EUROPEAN MICRO HOLDINGS, INC.
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(MARK ONE)
|X| Quarterly Report Pursuant to Section 13 or 15(d) of Securities Exchange
Act of 1934.
For the quarterly period ended March 31, 1999
|_| Transition report under Section 13 or 15(d) of the Securities Exchange
Act of 1934 (No Fee Required)
For the transition period from _______ to _______.
Commission File No. 333-44393
EUROPEAN MICRO HOLDINGS, INC.
(Name of Registrant as Specified in Its Charter)
Nevada 65-0803752
- ------ ----------
(State or Other Jurisdiction of Incorporation (I.R.S. Employer
or Organization Identification No.)
6073 N.W. 167th Street, Unit C-25, Miami, Florida 33015
- ------------------------------------------------- -----
(Address of Principal Executive Offices) (Zip Code)
(305) 825-2458
--------------
(Issuer's Telephone Number, Including Area Code)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months, and (2) has
been subject to such filing requirements for the past 90 days.
Yes |_| No |X|
There were 4,933,900 shares of Common Stock, par value $0.01 per share,
outstanding as of May 14, 1999.
<PAGE>
EUROPEAN MICRO HOLDINGS, INC.
PART I
FINANCIAL INFORMATION
- ---------------------
ITEM 1. FINANCIAL STATEMENTS.
--------------------
Index to Consolidated Financial Statements
Consolidated Condensed Balance Sheets as of March 31, 1999 and
June 30, 1998 3
Consolidated Condensed Statements of Earnings for the three
and nine months ended March 31, 1999 and 1998 4
Consolidated Statement of Changes in Shareholders' Equity
for the nine months ended March 31, 1999 5
Consolidated Condensed Statements of Cash Flows for the nine months
ended March 31, 1999 and 1998 6
Notes to Consolidated Condensed Financial Statements 8
2
<PAGE>
EUROPEAN MICRO HOLDINGS, INC.
<TABLE>
CONSOLIDATED CONDENSED BALANCE SHEETS
($ IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
<CAPTION>
MAR. 31, 1999 JUNE 30, 1998
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash $2,380 $5,012
Restricted cash 387 -
Trade receivables, net 6,212 7,985
Discounted trade receivables 7,853
-
Due from related parties 2,568 898
Inventories, net 8,853 1,715
Deferred tax asset 40 26
Prepaid expenses 401 304
Other current assets 635 2,459
----------- -----------
TOTAL CURRENT ASSETS 29,329 18,399
Property and equipment, net 672 611
Excess of cost over acquired net assets, net 1,622 -
Investments in and advances to unconsolidated 499 194
affiliate
----------- -----------
TOTAL ASSETS $32,122 $19,204
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Bank line of credit $540 $-
Discount creditor 6,675 -
Trade payables 3,769 1,638
Other current liabilities 2,048 987
Due to related parties 1,942 238
Income taxes payable 2,477 2,577
----------- -----------
TOTAL CURRENT LIABILITIES 17,451 5,440
Long-term borrowings under capital leases 60 84
Other liabilities 274 -
----------- -----------
TOTAL LIABILITIES 17,785 5,524
=========== ===========
Commitments & contingencies - -
SHAREHOLDERS' EQUITY:
Preferred stock $0.01 par value shares: 1,000,000
authorized, no shares issued and outstanding - -
Common stock $0.01 par value shares: 20,000,000
authorized, shares issued and outstanding, 49 49
4,933,900
Additional paid in capital 8,933 8,802
Retained earnings 5,541 4,773
Accumulated other comprehensive income (186) 56
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 14,337 13,680
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 32,122 $ 19,204
============ ===========
</TABLE>
3
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EUROPEAN MICRO HOLDINGS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
($ IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
(UNAUDITED) (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
SALES:
Net sales $ 31,269 $27,422 $86,990 $59,571
Net sales to related parties 7,196 11,708 9,783 25,667
-------- ------- ------- -------
Total net sales 38,465 39,130 96,773 85,238
-------- ------- ------- -------
COST OF GOODS SOLD:
Cost of goods sold (28,388) (20,936) (78,927) (48,990)
Cost of goods sold to related parties (7,148) (11,613) (9,714) (25,287)
-------- ------- ------- -------
Total cost of goods sold (35,536) (32,549) (88,641) (74,277)
-------- ------- ------- -------
GROSS PROFIT 2,929 6,581 8,132 10,961
OPERATING EXPENSES:
Selling, general and administrative
expenses (2,831) (2,842) (6,698) (5,248)
Expenses attributable to related parties (0) (31) (0) (104)
-------- ------- ------- -------
Total operating expenses (2,831) (2,873) (6,698) (5,352)
-------- ------- ------- -------
OPERATING PROFIT 98 3,708 1,434 5,609
Interest expense, net (77) (117) (150) (328)
Equity in net income (loss)
of unconsolidated affiliate 2 2 (45) 23
-------- ------- ------- -------
INCOME BEFORE INCOME TAXES 23 3,593 1,239 5,304
Income taxes (1) (1,213) (471) (1,770)
-------- ------- ------- -------
NET INCOME $22 $2,380 $768 $3,534
======== ======= ======= =======
NET INCOME PER SHARE - BASIC $.00 $.60 $.15 $.88
======== ======= ======= =======
NET INCOME PER SHARE - DILUTED $.00 $.60 $.15 $.88
======== ======= ======= =======
</TABLE>
4
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EUROPEAN MICRO HOLDINGS, INC.
<TABLE>
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
($ IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER TOTAL
PAID IN RETAINED COMPREHENSIVE SHAREHOLDERS'
COMMON STOCK CAPITAL EARNINGS INCOME EQUITY
SHARES AMOUNT
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1998 4,933,900 $49 8,802 4,773 56 $13,680
Net income - - - 768 - 768
Other comprehensive
income, net of tax, for
foreign currency
translation adjustment - - - - (242) (242)
Total comprehensive income - - - - - 526
Additional initial public
offering expenses - - (25) - - (25)
Compensation charge in
relation to share options
issued to non-employees - - 156 - - 156
--------- ------ ------ ------ ------ -------
Balance at March 31, 1999 4,933,900 $49 8,933 5,541 (186) $14,863
========= ====== ====== ====== ====== =======
</TABLE>
5
<PAGE>
EUROPEAN MICRO HOLDINGS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
($ IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
MARCH 31,
1999 1998
OPERATING ACTIVITIES:
Net income $768 $3,534
ADJUSTMENTS TO RECONCILE NET INCOME
TO NET CASH USED IN
OPERATING ACTIVITIES
Depreciation and amortization 278 120
Provision for deferred taxes (14) (57)
Equity in net loss (income) of
unconsolidated affiliate 45 (23)
Compensation charge for non-employee
stock options 156 -
CHANGES IN ASSETS AND LIABILITIES, NET
OF EFFECTS FROM ACQUISITIONS
Restricted cash (387) -
Trade and discounted receivables (1,886) (6,034)
Due from related parties (1,670) 510
Inventory (7,022) (2,477)
Prepaid expenses and other current 1,727 (2,489)
assets
Trade payables (1,013) (1,362)
Due to related parties 1,704 770
Taxes payable (100) 1,644
Other current liabilities (800) 1,881
------- -------
NET CASH USED IN OPERATING ACTIVITIES (8,214) (3,983)
------- -------
INVESTING ACTIVITIES:
Purchase of fixed assets (213) (451)
Sale of fixed assets - 121
Payment for acquisitions, net of cash
acquired (819) -
Advances to unconsolidated affiliate (350) -
------- -------
NET CASH USED IN INVESTING ACTIVITIES (1,382) (330)
------- -------
FINANCING ACTIVITIES:
Dividends paid - (550)
Additional initial public offering
expenses (25) -
Repayment of capital leases, net (24) 64
Change in bank line of credit 540 3,245
Change in discount creditor 6,675 1,784
------- -------
NET CASH PROVIDED BY FINANCING ACTIVITIES 7,166 4,543
------- -------
Exchange rate changes (202) 95
------- -------
NET INCREASE (DECREASE) IN CASH (2,632) 325
Cash at beginning of period 5,012 288
------- -------
CASH AT END OF PERIOD $2,380 $613
------- -------
6
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EUROPEAN MICRO HOLDINGS, INC.
Non-cash investing and financing activities:
Fair value of assets acquired $4,533 $-
Goodwill 1,705 -
Fair value of liabilities assumed (4,322) -
Notes issued for consideration (964) -
------- -------
Cash paid for acquisitions $952 -
Less cash acquired (133) -
------- -------
Net cash paid for acquisitions $819 $-
======= =======
Interest paid $239 $117
======= =======
Taxes paid $567 $261
======= =======
7
<PAGE>
EUROPEAN MICRO HOLDINGS, INC.
NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1 INTERIM FINANCIAL STATEMENTS
The accompanying unaudited interim financial statements have been prepared
pursuant to the rules and regulations for reporting on Form 10-Q. Accordingly,
certain information and notes required by generally accepted accounting
principles for complete financial statements are not included herein. The
interim statements should be read in conjunction with the Company's financial
statements and notes thereto included in the Company's latest annual report on
Form 10-K.
In the Company's opinion, all adjustments necessary for a fair presentation of
these interim statements have been included and are of a normal and recurring
nature.
2 INVENTORY
Inventories comprise ($ in thousands):
MAR.31, JUNE 30,
1999 1998
Finished goods and goods for resale $8,900 $1,724
Less: Allowance for inventory obsolescence (47) (9)
------ ------
$8,853 $1,715
====== ======
The Company insures its inventory against theft and other damage up to a maximum
of the higher of $9,900,000 or the carrying value of the inventory. On March
31, 1999, the carrying value was $8,853,000.
Obsolescence comprise ($ in thousands):
NINE MONTHS
ENDED YEAR ENDED
MAR. 31 JUNE 30,
1999 1998
Beginning balance $9 $35
Provision for obsolescence 592 248
Amounts written off (554) (274)
----- -----
Ending balance $47 $9
===== =====
8
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EUROPEAN MICRO HOLDINGS, INC.
NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
3 OTHER CURRENT ASSETS
Other current assets comprise ($ in thousands):
MAR. 31, JUNE 30,
1999 1998
Amounts paid in advance for inventories $- $2,015
Advanced Corporation Tax recoverable 314 145
Value Added Tax receivable 204 -
Other 117 299
------- ------
$635 $2,459
======= ======
4 EXCESS OF COST OVER ACQUIRED NET ASSETS
NINE MONTHS
ENDED
MAR. 31,
Beginning balance $-
Additions to excess of cost over acquired
net assets 1,657
Amortization (35)
------
Ending balance $1,622
======
5 BANK LINE OF CREDIT
European Micro UK has a line of credit with National Westminster Bank for
1,200,000 pounds sterling (approximately $1,933,000 at March 31, 1999). The
agreement bears interest at 1.25% over the base rate (5.5% at March 31, 1999).
Interest payments are due quarterly.
6 OTHER CURRENT LIABILITIES
Other current liabilities comprise ($ in thousands):
MAR. 31, JUNE 30,
1999 1998
Accrued expenses $854 $710
Value Added Tax payable 118 41
Accrued payroll taxes & national insurance 106 98
Current portion of capital leases 38 70
Deferred payments on Sunbelt acquisition 903 -
Other 29 68
----- -----
$ 2,048 $987
======= =====
9
<PAGE>
EUROPEAN MICRO HOLDINGS, INC.
NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
7 COMPREHENSIVE INCOME
An adjustment for foreign currency translation has been recorded to
shareholders' equity as other comprehensive income, net of tax. The exchange
rate changes recorded for the nine months ended March 31, 1999 and 1998, were
approximately $(242,000) and $40,000, respectively. Comprehensive income for the
nine months ended March 31, 1999 and 1998 totaled $526,000 and $3,574,000,
respectively.
8 EARNINGS PER SHARE
The calculation of earnings per share are detailed in the table below:
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
EARNINGS 1999 1998 1999 1998
Net income ($ in thousands) $22 $2,380 $768 $3,534
======= ====== ====== =======
WEIGHTED AVERAGE NUMBER OF SHARES
Outstanding common stock
during the period 4,976,883 4,000,000 4,954,106 4,000,000
---------- --------- --------- ---------
Effect of dilutive stock options 43,670 - 24,206 -
---------- --------- --------- ---------
DILUTED WEIGHTED AVERAGE NUMBER 5,020,553 4,000,000 4,978,312 4,000,000
OF SHARES ========== ========= ========= =========
Basic earnings per share $0.00 $0.60 $0.15 $0.88
========== ========= ========= =========
Diluted earnings per share $0.00 $0.60 $0.15 $0.88
========== ========= ========= =========
No stock options were issued during the three-month period ended March 31, 1999.
During the nine-month period ended March 31, 1999, the Company issued options to
purchase 35,000 shares of its common stock at exercise prices ranging from
$9.1875 to $11.00. The above dilutive earnings per share calculations exclude
the effect of options to purchase 20,000 shares of common stock at $11.00 per
share in the three-month and nine-month period ended March 31, 1999, due to the
fact they were anti-dilutive. The nine-month period ended March 31, 1999,
reflects only a pro-rata impact of all options as such options were
anti-dilutive in the first quarter of fiscal 1999. Also see Note 10 related to
contingently issuable shares related to an acquisition. The effect of contingent
shares related to the guaranteed earn-out amount not paid at the closing of the
Sunbelt acquisition and the effect of satisfactory completion of part of the
first contingent earn-out has been included in the above basic earnings per
share calculations. The effect of part of the first contingent earn-out dealing
with employment of some key employees has been included in diluted earnings per
share. However, the remainder of the first contingent earn-out and all of the
second contingent earn-out are not included, as the conditions necessary for
such contingent shares to be issued have not been met as of March 31, 1999. The
weighted average number of shares used in the 1998 periods reflect a retroactive
adjustment to assume the 4,000,000 shares issued in January 1998 in exchange for
the shares of European Micro Plc that were outstanding for the complete periods
in 1998.
10
<PAGE>
EUROPEAN MICRO HOLDINGS, INC.
NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
9 RELATED PARTY TRANSACTIONS
European Micro Holdings, Inc. belongs to a group of related companies (the
"GROUP"). The Group is comprised of 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
Holdings, Inc., John B. Gallagher and/or Harry D. Shields and their families.
The prices charged to members of the Group are lower than they would be in
arms-length transactions. The members of the Group maintain buying arrangements
which enables a Group member to purchase large job-lots at more competitive
prices than would otherwise be possible and then immediately sell part of the
purchase to the other Group members. In practical terms, the sales to related
parties are to the distributors in a similar trade as European Micro Holdings,
Inc. and these parties would not buy at higher prices.
Related party transactions are summarized as follows ($ in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
1999 1998 1999 1998
SALES TO:
American Micro Computer Center $4,107 ($590) $4,508 $9,823
Technology Express 3,089 12,298 5,275 15,844
------ ------ ------ ------
$7,196 $11,708 $9,783 $25,667
====== ======= ====== =======
PURCHASES FROM:
American Micro Computer Center $790 $15 $920 $340
Technology Express 1,712 979 15,264 3,916
------ ------ ------ ------
$2,502 $994 $16,184 $4,256
= ====== ======= ======
OPERATING EXPENSES
MANAGEMENT AND CONSULTANCY FEES PAID
TO:
American Micro Computer Center $- $15 $- $45
Technology Express - 16 - 59
------ ------ ------- ------
$- $31 $- $104
11
<PAGE>
EUROPEAN MICRO HOLDINGS, INC.
NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
9 RELATED PARTY TRANSACTIONS (CONTINUED)
Due from related parties comprised the following balances ($ in thousands):
MAR. 31, JUNE 30,
1999 1998
American Micro Computer Center $1,861 $54
Technology Express 707 844
-------- --------
$2,568 $898
======== ========
Due to related parties comprised of following balances ($ in thousands):
MAR. 31, JUNE 30,
1999 1998
American Micro Computer Center $77 $12
Technology Express 1,865 226
-------- -------
$1,942 $238
======== =======
There were no related party transactions between, or balances due to or
from, the Company and Ameritech Argentina or Ameritech Exports for the three and
nine-month periods ended March 31, 1999 and 1998.
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) of European Micro
Holdings, Inc., is the president of American Micro Computer Center and owns 50%
of the outstanding shares of capital stock in that company. See Note 11 for
further information.
TECHNOLOGY EXPRESS
Until 1996, Technology Express was a full service authorized reseller of
computers and related products based in Nashville, Tennessee, selling primarily
to end-users. Technology Express was sold to Inacom 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 32% of the outstanding shares) of European
Micro Holdings, Inc., is president of Technology Express and owns 100% of the
outstanding shares of capital stock of that company.
AMERITECH ARGENTINA
Ameritech Argentina was 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 and each owned 50% of
the outstanding shares of common stock until its sale on August 1, 1997.
12
<PAGE>
EUROPEAN MICRO HOLDINGS, INC.
NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
9 RELATED PARTY TRANSACTIONS (CONTINUED)
AMERITECH EXPORTS
Ameritech Exports was 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 and each
owned 50% of the outstanding shares of common stock until its sale on August 1,
1997.
10 ACQUISITION OF SUBSIDIARIES
On October 26, 1998, European Micro Plc, a wholly-owned subsidiary of European
Micro Holdings, Inc. ("European Micro"), acquired all of the outstanding shares
of capital stock of Sunbelt (UK) Limited ("Sunbelt"), a company registered in
England and Wales, from the shareholders of Sunbelt for the consideration
described below. As a result of the acquisition, Sunbelt is a wholly-owned
subsidiary of European Micro Plc. The Sunbelt purchase price (to be settled in
pounds sterling) is comprised of a guaranteed portion and two contingent
earn-out payments. The guaranteed portion of the purchase price, which was based
upon Sunbelt's net book value at closing and a multiple of its fiscal year 1998
pre-tax earnings, was 940,000 pounds sterling (approximately $1.51 million at
exchange rate on March 31, 1999). Of this guaranteed amount, approximately
360,000 pounds sterling (approximately $580,000 at exchange rate on March 31,
1999) was paid in cash at closing.
The unpaid balance of the guaranteed consideration includes a note payable to
the former 40% Sunbelt shareholder in the amount of approximately 240,163 pounds
sterling ($387,000 at exchange rate on March 31, 1999) to be repaid in November
2005, subject to early repayment at the option of the noteholder at any time
after June 1, 1999. Such note payable is secured by a cash account of equal
amount at March 31, 1999. The note payable and the cash balances are reflected
on the accompanying consolidated condensed balance sheet at March 31, 1999, in
restricted cash and other current liabilities, respectively.
The remainder of the unpaid guaranteed consideration of approximately 339,614
pounds sterling ($547,000 at exchange rate on March 31, 1999), plus accrued
interest, is to be paid in equal installments within ninety (90) days of the end
of the first and second contingent earn-out periods as discussed below. The
unpaid balance of the guaranteed purchase price is reflected in other current
liabilities and other liabilities on the accompanying consolidated condensed
balance sheet at March 31, 1999.
