------- -------
Total ............ $6,102 $20,360 $65,013
====== ======= =======
F-19
CHS ELECTRONICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1997--(CONTINUED)
NOTE E--INCOME TAXES--(CONTINUED)
The provision for income taxes consists of the following:
YEAR ENDED DECEMBER 31,
------------------------------------
1995 1996 1997
---------- --------- -----------
(IN THOUSANDS)
Current:
U.S Federal ......... $ 525 $1,721 $ 2,243
U.S. State .......... 41 228 329
Foreign ............. 1,357 4,520 8,493
------ ------ -------
1,923 6,469 11,065
------ ------ -------
Deferred:
U.S Federal ......... 67 (258) (569)
U.S. State .......... 5 (47) (92)
Foreign ............. (198) (78) 3,584
------ ------ -------
(126) (383) 2,923
------ ------ -------
Total ............. $1,797 $6,086 $13,988
====== ====== =======
Deferred tax assets (liabilities) are comprised of the following:
DECEMBER 31,
---------------------------
1996 1997
------------ ------------
(IN THOUSANDS)
Net operating losses of foreign subsidiaries ........... $ 11,405 $ 16,839
Employee compensation not currently deductible ......... 131 --
Inventory differences .................................. (3,009) (7,424)
Allowances for bad debts ............................... 1,788 1,115
Accruals not currently deductible ...................... 305 1,896
Other .................................................. (34) 27
--------- ---------
10,586 12,453
Valuation allowance .................................... (11,006) (13,676)
--------- ---------
Total ................................................ $ (420) $ (1,223)
========= =========
F-20
CHS ELECTRONICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1997--(CONTINUED)
NOTE E--INCOME TAXES--(CONTINUED)
The major elements contributing to the difference between taxes at the
U.S. federal statutory tax rate and the effective tax rate are as follows:
YEAR ENDED DECEMBER 31,
--------------------------------------
1995 1996 1997
--------- ----------- ------------
(IN THOUSANDS)
Income taxes at the United States statutory rate ..................... $2,070 $ 6,922 $ 22,104
Foreign income subject to tax at other than statutory rate ........... (212) (1,356) (15,690)
State or local income taxes, less effect of federal benefits ......... 55 168 156
Losses without tax benefit ........................................... 613 1,329 5,127
Goodwill amortization ................................................ 190 255 2,834
Utilizations of net operating losses of foreign subsidiaries ......... (826) (1,196) (759)
Other ................................................................ (93) (36) 216
------ -------- ---------
Income taxes at the effective tax rate ............................... $1,797 $ 6,086 $ 13,988
====== ======== =========
At December 31, 1997, the Company has net operating loss carryforwards in
certain foreign jurisdictions that expire as follows:
2001 ....................... $ 4,474,000
2002 ....................... 1,140,000
Thereafter ................. 14,730,000
No expiration date ......... 30,436,000
-----------
Total .................... $50,780,000
===========
In assessing the realization of net operating loss carryforwards,
management considers whether it is more likely than not that some portion or
all of these net operating loss carryforwards will not be realized. The
ultimate realization of these net operating loss carryforwards and other
deferred tax assets are dependent upon the generation of future taxable income
during the periods prior to the expiration of the operating loss carryforwards.
Management considers the scheduled reversal of deferred tax liabilities,
projected future taxable income, and tax planning strategies in making this
assessment. Based upon the level of historical taxable income and projections
for future taxable income over the operating loss carryforward periods,
management believes it is more likely than not the Company will not realize the
benefits of all of these net operating loss carryforwards and other deferred
tax assets. Accordingly, a valuation allowance has been established since the
full realization of such benefits was not likely. Subsequently recognized tax
benefits relating to the valuation allowance for deferred tax assets as of
December 31, 1997 will be allocated to income from continuing operations or
goodwill.
NOTE F--NOTES PAYABLE AND LONG TERM DEBT
Several of the Company's subsidiaries have short-term credit lines with
local banks. As of December 31, 1997, the aggregate amount available under
these agreements was $385.4 million, and $302.0 million was outstanding under
these facilities. Generally, borrowings under such lines are
F-21
CHS ELECTRONICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1997--(CONTINUED)
NOTE F--NOTES PAYABLE AND LONG TERM DEBT--(CONTINUED)
collateralized by receivables or inventory. The lines are principally of one
year duration and are renewable by the banks. Some of these lines contain
restrictions on dividends to the parent company. In 1997, the maximum and
average amounts outstanding were $395.2 million and $289.2 million,
respectively. The weighted average interest rate at December 31, 1997 was 7.3%.
The Company's long-term debt consists of the following:
DECEMBER 31,
-----------------------
1996 1997
---------- ----------
(IN THOUSANDS)
Two subsidiaries serving Latin America share a $60 million revolving
credit agreement with a financial institution. The agreement, which
expires October 1999, provides for advances and letters of credit based
upon eligible accounts receivable and inventories. Interest is at a
variable market rate based on the prime rate of the lender or LIBOR,
at the borrower's option. All of the the borrowers' assets, including
accounts receivable and inventories totaling $89.6 million at
December 31, 1997, are pledged as collateral. The agreement contains
certain restrictive covenants, including limitations on transactions with
affiliated companies and employee loans. The agreement also limits the
ability of these companies to pay dividends to the Company to 50% of
the borrowers' net income. .................................................. $34,374 $46,286
Capitalized leases, collateralized by computer equipment, bearing interest
ranging from 5% to 16% with maturities through
September, 2002. ............................................................ 10,626 10,983
Mortgages on buildings, interest ranging from 5.9% to 9.0%, with
maturities through 2009, collateralized by a building with net book
value at December 31, 1997 of $14.6 million. ................................ 2,455 6,114
Other notes, bearing interest of 5.9% at December 31, 1997,
collateralized by inventories and accounts receivable totaling
$54.9 million at December 31, 1997........................................... -- 5,204
Other debt .................................................................... -- 494
------- -------
Total ......................................................................... 47,455 69,081
Less current portion of long-term debt, included in notes payable ............. 2,128 7,515
------- -------
Total long-term debt .......................................................... $45,327 $61,556
======= =======
During November and December 1997, the borrowers were in violation of
requirements to deposit receipts in specific accounts pursuant to the $60
million revolving credit agreement. The lender has waived these violations.
F-22
CHS ELECTRONICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1997--(CONTINUED)
NOTE F--NOTES PAYABLE AND LONG TERM DEBT--(CONTINUED)
Scheduled maturities of long-term debt are as follows (in thousands):
YEAR ENDING DECEMBER 31,
- --------------------------
1998 ................ $ 7,515
1999 ................ 51,795
2000 ................ 5,095
2001 ................ 2,858
2002 ................ 968
Thereafter .......... 844
NOTE G--CONCENTRATIONS
The Company's operations are substantially all outside the United States.
