SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NO. 0-23949
EUROPEAN MICRO HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Nevada 65-0803752
(State or Other Jurisdiction (I.R.S. Employer Identification Number)
of Incorporation or Organization)
6073 N.W. 167th Street, Unit C-25, Miami, Florida 33015
(Address of Principal Executive Offices)(Zip Code)
Registrant's telephone number, including area code (305) 825-2458
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months, and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ___
The aggregate market value of the voting common stock held by
non-affiliates of the Registrant on September 21, 1999 was $12,880,836 based on
the average bid and asked prices on such date of $9.00.
The Registrant had 4,933,900 shares of Common Stock, par value $0.01
per share, outstanding on September 21, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the definitive proxy or information statement for the 1999
Annual Meeting of Stockholders to be filed by the Registrant with the Securities
and Exchange Commission under Regulation 14A are incorporated by reference in
Part III of this Form 10-K Report.
<PAGE>
PART I
ITEM 1. BUSINESS.
GENERAL DESCRIPTION OF BUSINESS
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS. THIS FILING CONTAINS
FORWARD-LOOKING STATEMENTS, INCLUDING STATEMENTS REGARDING, AMONG OTHER THINGS,
(A) EUROPEAN MICRO HOLDINGS, INC.'S ("EUROPEAN MICRO" OR THE "COMPANY")
PROJECTED SALES AND PROFITABILITY, (B) THE COMPANY'S GROWTH STRATEGIES, (C)
ANTICIPATED TRENDS IN THE COMPANY'S INDUSTRY, (D) THE COMPANY'S FUTURE FINANCING
PLANS, (E) THE COMPANY'S ANTICIPATED NEEDS FOR WORKING CAPITAL AND (F) BENEFITS
RELATED TO THE ACQUISITIONS OF AMERICAN SURGICAL SUPPLY CORP. OF FLORIDA D/B/A
AMERICAN MICRO COMPUTER CENTER ("AMCC"), SUNBELT (UK) LIMITED ("SUNBELT") AND
H&B TRADING INTERNATIONAL ("H&B"). IN ADDITION, WHEN USED IN THIS FILING, THE
WORDS "BELIEVES," "ANTICIPATES," "INTENDS," "IN ANTICIPATION OF," "EXPECTS," AND
SIMILAR WORDS ARE INTENDED TO IDENTIFY CERTAIN FORWARD-LOOKING STATEMENTS. THESE
FORWARD-LOOKING STATEMENTS ARE BASED LARGELY ON THE COMPANY'S EXPECTATIONS AND
ARE SUBJECT TO A NUMBER OF RISKS AND UNCERTAINTIES, MANY OF WHICH ARE BEYOND THE
COMPANY'S CONTROL. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THESE
FORWARD-LOOKING STATEMENTS AS A RESULT OF CHANGES IN TRENDS IN THE ECONOMY AND
THE COMPANY'S INDUSTRY, REDUCTIONS IN THE AVAILABILITY OF FINANCING AND
AVAILABILITY OF COMPUTER PRODUCTS ON TERMS AS FAVORABLE AS EXPERIENCED BY THE
COMPANY IN PRIOR PERIODS AND OTHER FACTORS. IN LIGHT OF THESE RISKS AND
UNCERTAINTIES, THERE CAN BE NO ASSURANCE THAT THE FORWARD-LOOKING STATEMENTS
CONTAINED IN THIS FILING 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 480
value-added resellers, corporate resellers, retailers, direct marketers and
distributors. The Company generally 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 an attempt 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.
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European Micro Holdings, Inc. was organized under the laws of the State
of Nevada in December 1997 and is the parent of European Micro UK, Nor'Easter
and Colchester. European Micro Holdings, Inc. is also the parent of American
Micro Computer Center, Inc. ("AMERICAN MICRO") which was formed on June 24, 1999
to acquire AMCC. This transaction was structured as a merger of AMCC with and
into American Micro, a newly-formed, wholly-owned subsidiary of the Company.
This transaction was consummated on July 1, 1999, which is subsequent to the
reporting period contained in this report. As such, the financial information
contained in this report excludes the financial results of American Micro.
American Micro is an independent distributor of microcomputer products in the
United States. A detailed discussion of the acquisition of AMCC is contained in
the section entitled "Related Party Transactions." European Micro UK was
organized under the laws of the United Kingdom in 1991 to serve as an
independent distributor of microcomputer products to customers mainly in Western
Europe and to related parties in the United States. 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.
Colchester was organized under the laws of Singapore in November 1998 to serve
as an independent distributor of microcomputer products in Asia. On January 31,
1998, European Micro Holdings, Inc. acquired one hundred percent (100%) of the
issued and outstanding shares of ordinary stock of European Micro UK in
consideration for the issuance of 4,000,000 newly issued shares of common stock,
par value $0.01 per share (the "COMMON STOCK"), of European Micro Holdings, Inc.
The 4,000,000 shares of Common 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 ("EUROPEAN MICRO
GERMANY"), 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. Sunbelt
continues to distribute its Nova line of products in accordance with past
practice. European Micro Holland was formed in 1995 and acquired the assets of
H&B. 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 Holding's headquarters are located at 6073 N.W. 167th
Street, Unit C-25, Miami, Florida 33015, and its telephone number is (305)
825-2458.
INDUSTRY
The microcomputer products industry has grown significantly in recent
years, primarily due to increasing worldwide demand for computer products and
the use of distribution channels by manufacturers for the distribution of
products. There are two traditional distribution channels in the microcomputer
industry: (i) those that sell directly to end-users ("RESELLERS") and (ii) those
that sell to resellers ("DISTRIBUTORS"). Distributors generally purchase a wide
range of products in bulk directly from manufacturers and then ship products in
smaller quantities to many different types of resellers, which typically include
dealers, value-added resellers, system integrators, mail order resellers,
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computer products superstores and mass merchants. European Micro is an
independent distributor and generally does not purchase products directly from
manufacturers but purchases from other distributors.
The Company operates in a fragmented industry, where little information
is available regarding its competitors and which the Company believes is not
dominated by one or a small number of competitors. As a result, the Company's
competitive position is not known or reasonably ascertainable. Information is
available, however, for other distributors of computer products, although the
Company does not compete directly with these companies. These companies include:
CHS Electronics, Inc., Ingram Micro, Inc., Inacom Corp., and Tech Data
Corporation.
There are a number of emerging trends in the microcomputer industry.
Some manufacturers have implemented direct sales business models and reduced the
number of distributors to which they distribute product. These efforts have been
facilitated by the use of the Internet, among other things, and have reduced the
availability of products in the surplus or after-market. The Company expects
these trends to continue for the foreseeable future. See "Certain Business Risk
Factors - Declining Margins" and "-- Competition."
Despite the recent difficulties in the industry, the Company believes
that the microcomputer products industry is still well suited for distributors
because of the large number of fragmented resellers in the industry. As a
result, it is cost efficient for manufacturers to outsource a portion of their
distribution, credit, inventory, marketing and customer support requirements to
distributors. In addition, resellers traditionally have not been able to
efficiently establish direct purchasing relationships with each manufacturer
because of the large number of manufacturers in the industry. Instead, resellers
have traditionally relied on distributors to satisfy a significant portion of
their product, financing, marketing and technical support needs. The Company
believes that resellers rely on distributors for inventory management and credit
rather than stocking large inventories themselves and maintaining credit lines
to finance their working capital needs.
STRATEGY
The Company's objectives are to continue to strengthen its position as
a distributor of microcomputer products within Western Europe, the United States
and Asia. It also proposes to diversify its international trading operations
into product lines outside the microcomputer industry. In attempting to achieve
these objectives, the Company intends to implement the following strategies:
GROWTH THROUGH START-UPS AND ACQUISITIONS. The Company hopes to expand
into new markets and products through a combination of start-up companies and
acquisitions of existing distributors, although there can be no assurance that
any acquisitions can be consummated on terms satisfactory to the Company. The
Company intends to evaluate acquisition candidates outside the microcomputer
industry to diversify its operations and to take advantage of its ability to
source inventory worldwide. The Company expects to seek acquisition candidates
which have strong entrepreneurial management teams with experience in the local
markets and the potential to benefit from the economies of scale that the
Company could provide through its existing infrastructure. The Company intends
that any acquisitions will adopt its policies and financial reporting procedures
but operate as autonomous business units. During the last two fiscal years, the
Company has formed Nor'Easter located in New Hampshire and Colchester located in
Singapore. Also, the Company has acquired Sunbelt located in Wimbledon, England,
H&B located near Amsterdam, Holland and AMCC located in Miami, Florida.
FURTHER DEVELOP NEW INTERNATIONAL MARKETS. The Company has, to date,
focused its activities on the distribution of microcomputer products mainly in
Western Europe and the United States. More recently, the Company has been
working on new opportunities in Asia and Eastern Europe. During Fiscal 1999,
Colchester began operations in Singapore. Colchester will source product for the
Company and will act as an independent distributor throughout Asia. The Company
believes that its success in the culturally and linguistically diverse markets
of Western Europe will be advantageous to the Company in expanding into new
regions.
FOCUSED DISTRIBUTION. The Company's strategy is to operate as a focused
distributor by addressing each national market in which it operates with a
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limited and select group of products from a limited and select group of high
quality manufacturers. The Company believes this strategy helps it achieve a
degree of strength within its chosen markets. The Company also believes that
this strategy will further enhance its relationships with both its suppliers and
customers. In addition, the Company intends to seek new products and suppliers
that will reflect the requirements of the marketplace while at the same time
remaining a focused distributor. The Company believes that this focused approach
also results in more effective asset management. Generally, because popular
products from leading manufacturers are in greater demand, the Company believes
that this results in more efficient inventory management by virtue of greater
inventory turns and, therefore, lower working capital requirements.
PRODUCTS AND CUSTOMERS
The Company's sales consist of hardware products such as personal
computers, memory modules, disc drives and networking products which are sold to
a customer base of more than 480 value-added resellers, corporate resellers,
retailers, direct marketers and distributors. The Company anticipates the
continued expansion of its customer database through the growth of start-up
companies and the addition of the acquired companies' customer lists.
The Company typically purchases its products from distributors and
other suppliers in large quantities. As a focused distributor, the Company
focuses on a limited and select group of products from a limited and select
group of high quality manufacturers. As a result, the Company carries fewer
individual products from fewer manufacturers than broadline distributors. The
Company believes that this policy enables it to better understand the products
it sells and the geographical areas in which it operates.
The Company's customers typically rely on distributors as their
principal source of microcomputer products. The Company finances a significant
portion of its total sales by extending trade credit. The Company attempts to
minimize the risk of such credit by, among other things, monitoring the credit
worthiness of its customers and insuring some of its accounts receivable.
European Micro UK has sought to insure substantially all of its accounts
receivable. Nor'Easter, Colchester and American Micro generally do not insure
their accounts receivable. For the fiscal year ended June 30, 1999, no single
customer accounted for more than approximately 6% of the Company's total net
sales. Technology Express, a company wholly-owned by Harry D. Shields, who is
also Co-President, Co-Chairman and a Director of the Company, was the Company's
largest customer accounting for about 6% of total net sales and AMCC, a company
previously owned 50% by John B. Gallagher, Co-President, Co-Chairman and a
Director of the Company which was acquired by the Company on July 1, 1999,
accounted for approximately 5.6% of the Company's total net sales. For the
fiscal year ended June 30, 1998, Technology Express accounted for approximately
17.2% of the Company's total net sales. For the fiscal year ended June 30, 1997,
no single customer accounted for more than approximately 8.5% of the Company's
total net sales. The Company does not believe the loss of any customer would
have a material adverse effect on its business, financial condition or results
of operations. The Company's backlog orders are not considered material to its
business.
The Company's operations involve a single industry segment, the
distribution of microcomputer products. Historically, the Company has operated
in one geographic area--the United Kingdom--and has exported products from the
United Kingdom to other European countries and to related parties in the United
States. With the addition of Nor'Easter in the United States, the Company's
sales to third parties in the United States have increased. This trend is
expected to continue with the addition of American Micro. The following table
sets forth the Company's net sales for each of the last three fiscal years
attributable to geographic areas:
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<TABLE>
($ IN THOUSANDS)
<CAPTION>
YEARS ENDED JUNE 30,
COUNTRY 1999 % 1998 % 1997 %
- -------- ---- - ---- - ---- -
<S> <C> <C> <C> <C> <C> <C>
Argentina $----- 0.0% $---- 0.0% $90 0.2%
Austria 125 0.1 316 0.3 --- 0.0
Belgium 1,286 1.0 1,568 1.4 1,496 3.2
Canada 2,202 1.7 --- --- --- ---
Denmark 2,254 1.7 5,182 4.7 1,402 3.0
Finland 1,357 1.0 1,859 1.7 696 1.5
France 7,891 5.9 6,219 5.6 4,173 8.9
Germany 12,910 9.8 13,476 12.1 8,282 17.7
Great Britain 47,753 36.1 30,712 27.5 21,050 45.1
Greece 66 0.0 --- --- --- ---
Ireland 1,918 1.5 1,132 1.0 642 1.4
Italy 580 0.4 58 0.0 26 0.1
Luxembourg 266 0.2 151 0.1 40 0.1
Netherlands 7,673 5.8 10,168 9.2 4,653 10.0
Portugal 5 0.0 105 0.1 71 0.2
Spain 70 0.1 14 0.0 35 0.1
Sweden 224 0.2 1,137 1.0 1,582 3.4
USA 36,727 27.8 30,999 27.8 64 0.1
Other 8,899 6.7 8,357 7.5 2,353 5.0
------- ------ ------- ------ ------ ------
Total Net Sales $132,206 100.0% $111,453 100.0% $46,655 100.0%
======== ====== ======== ====== ======= ======
</TABLE>
The Company's net sales from operations outside the United States are
primarily denominated in currencies other than United States dollar.
Accordingly, the Company's operations outside the United States impose risks
upon its business as a result of exchange rate fluctuations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Currency Risk Management."
SOURCES OF SUPPLY
The Company obtains its products from distributors and other suppliers
throughout the world in an attempt to obtain products at favorable prices while
also maintaining continuity of supply. The Company generally makes its purchases
based on the most favorable combination of prices, quantities and product
selection, and therefore its suppliers are constantly changing. Other than
Technology Express, the Company does not believe that the loss of any single
supplier would have a material adverse effect on its operations. For the fiscal
year ended June 30, 1999, the Company obtained 58.4% of its products from ten
suppliers (45.7% excluding Technology Express). For the fiscal year ended June
30, 1998, the Company obtained 87.2% of its products from ten suppliers (80.4%
excluding Technology Express). For the fiscal year ended June 30, 1997, the
Company obtained 86.5% of its products from ten suppliers (35.4% excluding
Technology Express). The decrease in the percentage of products sourced from the
top ten suppliers in 1999 is the result of an increase in the number of
suppliers attributable to the start-up growth of Nor'Easter and Colchester. The
Company does not generally obtain products directly from manufacturers and
generally does not enter into any long-term or distribution agreements with its
suppliers. In some cases suppliers are also customers. Whenever possible,
products are purchased with the benefit of price protection so that the Company
will receive a credit in the event the price of a product is reduced by the
manufacturer.
Suppliers deliver products against purchase orders tendered by the
Company. The Company often requests specific delivery dates in its purchase
orders and lead times for delivery from suppliers are typically short. Delivery
is, however, subject to availability, and, while suppliers have no liability to
the Company for failure to meet a delivery date, orders may be canceled by the
Company where the terms of an order have not been met. From time to time the
Company experiences delivery delays and inventory shortages. The Company
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believes that these delays and shortages are common to other distributors of
microcomputer products. The Company does not, like many of its competitors, rely
on a single contractual source of product supply.
Historically, the Company has paid for a significant amount of product
on delivery, a practice which leads to lower prices and earlier delivery dates.
The Company's suppliers have increased available credit commensurate with its
growth and the Company expects to continue to take advantage of credit
purchases.
Substantially all of the products purchased by the Company are
trademarked or copyrighted products which may have been sold to distributors by
the manufacturers and resold to the Company. From time to time, trademark or
copyright owners and their licensees and trade associations have initiated
litigation or administrative agency proceedings seeking to halt the importation
of such products into many of the countries in which the Company operates. There
can be no assurance that future judicial, legislative or administrative agency
action in such countries, including possible import, export, tariff or other
trade restrictions, will not limit or eliminate some of the Company's sources of
supply or other business activities. In addition, there can be no assurance that
the Company's business activities will not become the subject of legal or
administrative actions brought by manufacturers, distributors or others based on
violations of trademark or copyright rights or other laws. Such judicial,
legislative, administrative or legal actions could have a material adverse
effect on the Company's business, financial condition and results of operations.
The Company sells products in the United States and expects to continue to do so
in the future. United States trademark and copyright owners and their licensees
and trade associations in other industries have initiated litigation or
administrative agency proceedings seeking to halt the importation into the
United States of foreign manufactured or previously exported trademarked or
copyrighted products. Such actions in the United States may prevent the Company
from selling certain products in the United States.
The Company continues to closely monitor European and UK legal
decisions in respect of the importation of trademarked goods into the European
Economic Area ("EEA"). The approach of the European Courts has allowed trademark
owners to prevent re-importation without consent. However, a recent decision of
an English Court has placed the strictest possible interpretation on that
approach. The Company has historically not encountered any problems from its
suppliers as a result of these legal decisions but the Company has obtained a
significant amount of its inventory from outside the EEA. Any disruption in the
Company's ability to source goods from outside the EEA will have a material
adverse effect on the Company's business, financial condition and results of
operations.
SALES AND MARKETING
In order to address the individual customs, practices and business
conventions in the countries in which the Company operates, the Company employs
a sales staff conversant in Chinese, Dutch, English, French, German, Italian and
Spanish and with a general knowledge of the applicable markets. Oversight and
strategic direction are provided by senior management of the Company.
SALES. The Company markets its products to distributors and resellers,
not end-users. As of June 30, 1999, the Company distributed products to more
than 480 value-added resellers, corporate resellers, retailers, direct marketers
and distributors. The Company's customers typically place orders through a sales
representative. The Company maintains detailed information regarding its current
inventory levels and pricing. The Company has historically experienced a
reduction in demand during the summer months. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Seasonality."
MARKETING. The Company's marketing department monitors and evaluates
national market trends, price movements and changes in product specifications.
It is also responsible for developing and implementing the Company's advertising
programs. The marketing department routinely queries the Company's customer base
to ascertain how customers value its products, services, sales and support
compared to its competitors. The feedback allows the Company to constantly
tailor its business to its customers' needs. In 1996, European Micro introduced
the Premier Dealers Club to attract small and medium sized resellers by offering
them value-added procurement services that they were not enjoying from their
current broadline distributors. Members of the Premier Dealers Club agree to
purchase a target amount of products from the Company for a given period and
those members achieving such goals earn rebates. Members also enjoy priority
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access to products in short supply, expedited shipment of orders, monthly
analysis of purchases and rebates earned, internet ordering, marketing
information and purchasing and outsourcing assistance.
COMPETITION
The Company operates in an industry which is characterized by intense
competition based on price, product availability and delivery times. Its
competitors include manufacturers and international distributors. Some
competitors have greater financial and administrative resources than the
Company. The Company believes availability of the right product at the right
price is the key element of competitiveness and attempts to differentiate itself
from its competitors by providing a select number of products from a few name
brand manufacturers and maintaining a sufficient inventory of such products.
Furthermore, the Company believes that it enhances its competitive position by
providing responsible and responsive customer service through its sales
personnel.
INTELLECTUAL PROPERTY
The Company is attempting to build a brand name in the microcomputer
industry. To that end, the Company has applied for trademark protection both in
the United Kingdom and within the European Community. The Company is currently
evaluating and will continue to evaluate the need to apply for trademark
protection in the United States and in other countries as the Company expands.
The following is a summary of the trademarks which the Company has applied for
and their current status:
<TABLE>
<CAPTION>
TRADEMARK CLASS(1) NO. APPLICANT DATE OF FILING COMMENTS
- --------- -------- --- --------- -------------- --------
<S> <C> <C> <C> <C> <C>
European Micro 9 438689 European Micro UK 12-23-96 U.K. Trademark
granted
European Micro Plc & Logo 9 2119204 European Micro UK 12-20-96 U.K. Trademark
granted
Premier Dealers Club & Logo 9 2152310 European Micro UK 11-29-97 U.K. Trademark
granted
Premier Dealers Club & Logo 9 695072 European Micro UK 12-1-97 Community
Trademark
application
</TABLE>
- ---------------------
(1) Class 9 covers computer software, computer peripherals, parts and
accessories for all such goods.
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EMPLOYEES
On September 1, 1999, the Company and its subsidiaries had the number
of full-time employees set forth in the following table:
NAME NUMBER OF EMPLOYEES
- ---- -------------------
European Micro Holdings, Inc. 5
European Micro UK 50
European Micro Germany 2
European Micro Holland 1
Nor-easter 5
Big Blue Europe 20
Colchester 3
American Micro 22
---
TOTAL 108
Of the total number of full-time employees, forty-four work in
marketing and sales, twenty in warehousing and delivery and forty-four are
employed in administrative and other support positions. None of the Company's
employees are represented by unions. There has been no disruption of operations
due to a labor dispute. Management considers its relations with its employees to
be good.
CERTAIN BUSINESS RISK FACTORS
The Company is subject to various risks which may have a material
adverse effect on its business, financial condition and results of operations.
Certain risks are discussed below:
NO CONTRACTS OR DISTRIBUTION AGREEMENTS WITH SUPPLIERS
The Company is an independent distributor of personal computers and
related products. The Company has not entered and does not expect to enter into
any long-term distribution arrangements with its suppliers. Rather, the Company
depends almost entirely on the availability of product in the surplus or
aftermarket. The microcomputer products industry is characterized by periods of
severe product shortages and customer backlog due to suppliers' difficulty in
projecting demand. There can be no assurance that suppliers will be able to
maintain an adequate supply of products which will adequately fulfill all of the
Company's customer orders on a timely basis. Failure to obtain adequate product
in required quantities would have a material adverse effect on the Company's
business, financial condition and results of operations. Moreover, because the
Company does not utilize supplier contracts, it does not enjoy the traditional
benefits that they provide, such as inventory price protection, market
development funds or payment terms.
RELATED PARTY PURCHASES AND SALES
Since its formation in 1991, the Company has belonged to a group of
related companies called the Micro Computer Center Group (the "GROUP"). The
Group is comprised of European Micro Holdings, Inc. and its subsidiaries,
Technology Express in Nashville, Tennessee, and, until August 1, 1997, Ameritech
Exports, Inc., in Miami, Florida ("AMERITECH EXPORTS") and Ameritech Argentina
S.A., in Buenos, Argentina ("AMERITECH ARGENTINA"). Harry D. Shields is the sole
owner of Technology Express and, until August 1, 1997, had an ownership interest
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in Ameritech Exports and Ameritech Argentina. Until July 1, 1999, John B.
Gallagher had a 50% ownership interest in AMCC and, until August 1, 1997, had an
ownership interest in Ameritech Exports and Ameritech Argentina. In order to
facilitate fast and efficient international transactions, each member of the
Group has acted as a supplier for, and purchaser from, the other members of the
Group. Such factors as country supply, currency fluctuation and manufacturer's
geographic pricing strategy lead to a constantly changing model where purchases
and sales to other members of the Group depend on the then current economic
balance. The Group has attempted to price inter-Group sales at one percent above
the selling Group member's cost, although the Group has made numerous exceptions
in times of short supply, to cover assembly costs and to reward certain Group
members for exceptional low-cost purchases. This low mark-up has enabled each
Group member to buy product quickly and efficiently in the others' primary
territories and to take advantage of quantity purchasing, financing and
logistics of the other members of the Group. Additionally, the Company has paid
certain management and consulting fees to the other members of the Group.
The following table describes the inter-Group sales and purchases for
the time periods specified:
($ IN THOUSANDS)
YEARS ENDED JUNE 30,
1999 1998 1997
-------------- -------------- -------------
SALES TO GROUP MEMBERS
AMCC $7,356 $9,875 $66
Technology Express 7,984 19,217 (2)
Ameritech Argentina -- -- 90
-------------- -------------- -------------
$15,340 $29,092 $154
============== ============== =============
YEARS ENDED JUNE 30,
1999 1998 1997
-------------- -------------- -------------
PURCHASES FROM GROUP MEMBERS
AMCC $1,339 $507 $1,092
Technology Express 15,559 8,749 20,717
Ameritech Exports -- -- 848
============== ============== =============
$16,898 $9,256 $22,657
============== ============== =============
None of the members of the Group are under any legal obligation to
continue to act as a supplier for, or purchaser from, the other members of the
Group. Any member of the Group could at its sole discretion terminate its
relationship with the other members of the Group. In the event that the Company
were unable to purchase product from the United States members of the Group in
accordance with the inter-Group pricing structure, the Company's margins would
be significantly reduced and its business, financial condition and results of
operations would be materially adversely affected. Moreover, in the event the
Company is unable to sell product to other members of the Group, the Company's
revenues will be significantly reduced and its business, financial condition and
results of operations will be materially adversely affected.
The Group pricing structure is subject to review by the applicable
taxing agency, including the Internal Revenue Service in the United States and
Inland Revenue in the United Kingdom. An adverse decision by any such taxing
agency with respect to the inter-Group pricing structure could result in the
imposition of additional income taxes, interest or penalties. This would have a
material adverse effect on the Company's business, financial condition and
results of operations.
RISKS ASSOCIATED WITH INTERNATIONAL SALES
The Company's existing and planned international operations are subject
to political and economic uncertainties, including, without limitation,
inflation, hyperinflation, risk of renegotiation or modification of existing
agreements or arrangements with governmental authorities, transportation,
tariffs, export controls, foreign exchange restrictions which limit the
repatriation of investments and earnings therefrom, changes in taxation,
governmental challenges to the Company's tax strategies, hostilities and
confiscation or nationalization of property. The Company's current expansion
10
<PAGE>
into certain markets, such as Asia and Eastern Europe where, among other things,
the financial, economic, legal systems and infrastructures are less developed,
poses a greater degree of these and other risks than the Company's current
business operations in Western Europe and the United States. A material increase
in the risks posed by these and other considerations would have a material
adverse effect on the Company's business, financial condition and results of
operations.
RISK OF CURRENCY FLUCTUATIONS
A significant amount of the Company's sales were denominated in
currencies other than the United States dollar. Changes in the value of foreign
currencies relative to the United States dollar could adversely affect the
Company's results of operations and financial position, and transaction gains
and losses could contribute to fluctuations in the Company's results of
operations and cash position. When possible, the Company engages in currency
hedging transactions primarily through the purchase and sale of forward exchange
contracts intended to reduce these risks. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations Currency Risk
Management." There can be no assurance that fluctuations in foreign currency
rates will not have a material adverse effect on the Company's business,
financial condition and results of operations.
DECLINING MARGINS
As a result of intense price competition in the microcomputer products
industry, the Company has had, and expects to continue to have, narrower gross
profit and operating profit margins than in prior years. Such margins magnify
the impact on operating results of variations in sales and operating costs. The
Company's gross margins increased from 11.4% for the fiscal year ended 1997 to
12.9% for the fiscal year 1998. In the fiscal year ended June 30, 1999, gross
margin declined to 8.4%. Also, operating margins for the last three fiscal years
were 1.5% in 1999, 6.5% in 1998 and 4.4% in 1997. These narrower margins have
resulted from a lack of availability of products at favorable prices, resulting
in lower margins than in prior years. The Company has taken a number of steps
intended to address the computer industry's declining margins, including
improving and enhancing its information systems. In addition, the Company has
attempted to diversify its sources of supply to locate product at favorable
prices. Even though the Company has seen margin percentages move up and down
over the last three years, there can be no assurance that the Company will
maintain or increase sales or further reduce operating expenses as a percentage
of sales in the future. Moreover, there can be no assurance that these steps
will prevent these margins from continuing to decline. Future gross profit
margins may be adversely affected by changes in product mix, manufacturer
pricing actions and competitive and economic pressures. While the Company will
continue to explore ways to improve gross margins and reduce operating expenses
as a percentage of sales, there can be no assurance that the Company will be
successful in such efforts or that the Company's margins will not decline in the
future. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
COMPETITION
The Company operates in a highly competitive environment. The computer
wholesale distribution industry is characterized by intense competition, based
primarily on product availability, credit availability, price, speed of
delivery, quality and range of product lines, service and support. Certain of
the Company's competitors have greater financial, marketing, service and
technical support resources than the Company and may sell products at prices
below those charged by the Company. In addition, several computer manufacturers
have expanded their channels of delivery, pricing and product positioning,
including selling direct to consumers. These efforts have been facilitated
through the use of the Internet and are expected to continue for the foreseeable
future. There can be no assurance that the Company's resources will be
sufficient to allow the Company to compete effectively in the future. Continued
increases in competition could have a material adverse effect on the Company's
business, financial condition and results of operations due to, among other
things, potential price reductions and potential loss of market share.
11
<PAGE>
DEPENDENCE ON KEY PERSONNEL
The Company's success to date has been significantly dependent on the
contributions of John B. Gallagher and Harry D. Shields, the founders of the
Company. The loss of the services of either person would have a material adverse
effect on the Company's business, financial condition and results of operations.
The Company has key-man life insurance policies with respect to Harry D. Shields
and John B. Gallagher. The Company's success also depends to a significant
extent upon a number of its other key employees, and the loss of the services of
one or more other key employees could also have a material adverse effect on the
Company. In addition, the Company believes that its future success will depend
in part upon its ability to attract and retain additional highly-skilled
professional, managerial, sales and marketing personnel. Competition for such
personnel is intense. There can be no assurance that the Company will be
successful in attracting, training and retaining the personnel that it requires
for its business and planned growth, and the failure to do so could have a
material adverse effect on the Company's business, financial condition and
results of operations.
RELIANCE ON KEY SUPPLIERS
The Company does not manufacture any of its own products but rather
resells products purchased from suppliers. For the year ended June 30, 1999, the
Company obtained 58.4% of its products from ten suppliers (45.7% excluding
Technology Express). Accordingly, the Company is highly dependent upon such
suppliers and the loss of Technology Express or the loss of a combination of
other suppliers would have a material adverse effect on the Company's business,
financial condition and results of operations.
RELIANCE ON KEY PRODUCTS
For the fiscal year ended June 30, 1999, the Company's ten best selling
products accounted for the majority of its net sales. Accordingly, the inability
of the Company to obtain adequate supplies of these products would have a
material adverse effect on the Company's business, financial condition and
results of operations.
RELIANCE ON KEY CUSTOMERS
For the fiscal year ended June 30, 1999, the Company's twenty largest
third party customers accounted for 35.3% of the Company's net sales. None of
these customers individually accounted for more than about 3.0% of such net
sales. However, the Company is highly dependent upon such customers and the loss
of a combination of such customers could have a material adverse effect on the
Company's business, financial condition and results of operations.
RELIANCE ON KEY MARKETS
Certain markets within which the Company operates represent a high
percentage of its total operating earnings and net sales. For example, for the
year ended June 30, 1999, approximately 36.1% of net sales were attributable to
the markets of the United Kingdom and 27.8% for the United States. Decreases in
the volume of sales in such regions or declines in operating margins could have
a material adverse effect on the Company's business, financial condition or
results of operations.
CONTROL BY MANAGEMENT
John B. Gallagher and Harry D. Shields together beneficially own
approximately 71% of the outstanding shares of Common Stock of the Company. As a
result, these shareholders, acting together, have the voting power required to
approve all matters requiring approval by the Company's shareholders, including
the election of directors of the Company, transactions involving the potential
sale or merger of the Company, the issuance of additional equity, warrants or
options or the incurrence of significant indebtedness. Moreover, two trusts (the
"TRUST SHAREHOLDERS") created by Messrs. Gallagher and Shields together
12
<PAGE>
beneficially own approximately 10% of the outstanding shares of Common Stock of
the Company. Pursuant to a Trusteed Shareholders Cross-Purchase Agreement dated
January 31, 1998, Messrs. Gallagher and Shields agreed to vote all shares of
Common Stock owned or controlled by them together on all matters submitted to a
vote of the shareholders of the Company, including the election of directors. In
the event that Messrs. Gallagher and Shields cannot agree on the manner in which
to vote their respective shares, then neither may vote his shares. In addition,
the Trust Shareholders have agreed to vote all shares of Common Stock owned or
controlled by them together on all matters submitted to a vote of the
shareholders of the Company, including the election of directors. In the event
that the Trust Shareholders cannot agree on the manner in which to vote their
respective shares, neither Trust Shareholder may vote its shares.
