SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NO. 0-23949
EUROPEAN MICRO HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Nevada 65-0803752
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification Number)
6073 N.W. 167th Street, Unit C-25, Miami, Florida 33015
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (305) 825-2458
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months, and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ___
The aggregate market value of the voting common stock held by
non-affiliates of the Registrant on September 1, 1998 was $12,880,836 based on
the average bid and asked prices on such date of $9.00.
The Registrant had 4,933,900 shares of Common Stock, par value $0.01
per share, outstanding on September 1, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the definitive proxy or information statement for the 1998
Annual Meeting of Stockholders to be filed by the Registrant with the Securities
and Exchange Commission under Regulation 14A are incorporated by reference in
Part III of this Form 10-K Report.
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PART I
ITEM 1. BUSINESS.
GENERAL DESCRIPTION OF BUSINESS
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS. THIS FILING CONTAINS
FORWARD-LOOKING STATEMENTS, INCLUDING STATEMENTS REGARDING, AMONG OTHER THINGS,
(A) EUROPEAN MICRO HOLDINGS, INC.'S ("EUROPEAN MICRO" OR THE "COMPANY")
PROJECTED SALES AND PROFITABILITY, (B) THE COMPANY'S GROWTH STRATEGIES, (C)
ANTICIPATED TRENDS IN THE COMPANY'S INDUSTRY AND (D) THE COMPANY'S FUTURE
FINANCING PLANS. IN ADDITION, WHEN USED IN THIS FILING, THE WORDS "BELIEVES,"
"ANTICIPATES," "INTENDS," "IN ANTICIPATION OF," "EXPECTS," AND SIMILAR WORDS ARE
INTENDED TO IDENTIFY CERTAIN FORWARD-LOOKING STATEMENTS. THESE FORWARD-LOOKING
STATEMENTS ARE BASED LARGELY ON THE COMPANY'S EXPECTATIONS AND ARE SUBJECT TO A
NUMBER OF RISKS AND UNCERTAINTIES, MANY OF WHICH ARE BEYOND THE COMPANY'S
CONTROL. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THESE FORWARD-LOOKING
STATEMENTS AS A RESULT OF CHANGES IN TRENDS IN THE ECONOMY AND THE COMPANY'S
INDUSTRY, REDUCTIONS IN THE AVAILABILITY OF FINANCING AND AVAILABILITY OF
COMPUTER PRODUCTS ON TERMS AS FAVORABLE AS EXPERIENCED BY THE COMPANY IN PRIOR
PERIODS, THE FINANCIAL CONDITION OF THE COMPANY'S CUSTOMERS, THE ABILITY TO
OBTAIN COMPUTER PRODUCTS FROM THE COMPANY'S TRADITIONAL SUPPLIERS, DEMAND FOR
THE COMPANY'S PRODUCTS AND OTHER FACTORS. IN LIGHT OF THESE RISKS AND
UNCERTAINTIES, THERE CAN BE NO ASSURANCE THAT THE FORWARD-LOOKING STATEMENTS
CONTAINED IN THIS ANNUAL REPORT WILL IN FACT OCCUR. THE COMPANY DOES NOT
UNDERTAKE ANY OBLIGATION TO PUBLICLY RELEASE THE RESULTS OF ANY REVISIONS TO
THESE FORWARD-LOOKING STATEMENTS THAT MAY BE MADE TO REFLECT ANY FUTURE EVENTS
OR CIRCUMSTANCES.
UNLESS THE CONTEXT OTHERWISE REQUIRES AND EXCEPT AS OTHERWISE
SPECIFIED, REFERENCES HEREIN TO "EUROPEAN MICRO" OR THE "COMPANY" INCLUDE
EUROPEAN MICRO HOLDINGS, INC. AND ITS TWO WHOLLY-OWNED SUBSIDIARIES, EUROPEAN
MICRO PLC, A PUBLIC LIMITED COMPANY ORGANIZED UNDER THE LAWS OF THE UNITED
KINGDOM ("EUROPEAN MICRO UK"), AND NOR'EASTER MICRO, INC., A NEVADA CORPORATION
("NOR'EASTER") (COLLECTIVELY, THE TWO WHOLLY-OWNED SUBSIDIARIES ARE REFERRED TO
AS THE "SUBSIDIARIES").
The Company is an independent distributor of microcomputer products,
including personal computers, memory modules, disc drives and networking
products, to customers mainly in Western Europe and to related parties in the
United States. The Company's customers consist of more than 375 value-added
resellers, corporate resellers, retailers, direct marketers and distributors.
The Company does not sell to end-users. Substantially all of the products sold
by the Company are manufactured by well-recognized manufacturers such as IBM,
Compaq and Hewlett-Packard, although the Company generally does not obtain its
inventory directly from such manufacturers. European Micro monitors the
geographic pricing strategies related to such products, currency fluctuations
and product availability in order to obtain inventory at favorable prices from
other distributors, resellers and wholesalers.
European Micro considers itself to be a focused distributor, as opposed
to a broadline distributor, dealing with a limited and select group of products
from a limited and select group of leading manufacturers. The Company believes
that being a focused distributor enables it to respond more quickly to customer
requests and gives it greater availability of products, access to products and
improved pricing. The Company believes that as a focused distributor it has been
able to develop greater expertise in the products which it sells. The Company
places significant emphasis on market awareness and planning and actively shares
this knowledge with its customers in order to further enhance trading relations.
The Company strives to monitor and react quickly to market trends in order to
enable its multilingual sales team to maintain the highest levels of customer
service.
European Micro Holdings, Inc. was organized under the laws of the State
of Nevada and is the parent of Nor'easter and European Micro UK. Nor'easter was
organized under the laws of the State of Nevada on December 26, 1997 to serve as
an independent distributor of microcomputer products in the United States.
European Micro UK was organized under the laws of the United Kingdom in 1991 to
serve as an independent distributor to customers mainly in Western Europe and to
related parties in the United States. On January 31, 1998, European Micro
Holdings, Inc. acquired one hundred percent (100%) of the issued and outstanding
shares of ordinary stock of European Micro UK in consideration for the issuance
of 4,000,000 newly issued shares of common stock, par value $0.01 per share (the
"COMMON STOCK"), of European Micro Holdings, Inc. The 4,000,000 shares of Common
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Stock of European Micro Holdings, Inc. has been issued to the shareholders of
European Micro UK on a pro rata basis in accordance with such shareholders'
respective ownership interests in European Micro UK. As a result of the
exchange, the shareholders of European Micro UK together received all of the
issued and outstanding shares of Common Stock of European Micro Holdings, Inc.
prior to the consummation of its initial public offering. These shareholders
were John B. Gallagher, Harry D. Shields, Thomas H. Minkoff, as trustee of the
Gallagher Family Trust, and Stuart S. Southard and Robert H. True, as Trustees
of the 1997 Henry Daniel Shields Irrevocable Educational Trust. In addition,
European Micro UK became a wholly-owned subsidiary of European Micro Holdings,
Inc.
European Micro UK is the parent of European Micro GmbH (formerly known
as European Micro Computer Center GmbH) ("EUROPEAN MICRO GERMANY"). European
Micro Germany was organized under the laws of Germany in 1993 and operates as a
sales office in Dusseldorf, Germany. All products sold by European Micro Germany
are procured and shipped from the facilities of European Micro UK. European
Micro UK has a 50% joint venture interest in Big Blue Europe, B.V. ("BIG BLUE
EUROPE") which was formed in January 1997. Big Blue Europe was organized under
the laws of Holland and is a computer parts distributor with offices located
near Amsterdam, Holland. Selling primarily to computer maintenance companies,
Big Blue Europe has experienced growth in sales and the Company believes that
Big Blue Europe is positioned to participate in the relatively high margin parts
after-market industry. Big Blue Europe has no affiliation with International
Business Machines Corporation.
The following organizational chart summarizes the relationships among
European Micro Holdings, Inc., Nor'easter, European Micro UK, European Micro
Germany and Big Blue Europe.
EUROPEAN MICRO HOLDINGS, INC.
Miami, Florida, USA
100% 100%
NOR'EASTER EUROPEAN MICRO UK
Seabrook, New Hampshire, USA Manchester, England
Computer Hardware Distributor Computer Hardware Distributor
100% EUROPEAN MICRO GERMANY
Dusseldorf, Germany
Computer Hardware Distributor
50% BIG BLUE EUROPE
Amsterdam, Holland
Figures denote New and Used Computer Parts
ownership Distributor
European Micro Holdings, Inc. was formed in December 1997 to serve as a
holding company of the Subsidiaries. European Micro Holdings, Inc. does not have
any operations of its own. Its headquarters are located at 6073 N.W. 167th
Street, Unit C-25, Miami, Florida 33015, and its telephone number is (305)
825-2458.
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INDUSTRY
The microcomputer products industry has grown significantly in recent
years, primarily due to increasing worldwide demand for computer products and
the use of distribution channels by manufacturers for the distribution of
products. There are two traditional distribution channels in the microcomputer
industry: (i) those that sell directly to end-users ("RESELLERS") and (ii) those
that sell to resellers ("DISTRIBUTORS"). Distributors generally purchase a wide
range of products in bulk directly from manufacturers and then ship products in
smaller quantities to many different types of resellers, which typically include
dealers, value-added resellers, system integrators, mail order resellers,
computer products superstores and mass merchants. European Micro is an
independent distributor and generally does not purchase products directly from
manufacturers but purchases from other distributors.
European Micro operates in a fragmented industry, where little
information is available regarding its competitors and which the Company
believes is not dominated by one or a small number of competitors. As a result,
the Company's competitive position is not known or reasonably ascertainable.
Information is available, however, for other distributors of computer products,
although the Company does not compete directly with these companies. These
companies include: CHS Electronics, Inc.; Ingram Micro, Inc.; Inacom Corp.; and
Tech Data Corporation. For comparison purposes, these companies had reported in
recent filing with the Securities and Exchange Commission the following gross
margins. CHS Electronics, Inc. had a gross margin of 7.3% for the year ended
December 31, 1997. Ingram Micro, Inc. had a gross margin of 6.5% for the fiscal
year ended January 3, 1998. Inacom Corp. had a gross margin of 10.3% (including
margins earned from computer and communications services) for the fiscal year
ended December 27, 1997. Tech Data Corporation had a gross margin of 6.6% for
the fiscal year ended January 31, 1998. As discussed more fully in the
"Management's Discussion and Analysis of Financial Conditions and Results of
Operations," the Company had a gross margin of 12.9% in the fiscal year ended
June 30, 1998. There can be no assurance that the Company will be able to
maintain this level of gross margin in any future period.
The Company believes that the microcomputer products industry is
ideally suited for distributors because of the large number of fragmented
resellers in the industry. As a result, it is cost efficient for manufacturers
to outsource a portion of their distribution, credit, inventory, marketing and
customer support requirements to distributors. In addition, resellers
traditionally have not been able to efficiently establish direct purchasing
relationships with each manufacturer because of the large number of
manufacturers in the industry. Instead, resellers have traditionally relied on
distributors to satisfy a significant portion of their product, financing,
marketing and technical support needs. The Company believes that resellers rely
on distributors for inventory management and credit rather than stocking large
inventories themselves and maintaining credit lines to finance their working
capital needs. The Company believes the need for distributors in the
microcomputer industry will continue to grow. It also believes that more
manufacturers are using distributors as declining hardware prices, coupled with
rising selling costs, make it difficult for manufacturers to efficiently deal
directly with resellers.
STRATEGY
European Micro's objectives are to continue to strengthen its position
as a distributor of microcomputer products within Western Europe. It also
proposes to expand its operations into the United States, Asia, Eastern Europe,
and to a lesser extent, the Middle East and Africa. In attempting to achieve
these objectives, the Company intends to implement the following strategies:
GROWTH THROUGH START-UPS AND ACQUISITIONS. The Company hopes to expand
into new markets through a combination of start-up companies and acquisitions of
existing distributors, although there can be no assurance that any acquisitions
can be consummated on terms satisfactory to the Company. The Company expects to
seek acquisition candidates which have strong entrepreneurial management teams
with experience in the local markets and the potential to benefit from the
economies of scale that the Company could provide through its focused product
lines. The Company intends that any acquisitions will adopt its policies and
financial reporting procedures but operate as autonomous business units.
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In September 1998, European Micro UK agreed in principle to acquire all
of the issued and outstanding capital stock of Sunbelt (UK) Ltd., a company
registered in England and Wales ("SUNBELT"), from its shareholders, whereby
Sunbelt will become a wholly-owned subsidiary of European Micro UK. The
agreement is conditioned upon the parties negotiating and entering into a
definitive agreement. Sunbelt is an independent distributor of computer products
mainly in the United Kingdom. The shareholders of Sunbelt will receive cash and
newly-issued shares of common stock of European Micro Holdings, Inc. ("EMCC
SHARES"). The purchase price will be payable as follows: (i) a cash payment at
the closing equal to the sum of (a) the book value of Sunbelt on June 30, 1998,
plus (b) one and two-tenths (1.2) times the pre-tax earnings of Sunbelt for the
year ended June 30, 1998; (ii) a cash payment or the issuance of EMCC Shares (at
the Company's discretion) on or before December 31, 1999 equal to the sum of (a)
four-tenths (.4) times the pre-tax earnings of Sunbelt for the year ended June
30, 1998, plus (b) up to one (1) times the pre-tax earnings of Sunbelt for the
year ended June 30, 1998 (subject to the satisfaction of certain performance
criteria); and (iii) a cash payment or the issuance of EMCC Shares (at the
Company's discretion) on or before December 31, 2000 equal to the sum of (a)
four-tenths (.4) times the pre-tax earnings of Sunbelt for the year ended June
30, 1998, plus (b) up to one (1) times the pre-tax earnings of Sunbelt for the
year ended June 30, 1998 (subject to the satisfaction of certain performance
criteria).
FOCUSED DISTRIBUTION. European Micro's strategy is to operate as a
focused distributor by addressing each national market in which it operates with
a limited and select group of products from a limited and select group of high
quality manufacturers. The Company believes this strategy helps it achieve a
degree of strength within its chosen markets. The Company also believes that
this strategy will further enhance its relationships with both its suppliers and
customers. In addition, the Company intends to seek new products and suppliers
that will reflect the requirements of the marketplace while at the same time
remaining a focused distributor. The Company believes that this focused approach
also results in more effective asset management. Generally, because popular
products from leading manufacturers are in greater demand, the Company believes
that this results in more efficient inventory management by virtue of greater
inventory turns and, therefore, lower working capital requirements.
FURTHER DEVELOP NEW INTERNATIONAL MARKETS. European Micro has, to date,
focused its activities on the distribution of microcomputer products in Western
Europe and to related parties in the United States. However, the Company
believes that new opportunities are emerging in Asia and Eastern Europe, and to
a lesser extent, the Middle East and Africa as well as more mature markets such
as North America. The Company believes that its success in the culturally and
linguistically diverse markets of Western Europe will be advantageous to the
Company in expanding into new regions.
INTERNET PRODUCTS. European Micro plans to address directly the demand
for internet-oriented products. The Company has received distribution rights to
distribute firewall products manufactured by WatchGuard Technologies, Inc.
throughout Europe. The Company intends to seek to acquire distribution rights in
other internet oriented products and to enhance its technical capability by
recruiting qualified personnel.
PRODUCTS AND CUSTOMERS
European Micro's sales consist of hardware products such as personal
computers, memory modules, disc drives and networking products which are sold to
a customer base of more than 375 value-added resellers, corporate resellers,
retailers, direct marketers and distributors. The Company anticipates the
continued expansion of its customer database as the Premier Dealers Club and
Internet Services Division add new products and services. For the year ended
June 30, 1998, the Company's product mix by category was storage products
(approximately 60%), networking (approximately 11%), memory (approximately 11%),
system units (approximately 6%) and other (approximately 12%). For the year
ended June 30, 1998, the five best selling products accounted for 56% of
European Micro's net sales. These products generally have short life cycles as
technological obsolescence ensures that the end-user must constantly update
hardware for new technology. In order to reduce its exposure to obsolescence,
European Micro strives to achieve a continually high rate of inventory turnover.
European Micro purchases its products from distributors and other
suppliers in large quantities. As a focused distributor, the Company focuses on
a limited and select group of products from a limited and select group of high
quality manufacturers. As a result, the Company carries fewer individual
products from fewer
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manufacturers than the broadline distributors. The Company believes that this
policy enables it to better understand the products it sells and the
geographical areas in which it operates.
European Micro's customers typically rely on distributors as their
principal source of microcomputer products. The Company finances a significant
portion of its total sales on trade credit. In order to minimize the risk
associated with such credit, European Micro UK has sought to insure
substantially all of its accounts receivable. For the fiscal year ended June 30,
1997, no single customer accounted for more than approximately 8.5% of European
Micro's total net sales. For the fiscal year ended June 30, 1998, Technology
Express, Inc. ("TECHNOLOGY EXPRESS"), a company wholly-owned by Harry D.
Shields, Co-President, Co-Chairman and a Director of the Company, accounted for
17.2% of net sales. Other than Technology Express, the Company does not believe
the loss of any customer would have a material adverse effect on its business,
financial condition or results of operations. The Company's backlog orders is
not considered material to its business.
During the fiscal year ended June 30, 1998, European Micro set up an
Internet Services Division to address the demand for internet oriented products.
It also entered into a Master Distribution Agreement with WatchGuard
Technologies, Inc. to distribute its WatchGuard range of firewall products
throughout Europe. These products have enjoyed extensive press coverage in the
industry. European Micro intends to seek to acquire distribution rights in other
internet-oriented products and to enhance its technical capability by recruiting
qualified personnel.
The Company's operations involve a single industry segment, the
distribution of microcomputer products. Historically, the Company has operated
in one geographic area--the United Kingdom--and has exported products from the
United Kingdom to other European countries and to related parties in the United
States and Argentina. With the addition of Nor'Easter in the United States, the
Company expects its sales to third parties in the United States to increase. The
following table sets forth the Company's net sales for each of the last three
fiscal years attributable to its geographic area and the amount of export sales:
($ IN THOUSANDS)
YEAR ENDED JUNE 30,
<TABLE>
<CAPTION>
COUNTRY 1996 % 1997 % 1998 %
- -------- ---- - ---- - ---- -
<S> <C> <C> <C> <C> <C> <C>
Argentina $ -- 0.0% $90 0.2% $ -- 0.0%
Austria 49 0.1 -- 0.0 316 0.3
Belgium 450 1.1 1,496 3.2 1,568 1.4
Germany 11,305 28.0 8,282 17.7 13,476 12.1
Denmark 977 2.4 1,402 3.0 5,182 4.7
Spain 185 0.5 35 0.1 14 0.0
Finland 157 0.4 696 1.5 1,859 1.7
France 2,700 6.7 4,173 8.9 6,219 5.6
Great Britain 11,876 29.4 21,050 45.1 30,712 27.5
Ireland 126 0.3 642 1.4 1,132 1.0
Italy 7 0.0 26 0.1 58 0.0
Luxembourg 39 0.1 40 0.1 151 0.1
Netherlands 8,230 20.4 4,653 10.0 10,168 9.2
Portugal 507 1.3 71 0.2 105 0.1
Sweden 1,246 3.1 1,582 3.4 1,137 1.0
USA 436 1.1 64 0.1 30,999 27.8
Other 2,058 5.1 2,353 5.0 8,357 7.5
----- ----- ----- ----- ----- -----
Total Net Sales $40,348 100.0% $46,655 100.0% $111,453 100.0%
======= ====== ======= ====== ======== ======
</TABLE>
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The Company's net sales from operations outside the United States are
primarily denominated in currencies other than United States dollar.
Accordingly, the Company's operations outside the United States impose risks
upon its business as a result of exchange rate fluctuations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Currency Risk Management."
SOURCES OF SUPPLY
European Micro obtains its products from distributors and other
suppliers throughout the world in an attempt to obtain products at favorable
prices while also maintaining continuity of supply. The Company generally makes
its purchases based on the most favorable combination of prices, quantities and
product selection, and therefore its suppliers are constantly changing. Other
than Technology Express, the Company does not believe that the loss of any
single supplier would have a material adverse affect on its operations. For the
fiscal year ended June 30, 1998, the Company obtained 87.2% of its products from
ten suppliers (80.4% excluding Technology Express). For the fiscal year ended
June 30, 1997, the Company obtained 86.5% of its products from ten suppliers
(36.2% excluding Technology Express). The Company does not generally obtain
products directly from manufacturers and generally does not enter into any
long-term or distribution agreements with its suppliers (except for the Master
Distribution Agreement with WatchGuard Technologies, Inc.). In some cases
suppliers are also customers. Whenever possible, products are purchased with the
benefit of price protection so that the Company will receive a credit in the
event the price of a product is reduced by the manufacturer.
Suppliers deliver products against purchase orders tendered by European
Micro. The Company often requests specific delivery dates in its purchase orders
and lead times for delivery from suppliers are typically short. Delivery is,
however, subject to availability, and, while suppliers have no liability to the
Company for failure to meet a delivery date, orders may be canceled by the
Company where the terms of the order have not been met. From time to time the
Company experiences delivery delays and inventory shortages. The Company
believes that these delays and shortages are common to other distributors of
microcomputer products. The Company does not, like many of its competitors, rely
on a single contractual source of product supply.
Historically, European Micro has paid for a significant amount of
product on delivery, a practice which leads to lower prices and earlier delivery
dates. European Micro's suppliers have increased available credit commensurate
with its growth and the Company expects to continue to take advantage of credit
purchases.
Substantially all of the products purchased by European Micro are
trademarked or copyrighted products which may have been sold to distributors by
the manufacturers and resold to the Company. From time to time, trademark or
copyright owners and their licensees and trade associations have initiated
litigation or administrative agency proceedings seeking to halt the importation
of such products into many of the countries in which the Company operates. There
can be no assurance that future judicial, legislative or administrative agency
action in such countries, including possible import, export, tariff or other
trade restrictions, will not limit or eliminate some of the Company's sources of
supply or other business activities. In addition, there can be no assurance that
the Company's business activities will not become the subject of legal or
administrative actions brought by manufacturers, distributors or others based on
violations of trademark or copyright rights or other laws. Such judicial,
legislative, administrative or legal actions could have a material adverse
effect on the Company's business, financial condition and results of operations.
The Company sells products in the United States and expects to continue to do so
in the future. United States trademark and copyright owners and their licensees
and trade associations in other industries have initiated litigation or
administrative agency proceedings seeking to halt the importation into the
United States of foreign manufactured or previously exported trademarked or
copyrighted products. Such actions in the United States may prevent the Company
from selling products in the United States or, if, at that time, the Company is
already selling products in the United States, cease selling products in the
United States.
Recently, a trademark owner was successful in prohibiting the
importation of trademarked goods into the European Economic Area (the "EEA").
These trademarked goods had been sold by the trademark owner to a
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distributor located outside the EEA on the condition that such goods not be
imported into the EEA. The Company is in the process of evaluating whether this
decision will have any impact on the Company's business. Historically, the
Company has obtained a significant amount of its inventory from outside the EEA.
Any disruption of the Company's ability to source products from outside the EEA
will have a material adverse affect on the Company's business, financial
condition and results of operations.
SALES AND MARKETING
In order to address the individual customs, practices and business
conventions in the countries in which European Micro operates, the Company
employs a sales staff conversant in English, German, Spanish, Italian, French
and Dutch and with a general knowledge of the applicable markets. Oversight and
strategic direction are provided by senior management of the Company.
SALES. European Micro markets its products to distributors and
resellers, not end-users. As of June 30, 1998, the Company distributed products
to more than 375 value-added resellers, corporate resellers, retailers, direct
marketers and distributors. The Company's customers typically place orders with
a sales representative. The Company maintains detailed information regarding its
current inventory levels and pricing. The Company has historically experienced a
reduction in demand during the summer months. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Seasonality."
MARKETING. European Micro's marketing department monitors and evaluates
national market trends, price movements and changes in product specifications.
It is also responsible for developing and implementing the Company's advertising
programs. The marketing department routinely queries the Company's customer base
to ascertain how customers value its products, services, sales and support
compared to its competitors. The feedback allows the Company to constantly
tailor its business to its customers' needs. In 1996, European Micro introduced
the Premier Dealers Club to attract small and medium sized resellers by offering
them value-added procurement services that they were not enjoying from their
current broadline distributors. Members of the Premier Dealers Club agree to
purchase a target amount of products from the Company for a given period and
those members achieving such goals earn rebates. Members also enjoy priority
access to products in short supply, expedited shipment of orders, monthly
analysis of purchases and rebates earned, internet ordering, marketing
information and purchasing and outsourcing assistance.
COMPETITION
The Company operates in an industry which is characterized by intense
competition based on price, product availability and delivery times. Its
competitors include manufacturers and international distributors. Some
competitors have greater financial and administrative resources than the
Company. The Company believes availability of the right product at the right
price is the key element of competitiveness and attempts to differentiate itself
from its competitors by providing a select number of products from a few name
brand manufacturers and maintaining a sufficient inventory of such products.
Furthermore, the Company believes that it enhances its competitive position by
providing responsible and responsive customer service through its sales
personnel.
INTELLECTUAL PROPERTY
European Micro is attempting to build a brand name in the microcomputer
industry. To that end, European Micro has applied for trademark protection both
in the United Kingdom and within the European Community. The Company is
currently evaluating and will continue to evaluate the need to apply for
trademark protection in the United States and in other countries as the Company
expands. The following is a summary of the trademarks which the Company has
applied for and their current status:
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<TABLE>
<CAPTION>
TRADEMARK CLASS(1) NO. APPLICANT DATE OF FILING COMMENTS
- --------- -------- --- --------- -------------- --------
<S> <C> <C> <C> <C> <C>
European Micro 9 438689 European Micro UK 12-23-96 Community
Trademark
application
European Micro Plc & Logo 9 2119204 European Micro UK 12-20-96 U.K. Trademark
granted
Premier Dealers Club & 9 2152310 European Micro UK 11-29-97 U.K. Trademark
Logo application
Premier Dealers Club & 9 695072 European Micro UK 12-1-97 Community
Logo Trademark
application
</TABLE>
- ---------------------
(1) Class 9 covers computer software, computer peripherals, parts and
accessories for all such goods.
EMPLOYEES
On September 1, 1998, European Micro UK had thirty-three full-time
employees in the United Kingdom. European Micro Germany had four full-time
employees in Germany. Nor'easter had four full-time employees in the United
States. Big Blue Europe had eighteen full-time employees in Holland. European
Micro Holdings, Inc. had four employees in the United States. Of the total
number of full-time employees, twenty-eight work in marketing and sales, nine
work in warehousing and delivery and twenty-six are employed in administrative
and other support positions. None of the Company's employees are represented by
unions. There has been no disruption of operations due to a labor dispute.
Management considers its relations with its employees to be good.
RESEARCH AND DEVELOPMENT
The Company has not incurred material expenditures on research and
development during any of the last three fiscal years.
ENVIRONMENTAL REGULATION
The Company did not make any material expenditures in the fiscal year
ended June 30, 1998 in complying with applicable environmental regulations. The
Company believes that compliance with applicable environmental regulations will
not require any material capital expenditures in fiscal 1999.
CERTAIN BUSINESS RISK FACTORS
The Company is subject to various risks which may have a material
adverse affect on its business, financial condition and results of operations.
Certain risks are discussed below:
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NO CONTRACTS OR DISTRIBUTION AGREEMENTS WITH SUPPLIERS
The Company is an independent distributor of personal computers and
related products. With only one exception, the Company has not entered and does
not expect to enter into any long-term distribution arrangements with its
suppliers. Rather, the Company depends almost entirely on the availability of
product in the surplus or aftermarket. The microcomputer products industry is
characterized by periods of severe product shortages and customer backlog due to
suppliers' difficulty in projecting demand. There can be no assurance that
suppliers will be able to maintain an adequate supply of products which will
adequately fulfill all of the Company's customer orders on a timely basis.
Failure to obtain adequate product in required quantities would have a material
adverse affect on the Company's business, financial condition and results of
operations. Moreover, because the Company does not utilize supplier contracts,
it does not enjoy the traditional benefits that they provide, such as inventory
price protection, market development funds or payment terms.
RELATED PARTY PURCHASES AND SALES
Since its formation in 1991, the Company has belonged to a group of
related companies called the Micro Computer Center Group (the "GROUP"). The
Group is comprised of European Micro, Technology Express in Nashville,
Tennessee, American Surgical Supply Corp. d/b/a American Micro Computer Center
in Miami, Florida ("AMERICAN MICRO COMPUTER CENTER") and, until August 1, 1997,
Ameritech Exports Inc. in Miami, Florida ("AMERITECH EXPORTS") and Ameritech
Argentina S.A. in Buenos Aires, Argentina ("AMERITECH ARGENTINA"). Harry D.
Shields is the sole owner of Technology Express and, until August 1, 1997, had
an ownership interest in Ameritech Exports and Ameritech Argentina. John B.