In 1997, the largest amount of sales occurred in Germany, which comprised 29%
of total sales. The Company also had sales of almost 9% in each of France and
England. While these countries are considered politically stable, there is risk
that economic difficulties in any of these countries could adversely affect the
Company's business. The Company also has operations in less politically stable
countries.
Most of the Company's sales are made in local currencies other than the
U.S. dollar in 1997. The largest amounts of sales were in German marks (29%),
French francs (10%) and British pounds (9%). In some countries, certain
purchases and the resulting payables are in currencies (principally the U.S.
dollar) different than the functional currency. Further, certain subsidiaries
have loans receivable or payable denominated in currencies other than their
functional currency. Transaction gains and losses on these receivables and
liabilities are included in the determination of earnings for the relevant
periods. In 1995, 1996 and 1997 foreign currency gains were $74,000, $1,559,000
and $1,219,000, respectively.
The Company enters into foreign exchange contracts to hedge groups of
foreign currency transactions on a continuing basis for periods consistent with
its committed exposure. The foreign exchange contracts are valued at market and
generally have maturities which do not exceed six months. Gains and losses on
foreign exchange contracts are intended to offset losses and gains on assets,
liabilities and transactions being hedged. As a result, the Company does not
anticipate any material adverse effect due to exchange rate movements over the
short term period covered by these contracts. At December 31, 1997, the face
value of foreign exchange forward contracts against trade payables was $104.9
million, which approximated the fair market value of the contracts. At December
31, 1997, approximately $271.6 million of accounts payable were attributable to
foreign currency liabilities denominated in currencies other than the
subsidiaries' functional currencies (principally $229.3 million in U.S. dollars
and $26.2 million in German marks). The largest unhedged amounts of trade
payables were in subsidiaries in Hong Kong, Czech Republic, Poland, Argentina
and Mexico.
In some countries there are risks of continuing periodic devaluations or
of large devaluations. In these countries, no hedging mechanism exists. The
Company has risks in these countries that such devaluations could cause
economic loss and negatively impact future sales since its product cost would
increase in local terms after such devaluations. The Company attempts to limit
its economic loss through structural mechanisms of limiting its holdings of
local currency and receivables to the amount of its local currency payables.
F-23
CHS ELECTRONICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1997--(CONTINUED)
NOTE G--CONCENTRATIONS--(CONTINUED)
The Company has a major supplier, Hewlett-Packard (HP), whose products
accounted for 35%, 34%, and 19% and of sales for 1995, 1996 and 1997
respectively. No other vendor accounted for more than 10% of sales in any year
except in 1996, in which one vendor was 12%. HP has the right to terminate its
distribution agreement with any Company subsidiary if the subsidiary is unable
to cure, within a reasonable period of time, any violation of the agreement
after having received notice from HP of the violation. Each Company subsidiary
has the right to terminate the HP agreement on 90 days notice. Each Company
subsidiary believes that its relationship with HP is good, and has no reason to
believe that its distribution arrangement will not be a long-term relationship.
No assurance can be given, however, that HP will renew each Company
subsidiary's agreement at the time of its annual review or in subsequent years.
Management has not formulated alternative plans of action in the event the HP
contracts are terminated. The amounts outstanding to HP at December 31, 1996
and 1997 were $70 million and $80 million, respectively.
NOTE H--LEASE OBLIGATIONS AND OTHER CONTINGENCIES
The Company leases equipment, offices, sales and warehouse space under
non-cancelable leases. The following is a schedule by years of the minimum
rental commitments remaining on leased property and equipment (in thousands)
with terms greater than one year:
YEAR ENDING
DECEMBER 31, TOTAL
- ------------------------------- ----------
1998 ................... $12,416
1999 ................... 12,489
2000 ................... 11,625
2001 ................... 10,837
2002 ................... 4,305
Subsequent years ......... 7,716
Total rental expense was $2,503,000, $6,715,000 and $14,542,000 for the
years ended December 31, 1995, 1996 and 1997, respectively.
Rental expense includes approximately $734,000 annually for monthly rent
due on a CHS facility in Germany under a lease agreement dated November 1993
with a term of 17 years. CHS Germany has the option to purchase the leased
property at both the end of the seventh year of the lease term, and at the end
of the lease, for the net book value of the property as calculated under
applicable German tax laws. The option prices at the end of the seventh and
seventeenth year would approximate $5.6 million and $2.8 million, respectively.
In addition, the lessor has the right to adjust the minimum rental payments at
the end of 1999 if certain economic conditions prevail.
The Company is involved in litigation relating to claims arising out of
its operations in the normal course of business. The Company is not currently
engaged in any legal proceedings that are expected, individually or in the
aggregate, to have a material adverse effect on the Company.
F-24
CHS ELECTRONICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1997--(CONTINUED)
NOTE I--RELATED PARTY TRANSACTIONS
A member of the Board of Directors and shareholder of the Company also
serves as a member of the Board of Directors of a company which supplies
product to the Company. This Company also has ownership interests in other
companies which do business with the Company. Transactions with these related
parties in 1997 were as follows (in thousands):
Sales to such related parties ...................... $102,724
Purchases from such related parties ................ $ 57,376
Commissions paid to such related parties ........... $ 10,116
Rebates received from such related parties ......... $ 11,163
The rebates received pertain to vendor rebates passed from such related
parties to the Company. The net amount of trade receivable due from such
parties at December 31, 1997 was $12,193,000.
At December 31, 1996 and 1997, the Company carried a receivable from
Comtrad and Comtrad Holdings, Inc. (CHI) in an amount of $3.2 million and $17.4
million, respectively. In 1997 this receivable is in the form of a promissory
note which Comtrad and CHI has agreed to collateralize with 5,487,203 shares of
CHS owned by Comtrad and CHI. Interest rate charged on the promissory note is
at prime rate. The amount is due on demand. Interest charged to Comtrad was
$438,000, $86,000 and $684,000 in 1995, 1996 and 1997 respectively. In 1995 the
Company owed amounts to Comtrad which were subsequently extinguished. Interest
paid to Comtrad was $126,000 in 1995.
In 1996, the Company purchased a company in Romania from Comtrad for
$375,000. Subsequently, the Company loaned $800,000 to the subsidiary to enable
it to purchase an office building. In December 1996, the Company sold this
subsidiary back to Comtrad for the original purchase price plus an amount equal
to the losses from April to date of sale ($200,000). No gain was recognized on
the sale, which had the impact of increasing the amount due from Comtrad by
$1.4 million.
