EUROPEAN MICRO HOLDINGS INC, 10-Q, 2000-02-14

EUROPEAN MICRO HOLDINGS INC
10-Q, 2000-02-14
COMPUTERS & PERIPHERAL EQUIPMENT & SOFTWARE

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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-Q

(MARK ONE)

Quarterly Report Pursuant to Section 13 or 15(d) of Securities Exchange Act of
1934

For the quarterly period ended December 31, 1999

Transition report under Section 13 or 15(d) of the Securities Exchange
Act of 1934 (No Fee Required)

For the transition period from _______ to _______.

Commission File No. 333-44393

EUROPEAN MICRO HOLDINGS, INC.
(Name of Registrant as Specified in Its Charter)

NEVADA 65-0803752
(State or Other Jurisdiction of (I.R.S. Employer Identification
Incorporation No.)
or Organization)
6073 N.W. 167th Street, Unit C-25, 33015
- ----------------------------------- -----
MIAMI, FLORIDA (Zip Code)
(Address of Principal Executive
Offices)
(305) 825-2458
--------------
(Issuer's Telephone Number, Including Area Code)

Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months, and (2) has been
subject to such filing requirements for the past 90 days. Yes (X) No ( )

There were 4,933,900 shares of Common Stock, par value $0.01 per share,
outstanding as of February 11, 2000.

<PAGE>

PART I

FINANCIAL INFORMATION

ITEM FINANCIAL STATEMENTS.

INDEX TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

Consolidated Condensed Balance Sheets as of December 31, 1999 and
June 30, 1999..................................................................3

Consolidated Condensed Statements of Operations for the three and
six months ended December 31, 1999 and 1998....................................4

Consolidated Statement of Shareholders' Equity for the six months
ended December 31, 1999....................................................... 5

Consolidated Condensed Statements of Cash Flows for the six months
ended December 31, 1999 and 1998...............................................6

Notes to the Consolidated Condensed Financial Statements.......................8

<PAGE>

EUROPEAN MICRO HOLDINGS, INC.

CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands, except share data)

(UNAUDITED)
DECEMBER 31, 1999 JUNE 30, 1999
----------------- -------------

ASSETS
CURRENT ASSETS:
Cash $1,819 $3,168
Restricted Cash 393 379
Trade receivables, net 10,146 14,938
Due from related parties 46 1,128
Inventories, net 7,637 7,232
Prepaid expenses 335 402
Other current assets 470 562
------------ -----------
TOTAL CURRENT ASSETS 20,846 27,809
Property and equipment, net 3,785 612
Goodwill, net 2,791 1,675
Investments in and advances to
unconsolidated subsidiaries 502 503
Other assets 205 -
------------ -----------
TOTAL ASSETS $28,129 $30,599
============ ===========

LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings $5,687 $8,614
Current portion of long-term borrowings 1,744 -
Trade payables 925 3,484
Accrued expenses and other current
liabilities 2,225 2,851
Due to related parties 11 633
Income taxes payable 752 383
------------- -----------
TOTAL CURRENT LIABILITIES 11,344 15,965
Long-term borrowings 1,769 23
Other liabilities - 268
------------- -----------
TOTAL LIABILITIES $13,113 $16,256
============= ===========
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, 4,933,900 shares
issued and outstanding 49 49
Additional paid-in capital 9,163 8,979
Accumulated other comprehensive loss (41) (312)
Retained earnings 5,845 5,627
------------- -----------
TOTAL SHAREHOLDERS' EQUITY 15,016 14,343
============= ===========

COMMITMENTS AND CONTINGENCIES

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $28,129 $30,599
------------- -----------

See accompanying notes to consolidated condensed financial statements.

3
<PAGE>
EUROPEAN MICRO HOLDINGS, INC.

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)

THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
--------------------------------- ---------------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
SALES:
Net sales $33,651 $27,939 $65,396 $55,720
Net sales to related parties 895 1,072 1,914 2,588
------- ------- ------- -------
Total net sales 34,546 29,011 67,310 58,308
------- ------- ------- -------

COST OF GOODS SOLD:
Cost of goods sold (29,969) (25,685) (58,045) (50,539)
Cost of goods sold to related parties (872) (1,068) (1,863) (2,566)
------- ------- ------- -------

Total cost of goods sold (30,841) (26,753) (59,908) (53,105)
------- ------- ------- -------

GROSS PROFIT 3,705 2,258 7,402 5,203

OPERATING EXPENSES:
Selling, general and administrative expenses (3,357) (2,150) (6,423) (3,867)
------- ------- ------- -------

INCOME FROM OPERATIONS 348 108 979 1,336

Interest income 20 33 59 69
Interest expense (309) (60) (528) (142)
Equity in net income (loss) of unconsolidated
subsidiaries 2 (19) 0 (47)
------- ------- ------- -------

INCOME BEFORE INCOME TAXES 61 62 510 1,216

Income tax expense (50) (38) (292) (470)
------- ------- ------- -------

NET INCOME $11 $24 $218 $746
======= ======= ======= =======

Net income per share - basic $0.00 $0.00 $0.04 $0.15
======= ======= ======= =======

Net income per share - diluted $0.00 $0.00 $0.04 $0.15
======= ======= ======= =======

See accompanying notes to consolidated condensed financial statements.
</TABLE>

4
<PAGE>
EUROPEAN MICRO HOLDINGS, INC.

CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(In thousands, except share data)
(Unaudited)

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, 1999 4,933,900 $49 $8,979 $(312) $5,627 $14,343

Comprehensive Income:
Net income - - - - 218 218
Other comprehensive income,
foreign currency
translation adjustment - - - 271 - 271
--------- --------- --------- --------- --------- ---------
Total comprehensive income - - - 271 218 489

Adjustment to accrued offering
costs - - 156 - - 156
Compensation charge in
relation to share options
issued to non-employees - - 28 - - 28
--------- --------- --------- --------- --------- ---------
Balance at December 31, 1999 4,933,900 $49 $9,163 $(41) $5,845 $15,016
========= ========= ========= ========= ========= =========
</TABLE>

See accompanying notes to consolidated condensed financial statements.

5
<PAGE>
EUROPEAN MICRO HOLDINGS, INC.