Gallagher has a minority ownership interest in American Micro Computer Center
and, until August 1, 1997, had an ownership interest in Ameritech Exports and
Ameritect Argentina. In order to facilitate fast and efficient international
transactions, each member of the Group has acted as a supplier for, and
purchaser from, the other members of the Group. Such factors as country supply,
currency fluctuation and manufacturer's geographic pricing strategy lead to a
constantly changing model where purchases and sales to other members of the
Group depend on the then current economic balance. The Group has attempted to
price inter-Group sales at one percent above the selling Group member's cost,
although the Group has made numerous exceptions in times of short supply, to
cover assembly costs and to reward certain Group members for exceptional
low-cost purchases. This low mark-up has enabled each Group member to buy
product quickly and efficiently in the others' primary territories and to take
advantage of quantity purchasing, financing and logistics of the other members
of the Group. Additionally, the Company has paid certain management and
consulting fees to the other members of the Group. The amount of these fees is
set forth in the "Certain Relationships and Related Transactions" section of
this filing.
The following table describes the inter-Group sales and purchases for
the time periods specified:
<TABLE>
<CAPTION>
($ IN THOUSANDS)
YEAR ENDED JUNE 30,
1996 1997 1998
---------------- ------------- -------------
<S> <C> <C> <C>
SALES TO GROUP MEMBERS
American Micro Computer Center $306 66 $9,875
Technology Express 104 (2) 19,217
Ameritech Argentina - 90 --
Ameritech Exports 26 - --
---------------- ------------- -------------
$436 154 $29,092
================ ============= =============
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
($ IN THOUSANDS)
YEAR ENDED JUNE 30,
1996 1997 1998
---------------- ------------- -------------
<S> <C> <C> <C>
PURCHASES FROM GROUP MEMBERS
American Micro Computer Center $2,289 1,092 $507
Technology Express 14,890 20,717 8,749
Ameritech Argentina - - --
Ameritech Exports 1,116 848 --
================ ============= =============
$18,295 22,657 $9,256
================ ============= =============
</TABLE>
None of the members of the Group are under any legal obligation to
continue to act as a supplier for or purchaser from the other members of the
Group. Any member of the Group could at its sole discretion terminate its
relationship with the other members of the Group. In the event that the Company
were unable to purchase product from the United States members of the Group in
accordance with the inter-Group pricing structure, the Company's margins would
be significantly reduced and its business, financial condition and results of
operations would be materially adversely affected. Moreover, in the event the
Company is unable to sell product to other members of the Group, the Company's
revenues will be significantly reduced and its business, financial condition and
results of operations will be materially adversely affected.
The Group pricing structure is subject to review by the applicable
taxing agency, including the Internal Revenue Service in the United States and
Inland Revenue in the United Kingdom. An adverse decision by any such taxing
agency with respect to the inter-Group pricing structure could result in the
imposition of additional income taxes, interest or penalties. This would have a
material adverse affect on the Company's business, financial condition and
results of operations.
RISKS ASSOCIATED WITH INTERNATIONAL SALES
European Micro's existing and planned international operations are
subject to political and economic uncertainties, including, without limitation,
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,
governmental challenges to the Company's tax strategies, hostilities and
confiscation or nationalization of property. The Company's expected expansion
into certain markets, such as Asia and Eastern Europe where, among other things,
the financial, economic, legal systems and infrastructures are less developed,
poses a greater degree of these and other risks than the Company's current
business operations in Western Europe and the United States. A material increase
in the risks posed by these and other considerations could have a material
adverse affect on the Company's business, financial condition and results of
operations.
RISK OF CURRENCY FLUCTUATIONS
With the exception of the fiscal year ended June 30, 1998, a
significant amount of European Micro's sales has historically been to customers
outside of the United States. A majority of the Company's sales were denominated
in currencies other than the United States dollar. 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 and cash position. When possible, the Company engages in currency
hedging transactions primarily through the purchase and sale of forward exchange
contracts intended to reduce these risks. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Currency Risk
Management." There can be no assurance that fluctuations in foreign currency
rates will not have a material adverse affect on the Company's business,
financial condition and results of operations.
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<PAGE>
DEPENDENCE ON KEY PERSONNEL
The Company's success to date has been significantly dependent on the
contributions of John B. Gallagher and Harry D. Shields, the founders of the
Company. The loss of the services of either person would have a material adverse
affect on the Company's business, financial condition and results of operations.
The Company's success also depends to a significant extent upon a number of its
other key employees, and the loss of the services of one or more other key
employees could also have a material adverse affect on the Company. The COMPANY
has key-man life insurance policies with respect to these key employees. In
addition, the Company believes that its future success will depend in part upon
its ability to attract and retain additional highly-skilled professional,
managerial, sales and marketing personnel. Competition for such personnel is
intense. There can be no assurance that the Company will be successful in
attracting, training and retaining the personnel that it requires for its
business and planned growth, and the failure to do so could have a material
adverse affect on the Company's business, financial condition and results of
operations.
RELIANCE ON KEY SUPPLIERS
European Micro does not manufacture any of its own products but rather
resells products purchased from suppliers. For the year ended June 30, 1998, the
Company obtained 87.2% of its products from ten suppliers (80.4% excluding
Technology Express). Accordingly, the Company is highly dependent upon such
suppliers and the loss of Technology Express or the loss of a combination of
suppliers would have a material adverse affect on the Company's business,
financial condition and results of operations.
RELIANCE ON KEY PRODUCTS
For the fiscal year ended June 30, 1998, the Company's five best
selling products accounted for 66.8% of its net sales. Accordingly, the
inability of the Company to obtain adequate supplies of products would have a
material adverse affect on the Company's business, financial condition and
results of operations.
RELIANCE ON KEY CUSTOMERS
For the fiscal year ended June 30, 1998, European Micro's twenty
largest customers (excluding sales to any member of the Group) accounted for
48.4% of the Company's net sales. None of these customers individually accounted
for more than 4.1% of such net sales. However, the Company is highly dependent
upon such customers and the loss of Technology Express or any other such
customer or customers could have a material adverse affect on the Company's
business, financial condition and results of operations.
RELIANCE ON KEY MARKETS
Certain markets within which the Company operates represent a high
percentage of its total operating earnings and net sales. For example,
approximately 27.5% of net sales were attributable to the markets of the United
Kingdom for the year ended June 30, 1998. Decreases in the volume of sales in
such regions or declines in operating margins could have a material adverse
affect on the Company's business, financial condition or results of operations.
CONTROL BY MANAGEMENT
John B. Gallagher and Harry D. Shields together beneficially own
approximately 71% of the outstanding shares of Common Stock of the Company. As a
result, these shareholders, acting together, have the voting power required to
approve all matters requiring approval by the Company's shareholders, including
the election of directors of the Company, transactions involving the potential
sale or merger of the Company, the issuance of additional equity, warrants or
options or the incurrence of significant indebtedness. Moreover, two trusts (the
"TRUST SHAREHOLDERS") created by Messrs. Gallagher and Shields together
beneficially own approximately 10% of the outstanding shares of Common Stock of
the Company. Pursuant to a Trusteed Shareholders Cross-Purchase Agreement dated
January 31, 1998 (the "SHAREHOLDERS AGREEMENT"), Messrs. Gallagher and Shields
agreed to vote
12
<PAGE>
all shares of Common Stock owned or controlled by them together on all matters
submitted to a vote of the shareholders of the Company, including the election
of directors. In the event that Messrs. Gallagher and Shields cannot agree on
the manner in which to vote their respective shares, then neither may vote his
shares. In addition, the Trust Shareholders have agreed to vote all shares of
Common Stock owned or controlled by them together on all matters submitted to a
vote of the shareholders of the Company, including the election of directors. In
the event that the Trust Shareholders cannot agree on the manner in which to
vote their respective shares, neither Trust Shareholder may vote its shares.
INABILITY TO MAINTAIN PROFIT MARGINS
As a result of intense price competition in the microcomputer products
industry, European Micro has had, and expects to continue to have, narrow gross
profit and operating profit margins. These narrow margins magnify the impact on
operating results of variations in sales and operating costs. The Company's
gross margins have declined from 14.2% for the fiscal year ended 1995 to 11% for
the fiscal year 1996, but have climbed to 11.4% and 12.9% in fiscal years 1997
and 1998 respectively. Also, operating margins have declined from 5.5% for the
fiscal year ended 1995 to 3.7% for the fiscal year 1996, but have climbed to
4.4% and 6.5% in fiscal years 1997 and 1998 respectively. The Company has taken
a number of steps intended to address the computer industry's declining margins
including improving and enhancing its information systems and by increasing
sales and reducing operating expenses as a percentage of sales. Even though the
Company has improved the margin percentages over the last two years, there can
be no assurance that the Company will maintain or increase sales or further
reduce operating expenses as a percentage of sales in the future. Moreover,
there can be no assurance that these steps will prevent these margins from
continuing to decline. Future gross profit margins may be adversely affected by
changes in product mix, manufacturer pricing actions and competitive and
economic pressures. While the Company will continue to explore ways to improve
gross margins and reduce operating expenses as a percentage of sales, there can
be no assurance that the Company will be successful in such efforts or that the
Company's margins will not decline in the future. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
CUSTOMER CREDIT EXPOSURE
European Micro sells its products and services to a customer base of
more than 375 value-added resellers, corporate resellers, retailers, direct
marketers and distributors. The Company finances a significant portion of such
sales by extending trade credit. As a result, the Company's business could be
adversely affected in the event of the deterioration of the financial condition
of its customers, resulting in the customers' inability to repay the Company. In
order to minimize the risk associated with such credit, European Micro UK has
sought to insure substantially all of its accounts receivable. No assurances can
be given that European Micro UK will maintain such insurance or, if such
insurance is maintained, that it will be maintained in an amount equal to the
aggregate amount of credit extended by European Micro UK. In addition, no
assurances can be given that such insurance will be available in the future on
terms acceptable to European Micro UK, if at all. Moreover, the deterioration of
the financial condition of one or more of its customers may make future sales to
such customers uninsurable.
ABILITY TO INSURE INVENTORY AGAINST THEFT
The Company experienced several thefts of inventory in 1997. The
Company insures its inventory against theft and other damage up to a maximum of
the higher of $8,900,000 or the carrying value of the inventory. On June 30,
1998, the carrying value was $1,715,000 and the maximum coverage was $8,900,000.
See "Note 6 of the Notes to Financial Statements." There can be no assurance
that such insurance coverage will adequately compensate the Company for all
losses incurred as a result of theft or other casualty and there can be no
assurance that the Company will be able to find replacement coverage if such
coverage terminates or is otherwise canceled. There can be no assurance that
such coverage will remain available and, if available, at affordable rates. A
loss in excess of the Company's coverage or for which coverage is not available
could have a material adverse affect on the Company's business, financial
condition and results of operations.
13
<PAGE>
RISKS ASSOCIATED WITH ACQUISITIONS
In September 1998, European Micro UK agreed in principle to acquire all
of the issued and outstanding capital stock of Sunbelt, from its shareholders,
whereby Sunbelt will become a wholly-owned subsidiary of European Micro UK. The
agreement is conditioned upon the parties negotiating and entering into a
definitive agreement. The shareholders of Sunbelt will receive cash and EMCC
Shares. The purchase price will be payable as follows: (i) a cash payment at the
closing equal to the sum of (a) the book value of Sunbelt on June 30, 1998, plus
(b) one and two-tenths (1.2) times the pre-tax earnings of Sunbelt for the year
ended June 30, 1998; (ii) a cash payment or the issuance of EMCC Shares (at the
Company's discretion) on or before December 31, 1999 equal to the sum of (a)
four-tenths (.4) times the pre-tax earnings of Sunbelt for the year ended June
30, 1998, plus (b) up to one (1) times the pre-tax earnings of Sunbelt for the
year ended June 30, 1998 (subject to the satisfaction of certain performance
criteria); and (iii) a cash payment or the issuance of EMCC Shares (at the
Company's discretion) on or before December 31, 2000 equal to the sum of (a)
four-tenths (.4) times the pre-tax earnings of Sunbelt for the year ended June
30, 1998, plus (b) up to one (1) times the pre-tax earnings of Sunbelt for the
year ended June 30, 1998 (subject to the satisfaction of certain additional
performance criteria).
European Micro may use a portion of the net proceeds from its initial
public offering for acquisitions of other companies' assets or product lines
that the Company believes would complement or expand its existing business,
including the acquisition of Sunbelt. 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 difficulty of assimilation of the
operations and personnel of the acquired companies; (iii) the amortization of
acquired intangible assets; (iv) the assumption of potential liabilities,
disclosed or undisclosed, associated with the businesses acquired, which may
exceed the amount of indemnification available from the seller, if any; (v) the
risk that the financial and accounting systems utilized by the businesses
acquired will not meet the Company's standards; (vi) the risk that the
businesses acquired will not maintain the quality of services that the Company
has historically provided; (vii) the dilutive effect of the use of the Company's
Common Stock as consideration for acquisitions; and (viii) the inability to
attract and retain qualified local management. There can be no assurance that
the Company will be able to consummate any future acquisitions on satisfactory
terms (including, without limitation, the acquisition of Sunbelt), if at all,
that adequate financing will be available on terms acceptable to the Company,
that any acquired operations will be successfully integrated or that such
operations will ultimately have a positive impact on the Company's business,
financial condition and results of operations.
TRADE RESTRICTIONS ON CROSS-BORDER SALES
Substantially all of the products purchased by European Micro are
trademarked or copyrighted products which may have been sold to distributors by
the manufacturers and resold to the Company. From time to time, trademark or
copyright owners and their licensees and trade associations have initiated
litigation or administrative agency proceedings seeking to halt the importation
of such products into many of the countries in which the Company operates. There
can be no assurance that future judicial, legislative or administrative agency
action in such countries, including possible import, export, tariff or other
trade restrictions, will not limit or eliminate some of the Company's secondary
sources of supply or other business activities. In addition, there can be no
assurance that the Company's business activities will not become the subject of
legal or administrative actions brought by manufacturers, distributors or others
based on violations of trademark or copyright rights or other laws. Such
judicial, legislative, administrative or legal actions could have a material
adverse affect on the Company's business, financial condition and results of
operations. The Company sells products in the United States and expects to
continue to do so in the future. United States trademark and copyright owners
and their licensees and trade associations in other industries have initiated
litigation or administrative agency proceedings seeking to halt the importation
into the United States of foreign manufactured or previously exported
trademarked or copyrighted products. Such actions in the United States may
prevent the Company from selling products in the United States or, if, at that
time, the Company is already selling products in the United States, cause the
Company to cease selling products in the United States. Recently, a trademark
owner was successful in prohibiting the importation of trademarked goods into
the European Economic Area (the "EEA"). These trademarked goods had been sold by
the trademark owner to a distributor located outside the EEA on the condition
that such goods not be imported into the EEA. The Company is in the process of
evaluating whether this decision will have any impact on the Company's
14
<PAGE>
business. Historically, the Company has obtained a significant amount of its
inventory from outside the EEA. Any disruption of the Company's ability to
source products from outside the EEA will have a material adverse affect on the
Company's business, financial condition and results of operations. See "Business
- - Sources of Supply."
MANAGEMENT OF GROWTH
The rapid growth of the Company's business has required the Company to
make significant additions in personnel and has significantly increased its
working capital requirements. Such growth has resulted in new and increased
responsibilities for management personnel and has placed and continues to place
a significant strain upon the Company's management, operating and financial
systems and other resources. There can be no assurance that the strain placed
upon the Company's management, operating and financial systems and other
resources will not have a material adverse affect on the Company's business,
financial condition and results of operations, nor can there be any assurance
that the Company will be able to attract or retain sufficient personnel to
continue the planned expansion of its operations. Also crucial to the Company's
success in managing its growth will be its ability to achieve economies of
scale, such as enhanced purchasing power, the ability to purchase a higher
percentage of product on credit and the ability to obtain product which the
Company might not otherwise be able to obtain. There can be no assurance that
the Company will be able to achieve such economies of scale, and the failure to
do so could have a material adverse affect on the Company's business, financial
condition and results of operations. Although the Company has experienced
significant sales growth, such growth may not be indicative of future sales
growth.
To manage the expansion of its operations, the Company must
continuously evaluate the adequacy of its management structure and its existing
systems and procedures, including, without limitation, its data processing,
financial and internal control systems. When entering new geographic markets,
the Company will be required to implement its policies and financial reporting
procedures, recruit personnel, and adapt its distribution systems to varying
cultural, economic and governmental systems. There can be no assurance that
management will adequately anticipate all of the changing demands that growth
could impose on the Company's systems, procedures, and structure. In addition,
the Company will be required to react to changes in its industry, and there can
be no assurance that it will be able to do so successfully or at all. Any
failure to adequately anticipate and respond to such changing demands may have a
material adverse affect on the Company's business, financial condition and
results of operations.
RISKS ASSOCIATED WITH HOLDING FOREIGN SUBSIDIARIES
All of the operations of European Micro Holdings, Inc. are and will be
conducted through its direct or indirect subsidiaries, some of which are formed
outside of the United States. European Micro Holdings, Inc.'s available cash
will depend upon the cash flow of its Subsidiaries and the ability of those
Subsidiaries to make funds available to European Micro Holdings, Inc. in the
form of loans, dividends, intercompany advances, management fees or otherwise.
The Subsidiaries are separate and distinct legal entities and, except for the
payment of management fees, have no obligation, contingent or otherwise, to make
funds available to European Micro Holdings, Inc., whether in the form of loans,
dividends, intercompany advances or otherwise. The applicable law in certain
countries may limit the ability of the Company's foreign Subsidiaries to pay
dividends in the absence of sufficient withholding taxes, distributable reserves
or for other reasons. None of European Micro Holdings, Inc.'s current
Subsidiaries are subject to any currency exchange controls. However, future
exchange controls, or the existence of such controls in other countries in which
European Micro Holdings, Inc. establishes or acquires subsidiaries, could limit
or restrict the ability of European Micro Holdings, Inc. to obtain loans,
dividends, intercompany advances or otherwise access the financial resources of
such subsidiaries. In addition, the Subsidiaries may from time to time in the
future become parties to financing arrangements, which may contain limitations
on the ability of such Subsidiaries to pay dividends or to make loans or
advances to European Micro Holdings, Inc. In the event of any insolvency,
bankruptcy or similar proceedings, creditors of the Subsidiaries would generally
be entitled to priority over European Micro Holdings, Inc. with respect to
assets of the affected Subsidiaries.
15
<PAGE>
AVAILABLE CAPITAL FOR OBTAINING PRODUCTS IN BULK
The Company's business often requires the volume buying of discounted
products. This requires the Company to have sufficient available cash or
financing to be able to take advantage of such discounted prices on a timely
basis. There can be no assurance that the Company will continue to have
available cash or financing. A shortage of available cash or financing may
prevent the Company from being able to purchase inventory at favorable prices
and therefore have a material adverse affect on the Company's business,
financial condition and results of operations.
NEED FOR ADDITIONAL CAPITAL
European Micro has historically grown through internal expansion, which
has resulted in the need for significant amounts of capital or financing which
often has been provided by the Company's founding shareholders. To maintain
historical levels of growth, European Micro may need to seek additional funding
through a secondary public offering or private financing and may, when
attractive sources of capital become available, elect to obtain capital in
anticipation of such needs. There can be no assurances that the founding
shareholders will continue to extend credit to the Company. Adequate funds may
not be available when needed or may not be available on terms favorable to
European Micro. If additional funds are raised by issuing equity securities,
dilution to existing shareholders may result. If funding is insufficient, the
Company may be required to delay, reduce the scope of or eliminate some or all
of its expansion plans.
RISK OF INDEBTEDNESS
The Company may incur substantial amounts of indebtedness in its
operations. In such event, European Micro would dedicate an increasing portion
of its cash flow to servicing such indebtedness, thereby exposing it to the
risks inherent in a highly leveraged company, including, among other things,
interest rate and default risks. An increase in interest rates charged by
lending institutions will increase the cost of servicing the Company's
indebtedness as well as increase the cost of financing future acquisitions.
Additionally, the Company anticipates that such indebtedness will be secured by
liens on the Company's assets, and a default on such indebtedness may result in
the Company's lenders foreclosing such liens. The occurrence of any of these
things could have a material adverse affect on the Company's business, financial
condition and results of operations. Loan agreements also typically impose
substantial restrictions on borrowers and normally require strict compliance
with certain financial ratios and other criteria, all of which may significantly
restrict the Company's business or financial flexibility and have a material
adverse affect on the Company's business and financial condition. If funding is
insufficient, European Micro may be required to delay, reduce the scope of or
eliminate some or all of its expansion plans. This would have a material adverse
affect of the Company's business, financial condition and results of operations.
VARIABILITY OF CUSTOMER REQUIREMENTS
The level and timing of orders placed by European Micro's customers
vary due to a number of factors, including customer attempts to manage
inventory, changes in customers' business strategies and variations in demand
for products. European Micro 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. European Micro does not have long term
contracts with its customers. As such, nothing would prohibit European Micro's
customers from reducing or eliminating their orders with European Micro which
would result in a decrease in sales and an increase in inventory carrying costs
and obsolescence. Any significant reduction in customer orders could have a
material adverse affect on European Micro's business, financial condition and
results of operations.
COMPETITION
European Micro operates in a highly competitive environment. The
computer wholesale distribution industry is characterized by intense
competition, based primarily on product availability, credit availability,
price, speed of delivery, quality and range of product lines, service and
support. Certain of European Micro's
16
<PAGE>
competitors have greater financial, marketing, service and technical support
resources than European Micro and may sell products at prices below those
charged by European Micro. There can be no assurance that European Micro's
resources will be sufficient to allow European Micro to compete effectively in
the future. Continued increases in competition could have a material adverse
affect on European Micro's business, financial condition and results of
operations due to, among other things, potential price reductions and potential
loss of market share.
FLUCTUATIONS IN QUARTERLY RESULTS
European Micro's quarterly net sales and operating results have varied
significantly in the past and will likely continue to do so in the future as a
result of such factors as seasonal variations in the demand for the products and
services offered by the Company, the introduction of new hardware and software
technologies and products offering improved features and functionality, the
introduction of new products and services by the Company and its competitors,
the loss or consolidation of a significant supplier or customer, changes in the
level of operating expenses, inventory adjustments, product supply constraints,
competitive conditions including pricing, interest rate fluctuations, the impact
of acquisitions, currency fluctuations and general economic conditions.
Specific historical seasonal variations in European Micro's operating
results have included a reduction in demand in Europe during the summer months
and changes in the product cycle of major products. European Micro may be unable
to adjust spending sufficiently in a timely manner to compensate for any
unexpected sales shortfall, which could materially adversely affect quarterly
operating results. Accordingly, European Micro believes that period-to-period
comparisons of its operating results should not be relied upon as an indication
of future performance. In addition, the results of any quarterly period are not
indicative of results to be expected for a full fiscal year. In certain future
quarters, European Micro's operating results may be below the expectations of
public market analysts or investors. In such event, the market price of the
Common Stock would be materially adversely affected.
EFFECTS OF TECHNOLOGICAL CHANGE
The products sold by European Micro are characterized by rapidly
changing technology, frequent new product introductions and evolving industry
standards that can render the products marketed by European Micro obsolete or
unmarketable in a relatively short period of time. Although it is the policy of
most manufacturers of microcomputer products to protect distributors in the form
of price protection and/or stock rotation, the nature of European Micro's
business does not allow it to enjoy those benefits. See "Business Risk Factors -
No Contracts or Distribution Agreements with Suppliers." European Micro'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.
ANTI-TAKEOVER CONSIDERATIONS
The Company's Board of Directors has the authority to issue up to
1,000,000 shares of preferred stock in one or more series and to fix the powers,
designations, preferences and relative rights thereof without any further vote
or action by the Company's shareholders. The issuance of preferred stock could
dilute the voting power of holders of Common Stock and could have the effect of
delaying, deferring or preventing a change in control of the Company. The
Company's Articles of Incorporation provide that the holders of a majority of
the preferred stock, voting separately from the holders of the Common Stock,
must approve certain transactions. The Company's Board of Directors has been
divided into three equal size classes serving staggered three-year terms. See
"Management - Directors." Therefore, any shareholder (other than Messrs.
Gallagher and Shields) interested in gaining control of the Company will be
precluded from electing a majority of directors in any single year. Certain
change of control transactions such as mergers, share exchange or sale of
substantially all of the assets of the Company require an affirmative vote of a
majority of the holders of the Company's Common Stock and a majority of the
holders of the Company's preferred stock.
In addition, Messrs. Gallagher and Shields together control
approximately 71% (81% if the Shares of the Trust Shareholders are included
although Messrs. Gallagher and Shields do not have voting power with respect to
17
<PAGE>
the shares held by the Trust Shareholders) of the outstanding shares of Common
Stock and the voting power of these shareholders could have the effect of
delaying or preventing a change in control of European Micro. These, and certain
other provisions of the Company's Articles of Incorporation and Bylaws, as well
as Nevada law, may operate in a manner that could discourage or render more
difficult a takeover of the Company or the removal of management or the Board of
Directors.
FOREIGN CORRUPT PRACTICES ACT
The Company, like other companies operating internationally, is subject
to the United States Foreign Corrupt Practices Act ("FCPA") and other laws which
prohibit improper payments to foreign governments and their officials by United
States and other business entities. The FCPA also requires companies to maintain
accurate record keeping and systems of internal control to ensure that funds are
not misappropriated. The Company's operations in certain countries create the
risk of an unauthorized payment by an employee or agent of the Company which
would be in violation of such laws, including the FCPA. Violations of the FCPA
or these other laws may result in severe criminal penalties against the Company
and its officers and directors which could have a material adverse affect on the
Company's business, financial condition and results of operations.
NO ANTICIPATION OF DIVIDENDS
European Micro anticipates that for the foreseeable future, earnings,
if any, will be retained for the development of its business and will not be
distributed to shareholders as dividends. The declaration and payment of
dividends, if any, by European Micro at some future time will depend upon
European Micro's results of operations, financial condition, cash requirements,
future prospects, limitations imposed by credit agreements or senior securities
and any other factors deemed relevant by European Micro's Board of Directors.
The declaration and payment of dividends, if at all, by European Micro will be
at the discretion of the Board of Directors. See "Dividend Policy."
IMPACT OF THE EUROPEAN MONETARY UNION
European monetary union is scheduled to commence in 1999, when certain
European countries will adopt a single European currency called the "Euro."
Substantially all of the countries in which the Company currently conducts
business (except for the United States) will be affected by the European
monetary union and the Euro. The Company cannot predict the impact which the
European monetary union or the Euro will have on the Company. Either the
European monetary union or the Euro may have a material adverse affect on the
Company's business, financial condition or results of operations.
LABOR RELATIONS
European Micro's labor force is not unionized. European Micro, however,
does business in certain foreign countries where labor disruption is more common
than in the United States. The majority of the freight carriers used by European
Micro are unionized. A labor strike by one of European Micro's freight carriers
or vendors, a general strike by civil service employees, a governmental shutdown
or any type of labor disruption could have a material adverse affect on European
Micro's business, financial condition and results of operation.
ITEM 2. PROPERTIES.
The corporate headquarters of European Micro Holdings, Inc. is located
in Miami, Florida. Approximately 350 square feet is dedicated to management
offices. European Micro UK operates primarily from facilities located in
Manchester, England. Approximately 4,400 square feet of the facilities in
Manchester are allocated to offices, including management, sales and
administrative areas and the remaining 8,000 square feet is warehousing space.
18
<PAGE>
European Micro's facilities are described below:
<TABLE>
<CAPTION>
LOCATION SQUARE FEET LEASE EXPIRATION
-------- ----------- ----------------
<S> <C> <C>
Manchester (warehouse)(1) 8,000 2012
Manchester (offices)(1) 4,400 2002
Germany (offices)(2) 1,360 2004
Netherlands (offices and warehouse)(3) 18,000 2002
Miami, Florida (offices)(4) 350 --
Seabrook, New Hampshire (offices and
warehouse)(5) 2,300 1998
</TABLE>
-------------
(1) European Micro UK
(2) European Micro Germany
(3) Big Blue Europe 50% Joint Venture
(4) European Micro Holdings, Inc.
(5) Nor'easter
The office in Germany is a sales office with no warehousing facility.
All products are shipped from the Manchester facility directly to the customer.
European Micro considers its existing facilities to be adequate for its
foreseeable needs.
ITEM 3. LEGAL PROCEEDINGS.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's shares of Common Stock began trading on the Nasdaq
National Market on June 12, 1998, under the symbol "EMCC." The Company's high
and low stock prices by quarter during 1998 are presented as follows:
1998(1)
HIGH LOW
---- ---
First quarter n/a n/a
Second quarter n/a n/a
Third quarter n/a n/a
Fourth quarter $11.875 $4.75
-----------------------
(1) The Company was not listed on any national exchange or
inter-dealer quotation system until June 12, 1998, subsequent to the
close of its initial public offering. Therefore, the stock prices
for the quarter ended June 30, 1998 reflect approximately 12 trading
days.
On September 28, 1998, the Company had approximately nine shareholders
of record. The Company believes that it has in excess of 400 beneficial owners.