In 1995 the Company billed Comtrad $495,000 for actual costs of salaries,
space and other administrative costs it incurred on Comtrad's behalf. In 1995,
Comtrad billed the Company $887,000 for the Company's share of actual costs
incurred by Comtrad for salaries, space and other administrative expenses for
shared employees.
A director of the Company served the Company as a management consultant
under a consulting agreement specifying payments of $4,000 per month. The
agreement was terminated at the end of 1996. In 1995 and 1996, $48,000 and
$48,000 respectively was paid under this agreement.
NOTE J--COMMON STOCK AND STOCK OPTION PLANS
In September 1997, the Board approved a 3 for 2 stock split. All share
information has been restated to reflect all stock splits. In March 1996, the
shareholders approved a reincorporation as a Florida company, a reverse 1 for 2
stock split and the authorization of 5,000,000 shares of preferred stock in
such class or series and with such rights as approved by the Board of
Directors. Under Florida law, a majority vote by the holders of the preferred
stock as well as the holders of common stock is necessary to vote affirmatively
on matters of mergers, sales of substantially all the Company's assets,
exchanges of stock or changes in the articles of incorporation.
F-25
CHS ELECTRONICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1997--(CONTINUED)
NOTE J--COMMON STOCK AND STOCK OPTION PLANS--(CONTINUED)
In August 1997, the Company completed a public offering of common shares
in which the Company sold 21,208,134 shares and selling shareholders sold
1,216,866 shares. The Company's shares were sold at $21.17 per share which
raised $428.2 million for the Company net of expenses and commissions.
In June 1996, the Company completed a public offering of common shares in
which the Company sold 6,887,308 shares and selling shareholders sold 2,600,191
shares. The Company shares were sold at $8 per share which raised $50.6 million
for the Company net of expenses and commissions. As part of the offering the
underwriter received warrants entitling the purchase of 450,000 shares of stock
in a 4 year period beginning in June 1997 at a price starting at $8.80 and
increasing each year.
In August 1994, a Stock Incentive Plan was adopted by the Company's Board
of Directors and subsequently approved by the Company's shareholders in June
1995. The maximum number of shares issuable under the Plan has been amended
several times and is 2,620,500 at December 31, 1997. Certain of the grants
(785,500 at December 31, 1997) are intended to qualify as incentive stock
options and the remaining are non-qualified options. All options were issued
with an exercise price equal to the market price and have a life of 10 years.
Vesting periods are generally 25% a year for four years.
In 1997 the Board of Directors and subsequently the shareholders approved
the Directors and Officers 1997 Stock Option Plan. The Plan authorizes options
covering up to 1,350,000 shares of CHS Stock to be granted to executive
officers and Directors. The options are to be granted at fair market value and
generally vest over 3 years. In 1997, 1,275,000 options were granted under this
Plan.
In 1997 the Board of Directors and subsequently the shareholders approved
the 1997 CEO Stock Option Plan. The plan authorizes options covering up to
750,000 shares of CHS Stock to be issued to the CEO upon approval by the Board
of a business acquisition. The options are granted at market value and vest
based on the earnings of the acquired company. In 1997 all the options
authorized by this plan were granted.
In June 1996, the Board of Directors, and subsequently the shareholders,
approved the 1996 Chief Executive Officer Option Plan. The Plan provides for
options covering up to 750,000 shares of CHS stock to be issued to the CEO upon
the approval by the Board of Directors of a qualifying acquisition, as defined
or of any acquisition if recommended by the Compensation Committee and approved
by the Board. A qualifying acquisition is one where greater than 50% of the
purchase price is comprised of common stock calculated by an earn out formula.
The options are granted at market value and vest based on the earnings of the
acquired company. In 1996 and 1997, all the options authorized by this plan
were granted.
In December 1994, when the estimated fair value was $4.00, the Board
granted the Company's Chief Executive Officer non-qualified options to purchase
84,120 shares for which the exercise price is $.67 per share. The vesting
period was two years and the options expire in ten years. The compensation
element of $280,400 has been amortized to compensation expense in the
accompanying financial statements.
F-26
CHS ELECTRONICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1997--(CONTINUED)
NOTE J--COMMON STOCK AND STOCK OPTION PLANS--(CONTINUED)
The Company accounts for its stock options under APB 25. No compensation
cost has been recognized as the exercise price of each options does not exceed
the fair value of the underlying stock at the date of grant. Had compensation
cost for the plan been determined based on the fair value of the options at the
grant dates consistent with the method of SFAS No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION, the Company's net earnings per share would have been
reduced to the pro forma amounts indicated below.
1996 1997
-------------- --------------
Net earnings As reported .......... $12,166,000 $48,391,000
Pro forma ............ 11,777,000 44,362,000
Net earnings per share--basic As reported .......... $ .80 $ 1.44
Pro forma ............ .77 1.32
Net earnings per share--diluted As reported .......... $ .78 $ 1.32
Pro forma ............ .75 1.21
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes options pricing model with the following
weighted-average assumptions used for grants in 1996 and 1997, respectively;
dividend yield of 0% for each year; expected volatility of 70% in 1996 and
67.9% in 1997; risk-free interest rates 6.06% in 1996 and ranging from 5.68% to
6.47% in 1997; and expected lives of 4.5 years for each year.
A summary of the status of the Company's stock option plans as of December
31, 1995, 1996 and 1997 and changes during the years ending on those dates is
presented below.