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
SIX MONTHS ENDED DECEMBER 31,
---------------------------------------------
1999 1998
---- ----
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $218 $746
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES
Depreciation and amortization 287 143
Amortization of expense related to contingent
earn-out provisions 47 -
Deferred income taxes (15) (11)
Equity in net loss of unconsolidated subsidiaries - 47
Compensation charge for non-employee stock options 28 94
CHANGES IN ASSETS AND LIABILITIES, NET OF EFFECTS FROM ACQUISITIONS
Trade receivables 5,512 884
Due from related parties 1,082 341
Inventories 1,512 (3,525)
Prepaid expenses and other current assets 225 1,366
Trade payables (3,705) (2,059)
Accrued expenses and other current liabilities (1,185) (1,480)
Due to related parties (622) (180)
Income taxes payable 369 146
--------- ---------
NET CASH PROVIDED BY (USED IN ) OPERATING ACTIVITIES 3,753 (3,488)
--------- ---------
INVESTING ACTIVITIES:
Purchase of fixed assets (2,993) (166)
Sale of fixed assets 27 -
Payment for acquisition, net of cash acquired (1,220) (648)
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES (4,186) (814)
--------- ---------
FINANCING ACTIVITIES:
Short-term borrowings, net (4,175) 4,606
Proceeds from long-term borrowings 3,645 -
Repayment of long term borrowings (527) -
Issuance of common stock, net - (25)
Repayment of capital leases (33) (30)
--------- ---------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (1,090) 4,551
--------- ---------
Exchange rate changes 174 10
--------- ---------
NET INCREASE (DECREASE) IN CASH: (1,349) 259
Cash at beginning of period 3,168 5,012
--------- ---------
CASH AT END OF PERIOD $1,819 $5,271
========= =========

6
<PAGE>
EUROPEAN MICRO HOLDINGS, INC.

Non-cash investing and financing activities:
Fair value of assets acquired $3,314 $4,533
Goodwill 1,408 1,534
Fair value of liabilities assumed (2,817) (4,322)
Notes issued for consideration (604) (964)
--------- ---------

Cash paid for acquisitions $1,301 $781
Less cash acquired (81) (133)
--------- ---------

Net cash paid for acquisitions $1,220 $648
========= =========

Interest paid $517 $129
========= =========

Taxes paid $29 $391
========= =========

</TABLE>

See accompanying notes to consolidated condensed financial statements.

7
<PAGE>

EUROPEAN MICRO HOLDINGS, INC.

NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

1 INTERIM FINANCIAL STATEMENTS

The accompanying unaudited interim financial statements have been prepared
pursuant to the rules and regulations for reporting on Form 10-Q. Accordingly,
certain information and notes required by generally accepted accounting
principles for complete financial statements are not included herein. The
interim statements should be read in conjunction with the Company's financial
statements and notes thereto included in the Company's 1999 Annual Report on
Form 10-K.

In the Company's opinion, all adjustments necessary for a fair presentation of
these interim statements have been included and are of a normal and recurring
nature.

2 INVENTORY

Inventories consist of the following (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31, 1999 JUNE 30, 1999
----------------- -------------

<S> <C> <C>
Finished goods and goods for resale $7,675 $7,348
Less: Allowance for inventory obsolescence (38) (116)
------- -------
$7,637 $7,232
======= =======

A roll forward of allowance for obsolescence is as follows (in thousands):

DECEMBER 31, 1999 JUNE 30, 1999
----------------- -------------

Balance at beginning of period $116 $9
Foreign currency translation adjustment 2 -
Provision for obsolescence 119 602
Amounts written off (199) (495)
------- -------

Balance at end of period $38 $116
======= =======

3 PROPERTY AND EQUIPMENT

Property and equipment consists of the following (in thousands):

DECEMBER 31, 1999 JUNE 30, 1999
----------------- -------------

Buildings and leasehold improvements $2,878 $-
Furniture, fixtures and equipment 1,398 994
Vehicles and other 501 416
------- -------

4,777 1,410
Less: accumulated depreciation (992) (798)
------- -------

$3,785 $612
======= =======
</TABLE>

8
<PAGE>
EUROPEAN MICRO HOLDINGS, INC.

NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

3 PROPERTY AND EQUIPMENT (CONTINUED)

On July 16, 1999, European Micro Plc, a wholly-owned subsidiary of the Company
("EUROPEAN MICRO UK"), purchased the office building in which it had previously
leased space for a purchase price of 1,705,000 pounds sterling ($2,787,000 at
exchange rate on December 31, 1999). The purchase price was financed in part by
a loan in the amount of 1,312,000 pounds sterling ($2,144,000 at exchange rate
on December 31, 1999). This loan calls for monthly payments of principal and
interest in the amount of 15,588 pounds sterling ($25,478 at December 31, 1999)
and matures in July 2009. The mortgage loan note bears interest at a fixed rate
of 7.598%.

Depreciation expense was $207,000 and $48,000 for the six-month periods ended
December 31, 1999 and December 31, 1998, respectively.

4 GOODWILL

On October 26, 1998, European Micro UK 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
$1,536,000 at exchange rate on December 31, 1999). Of this guaranteed amount,
approximately 360,000 pounds sterling (approximately $588,000 at exchange rate
on December 31, 1999) was paid in cash at closing. The unpaid balance of the
guaranteed consideration includes a note payable to the former 40% Sunbelt
shareholder in the amount of 240,163 pounds sterling ($393,000 at exchange rate
on December 31, 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 December 31, 1999. The
note payable and the cash balances are reflected on the accompanying
consolidated condensed balance sheet at December 31, 1999, in accrued expenses
and other current liabilities and restricted cash, respectively. The Company has
the option of paying 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. Sunbelt
continued to distribute its Nova line of products in accordance with past
practice, however, the Company discontinued the Nova line of products effective
January 31, 2000. With the closure of the Nova line of products, the employment
agreement with one of the former shareholders also will be terminated.

During November 1999, purchase accounting adjustments were made to the
calculation of the guaranteed portion and the two contingent earn-out amounts.
These adjustments were derived from the recalculation of fiscal year 1998 pretax
earnings of Sunbelt resulting in a reduction of $272,000 to goodwill. The
portion of the guaranteed consideration due at the end of the first contingent
earn-out period which ran from November 1, 1998 to October 31, 1999, was paid in
November 1999 in the amount of 53,708 pounds sterling ($87,786 at exchange rate
on December 31, 1999). Also, the portion of the first contingent earn-out
payment related to employee retention and the volume of purchases from the Far
East, was paid in November 1999 in the amount of 190,820 pounds sterling
($311,895 at exchange rate on December 31, 1999).