CUSTOMER CREDIT EXPOSURE
The Company sells its products and services to a customer base of more
than 480 value-added resellers, corporate resellers, retailers, direct marketers
and distributors. The Company finances a significant portion of such sales by
extending trade credit. As a result, the Company's business could be adversely
affected in the event of the deterioration of the financial condition of its
customers, resulting in the customers' inability to repay the Company. The
Company attempts to minimize the risk of such credit by, among other things,
monitoring the creditworthiness of its customers and insuring some of its
accounts receivable. European Micro UK has sought to insure substantially all of
its accounts receivable. Nor'Easter, Colchester and American Micro generally do
not insure their accounts receivable. No assurances can be given that European
Micro UK will maintain such insurance or, if such insurance is maintained, that
it will be maintained in an amount equal to the aggregate amount of credit
extended by European Micro UK. In addition, no assurances can be given that such
insurance will be available in the future on terms acceptable to European Micro
UK, if at all. Moreover, the deterioration of the financial condition of one or
more of its customers may make future sales to such customers uninsurable.
RISKS ASSOCIATED WITH ACQUISITIONS
During fiscal year 1999, the Company acquired two businesses, Sunbelt
and H&B. In addition, on July 1, 1999, the Company acquired AMCC. The Company
may acquire other businesses that it believes would compliment and expand
its existing business. Acquisitions in other lines of business are also
possible. Acquisitions involve a number of risks that could adversely affect the
Company's operating results, including: (i) the diversion of management's
attention; (ii) the difficulty of assimilation of the operations and personnel
of the acquired companies; (iii) the amortization of acquired intangible assets;
(iv) the assumption of potential liabilities, disclosed or undisclosed,
associated with the businesses acquired, which may exceed the amount of
indemnification available from the seller, if any; (v) the risk that the
financial and accounting systems utilized by the businesses acquired will not
meet the Company's standards; (vi) the risk that the businesses acquired will
not maintain the quality of services that the Company has historically provided;
(vii) the dilutive effect of the use of the Company's Common Stock as
consideration for acquisitions; and (viii) the inability to attract and retain
qualified local management. There can be no assurance that the Company will be
able to consummate any future acquisitions on satisfactory terms, if at all,
that adequate financing will be available on terms acceptable to the Company,
that any acquired operations will be successfully integrated or that such
operations will ultimately have a positive impact on the Company's business,
financial condition and results of operations.
TRADE RESTRICTIONS ON CROSS-BORDER SALES
Substantially all of the products purchased by the Company are
trademarked or copyrighted products which may have been sold to distributors by
the manufacturers and resold to the Company. From time to time, trademark or
copyright owners and their licensees and trade associations have initiated
litigation or administrative agency proceedings seeking to halt the importation
of such products into many of the countries in which the Company operates. There
can be no assurance that future judicial, legislative or administrative agency
action in such countries, including possible import, export, tariff or other
trade restrictions, will not limit or eliminate some of the Company's secondary
13
<PAGE>
sources of supply or other business activities. In addition, there can be no
assurance that the Company's business activities will not become the subject of
legal or administrative actions brought by manufacturers, distributors or others
based on violations of trademark or copyright rights or other laws. Such
judicial, legislative, administrative or legal actions could have a material
adverse effect on the Company's business, financial condition and results of
operations. The Company sells products in the United States and expects to
continue to do so in the future. United States trademark and copyright owners
and their licensees and trade associations in other industries have initiated
litigation or administrative agency proceedings seeking to halt the importation
into the United States of foreign manufactured or previously exported
trademarked or copyrighted products. Such actions in the United States may
prevent the Company from selling certain products in the United States. The
Company continues to closely monitor European and UK legal decisions in respect
of the importation of trademarked goods into the European Economic Area ("EEA").
The approach of the European Courts has allowed trademark owners to prevent
re-importation without consent. However, a recent decision of an English Court
has placed the strictest possible interpretation on that approach. The Company
has not encountered any problems from its suppliers as a result of these
decisions but the Company has historically obtained a significant amount of its
inventory from outside the EEA. Any disruption on the Company's ability to
source goods from outside the EEA will have an adverse effect on the Company's
business, financial condition and results of operations.
MANAGEMENT OF GROWTH
The rapid growth of the Company's business has required the Company to
make significant additions in personnel and has significantly increased its
working capital requirements. Such growth has resulted in new and increased
responsibilities for management personnel and has placed and continues to place
a significant strain upon the Company's management, operating and financial
systems and other resources. There can be no assurance that the strain placed
upon the Company's management, operating and financial systems and other
resources will not have a material adverse effect on the Company's business,
financial condition and results of operations, nor can there be any assurance
that the Company will be able to attract or retain sufficient personnel to
continue the planned expansion of its operations. Also crucial to the Company's
success in managing its growth will be its ability to achieve economies of
scale, such as enhanced purchasing power, the ability to purchase a higher
percentage of product on credit and the ability to obtain product which the
Company might not otherwise be able to obtain. There can be no assurance that
the Company will be able to achieve such economies of scale, and the failure to
do so could have a material adverse effect on the Company's business, financial
condition and results of operations. Although the Company has experienced
significant sales growth, such growth may not be indicative of future sales
growth.
To manage the expansion of its operations, the Company must
continuously evaluate the adequacy of its management structure and its existing
systems and procedures, including, without limitation, its data processing,
financial and internal control systems. When entering new geographic markets,
the Company will be required to implement its policies and financial reporting
procedures, recruit personnel, and adapt its distribution systems to varying
cultural, economic and governmental systems. There can be no assurance that
management will adequately anticipate all of the changing demands that growth
could impose on the Company's systems, procedures and structure. In addition,
the Company will be required to react to changes in its industry, and there can
be no assurance that it will be able to do so successfully or at all. Any
failure to adequately anticipate and respond to such changing demands may have a
material adverse effect on the Company's business, financial condition and
results of operations.
RISKS ASSOCIATED WITH HOLDING FOREIGN SUBSIDIARIES
Most of the operations of European Micro Holdings, Inc. are and will be
conducted through its direct or indirect subsidiaries, some of which are formed
outside of the United States. Periodically, European Micro Holdings, Inc. loans
money to its subsidiaries to finance their operations. These loans are
unsecured. European Micro Holdings, Inc.'s available cash will depend upon the
cash flow of its subsidiaries and the ability of those subsidiaries to repay
these loans and to make funds available to European Micro Holdings, Inc. in the
form of loans, dividends, intercompany advances, management fees or otherwise.
The subsidiaries are separate and distinct legal entities and, except for the
payment of management fees and the repayment of the loans, have no obligation,
contingent or otherwise, to make funds available to European Micro Holdings,
14
<PAGE>
Inc., whether in the form of loans, dividends, intercompany advances or
otherwise. The applicable law in certain countries may limit the ability of the
Company's foreign subsidiaries to repay the loans or to pay dividends in the
absence of sufficient withholding taxes, distributable reserves or for other
reasons. None of European Micro Holdings, Inc.'s current subsidiaries are
subject to any currency exchange controls. However, future exchange controls, or
the existence of such controls in other countries in which European Micro
Holdings, Inc. establishes or acquires subsidiaries, could limit or restrict the
ability of European Micro Holdings, Inc. to get repaid or obtain loans,
dividends, intercompany advances or otherwise access the financial resources of
such subsidiaries. In addition, the subsidiaries may from time to time in the
future become parties to financing arrangements, which may contain limitations
on the ability of such subsidiaries to pay dividends or to make loans or
advances to European Micro Holdings, Inc. In the event of any insolvency,
bankruptcy or similar proceedings, creditors of the subsidiaries would generally
be entitled to priority over European Micro Holdings, Inc. with respect to
assets of the affected subsidiaries. Such an event may adversely affect European
Micro Holdings, Inc.'s ability to collect the loans from its subsidiaries and
would have a material adverse effect on its business, financial condition and
results of operations.
AVAILABLE CAPITAL FOR OBTAINING PRODUCTS IN BULK
The Company's business often requires the volume buying of discounted
products. This requires the Company to have sufficient available cash or
financing to be able to take advantage of such discounted prices on a timely
basis. There can be no assurance that the Company will continue to have
available cash or financing. A shortage of available cash or financing may
prevent the Company from being able to purchase inventory at favorable prices
and therefore have a material adverse effect on the Company's business,
financial condition and results of operations.
NEED FOR ADDITIONAL CAPITAL
The Company has grown through internal expansion and acquisitions,
which has resulted in the need for significant amounts of capital or financing
which prior to the initial public offering had been provided by the Company's
founding shareholders. To maintain historical levels of growth, the Company may
need to seek additional funding through a secondary public offering or private
financing and may, when attractive sources of capital become available, elect to
obtain capital in anticipation of such needs. Adequate funds may not be
available when needed or may not be available on terms favorable to the Company.
If additional funds are raised by issuing equity securities, dilution to
existing shareholders may result. If funding is insufficient, the Company may be
required to delay, reduce the scope of or eliminate some or all of its expansion
plans.
RISK OF INDEBTEDNESS
The Company may incur substantial amounts of indebtedness in its
operations. In such event, the Company would dedicate an increasing portion of
its cash flow to servicing such indebtedness, thereby exposing it to the risks
inherent in a highly leveraged company, including, among other things, interest
rate and default risks. An increase in interest rates charged by lending
institutions will increase the cost of servicing the Company's indebtedness as
well as increase the cost of financing future acquisitions. Additionally, the
Company anticipates that such indebtedness will be secured by liens on the
Company's assets, and a default on such indebtedness may result in the Company's
lenders foreclosing such liens. The occurrence of any of these things could have
a material adverse effect on the Company's business, financial condition and
results of operations. Loan agreements also typically impose substantial
restrictions on borrowers and normally require strict compliance with certain
financial ratios and other criteria, all of which may significantly restrict the
Company's business or financial flexibility and have a material adverse effect
on the Company's business and financial condition. If funding is insufficient,
the Company may be required to delay, reduce the scope of or eliminate some or
all of its expansion plans. This would have a material adverse effect of the
Company's business, financial condition and results of operations.
VARIABILITY OF CUSTOMER REQUIREMENTS
The level and timing of orders placed by the Company's customers vary
due to a number of factors, including customer attempts to manage inventory,
15
<PAGE>
changes in customers' business strategies and variations in demand for products.
The Company relies on its estimate of anticipated future volumes when making
commitments regarding the quantities and the mix of products that it intends to
carry in inventory. The Company does not have long term contracts with its
customers. As such, nothing would prohibit the Company's customers from reducing
or eliminating their orders with the Company which would result in a decrease in
sales and an increase in inventory carrying costs and obsolescence. Any
significant reduction in customer orders could have a material adverse effect on
the Company's business, financial condition and results of operations.
FLUCTUATIONS IN QUARTERLY RESULTS
The Company's quarterly net sales and operating results have varied
significantly in the past and will likely continue to do so in the future, as a
result of such factors as seasonal variations in the demand for the products and
services offered by the Company, the introduction of new hardware and software
technologies and products offering improved features and functionality, the
introduction of new products and services by the Company and its competitors,
the loss or consolidation of a significant supplier or customer, changes in the
level of operating expenses, inventory adjustments, product supply constraints,
competitive conditions including pricing, interest rate fluctuations, the impact
of acquisitions, currency fluctuations and general economic conditions.
Specific historical seasonal variations in the Company's operating
results have included a reduction in demand in Europe during the summer months
and changes in the product cycle of major products. The Company may be unable to
adjust spending sufficiently in a timely manner to compensate for any unexpected
sales shortfall, which could materially adversely affect quarterly operating
results. Accordingly, the Company believes that period-to-period comparisons of
its operating results should not be relied upon as an indication of future
performance. In addition, the results of any quarterly period are not indicative
of results to be expected for a full fiscal year. In certain future quarters,
the Company's operating results may be below the expectations of public market
analysts or investors. In such event, the market price of the Common Stock would
be materially adversely affected.
EFFECTS OF TECHNOLOGICAL CHANGE
The products sold by the Company are characterized by rapidly changing
technology, frequent new product introductions and evolving industry standards
that can render the products marketed by the Company obsolete or unmarketable in
a relatively short period of time. Although it is the policy of most
manufacturers of microcomputer products to protect distributors in the form of
price protection and/or stock rotation, the nature of the Company's business
does not allow it to enjoy those benefits. See "Certain Business Risk Factors -
No Contracts or Distribution Agreements with Suppliers." The Company's future
success will depend upon its ability to limit its exposure to obsolescence in
its inventory and to gain access to its vendors' new product lines, as well as
product lines of any additional vendors that release new and desirable
technology.
ANTI-TAKEOVER CONSIDERATIONS
The Company's Board of Directors has the authority to issue up to
1,000,000 shares of preferred stock in one or more series and to fix the powers,
designations, preferences and relative rights thereof without any further vote
or action by the Company's shareholders. The issuance of preferred stock could
dilute the voting power of holders of Common Stock and could have the effect of
delaying, deferring or preventing a change in control of the Company. The
Company's Articles of Incorporation provide that the holders of a majority of
the preferred stock, voting separately from the holders of the Common Stock,
must approve certain transactions. The Company's Board of Directors has been
divided into three equal size classes serving staggered three-year terms.
Therefore, any shareholder interested in gaining control of the Company will be
precluded from electing a majority of directors in any single year. Certain
change of control transactions such as mergers, share exchange or sale of
substantially all of the assets of the Company require an affirmative vote of a
majority of the holders of the Company's Common Stock and a majority of the
holders of the Company's preferred stock.
In addition, Messrs. Gallagher and Shields together control
approximately 71% (81% if the Shares of the Trust Shareholders are included
16
<PAGE>
although Messrs. Gallagher and Shields do not have voting power with respect to
the shares held by the Trust Shareholders) of the outstanding shares of Common
Stock, and the voting power of these shareholders could have the effect of
delaying or preventing a change in control of the Company. These, and certain
other provisions of the Company's Articles of Incorporation and Bylaws, as well
as Nevada law, may operate in a manner that could discourage or render more
difficult a takeover of the Company or the removal of management or the Board of
Directors.
FOREIGN CORRUPT PRACTICES ACT
The Company, like other companies operating internationally, is subject
to the United States Foreign Corrupt Practices Act ("FCPA") and other laws which
prohibit improper payments to foreign governments and their officials by United
States and other business entities. The FCPA also requires companies to maintain
accurate record keeping and systems of internal control to ensure that funds are
not misappropriated. The Company's operations in certain countries create the
risk of an unauthorized payment by an employee or agent of the Company which
would be in violation of such laws, including the FCPA. Violations of the FCPA
or these other laws may result in severe criminal penalties against the Company
and its officers and directors which could have a material adverse effect on the
Company's business, financial condition and results of operations.
NO ANTICIPATION OF DIVIDENDS
The Company anticipates that for the foreseeable future, earnings, if
any, will be retained for the development of its business and will not be
distributed to shareholders as dividends. The declaration and payment of
dividends, if any, by the Company at some future time will depend upon the
Company's results of operations, financial condition, cash requirements, future
prospects, limitations imposed by credit agreements or senior securities and any
other factors deemed relevant by the Company's Board of Directors. The
declaration and payment of dividends, if at all, by the Company will be at the
discretion of the Board of Directors. See "Dividends."
IMPACT OF THE EUROPEAN 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 will have on its continuing
business operations and no assurances can be given that the Euro will not have a
material adverse effect on the Company's business, financial condition and
results of operations. However, the Company does not expect the Euro to have a
material effect 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
two quarters of trading, the Euro devalued against sterling by 8.55%, adversely
affecting the value of the Company's trade receivables denominated in Euros, 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.
LABOR RELATIONS
The Company's labor force is not unionized. The Company, however, does
business in certain foreign countries where labor disruption is more common than
in the United States. The majority of the freight carriers used by the Company
17
<PAGE>
are unionized. A labor strike by one of the Company's freight carriers or
vendors, a general strike by civil service employees, a governmental shutdown or
any type of labor disruption could have a material adverse effect on the
Company's business, financial condition and results of operation.
ITEM 2. PROPERTIES.
The corporate headquarters of European Micro Holdings, Inc. is located
in Miami, Florida. Approximately 350 square feet is dedicated to management
offices.
European Micro's facilities are described below:
<TABLE>
<CAPTION>
LOCATION SQUARE FEET LEASE EXPIRATION
-------- ----------- ----------------
<S> <C> <C>
Manchester, UK(warehouse)(1) 8,000 2012
Manchester, UK (offices)(1) 5,800 2002
Dusseldorf, Germany (offices)(2) 1,360 2004
Amsterdam, Netherlands
(offices and warehouse)(3) 18,000 2002
Singapore (office) (4) 500 2001
Miami, Florida (offices)(5) 350 2002
Nashville, Tennessee (offices) (5) 350 1999
Wimbledon, UK (offices and warehouse)(6) 5,813 2008
Seabrook, New Hampshire
(offices and warehouse)(7) 4,500 1999
</TABLE>
-------------------------
(1) European Micro UK
(2) European Micro Germany
(3) European Micro Holland & Big Blue Europe 50% Joint Venture
(4) Colchester
(5) European Micro Holdings, Inc.
(6) Sunbelt
(7) Nor'Easter
European Micro UK operates from facilities located in Manchester,
England. Approximately 5,800 square feet of the facilities in Manchester are
offices, including management, sales and administrative areas and 8,000 square
feet is warehouse space.
The Company utilizes approximately 700 square feet of office space and
certain equipment owned or leased by Technology Express and AMCC for which it is
not charged a fee.
The office in Germany is a sales office with no warehousing facility.
All products are shipped from the Manchester facility directly to the customer.
The office in the Netherlands houses both European Micro Holland and
Big Blue Europe.
The office in Singapore is a sales and purchasing office with no
warehousing facility. All products are shipped from suppliers directly to the
Company's other warehouses.
On July 16, 1999, European Micro UK purchased the office building in
which they had previously been leasing space for 1,705,000 pounds sterling
($2,693,000 at June 30, 1999). The purchase price was financed in part by a loan
in the amount of 1,300,000 pounds sterling($2,053,000 at June 30, 1999) at an
annual interest rate of 7.6%, payable over ten years. The total square footage
of the building is 11,603, of which 5,816 square feet is being leased to
unrelated third parties. European Micro UK continues to lease its warehouse
space.
The Company considers its existing facilities to be adequate for its
foreseeable needs.
18
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ITEM 3. LEGAL PROCEEDINGS.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's shares of Common Stock began trading on the Nasdaq
National Market on June 12, 1998, under the symbol "EMCC." The Company's high
and low bid prices by quarter during fiscal 1999 and 1998 are presented as
follows:
FISCAL YEAR 1999(1)
HIGH LOW
First quarter $11.375 $4.50
Second quarter 15.75 8.00
Third quarter 13.75 8.50
Fourth quarter 10.50 7.00
FISCAL YEAR 1998(1)
HIGH LOW
First quarter n/a n/a
Second quarter n/a n/a
Third quarter n/a n/a
Fourth quarter $11.00 $9.9375
- -------------------------
(1) The Company was not listed on any national exchange or inter-dealer
quotation system until June 12, 1998, subsequent to the close of its initial
public offering. Therefore, the stock prices for the quarter ended June 30, 1998
reflect approximately 12 trading days. These quotations reflect inter-dealer
prices, without retail mark-up, mark-down or commission, and may not necessarily
represent actual transactions.
On September 16, 1999, the Company had approximately 34 shareholders of
record. The Company believes that it has in excess of 400 beneficial owners.
DIVIDENDS
During the fiscal year ended June 30, 1999, no dividends were declared
or paid. On February 9, 1998, the Company declared and paid a cash dividend of
$550,000 or $0.1375 per share of Common Stock. During the fiscal year ended June
30, 1997, the Company declared and paid a cash dividend of $562,000 or $0.14 per
share of Common Stock. The dividends per share were calculated based on
4,000,000 shares of Common Stock outstanding. These dividends were declared and
paid prior to the Company's initial public offering. The Company currently
intends to retain future earnings to fund its operations and does not expect
such earnings to be distributed in the future to shareholders as dividends. The
declaration and payment by the Company of any future dividends and the amount
thereof will depend upon the Company's results of operations, financial
condition, cash requirements, future prospects, limitations imposed by credit
agreements or senior securities and other factors deemed relevant by the Board
19
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of Directors. The declaration and payment of dividends, if at all, by the
Company will be at the discretion of the Board of Directors.
RECENT SALES OF UNREGISTERED SECURITIES
None.
ITEM 6. SELECTED FINANCIAL DATA.
SELECTED CONSOLIDATED FINANCIAL DATA
($ IN THOUSANDS, EXCEPT PER SHARE DATA)
The following statement of operations and balance sheet data of the
Company is set forth below for each year in the five-year period ended June 30,
1999. The information presented is derived from the audited consolidated
financial statements of the Company and should be read in conjunction with the
consolidated Financial Statements as of June 30, 1999 and 1998 and each of the
years in the three-year period ended June 30, 1999 and the Notes thereto
included elsewhere in this filing.
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
1999 1998 1997 1996 1995
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net Sales $132,206 $111,453 $46,655 $40,348 $33,864
Income from operations 1,935 7,232 2,051 1,478 1,848
Net income 854 4,485 1,034 845 1,115
Net income per share
(basic and diluted) 0.17 1.10 0.26 0.21 0.28
Dividends per share $0.00 $0.14 $0.14 $0.24 $0.10
Weighted average common shares
outstanding, basic 4,978,614 4,066,524 4,000,000 4,000,000 4,000,000
Weighted average common shares
outstanding, diluted 4,989,961 4,087,466 4,000,000 4,000,000 4,000,000
JUNE 30,
1999 1998 1997 1996 1995
---------------------------------------------------------------------------
BALANCE SHEET DATA:
Working capital 11,844 12,959 1,976 1,474 1,736
Total assets 30,599 19,204 8,844 7,857 5,873
Long-term debt, net of
current portion 23 84 45 37 41
Shareholders' equity 14,343 13,680 2,511 1,769 1,924
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
THE FOLLOWING INFORMATION SHOULD BE READ IN CONJUNCTION WITH THE
CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY AND THE NOTES THERETO APPEARING
ELSEWHERE IN THIS FILING.
OVERVIEW
The Company is an independent distributor of microcomputer products,
including personal computers, memory modules, disc drives and networking
products, operating primarily in Western Europe and the United States. The
20
<PAGE>
Company has pursued and expects to continue to pursue a strategy of purchasing
product for resale on the worldwide surplus or aftermarket as opposed to
purchasing products for resale directly from manufacturers. The Company's
ability to purchase products for resale in these markets has enabled the Company
to increase net sales. For the three-year period ended June 30, 1999, the
Company's total net sales increased from $46.7 million in fiscal 1997 to $132.2
million in fiscal 1999, and gross profit increased from $5.3 million in fiscal
1997 to $11.1 million in fiscal 1999. The Company attributes these increases in
sales to increased customer demand for the Company's products and, more
recently, to the expansion of the range of products offered and geographical
markets served.
To date, the Company has derived the majority of its operating income
and cash flow from European Micro UK. Generally, European Micro UK purchases and
sells its products in currencies other than the United States dollar. European
Micro UK seeks to limit its exposure to currency fluctuations through hedging.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Currency Risk Management."
RESULTS OF OPERATIONS
The following table sets forth, for the periods presented, the
percentage of net sales represented by certain items in the Company's
Consolidated Statements of Operations:
PERCENTAGE OF NET SALES
YEARS ENDING JUNE 30,
1999 1998 1997
---- ---- ----
Net sales 88.4% 73.9% 99.7%
Net sales to related parties 11.6 26.1 0.3
------- ------- -------
Total net sales 100.0 100.0 100.0
------- ------- -------
Cost of goods sold (80.1) (61.4) (88.2)
Cost of goods sold to related parties (11.5) (25.7) (0.4)
------- ------- -------
Total cost of goods sold (91.6) (87.1) (88.6)
------- ------- -------
Gross profit 8.4 12.9 11.4
Operating expenses (6.9) (6.4) (7.0)
------- ------- -------
Income from operations 1.5 6.5 4.4
Interest income - - -
Interest expense (0.3) (0.4) (0.6)
Equity in net income (loss) of
unconsolidated subsidiaries - - (0.2)
------- ------- -------
Income before income taxes 1.2 6.1 3.6
Income tax expense (0.6) (2.1) (1.4)
------- ------- -------
Net Income 0.6% 4.0% 2.2%
======= ======= =======
YEARS ENDED JUNE 30, 1999 AND 1998
TOTAL NET SALES. Total net sales increased $20.8 million, or 18.6%,
from $111.4 million in the year ended June 30, 1998 to $132.2 million in the
comparable period in 1999. Excluding net sales to related parties, net sales
increased $34.5 million, or 41.9%, from $82.4 million in the year ended June 30,
1998 to $116.9 million in the comparable period in 1999. This increase was
21
<PAGE>
attributable to the start-up growth of Nor'Easter which started its operations
in February 1998 (accounting for approximately $22.3 million), the addition of
Sunbelt's trading sales (accounting for approximately $10.8 million), the growth
of the Premier Dealers Club (accounting for approximately $6.6 million) and the
additional sales from Sunbelt's Nova line of products (accounting for
approximately $1.5 million). This increase was offset by a reduction in European
Micro UK's trading sales of $6.7 million 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 at a
significant mark-up. 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.
For the years ended June 30, 1999 and 1998, respectively, customer rebates and
discounts were immaterial.
Net sales to related parties decreased $13.8 million from $29.1 in the
year ended June 30, 1998 to $15.3 million in the comparable period in 1999. This
decrease is primarily attributable to large purchases of computer peripherals
made on behalf of related parties in the year ended June 30, 1998 compared to
the same period in 1999. In addition, the Company's purchases from related
parties increased by $7.6 million in the year ended June 30, 1999 from the
comparable period in 1998.
GROSS PROFIT. Gross profit decreased $3.3 million, or 22.9%, from $14.4
million in the year ended June 30, 1998 to $11.1 million in the comparable
period in 1999. Gross profit excluding related party transactions decreased to
$11.0 million for the year ended June 30, 1999 from $14.0 million in the same
period of the prior year. 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 was
unusually high in the period ended June 30, 1998 due to the purchase of computer
peripherals on favorable terms. As indicated in its previous filings, the
Company expected its gross profit to be significantly lower in periods after
fiscal 1998 because it did not expect to be able to regularly purchase computer
peripherals and other products on terms as favorable as achieved in the period
ended June 30, 1998.
Gross profit attributable to related party sales decreased $318,000, or
76.8%, from $414,000 in the year ended June 30, 1998 to $96,000 in the
comparable period in 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 0.6%.
Gross margins decreased from 12.9% in the year ended June 30, 1998 to
8.4% in the comparable period in 1999. Excluding related party transactions,
gross margin decreased from 17.0% in the year ended June 30, 1998 to 9.4% in the
comparable period in 1999. The decrease in gross margins was attributable to
higher than usual margins caused by the purchase of computer peripherals in 1998
which were purchased by the Company on exceptional trading terms and
subsequently sold at significant mark-ups.
Foreign exchange losses, net, increased from a loss of $510,000 in the
year ended June 30, 1998 to a loss of $579,000 in the comparable period in 1999.
This increase 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. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Currency Risk Management."
OPERATING EXPENSES. Operating expenses as a percentage of total net
sales increased from 6.4% in the year ended June 30, 1998 to 6.9% in the
comparable period in 1999. Commissions and bonus payments to employees decreased
as these payments are tied to the Company's gross profit and gross margin. This
22
<PAGE>
decrease was offset by increased operating expenses related to the opening of
the Singapore office in November 1998 and administrative expenses incurred by
European Micro Holdings, Inc. which began operations in January 1998, but did
not start to incur substantial expenses until April 1998.
INTEREST EXPENSE. Interest expense decreased by $13,000 from $459,000
in the year ended June 30, 1998 to $446,000 in the comparable period in 1999.
This was attributable to decreased borrowings by the Company to fund its
inventory and accounts receivable after the receipt of funds from the Company's
initial public offering.
INCOME TAXES. Income taxes as a percentage of earnings before income
taxes increased from 34.0% in the year ended June 30, 1998 to 46.8% in the
comparable period in 1999. This increase was primarily attributable to the
increase in the tax provision for European Micro Germany related to transfer
pricing from European Micro UK, changes in the valuation allowance and other
nondeductible expenses. 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 changed from a gain of $3,000 in the year ended June 30, 1998 to
a loss of $32,000 in the comparable period in 1999. This reduction in earnings
is attributed to an increased provision for inventory obsolescence. During the
year ended June 30, 1999, the Company made an unsecured loan to Big Blue Europe
in the amount of $350,000. This loan is due on demand and has an annual interest
rate of 9.25%, payable quarterly.
YEARS ENDED JUNE 30, 1998 AND 1997
TOTAL NET SALES. Total net sales increased $64.8 million, or 139%, from
$46.6 million in the year ended June 30, 1997 to $111.4 million in the
comparable period in 1998. The increase in net sales was primarily attributable
to sales to related parties (accounting for approximately $28.9 million), the
purchase of computer peripherals on favorable terms and subsequently sold in the
period (accounting for approximately $13.8 million), the broadening of the
Company's product base (accounting for approximately $6.0 million), the return
of some key personnel from temporary leave (accounting for approximately $4.0
million) and the growth of the Premier Dealers Club (accounting for
approximately $2.6 million). There can be no assurance that the Company will be
able to maintain the level of sales or sales growth achieved in this period
because the Company does not expect to be able to regularly purchase peripherals
and other products on terms as favorable as achieved in the period ended June
30, 1998. For the years ended June 30, 1998 and 1997, respectively, customer
rebates and discounts were immaterial.
Excluding net sales to related parties, net sales increased $35.8
million, or 77%, from $46.5 million in the year ended June 30, 1997 to $82.3
million in comparable period in 1998.
Net sales to related parties increased $28.9 million from $154,000 in
the year ended June 30, 1997 to $29.1 million in the comparable period in 1998.
This increase is attributable to Group purchases by the Company of computer
peripherals made on behalf of related parties and subsequently by related
parties to third parties.
GROSS PROFIT. Gross profit increased $9.1 million, or 171.7%, from $5.3
million in the year ended June 30, 1997 to $14.4 million in the comparable
period in 1998. Gross profit excluding related party transactions increased to
$14 million the year ended June 30, 1998 from $5.3 million in the same period of
the prior year. Gross profit was unusually high in the period due to the
purchase of computer peripherals on favorable terms during the year ended June
30, 1998. The Company expects its gross profit to be significantly lower in
future periods because it does not expect to be able to regularly purchase
computer peripherals and other products on terms as favorable as achieved in the
period ended June 30, 1998.
Gross margins increased from 11.4% in the year ended June 30, 1997 to
12.9% in the comparable period in 1998. Excluding related party transactions,
gross margin increased from 11.5% in the year ended June 30, 1997 to 17.0% in
the comparable period in 1998. The increase in gross margins was attributable to
higher than usual margins caused by the purchase of computer peripherals in the
23
<PAGE>
period which were purchased by the Company on exceptional trading terms and
subsequently sold. The Company expects its gross margin to be significantly
lower in future periods because it does not expect to be able to regularly
purchase products on as favorable terms as that experienced in the period.
Foreign exchange losses, net, increased from a loss of $157,000 in the
year ended June 30, 1997 to a loss of $510,000 in the comparable period in 1998.
During the second quarter of fiscal 1997, the Company suffered considerable
exchange losses as a result of the strengthening of the U.K. pound sterling
relative to other European currencies, causing a devaluation of many of the
Company's foreign currency accounts receivable.