1995 1996 1997
------------------------- ------------------------- -------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------------ ---------- ------------ ---------- ------------- ---------
Outstanding at beginning of year .......... 603,008 $3.53 846,132 $ 4.60 2,314,299 $ 8.01
Granted ................................... 334,500 6.39 1,583,720 9.75 3,191,381 18.09
Exercised ................................. -- -- (61,611) 4.57 (705,469) 10.40
Cancelled ................................. (91,376) 4.11 (53,942) 10.28 (182,398) 8.36
------- ----- --------- ------ --------- ------
Outstanding at end of year ................ 846,132 $4.60 2,314,299 $ 8.01 4,617,813 $15.17
======= ===== ========= ====== ========= ======
Options exercisable at year end ........... 208,283 $3.33 773,442 $ 5.89 1,095,037 $ 4.58
Weighted--average fair value of
options granted during the year ......... N/A N/A $10.61
F-27
CHS ELECTRONICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1997--(CONTINUED)
NOTE J--COMMON STOCK AND STOCK OPTION PLANS--(CONTINUED)
The following information applies to options outstanding at December 31,
1997:
Number outstanding .................................. 4,617,813
Range of exercise prices ............................ $4.00-$25.46
Weighted-average exercise price ..................... $ 15.17
Weighted-average remaining contractual life ......... 9.2 years
F-28
CHS ELECTRONICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1997--(CONTINUED)
NOTE K--SEGMENT INFORMATION
The Company's business activities involve the operating segments of
distribution of microcomputer equipment and software products. The operating
segments are the distribution of universal products (products that represent
the basic components of a personal computer without regard to the specific
local language, regulatory and technical factors of individual markets) and
localized products. The accounting policies of the segments are the same as
those described in the Summary of Accounting Policies (Note A). The segments
are managed separately since each requires different business and marketing
strategies. The geographic areas in which the localized product segments
operate are Western Europe, Eastern Europe and Latin America. Net sales,
operating income (before interest and income taxes) and identifiable assets by
segment were as follows (in thousands):
LOCALIZED PRODUCTS
-------------------------------------------
WESTERN EASTERN LATIN UNIVERSAL
EUROPE EUROPE AMERICA PRODUCTS ELIMINATIONS CONSOLIDATED
------------- ----------- ------------- ---------- -------------- -------------
1995
Net sales ................... $ 542,438 $ 65,320 $ 328,945 $ -- $ -- $ 936,703
==========
Operating income ............ $ 7,358 $ 252 $ 3,934 $ -- $ -- $ 11,544
Corporate expenses .......... (745)
----------
$ 10,799
==========
Identifiable assets ......... $ 169,442 $ 33,283 $ 85,409 $ -- $ (22,677) $ 265,457
Corporate assets ............ 347
----------
$ 265,804
==========
1996
Net sales ................... $1,063,997 $215,518 $ 576,025 $ -- $ -- $1,855,540
==========
Operating income ............ $ 9,559 $ 11,440 $ 10,663 $ -- $ -- $ 31,662
Corporate expenses .......... (2,789)
----------
$ 28,873
==========
Identifiable assets ......... $ 528,568 $110,656 $ 207,734 $ -- $ -- $ 846,958
Corporate assets ............ 14,991
----------
$ 861,949
==========
1997
Net sales ................... $2,676,905 $389,553 $1,118,504 $571,421 $ -- $4,756,383
==========
Operating income ............ $ 42,867 $ 18,871 $ 17,891 $ 14,501 $ -- $ 94,130
Corporate expenses .......... (4,969)
----------
$ 89,161
==========
Identifiable assets ......... $ 894,248 $189,918 $ 280,814 $472,689 $ -- $1,837,669
Corporate assets ............ 110,571
----------
$1,948,240
==========
F-29
CHS ELECTRONICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1997--(CONTINUED)
NOTE L--SUBSEQUENT EVENTS
In January 1998, the Company implemented a Common Stock Purchase Rights
Plan and distributed one right (a "Right") for each share of the Company's
Common Stock outstanding. Each Right has an initial exercise price of $100 for
one-one thousandth of a share of the Company's Series A junior participating
preferred stock. The Rights are not exercisable or transferable, apart from the
Company's Common Stock, until after a person or group acquires, or has the
right to acquire, beneficial ownership of 15% or more of the Company's Common
Stock (which threshold may, under certain circumstances, be reduced to 10%) or
announces a tender or exchange offer to acquire such percentage of the
Company's Common Stock. Upon such occurrence, each Right (other than Rights
owned by such person or group) will entitle the holder to purchase from the
Company, or the particular acquiring person or group under certain
circumstances and conditions, the number of shares of the Company's, or such
person's or group's, Common Stock having a market value equal to twice the
exercise price of the Right. The Rights are redeemable by the Company's Board
of Directors under certain circumstances.
In April 1998, the Company issued $200 million of Senior Notes ("Notes")
due 2005. The Notes bear interest of 9.875% per annum and interest is payable
semi-annually on April 15 and October 15 beginning October 15, 1998. The Notes
are redeemable at the option of the Company, in whole or in part, at any time
on or after April 15, 2002, initially at 104.938% of their principal amount,
plus accrued and unpaid interest, declining to 100% of their principal amount,
plus accrued and unpaid interest, on or after April 15, 2004. Certain of the
Company's direct and indirect subsidiaries fully and unconditionally jointly
and severely guaranteed the Notes on an unsecured basis. The guarantor
subsidiaries are CHS Electronics, Inc. (Nevada), CHS Delaware, Inc., CHS
Delaware L.L.C. and CHS Americas, Inc. The Notes are effectively subordinated
to all existing and future liabilities of the Company's subsidiaries that are
not guarantors. The Notes contain certain covenants which, among other things,
will restrict the ability of the Company and certain of its subsidiaries to
incur additional indebtedness; pay dividends or make distributions in respect
to their capital stock; enter into certain transactions with shareholders and
affiliates; make certain investments and other restricted payments; create
liens; enter into certain sale and leaseback transactions and sell assets. The
covenants are, however, subject to a number of exceptions and qualifications.
The following condensed consolidated financial information presents the
results of operations, financial position and cash flows of the Company (on a
stand alone basis), the guarantor subsidiaries (on a combined basis), the
non-guarantor subsidiaries (on a combined basis) and the eliminations necessary
to arrive at the consolidated results for the Company. The results of
operations and cash flows presented below assume as if the guarantor
subsidiaries were in place for all periods presented. The Company and
subsidiary guarantors have accounted for investments in their respective
subsidaries on an unconsolidated basis using the equity method of accounting.