The unpaid balance of the guaranteed purchase price of 152,656 pounds sterling
($249,517 at exchange rate on December 31, 1999) is reflected in goodwill, net
and accrued expenses and other current liabilities on the accompanying
consolidated condensed balance sheet at December 31, 1999. The second contingent
earn-out payment has not been recognized in the accompanying consolidated
condensed financial statements as the payment of such amounts are not, in the
opinion of management, determinable beyond a reasonable doubt. The guaranteed
portion of the purchase price of 940,000 pounds sterling (approximately
$1,536,000 at exchange rate on December 31, 1999) and the portion of the first
contingent earn-out payment related to employee retention and the volume
purchases from the Far East of 190,820 pounds sterling ($311,895 at exchange
rate on December 31, 1999) is being amortized on a straight line basis over 20
years.

9
<PAGE>

4 GOODWILL (CONTINUED)

On November 12, 1998, European Micro UK 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 ($57,000 at exchange rate on December 31, 1999) exceeded
the estimated value of net assets acquired by approximately 85,000 Dutch
guilders ($39,000 at exchange rate on December 31, 1999), which is being
amortized on a straight-line basis over 20 years. If certain financial
performance criteria are met for the fiscal year ended June 30, 2000, additional
consideration of approximately 75,000 Dutch guilders ($34,000 at exchange rate
on December 31, 1999) 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. The year 2000 contingent consideration has not been reflected
in the accompanying consolidated condensed financial statements as the
calculation of such amounts are not determinable at this point in time. The
results of operations of H&B have been included in the accompanying financial
statements from the date of acquisition.

The Company acquired American Surgical Supply Corp. of Florida d/b/a/ American
Micro Computer Center ("AMCC"), in a merger on July 1, 1999. The transaction was
structured as a merger of AMCC with and into the newly formed, wholly owned
subsidiary of the Company. Upon consummation of the merger, the subsidiary's
name was changed to American Micro Computer Center, Inc. ("AMERICAN MICRO"). The
purchase price for AMCC was equal to $1,131,000, 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. 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, the Company's
Co-President, Co-Chairman and significant shareholder. This note was repaid in
full in November 1999. 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.

The acquisition of AMCC was accounted for as a purchase. The base purchase
price, inclusive of transaction costs, of approximately $1,301,000 exceeded the
estimated fair market value of net assets acquired by approximately $804,000,
which constitutes goodwill and which is being amortized on a straight-line basis
over 20 years. The results of operations of American Micro, since acquisition,
have been included in the accompanying financial statements. The contingent
earn-out payment relating to two times the after tax earnings for calendar year
1999 of $605,000 (2 x $302,500) has been accrued and is reflected in goodwill,
net and accrued expenses and other current liabilities. The contingent earn-out
payment relating to two times the after tax earnings for calendar year 2000 has
not been recognized in the accompanying consolidated condensed financial
statements as the calculation of such amounts are not determinable at this point
in time.
Purchase accounting adjustments have not been finalized.

The following summarized unaudited pro forma financial information assumes the
acquisitions of Sunbelt and AMCC occurred on July 1, 1998 (in thousands, except
share data):

SIX MONTHS ENDED
DECEMBER 31, 1998
-----------------

Total net sales $76,623
Net income $696
Earnings per share:
Basic $0.14
Diluted $0.14

The pro forma financial information is 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.

10
<PAGE>

4 GOODWILL (CONTINUED)

A roll forward of goodwill is as follows (in thousands):

DECEMBER 31, 1999
-----------------

Balance at beginning of period $1,675
Foreign currency translation
adjustment 60
Purchase accounting adjustments (272)
Additions 1,408
Amortization (80)
-------
Balance at end of period $2,791
=======

5 SHORT-TERM BORROWINGS

Short-term borrowings consists of the following (in thousands):

DECEMBER 31, 1999 JUNE 30, 1999
----------------- -------------

Bank lines of credit:
European Micro UK facility $1,238 $1,581
Nor'Easter Micro facility 708 -
American Micro facility 878 -
-------- --------
Total bank lines of credit 2,824 1,581
Receivable financing 2,181 7,033
Other short-term borrowings 682 -
-------- --------

Total short-term borrowings $5,687 $8,614
======== ========

European Micro Plc has a bank line of credit (the "EUROPEAN MICRO UK FACILITY")
which is secured by a mortgage debenture on all the assets of European Micro UK
and is subordinate to the receivable financing and the capital leases. The
European Micro UK Facility is subject to review in July each year and has been
renewed to July 2000. This facility has total availability to the Company at
December 31, 1999 of $1.2 million pounds sterling ($2.0 million at December 31,
1999). Interest is charged on the bank line of credit at 1.25% over the bank
borrowing rate of 5.50% at December 31, 1999 and 5% at June 30, 1999.

The Company also obtained two lines of credit on October 29, 1999, to finance
operations based in the United States. American Micro and Nor'Easter each
obtained a line of credit, secured by accounts receivable and inventory. Amounts
available under each of the line of credit agreements are based upon eligible
accounts receivable and inventory, up to a maximum borrowing amount of $1.5
million of each agreement. Each of these lines of credit matures on October 28,
2000, and each bears interest at 0.5% over the bank borrowing rate of 8.5% at
December 31, 1999. As partial security for these loans, Messrs. Gallagher and
Shields pledged to the lender a portion of their shares of common stock of the
Company. In the event the Company defaults on one or more of these loans, the
lender may foreclose on all or a portion of the pledged securities. Such an
event may cause a change of control in the Company because Messrs. Gallagher and
Shields together own 71% of the Company's outstanding common stock. The lines of
credit agreements include certain financial and non-financial covenants and
restrictions. The agreements also contain a provision whereby the lender can
declare a default based on subjective criteria. As of December 31, 1999, the
Company was not in compliance with one of the financial covenants in the
agreements. The Company has obtained a waiver of these events of non-compliance
for the December 31, 1999 reporting period. Given the Company's current and
expected operating results, it is likely that the Company will be out of
compliance with such covenant requirements at the next quarterly reporting date.