OPERATING EXPENSES. Operating expenses as a percentage of total net
sales decreased from 7.0% in the year ended June 30, 1997 to 6.4% in the
comparable period in 1998 due primarily to the increase in total net sales
relative to operating expenses. Operating expenses consist primarily of fixed
costs, such as wages, salaries, rents and rates. Excluding related party
transactions, operating expenses as a percentage of net sales increased from
6.9% in the year ended June 30, 1997 to 8.6% in the comparable period in 1998
due to higher commissions and bonus compensation paid during the period. The
Company's commission and bonus compensation is based on the Company's gross
margin. For the reasons set forth above, the Company achieved higher gross
margins in the period which resulted in higher commission and bonus compensation
in the period.
INTEREST EXPENSE. Interest expense increased by $150,000 from $309,000
in the year ended June 30, 1997 to $459,000 in the comparable period in 1998.
This was attributable to increased borrowings by the Company to fund its
inventory and accounts receivable due to the large increase in sales during the
period.
INCOME TAXES. Income taxes as a percentage of earnings before income
taxes decreased from 38.6% in the year ended June 30, 1997 to 34.0% in the
comparable period in 1998. This decrease was primarily attributable to the
increase in income before income taxes relative to disallowed expenditures for
corporate income tax purposes. The effective rate of income tax may increase in
the future periods as a result of the change in structure and the mix of sales
across the various countries to which the Company sells its products.
INTEREST IN JOINT VENTURE. The Company's share of income or loss from
Big Blue Europe increased from a loss of $73,000 in the year ended June 30, 1997
to a gain of $3,000 in the comparable period in 1998. These earnings are
attributable to the business maturing past the start-up stage.
WAREHOUSE BREAK-IN. In November 1997, European Micro UK's warehouse was
broken into and approximately $503,000 of inventory was stolen. All inventory
was insured and the Company was reimbursed by its insurance company for the cost
of the inventory less an $8,000 standard deductible. In order to prevent any
additional thefts, the Company has implemented the following steps:
(1) The Company has relocated its warehouse facility to a more secure
location.
(2) The Company consulted with a security specialist and expended over
$40,000 in security measures, including direct radio communication with law
enforcement.
(3) The Company implemented new procedures regarding occupancy and the
opening and closing of the warehouse facility.
SEASONALITY
The Company typically experiences variations in its total net sales and
net income on a quarterly basis as a result of many factors. These include, but
are not limited to, seasonal variations in demand for the products and services
offered by the Company, the introduction of new hardware and software
technologies and products offering improved features and functionality, the
introduction of new products and services by the Company and its competitors,
the loss or consolidation of a significant supplier or customer, changes in the
level of operating expenses, inventory adjustments, product supply constraints,
competitive conditions including pricing, interest rate fluctuations, the impact
of acquisitions, currency fluctuations and general economic conditions.
Historical operating results have included a reduction in demand in Europe
during the summer months.
24
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary cash requirements are for operating expenses,
funding accounts receivable and for the purchase of additional inventory to
support growth and to take greater advantage of available cash discounts offered
by certain of the Company's suppliers for early payment and to make
acquisitions. The Company has historically funded these cash requirements
through a combination of loans, internally generated cash flow and the net
proceeds of its initial public offering.
Short-term working capital requirements are funded by a combination of
line of credit facilities together with accounts receivable financing. Both of
these facilities are set and reviewed annually. In both cases, the amounts drawn
down accrue the same rate of interest based on a markup over the bank borrowing
rate in the United Kingdom. The overdraft facility was 1.2 million pounds
sterling ($1.9 million) at June 30, 1999 and 1998. The accounts receivable
financing provides for a borrowing base of 85% of accounts receivable, with a
limit of 5.5 million pounds sterling ($8.69 million on June 30, 1999). Further
funding was obtained in June 1998 in the form of a short term revolving credit
agreement, secured against inventory. The facility allows the Company to borrow
up to 3.5 million pounds sterling ($5.5 million on June 30, 1999) to assist in
the purchase of inventory. In addition, in June 1998, the Company received $9.3
million in gross proceeds from its initial public offering of 933,900 shares of
common stock. The Company incurred total expenses in connection with the
offering of $2.2 million. The Company has used the proceeds to fund operations
and provide working capital to European Micro UK and Nor'Easter and to acquire
Sunbelt.
Long-term funding is supplied to the Company in the form of capital
lease agreements. These agreements are secured by vehicles owned by the Company.
The agreements are usually for 36 months from the date of purchase and are
typically for 80% of the purchase value of the vehicle. All but two of the
agreements are subject to variable rate interest. As of June 30, 1999, the
borrowings were $80,000, of which $23,000 was due after more than one year.
Subsequent to the Company's fiscal year ended June 30, 1999, the
Company acquired AMCC for a purchase price of $940,660, plus an earn-out. See
"Related Party Tranasactions." The portion of the purchase price paid at closing
was funded through the Company's working capital. The earn-out portion of the
purchase price is expected to be funded through the Company's working capital or
the issuance of the shares of Common Stock.
On July 16, 1999, European Micro UK purchased the office building in
which they had previously been leasing space for 1,705,000 pounds sterling
($2,693,000 at June 30, 1999). The purchase price was financed in part by a loan
in the amount of 1,300,000 pounds sterling($2,053,000 at June 30, 1999) at an
annual interest rate of 7.6%, payable over ten years.
FISCAL YEAR ENDED JUNE 30, 1999. Net cash used in operating activities
for fiscal 1999 amounted to $8.8 million. Significant factors in the use of cash
were an decrease in trade payables, net of effects from acquisitions, of $1.1
million, an increase in inventories, net of effects from acquisitions of $5.4
million and an increase of trade receivables, net of effects from acquisitions
of $3.0 million. The decrease in trade 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 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 $854,000, cash generated from a reduction
in other current assets of $1.8 million, primarily related to the prepayment of
inventory at June 30, 1998 of $2.0 million.
Cash used in investing activities amounted to $1.2 million. This
consisted of expenditures on fixed assets of $155,000, the sale of fixed assets
of $7,000, the acquisitions of Sunbelt and H&B of $720,000 and an advance to Big
Blue Europe of $350,000.
Cash provided by financing activities was $8.5 million, of which $7.0
million was provided by an increase in the accounts receivable financing
facility and $1.6 million was provided by an increase in the bank line of
credit.
FISCAL YEAR ENDED JUNE 30, 1998. Cash provided by operating activities
for fiscal 1998 amounted to $1.6 million. Significant factors in the generation
of cash were net income for the year of $4.5 million and increases in taxes
payable of $2.2 million. The cash provided by operations was partially offset
primarily by the increases in trade receivables of $2.3 million, which was a
result of the considerable increase in business during the period, including
significant UK sales with longer credit terms and an advance payment made for
the purchase of inventory of $2.0 million. The advance payment was made to take
advantage of favorable pricing. Further, cash was used to pay down trade
payables by $400,000 and an increase in due from related parties of $329,000.
25
<PAGE>
Cash used in investing activities amounted to $421,000. This was
attributed to the purchase of fixed assets amounting to $596,000 less the sale
of fixed assets of $175,000. The purchase of fixed assets consisted primarily of
expenditures for office improvements (as the Company moved onto an additional
floor at their Manchester, England) of $150,000, new computers and office
equipment of $103,000, a forklift for the warehouse of $22,000, and new vehicles
of $286,000. The sale of fixed assets consisted primarily of used vehicles
traded for the purchase of new vehicles.
Cash provided by financing activities amounted to $3.4 million. This
was primarily the result of the receipt of net proceeds from the initial
offering of $7.1 million ($9.3 million proceeds less expenses of $2.2 million).
Cash used in financing activities amounted to $3.8 million to repay the
short-term financing facilities and the payment of a cash dividend of $550,000
prior to the Company's initial public offering.
FISCAL YEAR ENDED JUNE 30, 1997. Cash provided by operating activities
during the year amounted to $247,000. Significant factors in the generation of
cash were net income for the year amounting to $1.0 million and increases in
trade payables of $1.0 million. This was due primarily to a significant move
towards third party suppliers as opposed to related party purchases which had
been particularly high in 1996. Cash was also provided by reductions in amounts
due from related parties ($139,000) and a decrease in other current assets
($267,000). The cash provided by operations was partially offset primarily by
the decrease in amounts due to related parties of $956,000 (as a result of the
high third party purchases), an increase in trade receivables of $672,000 and an
increase in inventory of $540,000. The increase in trade receivables was due to
both a movement away from central European sales towards UK sales, which
traditionally have longer credit terms and the continuing pressure to offer
longer credit terms to the maturing marketplace.
Cash used in investing activities amounted to $412,000 which was
primarily attributed to the purchase of fixed assets amounting to $195,000 which
was partially offset by disposals ($47,000) and the investment in an
unconsolidated affiliate, Big Blue Europe of $264,000. The larger fixed asset
purchases included the addition of two cars ($69,000) and computer equipment for
additional staff, network upgrades and laptop computers ($86,000). Fixtures and
fittings purchases during the year of $40,000 included additional furniture for
the increase in employees and $15,000 for warehouse security measures.
Cash used in financing activities amounting to $123,000 was used
primarily for the payment of dividends amounting to $562,000, reductions in the
bank overdraft amounting to $314,000 and repayment of capital leases of $71,000.
The generation of $824,000 through trade receivable discounting was brought
about partially through the increase in trade receivables and partially through
a change in banking policy in December 1996. While the Company had only
discounted UK receivables up to December 1996, the change in policy allowed the
Company to additionally discount central European trade receivables. Against
this increase in the discounting creditor the level of the bank overdraft was
reduced and this is reflected by the $314,000 adverse change in the bank
overdraft.
Exchange movements of $254,000 had a favorable effect on cash. This
arises as a result of the year end sterling to dollar exchange rate moving from
(pound)1:$1.5538 as of June 30, 1996, to (pound)1:$1.6643 as of June 30, 1997
and the resulting effect on translating the balance of net assets as of June 30,
1996 together with the retained earnings for the year ended June 30, 1997.
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 microprocessors. The
Company has divided the Plan into five major phases - assessment, planning,
26
<PAGE>
conversion, implementation and testing. The Company completed the assessment and
planning phases in fiscal 1998. During fiscal 1999, the Company has addressed
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 were minimal. European Micro UK and Sunbelt have obtained assurances
from manufacturers of all of its computer equipment, software and other
non-information technology equipment as to whether they are Year 2000 compliant.
The Company believes that all non-compliant software and hardware have been
upgraded or replaced. The Company 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 has evaluated 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 (except Technology Express) 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 believes that Technology
Express is Year 2000 complaint. 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 has formulated
contingency plans to implement in the event these parties fail to address the
Year 2000 problem.
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 effect on the
Company's operations, liquidity or financial condition.
ASSET MANAGEMENT
INVENTORY. The Company's goal is to achieve high inventory turns and
maintain a low inventory level and thereby reduce the Company's working capital
requirements. The Company's strategy to achieve this goal is to effectively
manage its inventory and to achieve high order fill rates. Inventory levels may
vary from period to period, due to factors including increases or decreases in
sales levels, the Company's practice of making large-volume purchases when it
deems such purchases to be attractive, new products and changes in the Company's
product mix.
ACCOUNTS RECEIVABLE. The Company sells its products and services to a
customer base of more than 480 value-added resellers, corporate resellers,
retailers and direct marketers. The Company offers credit terms to qualifying
customers and also sells on a pre-pay and cash-on-delivery basis. With respect
to credit sales, the Company 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. Also, substantially all of European Micro UK's
accounts receivables are insured. Nor'Easter, Colchester and American Micro
generally do not insure their accounts receivable.
CURRENCY RISK MANAGEMENT
REPORTING CURRENCY. European Micro Holding'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. The Company occasionally
hedges to guard against currency fluctuations between the U.K. pound sterling
27
<PAGE>
and the U.S. dollar. Because the functional currency of European Micro Holding's
main operating subsidiary, European Micro UK, is the U.K. pound sterling,
currency fluctuations of the U.K. 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. The Company 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 manages its currency exposure when transactions are
consummated in currency other than United Kingdom pound sterling. For example,
in the year ended June 30, 1999, purchases of inventory by European Micro UK,
were in United States dollars (55%), United Kingdom pound sterling (30%),
Swedish Krona (3%), Euro (9%) and other (3%). The most significant currencies in
which sales were made, other than United Kingdom pound sterling (52%), were the
Euro (30%) United States dollar (10%), Swiss Francs (3%), and other (5%).
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 seven currencies:
Euro, 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 will have on
its continuing business operations and no assurances can be given that the Euro
will not have a material adverse effect on the Company's business, financial
condition and results of operations. However, the Company does not expect the
Euro to have a material effect 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 two quarters of trading, the Euro devalued against sterling by 8.55%,
adversely affecting the value of the Company's trade receivables denominated in
Euros. Going forward, 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.
RELATED PARTY TRANSACTIONS
In order to achieve attractive prices from suppliers, the Company must
commit to purchasing large quantities of product. To accomplish this, the
Company polls all the subsidiaries and Technology Express for informal
commitments to help distribute that product. Thereafter, the purchasing entity,
would obtain the product, examine the product for damage and authenticity, and
then supervise the shipping to the other subsidiaries and the related party. In
such capacity, the purchasing entity acts as a "purchasing agent" for the other
subsidiaries and the related party. In the periods ending June 30, 1999, 1998
28
<PAGE>
and 1997, the Company benefited from low mark-up purchases from the related
parties totaling $16.9 million, $9.3 million and $22.7 million, respectively.
During the same periods, the Company's sales to the related parties were $15.3
million, $29.1 million, and $154,000. These fluctuations are primarily due to
currency fluctuations, product availability and changes in geographic pricing
strategies of manufacturers and suppliers of the Company's products.
On February 2, 1999, the Company's Board of Directors formed a
a special 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 were 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, was the President and a Director of AMCC and owned
fifty percent of its outstanding capital stock. Frank Cruz, who is Chief
Operating Officer of the Company, was an employee of AMCC since 1994. He is
currently an employee of American Micro, the newly-formed, wholly-owned
subsidiary of the Company formed to acquire AMCC. The committee's charter
authorized it to take any action it deemed 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 hired independent legal counsel and an
independent financial advisor. Prior to consummating this transaction, the
Company received an opinion from the independent financial advisor that the
consideration paid in connection with the transaction was fair from a financial
point of view to the Company's shareholders. On July 1, 1999, the Company
acquired AMCC.
The transaction was structured as a merger of AMCC with and into
American Micro, a newly-formed, wholly-owned subsidiary of the Company. Upon
consummation of the merger, this subsidiary's name was changed to American Micro
Computer Center, Inc. The purchase price for AMCC was equal to $940,660, 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 American
Micro in calendar year 1999 and two times the after-tax earnings of American
Micro in calendar year 2000. The portion of the purchase price paid at closing
was funded through the Company's working capital. The earn-out portion of the
purchase price is expected to be funded through the Company's working capital or
the issuance of shares of Common Stock. In addition, the Company assumed all
outstanding indebtedness of AMCC, including a shareholder loan in the
approximate amount of $289,000. This loan is owed to the father of John B.
Gallagher. 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company utilizes derivative financial instruments in the form of
forward exchange contracts for the purpose of economic hedges of anticipated
sale and purchase transactions. In addition, the Company enters into economic
hedges for the purposes of hedging foreign currency market exposures of
underlying assets, liabilities and other obligations which exist as part of its
ongoing business operations. 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.
EXCHANGE RATE SENSITIVITY
The table below summarizes information on foreign currency forward
exchange agreements. The table presents the notional amounts and weighted
average exchange rates by expected (contractual) maturity dates (in thousands
except exchange rates). 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.
29
<PAGE>
EXPECTED
MATURITY OR
TRANSACTION DATE FAIR VALUE
---------------- ----------
FOREIGN CURRENCY EXCHANGE CONTRACTS
JUNE 30, 1999
(Receive (pound)/pay euro) July 9, 1999
Contract amount (pound)1,000 (pound)1,027
Average contractual exchange rate 1.5635 euro /(pound)1
(Receive (pound)/pay euro) July 12, 1999
Contract amount (pound)1,000 (pound)1,015
Average contractual exchange rate 1.546 euro /(pound)1
Foreign currency losses, net were $579,000 in 1999, $510,000 in 1998
and $157,000 in 1997. See "Management's Discussion and Analysis - Fiscal Years
Ended June 30, 1999 and 1998" and "Fiscal Years Ended June 30, 1998 and 1997"
for discussion on the changes:
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The consolidated financial statements of the Company appear beginning
at page F-1. Certain quarterly financial data is set forth below.
<TABLE>
<CAPTION>
($ IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
NET INCOME PER SHARE
JUNE 30, 1999 NET SALES GROSS PROFIT NET INCOME (BASIC AND DILUTED)
- ------------- --------- ------------ ---------- -------------------
First Quarter $29,297 2,945 722 $0.15
Second Quarter 29,011 2,258 24 0.00
Third Quarter 38,465 2,929 22 0.00
Fourth Quarter 35,433 2,954 86 0.02
NET INCOME PER SHARE
JUNE 30, 1998 NET SALES GROSS PROFIT NET INCOME (BASIC AND DILUTED)
- ------------- --------- ------------ ---------- -------------------
First Quarter $24,107 1,839 485 $0.12
Second Quarter 22,002 2,541 669 0.16
Third Quarter 39,130 6,581 2,380 0.59
Fourth Quarter 26,214 3,434 951 0.23
NET INCOME PER SHARE
30
<PAGE>
JUNE 30, 1997 NET SALES GROSS PROFIT NET INCOME (BASIC AND DILUTED)
- ------------- --------- ------------ ---------- -------------------
First Quarter $ 8,696 1,231 287 $0.07
Second Quarter 10,963 1,025 94 0.02
Third Quarter 13,571 1,454 291 0.07
Fourth Quarter 13,425 1,627 362 0.10
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
31
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
ITEM 11. EXECUTIVE COMPENSATION.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information called for by Items 10, 11, 12 and 13 of this Part III
is incorporated herein by reference to the Company's Proxy Statement for its
Annual Meeting of Stockholders to be held on November 15, 1999.
ITEM 14. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1)(2) FINANCIAL STATEMENTS. See index to consolidated financial
statements and supporting schedules.
(a)(3) EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION LOCATION
--- ----------- --------
<S> <C> <C>
2.01 Agreement for the Acquisition of Sunbelt (UK) Incorporated by reference to Exhibit 2.01 to
Limited by European Micro Plc dated October Registrant's Form 10-Q for the quarter ended
26, 1998 September 30, 1998.
2.02 Merger Agreement dated June 29, 1999 by and Provided herewith
among the Company, American Micro, AMCC
and the shareholders of AMCC
2.03 Plan of Merger dated June 29, 1999 Provided herewith
2.04 Articles of Merger dated June 29, 1999 Provided herewith
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 to
Incorporation 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 Stock Employee Stock Purchase Plan Incorporated by reference to Exhibit No. 4.03 to
the Registration Statement.
4.04 Form of Lock-up Agreement Incorporated by reference to Exhibit No. 4.04 to
the Registration Statement.
32
<PAGE>
EXHIBIT
NO. DESCRIPTION LOCATION
--- ----------- --------
10.01 Form of Advice of Borrowing Terms with Incorporated by reference to Exhibit No. 10.01 to
National Westminster Bank Plc the Registration Statement.
10.02 Invoice Discounting Agreement with Lombard Incorporated by reference to Exhibit No. 10.02 to
NatWest Discounting Limited, dated November the Registration Statement.
21, 1996
10.03 Commercial Credit Insurance, policy number Incorporated by reference to Exhibit No. 10.03 to
60322, with Hermes Kreditversicherungs-AG the Registration Statement.
dated August 1, 1995
10.04 Commercial Credit Insurance, policy number Incorporated by reference to Exhibit No. 10.04 to
82692, with Hermes Kreditversicherungs-AG the Registration Statement.
dated August 1, 1995
10.05 Consignment Agreement with European Micro Incorporated by reference to Exhibit No. 10.05 to
Computer B.V., dated January 1996 the Registration Statement.
10.06 Shareholders' Cross-Purchase Agreement by and Incorporated by reference to Exhibit No. 10.07 to
between Jeffrey Gerard Alnwick, Marie Alnwick, the Registration Statement.
European Micro Plc and Big Blue Europe, B.V.
dated August 21, 1997
10.07 Trusteed Shareholders Cross-Purchase Agreement Incorporated by reference to Exhibit No. 10.08 to
by and between John B. Gallagher, Harry D. the Registration Statement.
Shields, Thomas H. Minkoff, Trustee of the
Gallagher Family Trust, Robert H. True and
Stuart S. Southard, Trustees of the Henry
Daniel Shields 1997 Irrevocable Educational
Trust, European Micro Holdings, Inc. and
SunTrust Bank, Nashville, N.A., as Trustee
dated January 31, 1998
10.08 Executive Employment Agreement between John B. Incorporated by reference to Exhibit No. 10.09 to
Gallagher and European Micro Holdings, Inc. the Registration Statement.
effective as of January 1, 1998
10.09 Executive Employment Agreement between Harry Incorporated by reference to Exhibit No. 10.10 to
D. Shields and European Micro Holdings, Inc. the Registration Statement.
effective as of January 1, 1998
10.10 Contract of Employment Agreement between Incorporated by reference to Exhibit No. 10.11 to
Laurence Gilbert and European Micro UK dated the Registration Statement.
March 14, 1998
10.11 Contract of Employment between Bernadette Incorporated by reference to Exhibit No. 10.12 to
Spofforth and European Micro UK dated the Registration Statement.
April 30, 1996
10.12 Subscription Agreement by and between John B. Incorporated by reference to Exhibit No. 10.13 to
Gallagher, Harry D. Shields, Thomas H. the Registration Statement.
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. effective as of January 31, 1998
<PAGE>
EXHIBIT
NO. DESCRIPTION LOCATION
--- ----------- --------
10.13 Administrative Services Contract by and Incorporated by reference to Exhibit No. 10.14 to
between European Micro Holdings, Inc. and the Registration Statement.
European Micro Plc effective as of January 1,
1998
10.14 Escrow Agreement between European Micro Incorporated by reference to Exhibit No. 10.15 to
Holdings, Inc., Tarpon Scurry Investments, the Registration Statement.
Inc. and The Chase Manhattan dated as of March
24, 1998
10.15 Form of Indemnification Agreements with Incorporated by reference to Exhibit No. 10.16 to
officers and directors the Registration Statement.
10.16 Form of Transfer Agent Agreement with Chase Incorporated by reference to Exhibit No. 10.17 to
Mellon Shareholder Services, L.L.C. the Registration Statement.
10.17 Form of Credit Agreement by and between Incorporated by reference to Exhibit No. 10.17 to
European Micro UK and National Westminster the Annual Report on Form 10-K for the fiscal year
Bank Plc ended June 30, 1998 filed with the Commission on
September 28, 1998.
10.18 Consulting Contract dated September 10, 1998 Incorporated by reference to Exhibit 10.19 to
by and between European Micro Holdings, Inc. Registrant's Form 10-Q for the quarter ended
and The Equity Group September 30, 1998.
10.19 Service Agreement dated October 28, 1998 by Incorporated by reference to Exhibit 10.20 to
and between European Micro Holdings, Inc. and Registrant's Form 10-Q for the quarter ended
Michael Gesner September 30, 1998.
10.20 Service Agreement dated October 28, 1998 by Incorporated by reference to Exhibit 10.21 to
and between European Micro Plc and Gerard Registrant's Form 10-Q for the quarter ended
O'Rourke September 30, 1998.
10.21 Employment Agreement dated July 1, 1999 by and Provided herewith.
between American Micro and John B. Gallagher
11.01 Statement re: Computation of Earnings Not applicable.
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 Submitted Not applicable.
to Vote of Security Holders
23.01 Consents of Independent Accountants Provided herewith
24.01 Power of Attorney Not applicable.
27.01 Financial Data Schedule Provided herewith.
(b) REPORTS ON FORM 8-K.
None.
</TABLE>
34
<PAGE>
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereto duly authorized.
Date: September 28, 1999
EUROPEAN MICRO HOLDINGS, INC.
By: /s/ John B. Gallagher
------------------------------
John B. Gallagher
Co-President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ Harry D.Shieldss Co-Chairman; Co-President September 28, 1999
- ------------------------- (Principal Executive Officer);
Harry D.Shieldss Director
/s/ John B. Gallagher Co-Chairman; Co-President September 28, 1999
- ------------------------- (Principal Executive Officer);
John B. Gallagher Director
/s/ Jay Nash Chief Financial Officer and September 28, 1999
- ------------------------- Controller (Principal Financial
Jay Nash Officer and Controller)
/s/ Laurence Gilbert Director September 28, 1999
- -------------------------
Laurence Gilbert
/s/ Bernadette Spofforth Director September 28, 1999
- -------------------------
Bernadette Spofforth
/s/ Kyle R. Saxon Director September 28, 1999
- -------------------------
Kyle R. Saxon
/s/ Barrett Sutton Director September 28, 1999
- -------------------------
Barrett Sutton
<PAGE>
INDEX TO THE FINANCIAL STATEMENTS
EUROPEAN MICRO HOLDINGS, INC.
Independent Auditors' Report F-2
Consolidated Balance Sheets as of June 30, 1999 and 1998 F-3
Consolidated Statements of Operations for the years ended June 30, 1999,
1998 and 1997 F-4
Consolidated Statements of Changes in Shareholders' Equity for the years
ended June 30, 1999, 1998 and 1997 F-5
Consolidated Statements of Cash Flows for the years ended June 30, 1999,
1998 and 1997 F-6
Notes to Consolidated Financial Statements F-7
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and the Shareholders of
European Micro Holdings, Inc.
We have audited the consolidated balance sheets of European Micro Holdings, Inc.
and subsidiaries as of June 30, 1999 and 1998, and the related consolidated
statements of operations, shareholders' equity, and cash flows for each of the
years in the three-year period ended June 30, 1999. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of European Micro
Holdings, Inc. and subsidiaries as of June 30, 1999 and 1998 and the results of
their operations and their cash flows for each of the years in the three-year
period ended June 30, 1999 in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
- --------------------
KPMG LLP
Nashville, Tennessee
August 20, 1999
F-2
<PAGE>
EUROPEAN MICRO HOLDINGS, INC. AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
JUNE 30, 1999 JUNE 30, 1998
-----------------------------
ASSETS
CURRENT ASSETS:
Cash $3,168 $5,012
Restricted Cash 379 -
Trade receivables, net 14,938 7,985
Due from related parties 1,128 898
Inventories, net 7,232 1,715
Prepaid expenses 402 304
Other current assets 562 2,485
------ ------
TOTAL CURRENT ASSETS 27,809 18,399
Property and equipment, net 612 611
Goodwill, net 1,675 -
Investments in and advances to unconsolidated 503 194
subsidiaries ------ ------
TOTAL ASSETS $30,599 $19,204
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short term borrowings $8,614 $-
Trade payables 3,484 1,638
Accrued expenses and other current 2,851 987
liabilities
Due to related parties 633 238
Income taxes payable 383 2,577
------ ------
TOTAL CURRENT LIABILITIES 15,965 5,440
Long term borrowings 23 84
Other liabilities 268 -
------ ------
TOTAL LIABILITIES $16,256 $5,524
------ ------
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 49 49
outstanding, 4,933,900 at 1999 and 1998
Additional paid-in capital 8,979 8,802
Accumulated other comprehensive income (loss) (312) 56
Retained earnings 5,627 4,773
------ ------
TOTAL SHAREHOLDERS' EQUITY 14,343 13,680
------ ------
COMMITMENTS, CONTINGENCIES AND SUBSEQUENT
EVENTS
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $30,599 $19,204
======= =======
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
EUROPEAN MICRO HOLDINGS, INC. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except per share data)
YEARS ENDED JUNE 30,
-----------------------------------
1999 1998 1997
SALES:
Net sales $116,866 $82,361 $46,501
Net sales to related parties 15,340 29,092 154
------- ------- ------
Total net sales 132,206 111,453 46,655
------- ------- ------
COST OF GOODS SOLD:
Cost of goods sold (105,876) (68,380) (41,163)
Cost of goods sold to (15,244) (28,678) (156)
related parties ------- ------- ------
Total cost of goods sold (121,120) (97,058) (41,319)
GROSS PROFIT 11,086 14,395 5,336
-------- ------- ------
OPERATING EXPENSES:
Selling, general and
administrative expenses (9,151) (7,059) (3,230)
Expenses attributable to
related parties - (104) (55)
------- ------ ------
Total operating expenses (9,151) (7,163) (3,285)
------- ------ ------
INCOME FROM OPERATIONS 1,935 7,232 2,051
------- ------ ------
Interest income 147 22 16
Interest expense (446) (459) (309)
Equity in net (loss) income of
unconsolidated subsidiaries (32) 3 (73)
------- ------ ------
INCOME BEFORE INCOME TAXES 1,604 6,798 1,685
------- ------ ------
Income tax expense (750) (2,313) (651)
------- ------ ------
NET INCOME $854 $4,485 $1,034
======= ====== ======
Net income per share - basic $0.17 $1.10 $0.26
======= ====== ======
Net income per share - $0.17 $1.10 $0.26
diluted ======= ====== ======
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
EUROPEAN MICRO HOLDINGS, INC. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER TOTAL
PAID-IN COMPREHENSIVE RETAINED SHAREHOLDERS'
COMMON STOCK CAPITAL INCOME (LOSS) EARNINGS EQUITY
----------------------- ------------- ------------------ ------------- ----------------
Shares Amount
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1996 4,000,000 $40 $115 $4 $1,610 $1,769
Comprehensive Income:
Net income - - - - 1,034 1,034
Other comprehensive income for
foreign currency translation
adjustment - - 11 17 242 270
------------- ------------------ ------------- ----------------
Total comprehensive income - - 11 17 1,276 1,304
Dividends declared
($0.14 per share) - - - - (562) (562)
Capitalization of retained
earnings - - 1,498 - (1,498) -
------------ ---------- ------------- ------------------ ------------- ----------------
Balance at June 30, 1997 4,000,000 $40 $1,624 $21 $826 $2,511
------------ ---------- ------------- ------------------ ------------- ----------------
Comprehensive Income:
Net income - - - - 4,485 4,485
Other comprehensive income
for foreign currency
translation adjustment - - - 35 40 75
------------------ ------------- ----------------
Total comprehensive income - - - 35 4,525 4,560
Dividends declared ($0.14 per share)
- - - - (550) (550)
Issuance of common stock, net of
$2,180 in offering costs 933,900 9 7,150 - - 7,159
Compensation charge in relation to
share options issued to
non-employees - - 28 - (28) -
------------ ---------- ------------- ------------------ ------------- ----------------
Balance at June 30, 1998 4,933,900 $49 $8,802 $56 $4,773 $13,680
------------ ---------- ------------- ------------------ ------------- ----------------
Comprehensive Income:
Net income - - - - 854 854
Other comprehensive income
for foreign currency
translation adjustment - - - (368) - (368)
------------------ ------------- ----------------
Total comprehensive income - - - (368) 854 486
Additional offering costs - - (25) - - (25)
Compensation charge in relation to
share options issued to
non-employees - - 202 - - 202
============ ========== ============= ================== ============= ================
Balance at June 30, 1999 4,933,900 $49 $8,979 $(312) $5,627 $14,343
============ ========== ============= ================== ============= ================
See accompanying notes to consolidated financial statements.