19
<PAGE>
DIVIDENDS
On February 9, 1998, the Company declared and paid a cash dividend of
$550,000 or $0.1375 per share of Common Stock. During the fiscal year ended June
30, 1997, European Micro declared and paid a cash dividend of $562,000 or $0.14
per share of Common Stock. The dividends per share were calculated based on
4,000,000 shares of Common Stock outstanding. These dividends were declared and
paid prior to the Company's initial public offering. The Company currently
intends to retain future earnings to fund its operations and does not expect
such earnings to be distributed in the future to shareholders as dividends. The
declaration and payment by European Micro of any future dividends and the amount
thereof will depend upon European Micro's results of operations, financial
condition, cash requirements, future prospects, limitations imposed by credit
agreements or senior securities and other factors deemed relevant by the Board
of Directors. The declaration and payment of dividends, if at all, by European
Micro will be at the discretion of the Board of Directors.
RECENT SALES OF UNREGISTERED SECURITIES
On January 31, 1998, the Company issued an aggregate of 4,000,000
shares of Common Stock to John B. Gallagher (1,900,000 shares), Harry D. Shields
(1,602,696 shares), Thomas H. Minkoff, as Trustee of the Gallagher Family Trust
(100,000 shares) and Stuart S. Southard and Robert H. True, Trustees of the 1997
Henry Daniel Shields Irrevocable Educational Trust (397,304 shares) in exchange
for all of their shares of ordinary stock of European Micro UK pursuant to an
exemption from registration under Section 4(2) of the Securities Act of 1933, as
amended (the "SECURITIES ACT"), and Rule 701 promulgated under the Securities
Act. No commissions or other remuneration was paid in connection with the
above-described issuance of securities.
On May 7, 1998, the Company granted to employees and consultants of the
Company or its Subsidiaries and to other persons instrumental to the success of
the Company options to purchase an aggregate of 294,000 shares of Common Stock
of the Company at an exercise price of $10.00 per share of Common Stock. Of the
options granted, 45,000 options become exercisable on May 6, 1999, and an
additional 62,250 options become exercisable on each of May 6, 2001, 2002, 2003
and 2004. These options were granted pursuant to an exemption from registration
under Section 4(2) of the Securities Act of 1933, as amended. No commissions or
other remuneration was paid in connection with the above-described issuance of
securities.
USE OF PROCEEDS
The Company's Registration Statement (the "REGISTRATION STATEMENT") on
Form S-1 filed by the Company on January 16, 1998 (File No. 333-44393) was
declared effective by the Securities and Exchange Commission on April 6, 1998.
The offering commenced on April 6, 1998 pursuant to a "best efforts"
underwriting by Tarpon Scurry Investments, Inc. Pursuant to the terms of the
Underwriting Agreement, the offering terminated on June 5, 1998 prior to the
sale of all securities registered. The Registration Statement registered
1,100,000 shares of Common Stock of the Company, of which 1,000,000 shares were
offered by the Company and 100,000 shares were offered by John B. Gallagher and
Harry D. Shields, the Co-Presidents of the Company. The aggregate offering price
of the shares registered was $11,000,000. The Company sold an aggregate of
933,900 shares of Common Stock in the offering for an aggregate offering price
of $9,339,000. As of June 30, 1998, the gross proceeds of the offering were used
as follows:
20
<PAGE>
<TABLE>
<CAPTION>
ACTUAL EXPENSES INCURED IN OFFERING
<S> <C> <C>
GROSS PROCEEDS $9,339,000
Underwriting Commission $747,120
Underwriting Expenses 125,000
Nasdaq National Market Listing Fee 59,000
Printing and Engraving Expenses 74,146
Accounting Fees and Expenses 284,808
Legal Fees and Expenses 432,987
Transfer Agent Fees and Expenses 7,500
Travel 105,584
Public Communications 26,412
Stamp Duty 260,000
Other 57,287
TOTAL ACTUAL EXPENSES1 2,179,844
-------------------------
NET PROCEEDS $7,159,156
=========================
</TABLE>
- ---------------------
1 No expenses were paid to directors, officers, shareholders or affiliates of
the Company.
<TABLE>
<CAPTION>
USE OF NET PROCEEDS
<S> <C> <C>
NET PROCEEDS $7,159,156
Loaned to Subsidiaries for Operations:
European Micro UK $3,500,000
Nor'easter 1,000,000
-------------------------
PROCEEDS UTILIZED IN THE PERIOD 4,500,000
-------------------------
NET PROCEEDS STILL AVAILABLE $2,659,156
=========================
</TABLE>
ITEM 6. SELECTED FINANCIAL DATA.
SELECTED CONSOLIDATED FINANCIAL DATA
($ IN THOUSANDS, EXCEPT PER SHARE DATA)
The following selected statement of operations and balance sheet data
of the Company is set forth below for each year in the five-year period ended
June 30, 1998. The information presented as of and for the years ended June 30,
1995, 1996, 1997 and 1998 is derived from the audited consolidated financial
statements of the Company and should be read in conjunction with the
consolidated Financial Statements as of June 30, 1997 and 1998 and each of the
years in the three-year period ended June 30, 1998 and the Notes thereto
included elsewhere in this filing. The information presented as of and for the
year ended June 30, 1994 is derived from the Company's unaudited consolidated
financial statements. In the opinion of management, the unaudited financial
statements of the Company have been prepared on the same basis as the audited
financial statements included herein and include all adjustments necessary for
the fair presentation of financial position and results of operations at these
dates and
21
<PAGE>
for these periods which adjustments are only of a normal recurring nature. The
results of operations for interim periods are not necessarily indicative of
results that may be expected for the full year. See "Index to Financial
Statements."
<TABLE>
<CAPTION>
($ IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED JUNE 30,
1994 1995 1996 1997 1998
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net Sales $29,235 33,864 40,348 46,655 111,453
Income from operations 986 1,848 1,478 2,051 7,232
Net income 524 1,115 845 1,034 4,485
Net income per share $0.13 0.28 0.21 0.26 1.10
Dividends per share (basic and diluted) 0.0 0.10 0.24 0.14 0.14
Weighted average common shares
outstanding, basic 4,000,000 4,000,000 4,000,000 4,000,000 4,066,524
Weighted average common shares
outstanding, diluted 4,000,000 4,000,000 4,000,000 4,000,000 4,087,466
</TABLE>
<TABLE>
<CAPTION>
($ IN THOUSANDS, EXCEPT PER SHARE DATA)
JUNE 30,
1994 1995 1996 1997 1998
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital(1) $674 1,736 1,474 1,976 12,959
Total assets 3,928 5,873 7,857 8,844 19,204
Long-term debt, net of
current portion 68 41 37 45 84
Shareholders' equity $843 1,924 1,769 2,511 13,680
</TABLE>
- ------------------------
(1) Total current assets less total current liabilities.
ITEM 7. 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 APPEARING
ELSEWHERE IN THIS FILING.
OVERVIEW
European Micro is an independent distributor of microcomputer products,
including personal computers, memory modules, disc drives and networking
products, operating primarily in Western Europe. European Micro has pursued and
expects to continue to pursue a strategy of purchasing product for resale on the
worldwide surplus or aftermarket as opposed to purchasing products for resale
directly from manufacturers. European Micro's ability to purchase products for
resale in these markets has enabled European Micro to increase net sales and
achieve strong operating results. For the three-year period ended June 30, 1998,
European Micro's total net sales increased from $40.3 million in fiscal 1996 to
$111.4 million in fiscal 1998, and gross profit increased from $4.4 million to
$14.4 million. European Micro attributes these increases in sales to increased
customer demand for European Micro's products and, more recently, to the
expansion of the range of products offered.
To date, European Micro has derived substantially all of its operating
income and cash flow from European Micro UK. Generally, European Micro UK
purchases and sells its products in currencies other than the United States
dollar. European Micro UK seeks to limit its exposure to currency fluctuations
through hedging.
22
<PAGE>
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Currency Risk Management."
RESULTS OF OPERATIONS
The following table sets forth, for the periods presented, the
percentage of net sales represented by certain items in European Micro's
Consolidated Statements of Operations:
PERCENTAGE OF NET SALES
<TABLE>
<CAPTION>
FISCAL YEARS ENDING JUNE 30,
----------------------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Net sales to third parties 98.9% 99.7% 73.9%
Net sales to related parties 1.1 0.3 26.1
-------- -------- --------
Total net sales 100.0 100.0 100.0
-------- -------- --------
Cost of goods sold to third parties (87.9) (88.2) (61.4)
Cost of goods sold to related parties (1.1) (0.4) (25.7)
-------- -------- --------
Total cost of goods sold (89.0) (88.6) (87.1)
-------- -------- --------
Gross profit 11.0 11.4 12.9
Operating expenses (7.3) (7.0) (6.4)
-------- -------- --------
Operating profit 3.7 4.4 6.5
Interest expense (0.4) (0.6) (0.4)
Share of (loss) or income in the
unconsolidated affiliate - (0.2) -
-------- -------- --------
Income before income taxes 3.3 3.6 6.1
Provision for income taxes (1.2) (1.4) (2.1)
-------- -------- --------
Net Income 2.1% 2.2% 4.0%
======== ======== ========
</TABLE>
FISCAL YEARS ENDED JUNE 30, 1998 AND 1997
TOTAL NET SALES. Total net sales increased $64.8 million, or 139%, from
$46.6 million in the year ended June 30, 1997 to $111.4 million in the
comparable period in 1998. The increase in net sales was primarily attributable
to sales to related parties (accounting for approximately $29.1 million), the
purchase of computer peripherals on favorable terms and subsequently sold in the
period (accounting for approximately $13.8 million), the broadening of the
Company's product base (accounting for approximately $6.0 million), the return
of some key personnel from temporary leave (accounting for approximately $4.0
million) and the growth of the Premier Dealers Club (accounting for
approximately $2.6 million). There can be no assurance that the Company will be
able to maintain the level of sales or sales growth achieved in this period
because the Company does not expect to be able to regularly purchase peripherals
and other products on terms as favorable as achieved in the period ended June
30, 1998. For the years ended June 30, 1998 and 1997, respectively, customer
rebates and discounts were immaterial.
Excluding net sales to related parties, net sales increased $35.8
million, or 77%, from $46.5 million in the year ended June 30, 1997 to $82.3
million in comparable period in 1998.
23
<PAGE>
Net sales to related parties increased $28.9 million from $154,000 in
the year ended June 30, 1997 to $29.1 million in the comparable period in 1998.
This increase is attributable to Group purchases by the Company of computer
peripherals made on behalf of related parties and subsequently by related
parties to third parties.
GROSS PROFIT. Gross profit increased $9.1 million, or 169.8%, from $5.3
million in the year ended June 30, 1997 to $14.4 million in the comparable
period in 1998. Gross profit excluding related party transactions increased to
$14 million the year ended June 30, 1998 from $5.3 million in the same period of
the prior year. Gross profit was unusually high in the period due to the
purchase of computer peripherals on favorable terms during the year ended June
30, 1998. The Company expects its gross profit to be significantly lower in
future periods because it does not expect to be able to regularly purchase
computer peripherals and other products on terms as favorable as achieved in the
period ended June 30, 1998.
Gross margins increased from 11.4% in the year ended June 30, 1997 to
12.9% in the comparable period in 1998. Excluding related party transactions,
gross margin increased from 11.5% in the year ended June 30, 1997 to 17.0% in
the comparable period in 1998. The increase in gross margins was attributable to
higher than usual margins caused by the purchase of computer peripherals in the
period which were purchased by the Company on exceptional trading terms and
subsequently sold. The Company expects its gross margin to be significantly
lower in future periods because it does not expect to be able to regularly
purchase products on as favorable terms as that experienced in the period.
Foreign exchange gains and losses moved from a loss of $157,000 in the
year ended June 30, 1997 to a loss of $510,000 in the comparable period in 1998.
During the second quarter of fiscal 1997, the Company suffered considerable
exchange losses as a result of the strengthening of the pound sterling relative
to other European currencies, causing a devaluation of many of the Company's
foreign currency accounts receivable. The Company addressed this issue by
introducing more rigorous hedging policies.
OPERATING EXPENSES. Operating expenses as a percentage of total net
sales decreased from 7.0% in the year ended June 30, 1997 to 6.4% in the
comparable period in 1998 due primarily to the increase in total net sales
relative to operating expenses. Operating expenses consist primarily of fixed
costs, such as wages, salaries, rents and rates. Excluding related party
transactions, operating expenses as a percentage of net sales increased from
6.9% in the year ended June 30, 1997 to 8.6% in the comparable period in 1998
due to higher commissions and bonus compensation paid during the period. The
Company's commission and bonus compensation is based on the Company's gross
margin. For the reasons set forth above, the Company achieved higher gross
margins in the period which resulted in higher commission and bonus compensation
in the period.
INTEREST EXPENSE. Interest expense increased by $144,000 from $293,000
in the year ended June 30, 1997 to $437,000 in the comparable period in 1998.
This was attributable to increased borrowings by European Micro to fund its
inventory and accounts receivable prior to the receipt of funds from the
Company's initial public offering.
INCOME TAXES. Income taxes as a percentage of earnings before income
taxes decreased from 38.6% in the year ended June 30, 1997 to 34.0% in the
comparable period in 1998. This decrease was primarily attributable to the
increase in income before income taxes relative to disallowed expenditures for
corporate income tax purposes. The effective rate of income tax may increase in
the future periods as a result of the change in structure and the mix of sales
across the various countries to which the Company sells its products.
INTEREST IN JOINT VENTURE. European Micro's share of income or loss
from Big Blue Europe increased from a loss of $73,000 in the year ended June 30,
1997 to a gain of $3,000 in the comparable period in 1998. These earnings are
attributable to the business maturing past the start-up stage. The Company
expects this trend to continue as Big Blue Europe attracts more customers and
further strengthens existing relationships.
WAREHOUSE BREAK-IN. In November 1997, European Micro UK's warehouse was
broken into and approximately $503,000 of inventory was stolen. All inventory
was insured and the Company was reimbursed by
24
<PAGE>
its insurance company for the cost of the inventory less an $8,000 standard
deductible. In order to prevent any additional thefts, the Company has
implemented the following steps:
(1) The Company has relocated its warehouse facility to a more
secure location.
(2) The Company consulted with a security specialist and expended
over $40,000 in security measures, including direct radio
communication with law enforcement.
(3) The Company implemented new procedures regarding occupancy and
the opening and closing of the warehouse facility.
A receivable was established in the accounts as it was probable that
the claim would be settled. This claim has now been settled in full following
receipt of the claim in February 1998.
FISCAL YEARS ENDED JUNE 30, 1997 AND 1996
TOTAL NET SALES. Total net sales increased $6.4 million, or 15.9%, from
$40.3 million in the year ended June 30, 1996 to $46.7 million in the comparable
period in 1997. Excluding net sales to related parties, net sales increased $6.6
million, or 16.5%, from $39.9 million in the year ended June 30, 1996 to $46.5
million in the comparable period in 1997. The increase in net sales was
attributable to the broadening of the product base as a by-product of the new
purchasing department (accounting for approximately $4.2 million) and the
creation of the Premier Dealers Club (accounting for approximately $2.4
million). For the years ended June 30, 1997 and 1996, respectively, customer
rebates and discounts were immaterial.
Net sales to related parties decreased $282,000 from $436,000 in the
year ended June 30, 1996 to $154,000 in the comparable period in 1997. This did
not have any material affect on the Company's results of operations in the year
ended June 30, 1997.
GROSS PROFIT. Gross profit increased $0.8 million, or 17.8%, from $4.5
million in the year ended June 30, 1996 to $5.3 million in the year ended June
30, 1997 due to increased sales in the period. Related party transactions did
not have a material affect on gross profit in this period.
Gross margins increased from 11.0% in the year ended June 30, 1996 to
11.4% in the year ended June 30, 1997. This was attributable to European Micro's
product mix. The gross margins were not materially affected by the related party
transactions in the years ended June 30, 1997 and 1996, respectively. The
Company does not expect to maintain this level of gross margin in future
periods.
Foreign exchange gains and losses moved from a gain of $21,000 in the
year ended June 30, 1996 to a loss of $157,000 in the comparable period in 1997.
This loss was attributable to the strengthening of the pound sterling relative
to other European currencies.
OPERATING EXPENSES. Operating expenses as a percentage of total net
sales decreased from 7.4% in the year ended June 30, 1996 to 7.0% in the
comparable period in 1997. Operating expenses consist primarily of fixed costs,
such as salaries, rents and rates. Therefore, while net sales have increased in
the period there has not been a corresponding increase in the fixed cost base.
INTEREST EXPENSE. Interest expense increased $133,000 from $160,000 in
the year ended June 30, 1996 to $293,000 in the comparable period in 1997. The
increase was attributable to increased borrowings by European Micro to fund the
increased trading activity.
INCOME TAXES. Income taxes as a percentage of earnings before income
taxes increased from 35.9% in the year ended June 30, 1996 to 38.6% in the
comparable period in 1997. The increase was primarily attributed to the increase
in disallowed travel and entertainment expenditures for corporate income tax
purposes.
25
<PAGE>
INTEREST IN JOINT VENTURE. European Micro's share of losses from Big
Blue Europe was $73,000 in the year ended June 30, 1997. These losses are
attributed to business start-up costs. Big Blue Europe commenced operations in
January 1997.
WAREHOUSE BREAK-IN. In January 1997, European Micro UK's warehouse was
broken into and approximately $155,000 of inventory was stolen. All inventory
was insured and the Company was reimbursed by its insurance company for the cost
of the inventory less an $8,000 standard deductible. To attempt to prevent any
additional thefts, the Company took several steps including the addition of
steel bars on all roof vents and skylights.
A receivable was established in the balance sheet as it was probable
that the claim would be settled. The claim was settled in full minus the
deductible upon receipt of the claim in May 1997.
SEASONALITY
European Micro typically experiences variability in its total net sales
and net income on a quarterly basis as a result of many factors. These include,
but are not limited to, seasonal variations in demand for the products and
services offered by the Company, the introduction of new hardware and software
technologies and products offering improved features and functionality, the
introduction of new products and services by the Company and its competitors,
the loss or consolidation of a significant supplier or customer, changes in the
level of operating expenses, inventory adjustments, product supply constraints,
competitive conditions including pricing, interest rate fluctuations, the impact
of acquisitions, currency fluctuations and general economic conditions.
Historical operating results have included a reduction in demand in Europe
during the summer months.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary cash requirements are for operating expenses,
funding accounts receivable and for the purchase of additional inventory to
support growth and to take greater advantage of available cash discounts offered
by certain of European Micro's suppliers for early payment.
In June 1998, the Company received $9.3 million in gross proceeds from
its initial public offering of 933,900 shares of Common Stock. The Company
incurred total expenses in connection with the offering of $2.2 million. The
Company intends to use the proceeds to fund operations and provide working
capital to European Micro UK and for Nor'easter. The proceeds will also be used
for expansion purposes, including mergers and acquisitions.
Short-term working capital requirements are funded by a combination of
overdraft facilities provided by National Westminster Bank Plc together with
accounts receivable financing provided by Lombard Natwest. Both of these
facilities are set and reviewed annually. Short-term obligations must be repaid
within one year. In both cases the amounts drawn down attract the same rate of
interest based on a markup over the bank borrowing rate in the United Kingdom.
The overdraft facility was $830,000 in the year ended June 30, 1997, and was
increased to $2 million during fiscal 1998. The accounts receivable financing
provides for draw-down of 85% of trade debtors. Further funding was agreed
between the Company and the National Westminster Bank in June 1998 in the form
of a short term revolving credit agreement, secured against inventory. The
facility allows the Company to borrow up to $5.6 million to assist in the
purchase of inventory.
Long-term funding is supplied to the Company in the form of hire
purchase and capital lease agreements. Long-term obligations are due for
repayment in more than one year. These agreements are made through both Lloyds
Bowmaker and Natwest Vehicle Solutions, and are secured by vehicles owned by the
Company. The agreements are usually for 36 months from the date of purchase and
are typically for 80% of the purchase value of the vehicle. All but two of the
agreements are subject to variable rate interest. As of June 30, 1998, the
borrowings were $154,000, of which $84,000 was due after more than one year.
26
<PAGE>
FISCAL YEAR ENDED JUNE 30, 1998. Cash provided by operating activities
for fiscal 1998 amounted to $1.6 million. Significant factors in the generation
of cash were net income for the year of $4.5 million and increases in taxes
payable of $2.2 million. The cash provided by operations was partially offset
primarily by the increases in trade receivables of $2.3 million, which was a
result of the considerable increase in business during the period, including
significant UK sales with longer credit terms and an advance payment made for
the purchase of inventory of $2.0 million. The advance payment was made to take
advantage of favorable pricing. Further, cash was used to pay down trade
payables by $400,000 and an increase in due from related parties of $329,000.
Cash used in investing activities amounted to $421,000. This was
attributed to the purchase of fixed assets amounting to $596,000 less the sale
of fixed assets of $175,000. The purchase of fixed assets consisted primarily of
expenditures for office improvements (as the Company moved onto an additional
floor at their Manchester, England office) of $150,000, new computers and office
equipment of $103,000, a forklift for the warehouse of $22,000, and new vehicles
of $286,000. The sale of fixed assets consisted primarily of used vehicles
traded for the purchase of new vehicles.
Cash provided by financing activities amounted to $3.4 million. This
was primarily the result of the receipt of net proceeds from the initial
offering of $7.1 million ($9.3 million proceeds less expenses of $2.2 million).
Cash used in financing activities amounted to $3.8 million to repay the
short-term financing facilities and the payment of a cash dividend of $550,000
prior to the Company's initial public offering.
The net increase in cash was $4.7 million for the year ended June 30,
1998 which is after the impact of exchange rates of $82,000.
FISCAL YEAR ENDED JUNE 30, 1997. Cash provided by operating activities
during the year amounted to $247,000. Significant factors in the generation of
cash were net income for the year amounting to $1.0 million and increases in
trade payables of $1.0 million. This was due primarily to a significant move
towards third party suppliers as opposed to related party purchases which had
been particularly high in 1996. Cash was also provided by reductions in amounts
due from related parties ($139,000) and a decrease in other current assets
($267,000). The cash provided by operations was partially offset primarily by
the decrease in amounts due to related parties of $956,000 (as a result of the
high third party purchases), an increase in trade receivables of $672,000 and an
increase in inventory of $540,000. The increase in trade receivables was due to
both a movement away from central European sales towards UK sales, which
traditionally have longer credit terms and the continuing pressure to offer
longer credit terms to the maturing marketplace.
Cash used in investing activities amounted to $412,000 which was
primarily attributed to the purchase of fixed assets amounting to $195,000 which
was partially offset by disposals ($47,000) and the investment in an
unconsolidated affiliate, Big Blue Europe of $264,000. The larger fixed asset
purchases included the addition of two cars ($69,000) and computer equipment for
additional staff, network upgrades and laptop computers ($86,000). Fixtures and
fittings purchases during the year of $40,000 included additional furniture for
the increase in employees and $15,000 for warehouse security measures.
Cash used in financing activities amounting to $123,000 was used
primarily for the payment of dividends amounting to $562,000, reductions in the
bank overdraft amounting to $314,000 and repayment of capital leases of $71,000.
The generation of $824,000 through trade receivable discounting was brought
about partially through the increase in trade receivables and partially through
a change in banking policy in December 1996. While the Company had only
discounted UK receivables up to December 1996, the change in policy allowed the
Company to additionally discount central European trade receivables. Against
this increase in the discounting creditor the level of the bank overdraft was
reduced and this is reflected by the $314,000 adverse change in the bank
overdraft.
Exchange movements of $254,000 had a favorable effect on cash. This
arises as a result of the year end sterling to dollar exchange rate moving from
(pound)1:$1.5538 as of June 30, 1996, to (pound)1:$1.6643 as of June 30, 1997
and the resulting effect on translating the balance of net assets as of June 30,
1996 together with the retained earnings for the year ended June 30, 1997.
27
<PAGE>
The overall net decrease in cash was $34,000.
FISCAL YEAR ENDED JUNE 30, 1996. Cash provided by operating activities
amounting to $170,000 was primarily attributable to net income generated for the
year amounting to $845,000, an increase in amounts due to related parties of
$866,000, reductions in inventory of $661,000 and an increase in other current
liabilities ($425,000). These amounts were partially offset by an increase in
trade receivables of $1,677,000 and increases in the amounts due from related
parties of $611,000. In addition cash was also used to reduce trade payables
($407,000). May 1996 was a particularly strong month for European Micro, the
highest monthly turnover in the Company's history. Certain UK customers had
bought significant volumes and value of product, and with the larger customers
having longer credit terms, some May 1996 debt was still outstanding at the end
of June 1996. Much of the product bought at the end of the 1996 fiscal year was
purchased from related parties, and with the cash used in funding debtors the
level of payables due to related parties was high, while the payables to third
parties were reduced.
Inventory value decreased by $611,000 in the fiscal year ended June 30,
1996. Such fluctuations are not uncommon given that European Micro typically
purchases large amounts of inventory at a time which is then sold over a period
of weeks. This creates an uneven inventory balance on a monthly basis.
Cash used in investing activities amounted to $157,000. This amount
consisted of $171,000 (related to the purchase of fixed assets consisting
primarily of $100,000 of vehicles) which was partially offset by sales of fixed
assets ($14,000).
Cash provided by financing activities of $292,000 primarily resulted
from an increase in the level of the bank overdraft of $1,029,000 and an
increase in the discount creditor of $283,000. Cash was used in the payment of
dividends amounting to $961,000 and $59,000 of payments made on capital leases.
The net increase in cash was $275,000, which is after the impact of
exchange rates amounting to $30,000.
YEAR 2000 ISSUES
Many existing computer programs use only two digits to identify a year
in the date field. These programs were designed and developed without
considering the impact of the upcoming change in the Year 2000. If not corrected
in the computer applications of the Company or its suppliers and customers, this
problem may cause computer applications to fail or to create erroneous results
by or at the Year 2000. The Company has received informal assurances from the
companies manufacturing the computer applications used in its business
operations that such computer applications are Year 2000 compliant. Although the
Company believes that its computer applications will not be affected by the Year
2000 problem, any failure or erroneous results produced thereby may have a
material adverse affect on the Company's business, financial condition or
results of operations. The Company does not generally sell software products and
therefore the Company does not expect its products to be affected by the Year
2000 problem.
The Company is evaluating the impact the Year 2000 problem will have on
its suppliers and customers, although the Company expects such evaluation to be
made informally through discussions with customers and suppliers. The failure of
the Company's suppliers and customers to correct the Year 2000 problem in their
computer applications may have a material adverse affect on the Company's
business, financial condition and results of operations. As of the date of this
filing, the Company cannot accurately anticipate or quantify the impact on the
Company of its suppliers' and customers' failure to correct this problem. The
Company is formulating contingency plans to implement in the event its
suppliers' and customers' fail to address the Year 2000 problem.
ASSET MANAGEMENT
INVENTORY. European Micro's goal is to achieve high inventory turns and
maintain a low number of stock keeping units and thereby reduce European Micro's
working capital requirements. European Micro's strategy to achieve this goal is
to effectively manage its inventory and to achieve high order fill rates.
Inventory levels may
28
<PAGE>
vary from period to period, due to factors including increases or decreases in
sales levels, European Micro's practice of making large-volume purchases when it
deems such purchases to be attractive, new products and changes in European
Micro's product mix.
ACCOUNTS RECEIVABLE. European Micro sells its products and services to
a customer base of more than 375 value-added resellers, corporate resellers,
retailers and direct marketers. European Micro offers credit terms to qualifying
customers and also sells on a pre-pay and cash-on-delivery basis. With respect
to credit sales, European Micro attempts to control its bad debt exposure by
monitoring customers' creditworthiness and, where practicable, through
participation in credit associations that provide customer credit rating
information for certain accounts. Substantially all of European Micro UK's
accounts receivables are insured.
CURRENCY RISK MANAGEMENT
REPORTING CURRENCY. European Micro Holdings, Inc.'s reporting and
functional currency, as defined by Statement of Financial Accounting Standards
No. 52, is the United States dollar. The functional currency of European Micro
UK is the United Kingdom pound sterling. European Micro UK translates into the
reporting currency by measuring 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 period.
HEDGING AND CURRENCY MANAGEMENT ACTIVITIES. European Micro attempts to
limit its risk of currency fluctuations through hedging where possible. European
Micro utilizes derivative financial instruments in the form of forward exchange
contracts for the purpose of economic hedges of anticipated sale and purchase
transactions. In addition, European Micro enters into economic hedges for the
purpose of hedging foreign currency market exposures of underlying assets,
liabilities and other obligations which exist as part of its ongoing business
operations.
European Micro UK manages its currency exposure when transactions are
consummated in currency other than United Kingdom pound sterling. For example,
in the year ended June 30, 1998, purchases of inventory by European Micro UK,
were in United Kingdom pound sterling (58%), Spanish pesetas (14%), United
States dollars (11%), Finland marks (8%) and other (9%). The most significant
currencies in which sales were made, other than United Kingdom pound sterling
(34%), were the United States dollar (33%), German Mark (12%), and the Dutch
guilder (6%). Additionally, receivables are significantly spread out over
several currencies. Lastly, if bank balances are maintained in different
currencies they would also be subject to currency fluctuations.
The policy of the Company is not to hedge specifically against
individual daily transactions. Instead, the exposure to a currency is determined
every two to three days. This is done by comparing the bank account balances and
account receivables with accounts payable, all in the same currency which acts
as a "natural" hedge. Thereafter, to the extent that a bank balance and the
accounts receivable are not substantially offset by the accounts payable, there
would be a need to cover the residual balance with a forward currency contract.