11
<PAGE>

EUROPEAN MICRO HOLDINGS, INC.

NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

5 SHORT-TERM BORROWINGS (CONTINUED)

As a result, the Company is in discussion with the lender to amend the
agreements to adjust the financial covenant requirements. While management
believes such discussions will result in amended covenant requirements which the
Company will be able to achieve, there can be no assurances that the Company
will be successful in these negotiations.

Receivable financing represents borrowings secured by various trade receivables
totaling $2.6 million at December 31, 1999 and $8.3 million at June 30, 1999.
Trade receivables can be financed up to the lower of 85% of the value of the
trade receivables balance or 6.2 million pounds sterling at December 31, 1999
($10.1 million at December 31, 1999). The trade receivable financing increased
from a maximum of 5.5 million pounds sterling at June 30, 1999 ($8.7 million at
June 30, 1999). This facility can be terminated by either party giving three
months' notice. The finance company which provides the receivable financing
facility has full recourse to European Micro UK 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 5.50% at December 31, 1999, and 5% at
June 30, 1999.

European Micro UK also had a revolving credit agreement, secured against
inventory. The facility allowed European Micro UK to borrow up to 3.5 million
pounds sterling ($5.7 million at December 31, 1999) to assist in the purchase of
inventory. To date, no borrowings have been drawn down on this line. This
revolving credit agreement has expired and European Micro UK is negotiating to
renew.

Other short-term borrowings represent various notes payable of American Micro.
The maturity dates of the notes range from on demand to June 30, 2000. The
interest rates range from 2.25% over the prime interest rate to 12%.

6 LONG-TERM BORROWINGS

Long-term borrowings consists of the following (in thousands):

DECEMBER 31, 1999 JUNE 30, 1999
----------------- -------------

Mortgage loan note $2,043 $-
Term loan 1,375 -
Other long-term borrowings 95 23
-------- -------
$3,513 $23
Less current maturities of (1,744) -
long-term borrowings
-------- -------

Total long-term borrowings $1,769 $23
======== =======

The mortgage loan note is secured by a mortgage on the office building of
European Micro UK. The note calls for monthly payments of principal and interest
in the amount of 15,588 pounds sterling ($25,478 at December 31, 1999) and
matures in July 2009. The mortgage loan note bears interest at a fixed rate of
7.598%.

The term loan was obtained on October 29, 1999, in the amount of $1,500,000. The
term loan is to be repaid with quarterly payments of $125,000 over three years.
The term loan bears interest at the one-month LIBOR plus two and one-quarter
percentage points (2.25%). One-month LIBOR at December 31, 1999 was 5.8%. The
term loan is secured by substantially all of the assets of the Company. As
partial security for this loan, Messrs. Gallagher and Shields pledged to the
lender a portion of their shares of common stock of the Company. In the event
the Company defaults on this loan, the lender may foreclose on all or a portion
of the pledged securities. Such an event may cause a change of control in the
Company because Messrs. Gallagher and Shields together own 71% of the Company's
outstanding common stock. The term loan agreement includes certain financial and
non-financial covenants and restrictions. The agreement also contains a
provision whereby the lender can declare a default based on subjective criteria.

12
<PAGE>

EUROPEAN MICRO HOLDINGS, INC.

NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

6 LONG-TERM BORROWINGS (CONTINUED)

The term loan agreement is with the same lender as the Nor' Easter Micro and
American Micro line of credit facilities discussed in Note 5. Further, the term
loan credit agreement contains similar loan covenant requirements. As such, the
Company's non-compliance with one of the financial covenants has been waived for
the December 31, 1999 reporting period. The total amount outstanding under the
term loan agreement is reflected in current maturities of long term debt at
December 31, 1999, because of the likelihood of covenant violation at the next
quarterly reporting date absent an amendment to the term loan agreement.

In conjunction with the purchase of AMCC, the Company assumed a note payable to
John P. Gallagher, the father of John B. Gallagher, who is a significant
shareholder, co-chairman, and co-president of the Company. This note was paid in
full during November 1999.

7 EARNINGS PER SHARE

The calculation of earnings per share are detailed in the table below:

<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
-----------------------------------------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
EARNINGS
Net income (in thousands) $11 $24 $218 $746
--------- --------- ---------- ---------
WEIGHTED AVERAGE NUMBER OF SHARES
Outstanding common stock during the period 4,933,900 4,933,900 4,933,900 4,933,900
Contingently issuable shares 114,011 - 99,559 -
--------- --------- ---------- ---------

BASIC WEIGHTED AVERAGE NUMBER OF SHARES 5,047,911 4,933,900 5,033,459 4,933,900
Effect of dilutive stock options and other contingent shares - 17,926 497 8,963
--------- --------- ---------- ---------

DILUTED WEIGHTED AVERAGE NUMBER OF SHARES 5,047,911 4,951,826 5,033,956 4,942,863
========= ========= ========= =========

Basic earnings per share $0.00 $0.00 $0.04 $0.15
========= ========= ========= =========

Diluted earning per share $0.00 $0.00 $0.04 $0.15
========= ========= ========= =========
</TABLE>

During the three-month period ended December 31, 1999, the Company issued
options to purchase up to 2,500 shares of Common Stock at an exercise price of
$8.00 per share. The above dilutive earnings per share calculations for the
three-month and six-month periods ended December 31, 1999, exclude the effect of
options to purchase 349,000 and 341,500 shares of common stock, respectively, at
exercise prices ranging from $7.50 to $12.00 per share, due to the fact they
were anti-dilutive (i.e., the exercise price was greater than the average market
price for the respective periods). The above dilutive earnings per share
calculations for the three-month and six-month periods ended December 31, 1998,
exclude the effect of options to purchase 20,000 and 20,000 shares of common
stock, respectively, at exercise prices ranging from $9.19 to $11.00 per share,
due to the fact they were anti-dilutive. Also see "Note 4 (Goodwill) to the
Consolidated Condensed Financial Statements" related to contingently issuable
shares related to acquisitions. However, the effect of contingent shares related
to the payment due after the first contingent earn-out period of the Sunbelt
acquisition has not been included in the three month period ended December 31,
1999 as such payment was paid in cash in November 1999. Also the effect of the
contingent shares related to the second contingent earn-out of the Sunbelt
acquisition are not included, as the conditions necessary for such contingent
shares to be issued have not been met as of December 31, 1999. However, the
effect of contingent shares related to the guaranteed earn-out amount payable
after the second contingent earn-out period is included. The effect of
contingent shares related to the first earn-out of American Micro is included in
the three-month period ended December 31, 1999. The effect of contingent shares

13
<PAGE>

EUROPEAN MICRO HOLDINGS, INC.

NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

7 EARNINGS PER SHARE (CONTINUED)

related to second earn-out of American Micro is not included, as determination
of the amount of such contingent shares to be issued are not determinable.

8 RELATED PARTY TRANSACTIONS

European Micro Holdings, Inc. belongs to a group of related companies (the
"GROUP"). The Group is comprised of Technology Express, Inc. located in
Nashville, Tennessee ("TECHNOLOGY EXPRESS"), and, until July 1, 1999, AMCC which
was purchased by European Micro Holdings, Inc. See "Note 4 (Goodwill) to the
Consolidated Condensed Financial Statements." Technology Express is owned and
controlled by Harry D. Shields, who is Co-President and Co-Chairman of the
Company. Until July 1, 1999, AMCC was controlled by John B. Gallagher, who is a
Co-President and Co-Chairman of the Company. The Company acquired AMCC on July
1,1999.

The rates charged on related party sales are lower than they would be in
arms-length transactions. The Company has a bulk buying arrangement with the
remaining related party, Technology Express, which gives the Company the benefit
of buying 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
party.

Related party transactions are summarized as follows (in thousands):

THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
-----------------------------------------------
1999 1998 1999 1998
---- ---- ---- ----
SALES TO:
AMCC N/A $389 N/A $402
Technology Express $895 683 $1,914 2,186
------ ------ ------ ------
$895 $1,072 $1,914 $2,588
====== ====== ====== ======

PURCHASES FROM:
AMCC N/A $130 N/A $130
Technology Express $44 1,113 $1,724 13,552
------ ------ ------ ------

$44 $1,243 $1,724 $13,682
====== ====== ====== ======

Due from related parties was comprised of the following balances (in thousands):

DECEMBER 31, 1999 JUNE 30, 1999
----------------- -------------

AMCC N/A $974
Technology Express $46 154
----- ------
$46 $1,128
===== ======

14
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EUROPEAN MICRO HOLDINGS, INC.

NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

8 RELATED PARTY TRANSACTIONS (CONTINUED)

Due to related parties was comprised of the following balances (in thousands):

DECEMBER 31, 1999 JUNE 30, 1999
----------------- -------------

AMCC N/A $3
Technology Express $11 630
----- ------

$11 $633
===== ======

The entities listed above are related to the Company in the following manner:

AMCC

AMCC is a distributor of computer hardware based in Miami, Florida. John B.
Gallagher who is Co-Chairman, Co-President, a Director and shareholder (owning
39% of the outstanding shares) of European Micro Holdings, Inc., was until July
1, 1999, the president of AMCC and owned 50% of the outstanding shares of
capital stock in that company. See "Note 4 (Goodwill) to the Consolidated
Condensed Financial Statements" regarding the acquisition of AMCC. Frank Cruz,
who is Chief Operating Officer of European Micro Holdings, Inc., has been an
employee of AMCC since 1994.

TECHNOLOGY EXPRESS

Until 1996, Technology Express was a full service authorized reseller of
computers and related products based in Nashville, Tennessee, selling primarily
to end-users. Technology Express was sold to Inacom Computers in 1996.
Concurrently with the sale, Mr. Shields founded a new computer company with the
name Technology Express. This company is a distributor of computer products and
does not sell to end-users. Harry D. Shields, who is Co-Chairman, Co-President,
a Director and shareholder (owning 32% of the outstanding shares) of European
Micro Holdings, Inc., is president of Technology Express and owns 100% of the
outstanding shares of capital stock of that company. Jay Nash, who is Chief
Financial Officer, Treasurer and Secretary of European Micro Holdings, Inc., has
been an employee of Technology Express since 1992.

9 CONTINGENCIES

European Micro UK and the Company have each demanded payment from Big Blue
Europe for loans made in the amounts of $150,000 and $350,000, respectively. Big
Blue Europe is currently under a court order prohibiting payment of these loans.
The 50% shareholders of Big Blue Europe, its principals, Jeff and Marie Alnwick,
and Big Blue Europe, derivatively, have filed a lawsuit against the Company,
European Micro UK, John B. Gallagher and Harry D. Shields alleging fraud, aiding
and abetting fraud, misappropriation of trade secrets, breach of fiduciary duty,
aiding and abetting breach of fiduciary duty, breach of contract and tortious
interference with contract. The complaint states that the plaintiffs seek $10
million or more in damages. The suit was filed in the United States District
Court of the Eastern District of New York, Case # 99 CV 7380 (E.D.N.Y.) (ADS).
The factual allegations underlying the lawsuit stem from European Micro UK's
joint venture interest in Big Blue Europe. The Company has a pending motion to
dismiss the complaint and has requested the New York court to refer the case to
the courts of Holland upon the doctrine of FORUM NON CONVENIENS. The Company
believes that the allegations specified in the complaint are without merit and
intends to vigorously defend the suit. As a consequence of some of the
allegations in such complaint, Messrs. Gallagher and Shields have filed an
action in the United Kingdom for defamation against the Alnwicks and others.

15
<PAGE>

EUROPEAN MICRO HOLDINGS, INC.

ITEM MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.