</TABLE>
F-5
<PAGE>
EUROPEAN MICRO HOLDINGS, INC. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
YEARS ENDED JUNE 30,
-----------------------------------
1999 1998 1997
---- ---- ----
OPERATING ACTIVITIES:
Net income $854 $4,485 $1,034
ADJUSTMENTS TO RECONCILE NET INCOME
TO NET CASH (USED IN) PROVIDED BY
OPERATING ACTIVITIES
Depreciation and amortization 323 192 163
Amortization of expense related to
contingent earn-out provisions 112 - -
Deferred income taxes (15) (80) 87
Equity in net loss (income) of
unconsolidated subsidiaries 32 (3) 73
Compensation charge for non-employee 202 - -
stock options
CHANGES IN ASSETS AND LIABILITIES, NET OF
EFFECTS FROM ACQUISITIONS
Restricted cash (379) - -
Trade receivables (3,034) (2,250) (672)
Due from related parties (230) (329) 139
Inventories (5,407) (155) (540)
Prepaid expenses and other current assets 1,840 (2,651) 267
Trade payables (1,139) (400) 1,011
Due to related parties 395 50 (956)
Income taxes payable (2,194) 2,202 (86)
Accrued expenses and other liabilities (168) 585 (273)
------ ------ ------
NET CASH (USED IN) PROVIDED BY OPERATING (8,808) 1,646 247
------ ------ ------
INVESTING ACTIVITIES:
Purchase of fixed assets (155) (596) (195)
Sale of fixed assets 7 175 47
Investment in / advance to (350) - (264)
unconsolidated subsidiaries
Payment for acquisitions, net of cash (720) - -
acquired ------ ------ ------
NET CASH USED IN INVESTING ACTIVITIES (1,218) (421) (412)
------ ------ ------
FINANCING ACTIVITIES:
Short term borrowings 8,614 (3,257) 510
Dividends paid - (550) (562)
Issuance of common stock, net (25) 7,159 -
Repayment of capital leases, net (74) 65 (71)
------ ------ ------
NET CASH PROVIDED BY (USED IN) FINANCING 8,515 3,417 (123)
ACTIVITIES ------ ------ ------
Exchange rate changes (333) 82 254
------ ------ ------
NET INCREASE (DECREASE) IN CASH (1,844) 4,724 (34)
Cash at beginning of year 5,012 288 322
------ ------ ------
CASH AT END OF YEAR 3,168 $5,012 $288
------ ------ ------
F-6
<PAGE>
EUROPEAN MICRO HOLDINGS, INC. AND ITS SUBSIDIARIES
Non-cash investing and financing activities:
Fair value of assets acquired $4,302 - -
Goodwill 1,731 - -
Fair value of liabilities assumed (4,103) - -
Notes issued for consideration - -
(1,083)
------- ------ ------
Cash paid for acquisitions $847 - -
Less cash acquired (127) - -
------- ------ ------
Net cash paid for acquisitions $720 - -
======= ====== ======
Interest paid $513 $478 $290
======= ====== ======
Taxes paid $2,637 $191 $584
======= ====== ======
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
EUROPEAN MICRO HOLDINGS, INC. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1 DESCRIPTION OF BUSINESS
On December 23, 1997, European Micro Holdings, Inc. was incorporated and
4,000,000 shares of common stock with a par value of $0.01 per share were
issued. The 4,000,000 shares were issued to the shareholders of European
Micro Plc in exchange for the entire issued share capital of that Company
on January 31, 1998. The accounts presented in relation to 1997 are those
of European Micro Plc as adjusted to account retroactively for the share
exchange referred to above. European Micro Holdings, Inc. and its
subsidiaries are hereinafter referred to as "European Micro" or "the
Company." The following companies' results of operations and financial
position have been included in the consolidated financial statements as
follows:
COMMENCED
COMPANIES INCORPORATED TRADING ACQUIRED
---------------------------------------
European Micro Holdings, 1997 1998 -
Inc.
Nor'Easter Micro Inc. 1997 1998 -
European Micro Plc 1991 1992 -
European Micro GmbH 1993 1993 -
European Micro BV 1997 1997 -
Colchester Enterprise Pte. 1998 1999 -
Ltd.
Sunbelt (UK) Limited - - October 26, 1998
European Micro operates in a single industry trading computer components.
In principle the Company purchases components from international
suppliers, including related parties, and sells them in local markets. The
main trading company, European Micro Plc, has its principal operations in
Altrincham, England with its subsidiaries operating in Wimbledon, England,
Germany and Holland. Nor'Easter Micro Inc. has its operations in Seabrook,
New Hampshire. Colchester Enterprise Pte. Ltd. has its operations in
Singapore.
The parent company holds a 50% interest in a joint venture company, Big
Blue Europe BV. Big Blue Europe BV commenced operations in January 1997
and has been included in these consolidated financial statements under the
equity method of accounting. Big Blue Europe BV operates in the same
industry as the Company.
2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The major accounting policies followed in the preparation of the
consolidated financial statements referred to above are set out below:
PRINCIPLES OF CONSOLIDATION
The consolidated results of the Company are in accordance with accounting
principles generally accepted in the United States and include the results
of operations of its wholly owned subsidiaries which it controls. All
significant intercompany balances and transactions are eliminated in
consolidation.
The Company's investment in Big Blue Europe BV is accounted for under the
equity method.
F-8
<PAGE>
EUROPEAN MICRO HOLDINGS, INC. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Property and equipment held
under capital leases are stated at the present value of minimum lease
payments at the inception of the related leases. Depreciation is
calculated using the straight line method over their estimated useful
lives as follows: Furniture, fixtures & equipment, 2-7 years and motor
vehicles and other, 4 years. Property and equipment held under capital
leases are amortized on a straight-line basis over the shorter of the
lease term or estimated useful life of the assets.
The costs of ordinary maintenance and repairs are charged to expense as
incurred.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews long-lived assets and certain identifiable intangibles
for impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying
amount of an asset to future net cash flows expected to be generated by
the asset. If such assets are considered to be impaired, the impairment to
be recognized is measured by the amount by which the carrying amount of
the assets exceed the fair value of the assets. Assets to be disposed of
are reported at the lower of the carrying amount or fair value less costs
to sell.
INVENTORIES
Inventories are stated at the lower of cost or market value. Cost is
determined using the weighted average cost method.
GOODWILL
Goodwill, which represents the excess of purchase price over fair value of
net assets acquired, is amortized on a straight-line basis over the
expected periods to be benefited, generally 20 years. The Company assesses
the recoverability of this intangible asset by determining whether the
amortization of the goodwill balance over its remaining life can be
recovered through undiscounted future operating cash flows of the acquired
operation. The amount of goodwill impairment, if any, is measured based on
projected discounted future operating cash flows using a discount rate
reflecting the Company's average cost of funds. The assessment of the
recoverability of goodwill will be impacted if estimated future operating
cash flows are not achieved.
INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
FINANCIAL INSTRUMENTS
The Company enters into foreign currency exchange contracts to reduce
exposure to foreign currency fluctuations associated with the settlement
of inter-company receivables and payables denominated in foreign
currencies. Foreign exchange contracts generally have maturities of less
than one year and are accounted for on the fair value method. Gains and
losses resulting from these instruments are recognized in the same period
as the underlying foreign currency transaction gains and losses and are
included in cost of sales. The Company does not use foreign currency
exchange contracts or other derivative financial instruments for
speculative or trading purposes. The fair value of the Company's foreign
exchange contracts at June 30, 1999 was $3,225,000 versus a notional
amount of $3,159,000.
F-9
<PAGE>
EUROPEAN MICRO HOLDINGS, INC. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FINANCIAL INSTRUMENTS (CONTINUED)
The Company has other financial instruments consisting of cash and cash
equivalents, trade receivables, accounts payable, and borrowings. The fair
value of the Company's financial instruments based on current market
indicators or quotes from brokers approximates their carrying amount.
FOREIGN CURRENCY
Revenues, costs and expenses of the Company's international operations
denominated in foreign currencies are translated to U.S. dollars at
average rates of exchange prevailing during the year. Realized and
unrealized gains and losses on foreign currency transactions and forward
exchange contracts are included in cost of sales. Assets and liabilities
are translated at the exchange rate on the balance sheet date. Translation
adjustments resulting from this process are accumulated and reported in
shareholders' equity.
STOCK OPTION PLANS
The Company accounts for its compensation and stock option plans in
accordance with the provisions of Accounting Principals Board ("APB")
Option No. 25, Accounting for Stock Issued to Employees, and related
interpretations. As such, compensation expense would be recorded on the
date of grant only if the current market price of the underlying stock
exceeded the exercise price. In accordance with the SFAS No. 123,
Accounting for Stock-Based Compensation, the Company provides pro forma
net income and pro forma earnings per share disclosures for employee stock
option grants made in 1998 and subsequent years as if the fair value based
method defined in SFAS No. 123 had been applied.
RELATED PARTY TRANSACTIONS
For the purpose of the accompanying consolidated financial statements,
shareholders and all companies in which there is direct or indirect
ownership by the shareholders of the consolidated companies are considered
as related parties.
REVENUE AND EXPENSE RECOGNITION
Revenues are recognized at the time the goods are shipped. Revenues from
related parties are recognized when the products are sold by the related
parties to third parties. Discount and customer rebates are deducted from
sales revenue when earned. Costs of goods sold include material costs
only. Selling, general and administrative costs are charged to expense as
incurred.
COMPREHENSIVE INCOME
Effective July 1, 1997, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
130"). SFAS 130 establishes standards for reporting the components of
comprehensive income and requires that all items which are required to be
recognized under accounting standards as components of comprehensive
income be included in a financial statement that is displayed with the
same prominence as other financial statements. Comprehensive income
includes net income as well as certain items that are reported directly
within a separate component of shareholders' equity and bypass net income.
The adoption of SFAS 130 had no impact on the Company's financial
condition or results of operation.
USE OF ESTIMATES
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these consolidated financial
statements in conformity with generally accepted accounting principles.
Actual results could differ from those estimates.
F-10
<PAGE>
EUROPEAN MICRO HOLDINGS, INC. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EARNINGS PER SHARE
Basic earnings per share is computed based on the weighted average shares
outstanding and excludes any potential dilution. Diluted earnings per
share reflects the potential dilution from the exercise or conversion of
all dilutive securities into common stock based on the average market
price of common shares outstanding during the period.
On incorporation of European Micro Holdings, Inc. in December 1997,
4,000,000 ordinary shares were issued with par value $0.01 per share. The
4,000,000 shares were issued to the shareholders of European Micro Plc in
exchange for the entire issued share capital of that company on January
31, 1998. The weighted average number of shares used in calculating
earnings per share has been retroactively adjusted to reflect the issued
and outstanding ordinary shares of European Micro Holdings, Inc. as
4,000,000 shares for 1997.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the
current year presentation.
NEW ACCOUNTING PRONOUNCEMENTS
SEGMENT INFORMATION
The Company adopted SFAS No. 131 "Disclosures about Segments of an
Enterprise and Related Information" in 1999. The statement requires that
companies disclose segment data based on how management make decisions
about allocating resources to segments and measuring their performance.
The statement also requires entity-wide disclosures about the products and
services an entity provides, the material countries in which it holds
assets and reports revenues and its major customers.
DERIVATIVE INSTRUMENTS
SFAS No. 133, "Accounting for Derivate Instruments and Hedging
Activities," was issued in June 1998 and as amended by SFAS No. 137, is
effective for fiscal years beginning after June 15, 2000. The standard
establishes accounting and reporting standards for derivative instruments
and hedging activities.
The Company is currently reviewing the likely financial statement impact
and the level of disclosure currently provided in its financial
statements.
3 TRADE RECEIVABLES, NET
Trade receivables consist of the following (in thousands):
JUNE 30,
------------------------
1999 1998
---- ----
Total trade receivables $15,017 $8,008
Less: Allowance for doubtful (79) (23)
receivables ---- ----
$14,938 $7,985
------- ------
Trade receivables in the amount of $8,274,000 are pledged as collateral
against borrowings (see note 9).
F-11
<PAGE>
EUROPEAN MICRO HOLDINGS, INC. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3 TRADE RECEIVABLES, NET (CONTINUED)
A roll forward of the allowance for doubtful trade receivables is as follows
(in thousands):
June 30,
-----------------------------
1999 1998
---- ----
Balance at beginning of year $23 $5
Sunbelt acquisition 11 -
Provision for bad debt 56 18
Amounts written off (11) -
------ -------
Balance at end of year $79 $23
====== =======
4 INVENTORIES
Inventories consist of the following (in thousands):
June 30,
-----------------------------
1999 1998
---- ----
Finished goods and goods for resale $7,348 $1,724
Less: Allowance for inventory (116) (9)
obsolescence ------ -------
$7,232 $1,715
====== =======
A roll forward of allowance for obsolescence is as follows (in thousands):
JUNE 30,
-----------------------------
1999 1998
---- ----
Balance at beginning of year $9 $35
Provision for obsolescence 602 248
Amounts written off (495) (274)
------ -------
Balance at end of year $116 $9
====== =======
5 OTHER CURRENT ASSETS
Other current assets consists of the following (in thousands):
JUNE 30,
------------------------------
1999 1998
---- ----
Amounts paid in advance for $0 $2,015
inventories
Other 562 470
------ -------
Total other current assets $562 $2,485
====== =======
F-12
<PAGE>
EUROPEAN MICRO HOLDINGS, INC. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6 PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
JUNE 30,
------------------------
1999 1998
---- ----
Furniture, fixtures and equipment $994 $782
Vehicles and other 416 328
------ ------
1,410 1,110
Less: accumulated depreciation (798) (499)
NET BOOK VALUE $612 $611
====== ======
At June 30, 1999 and 1998, vehicles with a cost of approximately $248,000
and $253,000, and accumulated depreciation of approximately $117,000 and
$52,000 respectively, were held under capital leases.
Depreciation expense was $267,000, $192,000 and $163,000 for the years
ended June 30, 1999, 1998, and 1997, respectively.
7 GOODWILL
On October 26, 1998, European Micro Plc acquired all of the outstanding
shares of capital stock of Sunbelt (UK) Limited ("Sunbelt"). 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 $1.48 million at exchange rate
on June 30, 1999). Of this guaranteed amount, approximately 360,000 pounds
sterling (approximately $569,000 at exchange rate on June 30, 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 240,163 pounds sterling ($379,000 at exchange
rate on June 30, 1999) to be repaid in November 2005, subject to early
repayment at the option of the note holder at any time after June 1, 1999.
Such note payable is secured by a cash account of equal amount at June 30,
1999. The note payable and the cash balances are reflected on the
accompanying consolidated balance sheet at June 30, 1999, in restricted
cash and accrued expenses and other current liabilities, respectively. 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 remainder of the unpaid guaranteed consideration of approximately
339,614 pounds sterling ($536,000 at exchange rate on June 30, 1999), plus
accrued interest, is to be paid in equal installments within nineteen (19)
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 accrued expenses and other current liabilities and other
liabilities on the accompanying consolidated balance sheet at June 30,
1999.
F-13
<PAGE>
EUROPEAN MICRO HOLDINGS, INC. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7 GOODWILL (CONTINUED)
The maximum contingent earn-out payments in the aggregate are two times
Sunbelt's fiscal year 1998 pre-tax earnings of 424,518 pounds sterling
($1.3 million at exchange rate on June 30, 1999). The first contingent
payment of up to 424,518 pounds sterling ($670,000 at exchange rate on
June 30, 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 424,518 pounds sterling ($670,000
at exchange rate on June 30, 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 ($168,000 at exchange rate on June 30, 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 ($168,000 at exchange rate on June 30, 1999), has been recognized
by the Company, and is reflected in goodwill, net and accrued expenses and
other current liabilities. The remaining portion of the first contingent
earn-out payment of approximately 212,260 pounds sterling ($335,000 at
exchange rate on June 30, 1999) and the second contingent earn-out payment
have not been recognized in the accompanying consolidated financial
statements as the payment of such amounts are not, in the opinion of
management, determinable beyond a reasonable doubt.
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 1,072,000 pounds sterling plus the
earned portion of the contingent earn-out of approximately 106,000 pounds
sterling for a total of 1,178,000 pounds sterling ($1,748,000 at exchange
rate on June 30, 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. Purchase accounting adjustments are preliminary as actual
1998 pre-tax earnings have not been finalized.
On November 12, 1998, European Micro Plc acquired the assets of H&B
Trading International BV ("H&B"). The acquisition of H&B was accounted for
as a purchase. The base purchase price, subject to adjustment, of
approximately 125,000 Dutch guilders ($72,000 at exchange rate on June 30,
1999) exceeded the estimated value of net assets acquired by approximately
85,000 Dutch guilders ($53,000 at exchange rate on June 30, 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 June 30, 1999) and 75,000 Dutch
guilders ($35,000 at exchange rate on June 30, 1999), respectively, will
be paid. The financial criteria for the period ended June 30, 1999 was not
met, therefore, the additional consideration was not accrued or paid.
Also, the year 2000 contingent consideration has not been reflected in the
accompanying consolidated condensed financial statements either. The
results of operations of H&B have been included in the accompanying
financial statements from the date of acquisition.
F-14
<PAGE>
EUROPEAN MICRO HOLDINGS, INC. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7 GOODWILL (CONTINUED)
The following summarized unaudited pro forma financial information assumes
the acquisition of Sunbelt occurred on July 1, 1997 ($ in thousands,
except share data):
YEARS ENDED JUNE 30,
--------------------------------
1999 1998
---- ----
Total net sales $137,960 $128,291
Net income $1,149 $4,645
Earnings per share:
Basic $0.23 $1.14
Diluted $0.23 $1.14
The pro forma 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.
A roll forward of goodwill is as follows (in thousands):
Year Ended
June 30, 1999
--------------
Balance at beginning of year $-
Additions 1,731
Amortization (56)
------
Balance at end of year $1,675
======
8 INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED SUBSIDIARIES
During the year ended June 30, 1997 the Company purchased 50% of the
issued share capital in Big Blue Europe BV. Big Blue Europe BV commenced
trading in January 1997. A roll forward of the investment is as follows
(in thousands):
YEARS ENDED JUNE 30,
------------------------
1999 1998
---- ----
Cost of investment in and advances to
unconsolidated $194 $191
subsidiaries brought forward
Foreign currency translation adjustment (9) -
Equity in net (loss) income of (32) 3
unconsolidated subsidiaries
Advance 350 -
---- ----
Investment in and advances to unconsolidated
subsidiaries at end of year $503 $194
==== ====
The equity share of (loss) income is based on the results of Big Blue
Europe BV. A summarized statement of earnings for Big Blue Europe BV for
fiscal years 1999 and 1998 and the period ended June 30, 1997 is set out
below (in thousands):
F-15
<PAGE>
EUROPEAN MICRO HOLDINGS, INC. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8 INVESTMENTS (CONTINUED)
PERIOD
YEARS ENDED ENDED
JUNE 30, JUNE 30,
----------------------
1999 1998 1997
---- ---- ----
Net sales $4,101 $1,910 $465
Cost of goods sold (3,068) (1,394) (354)
------- ------- -----
Gross profit 1,033 516 111
Operating expenses (1,133) (507) (325)
------- ------- -----
Income before income taxes (100) 9 (214)
Taxes on income 36 (3) 68
------- ------- -----
NET (LOSS) INCOME $(64) $6 (146)
------- ------- -----
Equity in net (loss) income of $(32) $3 $(73)
unconsolidated subsidiary ======= ======= =====
9 SHORT TERM BORROWINGS
Short term borrowings consists of the following (in thousands):
JUNE 30,
-------------------------
1999 1998
---- ----
Bank Line of Credit $1,581 $-
Receivable Financing 7,033 -
------ ------
Total short term borrowings $8,614 $-
====== ======
The bank line of credit is secured by a mortgage debenture on all the
assets of the Company and is subordinate to the receivable financing and
the capital leases. The bank line of credit is subject to review in July
each year. The facility available to the Company at June 30, 1999 was
$1,900,000. The Company is currently negotiating an extension of the line
of credit. Interest is charged on the bank line of credit at 1.25% over
the bank borrowing rate of 5% at June 30, 1999 and 7% at June 30, 1998.
The Company also had a revolving credit agreement, secured against
inventory. The facility allowed the Company to borrow up to $5,500,000 to
assist in the purchase of inventory. To date, no borrowings have been
drawn down on the $5,500,000 line. The Company is currently negotiating an
extension of the revolving credit agreement.
Receivables' financing represents the amount borrowed, which is secured by
various trade receivables totaling $8,274,000 at June 30, 1999. Trade
receivables can be financed up to the lower of 85% of the value of the
trade receivables balance or $8,686,000 at June 30, 1999 and $6,388,000 at
June 30, 1998. The facility is reviewed annually in November of each year.
The finance company which provides the receivable financing facility has
full recourse to the Company with respect to any doubtful or unrecovered
amounts. Interest is charged on the receivable financing balance at 1.25%
above the bank borrowing rate of 5% at June 30, 1999, and 7% at June 30,
1998.
F-16
<PAGE>
EUROPEAN MICRO HOLDINGS, INC. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10 TAXES ON INCOME
Income tax expense consists of the following (in thousands):
YEARS ENDED JUNE 30,
-------------------------------
1999 1998 1997
---- ---- ----
Current
Federal and State - - -
Foreign 765 2,393 564
Deferred
Federal and State - - -
Foreign (15) (80) 87
---- ----- ---
Total income tax expense 750 2,313 651
==== ===== ===
Provision has not been made for U.S. or additional foreign taxes on
approximately $4,652,000 and $5,613,000 at June 30, 1998 and 1999,
respectively, of undistributed earnings of foreign subsidiaries, as those
earnings are intended to be permanently reinvested.
A reconciliation between actual income taxes and amounts computed by
applying the federal statutory rate of 34% to earnings before income taxes
is summarized as follows (in thousands):
YEAR ENDED JUNE 30,
-----------------------------
1999 1998 1997
---- ---- ----
US federal statutory rate on
earnings before income taxes 545 2,311 573
before income taxes
Difference in foreign versus
U.S. federal income tax rate 43 (204) (17)
Change in valuation allowance 74 - -
Foreign non -deductible expenses 88 206 95
--- ----- ---
Income tax expense 750 2,313 651
=== ===== ===
F-17
<PAGE>
EUROPEAN MICRO HOLDINGS, INC. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. TAXES ON INCOME (CONTINUED)
Sources of deferred tax assets are as follows (in thousands):
JUNE 30,
------------------------
1999 1998
DEFERRED TAX ASSETS:
Property and equipment, principally
due to differences in depreciation 42 26
Net operating loss carry forwards 64 --
Other 9 --
---- ----
Total gross deferred tax assets 115 26
Valuation allowance (74) --
---- ----
Net deferred tax assets 41 26
==== ====
The Company has U.S. federal net operating loss carryforwards of
approximately $161,000 which will begin to expire in 2019. Management
believes that it is more likely than not that the results of operations
will generate sufficient taxable income to realize deferred tax assets
after giving consideration to the valuation allowance. The valuation
allowance has been provided for U.S. deferred tax assets as recoverability
is not deemed to be more likely than not.
11 COMMITMENTS AND CONTINGENCIES
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on
the Company's consolidated financial position, results of operations, or
liquidity.
The Company leases offices and certain equipment under non-cancelable
operating leases and vehicles under capital leases. Future minimum lease
payments under non-cancelable operating leases and capital leases as of
June 30, 1999 in aggregate for each of the five succeeding years is as
follows (in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
------- ---------
<S> <C> <C>
2000 $62 $93
2001 26 78
2002 - 78
2003 - 55
2004 and thereafter - 215
------ ------
Total minimum lease payments $88 $519
------ ======
Less amount representing (8)
interest at rates ranging
from 7.0% to 9.9%
------
</TABLE>
F-18
<PAGE>
EUROPEAN MICRO HOLDINGS, INC. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11 COMMITMENTS AND CONTINGENCIES (CONTINUED)
Present value of net minimum capital lease payments 80
Current portion, included in accrued expenses and (57)
other current liabilities ----
Total obligations under capital leases excluding $23
current portion ====
Rental expense for the years ended June 30, 1999, 1998 and 1997 was
$180,000, $136,000, and $78,000, respectively.
12 FOREIGN EXCHANGE CONTRACTS
The Company utilizes derivative financial instruments in the form of
forward exchange contracts for the purpose of economic hedges of
anticipated sale and purchase transactions. In addition the Company enters
into economic hedges for the purposes of hedging foreign currency market
exposures of underlying assets, liabilities and other obligations which
exist as part of its ongoing business operations.
Where the foreign currency exposure is covered by a forward foreign
exchange contract the asset, liability or other obligation is recorded at
the contracted rate each month end and the resultant mark-to-market gains
and losses are recognized as cost of sales in the current period,
generally consistent with the period in which the gain or loss of the
underlying transaction is recognized. Cash flows associated with
derivative transactions are classified in the statement of cash flows in a
manner consistent with those of the exposure being hedged.
EXCHANGE RATE SENSITIVITY
The table below summarizes information on foreign currency exchange
contracts. The table presents the notional amounts and weighted average
exchange rates by expected (contractual) maturity dates (in thousands
except exchange rates).
EXPECTED
MATURITY OR
TRANSACTION DATE FAIR VALUE
---------------- ----------
FOREIGN CURRENCY EXCHANGE
CONTRACTS
JUNE 30, 1999
(Receive(pound)/pay Euro) July 9, 1999
Contract amount (pound)1,000 (pound)1,027
Average contractual
exchange rate 1.5635 Euro/(pound)1
(Receive(pound)/pay Euro) July 12, 1999
Contract amount (pound)1,000 (pound)1,015
Average contractual
exchange rate 1.546 Euro/ (pound)1
F-19
<PAGE>
EUROPEAN MICRO HOLDINGS, INC. AND ITS SUBSIDIARIES
Notes to the Consolidated Financial Statements (continued)
12 FOREIGN EXCHANGE CONTRACTS (CONTINUED)
EXCHANGE RATE SENSITIVITY (CONTINUED)
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.
Foreign exchange losses, net were $579,000, $510,000 and $157,000 for
years ending June 30, 1999, 1998 and 1997, respectively.
13 RELATED PARTY INFORMATION
RELATED PARTY TRANSACTIONS
The Company has belonged to a group of related companies called Micro
Computer Center Group (the "Group"). The Group is comprised of the Company
and its subsidiaries, 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 the Company, John B. Gallagher and/or Harry D. Shields and their
families.
The rates charged on related party sales are lower than they would be in
arms length transactions. There are bulk buying arrangements with the
related parties which gives the Company the benefit that it can buy large
job-lots at more competitive prices than it would otherwise be possible to
do and then immediately sell part of the purchase to the related parties.
In practical terms, the sales to related parties are to the distributors
in a similar trade to the Company and these parties would not buy at
higher prices.
Related party transactions are summarized as follows (in thousands):
YEARS ENDED JUNE 30,
-------------------------------
1999 1998 1997
---- ---- ----
SALES
American Micro Computer Center $7,356 $9,875 $66
Technology Express 7,984 19,217 (2)
Ameritech Argentina - - 90
------ ------ ------
$15,340 $29,092 $154
====== ====== ======
PURCHASES
American Micro Computer Center $1,339 $507 $1,092
Technology Express 15,559 8,749 20,717
Ameritech Exports - - 848
------ ------ ------
$16,898 $9,256 $22,657
====== ====== ======
F-20
<PAGE>
EUROPEAN MICRO HOLDINGS, INC. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13 RELATED PARTY INFORMATION (CONTINUED)
RELATED PARTY TRANSACTIONS (CONTINUED)
OPERATING EXPENSES
CONSULTANCY FEES
American Micro Computer Center $- $45 $60
Technology Express - 45 60
------ ------ ------
- 90 120
------ ------ ------
Management fees
Technology Express - 14 16
------ ------ ------
Recharged consultancy fees
American Micro Computer Center - - (27)
Technology Express - - (27)
Ameritech Argentina - - (13)
Ameritech Exports - - (14)
------ ------ ------
- - (81)
------ ------ ------
$- $104 $55
====== ====== ======
"Recharged consultancy fees" represent the consultancy fees charged by Mr.
Gilbert to European Micro Plc, before he was appointed as a director of
the same, which have been recharged to the related companies on the basis
of the work completed by Mr. Gilbert with respect to those related
parties.
DUE FROM/TO RELATED PARTIES
a) Due from related parties consists of the following (in thousands):
JUNE 30,
-----------------------
1999 1998
---- ----
American Micro Computer Center $974 $54
Technology Express 154 844
------ ----
$1,128 $898
====== ====
F-21
<PAGE>
EUROPEAN MICRO HOLDINGS, INC. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13 RELATED PARTY INFORMATION (CONTINUED)
DUE FROM/TO RELATED PARTIES (CONTINUED)
b) Due to related parties consists of following (in thousands):
JUNE 30,
-------------------------
1999 1998
---- ----
American Micro Computer Center $3 $12
Technology Express 630 226
---- ----
$633 $238
==== ====
FACILITIES AND EQUIPMENT
The Company utilizes approximately 700 square feet of office space and
certain equipment owned or leased by Technology Express and American Micro
Computer Center for which it is not charged a fee.
NATURE OF RELATED PARTY RELATIONSHIPS
The entities listed above are related to the company in the following
manner:
AMERICAN MICRO COMPUTER CENTER
American Micro Computer Center is a distributor of computer hardware based
in Miami, Florida. John B. Gallagher who is Co-Chairman, Co-President,
Director and shareholder (owning 39% of the outstanding shares after the
Company's initial public offering ("Offering")) in the company was the
president of American Micro Computer Center and owned 50% of the stock in
that company. See note 17.
TECHNOLOGY EXPRESS, INC.
Until 1996, Technology Express, Inc. was a full service authorized
reseller of computers and related products based in Nashville, Tennessee,
selling primarily to end-users. Technology Express, Inc. was sold to
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 after the Offering) of European
Micro is president of Technology Express and owns 100% of the outstanding
shares of common stock of that company.
AMERITECH ARGENTINA SA
Ameritech Argentina SA is an authorized distributor of Compaq, Hewlett
Packard, IBM and Acer computers and accessories in Argentina. Messrs.
Shields and Gallagher were both Directors of Ameritech Argentina SA and
owned 50% of the outstanding shares of common stock each until its sale on
August 1, 1997.
AMERITECH EXPORTS INC.
Ameritech Exports Inc. is an authorized distributor of Compaq computers
and accessories into Caribbean and certain parts of central and South
America. Messrs. Shields and Gallagher were both Directors of Ameritech
Exports Inc. and owned 50% of the outstanding shares of common stock each
until its sale on August 1, 1997.
F-22
<PAGE>
EUROPEAN MICRO HOLDINGS, INC. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14 SEGMENT INFORMATION
The Company operates predominately in a single industry segment as a
wholesale distributor of computer-based technology products and services.
Geographic areas in which the Company operates include North America
(United States and Canada), Europe (Austria, Belgium, Denmark, Finland,
France, Germany, Great Britain, Greece, Holland, Ireland, Italy,
Luxembourg, the Netherlands, Portugal, Spain, and Sweden), and Other
(Singapore). The Company's reportable operating segments are based on
geographic location generating the revenue, and the measure of segment
profit is income from operations. The accounting policies of the segments
are the same as those described in Note 2 - Summary of Significant
Accounting Policies.
Financial information by geographic segments is as follows (in thousands):
YEARS ENDED JUNE 30,
--------------------------------------------
1999 1998 1997
---- ---- ----
NET SALES:
North America $ 48,994 $ 3,559 $ -
Europe 70,262 107,894 46,655
Other 12,950 - -
-----------------------------------------
Total $ 132,206 $ 111,453 $ 46,655
-----------------------------------------
INCOME (LOSS) FROM
OPERATIONS:
North America $ (1,293) $ (212) $ -
Europe 3,340 7,444 2,051
Other (112) - -
-----------------------------------------
Total $ 1,935 $ 7,232 $ 2,051
-----------------------------------------
IDENTIFIABLE ASSETS:
North America $ 10,594 $ 8,645 $ -
Europe 19,334 10,559 8,844
Other 671 - -
-----------------------------------------
Total $ 30,599 $ 19,204 $ 8,844
-----------------------------------------
The following table summarizes purchases from major suppliers in excess of
10% for the period as a percentage of total purchases:
YEARS ENDED JUNE 30,
------------------------------
1999 1998 1997
---- ---- ----
Related party
Technology Express 12.7% - 51.1%
Third parties
Supplier A 10.3% 38.9% -
B - 14.0% -
C - 10.0% -
D 10.9% - -
F-23
<PAGE>
EUROPEAN MICRO HOLDINGS, INC. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14 SEGMENT INFORMATION (CONTINUED)
The following table summarizes sales to major customers (sales in excess
of 10% for the period) as a percentage of total sales:
YEARS ENDED JUNE 30,
------------------------------
1999 1998 1997
---- ---- ----
RELATED PARTY
Technology Express - 17.2% -
The Company did not have any customers with sales in excess of 10% as a
percentage of total sales in the years ended June 30, 1999 or 1997.