F-30
CHS ELECTRONICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1997--(CONTINUED)
NOTE L--SUBSEQUENT EVENTS--(CONTINUED)
AS OF DECEMBER 31, 1997
----------------------------------------------------------------------------
CHS NON-
ELECTRONICS, INC. GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
------------------- ------------ ------------ ---------------- -------------
Cash .................................... $ 2,367 $ 83 $ 66,356 $ -- $ 68,806
Accounts receivables .................... 17,356 1 667,004 -- 684,361
Intercompany receivables ................ 191,627 -- 251,010 (442,637) --
Inventories ............................. -- -- 693,503 -- 693,503
Other current assets .................... 1,454 316 69,806 (6,321) 65,255
-------- -------- ---------- ------------ ----------
Total current assets .................. 212,804 400 1,747,679 (448,958) 1,511,925
Property and equipment, net ............. 2,247 24 59,197 -- 61,458
Cost in excess of assets
acquired, net ......................... -- -- 381,830 -- 381,830
Investments in affiliated companies ..... 517,774 289,244 -- (807,018) --
Other assets ............................ -- -- 13,599 13,599
-------- -------- ---------- ----------
Total assets .......................... $732,825 $289,668 $2,202,305 $ (1,255,976) $1,968,822
======== ======== ========== ============ ==========
Notes payable ........................... $ -- $ -- $ 309,510 $ -- $ 309,510
Intercompany payables ................... 1,835 145,217 295,199 (442,251) --
Accounts payable ........................ 1,207 -- 770,328 -- 775,635
Accrued expenses ........................ 7,153 44 76,112 -- 83,309
Amounts due to sellers .................. 54,866 -- -- -- 54,886
Income taxes payable and other
current liabilities.................... - - 14,607 (673) 13,934
-------- -------- ---------- ------------ ----------
Total current liabilities ............. 65,061 145,261 1,465,756 (442,924) 1,233,154
Long term debt .......................... -- -- 70,134 (8,578) 61,858
Minority interests ...................... -- -- -- 6,348 6,348
Shareholders' equity .................... 667,764 144,407 666,415 (810,822) 667,764
-------- -------- ---------- ------------ ----------
........................................ $732,825 $289,668 $2,202,305 $ 1,255,976 $1,968,822
======== ======== ========== ============ ==========
F-31
CHS ELECTRONICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1997--(CONTINUED)
NOTE L--SUBSEQUENT EVENTS--(CONTINUED)
AS OF DECEMBER 31, 1996
----------------------------------------------------------------------------
CHS NON-
ELECTRONICS, INC. GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
------------------- ------------ -------------- -------------- -------------
Cash ....................................... $ 576 $ -- $ 34,561 $ -- $ 35,137
Accounts receivables ....................... 1,072 -- 342,267 -- 343,339
Intercompany receivables ................... 76,122 -- 293,509 (369,631) --
Inventories ................................ -- -- 321,770 -- 321,770
Other current assets ....................... 3,116 -- 39,484 (3,226) 39,374
-------- -------- ---------- ---------- --------
Total current assets ..................... 80,886 -- 1,031,591 (372,857) 739,620
Property and equipment, net ................ 2,705 1 28,241 -- 30,947
Cost in excess of assets acquired, net ..... -- -- 78,780 -- 78,780
Investments in affiliated companies ........ 120,327 129,332 -- (249,649) --
Other assets ............................... -- -- 12,602 12,602
-------- -------- ---------- --------
Total assets ............................. $203,918 $129,323 $1,151,214 $ (622,506) $861,949
======== ======== ========== ========== ========
Notes payable .............................. $ -- $ -- $ 155,932 $ -- $155,932
Intercompany payables ...................... 21,583 76,054 272,161 (369,798) --
Accounts payable ........................... 11,629 1,871 431,980 452,569
Accrued expenses ........................... 15,587 36,375 -- 44,873
Amounts due to sellers ..................... 49,200 -- -- 49,200
Income taxes payable and other
current liabilities....................... 1,386 -- 3,734 420 5,540
-------- -------- ---------- ---------- --------
Total current liabilities ................ 99,385 114,300 863,807 (369,378) 708,114
Long term debt ............................. -- -- 48,973 (3,646) 45,327
Minority interests ......................... -- -- -- 3,975 3,975
Shareholders' equity ....................... 104,533 15,023 238,434 (253,457) 104,533
-------- -------- ---------- ---------- --------
........................................... $203,918 $129,323 $1,151,214 $ (622,506) $861,949
======== ======== ========== ========== ========
F-32
CHS ELECTRONICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1997--(CONTINUED)
NOTE L--SUBSEQUENT EVENTS--(CONTINUED)
1997
----------------------------------------------------------------------------------
CHS NON-
ELECTRONICS, INC. GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
------------------- ------------ ------------ -------------- -------------
Net sales ............................... $ -- $ -- $5,026,155 $ (269,772) $4,756,383
Cost of goods sold ...................... -- -- 4,684,548 (274,834) 4,409,714
--------- --------- ---------- ---------- ----------
Gross profit ........................... -- -- 341,607 5,062 346,669
Operating expenses ...................... 1,375 181 255,952 -- 257,508
--------- --------- ---------- ---------- ----------
Operating income ....................... (1,575) (181) 85,655 5,062 89,161
Other (income) expense, net ............. (2,771) 892 25,647 380 24,148
--------- --------- ---------- ---------- ----------
Earnings before income taxes and
minority interest in subsidiaries..... 1,396 (1,073) 60,008 4,682 65,013
Provision for income taxes .............. 308 (313) 12,623 1,370 13,988
Equity in (earnings) of affiliated
companies, net of tax ................. (47,303) (47,351) -- 94,654 --
Minority interest ....................... -- -- -- 2,634 2,634
--------- --------- ---------- ---------- ----------
Net earnings ............................ $ 48,391 $ 46,591 $ 47,385 $ (93,976) $ 48,391
========= ========= ========== ========== ==========
1996
----------------------------------------------------------------------------------
CHS NON-
ELECTRONICS, INC. GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
------------------- ------------ ------------ -------------- -------------
Net sales ........................... $ -- $ -- $1,879,707 $ (24,167) $1,855,540
Cost of goods sold .................. -- -- 1,748,599 (24,167) 1,724,432
--------- --------- ---------- --------- ----------
Gross profit ....................... -- -- 131,108 -- 131,108
Operating expenses .................. 1,408 1 103,027 (2,201) 102,235
--------- --------- ---------- --------- ----------
Operating income ................... (1,408) (1) 28,081 2,201 28,873
Other (income) expense, net ......... 1,197 -- 7,316 -- 8,513
--------- --------- ---------- --------- ----------
Earnings before income taxes and
minority interest in subsidiaries (2,605) (1) 20,765 2,201 20,360
Provision for income taxes .......... 560 -- 5,526 -- 6,086
Equity in (earnings) of affiliated
companies, net of tax ............. (15,331) (15,246) -- 30,577 --
Minority interest ................... -- -- -- 2,108 2,108
--------- --------- ---------- --------- ----------
Net earnings ........................ $ 12,166 $ 15,245 $ 15,239 $ (30,484) $ 12,166
========= ========= ========== ========= ==========
F-33
CHS ELECTRONICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1997--(CONTINUED)
NOTE L--SUBSEQUENT EVENTS--(CONTINUED)
1995
--------------------------------------------------------------------------
CHS NON-
ELECTRONICS, INC. GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