The Company tends to concentrate its currency management into four currencies:
United Kingdom pound sterling, United States dollar, Dutch guilder and German
mark. It normally deems the exposure in other currencies to be minimal. However,
when the Company buys products in other currencies, the Company may, in
conjunction with current market advice, enter into a forward currency contract
to cover current and some anticipated future purchases.
The currency instruments used by the Company are always forward
currency contracts with either fixed or optional take up dates. Moreover,
inasmuch as the need is to cover short-term receivables or payables (usually
always less than 45 days), these contracts are usually for periods that do not
exceed 60 days.
ECONOMIC AND MONETARY UNION. On January 1, 1999, eleven of the fifteen
member countries of the European Union are scheduled to establish fixed
conversion rates between their existing sovereign currencies and a new currency
called the "euro." These countries have agreed to adopt the euro as their common
legal currency on that date. The euro will then trade on currency exchanges and
be available for non-cash transactions. Thereafter and until January 1, 2002,
the existing sovereign currencies will remain legal tender in these countries.
On January 1, 2002, the euro is scheduled to replace the sovereign legal
currencies of these countries. Through the
29
<PAGE>
operations of European Micro UK, the Company has significant operations within
the European Union, including many of the countries which are scheduled to adopt
to euro. The Company is evaluating the impact the euro will have on its
continuing business operations and no assurances can be given that the euro will
not have a material adverse affect on the Company's business, financial
condition and results of operations. However, the Company does not expect the
euro to have a material affect on its competitive position as a result of price
transparency within the European Union because the Company does not rely on
currency imbalances in purchasing inventory from within the European Union.
Moreover, the Company is evaluating its ability to update its information
technology to accommodate the adoption of the euro but it does not expect to
incur material costs in either evaluating or updating such technology. In
addition, the Company cannot accurately predict the impact the euro will have on
currency exchange rates or the Company's currency exchange rate risk. The
Internal Revenue Service ("IRS") has requested comments on various tax issues
raised by the euro conversion. The IRS is expected to publish guidelines on this
issue soon and, until such time, the Company cannot predict whether the IRS
guidelines will have any tax consequences on the Company.
INTER-GROUP SALES
In order to achieve attractive prices from suppliers, the Company must
commit to the purchase of a large quantity of inventory. European Micro polls
the other members of the Group for informal commitments to help distribute such
inventory. Thereafter, European Micro, as a member of the Group, would obtain
the product, examine the product for damage and authenticity, and then supervise
the shipping to the other Group members. In that capacity, European Micro acts
as a "purchasing agent" for the other members of the Group. Such sales from
European Micro during fiscal 1997 were immaterial. Note however, that European
Micro benefited from similar low mark-up purchases from the Group to the extent
of over $22 million during that same period.
Later, when market conditions such as the strengthening of the United
States dollar and an aggressive sales effort from a leading manufacturer changed
the emphasis to European Micro purchasing during the year ended June 30, 1998,
sales from European Micro to related parties increased to over $29 million.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company utilizes derivative financial instruments in the form of
forward exchange contracts for the purpose of economic hedges of anticipated
sale and purchase transactions. In addition the Company enters into economic
hedges for the purposes of hedging foreign currency market exposures of
underlying assets, liabilities and other obligations which exist as part of its
ongoing business operations.
Where the foreign currency exposure is covered by a forward foreign
exchange contract the asset, liability or other obligation is recorded at the
contracted rate each month end and the resultant mark-to-market gains and losses
are recognized as cost of sales in the current period, generally consistent with
the period in which the gain or loss of the underlying transaction is
recognized. Cash flows associated with derivative transactions are classified in
the statement of cash flows in a manner consistent with those of the exposure
being hedged.
The Company places all foreign exchange forward contracts with Global
Financial Markets, a division of the National Westminster Bank PLC, a leading
European bank.
30
<PAGE>
EXCHANGE RATE SENSITIVITY
The table below summarizes information on foreign currency forward
exchange agreements. The table presents the notional amounts and weighted
average exchange rates by expected (contractual) maturity dates (in thousands
except exchange rates).
<TABLE>
<CAPTION>
EXPECTED
MATURITY OR
TRANSACTION DATE FAIR VALUE
----------------- -----------------
<S> <C> <C>
FORWARD EXCHANGE
AGREEMENTS
JUNE 30, 1998
(Receive (pound)/pay $US) July 10, 1998
Contract amount $700 $701
Average contractual
exchange rate $1.667/(pound)1
(Receive (pound)/pay PST) August 13, 1998
Contract amount $262 $262
Average contractual
exchange rate (pound)1/254.25
JUNE 30, 1997
(Receive $US/Pay(pound)) June 30, 1998
Contract amount $2,006 $2,006
Average contractual
exchange rate $1.66/(pound)1
(Receive (pound)/pay DM) June 30, 1998
Contract amount $430 $450
Average contractual
exchange rate (pound)0.36/DM
</TABLE>
The fair value has been determined by applying the mid-price of the
spread on the buy or sell rates as appropriate, of the relevant foreign currency
at the balance sheet date. The mid-price used is that quoted by the Financial
Times.
Income and losses in respect of the transaction foreign exchange
transactions were as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
1996 1997 1998
-------------------------------------------------
<S> <C> <C> <C>
(Loss) income on foreign exchange transactions $21 (157) (510)
======= ======= =======
</TABLE>
31
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The consolidated financial statements of the Company appear beginning
at page F-1. Certain quarterly financial data is set forth below.
($ IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NET INCOME
JUNE 30, PER SHARE
(BASIC AND
1998 NET SALES GROSS PROFIT NET INCOME DILUTED)1
- ---- --------- ------------ ---------- ----------
<S> <C> <C> <C> <C>
First Quarter $24,107 1,839 485 $0.12
Second Quarter 22,002 2,541 669 0.16
Third Quarter 39,130 6,581 2,380 0.59
Fourth Quarter $26,214 3,434 951 $0.23
</TABLE>
($ IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NET INCOME
JUNE 30, PER SHARE
(BASIC AND
1997 NET SALES GROSS PROFIT NET INCOME DILUTED)1
- ---- --------- ------------ ---------- ---------
<S> <C> <C> <C> <C>
First Quarter $8,696 1,231 287 $0.07
Second Quarter 10,963 1,025 94 0.02
Third Quarter 13,571 1,454 291 0.07
Fourth Quarter $13,425 1,627 362 $0.10
</TABLE>
- ---------------------
1 Net income per share is calculated pursuant to Financial Accounting Standards
Board (FASB) Statement of Financial Accounting Standards (SFAS) No. 128
"Earnings Per Share" which was issued in February 1997.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
ITEM 11. EXECUTIVE COMPENSATION.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information called for by Items 10, 11, 12 and 13 of this Part III
is incorporated herein by reference to the Company's Proxy Statement for its
Annual Meeting of Stockholders to be held on November 16, 1998.
32
<PAGE>
ITEM 14. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1)(2) FINANCIAL STATEMENTS. See index to consolidated financial
statements and supporting schedules.
(a)(3) EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION LOCATION
- --- ----------- --------
<S> <C> <C>
3.01 Articles of Incorporation Incorporated by reference to Exhibit No.
3.01 to Registrant's Registration
Statement (the "Registration Statement")
on Form S-1 (Registration Number
333-44393).
3.02 Certificate of Amendment of Articles of Incorporated by reference to Exhibit No.
Incorporation 3.02 to Registrant's Registration
Statement.
3.03 Bylaws Incorporated by reference to Exhibit No.
3.02 to the Registration Statement.
4.01 Form of Stock Certificate Incorporated by reference to Exhibit No.
4.01 to the Registration Statement.
4.02 1998 Stock Incentive Plan Incorporated by reference to Exhibit No.
4.02 to the Registration Statement.
4.03 1998 Stock Employee Stock Purchase Plan Incorporated by reference to Exhibit No.
4.03 to the Registration Statement.
4.04 Form of Lock-up Agreement Incorporated by reference to Exhibit No.
4.04 to the Registration Statement.
10.01 Form of Advice of Borrowing Terms with National Incorporated by reference to Exhibit No.
Westminster Bank Plc 10.01 to the Registration Statement.
10.02 Invoice Discounting Agreement with Lombard Incorporated by reference to Exhibit No.
Natwest Discounting Limited, dated November 10.02 to the Registration Statement.
21, 1996
10.03 Commercial Credit Insurance, policy number Incorporated by reference to Exhibit No.
60322, with Hermes Kreditversicherungs-AG dated 10.03 to the Registration Statement.
August 1, 1995
10.04 Commercial Credit Insurance, policy number Incorporated by reference to Exhibit No.
82692, with Hermes Kreditversicherungs-AG dated 10.04 to the Registration Statement.
August 1, 1995
10.05 Consignment Agreement with European Micro Incorporated by reference to Exhibit No.
Computer B.V., dated January 1996 10.05 to the Registration Statement.
10.06 Distributor Agreement with WatchGuard Incorporated by reference to Exhibit No.
Technologies, Inc., dated November 5, 1997 10.06 to the Registration Statement.
10.07 Shareholders' Cross-Purchase Agreement by and Incorporated by reference to Exhibit No.
between Jeffrey Gerard Alnwick, Marie Alnwick, 10.07 to the Registration Statement.
European Micro Plc and Big Blue Europe, B.V.
dated August 21, 1997
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
10.08 Trusteed Shareholders Cross-Purchase Agreement Incorporated by reference to Exhibit No.
by and between John B. Gallagher, Harry D. 10.08 to the Registration Statement.
Shields, Thomas H. Minkoff, Trustee of the
Gallagher Family Trust, Robert H. True and
Stuart S. Southard, Trustees of the Henry Daniel
Shields 1997 Irrevocable Educational Trust,
European Micro Holdings, Inc. and SunTrust Bank,
Nashville, N.A., as Trustee dated January 31,
1998
10.09 Executive Employment Agreement between John B. Incorporated by reference to Exhibit No.
Gallagher and European Micro Holdings, Inc. 10.09 to the Registration Statement.
effective as of January 1, 1998
10.10 Executive Employment Agreement between Harry D. Incorporated by reference to Exhibit No.
Shields and European Micro Holdings, Inc. 10.10 to the Registration Statement.
effective as of January 1, 1998
10.11 Contract of Employment Agreement between Incorporated by reference to Exhibit No.
Laurence Gilbert and European Micro UK dated 10.11 to the Registration Statement.
March 14, 1998
10.12 Contract of Employment between Bernadette Incorporated by reference to Exhibit No.
Spofforth and European Micro UK dated April 30, 10.12 to the Registration Statement.
1996
10.13 Subscription Agreement by and between John B. Incorporated by reference to Exhibit No.
Gallagher, Harry D. Shields, Thomas H. Minkoff, 10.13 to the Registration Statement.
Trustee of the Gallagher Family Trust, Robert H.
True and Stuart S. Southard, Trustees of the
Henry Daniel Shields 1997 Irrevocable
Educational Trust, European Micro Holdings, Inc.
effective as of January 31, 1998
10.14 Administrative Services Contract by and between Incorporated by reference to Exhibit No.
European Micro Holdings, Inc. and European Micro 10.14 to the Registration Statement.
Plc effective as of January 1, 1998
10.15 Escrow Agreement between European Micro Incorporated by reference to Exhibit No.
Holdings, Inc., Tarpon Scurry Investments, Inc. 10.15 to the Registration Statement.
and The Chase Manhattan dated as of March 24,
1998
10.16 Form of Indemnification Agreements with officers Incorporated by reference to Exhibit No.
and directors 10.16 to the Registration Statement.
10.17 Form of Credit Agreement by and between European Provided herewith.
Micro UK and National Westminster Bank Plc
21.01 Subsidiaries of the Registrant Provided herewith.
23.01 Consents of experts and counsel Provided herewith.
27.01 Financial Data Schedule Provided herewith.
</TABLE>
Management contracts or compensatory plans or arrangements are set
forth as Exhibits 4.02, 4.03, 10.09, 10.10, 10.11 and 10.12 above.
34
<PAGE>
(B) REPORTS ON FORM 8-K.
None.
35
<PAGE>
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereto duly authorized.
Date: September 28, 1998
EUROPEAN MICRO HOLDINGS, INC.
By: /S/ JOHN B. GALLAGHER
--------------------------------
John B. Gallagher
Co-President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/S/ HARRY D. SHIELDS Co-Chairman; Co-President September 28, 1998
- ----------------------------- (Principal Executive Officer);
Harry D. Shields Director
/S/ JOHN B. GALLAGHER Co-Chairman; Co-President September 28, 1998
- ----------------------------- (Principal Executive Officer);
John B. Gallagher Director
/S/ JAY NASH Chief Financial Officer and September 28, 1998
- ----------------------------- Controller (Principal Financial
Jay Nash Officer and Controller)
/S/ LAURENCE GILBERT Director September 28, 1998
- -----------------------------
Laurence Gilbert
/S/ BERNADETTE SPOFFORTH Director September 28, 1998
- -----------------------------
Bernadette Spofforth
/S/ KYLE R. SAXON Director September 28, 1998
- -----------------------------
Kyle R. Saxon
/S/ BARRETT SUTTON Director September 28, 1998
- -----------------------------
Barrett Sutton
</TABLE>
36
<PAGE>
INDEX TO THE FINANCIAL STATEMENTS
EUROPEAN MICRO HOLDINGS, INC.
Independent Auditors' Report F-2
Consolidated Balance Sheets as of June 30, 1997 and 1998 F-3
Consolidated Statements of Operations for the years ended
June 30, 1996, 1997 and 1998 F-4
Consolidated Statements of Changes in Shareholders' Equity
for the years ended June 30, 1996, 1997 and 1998 F-5
Consolidated Statements of Cash Flows for the years ended
June 30, 1996, 1997 and 1998 F-6
Notes to Consolidated Financial Statements F-7
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and the Shareholders of
European Micro Holdings, Inc.
We have audited the accompanying consolidated balance sheets of European Micro
Holdings, Inc. and its subsidiaries as of June 30, 1997 and 1998, and the
related consolidated statements of earnings, changes in shareholders' equity,
and cash flows for each of the years in the three-year period ended June 30,
1998. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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 our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of European Micro
Holdings, Inc. and its subsidiaries as of June 30, 1997 and 1998 and the results
of their operations and their cash flows for each of the years in the three-year
period ended June 30, 1998 in conformity with generally accepted accounting
principles in the United States.
/s/ KPMG
---------------------
KPMG
CHARTERED ACCOUNTANTS
REGISTERED AUDITORS
Manchester, England
September 28, 1998
F-2
<PAGE>
<TABLE>
<CAPTION>
EUROPEAN MICRO HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except per share data)
JUNE 30, JUNE 30,
1997 1998
-------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $288 5,012
Trade receivables, net (Note 5) 2,956 7,985
Discounted trade receivables (Note 5) 2,779 -
Due from related parties (Note 20) 569 898
Inventories, net (Note 6) 1,560 1,715
Deferred tax asset (Note 13) - 26
Prepaid expenses 75 304
Other current assets (Note 7) 37 2,459
------ ------
TOTAL CURRENT ASSETS 8,264 18,399
Property and equipment, net (Note 8) 389 611
Investments (Note 9) 191 194
------ ------
TOTAL ASSETS $8,844 19,204
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Bank overdraft (Note 10) $1,034 -
Discount creditor (Note 11 ) 2,223 -
Trade payables (Note 12) 2,038 1,638
Other current liabilities (Note 14) 376 987
Due to related parties (Note 20) 188 238
Income taxes payable (Note 13) 375 2,577
Deferred income taxes (Note 13) 54 -
------ ------
TOTAL CURRENT LIABILITIES 6,288 5,440
Long term borrowings (Note 15) 45 84
------ ------
TOTAL LIABILITIES 6,333 5,524
------ ------
Commitments & contingencies (Note 18) -
SHAREHOLDERS' EQUITY:
Preferred stock $0.01 par value shares: 1,000,000
authorized at 1997 and 1997, no shares issued and
outstanding at 1997 and 1998
Common stock $0.01 par value shares: 20,000,000
authorized at, 1997 and 1998, shares issued and
outstanding, 4,000,000 at 1997 and 4,933,900 at 1998, 40 49
(Notes 3 and 16)
Additional paid in capital 1,624 8,802
Retained earnings 826 4,773
Accumulated other comprehensive income 21 56
------ ------
TOTAL SHAREHOLDERS' EQUITY 2,511 13,680
------ ------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $8,844 19,204
====== ======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE>
EUROPEAN MICRO HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statement of Operations
(In thousands, except per share data)
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
SALES
Net sales (Note 3) $39,912 46,501 82,361
Net sales to related parties
(Note 20) 436 154 29,092
------- ------- -------
Total net sales 40,348 46,655 111,453
------- ------- -------
COST OF GOODS SOLD:
Cost of goods sold (35,475) (41,163) (68,380)
Cost of goods sold to related parties (417) (156) (28,678)
------- ------- -------
Cost of goods sold (35,892) (41,319) (97,058)
------- ------- -------
GROSS PROFIT 4,456 5,336 14,395
OPERATING EXPENSES:
Selling, general and administrative
expenses (Note 3) (2,884) (3,230) (7,059)
Expenses attributable to
related parties (Note 20) (94) (55) (104)
------- ------- -------
Total operating expenses (2,978) (3,285) (7,163)
------- ------- -------
OPERATING PROFIT 1,478 2,051 7,232
Interest expense, net (160) (293) (437)
Equity in net (loss) income of
unconsolidated affiliate (Note 9) - (73) 3
------- ------- -------
INCOME BEFORE INCOME TAXES 1,318 1,685 6,798
Taxes on income (Note 3 and 13) (473) (651) (2,313)
------- ------- -------
NET INCOME $845 1,034 4,485
======= ======= =======
Net income per share - basic
(Note 3 and Note 23) $0.21 0.26 1.10
======= ======= =======
Net income per share - diluted
(Note 3 and Note 23) $0.21 0.26 1.10
======= ======= =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE>
EUROPEAN MICRO HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
ACCUMULATED
RETAINED OTHER
ADDITIONAL EARNINGS COMPREHENSIVE TOTAL
PAID IN (ACCUMULATED INCOME SHAREHOLDERS'
COMMON STOCK CAPITAL LOSSES) EQUITY
------------ ------- ------- ------------- ------
SHARES AMOUNT
------ ------
<S> <C> <C> <C> <C> <C> <C>
Balance at July 1, 1995 4,000,000 $40 119 1,750 15 1,924
Net income - - - 845 - 845
Dividends declared ($0.24 per share) - - - (961) - (961)
Other comprehensive income, net of tax
- foreign currency translation
adjustment - - (4) (24) (11) (39)
--------- ------- -------- --------- -------- -------
Balance at June 30, 1996 4,000,000 40 115 1,610 4 1,769
Capitalisation of retained earnings
(Note 3(j)) - - 1,498 (1,498) - -
Net income - - - 1,034 - 1,034
Dividends declared ($0.14 per share) - - - (562) - (562)
Other comprehensive income, net of tax
- foreign currency translation
adjustment - - 11 242 17 270
--------- ------- -------- --------- -------- -------
Balance at June 30, 1997 4,000,000 40 1,624 826 21 2,511
Net income - - - 4,485 - 4,485
Dividends declared ($0.14 per share) - - - (550) - (550)
Issue of new shares, net proceeds* 933,900 9 7,150 - - 7,150
Compensation charge in relation to share
options issued to non-employees - - 28 (28) - -
Other comprehensive income, net of tax
- foreign currency translation
adjustment - - - 40 35 75
--------- ------- -------- --------- -------- -------
Balance at June 30, 1998 4,933,900 $49 8,802 4,773 56 13,680
========= ======= ======== ========= ======== =======
</TABLE>
* The net proceeds from the issue of new shares represent the gross proceeds of
$9,330 reduced by issue costs of $2,180.
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE>
EUROPEAN MICRO HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $845 1,034 4,485
ADJUSTMENTS TO RECONCILE NET INCOME
TO NET CASH (USED IN) PROVIDED BY
OPERATING ACTIVITIES
Depreciation and other 134 163 192
Provision for deferred taxes (17) 87 (80)
Equity in net loss (income) of
unconsolidated affiliate - 73 (3)
CHANGES IN ASSETS AND LIABILITIES
Trade receivables (1,677) (672) (2,250)
Due from related parties (611) 139 (329)
Inventory 661 (540) (155)
Other current assets 39 267 (2,651)
Trade payables (407) 1,011 (400)
Due to related parties 866 (956) 50
Taxes payable (88) (86) 2,202
Other net 425 (273) 585
------- ------- -------
NET CASH PROVIDED BY OPERATING
ACTIVITIES 170 247 1,646
------- ------- -------
INVESTING ACTIVITIES:
Purchase of fixed assets (171) (195) (596)
Sale of fixed assets 14 47 175
Investment in unconsolidated affiliate - (264) -
------- ------- -------
NET CASH USED IN INVESTING ACTIVITIES (157) (412) (421)
------- ------- -------
FINANCING ACTIVITIES:
Dividends paid (961) (562) (550)
Proceeds from issue of new shares, net - - 7,159
Repayment of capital leases (59) (71) 65
Change in bank overdraft 1,029 (314) (1,034)
Change in discounting creditor 283 824 (2,223)
------- ------- -------
NET CASH PROVIDED BY (USED IN )
FINANCING ACTIVITIES 292 (123) 3,417
------- ------- -------
Exchange rate changes (30) 254 82
------- ------- -------
NET INCREASE (DECREASE) IN CASH 275 (34) 4,724
Cash at beginning of period 47 322 288
------- ------- -------
CASH AT END OF PERIOD $322 288 5,012
======= ======= =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE>
EUROPEAN MICRO HOLDINGS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
1. DESCRIPTION OF BUSINESS
On December 23, 1997, European Micro Holdings, Inc. was incorporated
and 4,000,000 shares of common stock with a par value of $0.01 per
share were issued. The 4,000,000 shares were issued to the shareholders
of European Micro Plc in exchange for the entire issued share capital
of that Company on January 31, 1998. The accounts presented in relation
to 1996 and 1997 are those of European Micro Plc as adjusted to take
account of the share for share exchange referred to above. The
consolidated financial statements of European Micro Holdings, Inc.
includes the results of operations and financial position of its wholly
owned subsidiaries. European Micro Holdings, Inc. and its subsidiaries
are hereinafter refereed to as "European Micro" or "the Company". The
following companies results of operations and financial position have
been included in the consolidated financial statements based upon the
relative percentages below.
<TABLE>
<CAPTION>
OWNERSHIP
<S> <C> <C> <C>
COMPANIES 1996 1997 1998
European Micro Holdings, Inc. - - 100%
Nor'easter Micro Inc. ** ** 100%
European Micro Plc 100% 100% 100%
European Micro GmbH 100% 100% 100%
European Micro BV * 100% 100% 100%
</TABLE>
* Company began operations in January 1996 and ceased to trade in
December 1996. There were no significant operating assets and therefore
there was no significant accounting effect for the discontinuance of
European Micro BV.
** Incorporated December 1997; commenced trading January 1998.
European Micro operates in a single industry trading computer
components. In principle the Company purchases components from
international suppliers, including related parties, and sells them in
local markets. The main trading company European Micro plc has its
principal operations are in Altrincham, England with its subsidiaries
operating in Germany and Holland. Nor'easter Micro Inc. has its
operations in Seabrook, New Hampshire.
The parent company holds a 50% interest in a Joint Venture company, Big
Blue Europe BV. Big Blue Europe BV commenced operations in January
1997. It has been included in these consolidated financial statements
under the equity method of accounting: 50% of the net assets and
results of its operations have been included. Big Blue Europe BV
operates in the same industry as the Company.
All consolidated companies have a June 30, fixed accounting period end.
2 ADJUSTMENTS AND RECLASSIFICATIONS TO STATUTORY BOOKS OF ACCOUNTS
European Micro Holdings, Inc. and the subsidiaries maintain their books
of accounts and prepare their statutory financial statements in their
local currencies and in accordance with local commercial practice and
tax regulations applicable in the countries where they are resident.
The accompanying consolidated financial statements are based on these
statutory records with adjustments and reclassifications for the
purpose of fair presentation in accordance with accounting principles
generally accepted in the United States.
F-7
<PAGE>
EUROPEAN MICRO HOLDINGS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements (CONTINUED)
3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The major accounting policies followed in the preparation of the
consolidated financial statements referred to above are set out below:
A) REVENUE AND EXPENSE RECOGNITION
Revenues are recognised at the time the goods are shipped. Revenues
from related parties are recognised when the products are sold by the
related parties to third parties. Discount and customer rebates are
deducted from sales revenue when earned. Costs of goods sold include
material costs only. Selling, general and administrative costs are
charged to expense as incurred.
B) PRINCIPLES OF CONSOLIDATION
The consolidated results of European Micro include the results of
operations of its wholly owned subsidiaries which it controls. The
principles of consolidation are as follows:
/bullet/ All investments in the subsidiaries are eliminated.
/bullet/ All significant intercompany balances and transactions have
been eliminated in consolidation.
Investments greater than 20%, in which the Company exercises
significant influence, however does not control the entity, are
accounted for under the equity method.
C) PRINCIPLES OF TRANSLATION OF THE FINANCIAL STATEMENTS
The subsidiaries record transactions in their local currencies which
represent their functional operating currencies. Transactions
denominated in currencies other than local currencies are recorded at
the exchange rates ruling at the date of the transactions. Assets and
liabilities denominated in currencies other than local currencies are
converted into the local currencies at the exchange rates ruling at
balance sheet date. Resulting exchange differences are recognised in
the income for the period.
The consolidated financial statements have been translated from their
local currencies into US dollars, the reporting currency.
D) PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is provided
to write off the cost less the estimated residual value of tangible
fixed assets by equal instalments over their estimated useful economic
lives as follows:
Office equipment - 50% per annum on cost
Fixtures & Fittings - 15% per annum on cost
Motor vehicles - 25% per annum on cost
The costs of ordinary maintenance and repairs are charged to expense as
incurred.
When assets are otherwise disposed of, the costs and related
accumulated depreciation are removed from the accounts and resulting
gain or loss is reflected in net income.
F-8
<PAGE>
EUROPEAN MICRO HOLDINGS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements (CONTINUED)
3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
E) IMPAIRMENT OF LONG-LIVED ASSETS
In March 1995, the US Financial Accounting Standards Board ("FASB")
issued SFAS No. 121, requiring that long-lived assets and certain
identifiable intangibles held and used by an entity be reviewed for
impairment whenever events or changes in circumstances indicate that
the carrying amount of the asset may not be recoverable. The Company
adopted this standard in 1996. Adoption of this standard did not have a
material impact on its result of operations or financial position.
F) INVENTORIES
Inventories are stated at the lower of cost or market value. Cost is
determined using the weighted average cost method.
G) INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognised for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carry-forwards.
Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates
is recognised in income in the period that includes the enactment date.
H) STOCK OPTION PLANS
The Company adopted Statement of Financial Accounting Standards (SFAS)
No. 123, "Accounting for Stock Based Compensation", which permits
entities to recognize as expense over the vesting period for the fair
value of all stock-based awards on the date of grant. Alternatively,
SFAS No. 123 also allows entities to continue to apply the provisions
of APB Opinion No. 25 and provide pro forma net income and pro forma
earnings per share disclosures for employee stock option grants made in
1998 and future years as if the fair-value based method defined in SFAS
No. 123 had been applied. The Company has elected to continue to apply
the provisions of APB Opinion No. 25 and provide the proforma
disclosure provisions of SFAS No. 123.
I) RELATED PARTY TRANSACTIONS
For the purpose of the accompanying consolidated financial statements,
shareholders and all companies in which there is direct or indirect
ownership by the shareholders of the consolidated companies are
considered as related parties.
J) USE OF ESTIMATES
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities and the
disclosure of contingent assets and liabilities to prepare these
financial statements in conformity with generally accepted accounting
principles in the United States. Actual results could differ from those
estimates. Significant estimates and assumptions include the amounts
reflected as allowance for doubtful receivable, allowance for obsolete
inventories, amounts due to customers under incentive programs, and
deferred tax assets.
F-9
<PAGE>
EUROPEAN MICRO HOLDINGS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements (CONTINUED)
3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(CONTINUED)
K) EARNINGS PER COMMON SHARE AND SHARE CAPITAL REORGANIZATION
SFAS No. 128 simplifies the earnings per share ("EPS") calculations
required by Accounting principles Board ("APB") Opinion No. 15, and
related interpretations, by replacing the presentation of primary EPS
with a presentation of basic EPS. SFAS No. 128 requires dual
presentation of basic and diluted EPS by entities with complex capital
structures. Basic EPS includes no dilution and is computed by dividing
income available to common stockholders by the weighted-average number
of common shares outstanding for the period. Diluted EPS reflects the
potential dilution of securities that could share in the earnings of an
entity, similar to the fully diluted EPS of APB Opinion No. 15. The
Company adopted the provisions of SFAS No. 128 and has presented EPS
for basic earnings per share.
Basic earnings per share for each year is computed by dividing net
income by the weighted average number of shares of common stock
outstanding during the year.
In December 1996 retained earnings amounting to $1,498,000 were
capitalized pursuant to the requirements to re-register the main
trading company European Micro Plc as a plc company in the United
Kingdom.