INTRODUCTORY STATEMENTS

FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS. THIS QUARTERLY REPORT CONTAINS
FORWARD-LOOKING STATEMENTS, INCLUDING STATEMENTS REGARDING, AMONG OTHER THINGS,
(A) EUROPEAN MICRO HOLDINGS, INC.'S ("EUROPEAN MICRO" OR THE "COMPANY")
PROJECTED SALES AND PROFITABILITY, (B) THE COMPANY'S GROWTH STRATEGIES, (C)
ANTICIPATED TRENDS IN THE COMPANY'S INDUSTRY, (D) THE COMPANY'S FUTURE FINANCING
PLANS, AND (E) THE COMPANY'S ANTICIPATED NEEDS FOR WORKING CAPITAL. IN ADDITION,
WHEN USED IN THIS QUARTERLY REPORT, THE WORDS "BELIEVES," "ANTICIPATES,"
"INTENDS," "IN ANTICIPATION OF," "EXPECTS," AND SIMILAR WORDS ARE INTENDED TO
IDENTIFY CERTAIN FORWARD-LOOKING STATEMENTS. THESE FORWARD-LOOKING STATEMENTS
ARE BASED LARGELY ON THE COMPANY'S EXPECTATIONS AND ARE SUBJECT TO A NUMBER OF
RISKS AND UNCERTAINTIES, MANY OF WHICH ARE BEYOND THE COMPANY'S CONTROL. ACTUAL
RESULTS COULD DIFFER MATERIALLY FROM THESE FORWARD-LOOKING STATEMENTS AS A
RESULT OF CHANGES IN TRENDS IN THE ECONOMY AND THE COMPANY'S INDUSTRY,
REDUCTIONS IN THE AVAILABILITY OF FINANCING AND AVAILABILITY OF COMPUTER
PRODUCTS ON TERMS AS FAVORABLE AS EXPERIENCED BY THE COMPANY IN PRIOR PERIODS
AND OTHER FACTORS. IN LIGHT OF THESE RISKS AND UNCERTAINTIES, THERE CAN BE NO
ASSURANCE THAT THE FORWARD-LOOKING STATEMENTS CONTAINED IN THIS QUARTERLY REPORT
WILL IN FACT OCCUR. THE COMPANY DOES NOT UNDERTAKE ANY OBLIGATION TO PUBLICLY
RELEASE THE RESULTS OF ANY REVISIONS TO THESE FORWARD-LOOKING STATEMENTS 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 FOUR 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"), COLCHESTER
ENTERPRISE PTE. LTD., A COMPANY ORGANIZED UNDER THE LAWS OF SINGAPORE
("COLCHESTER"), AND AMERICAN MICRO COMPUTER CENTER, INC., A FLORIDA CORPORATION
("AMERICAN MICRO") (COLLECTIVELY, THE FOUR 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 to a related party in
the United States. The Company's customers consist of more than 670 value-added
resellers, corporate resellers, retailers, direct marketers and distributors.
The Company does not sell to end-users. Substantially all of the products sold
by the Company are manufactured by well-recognized manufacturers such as IBM,
Compaq and Hewlett-Packard, although the Company generally does not obtain its
inventory directly from such manufacturers. The Company monitors the geographic
pricing strategies related to such products, currency fluctuations and product
availability in order to obtain inventory at favorable prices from other
distributors, resellers and wholesalers.

The Company considers itself to be a focused distributor, as opposed to a
broadline distributor, dealing with a limited and select group of products from
a limited and select group of leading manufacturers. The Company believes that
being a focused distributor enables it to respond more quickly to customer
requests and gives it greater availability of products, access to products and
improved pricing. The Company believes that as a focused distributor it has been
able to develop greater expertise in the products which it sells. The Company
places significant emphasis on market awareness and planning and actively shares
this knowledge with its customers in order to further enhance trading relations.
The Company strives to monitor and react quickly to market trends in order to
enable its multilingual sales team to maintain the highest levels of customer
service.

European Micro Holdings, Inc. was organized under the laws of the State of
Nevada in December 1997 and is the parent of European Micro UK, Nor'Easter,
Colchester and American Micro. 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. American Micro was formed on June 24, 1999 to
acquire AMCC and now serves as an independent distributor in the United States.

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").

16
<PAGE>

EUROPEAN MICRO HOLDINGS, INC.

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.
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 discontinued the Nova product line
effective January 31, 2000. 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. 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.

RESULTS OF OPERATIONS

The following table sets forth, for the periods presented, the percentage of net
sales represented by certain items in the Company's Consolidated Condensed
Statements of Operations:

<TABLE>
<CAPTION>
PERCENTAGE OF NET SALES

THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>

Net sales to third parties 97.4% 96.3% 97.2% 95.6%
Net sales to related parties 2.6% 3.7% 2.8% 4.4%
---------- ---------- ---------- ----------
Total net sales 100.0% 100.0% 100.0% 100.0%
---------- ---------- ---------- ----------

Cost of goods sold to third parties (86.8%) (88.5%) (86.2%) (86.7%)
Cost of goods sold to related parties (2.5%) (3.7%) (2.8%) (4.4%)
---------- ---------- ---------- ----------

Total cost of goods sold (89.3%) 92.2% (89.0%) (91.8%)
---------- ---------- ---------- ----------

Total gross profit 10.7% 7.8% 11.0% 8.9%

Total operating expenses (9.7%) (7.4%) (9.6%) (6.6%)
---------- ---------- ---------- ----------

Operating profit 1.0% 0.04% 1.4% 2.3%

Interest income 0.1% 0.5% 0.1% 0.4%
Interest expense (0.9%) (0.6%) (0.8%) (0.5%)
Equity in net income (loss) of unconsolidated
subsidiary 0.0% (0.1%) 0.0% (0.1%)
---------- ---------- ---------- ----------

Income before income taxes 0.2% 0.2% 0.7% 2.1%
Income taxes (0.1%) (0.1%) (0.4%) (0.8%)
---------- ---------- ---------- ----------

Net income 0.1% 0.1% 0.3% 1.3%
========== ========== ========== ==========
</TABLE>

17
<PAGE>

EUROPEAN MICRO HOLDINGS, INC.

THREE-MONTH PERIOD ENDED DECEMBER 31, 1999 AND 1998

TOTAL NET SALES. Total net sales increased $5.5 million, or 19.1%, from $29.0
million in the three-month period ended December 31, 1998 to $34.5 million in
the comparable period in 1999. Excluding net sales to related parties, net sales
increased $5.8 million, or 20.4%, from $27.9 million in the three-month period
ended December 31, 1998 to $33.7 million in the comparable period in 1999. This
increase was attributable to the addition of Sunbelt's trading sales (accounting
for approximately $3.2 million), the addition of Colchester's sales (accounting
for approximately $2.8 million) and the addition of American Micro's sales
(accounting for approximately $4.5 million). This increase was partially offset
by a reduction of $1.4 million in the Premier Dealers Club, a reduction of
$50,000 from Sunbelt's Nova line of products, a reduction of $2.4 million from
European Micro UK's trading sales (excluding Sunbelt's trading sales) and a
reduction of $870,000 in Nor'Easter's sales.