------------------- ------------ ------------ -------------- -------------
Net sales .................................... $ -- $ -- $946,598 $ (9,895) $936,703
Cost of goods sold ........................... -- -- 878,611 (9,895) 868,716
-------- -------- -------- --------- --------
Gross profit ................................ -- -- 67,987 -- 67,987
Operating expenses ........................... 2,113 -- 54,825 250 57,188
-------- -------- -------- --------- --------
Operating income ............................ (2,113) -- 13,162 (250) 10,799
Other (income) expense, net .................. 287 -- 4,410 -- 4,697
-------- -------- -------- --------- --------
Earnings before income taxes and
minority interest in subsidiaries ......... (2,400) -- 8,752 250 6,102
Provision for income taxes ................... (381) -- 2,178 -- 1,797
Equity in (earnings) of affiliated
companies, net of tax ...................... (6,324) (6,407) -- 12,731 --
Minority interest ............................ -- -- -- -- --
-------- -------- -------- --------- --------
Net earnings ................................. $ 4,305 $ 6,407 $ 6,574 $ (12,981) $ 4,305
======== ======== ======== ========= ========
1997
--------------------------------
CHS
ELECTRONICS, INC. GUARANTORS
------------------- ------------
Net cash provided (used) in operating activities ........ -- --
Net cash provided (used) in investing activities ........ (201,517) --
Net cash provided (used) in financing activities ........ 203,308 --
Effect of exchange rate ................................. -- --
Cash at beginning ....................................... 576 --
Cash at end ............................................. 2,367 --
1997
------------------------------------------
NON-
GUARANTORS ELIMINATIONS CONSOLIDATED
------------ -------------- -------------
Net cash provided (used) in operating activities ........ (248,515) -- (248,515)
Net cash provided (used) in investing activities ........ (19,511) -- (221,028)
Net cash provided (used) in financing activities ........ 303,870 -- 507,178
Effect of exchange rate ................................. (3,966) -- (3,966)
Cash at beginning ....................................... 34,561 -- 35,137
Cash at end ............................................. 66,439 -- 68,806
1996
--------------------------------
CHS
ELECTRONICS, INC. GUARANTORS
------------------- ------------
Net cash provided (used) in operating activities ........ -- --
Net cash provided (used) in investing activities ........ (26,876) --
Net cash provided (used) in financing activities ........ 27,367 --
Effect of exchange rate ................................. -- --
Cash at beginning ....................................... 85 --
Cash at end ............................................. 576 --
1996
------------------------------------------
NON-
GUARANTORS ELIMINATIONS CONSOLIDATED
------------ -------------- -------------
Net cash provided (used) in operating activities ........ (99,125) -- (99,125)
Net cash provided (used) in investing activities ........ (11,624) -- (38,500)
Net cash provided (used) in financing activities ........ 135,981 -- 163,348
Effect of exchange rate ................................. (1,757) -- (1,757)
Cash at beginning ....................................... 11,086 -- 11,171
Cash at end ............................................. 34,561 -- 35,137
F-34
CHS ELECTRONICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1997--(CONTINUED)
NOTE L--SUBSEQUENT EVENTS--(CONTINUED)
1995
--------------------------------
CHS
ELECTRONICS, INC. GUARANTORS
------------------- ------------
Net cash provided (used) in operating activities ........ -- --
Net cash provided (used) in investing activities ........ 1,317 --
Net cash provided (used) in financing activities ........ (1,219) --
Effect of exchange rate ................................. -- --
Cash at beginning ....................................... 59 --
Cash at end ............................................. 85 --
1995
------------------------------------------
NON-
GUARANTORS ELIMINATIONS CONSOLIDATED
------------ -------------- -------------
Net cash provided (used) in operating activities ........ (22,053) -- (22,053)
Net cash provided (used) in investing activities ........ (6,866) -- (5,549)
Net cash provided (used) in financing activities ........ 31,146 -- 29,855
Effect of exchange rate ................................. 550 -- 550
Cash at beginning ....................................... 8,309 -- 8,368
Cash at end ............................................. 11,086 -- 11,171
As discussed in Note F, several of the borrowings of the Company's
subsidiaries contain restrictions on dividends to the Company. For the year
ended December 31, 1997, earnings before interest expense, income taxes and
depreciation and amortization ("EBITDA") of such subsidiaries represented 16.6%
of the Company's consolidated EBITDA. The Company has not presented separate
financial statements and other disclosures concerning the guarantors and
non-guarantor subsidiaries because it has determined they would not be material
to investors.
NOTE M--SUMMARIZED QUARTERLY FINANCIAL DATA FOR 1996 AND 1997 (UNAUDITED)
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER YEAR
----------- ----------- ------------- ---------------- -------------
(IN THOUSANDS, EXCEPT FOR PER SHARE INFORMATION)
1996
Net sales ........................... $302,995 $316,506 $ 376,209 $ 859,830 $1,855,540
Gross profit ........................ 22,542 23,764 27,109 57,693 131,108
Net earnings ........................ 1,988 1,726 2,325 6,127 12,166
Earnings per share--basic ........... .17 .14 .13 .33(A) .80
Earnings per share--diluted ......... .16 .13 .11 .32 .78
1997
Net sales ........................... $877,103 $946,955 $1,097,567 $1,834,758 $4,756,383
Gross profit ........................ 62,463 70,173 84,944 129,089 346,669
Net earnings ........................ 6,710 6,401 11,436 23,844 48,391
Earnings per share--basic ........... .30 .29 .28 .49 1.44
Earnings per share--diluted ......... .29 .27 .26 .45 1.32
- ----------------
(A) Results for the fourth quarter 1996 include a restructuring charge of $1.4
million ($1.1 million or $.07 per share after tax) for costs incurred by the
Company to implement consolidation of its operations with acquired operations
from Merisel.
F-35
- --------------------------------------------------------------------------------
--------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY
JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION
THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME AFTER THE DATE
HEREOF OR THAT THERE HAS NOT BEEN A CHANGE IN THE AFFAIRS OF THE COMPANY SINCE
THE DATE HEREOF.
-----------------------------------
TABLE OF CONTENTS
PAGE
-----
Summary ......................................
Risk Factors .................................
Recent Developments ..........................
The Exchange Offer ...........................
United States Federal Income Tax
Considerations ............................
Use of Proceeds ..............................
Capitalization ...............................
Selected Consolidated Financial Data .........
Management's Discussion and Analysis
of Financial Condition and Results
of Operations .............................
Business .....................................
Management ...................................
Certain Transactions .........................
Principal Shareholders .......................
Certain Indebtedness .........................
Description of Notes .........................
Exchange Offer; Registration Rights ..........
Plan of Distribution .........................
Legal Matters ................................
Experts ......................................
Available Information ........................
Incorporation by Reference ...................
Index to Financial Statements ................