On incorporation of European Micro Holdings, Inc. in December 1997,
4,000,000 ordinary shares were issued with par value $0.01 per share.
The 4,000,000 shares were issued to the current shareholders of
European Micro Plc in exchange for the entire issued share capital of
that company on January 31, 1998. The weighted average number of shares
used in calculating earnings per share has been retroactively adjusted
to reflect the issued and outstanding ordinary shares of European Micro
Holdings, Inc. as 4,000,000 shares for 1996 and 1997. The Company has
only presented the basic earnings per share as diluted earnings per
share is the same as basic.
F-10
<PAGE>
EUROPEAN MICRO HOLDINGS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements (CONTINUED)
4 NEW ACCOUNTING PRONOUNCEMENTS
COMPREHENSIVE INCOME
SFAS No. 130 "Reporting Comprehensive Income" was issued in June 1997
and is effective for fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier periods provided
for comparative purposes is required.
It requires that all items that are required to be recognised under
accounting standards as components of comprehensive income be reported
in a financial statement that is displayed with the same prominence as
other financial statements. It requires that an enterprise (a) classify
items of other comprehensive income by their nature in a financial
statement and (b) display the accumulated balance of other
comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of a statement of financial
position.
The Company has adopted SFAS No 130, and has included comprehensive
income within the Statement of Shareholders' Equity.
SEGMENT INFORMATION
SFAS No. 131 "Disclosures about Segments of an Enterprise and Related
Information" was issued in June 1997 and is effective for fiscal years
beginning after December 15, 1997. In the initial year of application
comparative information for earlier years is to be restated.
The statement requires that companies disclose segment data based on
how management make decisions about allocating resources to segments
and measuring their performance. The statement also requires
entity-wide disclosures about the products and services an entity
provides, the material countries in which it holds assets and reports
revenues and its major customers.
The Company is currently reviewing the likely impact on the level of
disclosure currently provided in its financial statements. However, the
Company considers that there will be no impact as the company operates
within a single industry segment upon which management make decisions
and allocate resources.
DERIVATIVE INSTRUMENTS
SFAS No 133 "Accounting for Derivate Instruments and Hedging
Activities" was issued in June 1998 and is effective for fiscal years
beginning after June 15, 1999. The standard establishes accounting and
reporting standards for derivative instruments and hedging activities.
The Company is currently reviewing the likely impact on the level of
disclosure currently provided in its financial statements.
F-11
<PAGE>
EUROPEAN MICRO HOLDINGS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements (CONTINUED)
4 NEW ACCOUNTING PRONOUNCEMENTS (CONTINUED)
COST OF COMPUTER SOFTWARE
SOP 98-1 "Accounting for the costs of Computer Software Developed or
Obtained for Internal Use" was issued in January 1998 and is effective
for fixed years beginning after December 15, 1998. The Company does not
expect the adoption of SOP 98-1 to have a material impact on the
Company's financial statements.
START-UP ACTIVITIES
SOP 98-5 "Reporting on the Costs of Start-Up Activities" was issued in
April 1998 and is effective for fiscal years beginning after December
15, 1998. SOP 98-5 provides guidance on the financial reporting of
start-up costs and organization costs. It requires costs of start-up
activities and organization costs to be expensed as incurred. The
Company is evaluating the impact of the pronouncement.
5 TRADE RECEIVABLES, NET
Trade receivables consisted of receivables maturing within one year and
are as follows (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
1997 1998
---- --------
<S> <C> <C>
Total trade receivables $5,740 8,008
Less: Allowance for doubtful receivables (5) (23)
------ -----
$5,735 7,985
====== =====
Trade receivables include discounted trade receivables as follows (in
thousands):
JUNE 30,
1997 1998
---- --------
Discounted trade receivables (see Note 11) $2,779 -
Non discounted trade receivables 2,956 7,985
------ -----
$5,735 7,985
====== =====
</TABLE>
F-12
<PAGE>
EUROPEAN MICRO HOLDINGS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements (CONTINUED)
5 TRADE RECEIVABLES, NET (CONTINUED)
The allowance for doubtful trade receivables is constituted as follows
(in thousands):
<TABLE>
<CAPTION>
JUNE 30,
1997 1998
---- --------
<S> <C> <C>
Beginning balance $ - 5
Provision for bad debt 5 18
------ -----
Ending balance $ 5 23
====== =====
6 INVENTORIES
Inventories comprises (in thousands):
JUNE 30,
1997 1998
---- --------
Finished goods and goods for resale $1,595 1,724
Less: Allowance for inventory obsolescence (35) (9)
------ -----
$1,560 1,715
====== =====
The allowance for obsolescence is constituted as follows (in
thousands):
JUNE 30,
1997 1998
---- --------
Beginning balance $ 116 35
Provision for obsolescence (81) 248
Amounts written off - (274)
------ -----
Ending balance $ 35 9
====== =====
</TABLE>
F-13
<PAGE>
EUROPEAN MICRO HOLDINGS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements (CONTINUED)
7 OTHER CURRENT ASSETS
Other current assets comprised (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
1997 1998
---- --------
<S> <C> <C>
Amounts paid in advance for inventories $ - 2,015
ACT recoverable - 145
Other 37 299
----- ------
$ 37 2,459
===== =====
8 PROPERTY AND EQUIPMENT
Property and equipment comprised (in thousands):
JUNE 30,
1997 1998
---- -------
Furniture and fixtures $ 136 273
Computers and office equipment 365 509
Vehicles and other 282 328
------ -----
783 1,110
Less: accumulated depreciation (394) (499)
------ -----
NET BOOK VALUE $389 611
====== =====
The charge for depreciation in each of the three years ended June 30,
was as follows (in thousands):
YEAR ENDED JUNE 30,
1996 1997 1998
---- ---- ----
Depreciation expense $133 167 227
====== ===== =====
</TABLE>
F-14
<PAGE>
EUROPEAN MICRO HOLDINGS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements (CONTINUED)
9 INVESTMENTS (in thousands)
<TABLE>
<CAPTION>
YEAR ENDED
JUNE 30,
1997 1998
---- ----
<S> <C> <C>
Investments in Big Blue Europe BV $ 191 194
====== =====
PERIOD ENDED YEAR ENDED
JUNE 30, 1997 JUNE 30, 1998
------------- -------------
Cost of investment/equity investment in
unconsolidated affiliate brought forward $ 264 191
Equity in net (loss) income of unconsolidated
affiliate (73) 3
------ ------
At end of period/year $ 191 194
====== ======
</TABLE>
During the year ended June 30, 1997 European Micro Plc purchased 50% of
the issued share capital in Big Blue Europe BV at a cost of $264,000.
Big Blue Europe BV commenced trading in January 1997.
The equity share of loss is based on the results of Big Blue Europe BV
during the year ended June 30, 1998. A summarised statement of earnings
for Big Blue Europe BV for the year is set out below (in thousands):
<TABLE>
<CAPTION>
PERIOD ENDED YEAR ENDED
JUNE 30, 1997 JUNE 30, 1998
------------- -------------
<S> <C> <C>
Net sales $ 465 1,910
Cost of goods sold (354) (1,394)
------ ------
Gross profit 111 516
Operating expenses (325) (507)
------ ------
Income before income taxes (214) 9
Taxes on income 68 (3)
------ ------
NET (LOSS) INCOME (146) 6
====== ======
Equity in net (loss) income of unconsolidated affiliate $ (73) 3
====== ======
</TABLE>
F-15
<PAGE>
EUROPEAN MICRO HOLDINGS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements (CONTINUED)
10 BANK OVERDRAFT
The bank overdraft was as follows (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
1997 1998
---- --------
<S> <C> <C>
Bank overdraft $1,034 -
====== =====
</TABLE>
The bank overdraft is secured by a mortgage debenture over the assets
of the Company. Note, the collateral attaching to the discount creditor
(Note 11) and the hire purchase and capital leases (Note 15), take
priority over the mortgage debenture. At June 30, 1997 the bank
overdraft of $1,034,000 was secured by the mortgage debenture.
The bank overdraft facility is subject to review in July each year. The
facility available to the Company at June 30, 1998 was $5,800,000.
Interest is charged on the bank overdraft at 1.75% over the UK bank
borrowing rate which was 6% at June 30, 1997 and 7% at June 30, 1998.
Interest expense in relation to the bank overdraft in each of the three
years ended June 30, 1998 was as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Bank overdraft interest expense $ 119 133 168
======= ======= =======
</TABLE>
F-16
<PAGE>
EUROPEAN MICRO HOLDINGS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements (CONTINUED)
11 DISCOUNT CREDITOR
The discount creditor balance was as follows (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
1997 1998
---- --------
<S> <C> <C>
Discount creditor $2,223 -
====== ======
</TABLE>
The discount creditor balance represents the finance obligation to
various trade receivable balances which have been discounted. The trade
receivable balances which have been discounted, and are included within
trade receivables are as follows (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
1997 1998
---- --------
<S> <C>
Discounted trade receivable balances
(See Note 5) $2,779 -
====== ======
</TABLE>
Trade receivables can be financed up to a maximum of 85% of the value
of the trade receivables balance. The total capacity of the Company to
discount trade receivable balances at June 30, 1997 amounted to
$4,133,000 and at June 30, 1998 amounted to $6,388,000 of which
$2,223,000 and $nil was used respectively. Therefore the unused
available facility at June 30, 1997 amounted to $1,910,000 and at June
30, 1998 amounted to $6,388,000.
The discount creditor balance is secured by a direct interest on the
trade receivable balances to which it relates. The discount creditor
facility is reviewed annually in November of each year.
The finance company which provides the discount creditor facility has
full recourse to the Company with respect to any doubtful or
unrecovered amounts.
Interest is charged at 1.5% above the bank borrowing rate, which was 6%
at June 30, 1997, and 7% at June 30, 1998, on the discount creditor
balance. The discount creditor finance charge for each of the years in
the three-year period ended June 30, 1998 was as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Discount creditor finance charge $24 149 291
====== ====== ======
</TABLE>
F-17
<PAGE>
EUROPEAN MICRO HOLDINGS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements (CONTINUED)
12 TRADE PAYABLES
At June 30, trade payables consisted principally of balances resulting
from purchase transactions.
13 TAXES ON INCOME
Taxes on income is only attributable to income from continuing
operations and consists of (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Current taxation $ 490 564 2,393
Deferred taxation (17) 87 (80)
------ ----- ------
$ 473 651 2,313
====== ===== ======
</TABLE>
The taxes on income represent the statutory rate of tax of 33%/31%*
adjusted for permanent differences. The income tax expense, which
arises solely on continuing operations, is reconciled below (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Income before income taxes $1,318 1,685 6,798
====== ===== =====
Expected tax charge @ 33%/31%* $ 435 556 2,107
Tax on permanently disallowed items 38 95 206
------ ----- -----
Taxes on income $ 473 651 2,313
====== ===== =====
</TABLE>
* Statutory tax rate changed for the year ended June 30, 1998.
The reconciliation has been completed using the UK statutory taxation
rate since that is the location of the principal operations.
F-18
<PAGE>
EUROPEAN MICRO HOLDINGS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements (CONTINUED)
13 TAXES ON INCOME (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are
presented below (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
1997 1998
---- --------
<S> <C> <C>
DEFERRED TAX ASSETS:
Property and equipment, principally due to
differences in depreciation $ - 26
Net operating loss carried forward 11 -
------ ------
Total deferred tax assets 11 26
------ ------
DEFERRED TAX LIABILITIES:
Property and equipment, principally due to
differences in depreciation (65) -
------ ------
Total deferred tax liabilities (65) -
------ ------
Net deferred tax (liabilities) assets $ (54) 26
====== ======
</TABLE>
Net operating losses can be carried forward indefinitely.
There is no valuation allowance against the deferred tax assets.
14 OTHER CURRENT LIABILITIES
Other current liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
1997 1998
---- --------
<S> <C> <C>
Accrued expenses $ 215 710
VAT payable 33 41
PAYE and NIC 63 98
Hire purchase and capital leases (see Note 15) 44 70
Others 21 68
------ ------
$ 376 987
====== ======
</TABLE>
F-19
<PAGE>
EUROPEAN MICRO HOLDINGS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements (CONTINUED)
15 HIRE PURCHASE AND CAPITAL LEASES
Balances outstanding in relation to hire purchase and capital leases
were as follows (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
1997 1998
---- --------
<S> <C> <C>
Amounts payable:
Within one year (*) $ 44 70
After one year 45 84
------ -----
$ 89 154
====== =====
</TABLE>
(*) Included within other current liabilities (see Note 14)
Hire purchase and capital leases are secured by the asset to which they
relate. At June 30, 1997 and 1998 assets, all of which were motor
vehicles were pledged as security against the respective hire purchase
or capital lease agreements. Information in respect of assets held as
security were as follows (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
1997 1998
---- --------
<S> <C> <C>
Cost $ 232 253
Less: accumulated depreciation (97) (52)
------- ------
NET BOOK VALUE $ 135 201
======= ======
</TABLE>
Hire purchase and capital lease agreements are generally for periods of
three years and they attract interest at a fixed rate of 7.5%.
The interest payment is integral within each monthly repayment. The
interest charge was as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Hire purchase and capital lease interest $ 5 3 19
====== ====== =====
</TABLE>
F-20
<PAGE>
EUROPEAN MICRO HOLDINGS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements (CONTINUED)
15 HIRE PURCHASE AND CAPITAL LEASES (CONTINUED)
The present value of the future minimum lease payments of the capital
leases as of June 30 1998, in aggregate, for each of the five
succeeding years is as follows (in thousands):
JUNE 30,
--------
1999 70
2000 84
2001 -
2002 -
2003 -
----
$154
====
16 COMMON STOCK
After adjusting for the share capitalization disclosed in note 3(k) at
June 30 1997, and June 30, 1998 the Company's authorized common stock
consists of 20,000,000 shares with par value of $0.01 per share, and
authorised preferred stock consists of 1,000,000 shares with par value
of $0.01 per share. Outstanding common stock consisted of 4,000,000 at
June 30, 1997 and 4,933,900 at June 30, 1998 shares with par value of
$0.01 per share. The increase in the number of outstanding shares was
pursuant to the IPO effective on June 5, 1998.
Dividends are payable at the discretion of the board and the members of
the Company.
All common shares carry equal voting rights.
F-21
<PAGE>
EUROPEAN MICRO HOLDINGS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements (CONTINUED)
17 COMMITMENTS AND CONTINGENCIES
CONTINGENCIES
LEGAL PROCEEDINGS
The Company is involved in various claims and legal actions arising in
the ordinary course of business. In the opinion of management, the
ultimate disposition of these matters will not have a material adverse
effect on the Company's consolidated financial position, results of
operations, or liquidity.
LEASES
The Company's lease agreements comprise:
OPERATING LEASES
The future minimum lease payments under non cancellable operating
leases as of June 30, 1998 in aggregate for each of the five succeeding
years is as follows (in thousands):
LAND AND
OTHER BUILDINGS
----- ---------
June 30,
1999 $ 7 142
2000 7 142
2001 7 142
2002 7 142
2003 $ 7 142
==== ===
The operating leases expire in June 1998.
CAPITAL LEASES
The future minimum lease payments of capital leases are disclosed in
Note 15.
F-22
<PAGE>
EUROPEAN MICRO HOLDINGS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements (CONTINUED)
18 FOREIGN EXCHANGE CONTRACTS
The Company utilises derivative financial instruments in the form of
forward exchange contracts for the purpose of economic hedges of
anticipated sale and purchase transactions. In addition the Company
enters into economic hedges for the purposes of hedging foreign
currency market exposures of underlying assets, liabilities and other
obligations which exist as part of its ongoing business operations.
Where the foreign currency exposure is covered by a forward foreign
exchange contract the asset, liability or other obligation is recorded
at the contracted rate each month end and the resultant mark-to-market
gains and losses are recognised as cost of sales in the current period,
generally consistent with the period in which the gain or loss of the
underlying transaction is recognised. Cash flows associated with
derivative transactions are classified in the statement of cash flows
in a manner consistent with those of the exposure being hedged.
The Company places all foreign exchange forward contracts with Global
Financial Markets, a division of the National Westminster Bank PLC, a
leading European bank.
F-23
<PAGE>
EUROPEAN MICRO HOLDINGS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements (CONTINUED)
18 FOREIGN EXCHANGE CONTRACTS (CONTINUED)
EXCHANGE RATE SENSITIVITY
The table below summarises information on foreign currency forward
exchange agreements. The table presents the notional amounts and
weighted average exchange rates by expected (contractual) maturity
dates (in thousands except exchange rates).
<TABLE>
<CAPTION>
EXPECTED
MATURITY OR
TRANSACTION
DATE FAIR VALUE
----------- ----------
<S> <C> <C>
FORWARD EXCHANGE
AGREEMENTS
JUNE 30, 1998
(Receive (pound)/pay $US) July 10, 1998
Contract amount $700 $701
Average contractual
exchange rate $1.667/(pound)1
(Receive (pound)/pay PST) August 13, 1998
Contract amount $262 $262
Average contractual
exchange rate (pound)1/254.25
JUNE 30, 1997
(Receive $US/Pay(pound)) June 30, 1998
Contract amount $2,006 $2,006
Average contractual
exchange rate $1.66/(pound)1
(Receive (pound)/pay DM) June 30, 1998
Contract amount $430 $450
Average contractual
exchange rate (pound)0.36/DM
</TABLE>
The fair value has been determined by applying the mid-price of the
spread on the buy or sell rates as appropriate, of the relevant foreign
currency at the balance sheet date. The mid-price used is that quoted
by the Financial Times.
Income and losses in respect of the transaction foreign exchange
transactions were as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
(Loss) income on foreign exchange transactions $ 21 (157) (510)
===== ==== ====
</TABLE>
F-24
<PAGE>
EUROPEAN MICRO HOLDINGS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements (CONTINUED)
19 FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash and equivalents,
trade receivables, borrowings and trade payables and foreign exchange
contracts. The carrying amounts of cash and equivalents, trade
receivables, borrowings and trade payables approximate their fair
values because of the short maturity (see Note 18 for fair value of
forward exchange contracts).
20 RELATED PARTY INFORMATION
RELATED PARTY TRANSACTIONS
European Micro Plc has belonged to a group of related companies called
Micro Computer Center Group (the "Group"). The Group is comprised of
European Micro Plc, Technology Express Inc.. located in Nashville,
Tennessee ("Technology Express"), American Surgical Supply Corp. d/b/a
American Micro Computer Center in Miami, Florida ("American Micro
Computer Center") and, until August 1, 1997, Ameritech Exports Inc..
located in Miami, Florida ("Ameritech Exports") and Ameritech Argentina
S.A. located in Buenos Aires, Argentina ("Ameritech Argentina"). All
members of the Group were owned and controlled by either of the two
primary shareholders of European Micro Plc, John B. Gallagher and/or
Harry D. Shields and their families.
The rates charged on related party sales are lower than they would be
in arms length transactions. There are bulk buying arrangements with
the related parties which gives European Micro Plc the benefit that it
can buy large job-lots at more competitive prices than it would
otherwise be possible to do and then immediately sell on part of the
purchase to the related parties. In practical terms, the sales to
related parties are to the distributors in a similar trade to European
Micro Plc and these parties would not buy at higher prices.
Related party transactions are summarised as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
1996 1997 1998
<S> <C> <C> <C>
SALES
American Micro Computer Center $306 66 9,875
Technology Express 104 (2) 19,217
Ameritech Argentina - 90 -
Ameritech Exports 26 - -
------- ------ ------
$436 154 29,092
======= ====== ======
PURCHASES
American Micro Computer Center $2,289 1,092 507
Technology Express 14,890 20,717 8,749
Ameritech Argentina - - -
Ameritech Exports 1,116 848 -
------- ------ ------
$18,295 22,657 9,256
======= ====== ======
</TABLE>
F-25
<PAGE>
EUROPEAN MICRO HOLDINGS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements (CONTINUED)
20 RELATED PARTY INFORMATION (IN THOUSANDS) (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
1996 1997 1998
<S> <C> <C> <C>
OPERATING EXPENSES
CONSULTANCY FEES
American Micro Computer Center $50 60 45
Technology Express 50 60 45
--- --- ---
100 120 90
--- --- ---
MANAGEMENT FEES
Technology Express 37 16 14
--- --- ---
37 16 14
--- --- ---
RECHARGED CONSULTANCY FEES
American Micro Computer Center (14) (27) -
Technology Express (14) (27) -
Ameritech Argentina (8) (13) -
Ameritech Exports (7) (14) -
--- --- ---
(43) (81) -
--- --- ---
$94 55 104
=== === ===
</TABLE>
"Recharged consultancy fees" represent the consultancy fees charged
by Mr Gilbert to European Micro Plc, before he was appointed as a
director of the same, which have been recharged to the related
companies on the basis of the work completed by Mr Gilbert in respect
of those related parties.
F-26
<PAGE>
EUROPEAN MICRO HOLDINGS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements (CONTINUED)
20 RELATED PARTY INFORMATION (CONTINUED)
DUE FROM/TO RELATED PARTIES
a) Due from related parties comprised the following balances (in
thousands):
<TABLE>
<CAPTION>
JUNE 30,
1997 1998
<S> <C> <C>
American Micro Computer Center $240 54
Technology Express - 844
Ameritech Argentina 329 -
Ameritech Exports - -
---- ---
$569 898
==== ===
</TABLE>
b) Due to related parties comprised of following balances (in
thousands):
<TABLE>
<CAPTION>
JUNE 30,
1997 1998
<S> <C> <C>
American Micro Computer Center $- 12
Technology Express 188 226
Ameritech Argentina - -
Ameritech Exports - -
---- ---
$188 238
==== ===
</TABLE>
NATURE OF RELATED PARTY RELATIONSHIPS
The entities listed above are related to the company in the following
manner:
AMERICAN MICRO COMPUTER CENTER
American Micro Computer Center is a distributor of computer hardware
based in Miami, Florida. John B. Gallagher who is Co-Chairman,
Co-President, Director and shareholder (owning 39% of the outstanding
shares after the Offering) in the company is a president of American
Micro Computer Center and owns 33.3% of the stock in that company.
F-27
<PAGE>
EUROPEAN MICRO HOLDINGS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements (CONTINUED)
20 RELATED PARTY INFORMATION (CONTINUED)
NATURE OF RELATED PARTY RELATIONSHIPS (CONTINUED)
TECHNOLOGY EXPRESS, INC.
Until 1996, Technology Express, Inc. was a full service authorized
reseller of computers and related products based in Nashville,
Tennessee, selling primarily to end-users. Technology Express, Inc. was
sold to Inacomp Computers in 1996. Concurrently with the sale, Mr.
Shields founded a new computer company with the name Technology
Express. This company is a distributor of computer products and does
not sell to end-users. Harry D. Shields who is Co-Chairman,
Co-President, Director and shareholder (owning 39% of the outstanding
shares after the Offering) of European Micro is president of Technology
Express and owns 100% of the outstanding shares of common stock of that
company.
AMERITECH ARGENTINA SA
Ameritech Argentina SA is an authorized distributor of Compaq, Hewlett
Packard, IBM and Acer computers and accessories in Argentina. Messrs.
Shields and Gallagher were both Directors of Ameritech Argentina SA and
owned 50% of the outstanding shares of common stock each until its sale
on August 1, 1997.
AMERITECH EXPORTS INC.
Ameritech Exports Inc. is an authorized distributor of Compaq computers
and accessories into Caribbean and certain parts of central and South
America. Messrs. Shields and Gallagher were both Directors of Ameritech
Exports Inc. and owned 50% of the outstanding shares of common stock
each until its sale on August 1, 1997.
F-28
<PAGE>
EUROPEAN MICRO HOLDINGS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements (CONTINUED)
21 SEGMENTAL INFORMATION AND CONCENTRATIONS
The Company's operations involve a single industry segment,
distribution of microcomputer equipment and software products. The
Company principally operates in two geographical areas being the UK and
the US and it exports product to other countries mainly within Europe.
A geographical analysis of the Company's operating revenues and export
sales is set out below (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
1996 1997 1998
<S> <C> <C> <C>
UK $11,876 21,050 30,712
Germany 11,305 8,282 13,476
Netherlands 8,230 4,653 10,168
Other EC countries 6,879 10,163 18,130
United States 436 154 30,999
Other 1,622 2,353 7,968
------- ------ -------
$40,348 46,655 111,453
======= ====== =======
</TABLE>
Included within $30,999,000 from the United States is an amount of
$3,559,000 from the Company's subsidiary operation Nor'easter Micro
Inc., which is based in the United States, the remaining revenues
represent export sales.
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.
Most of the Company's sales are made in sterling or US dollars. In some
countries, certain purchases and the resulting payables are in
currencies which are different than the functional currency of European
Micro Holdings, Inc.
F-29
<PAGE>
EUROPEAN MICRO HOLDINGS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements (CONTINUED)
21 SEGMENTAL INFORMATION AND CONCENTRATIONS (CONTINUED)
The following table summarizes purchases from major suppliers in excess
of 10% for the period as a percentage of total purchases:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
1996 1997 1998
<S> <C> <C> <C>
RELATED PARTY
Technology Express 43.2% 51.1% -
THIRD PARTIES
Supplier A 14.1% - -
B - - 38.9%
C - - 14.0%
D - - 10.0%
</TABLE>
The following table summarizes sales to major customers (sales in
excess of 10% for the period) as a percentage of total sales:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
1996 1997 1998
<S> <C> <C> <C>
RELATED PARTY
Technology Express - - 17.2%
THIRD PARTY
Customer E 10.2% - -
</TABLE>
The Company and it subsidiaries believe that their relationship with
the above customers are good and has no reason to believe that its
distribution arrangement will not be a long-term relationship. Amounts
outstanding at the end of each year are as follows:
DEBTOR BALANCE OUTSTANDING (IN THOUSANDS):
<TABLE>
<CAPTION>
JUNE 30,
1996 1997 1998
<S> <C> <C> <C>
RELATED PARTY
Technology Express $844
THIRD PARTY
Customer E $1,168
</TABLE>
F-30
<PAGE>
EUROPEAN MICRO HOLDINGS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements (CONTINUED)
22 EMPLOYEE STOCK OPTION PLANS
EMPLOYEE STOCK INCENTIVE PLAN
In January 1998, European Micro Holdings, Inc. adopted the 1998 Stock
incentive Plan ("the plan"). The total number of shares initially
authorized to be issued under the plan is 500,000 shares of common
stock. The plan will be administered by a committee of the Board ("the
committee"). The committee may grant to such participants as the
committee may select options entitling the participants to purchase
shares of common stock for the company in such numbers, at such prices
and on such terms and subject to such conditions, consistent with the
terms of the plan, as may be established by the committee. The plan
shall remain in effect until terminated by an action of the Board.
EMPLOYEE STOCK OPTION PLAN
In January 1998, European Micro Holdings, Inc. adopted the 1998
Employee Stock Purchase Plan ("the employee plan"). The purpose of the
employee plan is to provide a method whereby employees of European
Micro Holdings, Inc. and its subsidiaries will have an opportunity to
acquire a proprietary interest in European Micro Holdings, Inc. through
the purchase of shares of common stock. The Committee, as appointed by
the Board, will administer the employee plan. The maximum number of
shares of common stock which shall be issued under the employee plan is
50,000. The options issued under the employee plan, to eligible
employees, will be exercisable at 85% of market value or such higher
percentage (not in excess of 100%) as may be established by the
employee plan committee. The employee plan shall remain in effect until
terminated by an action of the Board.
The per share weighted-average fair value of stock options granted
during 1998 was $6.31 on the date of grant using the Black Scholes
option-pricing model with the following weighted average assumptions:
expected dividend yield 0%; risk free interest rate 5.5%; volatility
57%; and an expected life of 7 years.
The Company applies APB Opinion No. 25 in accounting for its plan and,
accordingly, no compensation cost has been recognised for its stock
options in the financial statements. Had the Company determined
compensation cost based on the fair value of the date of grant for its
stock options under SFAS No. 123, the Company's net income would have
been reduced to the pro forma amounts indicated below (in thousands,
except per share data):
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
1996 1997 1998
<S> <C> <C> <C>
NET INCOME: As reported $845 1,034 4,485
===== ===== =====
Pro forma $845 1,034 4,431
===== ===== =====
EPS, BASIC: As reported $0.21 0.26 1.10
===== ===== =====
Pro forma $0.21 0.26 1.09
===== ===== =====
EPS, DILUTED: As reported $0.21 0.26 1.10
===== ===== =====
Pro forma $0.21 0.26 1.08
===== ===== =====
</TABLE>
F-31
<PAGE>
EUROPEAN MICRO HOLDINGS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements (CONTINUED)
22 EMPLOYEE STOCK OPTION (CONTINUED)
The full impact of calculating compensation cost for stock options
under SFAS No. 123 is not reflected in the pro forma net income amounts
presented above because compensation cost is reflected over the
options' vesting period of several years. The vesting period for stock
options granted to employees is usually 6 years.
Compensation cost arising during the year ended June 30, 1998 in
relation to stock options granted during the year amounted to $28,000.
The vesting period for stock options granted to non-employees varies
between 1 and 6 years.