Net sales to related parties decreased $177,000, or 16.5%, in the three-month
period ended December 31, 1999 from the comparable period in 1998. This decrease
is primarily attributable to the acquisition of AMCC on July 1, 1999, and
therefore, net sales to American Micro are excluded from net sales to related
party. Until July 1, 1999, the related parties consisted of a group of entities
in which an ownership interest was held by either of the two primary
shareholders of the Company, John B. Gallagher or Harry D. Shields. See "Note 8
(Related party transactions) to the Consolidated Condensed Financial
Statements." Since the acquisition of AMCC, the sole member of the group is
Technology Express, Inc. In order to facilitate fast and efficient international
transactions, the Company expects to continue to act as a supplier for and
purchaser from Technology Express. Inter-group prices are expected to remain at
one percent over cost but exceptions may be made in times of short supply, to
cover assembly costs and to reward one another for exceptional low cost
purchases. The Company believes that its reliance on the group will continue to
decline, although the Company's sales will be lower in future periods if the
Company is unable to sell product to Technology Express as it has historically
done. Likewise, the Company's profitability may be lower in future periods if it
is unable to purchase products from Technology Express because the Company may
not be able to obtain such product from other sources or if available, on as
favorable terms.

There can be no assurance that the Company will be able to maintain the level of
sales or sales growth achieved in this period or past periods because of
seasonal variations in the demand for the products and services offered by the
Company, the introduction of new hardware and software technologies and 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.

GROSS PROFIT. Gross profit increased $1.4 million, or 64.1%, from $2.3 million
in the three-month period ended December 31, 1998 to $3.7 million in the
comparable period in 1999. Gross profit excluding related party transactions
increased $1.4 million, or 63.3%, from $2.3 million in the three-month period
ended December 31, 1998 to $3.7 million the comparable period in 1999. This
increase is primarily due to the addition of Colchester with $224,000 in gross
profit, the addition of American Micro with $480,000 in gross profit and an
increase at European Micro UK of $375,000 and an increase at Nor'Easter of
$360,000.

Gross profit attributable to related party sales was $24,000 in the three-month
period ended December 31, 1999. This represents a gross margin of approximately
(2.7%). 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.

Gross margins increased by 290 basis points from 7.8% in the three-month period
ended December 31, 1998 to 10.7% in the comparable period in 1999. Excluding
related party transactions, gross margin increased from 8.1% in the three-month
period ended December 31, 1998 to 10.9% in the comparable period in 1999. This
change is related to the shortage of memory products in the fiscal second
quarter resulting in higher selling prices and margin.

Foreign exchange gains and losses, net, increased from a loss of $52,000 in the
three-month period ended December 31, 1998 to a gain of $160,000 in the
comparable period in 1999. This favorable movement was attributable to the
weakening of the U.K. pound sterling relative to the Euro and the strengthening
of the U.K. pound sterling against the U.S. dollar.

18
<PAGE>
EUROPEAN MICRO HOLDINGS, INC.

OPERATING EXPENSES. Operating expenses as a percentage of total net sales
increased from 7.4% in the three-month period ended December 31, 1998 to 9.7% in
the comparable period in 1999. This increase in operating expenses was primarily
caused by higher commissions and bonus payments to employees which are tied to
the Company's gross profit and gross margin. Also contributing to this increase
were legal expenses incurred by the Company in connection with the Big Blue
lawsuit. Moreover, American Micro's operating expenses, which were included in
the Company's consolidated financial statements for period ended December 1999,
had a higher level of operating expenses relative to sales than that of the
Company.

INTEREST EXPENSE. Interest expense increased by $249,000 from $60,000 in
three-month period ended December 31, 1998 to $309,000 in the comparable period
in 1999. This was attributable to increased borrowings during the period because
of increased average accounts receivable and inventory balances, the purchase of
the office building and the acquisitions of Sunbelt and AMCC.

INCOME TAXES. Income taxes as a percentage of income before income taxes
increased from 61% in the three-month period ended December 31, 1998 to 82% in
the comparable period in 1999. For the period ended December 31, 1998, the
Company had accrued a tax benefit based on the estimate that the Company would
have consolidated U.S. taxable income. However, for the fiscal year ended June
30, 1999, the Company had a U.S. consolidated loss. The Company has not accrued
a tax benefit for the U.S. operating losses in the three-month period ended
December 31, 1999, and has continued to accrue tax expense for European Micro
UK. The net effect of accrued tax expenses was to increase the effective
consolidated income tax rate for the Company.

INTEREST IN JOINT VENTURE. The Company's share of income (loss) from Big Blue
increased from a loss of $19,000 in the three-month period ended December 31,
1998 to a gain of $2,000 in the comparable period in 1999.

SIX-MONTH PERIOD ENDED DECEMBER 31, 1999 AND 1998

TOTAL NET SALES. Total net sales increased $9.0 million, or 15.4%, from $58.3
million in the six-month period ended December 31, 1998 to $67.3 million in the
comparable period in 1999. Excluding net sales to related parties, net sales
increased $9.7 million, or 17.4%, from $55.7 million in the six-month period
ended December 31, 1998 to $65.4 million in the comparable period in 1999. This
increase was attributable to the addition of Sunbelt's trading sales (accounting
for approximately $5.5 million), the additional sales from Sunbelt's Nova line
of products (accounting for approximately $650,000), the addition of
Colchester's sales (accounting for approximately $3.4 million) and the addition
of American Micro's sales (accounting for approximately $9.4 million). This
increase was partially offset by a reduction of $6.6 million in European Micro
UK's trading sales (excluding Sunbelt's trading sales), a decrease in the
Premier Dealers Club (accounting for approximately $400,000) and a reduction of
$2.2 million in Nor'Easter's sales.

Net sales to related parties decreased $675,000, or 26.1%, in the six-month
period ended December 31, 1999 from the comparable period in 1998. This decrease
is primarily attributable to the acquisition of AMCC on July 1, 1999, and
therefore, net sales to American Micro are excluded from net sales to related
party. Until July 1, 1999, the related parties consisted of a group of entities
in which an ownership interest was held by either of the two primary
shareholders of the Company, John B. Gallagher or Harry D. Shields. See "Note 8
(Related party transactions) to the Consolidated Condensed Financial
Statements."