The purchase agreement also contains contingent purchase price provisions. The
maximum contingent earn-out payments in the aggregate are two (2) times
Sunbelt's fiscal year 1998 pre-tax earnings of approximately 424,518 pounds
sterling (approximately $1.4 million at exchange rate on March 31, 1999). The
first contingent payment of up to approximately 424,518 pounds sterling
($684,000 at exchange rate on March 31, 1999) will be made if certain financial
parameters are attained during the first contingent earn-out period which runs
from November 1, 1998 to October 31, 1999, and if certain of the Sunbelt
executives are still employed with the Company at the end of the first earn-out
period. The second contingent payment of up to approximately 424,518 pounds
sterling ($684,000 at exchange rate on March 31, 1999) will be made if certain
financial parameters are attained during the second contingent earn-out period
which runs from November 1, 1999 to October 31, 2000. That portion of the first
contingent earn-out payment related to employee retention, approximately 106,130
pounds sterling ($171,000 at exchange rate on March 31, 1999), is being
recognized by the Company over the course of the first contingent earn-out
period as compensation expense. That portion of the first contingent earn-out
payment related to the volume of purchases from the Far East has been met. This
portion of approximately 106,130 pounds sterling ($171,000 at exchange rate on
March 31, 1999), has been recognized by the Company, and is reflected in the
excess of cost over acquired net assets, net and other current liabilities. The
remaining portion of the first contingent earn-out payment of approximately
212,260 pounds sterling ($342,000 at exchange rate on March 31, 1999) and the
second contingent earn-out payment have not been recognized in the accompanying
consolidated condensed financial statements as the payment of such amounts are
not, in the opinion of management, determinable beyond a reasonable doubt.
13
<PAGE>
EUROPEAN MICRO HOLDINGS, INC.
NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
10 ACQUISITION OF SUBSIDIARIES (CONTINUED)
Within ninety (90) days of the end of first and second contingent earn-out
periods, the first and second purchase price installment payments will be made.
Such installment payments will each include one-half of the remaining 40%
guaranteed purchase price amounts, plus any amounts due under the first and
second contingent earn-out payment provisions. The amounts due to the former 40%
shareholder of Sunbelt will be satisfied by the issuance of a convertible loan
note due six years after the date of issue, and subject to early prepayment at
the option of the noteholder on any date after eight months from the date of
issuance. The Company has the option of paying all future amounts due to the
former Sunbelt shareholders in common stock of European Micro Holdings, Inc. The
Company also entered into employment agreements with the two former shareholders
of Sunbelt.
The acquisition of Sunbelt was accounted for as a purchase. The purchase price,
subject to adjustment as described above and inclusive of transaction costs, of
approximately 1,001,000 pounds sterling plus the earned portion of the
contingent earn-out of approximately 106,000 pounds sterling for a total of
1,107,000 pounds sterling ($1,784,000 at exchange rate on March 31, 1999)
exceeded the estimated fair market value of net assets acquired by approximately
$1,657,000, which is being amortized on a straight-line basis over 20 years. The
results of operations of Sunbelt have been included in the accompanying
financial statements from the date of acquisition.
Sunbelt, formerly privately held, is a distributor of microcomputer products to
dealers, value-added resellers and mass merchants throughout Western Europe.
Sunbelt's trading operations were integrated with and into the operations of
European Micro Plc. Sunbelt's business of distributing its Nova brand products
operates as a separate business entity consistent with past practice. Sunbelt
was established in 1992 and is based in Wimbledon, England. For the fiscal year
ended June 30, 1998, Sunbelt had total sales of approximately $16.5 million and
pre-tax earnings of approximately $742,500.
On November 12, 1998, European Micro Plc acquired the assets of H&B Trading
International BV ("H&B"). Based in Holland, H&B was a privately held,
independent, focused distributor of microcomputer products to the BENELUX
countries - Belgium, Holland and Luxembourg. H&B had 1997 annual revenues of
approximately $2 million. The acquisition of H&B was accounted for as a
purchase. The base purchase price, subject to adjustment, of approximately
125,000 Dutch guilders ($74,000 at exchange rate on March 31, 1999) exceeded the
estimated value of net assets acquired by approximately 85,000 Dutch guilders
($54,000 at exchange rate on March 31, 1999), which is being amortized on a
straight-line basis over 20 years. If certain financial performance criteria are
met for the fiscal years ended June 30, 1999 and 2000, additional consideration
of approximately 50,000 Dutch guilders ($24,000 at exchange rate on March 31,
1999) and 75,000 Dutch guilders ($37,000 at exchange rate on March 31, 1999),
respectively, will be paid. Such contingent consideration has not been reflected
in the accompanying consolidated condensed financial statements. The results of
operations of H&B have been included in the accompanying financial statements
from the date of acquisition.
The following summarized unaudited pro forma financial information assumes the
acquisition of Sunbelt occurred on July 1, 1997 ($ in thousands, except per
share data):
NINE MONTHS ENDED
MARCH 31, 1999 MARCH 31, 1998
-------------- --------------
Total net sales $102,571 $97,117
======== =======
Net earnings $835 $3,623
==== ======
Earnings per share:
Basic $0.17 $0.91
===== =====
Diluted $0.17 $0.91
===== =====
14
<PAGE>
EUROPEAN MICRO HOLDINGS, INC.
NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
10 ACQUISITION OF SUBSIDIARIES (CONTINUED)
The amounts are based on certain assumptions and estimates, and do not reflect
any benefits from economies which might be achieved from the combined
operations. The pro forma results do not necessarily represent results which
would have occurred if the acquisition had taken place on the basis assumed
above, nor are they indicative of the results of future operations.
11 SUBSEQUENT EVENTS
On February 2, 1999, the Company's Board of Directors formed a special committee
(the "Committee") consisting solely of independent directors to evaluate and
determine whether the Company should acquire American Surgical Supply Corp. of
Florida d/b/a American Micro Computer Center ("AMCC") and, if so, on what terms.
The members of the Committee are Kyle R. Saxon and Barrett Sutton. The Committee
members will be compensated at $150 per hour each for their service on the
Committee. John B. Gallagher, who is a significant shareholder, Co-Chairman and
Co-President of the Company, is the President and a Director of AMCC and owns
fifty percent of its outstanding capital stock. The Committee's charter
authorizes it to take any action it deems necessary to properly evaluate and
determine whether the Company should acquire AMCC, including hiring independent
advisors and ensuring that any such transaction is entirely fair to the Company
and its shareholders. The Committee has selected and hired independent legal
counsel and is currently interviewing investment banking firms and other
candidates to serve as financial advisor to the Committee. The Committee
anticipates that it will select and hire a financial advisor shortly. Since its
formation, the Committee has conducted a preliminary review of the books and
records of AMCC and the Company has entered into a non-binding letter of intent
to acquire AMCC dated May 5, 1999. The non-binding letter of intent is
conditional upon, among other things, the satisfactory completion of the
Committee's due diligence investigation and obtaining a fairness opinion from
the Committee's financial advisor.
According to the non-binding letter of intent, the purchase price for AMCC is
equal to $811,500, plus an amount equal to AMCC's book value as of the last day
of the month immediately prior to closing, payable in cash, plus an earn-out
amount payable in cash or shares of the Company's Common Stock (at the Company's
discretion) equal to two times the after-tax earnings of AMCC in calendar year
1999 and two times the after-tax earnings of AMCC in calendar year 2000. In
addition, the Company will repay a shareholder loan of approximately $289,000,
plus accrued interest. If the Company elects to pay any portion of the purchase
price in shares of the Company's Common Stock, then AMCC's shareholders have
fifteen days to make arrangements to sell such shares over the next forty
trading days. If the sale of such shares results in net proceeds of less than
the purchase price, then the Company will pay the difference in cash to AMCC's
shareholders. A copy of the non-binding letter of intent is attached to this
Quarterly Report on Form 10-Q as Exhibit 99.01. The terms of the proposed
acquisition of AMCC are subject to the Committee and AMCC negotiating and
entering into a definitive agreement. Until such time, no assurances can be
given that the acquisition will be consummated on the terms set forth above or
at all.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
INTRODUCTORY STATEMENTS
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS. THIS QUARTERLY REPORT
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, (D) THE COMPANY'S FUTURE FINANCING
PLANS, (E) THE COMPANY'S ANTICIPATED NEEDS FOR WORKING CAPITAL AND (F) BENEFITS
RELATED TO THE POSSIBLE ACQUISITION OF AMERICAN SURGICAL SUPPLY CORP. OF FLORIDA
D/B/A AMERICAN MICRO COMPUTER CENTER ("AMCC"). IN ADDITION, WHEN USED IN THIS
QUARTERLY REPORT, 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 AND OTHER FACTORS. IN
LIGHT OF THESE RISKS AND UNCERTAINTIES, THERE CAN BE NO ASSURANCE THAT THE
FORWARD-LOOKING STATEMENTS CONTAINED IN THIS QUARTERLY 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 THREE WHOLLY-OWNED SUBSIDIARIES, EUROPEAN MICRO PLC, A
COMPANY ORGANIZED UNDER THE LAWS OF THE UNITED KINGDOM ("EUROPEAN MICRO UK"),
NOR'EASTER MICRO, INC., A NEVADA CORPORATION ("NOR'EASTER") AND COLCHESTER
ENTERPRISE PTE LTD, A COMPANY ORGANIZED UNDER THE LAWS OF SINGAPORE
("COLCHESTER") (COLLECTIVELY, THE THREE WHOLLY-OWNED SUBSIDIARIES ARE REFERRED
TO AS THE "SUBSIDIARIES").
OVERVIEW
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 customers and 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. The Company 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.
The Company 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 European Micro UK, Colchester and Nor'easter.
Colchester was organized under the laws of Singapore in November 1998 to serve
as an independent distributor of microcomputer products in Singapore. 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
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EUROPEAN MICRO HOLDINGS, INC.
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 Stock of European Micro Holdings, Inc. were issued to
the shareholders of European Micro UK on a pro rata basis in accordance with
such shareholders' respective ownership interest 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"), Sunbelt (UK)
Limited ("Sunbelt") and European Micro B.V. ("European Micro Holland") and has a
50% joint venture interest in Big Blue Europe, B.V. ("Big Blue Europe").
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.
On October 26, 1998, European Micro UK completed its acquisition of all of the
outstanding shares of capital stock of Sunbelt. Sunbelt is a company registered
in England and Wales which was established in 1992 and is based in Wimbledon,
England. Sunbelt operates as a distributor of microcomputer products to dealers,
value-added resellers and mass merchants throughout Western Europe. Except for
the distribution of its Nova brand products, Sunbelt's distribution operations
were integrated with and into the operations of European Micro UK, since the
date of acquisition. Sunbelt continues to distribute its Nova line of products
in accordance with past practice. European Micro Holland was formed in 1995 and
recently acquired the assets of H&B Trading International B.V. ("H&B") from
European Micro UK. European Micro UK acquired these assets on November 12, 1998.