A summary of the status of the Company's two fixed stock option plans
at June 30, 1998 and changes during the year is presented below:
<TABLE>
<CAPTION>
NUMBER
<S> <C>
Granted 294,000
Exercised -
Forfeited -
-------
OUTSTANDING AT JUNE 30, 1998 294,000
=======
</TABLE>
OPTIONS OUTSTANDING
A summary of the options outstanding of the Company's two fixed stock
option plans at June 30, 1998 is presented below:
<TABLE>
<CAPTION>
EXERCISE PRICE JUNE 30, 1998 WEIGHTED AVERAGE
NUMBER OUTSTANDING REMAINING
CONTRACTUAL LIFE
<S> <C> <C>
$10.00 294,000 7 years
=======
</TABLE>
OPTIONS EXERCISABLE
A summary of the options exercisable of the Company's two fixed stock
option plans at June 30, 1998 is presented below:
<TABLE>
<CAPTION>
NUMBER EXERCISABLE AT WEIGHTED AVERAGE
JUNE 30, 1998 EXERCISE PRICE
<S> <C> <C>
Options exercisable Nil $10.00
=== ======
</TABLE>
F-32
<PAGE>
EUROPEAN MICRO HOLDINGS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements (CONTINUED)
23 EARNINGS PER SHARE
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, ,
EARNINGS 1996 1997 1998
<S> <C> <C> <C>
Net income (in thousands) $845 1,034 4,485
========= =========
WEIGHTED AVERAGE NUMBER OF SHARES
Outstanding common stock at beginning of 4,000,000 4,000,000 4,000,000
year
New shares issued - - 66,524
--------- --------- ---------
BASIC WEIGHTED AVERAGE NUMBER OF SHARES 4,000,000 4,000,000 4,066,524
Options to subscribe for new stock - - 20,942
--------- --------- ---------
DILUTED WEIGHTED AVERAGE NUMBER OF SHARES 4,000,000 4,000,000 4,087,466
========= ========= =========
Basic earnings per share $0.21 $0.26 $1.10
========= ========= =========
Diluted earning per share $0.21 $0.26 $1.10
========= ========= =========
</TABLE>
The impact of the stock options issued during the current period is not
dilutive.
24 SUPPLEMENTAL CASH FLOW INFORMATION (in thousands)
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
1996 1997 1998
<S> <C> <C> <C>
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid $(156) (290) (478)
Taxes on paid income (578) (584) (191)
----- ---- ----
$(734) (874) (669)
===== ==== ====
</TABLE>
25 SUBSEQUENT EVENTS (UNAUDITED)
In September 1998 the Company signed a non-binding letter of intent to
acquire the entire share capital of a company which operates in the
same industry. The maximum acquisition price set out in the letter of
intent is $4.1 million plus an earn out.
F-33
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
10.17 Form of Credit Agreement by and between European Micro Plc and
National Westminster Bank Plc
21.01 Subsidiaries of the Registrant
23.01 Consents of experts and counsel
27.01 Financial Data Schedule
EXHIBIT 10.17
DATED 1998
EUROPEAN MICRO PLC
as Borrower
and
NATIONAL WESTMINSTER BANK PLC
as Bank
------------------------------------------------------
CREDIT AGREEMENT
RELATING TO A
BILATERAL STERLING REVOLVING LOAN FACILITY
OF UP TO /POUND STERLING/3,500,000
------------------------------------------------------
WILDE SAPTE
1 Fleet Place
London EC4M 7WS
Tel. 0171 246 7000
Fax. 0171 246 7777
REF. # LVM/GP/128274/BF323501.06
<PAGE>
TABLE OF CONTENTS
CLAUSE HEADING PAGE NO.
1. DEFINITIONS AND INTERPRETAION.........................1
1.1 Definitions .........................................1
1.2 Headings .............................................9
1.3 Intepretation.........................................9
2. FACILITY ............................................10
3. PURPOSE .............................................10
3.1 Purpose .............................................10
3.2 No monitoring........................................10
4. CONDITIONS PRECENDENT................................10
5. DRAWDOWN ............................................11
5.1 Commitment Period....................................11
5.2 Conditions to each Advance...........................11
5.3 Drawdown Notice......................................11
5.4 Limitations on Advances..............................11
5.5 Advances ............................................12
6. INTEREST ............................................12
6.1 Interest rate........................................12
6.2 Interest Periods.....................................12
6.3 Default interest.....................................13
6.4 Calculation and payment of interest..................13
6.5 Bank's determination.................................13
7. REPAYMENT AND PREPAYMENT.............................13
7.1 Repayment ...........................................13
7.2 Prepayment ..........................................14
8. CANCELLATION ........................................15
8.1 Cancellation ........................................15
8.2 Notice ..............................................15
8.3 Effect of cancellation...............................15
8.4 Limitation ..........................................15
9. CHANGES IN CIRCUMSTANCES.............................15
9.1 Illegality ..........................................15
9.2 Increased Costs......................................15
9.3 Market disruption....................................17
9.4 Mitigation ..........................................17
9.5 Certificates ........................................18
10. PAYMENTS ............................................18
10.1 Funds ...............................................18
10.2 Payments ............................................18
10.3 Change of account....................................18
10.4 Business Days........................................18
10.5 Currency ............................................18
<PAGE>
10.6 Accounts as evidence.................................18
10.7 Partial payments.....................................19
10.8 Set-off and counterclaim.............................19
10.9 Grossing-up ........................................19
11. SECURITY ............................................21
12. REPRESENTATIONS AND WARRANTIES.......................21
12.1 Representations and warranties.......................21
12.2 Repetition ..........................................23
13. UNDERTAKINGS ........................................24
13.1 Information undertakings.............................24
13.2 Positive undertakings................................26
13.3 Negative undertakings................................27
13.4 Financial undertakings...............................28
14. DEFAULT ............................................#28
14.1 Default ............................................#28
14.2 Acceleration .......................................#30
15. SET-OFF ............................................31
16. FEES AND EXPENSES....................................31
16.1 Expenses ............................................31
16.2 Drawdown fee ........................................31
16.3 Commitment fee......................................#31
16.4 Documentary Taxes indemnity..........................32
16.5 VAT .................................................32
16.6 Indemnity payments...................................32
17. WAIVERS; REMEDIES CUMULATIVE.........................32
18. MISCELLANEOUS........................................33
18.1 Severance ...........................................33
18.2 Counterparts ........................................33
18.3 Entire agreement.....................................33
19. NOTICES .............................................33
19.1 Method ..............................................33
19.2 Delivery ............................................33
19.3 Addresses .. ........................................33
19.4 Deemed receipt.......................................34
20. ASSIGNMENTS AND TRANSFERS............................34
20.1 Benefit of Agreement.................................34
20.2 Assignments and transfers by Borrower................34
20.3 Assignments by Bank..................................34
20.4 Transfers by Bank....................................34
20.5 Consequences of transfer.............................35
20.6 Disclosure of information............................35
21. INDEMNITIES .........................................35
21.1 Breakage costs indemnity.............................35
21.2 Currency indemnity...................................35
21.3 General .............................................36
22. LAW .................................................36
<PAGE>
SCHEDULE 1 CONDITIONS PRECEDENT...............................37
SCHEDULE 2 DRAWDOWN NOTICE....................................38
SCHEDULE 3 - Part 1 - GROUP COMPANIES.........................40
SCHEDULE 3 - Part 2 - MATERIAL COMPANIES......................40
SCHEDULE 4 MANDATORY # COST RATE FORMULA......................41
<PAGE>
THIS AGREEMENT is made on 1998
BY:
(1) EUROPEAN MICRO PLC, a company incorporated in England and Wales with
registered number 2663964 (the "Borrower"); and
(2) NATIONAL WESTMINSTER BANK PLC as the Bank (as that term is more
particularly defined below)
IT IS AGREED as follows:
1. DEFINITIONS AND INTERPRETATION
1.1. DEFINITIONS
In this Agreement:
"ACCOUNTS" means the audited consolidated accounts (including all
additional information and notes to the accounts) of the Borrower
together with the relevant directors' report and auditors' report.
"ADVANCE" means in advance made or to be made to the Borrower under the
Facility or, as the case may be, the outstanding principal amount of
any such advance.
"AUDITORS" means Messrs KPMG Peat Marwick or any other firm of
chartered accountants of internationally recognised standing that has
been appointed as auditors of the Borrower.
"AVAILABLE FACILITY" means the Facility Limit less the Loan.
"BANK" means National Westminster Bank Plc and its successors in title,
assignees and transferees.
"BUSINESS DAY" means a day (other than a Saturday or Sunday) on which
banks and foreign exchange markets are open for business in London.
"CERTIFIED COPY" means, in relation to a document, a copy of that
document bearing the endorsement "Certified a true, complete and
accurate copy of the original, which has not been amended otherwise
than by a document, a Certified Copy of which is attached hereto",
which has been signed and dated by a duly authorised officer of the
relevant company and which complies with that endorsement.
"CHANGE" means, in relation to the Bank (or any company of which the
Bank is a Subsidiary), the introduction, implementation, repeal,
withdrawal or change in, or in the interpretation or application of,
(a) any law, regulation, practice or concession, or (b) any directive,
requirement, request or guidance (whether or not having the force of
law but if not having the force of law, one which applies generally to
a class or category of financial institutions of which the Bank (or
that company) forms part and compliance with which is in accordance
with the general practice of those financial institutions) of the
European Community, any central bank including the European Central
Bank, or any other fiscal, monetary, regulatory or other authority.
-1-
<PAGE>
"COMMITMENT PERIOD" means the period starting on the date of this
Agreement and ending on the date falling 3 days before the Final
Repayment Date.
"COMPOSITE GUARANTEE" means a composite guarantee in respect of the
obligations of the other Group Companies to the Bank in the Bank's
standard form.
"DANGEROUS MATERIALS" means any element or substance, whether
consisting of gas, liquid, solid or vapour, identified by any
Environmental Law to be, to have been, or to be capable of being or
becoming, harmful to mankind or any living organism or damaging to
the Environment.
"DEFAULT" means any event specified as such in Clause 14.1.
"DELIVERY NOTE" means the delivery note to be attached to a Drawdown
Notice in accordance with Clause 5.3.
"DEPRECIATION" has the meaning given to that term by GAAP.
"DISPOSAL" means a sale, transfer or other disposal (including by way
of lease or loan) by a person of all or part of its assets, whether
by one transaction or a series of transactions and whether at the
same time or over a period of time.
"DRAWDOWN DATE" means the date on which an Advance is made, or is
proposed to be made.
"DRAWDOWN NOTICE" means a notice substantially in the form set out in
Schedule 2.
"ELIGIBLE DOCTORS" means the trade debtors of the Group at any time
but excluding:
(a) any debts which are more than 90 days past the due date for
payment;
(b) any debts which have been assigned to LND pursuant to the Invoice
Discounting Agreement; and
(c) any debts that are subject to any factoring or similar
arrangement which any member of the Group may enter into.
"ELIGIBLE INVENTORY" means any product manufactured by a Nominated
Manufacturer which is a current model of such Nominated Manufacturer
and which is capable of being discounted under the Invoice
Discounting Agreement.
"ENCUMBRANCE" means any mortgage, charge, assignment by way of
security, pledge, hypothecation, lien, right of set-off, retention of
title provision, trust or flawed asset arrangement (for the purpose
of, or which has the effect of, granting security) or any other
security interest of any kind whatsoever, or any agreement, whether
conditional or otherwise, to create any of the same, or any agreement
to sell or otherwise dispose of any asset on terms whereby such asset
is or may be leased to or re-acquired or acquired by any Material
Company.
"ENVIRONMENTAl" means all or any of the following media: air
(including air within buildings or other structures and whether above
or below ground); land (including buildings and any other structures
or erections in, on or under it and any soil and anything below the
surface of land); land covered with water; and water (including sea,
ground and surface water).
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"ENVIRONMENTAL LAW" means any statutory or common law, treaty,
convention, directive or regulation having legal or judicial effect
whether or a criminal or civil nature, concerning:
(a) pollution or contamination of the Environment;
(b) harm, whether actual or potential, to mankind and human senses,
living organisms and ecological systems;
(c) the generation, manufacture, processing, distribution, use
(including abuse), treatment, storage, disposal, transport
or handling of Dangerous Materials; or
(d) the emission, leak, release or discharge into the
Environment of noise, vibration, dust, fumes, gas, odours,
smoke, steam, effluvia, heat, light, radiation (of any
kind), infection, electricity or any Dangerous Material
and any matter or thing capable of constituting a nuisance
or an actionable tort of any kind in respect of such
matters.
"EXCEPTIONAL ITEMS" has the meaning given to that term in FRS3, but
excluding those items listed in paragraph 20 of FRS3.
"FACILITY" means the Sterling revolving loan facility granted to the
Borrower under this Agreement.
"FACILITY LIMIT" means, subject to Clause 5.4, (pound)3,5000,000, as
reduced or cancelled in accordance with this Agreement.
"FACILITY PERIOD" means the period starting on the date of this
Agreement and ending on the date on which all the obligations and
liabilities of the Material Companies under the Financing Documents
are discharged in full and the Bank has no continuing obligation in
relation to the Facility.
"FINAL REPAYMENT DATE" means the date falling 364 days after the date
of this Agreement.
"FINANCE LEASE" means any lease, hire agreement, credit sale
agreement, purchase agreement, conditional sale agreement or
installment sale and purchase agreement which should be treated in
accordance with SSAP 21 (or any successor to SSAP 21) as a finance
lease or in the same way as a finance lease.
"FINANCIAL YEAR", in relation to a company, has the meaning given to
that term in section 223 of the Companies Act 1985.
"FINANCING DOCUMENTS" means this Agreement and the Security #
documents.
"FREE STOCK" means the stock in trade of the Group which is not
subject to any claims under reservation of title, liens or otherwise.
"FRS" together with a number means the financial reporting standard
issued by the Accounting Standards Board for application in England
and Wales and identified by reference to that number.
"GAAP" means, in relation to a company, accounting principles,
concepts, bases and policies generally adopted and accepted in the
jurisdiction of its incorporation.
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"GROUP" means the Borrower and its Subsidiaries; and "GROUP COMPANY"
means any of them.
"INDEBTEDNESS" means, in relation to a person its obligation (whether
present or future, actual or contingent, as principal or surety) for
the payment or repayment of money (whether in respect of interest,
principal or otherwise) incurred in respect of:
(a) moneys borrowed or raised;
(b) any bond, note, loan stock, debenture or similar instrument;
(c) any acceptance credit, bill discounting, note purchase, factoring
or documentary credit facility;
(d) the supply of any goods or services which is more than [45] days
past the due date;
(e) any hire purchase agreement, conditional sale agreement or
lease, where that agreement has been entered into
primarily as a method of raising finance or financing the
acquisition of an asset;
(f) any guarantee, bond, stand-by letter of credit or other
similar instrument issued in connection with the
performance contracts;
(g) any interest rate or currency swap agreement or any other hedging
or derivatives instrument or agreement;
(h) any arrangement pursuant to which any asset sold or
otherwise disposed of by that person is or may be leased
to or re-acquired by a Group Company (whether following
the exercise of an option or otherwise); or
(i) any guarantee, indemnity or similar insurance against
financial loss given in respect of the obligation of any
person.
"INTEREST PERIOD" means each period determined in accordance with
Clause 6 for the purpose of calculating interest on Advances or
overdue amounts.
"INVOICE DISCOUNTING AGREEMENT" means the invoice discounting
agreement dated * and made between LND and the Borrower.
"LENDING OFFICE" means the office set out under the Bank's name in
Clause 19.3 or such other office in the United Kingdom through which
the Bank maintains the Facility under this Agreement.
"LIBOR" means, in relation to an Advance or other sum and in relation
to a particular Interest Period:
(a) the rate of the offered quotation for Sterling deposits
for a period comparable to that Interest Period which
appears on the display designated as "Page 3750" on the
Telerate Service (or such other page or service as may
replace it for the purpose of displaying London interbank
offered rates of prime banks for Sterling deposits) at or
about 11.00 a.m. on the first day of that Interest Period;
or
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(b) if no such display rate is available, the rate per annum
(rounded upwards to the nearest whole multiple of 1/16% at
which the Bank was offering deposits in Sterling in an
amount comparable with that Advance or other sum, as the
case may be, to leading banks in the London interbank
market for a period equal to that Interest Period at or
about 11.00 a.m. on the first day of that Interest Period.
"LOAN" means, at any time, the aggregate of all Advances outstanding
at that time.
"LND" means Lombard NatWest Discounting Limited.
"MANDATORY # COST RATE" means the rate determined in accordance with
Schedule 4#.
"MARGIN" means 1.75 per cent per annum.
"MATERIAL ADVERSE EFFECT" means a material adverse effect on (a) the
ability of any Group Company to comply with its obligations under the
Financing Documents or (b) the business, financial condition or
assets of the Group taken as a whole.
"MATERIAL COMPANY" means the Borrower and each Group Company at any
time:
(a) whose profits are equal to or greater than 5 per cent of the
aggregate profits of the Group; or
(b) whose assets have a value equal to or greater than 5 per cent of
the aggregate value of all assets owned by the Group.
For the purpose of paragraph (a) above, profits shall be measured for
each period of 6 months duration ending on a Quarter Date.
"MORTGAGE DEBENTURE" means a mortgage debenture in the Bank's
standard form.
"NET INDEBTEDNESS" means Indebtedness less cash at bank and cash at
hand.
"NOMINATED MANUFACTURERS" means IBM, Hewlett Packard and Compaq and
"NOMINATED MANUFACTURER" shall be construed accordingly.
"OPERATING BUDGET" means, in relation to the Group and the period of
12 months starting not later than the date of this Agreement, the
Operating Plan, and in relation to each successive 12 month period
thereafter during the Facility Period:
(a) a projected balance sheet;
(b) a projected profit and loss account;
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(c) a projected cash flow statement; and
(d) projected covenant calculations relating to each financial
undertaking contained in Clause 13.4,
relative to each such period and on a month by month basis and with a
commentary drawing on the previous period's performance and forecast
market conditions.
"OPERATING PLAN" means the operating plan for the Group dated 5th
February 1998.
"PARTY" means a party to this Agreement.
"PBIT" means, in relation to any period, the consolidated profit of
the Group for that period (including, for the avoidance of doubt,
Exceptional Items) before Taxation and Total Debt Costs, but
excluding:
(a) profit attributable to minority interests;
(b) Extraordinary Items;
(c) any profit or loss arising on the disposal of fixed assets;
(d) mounts written off the value of investments;
(e) amounts written off the value attributed to net goodwill arising
on any acquisition after the date of this Agreement;
(f) income from participating interests in associated undertakings
and income from any other fixed asset investment; and
(g) realised and unrealised exchange gains and losses.
"PBITDA" means, in relation to any period, the aggregate of:
(a) PBIT; and
(b) Depreciation charged to the consolidated profit and loss account
of the Group during that period.
"PERMITTED ENCUMBRANCE" means:
(a) any Encumbrance subsisting under or in connection with any
Financing Document;
(b) any right of set-off arising by operation of law or in the
ordinary course of trading;
(c) any lien arising by operation of law in the ordinary course of
trading;
(d) any Encumbrance arising out of retention of title
provisions in a supplier's standard conditions of supply
in respect of goods acquired by a Group Company in the
ordinary course of trading; or
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(e) any agreement entered into by a Group Company in the
ordinary course of trading under which it is to sell or
otherwise dispose of any asset on terms whereby such asset
is or may be leased to or re-acquired or acquired by any
Group Company.
"PERMITTED INDEBTEDNESS" means:
(a) Indebtedness outstanding under any Financing Document;
(b) Indebtedness under any arrangement pursuant to which any
asset sold or otherwise disposed of by any Group Company
is or may be leased to or re-acquired by any Group Company
where such arrangement was entered into in the ordinary
course of trading; and
(c) Indebtedness under the Invoice Discounting Agreement.
"POTENTIAL DEFAULT" means an event or omission which, with the giving
of any notice, the lapse of time, the determination of materiality or
the satisfaction of any other condition under Clause 14.1, would be a
Default.
"PRE SOLD" means Eligible Inventory which a customer has indicated
orally (not more than 7 days before a Drawdown Date) or in writing
(not more than 1 month before a Drawdown Date) it wishes to take
delivery of.
"QUALIFYING BANK" means an institution which is a bank for the
purposes of section 349 of the Income and Corporation Taxes Act 1988.
"QUARTER DATE" means 31st March, 30th June, 30th September, 31st
December.
"SECURITY # DOCUMENTS" means the documents listed in Column 3 of
Schedule 3 and any other guarantee or document creating, evidencing
or acknowledging security in respect of any of the obligations and
liabilities of any Group Company under any Financing Document.
"SSAP" together with a number means the statement of standard
accounting practice issued by the Institute of Chartered Accountants
for application in England and Wales and identified by reference to
that number.
"STERLING" and "(POUND)" means the lawful currency for the time being
of the United Kingdom.
"SUBSIDIARY" means a subsidiary within the meaning of section 736 of
the Companies Act 1985.
"TAXES" includes all present and future taxes, charges, imposts,
duties, levies, deductions, withholdings or fees of any kind
whatsoever, or any amount payable on account of or as security for
any of the foregoing, by whomsoever on whomsoever and wherever
imposed, levied, collected, withheld or assessed, together with any
penalties, additions, fines, surcharges or interest relating thereto;
and "Tax" and "Taxation" shall be construed accordingly.
"TANGIBLE NET WORTH" means, on any date, the aggregate amount of the
paid up share capital of the Borrower as at that date including
amounts standing to the credit of the share premium account and any
capital redemption reserves plus or minus, as the case
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may be, the aggregate amount standing in the Group's capital and
revenue reserves (on a consolidated basis) as at that date:
(a) adjusted as may be appropriate to take account of any
variation in that share capital account and share premium
account since 30th June 1997;
(b) deducting any amounts attributable to any intangible asset
included as an asset in the Borrower's latest consolidated
balance sheet excluding amounts attributable to the net
goodwill arising on any acquisition after the date of this
Agreement;
(c) excluding any capital accounts or reserves derived from
any writing up of book value of any assets of any Group
Company above historic cost less accumulated Depreciation
at any time after the date of this Agreement;
(d) adding back any diminution due to the writing off of the
net goodwill arising on the any acquisition after the date
of this Agreement;
(e) excluding any minority interest arising on consolidation;
(f) including exchange gains and losses arising on
consolidation accounted for through reserves in accordance
with SSAP 20; and
(g) adding or deducting, as the case may be, any credit or any
debit balance on the Group's consolidated profit and loss
account [(but not to the extent that the same arises as a
result of any Extraordinary Items)] attributable to the
period in relation to which the calculation falls to be
made.
"TOTAL DEBT" means at any time the aggregate (without double
counting) of:
(a) that part of the Indebtedness of Group Companies which
relates to obligations (whether present or future, actual
or contingent and whether incurred as principal or surety)
for the payment or repayment of money in respect of
principal incurred in respect of (i) moneys borrowed or
raised, (ii) any bond, note, loan stock, debenture or
similar instrument, or (iii) any acceptance credit, bill
discounting, note purchase, factoring or documentary
credit facility (including, for the avoidance of doubt,
any indebtedness under this Agreement); and
(b) the capital element of all rentals or, as the case may be,
other payments payable under any Finance Lease entered
into by any Group Company.
"TOTAL DEBT COSTS" means, in relation to any period, the aggregate
of:
(a) all interest, commissions and other financing charges
payable by any Group Company in respect of that period;
(b) to the extent not included in paragraph (a) above, all
finance costs (as defined in FRS4) charged to the profit
and loss account of the Group in respect of that period;
(c) all amounts payable by any Group Company in respect of
that period under any interest rate protection agreement
(less any amounts receivable by any Group
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Company in respect of that period under any interest rate
protection agreement); and
(d) the interest element of all rentals or, as the case may
be, other amounts payable in respect of that period under
any Fiancee Lease entered into by any Group Company.
"VAT" means value added tax as provided for in the Value Added Tax
Act 1994 and legislation (or purported legislation and whether
delegated or otherwise) supplemental to that Act or in any primary or
secondary legislation promulgated by the European Community or any
official body or agency of the European Community, and any tax
similar or equivalent to value added tax imposed by any country other
than the United Kingdom and any similar or turnover Tax replacing or
introduced in addition to any of the same.
1.2. HEADINGS
The headings in this Agreement are for convenience only and shall be
ignored in construing this Agreement.
1.3. INTERPRETATION
In this Agreement (unless otherwise provided):
(a) words importing the singular shall include the plural and vice
versa;
(b) references to Clauses and Schedules are to be construed as
references to the clauses of, and schedules to, this Agreement;
(c) references to any Financing Document or any other document
shall be construed as references to that Financing
Document or that other document, as amended, varied,
novated or supplemented, as the case may be;
(d) references to any statute or statutory provision include
any statute or statutory provision which amends, extends,
consolidates or replaces the same, or which has been
amended, extended, consolidated or replaced by the same,
and shall include any orders, regulations, instruments or
other subordinate legislation made under the relevant
statute;
(e) references to a document being "IN THE AGREED FORM" means
that document the form and content of which has been
approved by the Bank and which has endorsed on it the
words "in the agreed form" and which is initialled by or
on behalf of the Bank and the Borrower;
(f) references to "ASSETS" shall include revenues sand
property and the right to revenues and property and rights
of every kind, present, future and contingent and whether
tangible or intangible (including uncalled share capital);
(g) the words "including" and "in particular" shall be
construed as being by way of illustration or emphasis only
and shall not be construed as, nor shall they take effect
as, limiting the generality of any foregoing words;
(h) the words "other " and "otherwise" shall not be construed
ejusdem generis with any foregoing words where a wider
construction is possible;
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(i) references to a "person" shall be construed so as to
include that person's assigns, transferees or successors
in title and shall be construed as including references to
an individual, firm, partnership, joint venture, company,
corporation, body corporate, unincorporated body of
persons or any state or any agency of a state;
(j) where there is a reference in this Agreement to any
amount, limit or threshold specified in Sterling, in
ascertaining whether or not that amount, limit or
threshold has been attained, broken or achieved, as the
case may be, a non- Sterling amount shall be counted on
the basis of the equivalent in Sterling of that amount
using the Bank's relevant spot rate of exchange; and
(k) accounting terms shall be construed so as to be consistent with
GAAP; and
(l) references to time are to London time.
2. FACILITY
Subject to the terms of this Agreement, the Bank agrees to make
available to the Borrower a Sterling revolving credit facility in the
maximum principal amount of (pound)3,5000,000.
3. PURPOSE
3.1. PURPOSE
The Borrower shall use the proceeds of all Advances to purchase
Eligible Inventory from Nominated Manufacturers.
3.2. NO MONITORING
The Bank shall not be obliged to investigate or monitor the use or
application of the proceeds of the Advances.
4. CONDITIONS PRECEDENT
Notwithstanding any other term of this Agreement, the Bank shall not
be under any obligation to make the Facility available to the
Borrower unless it has notified the Borrower that all the conditions
set out in Schedule 1 have been satisfied on or before 12th June
1998.
5. DRAWDOWN
5.1. COMMITMENT PERIOD
Subject to the terms of this Agreement, Advances shall be made to the
Borrower at any time during the Commitment Period when requested by
means of a Drawdown Notice in accordance with this Clause 5. At the
close of business on the last day of the Commitment Period, the
commitment of the Bank under the Facility shall be automatically
cancelled.
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5.2. CONDITIONS TO EACH ADVANCE
The obligation of the Bank to make available each Advance is subject
to the conditions that on the date on which the relevant Drawdown
Notice is given and on the Drawdown Date:
(a) the representations and warranties in Clause 12 to be
repeated on those dates are correct and will be correct
immediately after the Advance is made; and
(b) no Default or Potential Default has occurred and is
continuing or would occur on the making of the Advance.
5.3. DRAWDOWN NOTICE
5.3.1. Whenever the Borrower wishes to draw down under the Facility, it
shall deliver to the Bank not later than 10.30 a.m. on the Drawdown
Date:
(a) a duly completed Drawdown Notice confirming:
(i) the proportion of the Eligible Inventory which
is Pre Sold; and
(ii) that Disposal of the Eligible Inventory will
take place before the expiry of the relevant
Interest Period
(b) a copy of the delivery note in respect of which the
Advance is to be made identifying the Eligible Inventory
5.3.2. A Drawdown Notice shall be irrevocable and the Borrower shall be
obliged to borrow in accordance with its terms.
5.4. LIMITATIONS ON ADVANCES
The following limitations apply to Advances:
(a) the Drawdown Date of an Advance shall be a Business Day
falling before the end of the Commitment Period;
(b) the principal amount of an Advance shall be:
(i) a minimum amount of(pound)250,000 and an
integral multiple of(pound)50,000; or
(ii) the amount of the Available Facility;
(c) no Advance shall be made if the making of that Advance
would result in the Loan exceeding the Facility Limit;
(d) no more than 10 Advances may be outstanding at any one
time;
(e) the amount of an Advance shall not exceed:
(i) 75 per cent of the purchase price of the
Eligible Inventory as shown in the relevant
Delivery Note where at least 30 per cent of such
Eligible Inventory is Pre Sold; or
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(ii) 65 per cent of the purchase price of the
relevant Eligible Inventory as shown in the
relevant Delivery Note where less than 30 per
cent of such Eligible Inventory is Pre Sold; and
(f) a separate Advance must be made in respect of each
Delivery Note.