$200,000,000
97/8% SENIOR NOTES DUE 2005
-----------------------------------
PROSPECTUS
-----------------------------------
April , 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------
- --------------------------------------------------------------------------------
--------------------------------------------------------------------
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company has authority under Florida law to indemnify its directors and
officers to the extent provided in such statute. The Articles provide that the
Company shall indemnify its directors to the fullest extent permitted by law
either now or hereafter. The Company has also entered into an agreement with
each of its directors and executive officers wherein it has agreed to indemnify
each of them to the fullest extent permitted by law.
At present, there is no pending litigation or proceeding involving a
director or officer of the Company as to which indemnification is being sought,
nor is the Company aware of any threatened litigation that may result in claims
for indemnification by any officer or director.
ITEM 14. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
EXHIBIT DESCRIPTION
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3.1 Articles of Incorporation of the Company(1)
3.2 Bylaws of the Company(1)
3.3 Certificate of Formation of CHS Delaware L.L.C.(7)
3.4 Certificate of Incorporation of CHS Delaware, Inc.(7)
3.5 Bylaws of CHS Delaware, Inc.(7)
3.6 Articles of Incorporation of CHS Americas, Inc.(7)
3.7 Bylaws of CHS Americas, Inc.(7)
3.8 Articles of Incorporation of CHS Electronics, Inc. (Nevada)(7)
3.9 Bylaws of CHS Electronics, Inc. (Nevada)(7)
4.1 Registration Rights Agreement dated as of April 9, 1998 among the Registrant and the Initial
Purchasers (incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed on
April 22, 1998).
4.2 Subsidiary Guarantee dated as of April 9, 1998 by the Subsidiary Guarantors (incorporated by
reference to Exhibit 10.2 to Current Report on Form 8-K filed on April 22, 1998).
4.3 Indenture dated as of April 9, 1998 among the Registrant, the Subsidiary Guarantors and the
Trustee (incorporated by reference to Exhibit 10.3 to Current Report on Form 8-K filed on
April 22, 1998).
5.1 Opinion of Greenberg Traurig Hoffman Lipoff Rosen & Quentel, P.A.(7)
10.1 Plan of Acquisition dated June 30, 1994(2)
10.2 Form of Registration Agreement(2)
10.3 Agreement and Plan of Exchange dated June 30, 1994(2)
10.4 Purchase and Sale Agreement dated June 30, 1994(2)
10.5 Repurchase Option Agreement dated June 30, 1994(2)
10.6 Stockholders Agreements dated June 30, 1994(2)
10.7 Employment Agreement for Alvin Perlman(2)
10.8 Notes Payable to Comtrad, Inc., dated May 23, November 14, and December 29, 1994(2)
10.9 Revolving Credit Agreement with The First National Bank of Boston, dated March 1, 1993, as
amended (2)
10.10 Reseller Agreement with Hewlett Packard dated March 1, 1994(2)
10.11 Reseller Agreement with Hewlett Packard dated November 1, 1994(2)
10.12 Stock Incentive Plan(2)
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EXHIBIT DESCRIPTION
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10.13 Lease for Miami, Florida Facility dated June 29, 1993(2)
10.14 Real Estate Leasing Contract for Nenndorf, Germany Facility dated November 12, 1994(2)
10.15 Loan and Security Agreement by and between Congress Financial Corporation (Florida), as
Lender and Zemex Electronics International, Inc. as Borrower, dated February 5, 1996,
together with the guarantee thereof by the Company(1)
10.16 Credit Agreement by and between MashreqBank PSC, New York Branch, as lender and the
Company, as borrower, dated July 10, 1995(1) and Amendment dated as of August 17, 1995(3)
10.17 Employment Agreement between the Company and Claudio Osorio dated March 22, 1996(3)
10.18 Employment Agreement between the Company and Craig Toll dated March 22, 1996(3)
10.19 Form of Indemnity Agreement between the Company and each of the Directors of the
Company and Craig Toll(3)
10.20 Noncompetition Agreement dated April 11, 1996 among the Company, Comtrad, Inc. and
Comtrad Holdings, Inc.(3)
10.21 Purchase and Sale Agreement between Comtrad, Inc. and the Company dated December 8,
1993 (CHS Germany)(2)
10.22 Agreement and Plan of Exchange between the Company and Comtrad, Inc., dated April 25,
1995 (CHS Belgium, CHS England, CHS France and CHS Portugal)(3)
10.23 Agreement and Plan of Exchange between the Company and Comtrad Holdings, Inc. dated
October 13, 1995 (CHS BEK)(3)
10.24 Agreement and Plan of Exchange between the Company, CHS Czechia s.r.o., Comtrad, Inc.
and Zbynek Kraus dated October 27, 1995 (CHS Czechia)(3)
10.25 Stock Purchase Agreement between the Company and Comtrad Holdings, Inc. dated
December 29, 1995 (CHS Poland)(3)
10.26 Stock purchase agreement between the Company and Comtrad, Inc. dated December 29, 1995
(CHS Sweden)(3)
10.27 Stock Purchase Agreement between the Company and Comtrad, Inc. dated December 29, 1995
(CHS Finland)(3)
10.28 Purchase Agreement dated January 31, 1996 between the Company and Comtrad Holdings,
Inc. and the individual persons comprising the "KVENTA QUOTAHOLDERS"
(CHS Hungary)(4)
10.29 Stock Purchase Agreement between the Company, Contrad Holdings, Inc. and Comtrad, Inc.
dated March 27, 1996 (CHS Baltic, CHS Bulgaria, CHS Romania, CHS Croatia, CHS Brazil
and CHS Slovakia)(3)
10.30 Purchase Agreement dated March 1996 between Zemex Electronics International and Cosapi
Organizacion Empresarial S.A. (CHS Peru)(3)
10.31 Stock Purchase Agreement dated March 29, 1996 between the Company and Hugo Wyrsch
(CHS Switzerland)(3)
10.32 Loan Agreement dated 29 March 1996 among CHS Finance SA, Singer and Friedlander
Limited and certain banks named in the Agreement(3)
10.33 Purchase Agreement by and among CHS Electronics, Inc., as Buyer, and Merisel, Inc. and
Merisel Europe, Inc. as Sellers dated as of August 29, 1996 as amended by First Amendment
to Purchase Agreement dated as of October 4, 1996(4)
10.34 Second Amendment to Purchase Agreement by and among CHS Electronics, Inc. as Buyer
and Merisel, Inc. and Merisel Europe, Inc. as Sellers dated as of December 27, 1996(5)
10.35 Settlement Agreement and Release by and among CHS Electronics, Inc. as Buyer and Merisel,
Inc. and Merisel Europe, Inc. as Sellers dated February 13, 1997(5)
10.36 Agreement as of October 31, 1996 between CHS Electronics, Inc. and Comtrad, Inc.(5)
10.37 Stock Exchange Agreement dated December 19, 1996 between CHS Electronics, Inc. and
Frank & Walter Computer GmbH(5)
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EXHIBIT DESCRIPTION
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10.38 Modification of Re-Purchase Option Agreement dated July 1996(6)
10.39 Amendment to Stock Purchase Agreement dated October 16, 1996 between CHS Electronics,
Inc. and Hugo Wyrsch(6)
10.40 Employment Agreement between the Company and Carsten Frank dated December 19,
1996(6)
10.41 First Amendment to Employment Agreement of Claudio Osorio dated May 12, 1997(6)
10.42 Amended and Joinder to Loan and Security Agreement between Zemex Electronics
International, Inc. and Merisel Latin America, Inc. as Borrowers and Congress Financial
Corporation (Florida) as Lender dated October 4, 1996(6)