Big Blue Europe was organized under the laws of Holland in January 1997 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.
European Micro Holdings, Inc. was formed in December 1997 to serve as a
holding company of the Subsidiaries. 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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RESULTS OF OPERATIONS
The following table sets forth, for the periods presented, the percentage
of net sales represented by certain items in the Company's Consolidated
Condensed Statements of Earnings:
PERCENTAGE OF NET SALES
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
--------- ---------
1999 1998 1999 1998
---- ---- ---- ----
Net sales to third parties 81.3% 70.1% 89.9% 69.9%
Net sales to related parties 18.7% 29.9% 10.1% 30.1%
-------- ------- ------- -------
Total net sales 100.0% 100.0% 100.0% 100.0%
-------- ------- ------- -------
Cost of goods sold to third
parties (73.8%) (53.5%) (81.6%) (57.4%)
Cost of goods sold to related
parties (18.6%) (29.7%) (10.0%) (29.7%)
-------- ------- ------- -------
Total cost of goods sold
(92.4%) (83.2%) (91.6%) (87.1%)
-------- ------- ------- -------
Total gross profit 7.6% 16.8% 8.4% 12.9%
Total operating expenses (7.3%) (7.3%) (6.9%) (6.3%)
-------- ------- ------- -------
Operating profit 0.3% 9.5% 1.5% 6.6%
Interest expense, net (0.2%) (0.3%) (0.2%) (0.4%)
Equity in income (loss) of
unconsolidated affiliate (0.0%) (0.0%) (0.0%) (0.0%)
-------- ------- ------- -------
Income before income taxes 0.1% 9.2% 1.3% 6.2%
Income taxes (0.0%) (3.1%) (0.5%) (2.1%)
-------- ------- ------- -------
Net income 0.1% 6.1% 0.8% 4.1%
======== ======= ======= =======
THREE-MONTH PERIOD ENDED MARCH 31, 1999 AND 1998
TOTAL NET SALES. Total net sales decreased $0.6 million, or (1.7%), from
$39.1 million in the three-month period ended March 31, 1998 to $38.5 million in
the comparable period in 1999. Excluding net sales to related parties, net sales
increased $3.9 million, or 14.0%, from $27.4 million in the three-month period
ended March 31, 1998 to $31.3 million in the comparable period in 1999. This
increase was attributable to the addition of Sunbelt's trading sales (accounting
for approximately $4.9 million), the additional sales from Sunbelt's Nova line
of products (accounting for approximately $350,000), the start-up growth of
Nor'easter which started its operations in February 1998 (accounting for
approximately $4.7 million) and the growth of the Premier Dealers Club
(accounting for approximately $3.3 million). This increase was offset by a
reduction of $9.4 million in European Micro UK's trading sales which was
primarily due to the exceptional quarter ended March 31, 1998 when European
Micro UK made a one-time purchase of computer peripherals at favorable prices
and were later sold. Helping to offset the decrease from the prior period was
the purchase of approximately $2.3 million in product during the three-month
period ended March 31, 1999 from the office opened in Singapore in November
1998. There can be no assurance that the Company will be able to maintain the
level of sales or sales growth achieved in this period or past periods because
of seasonal variations in the demand for the products and services offered by
the Company, the introduction of new hardware and software technologies and
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EUROPEAN MICRO HOLDINGS, INC.
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 and
competitive conditions, including pricing, interest rate fluctuations, the
impact of acquisitions, currency fluctuations and general economic conditions.
Net sales to related parties decreased $4.5 million, or 38.5%, in the
three-month period ended March 31, 1999 from the comparable period in 1998. This
decrease is primarily attributable to large purchases of computer peripherals
made on behalf of related parties in the three-month period ended March 31, 1998
compared to the same period in 1999. In addition, the Company's purchases from
related parties increased by $1.5 million in the three-month period ended March
31, 1999 from the comparable period in 1998. The related parties consist of a
group of entities in which an ownership interest is held by either of the two
primary shareholders of the Company, John B. Gallagher or Harry D. Shields. See
"Note 9 to the Consolidated Condensed Financial Statements." 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. 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. 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. If the Company is unable to sell product
to the 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 Company would not be able to handle large
volume purchases at favorable prices, if they could not rely on related parties
to purchase a portion of the product and sell through their distribution
channels. Likewise, the Company's business and results of operations will be
materially adversely affected. Moreover, if the Company is unable to purchase
product from the other members of the group (including Technology Express) when
such product could be purchased from these group members at prices lower than
available from other sources.
GROSS PROFIT. Gross profit decreased $3.7 million, or 55.5%, from $6.6
million in the three-month period ended March 31, 1998 to $2.9 million in the
comparable period in 1999. Gross profit excluding related party transactions
decreased $3.6 million, or 55.5%, from $6.5 million in the three-month period
ended March 31, 1998 to $2.9 million the comparable period in 1999. This
decrease is primarily due to a large volume purchase of computer peripherals in
the prior year period which were purchased by the Company on exceptional terms
and later sold at a significant mark-up. In addition, this decrease is partially
the result of a shift in market conditions, resulting in a downward pressure on
margins due to currency fluctuations, product availability and changes in
geographic pricing strategies of manufacturers and suppliers of the Company's
products.
Gross profit attributable to related party sales was $48,000 in the
three-month period ended March 31, 1999. As discussed above, the mark-up on
sales to related parties is typically one percent over cost. Therefore, the
gross profit on sales to third parties is typically higher than the gross profit
earned on sales to related parties. This represents a gross margin of
approximately 0.7%. This is lower than the normal one percent mark-up due to the
currency changes between the U.K. pound sterling and the U.S. dollar.
Gross margin decreased from 16.8% in the three-month period ended March 31,
1998 to 7.6% in the comparable period in 1999. Excluding related party
transactions, gross margin decreased from 23.7% in the three-month period ended
March 31, 1998 to 9.2% in the comparable period in 1999. This decrease is
primarily due to a large volume purchase of computer peripherals on exceptional
terms in the three-month period ended March 31, 1998 and later sold at a
significant mark-up. The addition of Sunbelt's Nova line of products helped
offset the decrease in gross margin for the Company's other products. During the
period, the Nova line produced a gross margin of 23.0%.
Foreign exchange gains and losses moved from a loss of $138,000 in the
three-month period ended March 31, 1998 to a loss of $354,000 in the comparable
period in 1999. This adverse movement was attributable to the strengthening of
the U.S. Dollar against the U.K. pound sterling and the weakening of the Euro
relative to other European currencies, devaluing sales made in European
currencies.
OPERATING EXPENSES. Operating expenses as a percentage of total net sales
remained constant at 7.3% in the three-month period ended March 31, 1998 and
1999, respectively. Commissions and bonus payments to employees decreased as
these payments are tied to the Company's gross profit and gross margin. This
decrease was offset by increased operating expenses related to the
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<PAGE>
administrative expenses incurred by European Micro which began operations in
January 1998, but did not start to incur substantial expenses until April 1998.
INTEREST EXPENSE. Interest expense, net, decreased by $40,000 from $117,000
in three-month period ended March 31, 1998 to $77,000 in the comparable period
in 1999. This was attributable to decreased borrowing during the period because
of the availability of the net proceeds from the Company's initial public
offering.
INCOME TAXES. Income taxes as a percentage of income before income taxes
decreased from 33.7% in the three-month period ended March 31, 1998 to 4.3% in
the comparable period in 1999. During the current period, European Micro UK and
Nor'easter earned taxable income and accrued income taxes at an effective rate
of 38%. European Micro Holdings, Inc. had a taxable loss during the current
period, resulting in a tax benefit. On a consolidated basis, the effect of the
taxes accrued by European Micro UK and Nor'easter and the tax benefit recorded
by European Micro resulted in an decrease in income taxes as a percentage of
earnings before income taxes. The Company's effective income tax rate may
increase or decrease in the future as a result of the Company's product mix and
variations in the countries to which the Company sells its products.
INTEREST IN JOINT VENTURE. The Company's share of income from Big Blue
Europe remained constant at $2,000 in the three-month period ended March 31,
1998 and the comparable period in 1999. During the three-month period ended
March 31, 1999, the Company made an advance to Big Blue Europe in the amount of
$350,000, in the form of an unsecured note receivable, the terms of which are
principal due on demand with interest at a rate of 9.25% payable quarterly.
NINE-MONTH PERIOD ENDED MARCH 31, 1999 AND 1998
TOTAL NET SALES. Total net sales increased $11.5 million, or 13.5%, from
$85.2 million in the nine-month period ended March 31, 1998 to $96.7 million in
the comparable period in 1999. Excluding net sales to related parties, net sales
increased $27.4 million, or 46.0%, from $59.6 million in the nine-month period
ended March 31, 1998 to $87.0 million in the comparable period in 1999. This
increase was attributable to the addition of Sunbelt's trading sales of
(accounting for approximately $6.2 million), the additional sales from Sunbelt's
Nova line of products (accounting for approximately $1.0 million), the start-up
growth of Nor'easter which started its operations in February 1998 (accounting
for approximately $14.6 million) and the growth of the Premier Dealers Club
(accounting for approximately $6.4 million). This increase was offset by a
reduction in European Micro UK's trading sales of $800,000 which was primarily
due to the exceptional quarter ended March 31, 1998 when the Company made a
one-time purchase of computer peripherals at favorable prices which were later
sold. Helping to offset the decrease from the prior period was the purchase of
approximately $2.3 million in product during the three-month period ended March
31, 1999, from the office opened in Singapore in November 1998. There can be no
assurance that the Company will be able to maintain the level of sales or sales
growth achieved in this period or prior periods because of 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 and competitive conditions,
including pricing, interest rate fluctuations, the impact of acquisitions,
currency fluctuations and general economic conditions.