5.5. ADVANCES
Subject to the terms of this Agreement, the Bank acting through its
Lending Office shall make available to the Borrower on the Drawdown
Date for an Advance an amount equal to that Advance.
6. INTEREST
6.1. INTEREST RATE
Interest shall accrue on each Advance from and including the relevant
Drawdown Date to but excluding the date the Advance is repaid at the
rate determined by the Bank to be the aggregate of:
(a) the Margin;
(b) LIBOR; and
(c) the Mandatory # Cost Rate.
6.2. INTEREST PERIODS
6.2.1. The Borrower shall select an Interest Period for an Advance in the
relevant Drawdown Notice of 1 day, 7 day's, 14 day's or 1 month's
duration (or such other Interest Period as the Bank may allow).
6.2.2. If an Interest Period would otherwise end on a day which is not a
Business Day, that Interest Period shall instead end on the next
Business Day in the same calendar month (if there is one) or the
preceding Business Day (if there is not).
6.2.3. If an Interest Period begins on the last Business Day in a calendar
month or on a Business Day for which there is no numerically
corresponding day in the calendar month in which that Interest Period
is to end, it shall end on the last Business Day in that later
calendar month.
6.2.4. If an Interest Period would otherwise extend beyond the Final
Repayment Date, it shall be shortened so that it ends on the Final
Repayment Date.
6.3. DEFAULT INTEREST
6.3.1. If the Borrower fails to pay any amount payable under any Financing
Document on the due date, it shall pay default interest on the
overdue amount from the due date to the date of actual payment
calculated by reference to successive Interest Periods (each of such
duration as the Bank may select and the first beginning on the
relevant due date) at the rate per annum being the aggregate of (a) 2
per cent per annum, (b) the Margin, (c) LIBOR and (d) the Mandatory #
Cost Rate.
6.3.2. So long as the overdue amount remains unpaid, the default interest
rate shall be recalculated in accordance with the provisions of this
Clause 6.3 on the last day of each
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such Interest Period and any unpaid interest shall be compounded at
the end of each Interest Period.
6.4. CALCULATION AND PAYMENT OF INTEREST
6.4.1. At the beginning of each Interest Period, the Bank shall notify the
Borrower of the rate and amount of interest payable for the Interest
Period (but in the case of any default interest calculated under
Clause 6.3, any such notification need not be made more frequently
than weekly). Each notification shall set out in reasonable detail
the basis of computation of the amount of interest payable.
6.4.2. Interest due from the Borrower under this Agreement shall:
(a) accrue from day to day at the rate calculated under this
Clause 6;
(b) except as otherwise provided in this Agreement, be paid by
the Borrower to the Bank in arrear on the last day of each
Interest Period;
(c) be calculated on the basis of the actual number of days
elapsed and a 365 day year; and
(d) be payable both before and after judgment.
6.5. BANK'S DETERMINATION
The determination by the Bank of any interest payable under this
Clause 6 shall be conclusive and binding on the Borrower in the
absence of manifest error.
7. REPAYMENT AND PREPAYMENT
7.1. REPAYMENT
7.1.1. Subject to Clause 7.1.3, the Borrower shall repay each Advance in
full on the last day of the Interest Period relating to that Advance.
7.1.2. Subject to the terms of this Agreement, any amounts repaid under this
Agreement may be re-borrowed.
7.1.3. Subject to Clause 7.1.4, if all or part of an existing Advance made
to the Borrower is to be repaid from the proceeds of all or part of a
new Advance to be made to the Borrower, then the amount to be repaid
by the Borrower shall be set off against the amount to be advanced by
the Bank in relation to the new Advance and the party to whom the
smaller amount is to be paid shall pay to the other party a sum equal
to the difference between the two amounts.
7.1.4. Only Advances with an Interest Period of 1 day's duration may be
repaid from the proceeds of a new Advance and in any event no Advance
shall be repaid by a new Advance more than 3 times.
7.2. PREPAYMENT
Subject to Clauses 9, 10 and 21 the Borrower may not prepay any
Advance before the end of its Interest Period.
7.3. EXTENSIONS TO COMMITMENT PERIOD
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7.3.1. The Borrower may at any time by notice to the Bank request an
extension to the Commitment Period, subject to the provisions of this
Clause 7.3.
7.3.2. Upon receipt of any such request, the Bank shall undertake a full
credit assessment of the Borrower. The Bank shall be under no legal
or moral obligation to extend the Commitment Period. No extension
shall be effective unless agreed in writing by the Bank.
7.3.3. If the Borrower requests an extension during the final thirty days of
the Commitment Period, the Bank shall, at its absolute discretion,
have the option:
(a) (subject to Clause 7.3.2) to extend the Commitment Period
for a further period of 364 days from the date on which
the Commitment Period is then due to expire; or
(b) to decline such request.
7.3.4. If the Borrower requests an extension otherwise than in accordance
with Clause 7.3.3., the Bank shall, at its absolute discretion, have
the option:
(a) (subject to Clause 7.3.2) to extend the Commitment Period
for a further period of 364 days from the date on which
the Bank gives written notice to the Borrower of the
Bank's agreement to extend the Commitment Period; or
(b) to decline such request, in which event, the Bank may, at
or after the time of such request, immediately cancel the
undrawn portion of the Facility.
7.3.5. On any extension the Bank may require the Borrower to pay a further
commitment fee.
8. CANCELLATION
8.1. CANCELLATION
The Borrower may, by giving the Bank not less than 5 days' prior
notice, cancel all or part of the Available Facility (but if in part,
in a minimum amount of (pound)500,000 and an integral multiple of
(pound)250,000).
8.2. NOTICE
Any notice of cancellation shall be irrevocable and shall specify the
date on which the cancellation shall take effect and the amount of
the cancellation.
8.3. EFFECT OF CANCELLATION
The Borrower may not borrow any part of the Facility which has been
cancelled. Any cancellation shall reduce the Facility Limit
accordingly.
8.4. LIMITATION
The Borrower may not cancel all or part of the Facility except as
expressly provided in this Agreement.
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9. CHANGES IN CIRCUMSTANCES
9.1. ILLEGALITY
If it is or becomes illegal for the Bank to maintain the Facility or
to continue to make available or fund any Advance, then:
(a) the Bank shall notify the Borrower; and
(b) (i) the Facility shall be cancelled immediately and
the Facility Limit shall be reduced to zero;
and
(ii) the Borrower shall prepay to the Bank all
Advances (together with accrued interest on the
amount prepaid and all other amounts owing to
the Bank under this Agreement) within 5 Business
Days of demand by the Bank (or, if later and if
permitted by the relevant law, on the last day
of the Interest Period of the relevant
Advances).
Any such prepayment under paragraph (b)(ii) above shall be subject to
Clause 21.1.
9.2. INCREASED COSTS
9.2.1. If, after the date of this Agreement, a Change occurs which causes an
Increased Cost (as defined in Clause 9.2.3) to the Bank (or any
company of which the Bank is a Subsidiary) then the Borrower shall
pay (as additional interest) to the Bank within 5 Business Days of
demand all amounts which the Bank certifies to be necessary to
compensate the Bank (or any company of which the Bank is a
Subsidiary) for the Increased Cost.
9.2.2. Any demand made under Clause 9.2.1 shall set out in reasonable detail
so far as is practicable the basis of computation of the Increased
Cost.
9.2.3. In this Clause 9.2:
"INCREASED COST" means any cost to, or reduction in the amount
payable to, or reduction in the return on capital or regulatory
capital achieved by, the Bank (or any company of which the Bank is a
Subsidiary) to the extent that it arises, directly or indirectly, as
a result of the Change and is attributable to the Facility or any
Advance or the funding or any Advance including:
(a) any Tax Liability (other than Tax on Overall Net Income)
incurred by the Bank;
(b) any changes in the basis or timing of Taxation of the Bank
in relation to the Facility or any Advance or to the
funding of any Advance;
(c) the cost to the Bank (or any company of which the Bank is
a Subsidiary) of complying with, or the reduction in the
amount payable to or reduction in the return on capital or
regulatory capital achieved by the Bank (or any company of
which the Bank is a Subsidiary) as a result of complying
with, any capital adequacy or similar requirements
howsoever arising, including as a result of an increase in
the amount of capital to be allocated to the Facility or
of a change to the weighting of the commitment under the
Facility or any Advance; and
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(d) the cost to the Bank of complying with any reserve, cash
ratio, special deposit or liquidity requirements (or any
other similar requirements).
"TAX LIABILITY" means, in respect of any person:
(a) any liability or any increase in the liability of that
person to make any payment of or in respect of Tax;
(b) the loss of any relief, allowance, deduction or credit in
respect of Tax which would otherwise have been available
to that person;
(c) the setting off against income, profits or gains or
against any Tax liability of any relief, allowance,
deduction or credit in respect of Tax which would
otherwise have been available to that person; and
(d) the loss or setting off against any Tax liability of a
right to repayment of Tax which would otherwise have been
available to that person.
For the purposes of this definition of "Tax Liability", any question
of whether or not any relief, allowance, deduction, credit or right
to repayment of Tax has been lost or set off, and if so, the date on
which that loss or set-off took place, shall be conclusively
determined by the relevant person's auditors.
"TAX ON OVERALL NET INCOME" means, in relation to the Bank, Tax
(other than Tax deducted or withheld from any payment) imposed on the
net profits of the Bank by the jurisdiction in which its Lending
Office or its head office is situated.
9.2.4. The Borrower shall not be obliged to make a payment in respect of an
Increased Cost under this Clause 9.2 if and to the extent that the
Increased Cost has been compensated for by the payment of Mandatory
Liquid Asset Costs or the operation of Clause 10.9.
9.2.5. If the Borrower is required to pay any amount to the Bank under this
Clause 9.2, then, without prejudice to that obligation and so long as
the circumstances giving rise to the relevant Increased Cost are
continuing and subject to the Borrower giving the Bank not less than
10 days' prior notice (which shall be irrevocable), the Borrower may
prepay all, but not part, of the Loan together with accrued interest
on the amount prepaid. Any such prepayment shall be subject to Clause
21.1. On any such prepayment the Facility shall be automatically
cancelled and the Facility Limit shall be reduced to zero.
9.3. MARKET DISRUPTION
If, in relation to a proposed Advance:
(a) the Bank determines that, because of circumstances
affecting the London interbank market generally,
reasonable and adequate means do not exist ascertaining
LIBOR for that Advance for the relevant Interest Period;
or
(b) the Bank is of the opinion that:
(i) matching deposits may not be available to it in
the London interbank market in the ordinary
course of business to fund that Advance for the
relevant Interest Period; or
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(ii) the cost to it of obtaining matching deposits in
the London interbank market would be in excess
of LIBOR for the relevant Interest Period,
the Bank shall promptly notify the Borrower of that event and that
Advance shall not be made. Instead, the Bank and the Borrower shall
immediately enter into negotiations for a period of not more than 30
days with a view to agreeing a substitute basis for calculating the
interest rate for the Advance or for funding the Advance (whether in
Sterling or another currency). Any substitute basis agreed by the
Bank and the Borrower shall take effect in accordance with its terms.
9.4. MITIGATION
9.4.1. If any circumstances arise in respect of the Bank which would, or
upon the giving of notice would, result in the operation of Clause
9.1., 9.2, 9.3 or 10.9 to the detriment of the Borrower, then the
Bank shall:
(a) promptly upon becoming aware of those circumstances and
their results, notify the Borrower; and
(b) in consultation with the Borrower, take all such steps as
it determines are reasonably open to it to mitigate the
effects of those circumstances (including changing its
Lending office or consulting with the Borrower with a view
to transferring some or all of its rights and obligations
under this Agreement to another bank or other financial
institution acceptable to the Borrower) in a manner which
will avoid the circumstances in question and on terms
acceptable to the Borrower and the Bank,
provided that the Bank shall not be obliged to take any steps which
in its opinion would or might have an adverse effect on its business
or financial condition or the management of its Tax affairs or cause
it to incur any material costs or expenses.
9.4.2. Nothing in this Clause 9.4 shall limit, reduce, affect or otherwise
qualify the rights of the Bank or the obligations of the Borrower
under Clauses 9.1, 9.2, 9.3 and 10.9.
9.5. CERTIFICATES
The certificate or notification of the Bank as to any of the matters
referred to in this Clause 9 shall be in reasonable detail and shall
be conclusive and binding on the Borrower except for any manifest
error.
10. PAYMENTS
10.1. FUNDS
All payments under this Agreement shall be made for value on the due
date in freely transferable and readily available funds.
10.2. PAYMENTS
10.2.1. Each payment to the Borrower shall be made to the account of the
Borrower with [Nottingham branch], account number 36149837, sort code
60 80 09.
10.2.2. Each payment to the Bank shall be made to [Nottingham branch] for the
account of the Bank, account number 36149837, sort code 60 80 09.
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10.3. CHANGE OF ACCOUNT
The Borrower or the Bank may change its receiving account by not less
than 5 Business Days' notice to the other.
10.4. BUSINESS DAYS
If a payment under this Agreement is due on a day which is not a
Business Day, the due date for that payment shall instead by the next
Business Day in the same calendar month (if there is one) or the
preceding Business Day (if there is not).
10.5. CURRENCY
All payments relating to costs, losses, expenses or Taxes shall be
made in the currency in which the relative costs, losses, expenses or
Taxes were incurred. Any other amount payable under this Agreement
shall, except as otherwise provided, be made in Sterling.
10.6. ACCOUNTS AS EVIDENCE
The Bank shall maintain in accordance with its usual practice an
account which shall as between the Borrower and the Ban, be prima
facie evidence of the amounts from time to time advanced by, owing
to, paid and repaid to the Bank under this Agreement.
10.7. PARTIAL PAYMENTS
10.7.1. If the Bank receives a payment insufficient to discharge all the
amounts then due and payable by the Borrower under this Agreement,
the Bank shall apply that payment towards the obligations of the
Borrower under this Agreement in the following order:
(a) first, in or towards payment of any unpaid costs and
expenses of the Bank under this Agreement;
(b) second, in or towards payment of any accrued interest due
but unpaid under this Agreement;
(c) third, in or towards payment of any principal due but
unpaid under this Agreement; and
(d) fourth, in or towards payment of any other sum due but
unpaid under this Agreement.
10.7.2. The Bank may vary the order set out in Clauses 10.7.1(b) to (d).
10.7.3. Clauses 10.7.1 and 10.7.2 shall override any appropriation made by
the Borrower.
10.8. SET-OFF AND COUNTERCLAIM
All payments by the Borrower under this Agreement shall be made
without set-off or counterclaim.
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<PAGE>
10.9. GROSSING-UP
10.9.1. Subject to Clause 10.9.2, all sums payable to the Bank pursuant to or
in connection with any Financing Document shall be paid in full free
and clear of all deductions or withholdings whatsoever except only as
may be required by law.
10.9.2. If any deduction or withholding is required by law in respect of any
payment due from the Borrower to the Bank pursuant to or in
connection with any Financing Document the Borrower shall:
(a) ensure or procure that the deduction or withholding is
made and that it does not exceed the minimum legal
requirement therefor;
(b) pay, or procure the payment of, the full amount deducted
or withheld to the relevant Taxation or other authority in
accordance with the applicable law;
(c) increase the payment in respect of which the deduction or
withholding is required so that the next amount received
by the Bank after the deduction or withholding (and after
taking account of any further deduction or withholding
which is required to be made as a consequence of the
increase) shall be equal to the amount which the Bank
would have been entitled to receive in the absence of any
requirement to make any deduction or withholding; and
(d) promptly deliver or procure the delivery to the Bank of
receipts evidencing each deduction or withholding which
has been made.
10.9.3. The Borrower shall not be required to pay an additional amount under
this Clause 10.9 if the payment in respect of which the deduction or
withholding is required is a payment of interest on an Advance and:
(a) at the time that Advance was made, the Bank was not a
Qualifying Bank otherwise than as a consequence of a
Change occurring after the date of this Agreement (and the
obligation to deduct or withhold would not have arisen if
that Advance had been made by a Qualifying Bank); or
(b) at the time when the interest is paid, the Bank is not
beneficially entitled to it or, being beneficially
entitled to it, the Bank is not within the charge to
United Kingdom corporation tax as respects it otherwise
than as a consequence of a Change occurring after the date
of this Agreement (and the obligation to deduct or
withhold would not have arisen if the Bank had been
beneficially entitled to the interest and had been within
the charge to United Kingdom corporation tax as respects
it).
10.9.4. If the Bank determines, in its absolute discretion, that it has
received, realised, utilised and retained a Tax benefit by reason of
any deduction or withholding in respect of which the Borrower has
made an increased payment under this Clause 10.9, the Bank shall,
provided that it has received all amounts which are then due and
payable by the obligors under any Financing Document, pay to the
Borrower (to the extent that the Bank can do so without prejudicing
the amount of the benefit or repayment and the right of the Bank to
obtain any other benefit, relief or allowance which may be available
to it) such amount, if any, as the Bank, in its absolute discretion
shall determine, will leave the Bank in no
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<PAGE>
worse position than it would have been in if the deduction or
withholding had not be required, provided that:
(a) the Bank shall have an absolute discretion as to the time
at which and the order and manner in which it realises or
utilises any Tax benefit and shall not be obliged to
arrange its business or its Tax affairs in any particular
way in order to be eligible for any credit or refund or
similar benefit;
(b) the Bank shall not be obliged to disclose any information
regarding its business, Tax affairs or Tax computations;
(c) If the Bank has made a payment to the Borrower pursuant to
this Clause 10.9.4 on account of any Tax benefit and its
subsequently transpires that the Bank did not receive that
Tax benefit, or received a lesser Tax benefit, the
Borrower shall, on demand, pay to the Bank such sum as the
Bank may determine as being necessary to restore its
after-tax position to that which it would have been had no
adjustment under this Clause 10.9.4 been made. Any sums
payable by the Borrower to the Bank under this Clause
10.9.4 shall be subject to Clause 16.6.
10.9.5. The Bank shall not be obliged to make any payment under Clause 10.9.4
if, by doing so, it would contravene the terms of any applicable law
or any notice, direction nor requirement of any governmental or
regulatory authority (whether or not having the force of law).
10.9.6. If the Borrower is required to make an increased payment for the
account of the Bank under Clause 10.9.2, then, without prejudice to
that obligation and so long as such requirement exists and subject to
the Borrower giving the Bank not less than 10 days' prior notice
(which shall be irrevocable), the Borrower may prepay all, but not
part, of the Loan together with accrued interest on the amount
prepaid. Any such prepayment shall be subject to Clause 21.1. On any
such prepayment the Facility shall be automatically cancelled and the
Facility Limit shall be reduced to zero.
11. SECURITY
The obligations and liabilities of the Borrower to the Bank under
this Agreement shall be secured by the interests and rights granted
in favour of the Bank under the Security # documents.
12. REPRESENTATIONS AND WARRANTIES
12.1. REPRESENTATIONS AND WARRANTIES
The Borrower represents and warrants to the Bank that:
(a) STATUS: each Material Company is a limited company duly
incorporated under the laws of England and Wales, and it
possesses the capacity to sue and be sued in its own name
and has the power to carry on its business and to own its
property and other assets;
(b) POWERS AND AUTHORITY: each Material Company has power to
execute, deliver and perform its obligations under the
Financing Documents to which it is a
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<PAGE>
party and to carry out the transactions contemplated by
those documents and all necessary corporate, shareholder
and other action has been or will be taken to authorise
the execution, delivery and performance of the same;
(c) BINDING OBLIGATIONS: the obligations of each Material
Company under the Financing Documents to which it is a
party constitute its legal, valid, binding and enforceable
obligations;
(d) CONTRAVENTIONS: the execution, delivery and performance by
each Material Company of the Financing Documents to which
it is a party does not:
(i) contravene any applicable law or regulation or
any order of any governmental or other official
authority, body or agency or any judgment, order
or decree of any court having jurisdiction over
it;
(ii) conflict with, or result in any breach of any of
the terms of, or constitute a default under, any
agreement or other instrument to which it is a
party or any license or other authorisation to
which it is subject or by which it or any of its
property is bound; or
(iii) contravene or conflict with the provisions of
its memorandum and articles of association;
(e) INSOLVENCY: no Group Company has taken any action nor have
any steps been taken or legal proceedings been started or
threatened against it for winding-up, dissolution or
re-organisation, the enforcement of any Encumbrance over
its assets or for the appointment of a receiver,
administrative receiver, or administrator, trustee or
similar officer of it or of any of its assets;
(f) NO DEFAULT: no Group Company is (nor would be with any of
the giving of notice, the lapse of time, the determination
of materiality, or the satisfaction of any other
condition) in breach of or in default under any agreement
to which it is a party or which is binding on it or any of
its assets;
(g) LITIGATION: no action, litigation, arbitration or
administrative proceeding has been commenced, or to the
best of the Borrower's knowledge, information or belief is
pending or threatened, against any Group Company which, if
decided adversely, could reasonably be expected to have a
Material Adverse Effect and nor is there subsisting any
unsatisfied judgment or award given against any of them by
any court, arbitrator or other body;
(h) ACCOUNTS:
(i) each of the latest Accounts required to be
delivered under Clause 13.1(a) is prepared in
accordance with GAAP and gives a true and fair
view of the financial position of the Group as
at the date to which they were prepared and for
the period then ended; and
(ii) each of the latest set of management accounts
required to be delivered under Clause 13.1(c)
shows with reasonable accuracy the financial
condition of the Borrower during the period to
which it relates;
(i) ENCUMBRANCES: no Encumbrance other than a Permitted
Encumbrance exists over all or any part of the assets of
any Material Company;
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<PAGE>
(j) NO ENCUMBRANCES CREATED: the execution of the Financing
Documents by the Material Companies and the exercise of
each of their respective rights and the performance of
each of their respective obligations under the Financing
Documents will not result in the creation of, or any
obligation to create, any Encumbrance over or in respect
of any of their assets;
(k) AUTHORISATIONS: all authorisations, approvals, licenses,
consents, filings, registrations, payment of duties or
taxes and notarisations required:
(i) for the conduct of the business, trade and
ordinary activities of each Material Company;
(ii) for the performance and discharge of its
obligations under the Financing Documents to
which it is a party; and
(iii) in connection with the execution, delivery,
validity, enforceability or admissibility in
evidence of the Financing Documents.
are in full force and effect;
(l) TAXES: each Group Company has complied in all material
respects with all Taxation laws in all jurisdictions in
which it is subject to Taxation and has paid all Taxes due
and payable by it and no claims are being asserted against
it in respect of Taxes except for assessments in relation
to the ordinary course of its business or claims contested
in good faith and in respect of which adequate provision
has been made and disclosed in the latest Accounts or
information delivered to the Bank under this Agreement;
(m) NO MATERIAL ADVERSE CHANGE: since 5th February 1998 no
event has occurred which has had or could be reasonably
expected to have a Material Adverse Effect;
(n) ENVIRONMENTAL: each Group Company has and has at all times
complied with all applicable Environmental Law
non-compliance with which could reasonably be expected to
have a Material Adverse Effect, every consent,
authorisation, license or approval required under or
pursuant to any Environmental Law by each Group Company in
connection with the conduct of its business and the
ownership, use, exploitation or occupation of its assets,
the absence of which could reasonably be expected to have
a Material Adverse Effect, has been obtained and is in
full force and effect, there has been no default in the
observance of the conditions and restrictions (if any)
imposed in, or in connection with, any of the same, which
default could reasonably be expected to have a Material
Adverse Effect and no circumstances have arisen (i) which
would entitle any person to revoke, suspend, amend, vary,
withdraw or refuse to amend any of the same or (ii) which
might give rise to a claim against any Group Company which
could reasonably be expected to have a Material Adverse
Effect having regard to the cost to that Group Company of
meeting such a claim; and
(o) INFORMATION PACKAGE:
(i) the factual information contained in the
Operating Plan was, at the date of the Operating
Plan, true and accurate in all respects and not
misleading in any respect, there are no other
facts the omission of
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<PAGE>
which would make any fact
or statement in the Operating Plan misleading in
any respect and nothing has occurred which would
render any fact or statement in the Operating
Plan untrue or misleading in any respect; and
(ii) all estimates, forecasts and projections
contained or referred to in the Operating Plan,
and all assumptions and presumptions upon the
basis of which the same were made, were fair and
reasonable at the time they were made, and
nothing has occurred since the date the same
were made which would necessitate a revision to
any of those estimates, forecasts or projections
in order for them to be fair and reasonable.
12.2. REPETITION
The representations and warranties in Clause 12.1 shall survive the
execution of this Agreement and (other than those set out in Clauses
12.1(e), (g), (i), (j), (k), (m) and (o) shall be deemed to be
repeated by the Borrower on the date on which each Drawdown Notice is
given and on the first day of each Interest Period for each Advance
as if made with reference to the facts and circumstances existing at
that time.
13. UNDERTAKINGS
13.1. INFORMATION UNDERTAKINGS
The Borrower undertakes that during the Facility Period it shall,
unless the Bank otherwise agrees:
(a) ACCOUNTS: as soon as the same become available (and in any
event within 120 days after the end of each of its
Financial Years), deliver to the Bank the Accounts for
each such Financial Year together with the audited
accounts of each Material Company with a copy of the
relevant management letter (if any) addressed by the
Auditors to the directors of the Borrower;
(b) MANAGEMENT ACCOUNTS: as soon as the same become available
(and in any event within 21 days after the end of each
successive accounting period (none of which shall be more
than 5 weeks in duration) (each an "ACCOUNTING PERIOD")
during each of its Financial Years), deliver to the Bank
consolidated management accounts (the "MANAGEMENT
ACCOUNTS") of the Borrower for each such Accounting Period
in form and substance satisfactory to the Bank and which
shall include the following information in respect of each
such Accounting Period:
(i) a statement of profit and loss;
(ii) a balance sheet;
(iii) a cashflow statement; and
(iv) an analysis of the best selling 40 current
products in the Borrower's range,
together with a comparison, where appropriate, of all such
information with the estimates, forecasts and projections
in the relevant Operating Budget or any
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<PAGE>
replacement or substitution made therefor) in relation to
each such Accounting Period including an analysis
justifying any variations therefrom and, if necessary,
revised estimates, forecasts and projections;
(c) OPERATING BUDGETS:
(i) provide to the Bank (in a format acceptable to
the Bank) an Operating Budget for each of its
Financial Years during the Facility Period, not
less than 30 days prior to the start of each
such Financial Year; and
(ii) if any Group Company shall determine that any of
the estimates, forecasts or projections made in
relating to any of its Financial Years should be
different from those set out in the then current
Operating Budget (or any substitution therefor
subsequently made and agreed by the Bank),
provide to the Bank revised estimates, forecasts
or projections in respect of any part of each
such Financial Year and such revised estimates,
forecasts or projections shall apply immediately
following their approval by the board of
directors of the relevant company and the
Borrower,
(d) SHAREHOLDERS' DOCUMENTS: deliver to the Bank copies of all
documents despatched by it to its shareholders or its
creditors at the same time as they are despatched;
(e) COMPLIANCE CERTIFICATES: deliver to the Bank:
(i) together with the Accounts and Management
Accounts specified in Clauses 13.1(a) and
(b); and
(ii) promptly at any other time, if the Bank so
requests,
a certificate signed by two of its senior officers on its
behalf certifying that no Default is outstanding or, if a
Default is outstanding, specifying the Default and the
steps, if any, being taken to remedy it;
(f) AUDITORS CONFIRMATION: if the Bank disagrees with any such
calculations relevant to the financial undertakings
contained in Clause 13.4.1 made for the purposes of Clause
14.1(e) the Bank shall notify the Borrower and promptly
thereafter the Borrower shall procure that the Auditors
shall promptly review such calculations and notify the
Bank as soon as practicable as to whether such
calculations are made correctly and in accordance wit the
terms of this Agreement and if not made correctly,
promptly provide the Bank with the correct calculations
thereof made in accordance with the terms of this
Agreement;
(g) OTHER INFORMATION: supply to the Bank such information,
documents and records about the business, financial
condition, operations and prospects of any Group Company
as the Bank may from time to time reasonably require;
(h) GAAP: ensure that all Accounts and other financial
information submitted to the Bank have been prepared in
accordance with GAAP;
(i) DEFAULT, LITIGATION, ETC: promptly, upon becoming aware of
the same, notify the Bank of:
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<PAGE>
(i) the occurrence of a Default or Potential
Default;
(ii) any litigation, arbitration or administrative
proceeding commenced against any Group Company
involving a potential liability of any Group
Company in excess of (pound)50,000;
(iii) any Encumbrance (other than a Permitted
Encumbrance) attaching to any of the assets
of any Group Company; and
(iv) any occurrence (including any third party claim
or liability) which could reasonably be expected
to have a Material Adverse Effect; and
(j) MANAGEMENT: notify the Bank if any of Laurence Gilbert and
Bernadette Spofforth ceases to be an officer or employee
of the Borrower.