15 STOCKHOLDERS' EQUITY, STOCK OPTIONS AND INCENTIVE PLANS
CAPITALIZATION OF RETAINED EARNINGS
In December 1996 retained earnings amounting to $1,498,000 were
capitalized as Additional paid-in capital, pursuant to the requirements to
re-register the main trading company European Micro Plc as a plc company
in the United Kingdom.
EMPLOYEE STOCK PURCHASE PLAN
In January 1998, European Micro Holdings, Inc. adopted the 1998 Employee
Stock Purchase Plan ("the employee plan"). A total of 50,000 common shares
have been reserved for issuance under the plan. The shares issued under
the employee plan will be purchased at 85% of market value or such higher
percentage (not in excess of 100%) as may be established by the employee
plan committee. The employee plan shall remain in effect until terminated
by an action of the Board. No shares had been issued at June 30, 1999.
STOCK INCENTIVE PLAN
In January 1998, European Micro Holdings, Inc. adopted the 1998 Stock
Incentive Plan (the "Plan"). A total of 500,000 common shares have been
reserved for issuance under the Plan. The committee may grant to such
participants as the committee may select options entitling the
participants to purchase shares of common stock for the Company in such
numbers, at such prices and on such terms and subject to such conditions,
consistent with the terms of the Plan, as may be established by the
committee. The Plan shall remain in effect until terminated by an action
of the Board.
The per share weighted average fair value of stock options granted during
1999 and 1998 were $8.09 and $6.31, respectively. The preceding results
were calculated with the use of the Black-Scholes option-pricing model.
The assumptions were used for the years ended June 30, 1999 and 1998,
respectively: (1) risk-free interest rates of 4.68% and 5.5%; (2) dividend
yield of 0.0%; (3) expected lives of 7 years; and (4) volatility of 84%
and 57%. Results may vary depending on the assumptions applied within the
model.
The Company applies APB Opinion No. 25 in accounting for its plan and,
accordingly, no compensation cost has been recognized for its stock
options issued to employees with a stock price at market value on the date
of grant in the consolidated financial statements. Had the Company
determined compensation cost based on the fair value of the date of grant
for its stock options under SFAS No. 123, the Company's net income would
have been reduced to the pro forma amounts indicated below (in thousands,
except per share data):
F-24
<PAGE>
EUROPEAN MICRO HOLDINGS, INC. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15 STOCKHOLDERS' EQUITY, STOCK OPTIONS AND INCENTIVE PLANS (CONTINUED)
STOCK INCENTIVE PLAN (CONTINUED)
YEARS ENDED JUNE 30,
-----------------------------------------
1999 1998 1997
---- ---- ----
NET INCOME:
As reported $854 $4,485 $1,034
Pro forma $466 $4,431 $1,034
EARNINGS PER SHARE - BASIC:
As reported $0.17 $1.10 $0.26
Pro forma $0.09 $1.09 $0.26
EARNINGS PER SHARE - DILUTED:
As reported $0.17 $1.10 $0.26
Pro forma $0.09 $1.08 $0.26
Compensation cost arising during the year ended June 30, 1999 and June 30,
1998 in relation to stock options granted to non-employees during the year
amounted to $202,000 and $28,000, respectively. The vesting period for
stock options granted to non-employees varies between 1 and 6 years.
A summary of the Company's stock option plan is as follows:
1999 1998
------------------------------------------
WEIGHTED WEIGHTED
AVERAGE NUMBER AVERAGE
NUMBER OF EXERCISE OF EXERCISE
SHARES PRICE SHARES PRICE
Outstanding at beginning of 294,000 $10.00 -
year
Granted 45,000 $10.51 294,000 $10.00
Exercised - -
Forfeited - -
------- -------
OUTSTANDING AT YEAR END 339,000 $10.07 294,000 $10.00
Available for grant at year 161,000 206,000
end
F-25
<PAGE>
EUROPEAN MICRO HOLDINGS, INC. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15 STOCKHOLDERS' EQUITY, STOCK OPTIONS AND INCENTIVE PLANS (CONTINUED)
OPTIONS OUTSTANDING (CONTINUED)
A summary of the options outstanding at June 30, 1999 is presented below:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------------------------------------
NUMBER WEIGHTED WEIGHTED NO. WEIGHTED
RANGE OF OUTSTANDING AVERAGE AVERAGE EXERCISABLE AVERAGE
EXERCISE AT 6/30/99 REMAINING EXERCISE AT 6/30/99 EXERCISE
PRICES LIFE PRICE PRICE
$9.1875 - $12.00 339,000 8.9 $10.07 45,000 $10.00
16 EARNINGS PER SHARE
YEARS ENDED JUNE 30,
--------------------------------
EARNINGS 1999 1998 1997
---- ---- ----
Net income (in thousands) $854 $4,485 $1,034
==== ====== ======
WEIGHTED AVERAGE NUMBER OF SHARES
Outstanding common stock during 4,933,900 4,066,524 4,000,000
the period
Contingently issuable shares 44,714 - -
--------- --------- ---------
Basic weighted average number of 4,978,614 4,066,524 4,000,000
shares
Effect of dilutive stock options
and other contingent shares 11,347 20,942 -
--------- --------- ---------
DILUTED WEIGHTED AVERAGE NUMBER 4,989,961 4,087,466 4,000,000
OF SHARES ========== ========== =========
Basic earnings per share $0.17 $1.10 $0.26
========== ========== =========
Diluted earning per share $0.17 $1.10 $0.26
========== ========== =========
During the year-ended June 30, 1999, the Company issued options to
purchase 45,000 shares of its common stock at exercise prices ranging from
$9.19 to $12.00. The above dilutive earnings per share calculations in the
year-ended June 30, 1999 exclude the effect of options to purchase 30,000
shares of common stock at exercise prices ranging from $10.25 to $12.00
per share because they were anti-dilutive. Also see Note 7 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. 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 June 30, 1999.
F-26
<PAGE>
EUROPEAN MICRO HOLDINGS, INC. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17 SUBSEQUENT EVENTS (UNAUDITED)
On February 2, 1999, the Company's Board of Directors formed an
Acquisition Committee consisting solely of independent directors to
evaluate and determine whether the Company should acquire American Micro
Computer Center and, if so, on what terms. The members of the committee
are Kyle R. Saxon and Barrett Sutton. John B. Gallagher, who is a
significant shareholder, Co-Chairman and Co-President of the Company, was
the President and a Director of American Micro Computer Center and owned
fifty percent of its outstanding capital stock. Frank Cruz, who is Chief
Operating Officer of the Company, was an employee of American Micro
Computer Center since 1994. He is currently an employee of the
newly-formed, wholly-owned subsidiary of the Company formed to acquire
American Micro Computer Center. The committee's charter authorized it to
take any action it deemed necessary to properly evaluate and determine
whether the Company should acquire American Micro Computer Center,
including hiring independent advisors and ensuring that any such
transaction is entirely fair to the Company and its shareholders. The
committee hired independent legal counsel and an independent financial
advisor. Prior to consummating this transaction, the Company received an
opinion from the independent financial advisor that the consideration paid
in connection with the transaction was fair from a financial point of view
to the Company's shareholders. Effective July 1, 1999, the Company
acquired American Micro Computer Center.
The transaction was structured as a merger of American Micro Computer
Center with and into the newly-formed, wholly-owned subsidiary of the
Company and was accounted for as a purchase. Upon consummation of the
merger, this subsidiary's name was changed to American Micro Computer
Center, Inc. The purchase price for American Micro Computer Center was
equal to $940,660, 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 American Micro Computer Center, Inc. in
calendar year 1999 and two times the after-tax earnings of American Micro
Computer Center, Inc. in calendar year 2000. The portion of the purchase
price paid at closing was funded through the Company's working capital.
The earn-out portion of the purchase price is expected to be funded
through the Company's working capital or the issuance of shares of common
stock. In addition, the Company assumed all outstanding indebtedness of
American Micro Computer Center, including a shareholder loan in the
approximate amount of $289,000. This loan is owed to the father of John B.
Gallagher. If the Company elects to pay any portion of the purchase price
in shares of the Company's Common Stock, then American Micro Computer
Center'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 American Micro Computer Center's
shareholders. The Company is in the process of determining the fair market
value of the assets and liabilities acquired and the amount of goodwill
has not been determined.
On July 16, 1999, European Micro UK purchased the office building in which
they had previously been leasing space for 1,705,000 pounds sterling
($2,693,000 at June 30, 1999). The purchase price was financed in part by
a loan in the amount of 1,300,000 pounds sterling($2,053,000 at June 30,
1999) at an annual interest rate of 7.6%, payable over ten years.
F-27
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRITPION
- ------- -----------
2.02 Merger Agreement dated June 29, 1999 by and among the Company,
American Micro, AMCC and the shareholders of AMCC
2.03 Plan of Merger dated June 29, 1999
2.04 Articles of Merger dated June 29, 1999
10.21 Employment Agreement dated July 1, 1999 by and between
American Micro and John B. Gallagher
23.01 Consents of Independent Accountants
27.01 Financial Data Schedule
EXHIBIT 2.02
MERGER AGREEMENT
THIS MERGER AGREEMENT (the "Agreement") is entered into this 29th day of
June, 1999, by and among EUROPEAN MICRO HOLDINGS, INC., a Nevada corporation
(the "PARENT"), AMERICAN MICRO ACQUISITION CORP., a wholly-owned subsidiary of
the Parent and a Florida corporation (the "MERGER SUB"), AMERICAN SURGICAL
SUPPLY CORP. OF FLORIDA D/B/A AMERICAN MICRO COMPUTER CENTER, a Florida
corporation (the "COMPANY"), and the persons named as "Shareholders" on the
signature pages hereto (each a "SHAREHOLDER" and collectively the
"SHAREHOLDERS").
RECITALS:
A. The Shareholders own all of the outstanding capital stock of the
Company. The authorized capital stock of the Company consists of 7,500 shares of
common stock, par value $1.00 per share, 300 of which are issued and outstanding
(the "COMPANY COMMON STOCK").
B. Upon the terms and subject to the conditions set forth in this
Agreement, the Company shall merge with and into the Merger Sub (the "Merger")
with Merger Sub surviving, in accordance with the Florida Business Corporation
Act (the "FLORIDA BCA").
C. Capitalized terms used in this Agreement, which are not defined when
first used, shall have the meanings assigned to them in Section 1.3 hereof. For
the purposes hereof, references to the Company shall mean American Surgical
Supply Corp. of Florida d/b/a American Micro Computer Center up to and including
the Closing Date and thereafter shall mean the Merger Sub, which shall include
the operations of the Company.
AGREEMENT:
NOW, THEREFORE, in consideration of the mutual premises herein set forth
and certain other good and valuable consideration, the receipt and sufficiency
of which is hereby acknowledged, the parties hereto agree as follows:
1. THE MERGER AND RELATED TRANSACTIONS.
1.1. MERGER. In accordance with the provisions of this Agreement,
the Florida BCA and other applicable law, on the Closing Date (as defined
below), the Company shall be merged with and into the Merger Sub, which shall be
the surviving corporation (hereinafter sometimes referred to as the "Surviving
Corporation") and shall continue its corporate existence under the laws of the
State of Florida as a wholly-owned subsidiary of the Parent. As of the Closing,
the name of the Merger Sub shall be American Micro Computer Center, Inc. and the
separate existence of the Company shall cease. On the Closing Date and by virtue
of the Merger and without any action on the part of the Shareholders, all of the
<PAGE>
then issued and outstanding shares of capital stock of the Company shall be
automatically canceled and shall entitle the Shareholders to receive the Merger
Consideration set forth in Section 1.2 hereof.
1.2. MERGER CONSIDERATION AND PAYMENT.
1.2.1. MERGER CONSIDERATION. The merger consideration (the
"Merger Consideration") (of which twenty five thousand dollars ($25,000) shall
be paid to each Shareholder as consideration for the covenant against unfair
competition set forth in Section 2.6 hereof) shall be equal to the sum of:
(a) Book Value Amount; plus
(b) 1998 Normalized Earnings Payment Amount; plus
(c) Earn-Out Amount.
1.2.2. MANNER OF PAYMENT. The Merger Consideration 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 thirty (30) days of the completion of an audit
of the Company's financial statements for the year ended December 31, 1999 by
the Parent's independent certified public accountants and in no event later than
May 1, 2000, the First Earn-Out Amount (the "Second Installment"); and (c)
within thirty (30) days of the completion of an audit of the Company's financial
statements for the year ended December 31, 2000 by the Parent's Accountants and
in no event later than May 1, 2001, 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 Parent, be paid in cash or in shares (the "Parent's
Shares") of common stock, par value $0.01 per share (the "Parent's Common
Stock"), or any combination of cash or shares; provided that the Parent need not
pay each Shareholder in the same form of consideration. Notwithstanding the
foregoing, any Parent's Shares issued hereunder shall be salable by each
Shareholder over the sixty (60) trading day period either pursuant to an
effective registration statement or pursuant to an exemption from registration.
The number of Parent's Shares to be issued in payment of any portion of the
Merger Consideration shall be equal to: (a) the portion of the Merger
Consideration payable in Parent's Shares, divided by (b) the Per Share Value (as
defined herein); provided that in the event the Parent elects to pay any portion
of the Merger Consideration in Parent's Shares, then the Shareholders shall
notify the Parent within five (5) business days of his election to either hold
such Parent Shares or to sell such shares immediately. In the event a
Shareholder elects to immediately sell his Parent' Shares, he shall sell the
Parent's Shares in accordance with the Parent's instructions; provided, further,
that if the Shareholders cannot sell any such shares within a sixty (60) trading
day period commencing fifteen (15) days after the Shareholders' receipt of such
shares, then the Shareholders shall return any remaining Parent's Shares to the
Parent and the Parent shall promptly pay to the Shareholders any remaining
portion of the Merger Consideration less the net proceeds received by the
Shareholders for any Parent's Shares sold by the Shareholders. In the event that
the sale of the Parent's Shares by the Shareholders results in net proceeds of
<PAGE>
less than the amount of either the Second Installment or the Third Installment
(as applicable), then the Parent shall pay to the Shareholders the difference in
cash within twenty-eight (28) days of being notified the amount of any
shortfall.
1.3. CERTAIN DEFINITIONS.
1.3.1. "BOOK VALUE AMOUNT" means an amount equal to the
Company's combined shareholder's equity (stated capital, paid-in surplus and
retained earnings) as of the Closing Date (as defined herein). The Book Value
Amount shall be determined as provided herein and in accordance with generally
accepted accounting principles ("GAAP") consistently applied (except for the
reserves for inventory obsolescence and allowance for doubtful accounts
receivable), and shall be based on the financial statements of the Company for
the applicable period, as audited (or reviewed) by Parent's independent
certified public accountants and accepted by Parent. For purposes of paying the
First Installment, the Book Value Amount shall be estimated by the parties based
on the most recently completed monthly financial statements of the Company prior
to Closing, which is expected to be May 31, 1999 (the "ESTIMATED BOOK VALUE").
The Book Value Amount shall be adjusted as set forth in Subsection 1.4.2 hereof.
1.3.2. "1998 NORMALIZED EARNINGS PAYMENT AMOUNT" means two
(2) times the After-Tax Earnings of the Company in the twelve (12) month
calendar period ended December 31, 1998, as adjusted by adding back
non-recurring items and subtracting an assumed tax rate of 34%, all as set forth
on EXHIBIT "A" hereto.
1.3.3. The "EARN-OUT AMOUNT" means the sum of (i) two (2)
times the After-Tax Earnings of the Company (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 the Company (the
"SECOND EARN-OUT AMOUNT") in the twelve (12) month calendar period ended
December 31, 2000 (the "SECOND EARN-OUT PERIOD").
1.3.4. "AFTER-TAX EARNINGS" means net income after taxes for
the Company computed as provided herein and otherwise in accordance with GAAP,
and shall be based on the financial statements of the Company for the applicable
period, as audited (or reviewed and accepted) by Parent's independent certified
public accountants. In determining After-Tax Earnings, the Company's net
earnings shall be adjusted a set forth in Subsection 1.4.3. hereof. The Parent
shall cause its accountants to complete their audit of the Company's financial
statements as soon as practicable and in no event later than one-hundred-twenty
(120) days after the end of the First Earn-Out Period and the Second Earn-Out
Period, respectively.
1.3.5. "PER SHARE VALUE" means the average closing price for
the Parent's Common Stock on the Nasdaq Stock Market during the thirty (30)
trading days ending on the last trading day before the date of issuance of the
Parent's Common Stock in question.
1.4. CERTAIN ADJUSTMENTS.
1.4.1. FORCE MAJEURE. The Earn-Out Period shall be suspended
for so long as the Company is unable to conduct its business by reason of an
event of Force Majeure (confirmed to Parent's reasonable satisfaction). "FORCE
<PAGE>
MAJEURE" shall mean acts of God, strikes, explosions, fires, flood, embargo,
storm, or acts of war or terrorism that directly prevent the Company from
conducting its business. Upon the occurrence of an event of Force Majeure, the
Shareholders shall immediately provide the Parent with written notice thereof
(the "FORCE MAJEURE NOTICE"). The Earn-Out Period shall be suspended from the
date on which the Force Majeure Notice is received by Parent until such
condition no longer prevents the Company from conducting its business. The
Earn-Out Period shall be extended by the number of days such Earn-Out Period is
suspended hereunder. Notwithstanding the foregoing, in no event shall any
Earn-Out Period be extended pursuant to this Subsection 1.4.1 for more than an
aggregate of ninety (90) days. The Shareholders shall use all reasonable efforts
to prevent and reduce to a minimum and mitigate the effect of any event of Force
Majeure, and to ensure resumption of normal business operations after the
termination of any event of Force Majeure.
1.4.2. ADJUSTMENTS TO BOOK VALUE AMOUNT. Book Value Amount
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 the Company as of the 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 the Company as of the
Closing not sold by the Company within two hundred forty (240) days after
Closing and (b) any applicable provision for doubtful accounts receivable and
inventory obsolescence agreed to in accordance with Section 1.3.1 as of the
Closing. After Closing and completion of the audit (or the review and
acceptance) by the Parent's independent certified public accountants (which
shall be completed within sixty (60) days of the Closing), the Book Value Amount
shall be adjusted up or down as finally determined in accordance with Section
1.3.1, and each party shall pay in cash to the other within fifteen (15) days
after the Book Value Amount is finally determined such amounts as may be
necessary to give effect to the correct Book Value Amount, as finally
determined. Except for any payments required by the immediately preceding
sentence, payments due hereunder with respect to any adjustments to the Book
Value Amount under this Subsection 1.4.2 shall be paid by delivery on the
applicable determination date (i.e. within one hundred fifty (150) days after
Closing in the case of accounts receivable and within two hundred forty (240)
days after Closing in the case of inventory) of one or more promissory notes
which shall bear interest at the rate of eight percent (8%) per annum and shall
mature on the Second Installment payment date. Amounts due under the notes may
be set-off against any installments due to Shareholders under Subsection 1.2.2
hereof. Any account receivable or inventory which results in a reduction in Book
Value Amount under this Subsection 1.4.2 shall be assigned to the Shareholders
upon execution by Shareholders of the promissory note referred to above.
1.4.3. ADJUSTMENTS TO AFTER-TAX EARNINGS. After-Tax Earnings
shall be reduced by (a) any compensation paid to John P. Gallagher pursuant to
Section 2.13 hereof; (b) any compensation paid to John B. Gallagher pursuant to
Section 2.13 hereof; (c) any professional fees and other expense directly
related to the Company, including accounting and legal fees (excluding any costs
incurred by Parent in connection with this Agreement), and (d) any expenses and
costs (including interest) related to inter-company or other indebtedness used
to finance the Company's operations or to replace the Company's existing
indebtedness. The After-Tax Earnings for 1999 shall be adjusted by adding back
non-recurring items and subtracting an assumed tax rate of 34% for the period
between January 1, 1999 and the Closing Date, all as set forth on Exhibit "B"
hereto. No part of the Merger Consideration or any interest thereon (including
<PAGE>
any amortization of goodwill or any other intangible asset) shall be charged
against the Company for the purpose of calculating After-Tax Earnings under this
Agreement.
1.5. CLOSING. The parties to this Agreement shall file Articles of
Merger (as defined below) pursuant to the Florida BCA, cause the Merger to
become effective and consummate the other transactions contemplated by this
Agreement (the "CLOSING") no later than July 15, 1999; provided, in no event
shall the Closing occur prior to the satisfaction of the conditions precedent
set forth in Sections 6, 7 and 8 hereof. The date of Closing is referred to
herein as the "CLOSING DATE." The Closing shall take place at the offices of
counsel to Parent, or at such other place as may be mutually agreed upon by
Parent and Shareholders. At the Closing, (i) Shareholders shall deliver to
Parent the original stock certificates representing the Company Common Stock,
together with stock powers duly executed in blank; and (ii) Parent shall pay
Shareholders the First Installment.
1.6. RESOLUTION OF ACCOUNTING DISPUTES. Upon receipt of any
computation of the Book Value Amount, After-Tax Earnings, 1998 Normalized
Earnings Payment Amount, First Earn-Out Amount, Second Earn-Out Amount and the
tax payments required pursuant to Section 2.19 hereunder (collectively, the
"ACCOUNTING DETERMINATIONS"), Shareholders shall have a period of thirty (30)
days after their receipt of such computation to review the same. If Shareholders
disagree with any such computation, they shall object to same by written notice
to Parent (an "OBJECTION NOTICE"), which notice shall: (i) describe in detail
the basis for the objection; and (ii) be delivered to Parent within such thirty
(30) day period. For a period of thirty (30) days following Parent's receipt of
the Objection Notice, the parties shall cause the Shareholders' certified public
accountants (the "SHAREHOLDERS' ACCOUNTANTS") and the Parent's Accountants to
attempt to agree on the item(s) in question. If after such thirty (30) day
period no agreement is reached, the dispute shall be resolved by an independent
accounting firm jointly selected by Parent and Shareholders (the "INDEPENDENT
ACCOUNTANTS"), whose determination shall, absent manifest error, be final and
binding upon the parties. In connection with the Accounting Determinations and
related reviews and audits, (i) Parent shall pay the fees of Parent's
Accountants; (ii) Shareholders shall pay the fees of Shareholders' Accountants;
and (iii) the fees of the Independent Accountants shall be allocated and paid by
Parent or the Shareholders, or divided among them, on a basis determined by the
Independent Accountants to be fair, taking into account the correctness of the
positions asserted by each of them with respect to the disputed matters resolved
by such firm.
1.7. PLAN OF MERGER; ARTICLES OF MERGER. The parties to this
Agreement shall cause the Company and the Merger Sub to enter into a plan of
merger on the date hereof, a copy of which is attached hereto as Exhibit "C"
(the "Plan of Merger"), and, at Closing, to execute the Articles of Merger in
the form attached hereof as Exhibit "D" (the "Articles of Merger"). The Articles
of Merger shall be filed with the Secretary of State of Florida on the Closing
Date in accordance with the Florida BCA.
1.8. APPROVAL OF MERGER. By their execution of this Agreement, each
Shareholder of the Company hereby ratifies, approves and adopts the Plan of
Merger for all purposes under the Florida BCA. On or before the execution of
this Agreement, the Boards of Directors of the Parent, the Merger Sub and the
<PAGE>
Company shall have approved this Agreement, the Plan of Merger and the
transactions contemplated hereby and thereby, and the Parent shall have approved
the same as the sole shareholder of the Merger Sub.
2. ADDITIONAL AGREEMENTS.
2.1. ACCESS AND INSPECTION, ETC. The Shareholders have allowed and
shall allow Parent and its authorized representatives full access during normal
business hours from and after the date hereof and prior to the Closing Date to
all of the properties, books, contracts, commitments and records of the Company
for the purpose of making such investigations as the Parent may reasonably
request in connection with the transactions contemplated hereby (including the
taking of a physical inventory), and shall cause the Company to furnish Parent
such information concerning its affairs as Parent may reasonably request. The
Shareholders have caused and shall cause the personnel of the Company to assist
Parent in making such investigation and shall use their best efforts to cause
the counsel, accountants, engineers and other non-employee representatives of
the Company to be reasonably available to Parent for such purposes. The
Shareholders shall cause the Company to comply with all obligations of the
Company under this Agreement.
2.2. CONFIDENTIAL TREATMENT OF INFORMATION. From and after the date
hereof, the parties hereto shall and shall cause their representatives to hold
in confidence this Agreement (including the Schedules hereto), all matters
relating hereto and all data and information obtained with respect to the other
parties or their business, except such data or information as is published or is
a matter of public record, or as compelled by legal process. In the event this
Agreement is terminated pursuant to Section 10 hereof, each party shall promptly
return to the other(s) any statements, documents, schedules, exhibits or other
written information obtained from them in connection with this Agreement, and
shall not retain any copies thereof.
2.3. PUBLIC ANNOUNCEMENTS. After the date hereof and prior to
Closing, none of the parties hereto shall make any press release, statement to
employees or other disclosure of this Agreement or the transactions contemplated
hereby without the prior written consent of the other parties, except as may be
required by law. Neither the Company nor the Shareholders shall make any such
disclosure unless the Parent 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 the Parent
and its counsel.
2.4. SECURITIES LAW COMPLIANCE.
2.4.1. The Company covenants and agrees that the Parent
Shares to be issued to the Shareholders hereunder shall be issued either (i)
pursuant to an effective registration statement under the Securities Act of
1933, as amended, or (ii) pursuant to an exemption therefrom. In either event,
if the Company elects to issue the Parent's Shares to a Shareholder, then the
Company shall take all actions necessary in order that such Shareholder is
capable of selling the Parent Shares so issued within the sixty (60) trading day
period set forth in Section 1.2.2 hereof.
<PAGE>
2.4.2. Each Shareholder has received and reviewed copies of
the following disclosure documents filed by Parent with the U.S. Securities and
Exchange Commission (collectively, the "SEC DOCUMENTS"): (i) Quarterly Reports
on Form 10-Q for the three month periods ended March 31, 1999, December 31, 1998
and September 30, 1998 and (ii) Annual Report on Form 10-K for the year ended
June 30, 1998.
2.5. COMPANY FINANCING. Parent shall use commercially reasonable
efforts to cause the Shareholders to be released from any personal guarantees
executed with respect to obligations of the Company.
2.6. COVENANT AGAINST UNFAIR COMPETITION.
(a) Except for services to be provided to Parent or the
Company pursuant to written contracts and in consideration for the payment of
$25,000 to each Shareholder (which amount comprises a portion of the Merger
Consideration), no Shareholder will, for a period of two (2) years following the
Closing Date, for his own account or jointly with another, directly or
indirectly, for or on behalf of any individual, partnership, corporation or
other legal entity, as principal, agent or otherwise:
(i) own, control, manage, be employed by, consult
with, or otherwise participate in, a business involved within the Trade Area (as
hereinafter defined) in (1) the wholesale distribution of computers, computer
products, peripherals and related parts, components and equipment (collectively,
the "Products") or (2) any other business conducted by the Company during the
year preceding the Closing Date (the activities described in this clause (i) are
hereinafter referred to collectively as the "Business");
(ii) solicit or induce, or in any manner attempt to
solicit or induce, any person employed by the Company, the Parent or any
subsidiary of the Parent to leave such employment, whether or not such
employment is pursuant to a written contract and whether or not such employment
is at will, or hire any person who has been employed by the Company, the Parent
or any subsidiary of the Parent at any time during the six (6) month period
preceding such hiring by the Company, the Parent or any subsidiary of the Parent
(as applicable); or
(iii) use or disclose any trade secrets or
confidential information concerning the Business or any segment thereof. Trade
secrets and confidential information concerning the Business shall include, but
not be limited to, (1) lists of names and addresses of customers and suppliers
of the Company; and (2) software and computer programs, market research and data
bases, sources of leads and methods of obtaining new business, and methods of
purchasing, marketing, selling, performing and pricing products and services
employed by the Company in the Business or any segment thereof.
(b) As used herein, the term "Trade Area" shall mean
the United States and any other geographic area in which the Company conducted
any significant business activities within the twelve (12) month period
immediately prior to Closing.
<PAGE>
(c) Shareholders recognize the importance of the
covenant contained in this Section 2.6 and acknowledge that, based on their past
experience and training as the founders and executives of the Company and the
projected expansion of the Company's business, the restrictions imposed herein
are: (i) reasonable as to scope, time and area; (ii) necessary for the
protection of the Company's legitimate business interests, including, without
limitation, the Company's trade secrets, goodwill, and its relationship with
customers and suppliers; and (iii) not unduly restrictive of any Shareholder's
rights as an individual. Shareholders acknowledge and agree that the covenants
contained in this Section 2.6 are essential elements of this Agreement and that
but for these covenants, Parent would not have agreed to purchase the Company
Common Stock or enter into this Agreement. Such covenants shall be construed as
agreements independent of any other provision of this Agreement. The existence
of any claim or cause of action against Parent by the Shareholders, whether
predicated on the breach of this Agreement or otherwise, shall not constitute a
defense to the enforcement by the Parent of the covenants contained in this
Section 2.6.
(d) If any Shareholder commits a breach or threatens to
commit a breach of any of the provisions of this Section 2.6, Parent shall have
the right and remedy, in addition to any others that may be available, at law or
in equity, to have the provisions of this Section 2.6 specifically enforced by
any court having equity jurisdiction, through injunctive or other relief
(without any bond or security being required to be posted), it being
acknowledged that any such breach or threatened breach will cause irreparable
injury to Parent and the Company, the amount of which will be difficult to
determine, and that money damages will not provide an adequate remedy to Parent
and the Company.
(e) If any covenant contained in this Section 2.6, or
any part thereof, is hereafter construed to be invalid or unenforceable, the
same shall not affect the remainder of the covenants, which shall be given full
effect, without regard to the invalid portions, and any court having
jurisdiction shall have the power to reduce the duration, scope and/or area of
such covenant and, in its reduced form, said covenant shall then be enforceable.
If a Shareholder breaches the covenants set forth in this Section 2.6, the
running of the two (2) year noncompete period described herein (but not his
obligation) shall be tolled for so long as such breach continues.
2.7. BEST EFFORTS. Subject to the terms and conditions provided in
this Agreement, each of the parties shall use its best efforts in good faith to
take or cause to be taken as promptly as practicable all reasonable actions that
are within its power to cause to be fulfilled those conditions precedent to its
obligations or the obligations of the other parties to consummate the
transactions contemplated by this Agreement that are dependent upon its actions.
2.8. FURTHER ASSURANCES. The parties shall deliver any and all other
instruments or documents required to be delivered pursuant to, or necessary or
proper in order to give effect to, the provisions of this Agreement, including,
without limitation, all necessary stock powers and such other instruments of
transfer as may be necessary or desirable to transfer ownership of the Company
Common Stock and to consummate the transactions contemplated by this Agreement.
<PAGE>
2.9. COMPANY OPERATIONS. From the Closing Date and until the end of
the Second Earn-Out Period, (a) neither Parent nor any of its affiliates shall:
(i) charge management, overhead or other fees to the Company, except for the
standard management fee charged to other Parent subsidiaries which shall be
charged to the Company only; or (ii) allocate or assign additional employees or
employee compensation to the Company which are not reasonably required to
properly manage or conduct its business; and (b) the Company will operate as a
wholly-owned subsidiary of Parent. Subject to Section 2.11 and until the end of
the Second Earn-Out Period, Shareholders shall manage the day-to-day operations
of the Company, subject to the provisions of Section 2.11 hereof and subject to
the terms of their respective employment agreements and consistent with the
manner in which the business of the Company has theretofore been conducted, and
Shareholders shall cause the Company to expend all sums and take all actions
that are usual and customary for the Company to preserve its business and
further its prospects as an ongoing enterprise. If during the Earn-Out Period
the Shareholders shall be unable to manage the day-to-day operations of the
Company for any reason, including, without limitation, the termination of their
respective employment agreements, the Parent shall (a) cause the Company to be
managed in the manner contemplated by this Section 2.9, and (b) use its best
efforts to maximize the After-Tax Earnings of the Company.
2.10. SHAREHOLDER LOANS.
(a) Within thirty (30) days of the Closing, Parent
shall pay and satisfy the outstanding principal balance and accrued interest on
the shareholder loan payable by the Company to John P. Gallagher in an amount
not to exceed $300,000, which shall be reduced by the book value of the Lincoln
Town Car to be transferred to John P. Gallagher on or before the Closing.