Net sales to related parties decreased $15.9 million in the nine-month
period ended March 31, 1999 from the comparable period in 1998. This decrease is
primarily attributable to large purchases of computer peripherals made on behalf
of related parties in the nine-month period ended March 31, 1998 compared to the
same period in 1999. In addition, the Company's purchases from related parties
increased by $11.9 million in the nine-month period ended March 31, 1999 from
the comparable period in 1998. The related parties consist of a group of
entities in which an ownership interest is held by either of the two primary
shareholders of the Company, John B. Gallagher or Harry D. Shields. See "Note 9
to the Consolidated Condensed Financial Statements." 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. 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. 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. If the Company is unable to sell product to the
other members of the group, the Company's revenues will be significantly reduced
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<PAGE>
EUROPEAN MICRO HOLDINGS, INC.
and its business, financial condition and results of operations will be
materially adversely affected. Moreover, the Company would not be able to handle
large volume purchases at favorable prices, if they could not rely on related
parties to purchase a portion of the product and sell through their distribution
channels. Likewise, the Company's business and results of operations will be
materially adversely affected if the Company is unable to purchase product from
the other members of the group (including Technology Express) when such product
could be purchased from these group members at prices lower than available from
other sources.
GROSS PROFIT. Gross profit decreased $2.8 million, or 25.8%, from $10.6
million in the nine-month period ended March 31, 1998 to $8.1 million in the
comparable period in 1999. Gross profit excluding related party transactions
decreased $2.5 million, or 23.8%, from $10.6 million in the nine-month period
ended March 31, 1998 to $8.1 million the comparable period in 1999. This
decrease is primarily due to a large volume purchase of computer peripherals in
the prior year period which were purchased by the Company on exceptional terms
and later sold at a significant mark-up.
Gross profit attributable to related party sales was $69,000 in the
nine-month period ended March 31, 1999. As discussed above, the mark-up on sales
to related parties is typically one percent over cost. Therefore, the gross
profit on sales to third parties is typically higher than the gross profit
earned on sales to related parties. This represents a margin of approximately
0.7%. This is lower than the normal one percent due to the currency changes
between the U.K. pound sterling and the U.S. dollar.
Gross margin decreased from 12.9% in the nine-month period ended March 31,
1998 to 8.4% in the comparable period in 1999. Excluding related party
transactions, gross margin decreased from 17.8% in the nine-month period ended
March 31, 1998 to 9.3% in the comparable period in 1999. This decrease is
primarily due to a large volume purchase of computer peripherals in the prior
year period which were purchased by the Company on exceptional terms and later
sold at a significant mark-up.
Foreign exchange gains and losses moved from a loss of $370,000 in the
nine-month period ended March 31, 1998 to a loss of $538,000 in the comparable
period in 1999. This adverse movement was attributable to a strengthening of the
U.S. dollar relative to the U.K. pound sterling and a weakening of the Euro
relative to other European currencies. These movements created unfavorable
purchasing and selling conditions respectively.
OPERATING EXPENSES. Operating expenses as a percentage of total net sales
increased from 6.3% in the nine-month period ended March 31, 1998 to 6.9% in the
comparable period in 1999. This decrease is primarily attributable to a
reduction in commission and bonus payments to employees. These payments are tied
to the Company's gross profit and gross margins. This decrease was offset by
increased operating expenses related to the administrative expenses incurred by
European Micro which began operations in January 1998, but did not start to
incur substantial expenses until April 1998.
INTEREST EXPENSE. Interest expense, net, decreased by $178,000 from
$328,000 in nine-month period ended March 31, 1998 to $150,000 in the comparable
period in 1999. This was attributable to decreased borrowing during the period
because of the availability of the net proceeds from the Company's initial
public offering.
INCOME TAXES. Income taxes as a percentage of earnings before income taxes
increased from 33.4% in the nine-month period ended March 31, 1998 to 38.0% in
the comparable period in 1999. The Company's effective income tax rate may
increase or decrease in the future as a result of the Company's product mix and
variations in the countries to which the Company sells its products.
INTEREST IN JOINT VENTURE. The Company's share of income or loss from Big
Blue Europe decreased from income of $23,000 in the nine-month period ended
March 31, 1998 to a loss of $45,000 in the comparable period in 1999. This
reduction in earnings is attributed to an increased provision for inventory
obsolescence. During the three-month period ended March 31, 1999, the Company
made an advance to Big Blue Europe in the amount of $350,000, in the form of an
unsecured note receivable, the terms of which are principal due on demand with
interest at a rate of 9.25% payable quarterly.
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EUROPEAN MICRO HOLDINGS, INC.
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
and 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
Short-term working capital requirements are funded by a combination of
short-term revolving lines of credit provided by National Westminster Bank Plc
together with accounts receivable financing provided by Lombard NatWest.
Short-term obligations must be repaid within one year. One line of credit and
the accounts receivable facilities are set and reviewed annually. The interest
rate on these facilities is based on a mark-up over the bank borrowing rate in
the United Kingdom. This line of credit facility was $830,000 in fiscal 1997 and
was increased to $2.0 million during fiscal 1998. The accounts receivable
financing provides financing for up to 85% of trade receivables. In June 1998,
the Company obtained a second short-term line of credit which is secured by the
Company's inventory. This facility allows the Company to borrow up to $5.8
million to assist in the purchase of inventory.
European Micro's principal need for additional working capital in fiscal
1999 is expected to be for the purchase of additional inventory to support
growth, to take advantage of cash discounts offered by certain of European
Micro's suppliers for early payment and the possible acquisition of AMCC. See
"Related Party Transactions." Working capital may also be needed for other
acquisitions. European Micro expects to obtain cash for these purposes through
its internal cash flow and its existing bank credit lines, but there can be no
assurance that financing will be available on terms acceptable to European
Micro. The unavailability of such financing could adversely affect the Company's
business, financial condition and results of operations.
Net cash used in operating activities during the nine-month period to March
31, 1999 amounted to $8.2 million. Significant factors in the use of cash were a
decrease in trade payables, net of effects from acquisitions, of $1.0 million,
an increase in inventory, net of effects from acquisitions of $7.0 million and
an increase in trade and discounted receivables, net of effects from
acquisitions, of $1.9 million. The decrease in payables was largely attributable
to paying down the large payables balance that was acquired in the Sunbelt
acquisition. The increase in inventory was largely attributable to large
quantity purchases of computer products at prices which the Company considered
to be favorable and a relatively low level of inventory at June 30, 1998. The
increase in trade and discounted receivables is largely attributable to the
increase in third party sales. The amount of cash used in the Company's
operations was partially offset by net income in the period of $768,000, cash
generated from a reduction in other current assets, primarily related to the
prepayment of inventory at June 30, 1998 of $1.7 million.
Cash used in investing activities amounted to $1.4 million. This consisted
of expenditures on fixed assets of $213,000, the acquisitions of Sunbelt and of
H&B and a $350,000 advance to Big Blue Europe. See "Note 10 to the Consolidated
Condensed Financial Statements."
Cash provided by financing activities was $7.2 million, of which $6.7
million was provided by an increase in the Lombard NatWest accounts receivable
financing facility and $540,000 was provided by an increase in the bank line of
credit.
Overall, the Company experienced a net decrease in cash of $2.6 million for
the nine-month period ended March 31, 1999.
ASSET MANAGEMENT
INVENTORY. European Micro's goal is to achieve high inventory turns and to
maintain a low level of inventory on hand and thereby reduce European Micro's
working capital requirements. European Micro's strategy to achieve this goal is
to both effectively manage its inventory and achieve high order fill rates.
Inventory levels may vary from period to period, due to many factors, including
increases or decreases in sales levels, European Micro's practice of making
22
<PAGE>
EUROPEAN MICRO HOLDINGS, INC.
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 and
Sunbelt UK's accounts receivables are insured and its positive credit results
have allowed European Micro UK to enjoy what it believes to be one of the most
competitive insurance rates in the industry. Nor'easter's and Colchester's
accounts receivable are not insured.
CURRENCY RISK MANAGEMENT
REPORTING CURRENCY. European Micro's and Nor'easter's reporting and
functional currency, as defined by Statement of Financial Accounting Standards
No. 52, is the U.S. dollar. The functional currency of European Micro UK is the
U.K. pound sterling and Colchester is the Singapore dollar. European Micro UK
and Colchester translate 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 occasionally
hedges to guard against currency fluctuations between the U.K. pound sterling
and the U.S. dollar. Because the functional currency of European Micro's main
operating subsidiary, European Micro UK, is the U.K. pound sterling, currency
fluctuations of the pound sterling relative to the U.S. dollar may have a
material adverse effect on the Company's business, financial condition and
results of operations. European Micro may engage in hedging activities in the
future, although no assurances can be given that it will engage in such
activities and if it does so that such activities will be successful.
European Micro UK recognizes that it has currency exposure when
transactions are consummated in currency other than the pound sterling. For
example, for the quarter ended March 31, 1999, purchases of inventory by
European Micro UK were in the U.K. pound sterling (25%), German Mark (6%), U.S.
dollar (58%), Canadian dollar (0.5%), Swedish Krona (10%) and other (.5%). The
most significant currencies in which sales were made, other than the pound
sterling (46%), were the U.S. dollar (20%), German Mark (9%), Dutch guilder
(4%), French franc (7%), Canadian dollar (5%) and others (9%). Additionally,
receivables are also significantly spread out over several currencies. In
addition, European Micro UK has exposure to currency fluctuations to the extent
it maintains bank deposits in foreign currencies.
Generally, the Company's policy 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 to create a
"natural" hedge. Thereafter, to the extent that a bank balance and the account
receivable are not totally offset by the accounts payable, there would be a need
to cover the residual credit balance with a forward currency contract. The
Company tends to concentrate its currency management into six currencies: U.K.
pound sterling, U.S. dollar, Dutch guilder, Canadian dollar, Singapore dollar
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, book a forward contract
to cover current and some anticipated future purchases.