13.2. POSITIVE UNDERTAKINGS
The Borrower undertakes that during the Facility Period it shall, and
it shall procure that each Group Company shall, unless the Bank
otherwise agrees:
(a) PAY TAXES: pay and discharge all Taxes and governmental
charges payable by or assessed upon it prior to the date
on which the same become overdue unless, and only to the
extend that, such Taxes and charges shall be contested in
good faith by appropriate proceedings, pending
determination of which payment may lawfully be withheld,
and there shall be set aside adequate reserves with
respect to any such Taxes or charges so contested in
accordance with GAAP;
(b) INSURANCE: maintain insurance cover in relation to its
business and assets of a type and in an amount as is
usual for prudent companies carrying on a business such as
that carried on by it;
(c) AUTHORISATIONS: obtain, maintain and comply with the terms
of any authorisation, approval, license, consent,
exemption, clearance, filing or registration required:
(i) for the conduct of its business, trade and
ordinary activities; and
(ii) to enable it to perform its obligations under,
or for the validity, enforceability or
admissibility in evidence of, any Financing
Document;
(d) ACCESS: permit the Bank and any person (being an
accountant, auditor, solicitor, valuer or other
professional adviser of the Bank) authorised by the Bank
to have, at all reasonable times during normal business
hours and on reasonable notice, access to the property,
premises and accounting books and records of any Group
Company and to the officers of any Group Company;
(e) RANKING OF OBLIGATIONS: ensure that its obligations under
the Financing Documents to which it is a party shall at
all times rank at least pari passu with all its other
present and future unsecured and unsubordinated
Indebtedness except for any obligations which are
mandatorily preferred by law and not by contract;
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<PAGE>
(f) FURTHER DOCUMENTS: at the request of the Bank, do or
procure the doing of all such things and execute or
procure the execution of all such documents as are, in the
opinion of the Bank, necessary or desirable to ensure that
the Bank obtains all its rights and benefits under the
Financing Documents and in particular but without
limitation will procure that any Company which becomes a
Material Company will execute a Mortgage Debenture and
Composite Guarantee in favour of the Bank;
(g) COMPLIANCE WITH ENVIRONMENTAL LAW: comply in all respects
with Environmental Law.
(h) DANGEROUS MATERIALS: ensure that all Dangerous Materials
treated, kept and stored, produced, manufactured,
generated, refined or used from, in, upon, or under any of
the real property owned by that Group Company are held and
kept upon such real property in such a manner and up to
such standards as they would be kept by a prudent company
carrying on the same trade as that Group Company;
(i) SALES OF ELIGIBLE INVENTORY: ensure that all sales of
Eligible Inventory on credit terms comply with the terms
and conditions of the Invoice Discounting Agreement;
(l) EXCHANGE RATE HEDGING: make all such arrangements that a
prudent company carrying on the same trade as that Group
Company would make in relation to the hedging of its
exchange rate liabilities; and
(k) MILLENIUM RISK: take all such steps as a prudent company
carrying on the same trade as that Group Company would
take in relation to all computer software owned or used by
that Group Company in connection with defects arising as a
result of the date 1st January 2000 and thereafter.
13.3. NEGATIVE UNDERTAKINGS
The Borrower undertakes that during the Facility Period it shall not,
and it shall procure that none of the Group Companies shall, unless
the Bank otherwise agrees:
(a) NEGATIVE PLEDGE: create or permit to subsist any
Encumbrance over any of its assets other than Permitted
Encumbrances.
(b) DISPOSAL OF ASSETS: make a Disposal other than:
(i) in the ordinary course of its trading
activities; or
(ii) whether the proceeds of the Disposal are used
immediately to purchase an asset to replace
directly the asset the subject of that Disposal;
or
(iii) a Disposal on arm's length terms where the
aggregate value of the assets the subject of a
Disposal by Group Companies other than in
accordance with paragraphs (i) and (ii) above in
any Financial Year of the Borrower does not
exceed (pound)1,000,000 (for the purposes of
this paragraph, the value of any asset shall be
the greater of its book value and the
consideration received for it);
-26-
<PAGE>
(c) CHANGE OF BUSINESS: make any substantial change to the
general nature or scope of the business of the Borrower or
the Group as a whole from that carried on at the date of
this Agreement;
(d) MERGERS: enter into any amalgamation, demerger, merger or
reconstruction or any joint venture or partnership
agreement;
(e) LOANS: make an loans or grant any credit to or for the
benefit of any person, other than amounts of credit
allowed in the ordinary course of its trading activities;
(f) INDEBTEDNESS: incur any Indebtedness other than Permitted
Indebtedness;
(g) ACQUISITIONS: acquire any business of, or shares or
securities of, any company other than where the aggregate
of the consideration payable for, and Indebtedness assumed
by Group Companies in connection with, acquisitions made
by Group Companies in any Financial Year of the Borrower
does not exceed (pound)1,000,00.#
13.4. FINANCIAL UNDERTAKINGS
13.4.1. The Borrower undertakes to ensure that during the Facility Period,
unless the Bank otherwise agrees:
(a) PBIT TO TOTAL DEBT COSTS
The ratio of PBIT to Total Debt Costs for the period of 12
months ending on the last day of each month during the
Facility Period shall not be less than 3:1.
(b) TOTAL LEVERAGE RATIO
The ratio of Total Debt to PBITDA at any time during the
period of 12 months ending on the last day of each month
during the Facility Period shall not be greater than
2.5:1;
(c) MINIMUM TANGIBLE NET WORTH
Tangible Net Worth shall not on the date referred to in
Column A below be less than the amount set opposite that
date in Column B below.
<TABLE>
<CAPTION>
COLUMN A COLUMN B DATE AMOUNT
<S> <C> <C> <C>
30th June 1997 (pound)1,500,000 30th June 1998 (pound)2,500,000
</TABLE>
(d) NET INDEBTEDNESS COVER
The ratio of the aggregate value of Free Stock and
Eligible Debtors to Net Indebtedness shall not at any time
be less that 1.5:1.
13.4.2. The calculation of ratios and other amounts under this Clause 13.4
shall be made by the Bank by reference to latest Accounts and
management accounts and other financial information of the Group for
the period in relation to which the calculation falls to be made.
Each determination of the Bank under this Clause 13.4 shall be
conclusive and binding on the Borrower except for any manifest error.
-27-
<PAGE>
14. DEFAULT
14.1. DEFAULT
Each of the following shall be a Default:
(a) NON-PAYMENT: the Borrower does not pay on the due date any
amount payable by it under this Agreement at the place at
and in the currency and funds in which it is expressed to
be payable unless in relation to the payment of interest
only the failure to pay such amount is due solely to
administrative or technical delays in the transmission of
funds which are not the fault of the Borrower and such
amount is paid within 3 Business Days after its due date
for payment; or
(b) OTHER DEFAULTS: any Material Company breaches any of its
obligations under any Financing Document (other than the
obligations referred to in Clause 14.1(a) but including a
breach of any of the undertakings pursuant to Clause 13.1)
and, if that breach is capable of remedy, it is not
remedied within 5 Business Days after notice of that
breach has been given by the Bank to the Borrower; or
(c) BREACH OF REPRESENTATION OR WARRANTY: any representation,
warranty or statement made or deemed to be repeated by any
Material Company under any Financing Document or in any
document delivered by or on behalf of the Borrower under
or in connection with any Financing Document is incorrect
when made or deemed to have been repeated; or
(d) UNLAWFULNESS OR REPUDIATION: it is unlawful for any
Material Company to perform or comply with, or any
Material Company repudiates, any of its obligations under
any Financing Document; or
(e) CROSS-DEFAULT: any Indebtedness of all or any Group
Companies in excess of, in aggregate, (pound)10,000;
(i) is not paid when due; or
(ii) is declared to be or otherwise becomes due and
payable prior to its specified maturity,
or any creditor of all or any Group Companies becomes
entitled to declare any such Indebtedness due and payable
prior to its specified maturity; or
(f) ATTACHMENT OR DISTRESS: a creditor or encumbrancer
attaches or takes possession of, or a distress, execution,
sequestration or other process is levied or enforced upon
or sued out against, any of the assets of any Group
Company and such process is not discharged within 14 days;
or
(g) ENFORCEMENT OF SECURITY: any Encumbrance over any of the
assets of any Group Company becomes enforceable; or
(h) INABILITY TO PAY DEBTS: any Group Company:
(i) suspends payment of its debts or is unable or
admits its inability to pay its debts
as they fall due; or
-28-
<PAGE>
(ii) begins negotiations with any creditor with a
view to the readjustment or rescheduling
of any of its Indebtedness; or
(iii) proposes or enters into any composition or other
arrangement for the benefit of its creditors
generally or any class of creditors, or
(i) INSOLVENCY PROCEEDINGS: any person takes any action or any
legal proceedings are started or other steps taken
(including the presentation of a petition) for:
(i) any Group Company to be adjudicated or found
insolvent; or
(ii) the winding-up or dissolution of any Group
Company other than in connection with a solvent
reconstruction, the terms of which have been
previously approved in writing by the Bank; or,
(iii) the appointment of a trustee, receiver,
administrative receiver or similar officer in
respect of any Group Company or any of its
assets; or
(j) ADJUDICATION OR APPOINTMENT: any adjudication, order or
appointment is made under or in relation to any of the
proceedings referred to in Clause 14.1(I); or
(k) ADMINISTRATION ORDER: an application is made to the court
for an administration order under the Insolvency Act 1986
with respect to any Group Company; or
(l) ANALOGOUS PROCEEDINGS: any event occurs or proceeding is
taken with respect to any Group Company in any
jurisdiction to which it is subject which has an effect
equivalent or similar to any of the events mentioned in
Clause 14.1(f), (h), (i), (j) or (k); or
(m) CESSATION OF BUSINESS: any Group Company suspends, ceases
or threatens to suspend or cease to carry on all or a
substantial part of its business; or
(n) CHANGE OF CONTROL: a person (whether alone or together
with any associated person or persons) becomes the
beneficial owner of shares in the issued share capital of
the Borrower carrying the right to exercise more than 50
per cent of the votes exercisable at a general meeting of
the Borrower (for the purposes of this Clause 14.1(n),
"ASSOCIATED PERSON" means, in relation to any person, a
person who is (i) "acting in concert" (as defined in the
City Code on Takeovers and Mergers) with that person or
(ii) a "connected person" (as defined in section 839 of
the Income and Corporation Taxes Act 1988) of that
person); or
(o) MATERIAL ADVERSE CHANGE: any event or series of events
occur which, in the opinion of the Bank, has or could
reasonably be expected to have a Material Adverse Effect;
or
(p) INVOICE DISCOUNTING AGREEMENT: the Invoice Discounting
Agreement is terminated for any reason (other than on
terms which have previously been approved in writing by
the Bank) or any material variation or amendment is made
to the Invoice Discounting Agreement (other than with the
Bank's prior written consent).
-29-
<PAGE>
14.2. ACCELERATION
If a Default occurs and remains unremedied the Bank may be notice to
the Borrower:
(a) cancel the Facility and require the Borrower immediately
to repay the Loan together with accrued interest and all
other sums payable under this Agreement, whereupon they
shall become immediately due and payable; or
(b) place the Facility on demand, whereupon the Loan together
with accrued interest and all other sums payable under
this Agreement shall become repayable on demand made by
the Bank.
Upon the service of any such notice by the Bank the Bank's
obligations under this Agreement shall be terminated, the Facility
shall be cancelled and the Facility Limit shall be reduced to zero.
15. SET-OFF
The Bank may set off any matured obligation owed by the Borrower
under any Financing Document against any obligation (whether or not
matured) owed by the Bank to the Borrower, regardless of the place of
payment, booking branch or currency of either obligation. If the
obligations are in different currencies, the Bank may convert either
obligation at the spot rate of exchange of the Bank for the purpose
of the set-off.
16. FEES AND EXPENSES
16.1. EXPENSES
The Borrower shall on demand pay all expenses incurred (including
legal, valuation and accounting fees), and any VAT on those expenses:
(a) by the Bank in connection with the negotiation,
preparation and execution of the Financing Documents and
the other documents contemplated by the Financing
Documents;
(b) by the Bank in connection with the granting of any
release, waiver or consent or in connection with any
amendment or variation of any Financing Document; and
(c) by the Bank in enforcing, perfecting, protecting or
preserving (or attempting so to do) any of their rights,
or in suing for or recovering any sum due from the
Borrower or any other person under any Financing Document,
or in investigating any possible Default or Potential
Default.
16.2. DRAWDOWN FEE
The Borrower shall pay to the Bank a drawdown fee at the rate of 0.5
per cent of each Advance, such fee to be payable on the making of the
relevant Advance.
-30-
<PAGE>
16.3. COMMITMENT FEE
The Borrower shall pay a commitment fee in Sterling to the Bank of
(pound)40,000 on the date of this Agreement.
16.4. DOCUMENTARY TAXES indemnity
All stamp, documentary, registration or other like duties or Taxes,
including any penalties, additions, fines, surcharges or interest
relating to those duties and Taxes, which are imposed or chargeable
on or in connection with any Financing Document shall be paid by the
Borrower. The Bank shall be entitled but not obliged to pay any such
duties or Taxes (whether or not they are its primary responsibility).
If the Bank does so the Borrower shall on demand indemnify the Bank
against those duties and Taxes and against any costs and expenses
incurred by the Bank in discharging them.
16.5. VAT
16.5.1. All payments made by the Borrower under the Financing Documents are
calculated without regard to VAT. If any such payment constitutes the
whole or any part of the consideration for a taxable or deemed
taxable supply (whether that supply is taxable pursuant to the
exercise of an option or otherwise) by the Bank, the amount of that
payment shall be increased by an amount equal to the amount of VAT
which is chargeable in respect of the taxable supply in question.
16.5.2. No payment or other consideration to be made or furnished to the
Borrower by the Bank pursuant to or in connection with any Financing
Document or any transaction or document contemplated in any Financing
Document may be increased or added to by reference to (or as a result
of any increase in the rate of) any VAT which shall be or may become
chargeable in respect of any taxable supply.
16.6. INDEMNITY PAYMENTS
Where in any Financing Document the Borrower has an obligation to
indemnify or reimburse the Bank in respect of any loss or payment,
the calculation of the amount payable by way of indemnity or
reimbursement shall take account of the likely Tax treatment in the
hands of the Bank (as determined by the Bank's auditors) of the
amount payable by way of indemnity or reimbursement and of the loss
or payment in respect of which that amount is payable.
17. WAIVERS; REMEDIES CUMULATIVE
The rights of the Bank under the Financing Documents:
(a) may be exercised as often as necessary;
(b) are cumulative and not exclusive of its rights under
the general law; and
(c) may be waived only in writing and specifically.
Delay in exercising or non-exercise of any such right is not a waiver
of that right.
-31-
<PAGE>
18. MISCELLANEOUS
18.1. SEVERANCE
If any provision of this Agreement is or becomes illegal, invalid or
unenforceable in any jurisdiction, that shall not affect:
(a) the legality, validity or enforceability in that
jurisdiction of any other provision of this
Agreement; or
(b) the legality, validity or enforceability in any other
jurisdiction of that or any other provision of this
Agreement.
18.2. COUNTERPARTS
This Agreement may be executed in any number of counterparts and this
shall have the same effect as if the signatures on the counterparts
were on a single copy of this Agreement.
18.3. ENTIRE AGREEMENT
This Agreement in conjunction with the Security # documents
constitutes the entire agreement between the Parties in relation to
the Facility and supersedes all previous proposals, agreements and
other written and oral communications in relation to the Facility.
19. NOTICES
19.1. METHOD
Each notice or other communication to be given under this Agreement
shall be given in writing in English and, unless otherwise provided,
shall be made by fax or letter.
19.2. DELIVERY
Any notice or other communication to be given by one Party to another
under this Agreement shall (unless one P arty has by 15 days' notice
to the other Party specified another address) be given to that other
Party at the respective addresses given in Clause 19.3.
19.3. ADDRESSES
The address and fax number of the Borrower and Bank are:
(A) the Borrower:
20-24 Church Street
Altrincham
Cheshire WA14 4DW
Attention: *
Fax: 0161 955 1001
-32-
<PAGE>
(B) the Bank:
NatWest UK
Corporate Banking Services
1st Floor, Radford House
Radford Boulevard
Nottingham NG7 5QG
Attention: P. Bloxham
Fax: 0115 942 204
19.4. DEEMED RECEIPT
19.4.1. Any notice or other communication given by the Bank shall be deemed
to have been received:
(a) if sent by fax, with a confirmed receipt of transmission
from the receiving machine, on the day
on which transmitted;
(b) in the case of a notice given by hand, on the day of
actual delivery; and
(c) if posted, on the second Business Day following the day on
which it was despatched by first class mail postage
prepaid.
provided that a notice given in accordance with the above but
received on a day which is not a Business Day or after normal
business hours in the place of receipt shall be deemed to have been
received on the next Business Day.
19.4.2. Any notice or other communication given to the Bank shall be deemed
to have been given only on actual receipt.
20. ASSIGNMENTS AND TRANSFERS
20.1. BENEFIT OF AGREEMENT
This Agreement shall be binding upon and enure to the benefit of each
Party and its successors and assigns.
20.2. ASSIGNMENTS AND TRANSFERS BY BORROWER
The Borrower shall not be entitled to assign or transfer any of its
rights or obligations under this Agreement.
20.3. ASSIGNMENTS BY BANK
The Bank may (with the prior consent of the Borrower) assign any of
its rights and benefits under any Financing Document to another bank
or other financial institution.
20.4. TRANSFERS BY BANK
The Bank may with the prior consent of the Borrower) transfer any of
its rights and obligations under any Financing Document to another
bank or other financial institution.
The Borrower shall enter into such documents as the Bank may
reasonably stipulate in order to effect any such transfer.
-33-
<PAGE>
20.5. CONSEQUENCES OF TRANSFER
The Borrower shall be under no obligation to pay any greater amount
under this Agreement following an assignment or transfer by the Bank
of any of its rights or obligations pursuant to this Clause 20 if, in
the circumstances existing at the time of such assignment or
transfer, such greater amount would not have been payable but for the
assignment or transfer.
20.6. DISCLOSURE OF INFORMATION
The Bank may disclose to its professional advisers and to any actual
or potential assignee, transferee or sub-participant any information
which the Bank has acquired under or in connection with any Financing
Document.
21. INDEMNITIES
21.1. BREAKAGE costs indemnity
The Borrower shall indemnify the Bank on demand against any loss or
expense (including any loss of Margin or any other loss or expense on
account of funds borrowed, contracted for or utilised to fund any
amount payable under this Agreement, any amount repaid or prepaid
under this Agreement or any Advance) which the Bank has sustained or
incurred as a consequence of:
(a) an Advance not being made following the service of a
Drawdown Notice (except as a result of the failure of the
Bank to comply with its obligations under this Agreement);
(b) the failure of the Borrower to make payment on the due
date of any sum due under this Agreement;
(c) the occurrence of any Default or the operation of
Clause 14.2; or
(d) any repayment or prepayment of an Advance otherwise than
on the last day of the Interest Period in relation to that
Advance.
21.2. CURRENCY INDEMNITY
21.2.1. Any payment made to or for the account of or received by the Bank in
respect of any moneys or liabilities due, arising or incurred by the
Borrower to the Bank in a currency (the "CURRENCY OF PAYMENT") other
than the currency in which the payment should have been made under
this Agreement (the "CURRENCY OF OBLIGATION") in whatever
circumstances (including a result of a judgment against the Borrower)
and for whatever reason shall constitute a discharge to the Borrower
only to the extent of the Currency of Obligation amount which the
Bank is able on the date of receipt of such payment (or if such date
of receipt is not a Business Day, on the next succeeding Business
Day) to purchase with the Currency of Payment amount at its spot
rate of exchange (as conclusively determined by the Bank) in the
London foreign exchange market.
21.2.2. If the amount of the Currency of Obligation which the Bank is so able
to purchase falls short of the amount originally due to the Bank
under this Agreement, then the Borrower shall immediately on demand
indemnify the Bank against any loss or damage arising as a
-34-
<PAGE>
result of that shortfall by paying to the Bank that amount in the
Currency of Obligation certified by the Bank as necessary so to
indemnify it.
21.3. GENERAL
21.3.1. Each indemnity in this Clause 21 shall constitute a separate and
independent obligation from the other obligations contained in this
Agreement, shall give rise to a separate and independent cause of
action, shall apply irrespective of any indulgence granted from time
to time and shall continue in full force and effect notwithstanding
any judgment or order for a liquidated sum or sums in respect of
amounts due under this Agreement or under any such judgment or order.
21.3.2. The certificate of the Bank as to the amount of any loss or damage
sustained or incurred by it shall be conclusive and binding on the
Borrower except for any manifest error.
22. LAW
This Agreement is governed by and shall be construed in accordance
with English law.
IN WITNESS whereof the Parties have caused this Agreement to be duly executed on
the date set out above.
-35-
<PAGE>
SCHEDULE 1
CONDITIONS PRECEDENT
The Bank shall have received each of the following in form and substance
satisfactory to it:
1. A Certified Copy of the certificate of incorporation (and any
relevant certificate of incorporation on change of name) and the
memorandum and articles of association of each Material Company.
2. A Certified Copy of the board minutes and resolutions of the Borrower
approving and authorising the execution, delivery and performance of
each Financing Document to which the Borrower is a party on the terms
and conditions of those documents and authorising a person or persons
to sign or otherwise attest the due execution of those documents and
any other documents to be executed or delivered by the Borrower
pursuant to those documents together with a certificate of a duly
authorised officer of the Borrower setting out the names and
signatures of the persons authorised to sign such documents on behalf
of the Borrower.
3. Certificate signed by a director of the Borrower confirming that all
consents, licences, approvals or authorisations of any governmental
or other authority, bureau or agency required by each Material
Company in connection with the execution, delivery, performance,
validity or enforceability of the Financing Documents or any document
to be delivered under the Financing Documents are in place.
-36-
<PAGE>
SCHEDULE 2
DRAWDOWN NOTICE
To: National Westminster Bank Plc
From: European Micro plc
*[date] 1998
Dear Sirs,
(POUND)3,500,000 CREDIT AGREEMENT DATED * MAY 1998 (THE "CREDIT AGREEMENT")
Terms defined in the Credit Agreement have the same meaning in this notice.
We request [an] Advance[s] to be drawn down under the Credit Agreement as
follows:
1. Amount of Advance[s]:(pound)* [(pound)*]
2. Drawdown Date:
3. Duration of Interest Period[s]: *[day[s]/month]
4. Payment instructions: * (if applicable)
We attach a copy of the delivery note[s] dated * [and * ] from * [and *].
We confirm that:
(a) the Eligible Inventory referred to in [each of] the attached delivery
note[s] is marked *;
(b) * per cent of the Eligible Inventory [in the delivery note marked*] is Pre
Sold; and
(c) the Eligible Inventory referred to in [each of] the attached delivery
note[s] will be sold, transferred or otherwise disposed of to the
extent that is required to repay in full the relevant advance on or
before the expiry of the [relevant] Interest Period.
We further confirm that today and on the Drawdown Date:
(a) the representations and warranties in Clause 12 to be repeated are and
will be correct; and
(b) no Default or Potential Default has occurred and is continuing or will occur
on the making of the Advance.
-37-
<PAGE>
SIGNED
FOR AND ON BEHALF OF EUROPEAN MICRO PLC
-38-
<PAGE>
SCHEDULE 3
PART 1
GROUP COMPANIES
<TABLE>
<CAPTION>
COLUMN 1 COLUMN 2 COLUMN 3
NAME JURISDICTION OF INCORPORATION AND SECURITY DOCUMENTS
REGISTERED NUMBER
<S> <C> <C>
European Micro plc England & Wales (registered Mortgage Debenture dated 12th
number 2663964) November 1996
European Micro GmbH Germany (registered number None
HRB305196)
European Micro BV Netherlands (registered number None
2663964)
PART 2
MATERIAL COMPANIES
COLUMN 1 COLUMN 2 COLUMN 3
NAME JURISDICTION OF INCORPORATION AND SECURITY DOCUMENTS
REGISTERED NUMBER
European Micro plc England & Wales (registered Mortgage Debenture dated 12th
number 2663964) November 1996
</TABLE>
-39-
<PAGE>
SCHEDULE 4
MANDATORY COST RATE FORMULA
1. The Mandatory Cost Rate is an addition to the interest rate on an
Advance to compensate the Bank for the cost attributable to an
Advance resulting from the imposition from time to time under or
pursuant to the Bank of England Act 1998 (the "ACT") and/or by the
Bank of England and/or the Financial Services Authority (the "FSA")
(or other United Kingdom governmental authorities or agencies) of a
requirement to place non-interest-bearing cash ratio deposits or
Special Deposits (whether interest bearing or not) with the Bank of
England and/or pay fees to the FSA calculated by reference to
liabilities used to fund the Advance.
2. The Mandatory Cost Rate shall be the rate determined by the Bank (and
rounded upward, if necessary, to 4 decimal places) as the rate
resulting from the application (as appropriate) of the following
formulae:
in relation to an Advance denominated in Sterling:
XL + S(L-D) + F X 0.01
----------------------
100 - (X + S)
in relation to an Advance denominated in a currency other than
Sterling:
F X 0.01
--------
300
where on the day of application of a formula:
X is the percentage of Eligible Liabilities (in excess of
any stated minimum) by reference to which the Bank is
required under or pursuant to the Act to maintain cash
ratio deposits with the Bank of England;
L is the BBA Sterling LIBOR rate quoted at or about
11.00 a.m. on Telerate (now at page 3750) on
that day;
F. is the rate of charge payable by the Bank to the FSA
pursuant to paragraph 2.02 of the Fees Regulations (but
where, for this purpose, the figure at paragraph 2.02b of
the Fees Regulations shall be deemed to be zero) and
expressed in pounds per (pound)1 million of the Fee Base
of the Bank;
S is the level of interest bearing Special Deposits,
expressed as a percentage of Eligible Liabilities, which
the Bank is required to maintain by the Bank of England
(or other United Kingdom governmental authorities or
agencies); and
D is the percentage rate per annum payable by the Bank of
England to the Bank on Special Deposits.
(X, L, S and D shall be expressed in the formula as numbers and not
as percentages, e.g. if X = 0.15%and L = 7%, XL will be calculated as
0.15 x 7 and not as 0.15% x 7%. A negative result obtained from
subtracting D from L shall be counted as zero.)
3. The Mandatory Cost Rate attributable to an Advance or other sum for
any period shall be calculated at or about 11.00 a.m. on the first
day of that period for the duration of that period.
-40-
<PAGE>
4. The determination of the Mandatory Cost Rate in relation to any
period shall, in the absence of manifest error, be conclusive and
binding on the Parties.
5. If there is any change in circumstance (including the imposition of
alternative or additional requirements) which in the reasonable
opinion of the Bank renders or will render either of the above
formulae (or any element of the formulae, or any defined term used in
the formulae) inappropriate or inapplicable, the Bank shall be
entitled to vary the same by giving notice to the Borrower. Any such
variation shall, in the absence of manifest error, be conclusive and
binding on the Parties and shall apply from the date specified in
such notice.
For the purposes of this Schedule:
"ELIGIBLE LIABILITIES" and "SPECIAL DEPOSITS" have the
meanings given to those terms under or pursuant to the Act
or by the Bank of England (as may be appropriate), on the
day of the application of the formula.
"FEE BASE" has the meaning given to that term for the
purposes of, and shall be calculated in accordance with,
the Fees Regulations.
"FEES REGULATIONS" means, as appropriate, either:
(a) the Banking Supervision (Fees) Regulations 1998;
or
(b) such regulations as from time to time may be in
force, relating to the payment of fees for
banking supervision in respect of periods
subsequent to 31 March 1999.
-41-
<PAGE>
THE BORROWER
SIGNED BY )
)
for and on behalf of )
EUROPEAN MICRO PLC )
THE BANK
SIGNED BY )
)
for and on behalf of )
NATIONAL WESTMINSTER BANK PLC )
-42-
EXHIBIT 21.01
SUBSIDIARIES OF THE REGISTRANT
1. European Micro PLC (a public limited company organized under the
laws of the United Kingdom).
2. Nor'easter Micro, Inc. (a Nevada corporation).
EXHIBIT 23.01
The Board of Directors
European Micro Holdings, Inc.
We consent to the use of our report included herein.
September 28, 1998 /S/ KPMG
------------------------
KPMG Manchester, England
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary information extracted from the consolidated
balance sheets and consolidated statement of operations of European Micro
Holdings, Inc. and the notes thereto set forth in the filing.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 5,012
<SECURITIES> 0
<RECEIVABLES> 8,883
<ALLOWANCES> 23
<INVENTORY> 1,715
<CURRENT-ASSETS> 18,399
<PP&E> 611
<DEPRECIATION> 499
<TOTAL-ASSETS> 19,204
<CURRENT-LIABILITIES> 5,440
<BONDS> 84
0
0
<COMMON> 49
<OTHER-SE> 13,680
<TOTAL-LIABILITY-AND-EQUITY> 19,204
<SALES> 111,453
<TOTAL-REVENUES> 111,453
<CGS> 97,058
<TOTAL-COSTS> 7,163
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 18
<INTEREST-EXPENSE> 437
<INCOME-PRETAX> 6,798
<INCOME-TAX> 2,313
<INCOME-CONTINUING> 4,485
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,485
<EPS-PRIMARY> 1.10
<EPS-DILUTED> 1.10
</TABLE>