(b) At Closing, the loan owed by John B. Gallagher to
the Company shall be offset against the amounts owed to John B. Gallagher under
the First Installment.
2.11. INVENTORY ALLOCATION. On or before the Closing Date and
through the end of the Second Earn-Out Period, the Parent and Shareholders shall
establish a committee consisting of John B. Gallagher, Harry D.Shieldss, Frank
Cruz and Jay Nash to oversee the allocation of inventory among the Parent and
its subsidiaries and the Company during the period from the Closing Date until
the end of the Second Earn-Out Period. In addition, the Parent and Shareholders
shall agree upon a committee charter which shall more fully set forth the
committee's duties in reviewing issues of inventory allocation, including a
procedure pursuant to which Harry Shields shall cast the deciding vote in the
event of the deadlock of the committee members.
2.12. FAIRNESS OPINION. The Parent shall have received an opinion
from Morgan Keegan & Company, Inc. or another investment banking firm or other
financial advisor satisfactory to the Parent in its sole discretion stating that
the transaction taken as a whole is fair from a financial point of view to the
Parent and its public shareholders.
<PAGE>
2.13. EMPLOYMENT MATTERS.
(a) At Closing, John P. Gallagher will execute and
deliver an employment agreement with the Merger Sub in the form of EXHIBIT "E"
hereto, which agreement will include a non-compete provision extending through
the term of employment and for a period of two (2) years following the
termination of the employment agreement.
(b) At Closing, John B. Gallagher will execute and
deliver an employment agreement with the Merger Sub in the form of EXHIBIT "F",
which agreement shall provide for a base salary of One Hundred Four Thousand
($104,000) Dollars, a company car and a non-compete provision extending for the
term of employment and for a period of two (2) years following termination of
the Employment Agreement.
(c) Rich Niles shall have entered into an employment
agreement, in form and substance satisfactory to the Parent.
2.14. MODIFICATION OF NOTES PAYABLE. The Company and the
Shareholders shall use their best commercial efforts to modify the notes payable
identified on the 1998 Company Balance Sheet (as defined in Section 3.6 hereof)
and any other notes payable arising after December 31, 1998 in accordance with
the terms of this Agreement to extend the maturity date for a period of at least
one year from the Closing Date, at the same interest rate and with the right of
prepayment without penalty. The Company shall provide the Parent with written
notice of the modifications to the notes payable (if any) referenced in this
Section at least five (5) days prior to the Closing. The Parent shall have until
Closing to accept such modifications and to proceed to Closing or to reject such
modifications and to terminate this Agreement.
2.15. MODIFICATION OF REAL PROPERTY LEASE. The Shareholders hereby
grant to the Company, which grant shall be effective as of the Closing, the
irrevocable option to renew that certain Real Estate Lease (the "LEASE") dated
as of September 1997 between the Shareholders and the Company for two (2)
additional successive terms of three (3) years each, the first renewal period
commencing on September 1, 2002 and the second renewal period commencing on
September 1, 2005 (each, a "RENEWAL TERM"). The terms and conditions of the
Lease during any Renewal Term shall remain unchanged except that the rental
during any Renewal Term shall increase by a fraction, the numerator of which
shall be the CPI-U, as that term is defined below, for the month immediately
preceding the applicable Renewal Term, and the denominator of which shall be the
CPI-U for the month immediately preceding the Closing in the case of the first
Renewal Term and the month immediately preceding the first Renewal Term in the
case of the second Renewal Term. The "CPI-U" shall mean the "Consumer Price
Index-Seasonally Adjusted U.S. City Average For All Items For All Urban
Consumers, (1982-84=100)," published monthly in the "Monthly Labor Review" of
the Bureau of Labor Statistics of the United States Department of Labor. In
order to exercise this option, the Company shall give the Shareholders at least
ninety (90) days' written notice prior to the termination of the then current
term of the Lease.
2.16. CERTAIN TAX MATTERS.
(a) ALLOCATION OF MERGER CONSIDERATION. The Parent and
the Shareholders agree that the Merger Consideration and the liabilities of the
<PAGE>
Company (plus other relevant items) will be allocated to the assets of the
Company for all purposes (including tax and financial accounting) in a manner
consistent with the fair market values set forth on Schedule 2.16 hereto. The
Parent, the Company and the Shareholders will file all tax returns (including
amended returns and claims for refund) and information reports in a manner
consistent with such values.
(b) S CORPORATION STATUS. Prior to the Closing Date,
the Company and the Shareholders will not revoke the Company's election to be
taxed as an S corporation within the meaning of Sections 1361 and 1362 of the
Code. In addition, prior to the Closing Date, the Company and the Shareholders
will not take or allow any action other than the Merger pursuant to this
Agreement that would result in the termination of the Company's status as a
validly electing S corporation within the meaning of Code Sections 1361 and 1362
of the Code.
(c) TAX PERIODS ENDING ON OR BEFORE THE CLOSING DATE.
The Parent shall prepare or cause to be prepared and filed or cause to be filed
all tax returns for the Company for all periods ending on or prior to the
Closing Date which are filed after the Closing Date. The Parent shall permit the
Shareholders to review and comment on each such tax return described in the
preceding sentence prior to filing and shall make such revisions to such tax
returns as are reasonably requested by the Shareholders. To the extent permitted
by applicable law, the Shareholders shall include any income, gain, loss,
deduction or other tax items for such periods on their tax returns in a manner
consistent with the Schedule K-1s furnished by the Company to the Shareholders
for such periods. The Shareholders shall reimburse the Parent for any taxes of
the Company with respect to such period within fifteen (15) days after payment
by the Parent or the Company.
(d) COOPERATION ON TAX MATTERS.
(i) The Parent, the Company and the Shareholders
shall cooperate fully, as and to the extent reasonably requested by the other
party, in connection with the filing of tax returns pursuant to this Section and
any audit, litigation or other proceeding with respect to taxes. Such
cooperation shall include the retention and (upon the other party's request) the
provision of records and information which are reasonably relevant to any such
audit, litigation or other proceeding and making employees available on a
mutually convenient basis to provide additional information and explanation of
any material provided hereunder. The Company and the Shareholders agree (A) to
retain all books and records with respect to tax matters pertinent to the
Company relating to any taxable period beginning before the Closing Date until
the expiration of the statute of limitations (and, to the extent notified by the
Parent or the Shareholders, any extensions thereof) of the respective taxable
periods, and to abide by all record retention agreements entered into with any
taxing authority, and (B) to give the other party reasonable written notice
prior to transferring, destroying or discarding any such books and records and,
if the other party so requests, the Company or the Shareholders, as the case may
be, shall allow the other party to take possession of such books and records.
(ii) The Parent and Shareholder further agree, upon
request, to use their best efforts to obtain any certificate or other document
<PAGE>
from any governmental authority or any other person as may be necessary to
mitigate, reduce or eliminate any tax that could be imposed (including, but not
limited to, with respect to the transactions contemplated hereby).
2.17. RELEASE OF CLAIMS BY SHAREHOLDERS. Effective as of the Closing
Date, and except for (i) the indebtedness owed to John P. Gallagher by the
Company in an amount not to exceed $300,000 reduced by the book value of the
Lincoln Town Car to be transferred to John P. Gallagher on or before the Closing
and (ii) any obligations arising out of this Agreement (including, without
limitation, any liability incurred by the Shareholders with respect to the
guarantees referred to in Section 2.5 hereof), each Shareholder, and each of
their successors, predecessors, assigns, agents, advisors, legal
representatives, partners and all persons acting by, through or under each of
them, hereby release the Company and each of its successors, predecessors,
assigns, agents, advisors, officers, directors, employees, legal
representatives, partners and all persons acting by, through or under each of
them, from any and all claims, obligations, causes of action, actions, suits,
contracts, controversies, agreements, promises, damages, demands, costs,
attorneys' fees and liabilities of any nature whatsoever from the beginning of
time up to and including the Closing Date, in law or at equity, whether known
now or on the Closing Date, anticipated or unanticipated, suspected or claimed,
fixed or contingent, liquidated or unliquidated, arising out of, in connection
with or relating to any matter, cause or thing whatsoever.
2.18. NO-SHOP. From the date hereof until the termination of this
Agreement, neither the Company nor the Shareholders shall, directly or
indirectly, make, solicit, initiate or encourage submission of proposals or
offers from any persons (including any of their employees or officers) relating
to an Acquisition Proposal. As used herein, "Acquisition Proposal" means any
proposal or offer involving a liquidation, dissolution, recapitalization,
merger, consolidation or acquisition or purchase of all or substantially all of
the assets of, or equity interest in, the Company or other similar transaction
or business combination involving the Company. Each of the Company and the
Shareholders shall immediately cease and cause to be terminated all discussions
or negotiations with third parties with respect to any Acquisition Proposal, if
any, exiting on the date hereof.
<PAGE>
2.19. TAX PROTECTION POLICY.
(a) Within thirty (30) days of the Closing, the Parent
shall pay to the Shareholders an amount equal to the difference between (a) the
tax liability which would have been applicable to the Shareholders had the
Shareholders sold the Company Common Stock instead of agreeing to the Merger and
(b) the actual tax liability of the Shareholders. In addition and within thirty
(30) days of the Closing, the Parent shall pay to the Shareholders an amount
such that the net amount retained by the Shareholders after deduction of the tax
liability imposed on such payment shall be equal to the amount set forth in the
immediately preceding sentence.
(b) In the event installment sale treatment under the
applicable provisions of the Code is unavailable to the Shareholders as a result
of the Merger, then the Parent shall advance without interest to the
Shareholders, within thirty (30) days of the Parent's receipt of written notice
from the Shareholders, an amount equal to the difference between (a) the tax
liability which would have been applicable to the Shareholders had installment
sale treatment been available and (b) the actual tax liability of the
Shareholders. The Parent shall offset any advance hereunder against the Second
Earn-Out Amount. In the event the Second Earn-Out Amount is insufficient to
satisfy the advance payable pursuant to this Section, then the Shareholders
shall repay such advance in cash not later than the payment date of the Third
Installment in accordance with Section 1.2.2 hereof.
(c) The amount set forth in the Section 2.19 shall be
determined by the Shareholders and reviewed and accepted by the Parent, subject
to the dispute resolution set forth in Section 1.6 hereof.
3. REPRESENTATIONS, COVENANTS AND WARRANTIES OF THE SHAREHOLDERS.
To induce Parent and Merger Sub to enter into this Agreement and to
consummate the transactions contemplated hereby, the Company and the
Shareholders jointly and severally represent and warrant to and covenant with
Parent and Merger Sub as follows:
3.1. ORGANIZATION; COMPLIANCE. The Company is a corporation duly
organized, validly existing and in good standing under the laws of Florida. The
Company is: (a) entitled to own or lease its properties and to carry on its
business as and in the places where such business is now conducted, and (b) duly
licensed and qualified in all jurisdictions where the character of the property
owned by it or the nature of the business transacted by it makes such license or
qualification necessary, except where the failure to do so would not result in a
material adverse effect on the Company. Schedule 3.1 lists all locations where
the Company has an office or place of business and the nature of the ownership
interest in such property (fee, lease, or other).
<PAGE>
3.2. CAPITALIZATION AND RELATED MATTERS.
(a) The Company has an authorized capital consisting of
7,500 shares of common stock, 300 of which are issued and outstanding at the
date hereof. All shares of Company Common Stock are duly and validly issued,
fully paid and nonassessable. No shares of Company Common Stock (i) were issued
in violation of the preemptive rights of any shareholder, or (ii) are held as
treasury stock.
(b) There are not outstanding any securities
convertible into capital stock of the Company nor any rights to subscribe for or
to purchase, or any options for the purchase of, or any agreements providing for
the issuance (contingent or otherwise) of, or any calls, commitments or claims
of any character relating to, such capital stock or securities convertible into
such capital stock. The Company: (i) is not subject to any obligation
(contingent or otherwise) to repurchase or otherwise acquire or retire any of
its capital stock; or (ii) has no liability for dividends or other distributions
declared or accrued, but unpaid, with respect to any capital stock.
(c) Each Shareholder is, and will be at Closing, the
record and beneficial owner of one hundred fifty (150) shares of Company Common
Stock, free and clear of all claims, liens, options, agreements, restrictions,
and encumbrances whatsoever and no Shareholder is a party to any agreement,
understanding or arrangement, direct or indirect, relating to the Company Common
Stock, including, without limitation, agreements, understandings or arrangements
regarding voting or sale of such stock.
3.3. SUBSIDIARIES. The Company owns (a) no shares of capital stock
of any other corporation, including any joint stock company, and (b) no other
proprietary interest in any company, partnership, trust or other entity,
including any limited liability company.
3.4. EXECUTION; NO INCONSISTENT AGREEMENTS; ETC.
(a) This Agreement is a valid and binding agreement of
each Shareholder, enforceable in accordance with its terms, except as such
enforcement may be limited by bankruptcy or similar laws affecting the
enforcement of creditors' rights generally, and the availability of equitable
remedies. Each Shareholder has the absolute and unrestricted right, power,
authority, and capacity to execute and deliver this Agreement and the documents
to be delivered by him in connection with the Closing and to perform his
obligations under this Agreement.
(b) Except as set forth in Schedule 3.4, the execution
and delivery of this Agreement by the Shareholders does not, and the
consummation of the transactions contemplated hereby will not, constitute a
breach or violation of the charter or bylaws of the Company, or a default under
any of the terms, conditions or provisions of (or an act or omission that would
give rise to any right of termination, cancellation or acceleration under) any
note, bond, mortgage, lease, indenture, agreement or obligation to which the
Company or any Shareholder is a party, pursuant to which the Company or any
Shareholder
<PAGE>
otherwise receives benefits, or to which any of the properties of the Company or
any Shareholder is subject, or violate any judgment, order, decree, statute or
regulation applicable to the Company or the Shareholders or by which any of them
may be subject.
3.5. CORPORATE RECORDS. The statutory records, including the stock
register and minute books of the Company, fully reflect all issuances, transfers
and redemptions of its capital stock, currently show and will correctly show the
total number of shares of its capital stock issued and outstanding on the date
hereof and on the Closing Date, the charter or other organizational documents
and all amendments thereto, the bylaws as amended and currently in force. To the
knowledge of Shareholders, the books of account, minute books, stock record,
books, and other records of the Company, all of which have been made available
to Parent, are complete and correct and have been maintained in accordance with
sound business practices. The minute books of the Company contain accurate and
complete records of all meetings held of, and corporate action taken by, the
shareholders, the Board of Directors, and committees of the Boards of Directors
of the Company, and no meeting of any such shareholders, Board of Directors, or
committee has been held for which minutes have not been prepared and are not
contained in such minute books. At the Closing, all of those books and records
will be in the possession of the Company.
3.6. FINANCIAL STATEMENTS.
(a) The Shareholders have delivered to Parent (i) the
audited balance sheet of the Company as of December 31, 1998, and the related
statements of income, stockholders' equity and cash flows of the Company for the
fiscal year ended December 31, 1998 and the independent auditors' report thereon
and (ii) the unaudited balance sheet of the Company as of May 31, 1999 and the
unaudited statements of income of the Company for the three months ended May 31,
1999 (the balance sheet as of December 31, 1998 is hereinafter referred to as
the "1998 COMPANY BALANCE SHEET"). All the foregoing financial statements, and
any financial statements delivered pursuant to Subsection (c) below, are
referred to herein collectively as the "COMPANY FINANCIAL STATEMENTS."
(b) The Company Financial Statements have been and will
be prepared in accordance with GAAP throughout the periods involved, subject, in
the case of interim financial statements, to normal recurring year-end
adjustments (the effect of which will not, individually or in the aggregate, be
materially adverse) and the absence of notes (that, if presented, would not
differ materially from those included in the 1998 Company Balance Sheet),
applied on a consistent basis, and fairly reflect and will reflect in all
material respects the financial condition of the Company as at the dates thereof
and the results of the operations of the Company for the periods then ended, and
are true and complete and are consistent with the books and records of the
Company.
(c) Until Closing, the Shareholders will furnish to
Parent unaudited interim financial statements of the Company for each month
subsequent to May 31, 1999 as soon as practicable but in any event within thirty
(30) days after the close of any such month.
<PAGE>
3.7. LIABILITIES. The Company has no debt, liability or obligation
of any kind, whether accrued, absolute, contingent or otherwise, except: (a)
those reflected on the 1998 Company Balance Sheet, including the notes thereto,
and (b) liabilities incurred in the ordinary course of business since December
31, 1998, none of which have had or will have a material adverse effect on the
financial condition of the Company.
3.8. ABSENCE OF CHANGES. Except as described in Schedule 3.8, from
December 31, 1998 to the date of this Agreement:
(a) there has not been any adverse change in the
business, assets, liabilities, results of operations or financial condition of
the Company or in its relationships with suppliers, customers, employees,
lessors or others, other than changes in the ordinary course of business, none
of which, singularly or in the aggregate, have had or will have a material
adverse effect on the business, properties or financial condition of the
Company;
(b) there has not been any: (i) change in the Company's
authorized or issued capital stock, retirement, or other acquisition by the
Company of any shares of any such capital stock; (ii) a declaration or payment
of any dividend or other distribution or payment in respect of shares of capital
stock, except as set forth on Schedule 3.29; (iii) amendment to the articles of
incorporation or bylaws of the Company; (iv) increase by the Company of any
bonuses, salaries, or other compensation to any shareholder, director, officer,
or (except in the ordinary course of business) employee or entry into any
employment, severance, or similar agreement with any director, officer, or
employee; (v) adoption of, or increase in the payments to or benefits under, any
profit sharing, bonus, deferred compensation, savings, insurance, pension,
retirement, or other employee benefit plan for or with any employees of the
Company; (vi) sale (other than sales of inventory in the ordinary course of
business), lease, or other disposition of any asset or property of the Company
or mortgage, pledge, or imposition of any lien or other encumbrance on any
material asset or property of the Company; (vii) cancellation or waiver of any
claims or rights with a value to the Company in excess of $10,000; (viii)
material change in the accounting methods used by the Company; or (ix)
agreement, whether oral or written, by the Company to do any of the foregoing;
and
(c) the Company has complied with the covenants and
restrictions set forth in Section 5 to the same extent as if this Agreement had
been executed on, and had been in effect since, December 31, 1998.
3.9. TITLE TO PROPERTIES. The Company has good and marketable title
to all of its properties and assets, real and personal, including, but not
limited to, those reflected in the 1998 Company Balance Sheets (except as since
sold or otherwise disposed of in the ordinary course of business, or as
expressly provided for in this Agreement), free and clear of all encumbrances,
liens or charges of any kind or character except: (a) those securing liabilities
of the Company incurred in the ordinary course (with respect to which no default
exists); (b) liens of 1999 real estate and personal property taxes; and (c)
imperfections of title and encumbrances, if any, which, in the aggregate (i) are
not substantial in amount; (ii) do not detract from the value of the property
subject thereto or impair the operations of the Company or; and (iii) do not
have a material adverse effect on the business, properties or assets of the
Company.
<PAGE>
3.10. COMPLIANCE WITH LAW. The business and activities of the
Company has at all times been conducted in accordance with its articles of
incorporation and bylaws and any applicable law, regulation, ordinance, order,
License (defined below), permit, rule, injunction or other restriction or ruling
of any court or administrative or governmental agency, ministry, or body, except
where the failure to do so would not result in a material adverse effect on the
Company.
3.11. TAXES. The Company has duly filed all federal, state, and
material local and foreign tax returns and reports, and all returns and reports
of all other governmental units having jurisdiction with respect to taxes
imposed on it or on its income, properties, sales, franchises, operations or
employee benefit plans or trusts, all such returns were complete and accurate
when filed, and all taxes and assessments payable by the Company have been paid
to the extent that such taxes have become due. All taxes accrued or payable by
the Company for all periods through May 31, 1999 have been accrued or paid in
full, whether or not due and payable and whether or not disputed. The Company
has withheld proper and accurate amounts from its employees for all periods in
full compliance with the tax withholding provisions of applicable foreign,
federal, state and local tax laws. There are no waivers or agreements by the
Company for the extension of time for the assessment of any taxes. There are not
now any examinations of the income tax returns of the Company pending, or any
proposed deficiencies or assessments against the Company of additional taxes of
any kind. The Shareholders shall cause the Company to duly and timely prepare
and file all federal, state, and material local and foreign tax returns and
reports for 1999, and all returns and reports of all other governmental units
having jurisdiction with respect to taxes imposed on the Company or on its
income, properties, sales, franchises, operations or employee benefit plans or
trusts, and all such returns will be complete and accurate when filed. The
Company has been a validly existing S Corporation within the meaning of Sections
1361 and 1362 of the Code since its inception and the Company will be an S
Corporation up to and including the Closing Date.
3.12. REAL PROPERTIES. The Company does not have an interest in any
real property, except for the Leases (as defined below).
3.13. LEASES OF REAL PROPERTY. All leases pursuant to which the
Company is lessee of any real property (the "LEASES") are listed in Schedule
3.13 and are valid and enforceable in accordance with their terms. There is not
under any of such leases any material default or any claimed material default by
the Company or any event of default or event which with notice or lapse of time,
or both, would constitute a material default by the Company and in respect to
which the Company has not taken adequate steps to prevent a default on its part
from occurring. The copies of the Leases heretofore furnished to Parent are
true, correct and complete, and such Leases have not been modified in any
respect since the date they were so furnished, and are in full force and effect
in accordance with their terms. The Company is lawfully in possession of all
real properties of which they are a lessee (the "LEASED PROPERTIES").
3.14. Contingencies. Except as disclosed on Schedule 3.14, there are
no actions, suits, claims or proceedings pending, or to the knowledge of
Shareholders threatened against, by or affecting, the Company in any court or
before any arbitrator or governmental agency that may have a material adverse
effect on the
<PAGE>
Company or which could materially and adversely affect the right or ability of
any Shareholder to consummate the transactions contemplated hereby. To the
knowledge of the Shareholders, there is no valid basis upon which any such
action, suit, claim, or proceeding may be commenced or asserted against the
Company. There are no unsatisfied judgments against the Company and no consent
decrees or similar agreements to which the Company is subject and which could
have a material adverse effect on the Company.
3.15. INTELLECTUAL PROPERTY RIGHTS. The Company has: (a) the
exclusive right to use the name American Micro Computer Center in Florida, and
the use of such name does not conflict with or infringe upon the rights of any
other person, and (b) made all material filings and publications required to
register and perfect such exclusive right. The Company is not, and will not be,
subject to any liability, direct or indirect, for infringement damages,
royalties, or otherwise, by reason of (a) the use of the name "American Micro
Computer Center" in or outside the United States or (b) the business operations
of the Company, at any time prior to the Closing Date.
3.16. MATERIAL CONTRACTS. Schedule 3.16 contains a complete list of
all contracts of the Company which involve consideration in excess of the
equivalent of $10,000 or have a term of one year or more (the "MATERIAL
CONTRACTS"). The Company has delivered to Parent a true, correct and complete
copy of each of the written contracts, and a summary of each oral contract,
listed on Schedule 3.16. Except as disclosed in Schedule 3.16: (a) the Company
has performed all material obligations to be performed by it under all such
contracts, and is not in material default thereof, and (b) no condition exists
or has occurred which with the giving of notice or the lapse of time, or both,
would constitute a material default by the Company or accelerate the maturity
of, or otherwise modify, any such contract, and (c) all such contracts are in
full force and effect. No material default by any other party to any of such
contracts is known or claimed by the Company or any Shareholder to exist.
3.17. INSURANCE. Schedule 3.17 contains a complete list of all
policies of insurance presently maintained by the Company all of which are, and
will be maintained through the Closing Date, in full force and effect; and all
premiums due thereon have been paid and the Company has not received any notice
of cancellation with respect thereto. The Company has heretofore delivered to
Parent or its representatives a true, correct and complete copy of each such
insurance policy.
3.18. EMPLOYMENT AND LABOR MATTERS. Schedule 3.18 sets forth the
name, position, employment date, and 1998 compensation (base and bonus) of each
employee of the Company who earned $25,000 or more in 1998. The Company is not a
party to any collective bargaining agreement (whether industry wide or on a
company level) or agreement of any kind with any union or labor organization.
There has not been any attempt by any union or other labor organization to
organize the employees of the Company at any time in the past five (5) years.
Except as disclosed in Schedule 3.18, the Company is not a party to or bound by
any employment contract, consulting agreement, deferred compensation agreement,
bonus plan, incentive plan, profit sharing plan, retirement agreement, or other
employee compensation agreement. The Company is not aware that any officer or
key employee, or that any group of key employees, intends to terminate their
employment with the Company, nor does the Company have a present intention to
terminate the employment of any of the foregoing.
<PAGE>
3.19. EMPLOYEE BENEFIT MATTERS.
(a) Except as disclosed in Schedule 3.19, the Company
does not provide, nor is it obligated to provide, directly or indirectly, any
benefits for employees other than salaries, sales commissions and bonuses,
including, but not limited to, any pension, profit sharing, stock option,
retirement, bonus, hospitalization, insurance, severance, vacation or other
employee benefits (including any housing or social fund contributions) under any
practice, agreement or understanding.
(b) Each employee benefit plan maintained by or on
behalf of the Company or any other party (including any terminated pension
plans) which covers or covered any employees or former employees of the Company
(collectively, the "EMPLOYEE BENEFIT PLAN") is listed in Schedule 3.19. The
Company has delivered to Parent true and complete copies of all such plans and
any related documents. With respect to each such plan: (i) no litigation,
administrative or other proceeding or claim is pending, or to the knowledge of
the Shareholders, threatened or anticipated involving such plan; (ii) there are
no outstanding requests for information by participants or beneficiaries of such
plan; and (iii) such plan has been administered in compliance in all material
respects with all applicable laws and regulations.
(c) The Company has timely made payment in full of all
contributions to all of the Employee Benefit Plans which the Company was
obligated to make prior to the date hereof; and there are no contributions
declared or payable by the Company to any Employee Benefit Plan which, as of the
date hereof, has not been paid in full.
3.20. POSSESSION OF FRANCHISES, LICENSES, ETC. The Company: (a)
possess all material franchises, certificates, licenses, permits and other
authorizations (collectively, the "Licenses") from governmental authorities,
political subdivisions or regulatory authorities that are necessary for the
ownership, maintenance and operation of its business in the manner presently
conducted; (b) are not in violation of any provisions thereof; and (c) have
maintained and amended, as necessary, all Licenses and duly completed all
filings and notifications in connection therewith.
3.21. ENVIRONMENTAL MATTERS. Except as disclosed in Schedule 3.21:
(i) the Company is not in violation, in any material respect, of any
Environmental Law (as defined below); (ii) the Company has received all permits
and approvals with respect to emissions into the environment and the proper
collection, storage, transport, distribution or disposal of Wastes (as defined
below) and other materials required for the operation of its business at present
operating levels; and (iii) the Company is not liable or responsible for any
material clean up, fines, liability or expense arising under any Environmental
Law, as a result of the disposal of Wastes or other materials in or on the
property of the Company (whether owned or leased), or in or on any other
property, including property no longer owned, leased or used by the Company. As
used herein, (a) "ENVIRONMENTAL LAWS" means, collectively, the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended, the
Superfund Amendments and Reauthorization Act of 1986, the Resource Conservation
and Recovery Act, the Toxic Substances Control Act, as amended, the Clean Air
Act, as amended, the Clean Water Act, as amended, any other "Superfund" or
"Superlien" law or any other federal, or applicable state or local statute, law,
<PAGE>
ordinance, code, rule, regulation, order or decree (foreign or domestic)
regulating, relating to, or imposing liability or standards of conduct
concerning, Wastes, or the environment; and (b) "WASTES" means and includes any
hazardous, toxic or dangerous waste, liquid, substance or material (including
petroleum products and derivatives), the generation, handling, storage,
disposal, treatment or emission of which is subject to any Environmental Law.
3.22. INVENTORIES. At Closing, Shareholders will deliver to Parent a
complete and accurate list, as of a date not more than five (5) business days
prior to the Closing Date, of the products, materials and supplies and spare
parts (the "INVENTORY") then owned by the Company. Except as otherwise provided
on Schedule 3.22, the Inventory, as of the Closing Date: (a) will represent
items of a quality and quantity usable and saleable in the ordinary course of
business at the book value reflected as of the Closing Date, (b) will be free
from defects, (c) will not be obsolete, (d) will conform in all material
respects to customary trade standards for such inventory in the Company's
current markets and (e) will be sold, subject to any applicable reserves for
inventory obsolescence shown on the Company's books and records (which reserves
are adequate and calculated consistent with past practice), within two hundred
forty (240) days of the Closing Date for an amount at least equal to its book
value. There are no express or implied warranty obligations of the Company
which, singularly or in the aggregate, will have a material adverse effect on
the business, properties or financial condition of the Company.
3.23. ACCOUNTS RECEIVABLE. On the Closing Date, the Shareholders
will deliver to Parent a complete and accurate list, as of a date not more than
five (5) business days prior to the Closing Date, of the accounts and notes
receivable due to the Company (including, without limitation, receivables from
advances to employees and the Shareholders), which includes an aging of all
accounts and notes receivable showing amounts due in thirty (30) day aging
categories (collectively, the "ACCOUNTS RECEIVABLES"). As of the Closing Date,
the Accounts Receivable: (a) will represent valid obligations arising from sales
actually made or services actually performed in the ordinary course of business;
(b) will be current and collectible net of any applicable reserves shown on the
Company's books and records (which reserves are adequate and calculated
consistent with past practice); (c) subject to such reserves, will be collected
in full, without any set-off, within one hundred fifty (150) days after the
Closing Date; and (d) are not and will not be subject to any contest, claim,
defense or right of set-off, other than rebates and returns in the ordinary
course of business.
3.24. AGREEMENTS AND TRANSACTIONS WITH RELATED PARTIES. Except as
disclosed on Schedule 3.24, and except as disclosed in the Parent Financial
Statements, the Company is not, and since December 31, 1997 has not been, a
party to any contract, agreement, lease or transaction with, or any other
commitment to, (a) a Shareholder, (b) any person related by blood, adoption or
marriage to a Shareholder, (c) any director or officer of the Company, (d) any
corporation or other entity in which any of the foregoing parties has, directly
or indirectly, at least five percent (5.0%) beneficial interest in the capital
stock or other type of equity interest in such corporation or other entity, or
(e) any partnership in which any such party is a general partner or a limited
partner having a five percent (5%) or more interest therein (any or all of the
foregoing being herein referred to as a "RELATED PARTY" and collectively as the
"RELATED PARTIES"). Without limiting the generality of the foregoing, except as
<PAGE>
set forth in Schedule 3.24, and except as disclosed in the Company Financial
Statements no Related Party, directly or indirectly, owns or controls any assets
or properties which are or have since December 31, 1997 been used in the
business of the Company.
3.25. BUSINESS PRACTICES. Except as disclosed on Schedule 3.25, the
Company has not, at any time, directly or indirectly, made any contributions or
payment, or provided any compensation or benefit of any kind, to any municipal,
county, state, federal or foreign governmental officer or official, or any other
person charged with similar public or quasi-public duties, or any candidate for
political office. The Company's books, accounts and records (including, without
limitation, customer files, product packaging and invoices) accurately describe
and reflect, in all material respects, the nature and amount of the Company's
products, purchases, sales and other transactions. Without limiting the
generality of the foregoing, the Company has not engaged, directly or
indirectly, in: (a) the practice known as "double-invoicing;" or (b) the
incorrect or misleading labeling, marketing or sale of refurbished goods as new
goods or the sale of rebuilt goods as original manufactured equipment.
3.26. CONDITION AND SUFFICIENCY OF ASSETS. The buildings and
equipment leased or owned by the Company are generally in good operating
condition and repair, and are adequate for the uses to which they are being put.
The buildings and equipment of the Company are sufficient for the continued
conduct of the Company's business after the Closing in substantially the same
manner as conducted prior to the Closing.