ECONOMIC AND MONETARY UNION
On January 1, 1999, eleven of the fifteen member countries of the European
Union established fixed conversion rates between their existing sovereign
currencies and a new currency called the "Euro." These countries adopted the
Euro as their common legal currency on that date. The Euro is trading on
currency exchanges and is available for non-cash transactions. 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 operations of European Micro
UK, the Company has significant operations within the European Union, including
many of the countries which adopted the Euro. The Company continues to evaluate
the impact that the Euro is having on its continuing business operations and no
assurances can be given that the Euro will not have a material adverse affect on
23
<PAGE>
EUROPEAN MICRO HOLDINGS, INC.
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. In the first quarter of trading the Euro
devalued against sterling by 6%, adversely affecting the value of its trade
receivables in Euro, and on an ongoing basis 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.
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. In 1998, the Company initiated a plan ("Plan") to
identify, assess and remediate Year 2000 issues within each of its significant
computer programs and certain equipment which contain micro-processors. The
Company has divided the Plan into five major phases - assessment, planning,
conversion, implementation and testing. After completing the assessment and
planning phases in the prior year, the Company is currently in the conversion,
implementation and testing phases. The Plan addresses each subsidiary
differently. All computer equipment, software and other non-information
technology equipment owned by Nor'easter and Colchester were Year 2000 compliant
when purchased and therefore the costs of conversion and remediation are
expected to be minimal. European Micro UK and Sunbelt are in the process of
obtaining assurances from manufacturers of all of its computer equipment,
software and other non-information technology equipment as to whether they are
Year 2000 compliant. Any non-compliant software or hardware will be upgraded or
replaced. The Company expects to complete the conversion, implementation and
testing phases by September 1999. The Company has budgeted an aggregate of
$60,000 to cover these costs. 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, customers, financial institutions, freight carriers and general
economic infrastructure. The Company is not highly dependent upon any single
supplier or customer and therefore does not expect the failure of the Company's
suppliers and customers to correct the Year 2000 problem to have a material
adverse effect on the Company's business, financial condition and results of
operations. The Company is dependent upon financial institutions, freight
carriers and general economic infrastructure. The Company has received varying
information from these outside parties regarding their state of readiness for
the Year 2000 problem. The Company is formulating contingency plans to implement
in the event these parties fail to address the Year 2000 problem. The Company
expects such plans to be completed in September 1999.
The Company's failure to correct a material Year 2000 problem could result
in an interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the Company's
operations, liquidity and financial condition. The Company's ability to insulate
itself from the Year 2000 problem is limited due to the Company's inability to
accurately gauge the readiness of its suppliers, customers, financial
institutions, freight carriers and general economic infrastructure. Accordingly,
the Company cannot accurately anticipate or quantify the impact of the Year 2000
problem or determine whether the failure to correct the Year 2000 problem will
have a material adverse affect on the Company's operations, liquidity or
financial condition.
RELATED PARTY SALES
In order to achieve attractive prices from suppliers, a large quantity of a
product must be firmly committed to. European Micro polls the other members of
the group for informal commitments to help distribute that product. Thereafter,
the purchasing 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 such capacity, the purchasing member of the group acts as a
"purchasing agent" for the other group members.
24
<PAGE>
EUROPEAN MICRO HOLDINGS, INC.
In the three- and nine-month periods ended March 31, 1999, European Micro
benefited from low mark-up purchases from the other members of the group
totaling $2.5 million and $16.2 million, respectively. European Micro's sales to
the related parties during the three-month period ended March 31, 1999 decreased
$4.5 million from $11.7 million to $7.2 million and for the nine-month period
ended March 31, 1999 decreased $15.9 million from $25.7 million to $9.8 million.
These decreases are primarily attributable to large purchases of computer
peripherals made on behalf of related parties in the nine-month period ended
March 31, 1998 compared to the same period in 1999. While the average margin on
these sales was approximately 1% in the three- and nine-month periods compared
to an average margin of approximately 9.2% and 9.3%, respectively, on sales to
unrelated third parties during the same period, such margin was sufficient to
cover the costs incurred by the Company in purchasing such products on behalf of
the group. Significantly, European Micro was able to enjoy the marginal benefits
from the lower cost of the remaining product for its sales. See "Note 9 to the
Consolidated Condensed Financial Statements."
On February 2, 1999, the Company's Board of Directors formed an special
committee (the "Committee") consisting solely of independent directors to
evaluate and determine whether the Company should acquire AMCC and, if so, on
what terms. The members of the Committee are Kyle R. Saxon and Barrett Sutton.
The Committee members will be compensated at $150 per hour each for their
service on the Committee. John B. Gallagher, who is a significant shareholder,
Co-Chairman and Co-President of the Company, is the President and a Director of
AMCC and owns fifty percent of its outstanding capital stock. The Committee's
charter authorizes it to take any action it deems necessary to properly evaluate
and determine whether the Company should acquire AMCC, including hiring
independent advisors and ensuring that any such transaction is entirely fair to
the Company and its shareholders. The Committee has selected and hired
independent legal counsel and is currently interviewing investment banking firms
and other candidates to serve as financial advisor to the Committee. The
Committee anticipates that it will select and hire a financial advisor shortly.
Since its formation, the Committee has conducted a preliminary review of the
books and records of AMCC and the Company has entered into a non-binding letter
of intent to acquire AMCC dated May 5, 1999. The non-binding letter of intent is
conditional upon, among other things, the satisfactory completion of the
Committee's due diligence investigation and obtaining a fairness opinion from
the Committee's financial advisor.
According to the non-binding letter of intent, the purchase price for AMCC
is equal to $811,500, plus an amount equal to AMCC's book value as of the last
day of the month immediately prior to closing, payable in cash, plus an earn-out
amount payable in cash or shares of the Company's Common Stock (at the Company's
discretion) equal to two times the after-tax earnings of AMCC in calendar year
1999 and two times the after-tax earnings of AMCC in calendar year 2000. In
addition, the Company will repay a shareholder loan of approximately $289,000,
plus accrued interest. If the Company elects to pay any portion of the purchase
price in shares of the Company's Common Stock, then AMCC's shareholders have
fifteen days to make arrangements to sell such shares over the next forty
trading days. If the sale of such shares results in net proceeds of less than
the purchase price, then the Company will pay the difference in cash to AMCC's
shareholders. A copy of the non-binding letter of intent is attached to this
Quarterly Report on Form 10-Q as Exhibit 99.01. The terms of the proposed
acquisition of AMCC are subject to the Committee and AMCC negotiating and
entering into a definitive agreement. Until such time, no assurances can be
given that the acquisition will be consummated on the terms set forth above or
at all.
ITEM 3. 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 purpose of hedging foreign currency market exposures of
underlying assets, liabilities and other obligations which exist as part of its
ongoing business operations. See "Currency Risk Management."
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.
25
<PAGE>
EUROPEAN MICRO HOLDINGS, INC.
EXCHANGE RATE SENSITIVITY
The table below summarizes information on foreign currency forward exchange
agreements as of March 31, 1999. The table presents the notional amounts and
weighted average exchange rates by expected (contractual) maturity dates. 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.
Expected
maturity or
transaction date Fair value
------------------ ------------
FORWARD EXCHANGE
AGREEMENTS
(Receive $US/Pay (pound)) April 23, 1999
Contract amount $1,000,000 $990,411
Average contractual
exchange rate $1.6269/(pound)1
(Receive $US/Pay (pound)) April 15, 1999
Contract amount $1,927,400 $1,902,370
Average contractual
exchange rate $1.6325/(pound)1
Losses in respect of the foreign exchange transactions were as follows ($
in thousands). See "Management's Discussion and Analysis -- Three Month Period
Ending March 31, 1999 and 1998" and " -- Nine Month Period Ended March 31, 1999
and 1998" for discussion on the changes:
THREE MONTHS NINE MONTHS
ENDED MARCH 31, ENDED MARCH 31,
1999 1998 1999 1998
------------------------------------------
Loss on foreign exchange ($354) ($138) ($538) ($370)
transactions
========= ======= ======= ========
26
<PAGE>
PART II
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
(a), (b), (c) and (d). None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
------------------
On February 2, 1999, the Company's Board of Directors formed an special
committee (the "COMMITTEE") consisting solely of independent directors to
evaluate and determine whether the Company should acquire American Surgical
Supply Corp. of Florida d/b/a American Micro Computer Center ("AMCC") and, if
so, on what terms. The members of the Committee are Kyle R. Saxon and Barrett
Sutton. The Committee members will be compensated at $150 per hour each for
their service on the Committee. John B. Gallagher, who is a significant
shareholder, Co-Chairman and Co-President of the Company, is the President and a
Director of AMCC and owns fifty percent of its outstanding capital stock. The
Committee's charter authorizes it to take any action it deems necessary to
properly evaluate and determine whether the Company should acquire AMCC,
including hiring independent advisors and ensuring that any such transaction is
entirely fair to the Company and its shareholders. The Committee has selected
and hired independent legal counsel and is currently interviewing investment
banking firms and other candidates to serve as financial advisor to the
Committee. The Committee anticipates that it will select and hire a financial
advisor shortly. Since its formation, the Committee has conducted a preliminary
review of the books and records of AMCC, and the Company has entered into a
non-binding letter of intent to acquire AMCC dated May 5, 1999. The non-binding
letter of intent is conditional upon, among other things, the satisfactory
completion of the Committee's due diligence investigation and obtaining a
fairness opinion from the Committee's financial advisor.
According to the non-binding letter of intent, the purchase price for AMCC
is equal to $811,500, plus an amount equal to AMCC's book value as of the last
day of the month immediately prior to closing, payable in cash, plus an earn-out
amount payable in cash or shares of the Company's Common Stock (at the Company's
discretion) equal to two times the after-tax earnings of AMCC in calendar year
1999 and two times the after-tax earnings of AMCC in calendar year 2000. In
addition, the Company will repay a shareholder loan of approximately $289,000,
plus accrued interest. If the Company elects to pay any portion of the purchase
price in shares of the Company's Common Stock, then AMCC's shareholders have
fifteen days to make arrangements to sell such shares over the next forty
trading days. If the sale of such shares results in net proceeds of less than
the purchase price, then the Company will pay the difference in cash to AMCC's
shareholders. A copy of the non-binding letter of intent is attached to this
Quarterly Report on Form 10-Q as Exhibit 99.01. The terms of the proposed
acquisition of AMCC are subject to the Committee and AMCC negotiating and
entering into a definitive agreement. Until such time, no assurances can be
given that the acquisition will be consummated on the terms set forth above or
at all.