10.43 Shareholder Letter Agreement dated December 19, 1996 among Carsten Frank, Comtrad, Inc.
and Comtrad Holdings, Inc.(6)
10.44 Share Exchange Agreement dated June 20, 1997 among the Company and the shareholders of
Karma International S.A.(6)
23.1 Consent of Grant Thornton, LLP(7)
23.2 Consent of KPMG Coudet Suner Denetim ve Yeminli Mali Musavirlik A.S.(7)
23.3 Consent of Coopers & Lybrand ANS(7)
23.4 Consent of Greenberg Traurig Hoffman Lipoff Rosen & Quentel, P.A.(included in opinion
filed as Exhibit 5.1 hereto)(7)
24.1 Powers of Attorney (included in signature page to registration statement)
25.1 Statement of Eligibility of Trustee on Form T-1(7)
27.1 Financial Data Schedule(7)
99.1 Form of Letter of Transmittal(7)
99.2 Form of Notice of Guaranteed Delivery(7)
99.3 Form of Tender Instruction(7)
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(1) Incorporated herein by this reference from the Company's Annual Report on
Form 10-K for the year ended December 31, 1995.
(2) Incorporated herein by this reference from the Company's registration
statement on Form 10 filed with the Securities and Exchange Commission on
May 26, 1994 and the amendments thereto filed on August 1, 1994, September
9, 1994, December 2, 1994 and January 12, 1995.
(3) Incorporated herein by this reference from the Company's Registration
Statement on Form S-1 (File No. 333-03864).
(4) Incorporated herein by this reference from the Company's Current Report on
Form 8-K filed on October 18, 1996.
(5) Incorporated herein by this reference from the Company's Annual Report on
Form 10-K for the year ended December 31, 1996.
(6) Incorporated herein by this reference from the Company's Registration
Statement on Form S-3 (File No. 333-29779).
(7) Filed herewith.
ITEM 22. UNDERTAKINGS.
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
The undersigned registrant hereby undertakes as follows: that prior to any
public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the
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applicable registration form with respect to reofferings by persons who may be
deemed underwriters, in addition to the information called for by the other
items of the applicable form.
The registrant undertakes that every prospectus (i) that is filed pursuant
to the immediately preceding paragraph, or (ii) that purports to meet the
requirements of section 10(a)(3) of the Act and is used in connection with an
offering of securities subject to Rule 415, will be filed as a part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11 or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through
the date of responding to the request.
The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended
(the "Act"), the registrant certifies that it has reasonable grounds to believe
that it meets all of the requirements for filing on Form S-4 and has duly
caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Miami, State of Florida,
on April 23, 1998.
CHS ELECTRONICS, INC.
By: /s/ CLAUDIO OSORIO
-------------------------------------
Claudio Osorio, Chairman of the Board,
Chief Executive Officer and
President
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints Claudio Osorio and Craig Toll his true
and lawful attorneys-in-fact, each acting alone, with full powers of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any or all amendments, including any
post-effective amendments, to this registration statement, and any registration
statement filed pursuant to Rule 462(b) of the Act prepared in connection
therewith, and to file the same, with exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that said attorneys-in-fact or their substitutes,
each acting alone, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the date indicated.
SIGNATURE TITLE DATE
- ----------------------------- --------------------------------------------- ---------------
/s/ CLAUDIO OSORIO
- ------------------------ Chairman of the Board, Chief April 23, 1998
Claudio Osorio Executive Officer and President
/s/ ALVIN PERLMAN
- ------------------------ Executive Vice President--Vendor April 23, 1998
Alvin Perlman and Banking Relations and Director
/s/ CARSTEN FRANK
- ------------------------ Executive Vice President--Asian Region April 23, 1998
Carsten Frank and Director
/s/ ANTONIO BOCCALANDRO
- ------------------------ Chief Officer--Mergers and Acquisitions, April 23, 1998
Antonio Boccalandro Secretary and Director
/s/ CRAIG TOLL
- ------------------------ Vice President--Finance and Chief Financial April 23, 1998
Craig Toll Officer (principal financial officer and
principal accounting officer)
/s/ OTTO GERLACH
- ------------------------ Director April 23, 1998
Otto Gerlach
/s/ BERND KARRE
- ------------------------ Director April 23, 1998
Bernd Karre
/s/ ZBYNEK KRAUS
- ------------------------ Director April 23, 1998
Zbynek Kraus
/s/ PIERINO LARDI
- ------------------------ Director April 23, 1998
Pierino Lardi
/s/ DONALD D. WINSTEAD
- ------------------------ Director April 23, 1998
Donald D. Winstead
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EXHIBIT INDEX
EXHIBIT DESCRIPTION
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3.3 Certificate of Formation of CHS Delaware L.L.C.(7)
3.4 Certificate of Incorporation of CHS Delaware, Inc.(7)
3.5 Bylaws of CHS Delaware, Inc.(7)
3.6 Articles of Incorporation of CHS Americas, Inc.(7)
3.7 Bylaws of CHS Americas, Inc.(7)
3.8 Articles of Incorporation of CHS Electronics, Inc. (Nevada)(7)
3.9 Bylaws of CHS Electronics, Inc. (Nevada)(7)
5.1 Opinion of Greenberg Traurig Hoffman Lipoff Rosen & Quentel, P.A.(7)
23.1 Consent of Grant Thornton, LLP(7)
23.2 Consent of KPMG Coudet Suner Denetim ve Yeminli Mali Musavirlik A.S.(7)
23.3 Consent of Coopers & Lybrand ANS(7)
25.1 Statement of Eligibility of Trustee on Form T-1(7)
27.1 Financial Data Schedule(7)
99.1 Form of Letter of Transmittal(7)
99.2 Form of Notice of Guaranteed Delivery(7)
99.3 Form of Tender Instruction(7)