3.27. ACCOUNTING SYSTEM. The Company's accounting software is owned
or licensed by the Company, free and clear of all claims, liens and
encumbrances, and the transactions contemplated hereby will not result in a
breach of any license or other agreement with respect to the accounting
software. The Company's accounting software is in good working order and
condition, free from defects (latent and patent), has been maintained in
accordance with the manufacturer's recommended maintenance program, if any, and
is suitable for maintaining the books and records of the Company and all other
purposes for which it is intended.
3.28. YEAR 2000 COMPLIANCE. All of the Company's material properties
and assets, real and personal, including, but not limited to, those reflected on
the 1998 Company Balance Sheet and any business systems, equipment or processes
using or relying upon computer hardware, microchips, software or their
components (such as computer networks, hardware and software and all related
business functions) used in the regular course of the business shall: (a) handle
date information before, during and after January 1, 2000, including but not
limited to accepting date input, providing date output, and performing
calculations on dates or portions of dates without error; (b) function
accurately and without interruption before, during and after January 1, 2000
without any change in operations associated with the advent of the new century;
(c) respond to two-digit year-date input in a way that resolves the ambiguity as
to century in a disclosed, defined and predetermined manner, and (d) store and
provide output of date information. All third parties upon whom the Company
relies to operate its business are compliant with the foregoing requirements
that no notice of defect or noncompliance has been received from any third
party.
<PAGE>
3.29. DIVIDENDS AND OTHER DISTRIBUTIONS. Schedule 3.29 sets forth
the dates and amounts of all dividends and other distributions declared, paid or
payable by the Company to the Shareholders between January 1, 1999 and the date
hereof, which Schedule 3.29 shall be updated as of the Closing Date to set forth
all dividends and other distributions through the Closing Date.
3.30. FULL DISCLOSURE. No representation or warranty of the
Shareholders contained in this Agreement, and none of the statements or
information concerning the Company contained in this Agreement and the
Schedules, contains or will contain as of the date hereof and as of the Closing
Date any untrue statement of a material fact nor will such representations,
warranties, covenants or statements taken as a whole omit a material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading.
4. REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB.
To induce the Shareholders to enter into this Agreement and to
consummate the transactions contemplated hereby, each of Parent and Merger Sub
represent and warrant to and covenants with the Shareholders as follows:
4.1. ORGANIZATION. Each of Parent and Merger Sub is a corporation
duly organized, validly existing and in good standing under the laws of their
respective states of incorporation. Parent and each of its subsidiaries is
entitled to own or lease its properties and to carry on its business as and in
the places where such business is now conducted, and Parent and each of its
subsidiaries is duly licensed and qualified in all jurisdictions where the
character of the property owned by it or the nature of the business transacted
by it makes such license or qualification necessary, except where such failure
would not result in a material adverse effect on Parent or its subsidiaries.
4.2. CAPITALIZATION AND RELATED MATTERS.
(a) Parent has authorized capital stock consisting of
20,000,000 shares of common stock, par value $0.01 per share, of which 4,933,000
shares were issued and outstanding as of the date hereof, and 1,000,000 shares
of preferred stock, none of which are issued. The Parent owns all of the
outstanding capital stock of the Merger Sub. The Parent's Shares will be, when
issued, duly and validly authorized and fully paid and non-assessable, and will
be issued to the Shareholders free of all encumbrances, claims and liens
whatsoever.
(b) Except as set forth in Schedule 4.2, and except for
employee stock options to purchase shares of Parent's Common Stock, Parent does
not have outstanding any securities convertible into capital stock, nor any
rights to subscribe for or to purchase, or any options for the purchase of, or
any agreements providing for the issuance (contingent or otherwise) of, or any
calls, commitments or claims of any character relating to, its capital stock or
securities convertible into its capital stock.
<PAGE>
4.3. EXECUTION; NO INCONSISTENT AGREEMENTS; ETC.
(a) Subject to the Parent's Board approval contemplated
by Section 7.5 hereof, the execution and delivery of this Agreement and the
performance of the transactions contemplated hereby have been duly and validly
authorized and approved by Parent, the Merger Sub and this Agreement is a valid
and binding agreement of Parent and the Merger Sub, enforceable against Parent
and the Merger Sub in accordance with its terms, except as such enforcement may
be limited by bankruptcy or similar laws affecting the enforcement of creditors'
rights generally, and the availability of equitable remedies.
(b) The execution and delivery of this Agreement by
Parent and the Merger Sub does not, and the consummation of the transactions
contemplated hereby will not, constitute a breach or violation of the charter or
bylaws of Parent or the Merger Sub, or a default under any of the terms,
conditions or provisions of (or an act or omission that would give rise to any
right of termination, cancellation or acceleration under) any material note,
bond, mortgage, lease, indenture, agreement or obligation to which Parent or any
of its subsidiaries is a party, pursuant to which any of them otherwise receive
benefits, or by which any of their properties may be bound.
4.4. FINANCIAL STATEMENTS. Parent has delivered to the Company the
consolidated audited balance sheets of Parent as at June 30, 1997 and 1998, the
consolidated unaudited balance sheet as of March 31, 1999, the consolidated
audited statement of income for the two fiscal years ended June 30, 1997 and
1998, and the unaudited statement of income for the nine months ended March 31,
1999 (collectively, the "PARENT FINANCIAL STATEMENTS"). The Parent Financial
Statements have been prepared in accordance with GAAP, applied on a consistent
basis (except that the unaudited statements do not contain all the disclosures
required by GAAP), and fairly reflect in all material respects the consolidated
financial condition of Parent and its subsidiaries as at the dates thereof and
the consolidated results of Parent's operations for the periods then ended.
Since March 31, 1999, there has been no material adverse change in the assets or
liabilities, in the business or condition, financial or otherwise, of the
Parent, or in its results of operations.
4.5. LIABILITIES. Neither Parent nor any of its subsidiaries has any
material debt, liability or obligation of any kind, whether accrued, absolute,
contingent or otherwise, except (a) those reflected on the Parent Financial
Statements, including the notes thereto, and (b) liabilities incurred in the
ordinary course of business since March 31, 1999, none of which have had or will
have a material adverse affect on the financial condition of Parent and its
subsidiaries taken as a whole.
4.6. CONTINGENCIES. There are no actions, suits, claims or
proceedings pending or, to the knowledge of Parent's management, threatened
against, by or affecting Parent or any of its subsidiaries in any court or
before any arbitrator or governmental agency which could have a material adverse
effect on Parent or its subsidiaries or which could materially and adversely
affect the right or ability of the Parent to consummate the transactions
contemplated hereby. To the knowledge of Parent, there is no valid basis upon
which any such action, suit, claim or proceeding may be commenced or asserted
against the Parent. There are no unsatisfied judgments against Parent and no
consent decrees or similar agreements to which Parent is subject and which could
have a material adverse effect on Parent or its subsidiaries or which could
materially and
<PAGE>
adversely affect the right or ability of the Parent to consummate the
transactions contemplated hereby.
4.7. FULL DISCLOSURE. No representation or warranty of Parent
contained in this Agreement, and none of the statements or information
concerning Parent contained in this Agreement and the Schedules, contains or
will contain as of the date hereof and as of the Closing Date any untrue
statement of a material fact nor will such representations, warranties,
covenants or statements taken as a whole omit a material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading.
5. CONDUCT OF BUSINESS OF THE COMPANY PENDING CLOSING.
The Company and the Shareholders covenant and agree that between the
date hereof and the Closing Date:
5.1. BUSINESS IN THE ORDINARY COURSE. Except as set forth in
Schedule 5.1, the business of the Company shall be conducted only in the
ordinary course, and consistent with past practice. Without limiting the
generality of the foregoing, and except as set forth in Schedule 5.1 or as
otherwise approved in writing by Parent:
(a) The Company shall not enter into any contract,
agreement or other arrangement which would constitute a Material Contract,
except for contracts to sell or supply goods or services to customers in the
ordinary course of business at prices and on terms substantially consistent with
the prior operating practices of the Company;
(b) except for sales of personal property in the
ordinary course of its business, the Company shall not sell, assign, transfer,
mortgage, convey, encumber or otherwise dispose of, or cause the sale,
assignment, transfer, mortgage, conveyance, encumbrance or other disposition of
any of the assets or properties of the Company or any interest therein;
(c) the Company shall not acquire any material assets,
except expenditures made in the ordinary course of business as reasonably
necessary to enable the Company to conduct its normal business operations and to
maintain its normal inventory of goods and materials, at prices and on terms
substantially consistent with current market conditions and prior operating
practices;
(d) the Company shall maintain in full force and effect
all insurance policies referred to in Section 3.17 hereof or other insurance
equivalent thereto;
(e) the books, records and accounts of the Company
shall be maintained in the usual, regular and ordinary course of business on a
basis consistent with prior practices and in accordance with GAAP;
(f) the Company shall use its best efforts to preserve
its business organization, to preserve the good will of its suppliers, customers
<PAGE>
and others having business relations with the Company, and to retain the
services of key employees and agents of the Company after the Closing Date on
terms acceptable to Parent;
(g) except as they may terminate in accordance with the
terms of this Agreement, the Company shall keep in full force and effect, and
not cause a default of any of its obligations under, each of their contracts and
commitments;
(h) the Company shall duly comply in all material
respects with all laws applicable to it and to the conduct of its business;
(i) the Company shall not create, incur or assume any
liability or indebtedness, except in the ordinary course of business consistent
with past practices;
(j) the Company shall not make or commit to make any
capital expenditures in excess of ten thousand dollars ($10,000) in the
aggregate;
(k) other than as contemplated in this Agreement, the
Company shall not apply any of its assets to the direct or indirect payment,
discharge, satisfaction or reduction of any amount payable directly or
indirectly to or for the benefit of any Shareholder or any Related Party; and
(l) neither the Company nor a Shareholder shall take or
omit to take any action which would render any of the Shareholders'
representations or warranties untrue or misleading, or which would be a breach
of any of the Shareholders' covenants.
5.2. NO MATERIAL CHANGES. The Company shall not, without the prior
written consent of the Parent which consent shall not be unreasonably withheld,
materially alter its organization, capitalization, or financial structure,
practices or operations. Without limiting the generality of the foregoing:
(a) no change shall be made in the articles of
incorporation or bylaws of the Company;
(b) no change shall be made in the authorized or issued
capital stock of the Company;
(c) the Company shall not issue or grant any right or
option to purchase or otherwise acquire any of its capital stock or other
securities;
(d) no dividend or other distribution or payment shall
be declared or made with respect to any of the capital stock of the Company in
excess of an aggregate of $100,000; and
(e) no change shall be made affecting the banking
arrangements of the Company, except as set forth in Section 2.14.
<PAGE>
5.3. COMPENSATION. No increase shall be made in the compensation or
employee benefits payable or to become payable to any director, officer,
employee or agent of the Company, and no bonus or profit-share payment or other
arrangement (whether current or deferred) shall be made to or with any such
director, officer, employee or agent, except in the ordinary course of business
and consistent with prior practices.
5.4. NOTIFICATION. Each party to this Agreement shall promptly
notify the other parties in writing of the occurrence, or threatened occurrence,
of any event that would constitute a breach or violation of this Agreement by
any party or that would cause any representation or warranty made by the
notifying party in this Agreement to be false or misleading in any respect.
Shareholders will promptly notify Parent of any event of which any Shareholder
obtains knowledge which could have a material adverse effect on the business,
assets, financial condition or prospects of the Company. Shareholders shall have
the right to update the Schedules to this Agreement immediately prior to
Closing; provided, if such update discloses any breach of a representation,
warranty, covenant or obligation of Shareholders, Parent shall have the right to
then exercise its available rights and remedies hereunder.
6. CONDITIONS TO OBLIGATIONS OF ALL PARTIES.
The obligation of the Shareholders and Parent to consummate the
transactions contemplated by this Agreement are subject to the satisfaction, on
or before the Closing, of each of the following conditions; any or all of which
may be waived in whole or in part by the joint agreement of Parent and the
Shareholders:
6.1. ABSENCE OF ACTIONS. No action or proceeding shall have been
brought or threatened before any court or administrative agency to prevent the
consummation or to seek damages in a material amount by reason of the
transactions contemplated hereby, and no governmental authority shall have
asserted that the within transactions (or any other pending transaction
involving Parent, any of its subsidiaries, the Shareholders or the Company when
considered in light of the effect of the within transactions) shall constitute a
violation of law or give rise to material liability on the part of the
Shareholders, the Company or Parent or its subsidiaries.
6.2. CONSENTS. The parties shall have received from any suppliers,
lessors, lenders, lien holders or governmental authorities, bodies or agencies
having jurisdiction over the transactions contemplated by this Agreement, or any
part hereof, such consents, authorizations and approvals as are necessary for
the consummation hereof, including, without limitation, the consents listed on
Schedule 6.2.
6.3. COMPLIANCE WITH AGREEMENTS AND CONDITIONS. The Parent shall
have performed and complied with all material agreements and conditions required
by this Agreement to be performed or complied with by them prior to or on the
Closing Date.
6.4. HSR ACT. All applicable waiting periods under the Hart Scott
Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"), shall
expire or have been terminated.
<PAGE>
7. CONDITIONS TO OBLIGATIONS OF PARENT.
All obligations of Parent to consummate the transactions contemplated by
this Agreement are subject to the fulfillment and satisfaction of each and every
of the following conditions on or prior to the Closing, any or all of which may
be waived in whole or in part by Parent:
7.1. REPRESENTATIONS AND WARRANTIES. The representations and
warranties contained in Section 3 of this Agreement and in any certificate,
instrument, schedule, agreement or other writing delivered by or on behalf of
the Shareholders in connection with the transactions contemplated by this
Agreement shall be true, correct and complete in all material respects (except
for representations and warranties which are by their terms qualified by
materiality, which shall be true, correct and complete in all respects) as of
the date when made and shall be deemed to be made again at and as of the Closing
Date and shall be true, correct and complete at and as of such time in all
material respects (except for representations and warranties which are by their
terms qualified by materiality, which shall be true, correct and complete in all
respects).
7.2. COMPLIANCE WITH AGREEMENTS AND CONDITIONS. The Shareholders
shall have performed and complied with all material agreements and conditions
required by this Agreement to be performed or complied with by them and by the
Company prior to or on the Closing Date.
7.3. ABSENCE OF MATERIAL ADVERSE CHANGES. No material adverse change
in the business, assets, financial condition, or prospects of the Company shall
have occurred, no substantial part of the assets of the Company not
substantially covered by insurance shall have been destroyed due to fire or
other casualty, and no event shall have occurred which has had or will have a
material adverse effect on the business, assets, financial condition or
prospects of the Company.
7.4. CERTIFICATE OF THE SHAREHOLDERS. The Shareholders shall have
executed and delivered, or caused to be executed and delivered, to Parent one or
more certificates, dated the Closing Date, certifying in such detail as Parent
may reasonably request to the fulfillment and satisfaction of the conditions
specified in Sections 7.1 through 7.3 above.
7.5. BOARD APPROVAL. This Agreement and the transactions
contemplated hereby shall have been approved by (a) the unanimous approval of
the special Acquisition Committee of the Parent's Board of Directors formed for
the purpose of evaluating this Agreement and the transactions contemplated
hereby and, upon the approval of such committee, (b) the approval of the
Parent's Board of Directors.
7.6. FAIRNESS OPINION. The Parent shall have received an opinion
from Morgan Keegan & Company Inc. or another investment banking firm or other
financial advisor satisfactory to the Parent in its sole discretion stating that
the transaction taken as a whole is fair from a financial point of view to the
Parent and its public shareholders.
7.7. MODIFICATION OF NOTES PAYABLE. The notes payable identified on
the 1998 Company Balance Sheet and any other notes payable arising after
December 31, 1998 shall have been modified in accordance with Section 2.14
hereof.
<PAGE>
7.8. SATISFACTORY RESULTS OF INSPECTION. The results of the
inspection referred to in Section 2.1 (including, without limitation, the taking
of a physical inventory) hereof shall be satisfactory to the Parent in its sole
discretion.
7.9. EXECUTION OF EMPLOYMENT AGREEMENT BY JOHN P. GALLAGHER. The
Parent shall have received a copy of the employment agreement in the form of
EXHIBIT "E" hereto which has been duly executed by John P. Gallagher.
7.10. EXECUTION OF EMPLOYMENT AGREEMENT BY JOHN B. GALLAGHER. The
Parent shall have received a copy of the Employment Agreement in the form of
EXHIBIT "F" hereto which has been duly executed by John B. Gallagher.
7.11. EXECUTION OF EMPLOYMENT AGREEMENT BY RICH NILES. The Parent
shall have received a copy of the Employment Agreement of Rich Niles in a form
and substance satisfactory to Parent which has been duly executed by Rich Niles.
8. CONDITIONS TO OBLIGATIONS OF THE SHAREHOLDERS.
All of the obligations of the Shareholders to consummate the
transactions contemplated by this Agreement are subject to the fulfillment and
satisfaction of each and every of the following conditions on or prior to the
Closing, any or all of which may be waived in whole or in part by the
Shareholders:
8.1. REPRESENTATIONS AND WARRANTIES. The representations and
warranties contained in Section 4 of this Agreement and in any certificate,
instrument, schedule, agreement or other writing delivered by or on behalf of
Parent in connection with the transactions contemplated by this Agreement shall
be true and correct in all material respects (except for representations and
warranties which are by their terms qualified by materiality, which shall be
true, correct and complete in all respects) when made and shall be deemed to be
made again at and as of the Closing Date and shall be true at and as of such
time in all material respects (except for representations and warranties which
are by their terms qualified by materiality, which shall be true, correct and
complete in all respects).
8.2. COMPLIANCE WITH AGREEMENTS AND CONDITIONS. Parent shall have
performed and complied with all material agreements and conditions required by
this Agreement to be performed or complied with by Parent prior to or on the
Closing Date.
8.3. ABSENCE OF MATERIAL ADVERSE CHANGES. No material adverse change
in the business, assets, financial condition, or prospects of Parent and its
subsidiaries, taken as a whole, shall have occurred, no substantial part of the
assets of Parent and its subsidiaries, taken as a whole, shall have been
destroyed due to fire or other casualty, and no event shall have occurred which
has had, or will have a material adverse effect on the business, assets,
financial condition or prospects of Parent and its subsidiaries, taken as a
whole.
8.4. CERTIFICATE OF PARENT. Parent shall have delivered to the
Shareholders a certificate, executed by an executive officer and dated the
Closing Date, certifying in such detail as counsel for the Shareholder may
<PAGE>
reasonably request to the fulfillment and satisfaction of the conditions
specified in Sections 8.1 through 8.3 above.
8.5. EXECUTION OF EMPLOYMENT AGREEMENT BY THE COMPANY. John P.
Gallagher shall have received a copy of the Employment Agreement in the form of
EXHIBIT "E" hereto duly executed by the Merger Sub.
8.6. EXECUTION OF EMPLOYMENT AGREEMENT BY THE COMPANY. John B.
Gallagher shall have received a copy of the Employment Agreement in the form of
EXHIBIT "F" hereto duly executed by the Merger Sub.
9. INDEMNITY.
9.1. INDEMNIFICATION BY SHAREHOLDERS. Subject to Section 9.5,
Shareholders (hereinafter collectively called the "SHAREHOLDER INDEMNITOR")
shall jointly and severally defend, indemnify and hold harmless Parent and the
Merger Sub and their direct and indirect parent corporations, subsidiaries
(including the Company after Closing) and affiliates, their officers, directors,
employees and agents (hereinafter collectively called "PARENT INDEMNITEES")
against and in respect of any and all loss, damage, liability, fine, penalty,
cost and expense, including reasonable attorneys' fees and amounts paid in
settlement (collectively, "PARENT LOSSES"), suffered or incurred by any Parent
Indemnitee by reason of, or arising out of:
(a) any misrepresentation, breach of warranty or breach
or nonfulfillment of any agreement of any Shareholder contained in this
Agreement or in any certificate, schedule, instrument or document delivered to
Parent by or on behalf of the Shareholders or the Company pursuant to the
provisions of this Agreement (without regard to materiality thresholds contained
therein); and
(b) any liabilities of the Company of any nature
whatsoever (including tax liability, penalties and interest), whether accrued,
absolute, contingent or otherwise, (i) existing as of the date of the 1998
Company Balance Sheet, and required to be shown therein in accordance with GAAP,
to the extent not reflected or reserved against in full in the 1998 Company
Balance Sheet; or (ii) arising or occurring between December 31, 1998 and the
Closing Date, except for liabilities arising in the ordinary course of business,
none of which shall have a material adverse effect on the Company; and
(c) any liabilities of the Company in connection with
the AT&T UniPlan Service with FlatRate Agreement (the "AT&T DISPUTE") as more
particularly described on Schedule 3.14.
9.2. INDEMNIFICATION BY PARENT. Subject to Section 9.5, Parent and
Merger Sub (hereinafter called the "PARENT INDEMNITOR") shall jointly and
severally defend, indemnify and hold harmless each Shareholder (hereinafter
called "SHAREHOLDER INDEMNITEE") against and in respect of any and all loss,
damage, liability, cost and expense, including reasonable attorneys' fees and
amounts paid in settlement (collectively, "SHAREHOLDER LOSSES"), suffered or
incurred by Shareholder Indemnitee by reason of or arising out of:
<PAGE>
(a) any misrepresentation, breach of warranty or breach
or non-fulfillment of any material agreement of Parent contained in this
Agreement or in any other certificate, schedule, instrument or document
delivered to the Shareholders by or on behalf of Parent pursuant to the
provisions of this Agreement (without regard to materiality thresholds contained
therein); and
(b) any liabilities of the Company of any nature
whatsoever (including tax liability, penalties and interest), whether accrued,
absolute, contingent or otherwise, arising from the Parent's ownership or
operation of the Company after Closing, but only so long as such liability is
not the result of an act or omission of the Company or any Shareholder occurring
prior to Closing. Parent Losses and Shareholder Losses are sometimes
collectively referred to as "INDEMNIFIABLE LOSSES."
9.3. DEFENSE OF CLAIMS.
(a) Each party seeking indemnification hereunder (an
"INDEMNITEE"): (i) shall provide the other party or parties (the "INDEMNITOR")
written notice of any claim or action by a third party arising after the Closing
Date for which an Indemnitor may be liable under the terms of this Agreement,
within ten (10) days after such claim or action arises and is known to
Indemnitee, and (ii) shall give the Indemnitor a reasonable opportunity to
participate in any proceedings and to settle or defend any such claim or action.
The expenses of all proceedings, contests or lawsuits with respect to such
claims or actions shall be borne by the Indemnitor. If the Indemnitor wishes to
assume the defense of such claim or action, the Indemnitor shall give written
notice to the Indemnitee within ten (10) days after notice from the Indemnitee
of such claim or action, and the Indemnitor shall thereafter assume the defense
of any such claim or liability, through counsel reasonably satisfactory to the
Indemnitee, provided that Indemnitee may participate in such defense at their
own expense, and the Indemnitor shall, in any event, have the right to control
the defense of the claim or action.
(b) If the Indemnitor shall not assume the defense of,
or if after so assuming it shall fail to defend, any such claim or action, the
Indemnitee may defend against any such claim or action in such manner as they
may deem appropriate and the Indemnitees may settle such claim or litigation on
such terms as they may deem appropriate but subject to the Indemnitor's
approval, such approval not to be unreasonably withheld; provided, however, that
any such settlement shall be deemed approved by the Indemnitor if the Indemnitor
fails to object thereto, by written notice to the Indemnitee, within fifteen
(15) days after the Indemnitor's receipt of a written summary of such
settlement. The Indemnitor shall promptly reimburse the Indemnitee for the
amount of all expenses, legal and otherwise, incurred by the Indemnitee in
connection with the defense and settlement of such claim or action.
(c) If a non-appealable judgment is rendered against
any Indemnitee in any action covered by the indemnification hereunder, or any
lien attaches to any of the assets of any of the Indemnitee, the Indemnitor
shall immediately upon such entry or attachment pay such judgment in full or
discharge such lien unless, at the expense and direction of the Indemnitor, an
appeal is taken under which the execution of the judgment or satisfaction of the
lien is
<PAGE>
stayed. If and when a final judgment is rendered in any such action, the
Indemnitor shall forthwith pay such judgment or discharge such lien before any
Indemnitee is compelled to do so.
9.4. WAIVER. The failure of any Indemnitee to give any notice or to
take any action hereunder shall not be deemed a waiver of any of the rights of
such Indemnitee hereunder, except to the extent that Indemnitor is actually
prejudiced by such failure.
9.5. LIMITATIONS ON INDEMNIFICATION. Notwithstanding anything to the
contrary contained in this Agreement:
9.5.1. TIME LIMITATION. No party shall be responsible
hereunder for any Indemnifiable Loss unless the Indemnitee shall have provided
such party with written notice containing a reasonable description of the claim,
action or circumstances giving rise to such Indemnifiable Loss within three (3)
years after the Closing Date (the "Indemnity Notice Period"); provided, however,
that:
(a) with respect to any Indemnifiable Loss resulting or
arising from any breach of a representation or warranty of Shareholders relating
to taxes, or any tax liability of the Company arising or relating to periods
prior to the Closing Date, the Indemnity Notice Period shall extend for the full
duration of the statute of limitations; and
(b) there shall be no limit on the Indemnity Notice
Period for indemnity claims: (i) against Shareholders for Indemnifiable Losses
arising or resulting from a breach of a representation or warranty relating to
Environmental Laws, or any liability which relates to the handling or disposal
of Wastes or the failure to comply with any Environmental Law; and (ii) against
any party based on fraud or intentional breach or misrepresentation.
9.5.2. CAPS ON LOSSES. The aggregate liability of each
Shareholder after Closing for Parent Losses shall not exceed an amount equal to
the portion of the Merger Consideration paid to each Shareholder, except for
Parent Losses (a) based upon fraud or intentional breach or intentional
misrepresentation or (b) related to any tax or tax liability of the Company for
periods prior to the Closing Date. The aggregate liability of Parent and the
Merger Sub after Closing for Seller Losses shall not exceed the Merger
Consideration.
9.5.3. BASKET. No party shall have any liability hereunder
for Indemnifiable Losses after Closing, with respect to a breach of the
representations and warranties contained herein, until the aggregate of all
Indemnifiable Losses for which the Shareholders as a group or Parent and Merger
Sub as a group, as applicable, are responsible under this Agreement exceeds
Twenty-Five Thousand ($25,000) Dollars (the "Basket"); provided that once such
Basket is exceeded for the Shareholders as a group or Parent and Merger Sub as a
group, as applicable, the responsible party or parties shall be responsible for
all Indemnifiable Losses, from the first dollar as if such Basket never existed;
and further provided that this Section 9.5.3 shall not limit in any respect
indemnity claims: (a) based upon fraud or intentional breach or intentional
misrepresentation; (b) arising from a breach by the Parent Indemnitor of any
covenant contained in this Agreement; (c) arising from the AT&T Dispute; (d)
<PAGE>
arising from a breach by the Shareholders of any representation or warranty
contained in Section 3.2 hereof; or (e) related to any tax or tax liability of
the Company for periods prior to the Closing Date.
9.5.4. OFFSET. Each of Parent and Merger Sub shall have the
right to offset any Parent Losses against amounts due the Shareholders under
this Agreement, including, without limitation, the Earn-Out Amount or a
promissory note delivered to Parent pursuant to Section 1.4.2 hereof. Each of
Parent and Merger Sub shall collect all Parent Losses by exercising its right of
offset against such amount until the aggregate of such Parent Losses exceeds the
amounts due the Shareholders; thereafter, the Parent Losses may be collected
directly from the Shareholders.
10. TERMINATION.
10.1. TERMINATION. This Agreement may be terminated at any time on
or prior to the Closing:
(a) By mutual consent of Parent and the Shareholders;
or
(b) At the election of Parent if: (i) a Shareholder has
breached or failed to perform or comply with any of his representations,
warranties, covenants or obligations under this Agreement; or (ii) any of the
conditions precedent set forth in Section 6 or 7 is not satisfied as and when
required by this Agreement; or (iii) the Closing has not been consummated by
August 15, 1999; or
(c) At the election of the Shareholders if: (i) Parent
or the Merger Sub has breached or failed to perform or comply with any of its
representations, warranties, covenants or obligations under this Agreement; or
(ii) any of the conditions precedent set forth in Section 6 or 8 is not
satisfied as and when required by this Agreement; or (iii) if the Closing has
not been consummated by August 15, 1999.
10.2. MANNER AND EFFECT OF TERMINATION. Written notice of any
termination ("Termination Notice") pursuant to this Section 10 shall be given by
the party electing termination of this Agreement ("Terminating Party") to the
other party or parties (collectively, the "Terminated Party"), and such notice
shall state the reason for termination. The party or parties receiving
Termination Notice shall have a period of ten (10) days after receipt of
Termination Notice to cure the matters giving rise to such termination to the
reasonable satisfaction of the Terminating Party. If the matters giving rise to
termination are not cured as required hereby, this Agreement shall be terminated
effective as of the close of business on the tenth (10th) day following the
Terminated Party's receipt of Termination Notice. Upon termination of this
Agreement prior to the consummation of the Closing and in accordance with the
terms hereof, this Agreement shall become void and of no effect, and none of the
parties shall have any liability to the others, except that nothing contained
herein shall relieve any party from: (a) its obligations under Sections 2.2 and
2.3; or (b) liability for its intentional breach of any representation, warranty
or covenant contained herein, or its intentional failure to comply with the
terms and conditions of this Agreement or to perform its obligations hereunder.
<PAGE>
11. MISCELLANEOUS.
11.1. NOTICES.
(a) All notices, requests, demands, or other
communications required or permitted hereunder shall be in writing and shall be
deemed to have been duly given upon receipt if delivered in person, or upon the
expiration of four (4) days after the date sent, if sent by federal express (or
similar overnight courier service) to the parties at the following addresses:
(i) If to Parent of the Merger Sub:
European Micro Holdings, Inc.
6073 N.W. 167th Street, Unit C-25
Miami, Florida 33015
Attn: Harry D.Shieldss, Co-President
and
Acquisition Committee of European Micro Holdings, Inc.
c/o Barrett Sutton
Tuke Yopp & Sweeney
NationsBank Plaza - Suite 1100
414 Union Street
Nashville, Tennessee 37219
and
Acquisition Committee of European Micro Holdings, Inc.
c/o Kyle Saxon, Esquire
Catlin, Saxon, Tuttle and Evans
1700 Alfred I. DuPont Building
169 East Flagler Street
Miami, Florida 33131-1298
with a copy to:
Clayton E. Parker, Esq.
Kirkpatrick & Lockhart LLP
201 South Biscayne Blvd.
Suite 2000, Miami Center
Miami, Florida 33131
<PAGE>
(ii) If to the Shareholders:
Mr. John B. Gallagher
6073 N.W. 167th Street, Unit C-25
Miami, Florida 33015
(b) Notices may also be given in any other manner
permitted by law, effective upon actual receipt. Any party may change the
address to which notices, requests, demands or other communications to such
party shall be delivered or mailed by giving notice thereof to the other parties
hereto in the manner provided herein.
11.2. SURVIVAL. Except as provided in the next sentence, the
representations, warranties, agreements and indemnifications of the parties
contained in this Agreement or in any writing delivered pursuant to the
provisions of this Agreement shall survive any investigation heretofore or
hereafter made by the parties and the consummation of the transactions
contemplated herein and shall continue in full force and effect after the
Closing, subject to the limitations of Section 9.5. The representations,
warranties and agreements of the Company contained in this Agreement shall not
survive the Closing.
11.3. COUNTERPARTS; INTERPRETATION. This Agreement may be executed
in any number of counterparts, each of which shall be deemed an original, and
all of which shall constitute one and the same instrument. This Agreement
supersedes all prior discussions and agreements between the parties with respect
to the subject matter hereof, and this Agreement contains the sole and entire
agreement among the parties with respect to the matters covered hereby. All
Schedules hereto shall be deemed a part of this Agreement. This Agreement shall
not be altered or amended except by an instrument in writing signed by or on
behalf of all of the parties hereto. No ambiguity in any provision hereof shall
be construed against a party by reason of the fact it was drafted by such party
or its counsel. For purposes of this Agreement: "herein", "hereby", "hereunder",
"herewith", "hereafter" and "hereinafter" refer to this Agreement in its
entirety, and not to any particular subsection or paragraph. References to
"including" means including without limiting the generality of any description
preceding such term. Nothing expressed or implied in this Agreement is intended,
or shall be construed, to confer upon or give any person other than the parties
hereto any rights or remedies under or by reason of this Agreement.