27
<PAGE>
EUROPEAN MICRO HOLDINGS, INC.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(A) EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION LOCATION
<S> <C> <C>
2.01 Agreement for the Acquisition of Sunbelt (UK) Incorporated by reference to Exhibit 2.01
Limited by European Micro Plc dated October 26, to Registrant's Form 10-Q for the quarter
1998 ended September 30, 1998.
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 3.02
Incorporation to Registrant's Form 10-Q for the quarter
ended March 31, 1998.
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 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 21, 10.02 to the Registration Statement.
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
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.
28
<PAGE>
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 between Laurence Incorporated by reference to Exhibit No.
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 and 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 10.14 to the Registration Statement.
Micro 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 Incorporated by reference to Exhibit No.
officers and directors 10.16 to the Registration Statement.
10.17 Form of Transfer Agent Agreement with Chase Incorporated by reference to Exhibit No.
Mellon Shareholder Services, L.L.C. 10.17 to the Registration Statement.
10.18 Form of Credit Agreement by and between Incorporated by reference to Exhibit No.
European Micro UK and National Westminster 10.17 to the Annual Report on Form 10-K
Bank Plc for the fiscal year ended June 30, 1998
filed with the Commission on September 28,
1998.
10.19 Consulting Contract dated September 10, 1998 Incorporated by reference to Exhibit 10.19
by and between European Micro Holdings, Inc. to Registrant's Form 10-Q for the
and The Equity Group quarter ended September 30, 1998.
10.20 Service Agreement dated October 28, 1998 by Incorporated by reference to Exhibit 10.20
and between European Micro Holdings, Inc. to Registrant's Form 10-Q for the quarter
and Michael Gesner ended September 30, 1998.
29
<PAGE>
10.21 Service Agreement dated October 28, 1998 by Incorporated by reference to Exhibit 10.21
and between European Micro Plc and to Registrant's Form 10-Q for the quarter
Gerard O'Rourke ended September 30, 1998.
11.01 Statement re: Computation of Earnings Provided herewith.
15.01 Letter re: Unaudited Financial Information Not applicable.
18.01 Letter re Change in Accounting Principles Not applicable.
19.01 Report Furnished to Security Holders Not applicable.
22.01 Published Report Regarding Matters Not applicable.
Submitted to Vote of Security Holders
23.01 Consents of experts and counsel Not applicable.
24.01 Power of Attorney Not applicable.
27.01 Financial Data Schedule Provided herewith.
99.01 Non-binding Letter of Intent to Acquire AMCC Provided herewith.
</TABLE>
(B) REPORTS ON FORM 8-K.
On November 10, 1998, the Company filed its original Form 8-K ("Form 8-K")
with the Securities and Exchange Commission with respect to the acquisition of
Sunbelt. In the Form 8-K, the Company stated its intention to provide the
financial information of Sunbelt required by Item 7 of Form 8-K in an amendment
to be filed within sixty days. On January 8, 1999, the Company filed an amended
Form 8-K ("Amendment No. 1") with the Securities and Exchange Commission. In
Amendment No. 1, the Company stated that the financial information required by
Item 7 of Form 8-K would not be required and such financial information was
excluded. On March 12, 1999, the Company filed a second amended Form 8-K
("Amendment No. 2") with the Securities and Exchange Commission. In Amendment
No. 2, the Company stated that the financial information required by Item 7 of
Form 8-K would be required because it had incorrectly excluded approximately
$1.2 million in advances made to Sunbelt in order to pay dividends to its former
shareholders. When such advances are taken into account, Sunbelt is a
"significant" business under Rule 11-01(b) of Regulation S-X. Amendment No. 2
contained Sunbelt's financial statements and the Company's pro forma financial
statements which reflected the Sunbelt acquisition.
30
<PAGE>
EUROPEAN MICRO HOLDINGS, INC.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date: May 17, 1999 EUROPEAN MICRO HOLDINGS, INC.
By: /s/ Harry D. Shields
-------------------------------
Harry D. Shields, Co-President
31
EXHIBIT 11.01
STATEMENT RE COMPUTATION OF EARNINGS PER SHARE
The calculation of earnings per share are detailed in the table below:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
EARNINGS 1999 1998 1999 1998
<S> <C> <C> <C> <C>
Net income ($ in thousands) $22 $2,380 $768 $3,534
========= ========= ========= =========
WEIGHTED AVERAGE NUMBER OF SHARES
Outstanding common stock during the period 4,976,883 4,000,000 4,954,106 4,000,000
--------- --------- --------- ---------
Effect of dilutive stock options 43,670 - 24,206 -
--------- --------- --------- ---------
DILUTED WEIGHTED AVERAGE NUMBER OF SHARES 5,020,553 4,000,000 4,978,312 4,000,000
========= ========= ========= =========
Basic earnings per share $0.00 $0.60 $0.15 $0.88
========= ========= ========= =========
Diluted earning per share $0.00 $0.60 $0.15 $0.88
========= ========= ========= =========
</TABLE>
No stock options were issued during the three-month period ended March 31,
1999. During the nine-month period ended March 31, 1999, the Company issued
options to purchase 35,000 shares of its common stock at exercise prices ranging
from $9.1875 to $11.00. The above dilutive earnings per share calculations
exclude the effect of options to purchase 20,000 shares of common stock at
$11.00 per share in the three-month and nine-month period ended March 31, 1999,
due to the fact they were anti-dilutive. The nine-month period ended March 31,
1999, reflects only a pro-rata impact of all options as such options were
anti-dilutive in the first quarter of fiscal 1999. Also see Note 10 related to
contingently issuable shares related to an acquisition. The effect of contingent
shares related to the guaranteed earn-out amount not paid at the closing of the
Sunbelt acquisition and the effect of satisfactory completion of part of the
first contingent earn-out has been included in the above basic earnings per
share calculations. The effect of part of the first contingent earn-out dealing
with employment of some key employees has been included in diluted earnings per
share. However, the remainder of the first contingent earn-out and all of the
second contingent earn-out are not included, as the conditions necessary for
such contingent shares to be issued have not been met as of March 31, 1999. The
weighted average number of shares used in the 1998 periods reflect a retroactive
adjustment to assume the 4,000,000 shares issued in January 1998 in exchange for
the shares of European Micro Plc that were outstanding for the complete periods
in 1998.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheets and consolidated statement of operations of the
Company and the notes thereto set forth in the Prospectus. This information is
qualified in its entirety by reference to such financial information.
($ IN THOUSANDS, EXCEPT PER SHARE DATA)
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> JUN-30-1998 JUN-30-1998
<PERIOD-START> JAN-01-1999 JUL-01-1998
<PERIOD-END> MAR-31-1999 MAR-31-1999
<CASH> 2767 5012
<SECURITIES> 0 0
<RECEIVABLES> 16633 8883
<ALLOWANCES> 10 23
<INVENTORY> 8853 1715
<CURRENT-ASSETS> 29329 18399
<PP&E> 1612 1110
<DEPRECIATION> 906 499
<TOTAL-ASSETS> 32122 19204
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</TABLE>
EXHIBIT 99.01
EUROPEAN MICRO HOLDINGS, INC.
6073 N. W. 167 STREET, UNIT C-25
MIAMI, FLORIDA 33015
May 5, 1999
American Surgical Supply Corp. of Florida
6073 N. W. 167 Street, Unit C-25
Miami, Florida 33015
Attention: John D. Gallagher, Sr.
Gentlemen:
This letter confirms the intent of European Micro Holdings, Inc., a Nevada
corporation (the "Buyer"), to acquire all of the outstanding capital stock (the
"AMCC Shares") of American Surgical Supply Corp. of Florida d/b/a American Micro
Computer Center, a Florida corporation ("AMCC"), from the shareholders named on
the signature page hereto (each a "Shareholder" and collectively the
"Shareholders").
1. Purchase Price. The Buyer shall purchase from the Shareholders all of
the AMCC Shares in exchange for cash or newly-issued shares of common stock, par
value $0.01 per share, of the Buyer (the "Buyer's Shares"). The purchase price
for the AMCC Shares shall be equal to the sum of (the "Purchase Price"):
a. Book Value Amount (as defined herein); plus
b. 1998 Normalized Earnings Payment Amount (as defined herein); plus
c. the Earn-Out Amount (as defined herein).
2. Certain Definitions.
a. "Book Value Amount" means an amount equal to AMCC's shareholder's
equity (stated capital, paid-in surplus and retained earnings) as of the last
day of the month immediately prior to Closing (as defined herein). The Book
Value Amount shall be determined as provided herein and in accordance with
generally accepted accounting principles ("GAAP"), and shall be based on the
financial statements of AMCC for the applicable period, as audited (or reviewed
and accepted) by Buyer's independent certified public accountants. The Book
Value Amount shall be adjusted as set forth in Section 5 hereof.
<PAGE>
American Surgical Supply Corp. of Florida
May 5, 1999
Page 2
b. "1998 Normalized Earnings Payment Amount" means two (2)times the
1998 after-tax earnings of AMCC as adjusted by adding back non-recurring items
and subtracting an assumed tax rate of 34%, all as set forth on Exhibit "A"
hereto.
c. The "Earn-Out Amount" means the sum of (i) two (2) times the
After-Tax Earnings (as defined herein) of AMCC (the "First Earn-Out Amount") in
the twelve (12) month calendar period ended December 31, 1999 (the "First
Earn-Out Period") and (ii) two (2) times the After-Tax Earnings of AMCC (the
"Second Earn-Out Amount") in the twelve (12) month calendar period ended
December 31, 2000 (the "Second Earn-Out Period").
d. "After-Tax Earnings" means net income after taxes for AMCC computed
as provided herein and otherwise in accordance with GAAP, and shall be based on
the financial statements of AMCC for the applicable period, as audited (or
reviewed and accepted) by Buyer's independent certified public accountants. In
determining After-Tax Earnings, AMCC's net earnings shall be reduced by the
adjustments described in Section 5 hereof. The Buyer shall cause its accountants
to complete their audit (or review) of AMCC's financial statements as soon as
practicable after the end of each Earn-Out Period.
e. "Per Share Value" means the average closing price for the Buyer's
Shares on the Nasdaq Stock Market for the thirty (30) trading days ending on the
last trading day before the date of issuance of the Buyer's Shares in question.
3. Payment of Indebtedness. Within thirty (30) days of the Closing, the
Buyer shall pay and satisfy the Indebtedness (as defined herein). For the
purposes hereof, the "Indebtedness" means the amounts specified on and payable
to the persons identified on Exhibit "B" hereto.
4. Manner of Payment of the Purchase Price. The Purchase Price shall be
payable as follows: (a) at Closing, an amount equal to the sum of (i) Book Value
Amount, plus (ii) 1998 Normalized Earnings Payment Amount (collectively, the
"First Installment"); (b) within ninety (90) days of the end of the First
Earn-Out Period, the First Earn-Out Amount (the "Second Installment"); and (c)
within ninety (90) days of the end of the Second Earn-Out Period, an amount
equal to the Second Earn-Out Amount (the "Third Installment"). The First
Installment shall be paid in immediately available funds. The Second Installment
and Third Installment shall, at the option of the Buyer, be paid in cash or
Buyer's Shares, or any combination thereof. The number of Buyer's Shares to be
issued in payment of any portion of the Purchase Price shall be equal to: (a)
the portion of the Purchase Price payable in Buyer's Shares, divided by (b) the
Per Share Value (as defined herein); PROVIDED that in the event the Buyer elects
to pay any portion of the Purchase Price in Buyer's Shares, then the
Shareholders shall within fifteen (15) days of the receipt of the Buyer's Shares
arrange to sell such shares in approximately equal amounts over the next forty
(40) succeeding trading days. In the event that the sale of the Buyer's Shares
<PAGE>
American Surgical Supply Corp. of Florida
May 5, 1999
Page 3
by the Shareholders results in net proceeds of less than the amount of either
the Second Installment or the Third Installment (as applicable), then the Buyer
shall pay to the Shareholders the difference in cash within twenty eight (28)
days of being notified of the amount of any shortfall.
5. Adjustments to Book Value. Book Value shall be reduced by an amount
equal to the difference between (a) the sum of any accounts receivable (or any
portion thereof) identified on the financial statements of AMCC as of the last
day of the month immediately prior to Closing which are not collected in full,
without any set-off, within one hundred fifty (150) days after Closing, plus any
inventory identified on the financial statements of AMCC as of the last day of
the month immediately prior to Closing not sold by AMCC within two hundred forty
(240) days after Closing for an amount at least equal to its book value, and (b)
any applicable reserves as of the last day of the month immediately prior to
Closing. Any account receivable or inventory which results in a reduction in
Book Value under this Section 5 shall be assigned to the Shareholders upon
payment by the Shareholders to Buyer of the amount due to the Buyer. Payments by
the Shareholders of any adjustments to the Book Value under this Section 5 shall
be paid in cash on the applicable determination date and unpaid amounts shall
bear interest at the rate of 8% per annum. Any unpaid balance shall be set off
against any installments due to Shareholders under Section 4 hereof.
6. Costs. Each party agrees to pay, without right of reimbursement from the
other party and regardless of whether or not the transaction is consummated, the
costs incurred by it in connection with this transaction, including legal fees
and other costs incidental to the negotiation of the terms of the transaction
and the preparation of related documentation. Each party represents to the
others that it has dealt with no finder or broker in connection with this
transaction. The Buyer agrees to pay any costs of obtaining an opinion regarding
the fairness of this transaction to the Buyer and its shareholders. Each party
will indemnify and hold the others harmless from any loss, liability or expense
(including, without limitation, legal fees) resulting from the indemnifying
party's breach of the representations and agreements contained in this Section
6.
7. Conditions Precedent to Closing. The Agreement (as defined in Section 15
hereof) shall contain such conditions precedent as required by Buyer in its sole
discretion, including but not limited to (i) amendment of AMCC's existing credit
arrangements to extend the maturity date for a period of one year from date of
closing, at the same interest rate and with right of prepayment without penalty,
(ii) the execution of Employment Agreements on terms satisfactory to Buyer by
such "key" employees as designated by Buyer, (iii) receipt of all required
consents with respect to all agreements designated as "material" by Buyer and
(iv) receipt of an opinion from an investment banking firm satisfactory to the
<PAGE>
American Surgical Supply Corp. of Florida
May 5, 1999
Page 4
Buyer in its sole discretion stating that the transaction taken as a whole is
fair from a financial point of view to the Company and its shareholders.
8. Press Releases. Prior to the Closing, none of the parties will make any
press release, statement to employees or other disclosure of this letter or the
purchase contemplated hereby without the prior written consent of the other
party, except as required by law. Neither AMCC nor Shareholders shall make any
such disclosure unless Buyer shall have received prior notice of the
contemplated disclosure and has had adequate time and opportunity to comment on
such disclosure, which shall be satisfactory in form and content to Buyer and
its counsel.
9. Closing. This transaction will be consummated at a closing (the
"Closing") to be held at the offices of Buyer's attorneys, on a date which shall
be on or before June 30, 1999.
10. Due Diligence Inspection. For a period of forty-five (45) days
following the date hereof, the Buyer and its representatives may make such
examinations and inspections of AMCC as they may reasonably require to analyze
its financial condition, properties, legal matters, business and affairs,
including the taking of a physical inventory, so long as such examinations do
not unreasonably interfere with the conduct of business. The Shareholders will
cause their attorneys, legal advisors, accountants and other advisors and agents
to cooperate with the Buyer in its investigation and to make their files and
work papers available.
11. Exclusivity. From the date of this letter until June 30, 1999, neither
the Shareholders nor AMCC and its officers, directors, employees or other agents
will, directly or indirectly, take any action to solicit, initiate or encourage
any acquisition of substantially all of the assets or any of the issued share
capital of AMCC or any transaction similar to the transaction outlined herein,
nor will they entertain any unsolicited proposals or approaches in this regard.
12. Continued Operations. AMCC will conduct its business only in the normal
and ordinary course and in a manner consistent with good business practices.
Without the prior written consent of the Buyer, AMCC will not (a) engage in any
transaction which would have an adverse effect on the business, operations,
assets, financial condition or prospects of AMCC, or (b) amend its
organizational documents or any material contracts or issue any equity
securities of AMCC or securities convertible, exercisable or exchangeable into
equity securities of AMCC. AMCC will preserve its business organization intact
and preserve its existing business relationships.
13. Confidentiality. Each of the parties agrees to maintain the
confidentiality of all information furnished to it by the other party hereto
concerning the business, operations and financial condition of the party
furnishing such information, except to the extent required by applicable law.
<PAGE>
American Surgical Supply Corp. of Florida
May 5, 1999
Page 5
14. Approval. This transaction shall be subject to (i) the unanimous
approval of an independent committee of the Buyer's Board of Directors formed
for the sole purpose of evaluating this transaction, which approval shall be
made in such committee's sole discretion, and (ii) the approval of Buyer's Board
of Directors.
15. Non-Binding Letter of Intent. Except for Sections 6, 8, 10, 11, 12, 13,
14, 15 and 17 hereof, this letter is an expression of interest only and is not
intended to be a binding letter of intent, and the general principles set forth
in this letter shall not constitute an agreement to consummate the transaction
described herein. Upon the satisfactory completion of the due diligence
investigation described in Section 10 hereof to Buyer's sole satisfaction and
which confirms the Buyer's intent to consummate the transaction for the purchase
price described in Section 1 hereof, the parties will proceed to use their best
efforts to negotiate the definitive terms of this transaction and enter into a
formal and binding agreement (the "Agreement") which would set forth such
representations, warranties, covenants, indemnifications and other provisions as
are acceptable to the parties in their sole discretion. This letter of intent is
not an agreement to enter into any definitive agreement.
16. Counterparts. This letter may be signed in counterparts, each of which
will be considered an original and all of which will constitute the same
document.
17. Governing Law. This letter shall be interpreted in accordance with the
laws of the State of Florida without regard to its conflicts of law principles.
If this letter accurately reflects your understanding, please indicate
your agreement by signing both enclosed copies of this letter and returning one
executed copy to me by May 7, 1999.
Sincerely yours,
EUROPEAN MICRO HOLDINGS, INC.
By: /s/ Harry D. Shields
--------------------
Name: Harry D. Shields
Title: Co-Chairman
<PAGE>
American Surgical Supply Corp. of Florida
May 5, 1999
Page 6
ACCEPTED AND AGREED THIS 5TH DAY OF
MAY 1999:
AMERICAN SURGICAL SUPPLY
CORP. OF FLORIDA
By: /s/ John B. Gallagher, Jr.
---------------------------
Name: John B. Gallagher, Jr.
Title: President
SHAREHOLDERS:
/s/ John B. Gallagher, Jr.
- --------------------------
John B. Gallagher, Jr.
/s/ John P. Gallagher
- ---------------------
John P. Gallagher
<PAGE>
EXHIBIT "A"
1998 EXPENSES - NORMALIZED EARNINGS
Jeanette Hall $15,600
Julie Grzyb $15,600
Lauren Guthries $9,100
John P. Gallagher $26,000
JPG Car Depreciation $9,523
JPG Car Insurance $2,912
JPG Gas $1,169
Ameritech Freight Ins. $3,497
JBG Phone Expenses $1,226
CHS Purchase Legal Fees $11,026
-------
TOTAL: $95,653
=======
<PAGE>
EXHIBIT "B"
Shareholder loan payable to John P. Gallagher in the approximate amount of
$300,000.