11.4. GOVERNING LAW. The validity and effect of this Agreement shall
be governed by and construed and enforced in accordance with the laws of the
State of Florida, without regard to principles of conflicts of laws thereof. Any
dispute, controversy or question of interpretation arising under, out of, in
connection with or in relation to this Agreement or any amendments hereof, or
any breach or default hereunder, shall be litigated in the state or federal
courts in Miami-Dade County, Florida, U.S.A. Each of the parties hereby
irrevocably submits to the jurisdiction of any state or federal court sitting in
Miami-Dade County, Florida. Each party hereby irrevocably waives, to the fullest
extent it may effectively do so, the defense of an inconvenient forum to the
maintenance of any such action in Miami-Dade County, Florida.
<PAGE>
11.5. SUCCESSORS AND ASSIGNS; ASSIGNMENT. This Agreement shall be
binding upon
and shall inure to the benefit of the parties hereto and their respective heirs,
executors, legal representatives, and successors; provided, however, that no
Shareholder may assign this Agreement or any rights hereunder, in whole or in
part.
11.6. PARTIAL INVALIDITY AND SEVERABILITY. All rights and
restrictions contained
herein may be exercised and shall be applicable and binding only to the extent
that they do not violate any applicable laws and are intended to be limited to
the extent necessary to render this Agreement legal, valid and enforceable. If
any terms of this Agreement not essential to the commercial purpose of this
Agreement shall be held to be illegal, invalid or unenforceable by a court of
competent jurisdiction, it is the intention of the parties that the remaining
terms hereof shall constitute their agreement with respect to the subject matter
hereof and all such remaining terms shall remain in full force and effect. To
the extent legally permissible, any illegal, invalid or unenforceable provision
of this Agreement shall be replaced by a valid provision which will implement
the commercial purpose of the illegal, invalid or unenforceable provision.
11.7. WAIVER. Any term or condition of this Agreement may be waived
at any time by the party which is entitled to the benefit thereof, but only if
such waiver is evidenced by a writing signed by such party. No failure on the
part of a party hereto to exercise, and no delay in exercising, any right, power
or remedy created hereunder, shall operate as a waiver thereof, nor shall any
single or partial exercise of any right, power or remedy by any such party
preclude any other future exercise thereof or the exercise of any other right,
power or remedy. No waiver by any party hereto to any breach of or default in
any term or condition of this Agreement shall constitute a waiver of or assent
to any succeeding breach of or default in the same or any other term or
condition hereof.
11.8. HEADINGS. The headings as to contents of particular paragraphs
of this Agreement are inserted for convenience only and shall not be construed
as a part of this Agreement or as a limitation on the scope of any terms or
provisions of this Agreement.
11.9. EXPENSES. Except as otherwise expressly provided herein, all
legal and other costs and expenses incurred in connection with this Agreement
and the transactions contemplated hereby shall be paid by Parent or the
Shareholders as each party incurs such expenses, and none of such expenses shall
be charged to or paid by the Company.
11.10. FINDER'S FEES. Parent represents to the Shareholders that no
broker, agent, finder or other party has been retained by it in connection with
the transactions contemplated hereby and that no other fee or commission has
been agreed by the Parent to be paid for or on account of the transactions
contemplated hereby. Shareholders represent to Parent that no broker, agent,
finder or other party has been retained by Shareholders or the Company in
connection with the transactions contemplated hereby and that no other fee or
commission has been agreed by the Shareholders or the Company to be paid for or
on account of the transactions contemplated hereby.
<PAGE>
11.11. GENDER. Where the context requires, the use of the singular
form herein shall include the plural, the use of the plural shall include the
singular, and the use of any gender shall include any and all genders.
11.12. ACCEPTANCE BY FAX. This Agreement shall be accepted,
effective and binding, for all purposes, when the parties shall have signed and
transmitted to each other, by telecopier or otherwise, copies of the signature
pages hereto.
11.13. ATTORNEYS FEES. In the event of any litigation arising under
the terms of this Agreement, the prevailing party or parties shall be entitled
to recover its or their reasonable attorneys fees and court costs from the other
party or parties.
11.14. OPPORTUNITY TO HIRE COUNSEL; ROLE OF KIRKPATRICK & LOCKHART
LLP. Each Shareholder acknowledges that he has been advised and has been given
an opportunity to hire counsel with respect to this Agreement and the
transactions contemplated hereby. Each Shareholder further acknowledges that the
law firm of Kirkpatrick & Lockhart llp has solely represented the Parent in
connection with this Agreement and the transactions contemplated hereby and no
other person.
11.15. TIME IS OF THE ESSENCE. It is understood and agreed among the
parties hereto that time is of the essence in this Agreement and this applies to
all terms and conditions contained herein.
11.16. NO JURY TRIAL. THE PARTIES HEREBY KNOWINGLY, VOLUNTARILY AND
INTENTIONALLY WAIVE THE RIGHT ANY OF THEM MAY HAVE TO A TRIAL BY JURY IN RESPECT
OF ANY LITIGATION BASED HEREON OR ARISING OUT OF, UNDER OR IN CONNECTION WITH
THIS AGREEMENT AND ANY DOCUMENT CONTEMPLATED TO BE EXECUTED IN CONJUNCTION
HEREWITH, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER
VERBAL OR WRITTEN) OR ACTIONS OF ANY PARTY. THIS PROVISION IS A MATERIAL
INDUCEMENT FOR THE PARTIES' ACCEPTANCE OF THIS AGREEMENT.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement to be duly
executed by their duly authorized officers as of the day and year first above
written.
PARENT:
EUROPEAN MICRO HOLDINGS, INC.
By: /s/ Harry Shields
--------------------------------------
Name: Harry Shields
--------------------------------------
Title: Co-President
MERGER SUB:
AMERICAN MICRO ACQUISITION CORP.
By: /s/ Harry Shields
--------------------------------------
Name: Harry Shields
--------------------------------------
Title: Co-President
--------------------------------------
SHAREHOLDERS:
/s/ John B. Gallagher
--------------------------------------
John B. Gallagher
/s/ John P. Gallagher, Trustee
--------------------------------------
John P. Gallagher, Trustee,
John P. Gallagher Declaration of Trust
dated 9/24/98
THE COMPANY:
AMERICAN SURGICAL SUPPLY CORP. OF
FLORIDA D/B/A AMERICAN MICRO
COMPUTER CENTER
By: /s/ John B. Gallagher
--------------------------------------
Name: John B. Gallagher
--------------------------------------
Title: President
--------------------------------------
EXHIBIT 2.03
PLAN OF MERGER
THIS PLAN OF MERGER (the "Plan") is made and entered into as of this
29th day of June, 1999 by and between AMERICAN SURGICAL SUPPLY CORP. OF FLORIDA
D/B/A AMERICAN MICRO COMPUTER CENTER, a Florida corporation (the "MERGING
CORPORATION"), and AMERICAN MICRO ACQUISITION CORP., a Florida corporation (the
"SURVIVING CORPORATION"). The Merging Corporation and the Surviving Corporation
are hereinafter sometimes referred to collectively as the "CONSTITUENT
CORPORATIONS."
W I T N E S S E T H:
WHEREAS, the directors of the Constituent Corporations have determined
that it would be in the best interest of such corporations and their respective
shareholders for the Merging Corporation to merge with and into the Surviving
Corporation in accordance with Florida Business Corporation Act.
NOW, THEREFORE, in consideration of the premises, and the mutual
covenants, agreements, provisions and grants herein contained, the Constituent
Corporations hereby agree and prescribe the terms and conditions of this Plan of
Merger and the mode of carrying the same into effect, as follows:
1. MERGER. Subject to and on the terms and conditions set forth herein,
on the Effective Date (as defined in Section 2 below), the Merging Corporation
shall be merged (the "Merger") with and into the Surviving Corporation, with the
Surviving Corporation remaining the surviving corporation.
2. EFFECTIVE DATE. The Merger shall become effective upon the filing of
the Articles of Merger with the Florida Department of State (the "Effective
Date").
3. EFFECT OF MERGER. Upon the Effective Date: (a) the Merging
Corporation and the Surviving Corporation shall become a single corporation and
the separate corporate existence of the Merging Corporation shall cease; (b) the
Surviving Corporation shall succeed to and posses all the rights, privileges,
powers, and immunities of the Merging Corporation which, together with all of
the assets, properties, business, patents, trademarks, and goodwill of the
Merging Corporation, of every type and description wherever located, shall vest
in the Surviving Corporation without further act or deed; (c) all rights of
creditors and all liens upon any property of the Constituent Corporations shall
remain unimpaired; and (d) the name of the Surviving Corporation shall become
AMERICAN MICRO COMPUTER CENTER, INC., without further act or deed.
4. ARTICLES OF INCORPORATION, BYLAWS, OFFICERS AND DIRECTORS OF
SURVIVING CORPORATION. Upon the Effective Date: (a) the Articles of
Incorporation of the Surviving Corporation shall remain and continue as the
Articles of Incorporation of the Surviving Corporation until amended in the
<PAGE>
manner provided by law; (b) the Bylaws of the Surviving Corporation shall remain
and continue as the Bylaws of the Surviving Corporation until amended in the
manner provided by law; and (c) the officers and directors of the Surviving
Corporation shall remain and continue as the officers and directors of the
Surviving Corporation until their successors are duly elected and qualified in
the manner provided for in the Acquisition Agreement (as defined herein).
5. CANCELLATION OF SHARES. Upon the Effective Date, all of the
then-issued and outstanding shares of capital stock of the Merging Corporation
shall be automatically canceled, without any action on the part of the holder
thereof, in exchange for the right to receive the Merger Consideration (as
defined in Section 1.2 of that certain Merger Agreement (the "Merger Agreement")
of even date herewith among the Merging Corporation, the Surviving Corporation,
European Micro Holdings, Inc. and the shareholders of the Merging Corporation).
6. ARTICLES OF MERGER. At Closing (as defined in the Merger Agreement),
the parties shall promptly execute the Articles of Merger attached hereto and
file the same with the Florida Department of State.
7. GOVERNING LAW. This Plan of Merger shall be governed and construed in
accordance with the laws of the State of Florida.
8. COUNTERPARTS. This Plan of Merger may be executed in counterparts,
each of which when so executed shall constitute an original copy hereof, but
both of which together shall be considered but one and the same document.
IN WITNESS WHEREOF, the parties have executed this Plan of Merger on the
date first above written.
AMERICAN SURGICAL SUPPLY CORP.
OF FLORIDA D/B/A AMERICAN MICRO
COMPUTER CENTER
By: /s/ John B. Gallagher
-------------------------------
Name: John B. Gallagher
-----------------------------
Title: President
-----------------------------
AMERICAN MICRO ACQUISITION CORP.
By: /s/ Harry D. Shields
-------------------------------
Name: Harry D. Shields
----------------------------
Title: President
----------------------------
EXHIBIT 2.04
ARTICLES OF MERGER
OF
AMERICAN SURGICAL SUPPLY CORP. OF FLORIDA
D/B/A AMERICAN MICRO COMPUTER CENTER
INTO
AMERICAN MICRO ACQUISITION CORP.
Pursuant to the provisions of Chapter 607, Florida Statutes, the parties
hereto hereby adopt the following Articles of Merger for the purpose of merging
them into one corporation:
1. AMERICAN SURGICAL SUPPLY CORP. OF FLORIDA D/B/A AMERICAN MICRO
COMPUTER CENTER, a Florida corporation (the "Merging Corporation"), shall be
merged with and into AMERICAN MICRO ACQUISITION CORP., a Florida corporation
(the "SURVIVING CORPORATION"), which shall be the surviving corporation in the
merger.
2. The merger shall become effective on the date on which these Articles
of Merger are filed with the Florida Department of State (the "EFFECTIVE DATE").
3. The Articles of Incorporation of the Surviving Corporation as in
effect immediately prior to the Effective Date shall remain and be the Articles
of Incorporation of the Surviving Corporation.
4. The Plan of Merger, a copy of which is attached hereto and made a
part hereof, was adopted and approved by the directors and shareholders of the
Merging Corporation on June 29, 1999 and the Surviving Corporation on June 29,
1999.
5. The name of the Surviving Corporation after the Merger shall be
AMERICAN MICRO COMPUTER CENTER, INC.
IN WITNESS WHEREOF, the Surviving Corporation and the Merging
Corporation have caused these Articles of Merger to be executed by their
respective officers as of June 29, 1999.
AMERICAN SURGICAL SUPPLY CORP. AMERICAN MICRO ACQUISITION
OF FLORIDA D/B/A AMERICAN MICRO CORP.
COMPUTER CENTER
By: /s/ John B. Gallagher By: /s/ Harry D. Shields
---------------------------------- -----------------------------
Name: John B. Gallagher Name: Harry D. Shields
Its: President Its: President
EXHIBIT 10.21
-------------
EMPLOYMENT AGREEMENT
--------------------
THIS AGREEMENT is entered into as of July 1, 1999 (the "EFFECTIVE DATE"),
by and between AMERICAN MICRO COMPUTER CENTER, INC., a Florida corporation (the
"COMPANY"), and JOHN B. GALLAGHER (the "EMPLOYEE"). All capitalized terms used
in this Agreement and not otherwise defined herein shall have the meanings
assigned to them in the Acquisition Agreement (as defined herein).
RECITALS. Pursuant to a Merger Agreement dated as of June 29, 1999 (the
"Merger Agreement"), the Company is the surviving corporation of a merger with
American Surgical Supply Corp. of Florida d/b/a American Micro Computer Cener
("AMCC"). Employee's participation in the business of the Company is essential
to the Company's success. The parties wish to provide for the employment of
Employee by the Company from and after the date hereof, and to restrict the
ability of Employee to compete with the Company, all on the terms and conditions
herein set forth.
NOW, THEREFORE, for and in consideration of the premises and the mutual
covenants and agreements herein contained, and for other valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, the parties hereby
agree as follows:
1. EMPLOYMENT. Subject to Section 3 below, the Company hereby employs
Employee for a term of two (2) years (the "EMPLOYMENT TERM"), commencing on the
Effective Date, to serve as President of the Company and to perform such
services and duties as are consistent with such position. Employee hereby
accepts such employment. During the term of his employment hereunder, except
with respect to Employee's duties as Co-President and Co-Chairman of European
Micro Holdings, Inc., a Nevada corporation and parent corporation of the Company
("EMCC"), Employee shall devote substantially all of his business time,
attention, knowledge and skills faithfully, diligently and to the best of his
ability to perform his duties hereunder, and Employee shall not engage in any
venture or activity which materially interferes with Employee's performance of
his duties hereunder.
2. COMPENSATION AND BENEFITS. During the Employment Term, the Company
shall pay Employee the compensation and other amounts set forth below.
2.1. SALARY. The Company shall pay Employee a salary ("SALARY") of
ONE-HUNDRED-FOUR THOUSAND DOLLARS ($104,000) per annum during the Employment
Term, payable in installments according to the Company's regular payroll
practices and subject to such deductions as may be required by law.
2.2. BENEFITS. Employee shall receive: (i) a Company automobile; (ii)
the employee benefits and perquisites provided by the Company to its executive
officers from time-to-time, which shall in any case be consistent with EMCC's
policies relating to subsidiary compensation and benefit plans; and (ii)
reimbursement for reasonable and necessary out-of-pocket expenses incurred in
the performance of his duties hereunder, including but not limited to travel and
<PAGE>
entertainment expenses (such expenses shall be reimbursed by the Company, from
time to time, upon presentation of appropriate receipts therefor).
3. TERMINATION.
-----------
3.1. Employee's employment pursuant to this Agreement shall be
terminated by the first to occur of the following events.
(a) The death of Employee.
(b) The Complete Disability of Employee. "COMPLETE DISABILITY"
as used herein shall mean the inability of Employee, due to illness, accident or
any other physical or mental incapacity, to perform the services provided for in
this Agreement for an aggregate of one-hundred-twenty (120) days within any
period of twelve (12) consecutive months during the term hereof, as certified by
a licensed competent physician ("FIRST PHYSICIAN"). In the event that either
party disputes the First Physician's determination of the Employee's disability,
such party (the "OBJECTING PARTY") shall so notify the other party (the "OTHER
PARTY") in writing within ten (10) days after receipt of the First Physician's
certification of disability ("NOTICE OF DISPUTE"). For a period of fifteen (15)
days following the Other Party's receipt of the Notice of Dispute, the parties
shall cause a licensed physician selected by the Objecting Party (the "RECORD
PHYSICIAN") and the First Physician to attempt to agree on whether the Employee
is completely disabled within the meaning of this section. If after such fifteen
(15) day period no agreement is reached, the dispute shall be resolved by an
independent licensed physician jointly selected by the First Physician and
Second Physician (the "INDEPENDENT PHYSICIAN"), whose determination of
disability, or absence thereof, shall be final and binding upon the parties.
Employee shall be reasonably available to be examined by each of the physicians
selected hereunder. Each party shall pay the fees of the physician appointed by
him. If the Independent Physician agrees with Employee's position on disability,
the Company shall pay the fees and expenses of the Independent Physician. If the
Independent Physician does not agree with Employee's position on disability, the
Employee shall pay the fees and expenses of the Independent Physician.
(c) The resignation of Employee. Employee may resign his
employment at any time upon three (3) months' prior written notice.
(d) The discharge of Employee by the Company for Cause. "Cause"
as used herein shall mean:
(i) illegal drug use or alcohol abuse, as determined by the
Company after investigation, notice of the charge to Employee and after allowing
Employee an opportunity to explain the conduct in question;
(ii) conviction of a felony or a crime involving moral
turpitude;
(iii) acts of fraud by Employee against the Company or its
affiliates, or in connection with the performance of his duties hereunder, as
determined by the Company after investigation, notice of the charge to Employee
and after allowing Employee an opportunity to dispute the charge in question; or
2
<PAGE>
(iv) the Employee's willful failure or refusal to comply
with the provisions of this Agreement or to perform Employee's duties and
obligations under this Agreement (a "DEFAULT"); provided, however, that in the
case of this Subsection (iv), termination for "Cause" shall occur only if the
Company has given written notice of the Default to Employee and Employee has
failed to cure the Default in question during a period of seven (7) days after
the date of Employee's receipt of such notice.
3.2. Upon any termination pursuant to Section 3.1, the Company shall
be released from all obligations hereunder (except for the obligation to pay any
compensation and benefits described in Section 2 hereof which are accrued and
unpaid as of the date of termination), including, without limitation, the
obligation to compensate Employee pursuant to Section 2 hereof.
4. CONFIDENTIALITY/COVENANT AGAINST UNFAIR COMPETITION.
---------------------------------------------------
4.1. The Company and the Employee acknowledge that the services to be
performed by the Employee under this Agreement are unique and extraordinary and,
as a result of such employment, the Employee will be in possession of
confidential information relating to the business practices of the Company. The
term "CONFIDENTIAL INFORMATION" shall mean any and all information (verbal and
written) relating to the Company or any of its affiliates, or any of their
respective activities, other than such information which can be shown by the
Employee to be in the public domain (such information not being deemed to be in
the public domain merely because it is embraced by more general information
which is in the public domain) other than as the result of breach of the
provisions of this Section 4.1, including, but not limited to, information
relating to: trade secrets, personnel lists, financial information, research
projects, services used, pricing, customers, customer lists and prospects,
product sourcing, marketing and selling and servicing. The Employee agrees that
he will not, during or for a period of two (2) years after the termination of
employment, directly or indirectly, use, communicate, disclose or disseminate to
any person, firm or corporation any confidential information regarding the
clients, customers, product sources or business practices of the Company
acquired by the Employee during his employment by the Company, without the prior
written consent of the Company.
4.2. Employee agrees that during the Employment Term and for a period
of two (2) years following the termination of his employment (for any reason),
he will not, for his own account or jointly with another, directly or
indirectly, for or on behalf of any individual, partnership, corporation, or
other legal entity, as principal, agent or otherwise:
(i) own, control, manage, be employed by, consult with, or
otherwise participate in, a business involved within the Trade Area (as
hereinafter defined) in: (A) the wholesale distribution of computers, computer
products, peripherals, and related parts, components and equipment; or (B) any
other business activity which competes with the business conducted by the
Company or any of their subsidiaries at any time during the one (1) year
preceding the date of such termination (the activities described in this clause
(i) are hereinafter referred to collectively as the "BUSINESS");
3
<PAGE>
(ii) solicit or induce, or in any manner attempt to solicit,
any person employed by EMCC or the Company or any of their subsidiaries to leave
such employment, whether or not such employment is pursuant to a written
contract and whether or not such employment is at will, or hire any person who
has been employed by EMCC or the Company or any of their subsidiaries at any
time during the six (6) month period preceding such hiring (except that Employee
shall not be prohibited from hiring any person terminated by EMCC or the Company
without cause, so long as such person is not solicited or hired until after his
or her termination by EMCC or the Company); or
(iii) use or disclose any trade secrets or confidential
information concerning the Business or any segment thereof Trade secrets and
confidential information concerning the Business shall include, but not be
limited to, (1) lists of names and addresses of customers and suppliers of the
Company or its subsidiaries, and (2) software and computer programs, market
research and data bases, sources of leads and methods of obtaining new business,
and services employed by the Company, EMCC or their subsidiaries in the Business
or any segment thereof.
4.3. As used herein, the term "TRADE AREA" shall mean the United
States and any other geographic area in which the Company conducted any
significant business activities within the twelve (12) month period prior to the
termination of this Agreement.
4.4. Employee recognizes the importance of the covenant contained in
this Section 4 and acknowledges that, based on his past experience and training
as an executive of the Company and the projected expansion of the Company's
business, the restrictions imposed herein are: (i) reasonable as to scope, time
and area; (ii) necessary for the protection of the Company's legitimate business
interests, including without limitation, the Company's trade secrets, goodwill,
and its relationship with customers and suppliers; (iii) not unduly restrictive
of any Employee's rights as an individual; and (iv) supported by adequate
consideration. Employee acknowledges and agrees that the covenants contained in
this Section 4 are essential elements of this Agreement and that but for these
covenants, EMCC would not have agreed to acquire the Company Common Stock or
enter into this Agreement. Such covenants shall be construed as agreements
independent of any other provision of this Agreement. The existence of any claim
or cause of action against the Company by Employee, whether predicated on the
breach of this Agreement or otherwise, shall not constitute a defense to the
enforcement by the Company of the covenants contained in this Section 4.
4.5. If Employee commits a breach or threatens to commit a breach of
any of the provisions of this Section 4, the Company shall have the right and
remedy, in addition to any others that may be available, at law or in equity, to
have the provisions of this Section 4 specifically enforced by any court having
equity jurisdiction, through injunctive or other relief (without any bond or
security being required to be posted), it being acknowledged that any such
breach or threatened breach will cause irreparable injury to the Company, the
amount of which will be difficult to determine, and that money damages will not
provide an adequate remedy to the Company.
4
<PAGE>
4.6. If any covenant contained in this Section 4, or any part thereof,
is hereafter construed to be invalid or unenforceable, the same shall not affect
the remainder of the covenants, which shall be given full effect, without regard
to the invalid portions, and any court having jurisdiction shall have the power
to reduce the duration, scope and/or area of such covenant and, in its reduced
form, said covenant shall then be enforceable. If Employee breaches the
covenants set forth in this Section 4, the running of the non-compete period
described herein (but not his obligation) shall be tolled for so long as such
breach continues. The provisions of this Section 4 shall survive the expiration
and termination of this Agreement, and the termination of Employee's employment
hereunder.
5. COMPANY PROPERTY.
----------------
5.1. The Company shall be the sole owner of all products and proceeds
of the Employee's services hereunder, including, but not limited to, all
materials, ideas, concepts, formats, suggestions, developments, arrangements,
packages, programs and other intellectual properties that the Employee may
acquire, obtain, develop or create in connection with and during the term of the
Employee's employment hereunder, free and clear of any claims by the Employee
(or anyone claiming under the Employee) of any kind or character whatsoever
(other than the Employee's right to receive compensation hereunder). The
Employee shall, at the request of the Company, execute such assignments,
certificates or other instruments as the Company may from time to time deem
necessary or desirable to evidence, establish, maintain, perfect, protect,
enforce or defend its right, title and interest in or to any such properties.
Upon the termination of the Employee's employment for any reason whatsoever, all
documents, records, notebooks, equipment, price lists, specifications, programs,
customer and prospective customer lists and other materials which refer or
relate to any aspect of the Business which are in the possession of the Employee
(including all copies thereof), shall be promptly returned to the Company.
5.2. The Employee agrees that all processes, technologies and
inventions ("INVENTIONS"), including new contributions, improvements, ideas and
discoveries, whether patentable or not, conceived, developed, invented or made
by him during his employment by the Company shall belong to the Company,
provided that such Inventions grew out of the Employee's work with the Company,
are related in any manner to the Business or are conceived or made on the
Company's time or with the use of the Company's facilities or materials. The
Employee shall (i) promptly disclose such Inventions to the Company; (ii) assign
to the Company, without additional compensation, all patent and other rights to
such Inventions for the United States and foreign countries; (iii) sign all
papers necessary to carry out the foregoing; and (iv) given testimony in support
of his inventorship.
6. SUCCESSORS. This Agreement is personal to Employee and without the
prior written consent of the Company shall not be assignable by Employee. This
Agreement is not assignable by the Company except in connection with the sale of
all or substantially all of the Company's assets. Subject to the foregoing, this
Agreement shall inure to the benefit of and be binding upon the Company and its
successors and assigns.
5
<PAGE>
7. MISCELLANEOUS.
-------------
7.1. MODIFICATION AND WAIVER. Any term or condition of this Agreement
may be waived at any time by the party hereto that is entitled to the benefit
thereof; provided, however, that any such waiver shall be in writing and signed
by the waiving party, and no such waiver of any breach or default hereunder is
to be implied from the omission of the other party to take any action on account
thereof a waiver on one occasion shall not be deemed to be a waiver of the same
or of any other breach on a future occasion. This Agreement may be modified or
amended only by a writing signed by both parties hereto.
7.2. GOVERNING LAW. The validity and effect of this Agreement shall be
governed by and construed and enforced in accordance with the laws of the State
of Florida. Any dispute, controversy, or question of interpretation arising
under, out of, in connection with, or in relation to this Agreement or any
amendments hereof, or any breach or default hereunder, shall be resolved by
litigation as provided in Section 11.4 of the Acquisition Agreement.
7.3. TAX WITHHOLDING. The Company may withhold from any amounts
payable under this Agreement such taxes as shall be required to be withheld
pursuant to any applicable law or regulation.
7.4. SECTION CAPTIONS. Section and other captions contained in this
Agreement are for reference purposes only and are in no way intended to
describe, interpret, define or limit the scope, extent or intent of this
Agreement or any provision hereof.
7.5. SEVERABILITY. Every provision of this Agreement is intended to be
severable. If any term or provision hereof is illegal or invalid for any reason
whatsoever, such illegality or invalidity shall not affect the validity of the
remainder of this Agreement.
7.6. INTEGRATED AGREEMENT. This Agreement constitutes the entire
understanding and agreement among the parties hereto with respect to the subject
matter hereof, and supersedes any other employment agreements executed before
the date hereof. There are no agreements, understandings, restrictions,
representations, or warranties among the parties other than those set forth
herein or herein provided for.
7.7. INTERPRETATION. No provision of this Agreement is to be
interpreted for or against any party because that party or that party's legal
representative drafted such provision. For purposes of this Agreement: "herein,"
"hereby," "hereunder," "herewith," "hereafter," and "hereinafter" refer to this
Agreement in its entirety, and not to any particular Section or subsection. This
Agreement may be executed in any number of counterparts, each of which shall be
deemed an original, and all of which shall constitute one and the same
instrument.
7.8. NOTICES. All notices, requests, demands, or other communications
required or permitted hereunder shall be in writing and shall be deemed to have
been duly given upon receipt if delivered in person or by facsimile transmission
(with confirmation transmission), or upon the expiration of four (4) days after
6
<PAGE>
the date sent, if sent by Federal Express (or similar overnight courier service)
to the parties at the following addresses:
If to Employee: John B. Gallagher
6073 N.W. 167th Street
Unit C-25
Miami, Florida 33015
If to the Company: c/o Technology Express
808 Third Avenue, South
Nashville, Tennessee 37210
Attention: Harry D.Shields, Co-President
With a copy to: Kirkpatrick & Lockhart LLP
201 South Biscayne Boulevard
Suite 2000
Miami, Florida 33131
Attention: Clayton E. Parker, Esq.
Notices may also be given in any other manner permitted by law, effective
upon actual receipt. Any party may change the address to which notices,
requests, demands or other communications to such party shall be delivered or
mailed by giving notice thereof to the other parties hereto in the manner
provided herein. Any notice may be given on behalf of a party by its counsel.
7.9. NO JURY TRIAL. THE PARTIES HEREBY KNOWINGLY, VOLUNTARILY AND
INTENTIONALLY WAIVE THE RIGHT ANY OF THEM MAY HAVE TO A TRIAL BY JURY IN RESPECT
OF ANY LITIGATION BASED HEREON OR ARISING OUT OF, UNDER OR IN CONNECTION WITH
THIS AGREEMENT AND ANY DOCUMENT CONTEMPLATED TO BE EXECUTED IN CONJUNCTION
HEREWITH, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS WHETHER VERBAL
OR WRITTEN OR ACTIONS OF ANY PARTY. THIS PROVISION IS A MATERIAL INDUCEMENT FOR
THE PARTIES' ACCEPTANCE OF THIS AGREEMENT.
7.10. ATTORNEYS' FEES. In the event of any litigation arising under
the terms of this Agreement, the prevailing party or parties shall be entitled
to recover its or their reasonable attorneys' fees and court costs from the
other party or parties.
7
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the Effective Date.
COMPANY:
AMERICAN MICRO COMPUTER CENTER, INC.
By: /s/ Harry D.Shields
------------------------------
Name: Harry D.Shields
Title: President
EMPLOYEE:
/s/ John B. Gallagher
---------------------------------
John B. Gallagher
8
EXHIBIT 23.01
CONSENT OF INDEPENDENT ACCOUNTANTS
----------------------------------
The Board of Directors
European Micro Holdings, Inc.
We consent to incorporation by reference in the registration statement on Form
S-8 (No. 333-69215) of our report dated August 20, 1999, relating to the
consolidated balance sheets of European Micro Holdings, Inc. and subsidiaries as
of June 30, 1999 and 1998, and the related consolidated statements of
operations, shareholders' equity and cash flows for each of the years in the
three-year period ended June 30, 1999, which report appears in the June 30, 1999
annual report on Form 10-K of European Micro Holdings, Inc.
KPMG LLP
/s/ KPMG LLP
- ------------
Nashville, Tennessee
September 28, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary information extracted from the
consolidated balance sheets and consolidated statement of operations of
European Micro Holdings, Inc. and the notes thereto set forth in the
filing. This information is qualified in its entirety by reference to
such financial information.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> Jun-30-1999
<PERIOD-START> Jul-01-1998
<PERIOD-END> Jun-30-1999
<CASH> 3,547
<SECURITIES> 0
<RECEIVABLES> 15,017
<ALLOWANCES> 79
<INVENTORY> 7,232
<CURRENT-ASSETS> 27,809
<PP&E> 1,410
<DEPRECIATION> 798
<TOTAL-ASSETS> 30,599
<CURRENT-LIABILITIES> 15,965
<BONDS> 23
0
0
<COMMON> 49
<OTHER-SE> 14,294
<TOTAL-LIABILITY-AND-EQUITY> 30,599
<SALES> 132,206
<TOTAL-REVENUES> 132,206
<CGS> 121,120
<TOTAL-COSTS> 9,151
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 56
<INTEREST-EXPENSE> 446
<INCOME-PRETAX> 1,604
<INCOME-TAX> 750
<INCOME-CONTINUING> 854
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 854
<EPS-BASIC> 0.17
<EPS-DILUTED> 0.17
</TABLE>