GROSS PROFIT. Gross profit increased $2.2 million, or 42.3%, from $5.2 million
in the six-month period ended December 31, 1998 to $7.4 million in the
comparable period in 1999. Gross profit excluding related party transactions
increased $2.2 million, or 41.9%, from $5.2 million in the six-month period
ended December 31, 1998 to $7.4 million the comparable period in 1999. This
increase is primarily due to the addition of Colchester with $224,000 in gross
profit, the addition of American Micro with $994,000 in gross profit, an

19
<PAGE>
EUROPEAN MICRO HOLDINGS, INC.

increase at European Micro UK of $818,000 and an increase at Nor'Easter of
$179,000.

Gross profit attributable to related party sales was $51,000 in the six-month
period ended December 31, 1999. This represents a gross margin of approximately
2.7%. 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.

Gross margins increased by 210 basis points from 8.9% in the six-month period
ended December 31, 1998 to 11.0% in the comparable period in 1999. Excluding
related party transactions, gross margin increased from 9.3% in the six-month
period ended December 31, 1998 to 11.2% in the comparable period in 1999. This
change is related to the shortage of memory products in the quarter ended
December 31, 1999, resulting in higher selling prices and gross margin.

Foreign exchange gains and losses, net, increased from a loss of $184,000 in the
six-month period ended December 31, 1998 to a loss of $82,000 in the comparable
period in 1999. This favorable movement was attributable to the weakening of the
U.K. pound sterling relative to the Euro and the strengthening of the U.K. pound
sterling against the U.S. dollar.

OPERATING EXPENSES. Operating expenses as a percentage of total net sales
increased from 6.6% in the six-month period ended December 31, 1998 to 9.6% in
the comparable period in 1999. This increase in operating expenses was caused
primarily by higher commissions and bonus payments to employees which are tied
to the Company's gross profit and gross margin. Also contributing to this
increase were legal expenses incurred by the Company in connection with the Big
Blue lawsuit. Moreover, American Micro's operating expenses, which were included
in the Company's consolidated financial statements for period ended December
1999 had a higher level of operating expenses relative to sales than that of the
Company.

INTEREST EXPENSE. Interest expense increased by $386,000 from $142,000 in
six-month period ended December 31, 1998 to $528,000 in the comparable period in
1999. This was attributable to increased borrowings during the period because of
increased average accounts receivable and inventory balances, the purchase of
the office building and the acquisitions of Sunbelt and AMCC.

INCOME TAXES. Income taxes as a percentage of income before income taxes
increased from 39% in the six-month period ended December 31, 1998 to 57% in the
comparable period in 1999. For the period ended December 31, 1998, the Company
had accrued a tax benefit based on the estimate that the Company would have
consolidated U.S. taxable income. However, for the fiscal year ended June 30,
1999, the Company had a U.S. consolidated loss. The Company has not accrued a
tax benefit for the U.S. operating losses in the six-month period ended December
31, 1999, and has continued to accrue tax expense for European Micro UK. The net
effect of accrued tax expense was to increase the effective consolidated income
tax rate for the Company.

INTEREST IN JOINT VENTURE. The Company's share of gain/loss from Big Blue
increased from a loss of $47,000 in the six-month period ended December 31, 1998
to breaking even in the comparable period in 1999.

SEASONALITY

The Company typically experiences variability in its total net sales and net
income on a quarterly basis as a result of many factors. These include, but are
not limited to, seasonal variations in demand for the products and services
offered by the Company, the introduction of new hardware and software
technologies and products offering improved features and functionality, the
introduction of new products and services by the Company and its competitors,
the loss or consolidation of a significant supplier or customer, changes in the
level of operating expenses, inventory adjustments, product supply constraints
and competitive conditions, including pricing, interest rate fluctuations, the
impact of acquisitions, currency fluctuations and general economic conditions.
Historical operating results have reflected a reduction in demand in Europe
during the summer months.

LIQUIDITY AND CAPITAL RESOURCES

The Company's primary cash requirements are for operating expenses, funding
accounts receivable, the purchase of inventory to support growth, taking greater
advantage of available cash discounts offered by certain of the Company's

20
<PAGE>
EUROPEAN MICRO HOLDINGS, INC.

suppliers for early payment and making 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 of European Micro UK are funded by a
combination of line of credit facilities together with accounts receivable
financing. 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 bank line of credit was 1.2 million pounds sterling ($1.96 million) at
December 31, 1999. The accounts receivable financing provides for a borrowing
base of 85% of accounts receivable, with a limit of 6.2 million pounds sterling
($10.1 million on December 31, 1999). The limit on trade receivables financing
increased from a maximum of 5.5 million pounds sterling at June 30, 1999 ($8.7
million at June 30, 1999). European Micro UK also had a revolving credit
agreement, secured against inventory. The facility allowed European Micro UK to
borrow up to 3.5 million pounds sterling ($5.7 million at December 31, 1999) to
assist in the purchase of inventory. To date, no borrowings have been drawn down
on this line. This revolving credit agreement has expired and European Micro UK
is negotiating to renew.

Short-term working capital requirements of the Company are funded by two lines
of credit on October 29, 1999, to finance operations based in the United States.
American Micro and Nor'Easter each obtained a line of credit, secured by
accounts receivable and inventory. Amounts available under each of the line of
credit agreements are based upon eligible accounts receivable and inventory, up
to a maximum borrowing amount of $1.5 million of each agreement. Each of these
lines of credit matures on October 28, 2000, and each bears interest at 0.5%
over the bank borrowing rate of 8.5% at December 31, 1999. As partial security
for these loans, Messrs. Gallagher and Shields pledged to the lender a portion
of their shares of common stock of the Company. In the event the Company
defaults on one or more of these loans, the lender may foreclose on all or a
portion of the pledged securities. Such an event may cause a change of control
in the Company because Messrs. Gallagher and Shields together own 71% of the
Company's outstanding common stock. The lines of credit agreements include
certain financial and non-financial covenants and restrictions. The agreements
also contain a provision whereby the lender can declare a default based on
subjective criteria. As of December 31, 1999, the Company was not in compliance
with one of the financial covenants in the agreements. The Company has obtained
a waiver of these events of non-compliance for the December 31, 1999 reporting
period. Given the Company's current and expected operating results, it is likely
that the Company will be out of compliance with such covenant requirements at
the next quarterly reporting date. As a result, the Company is in discussion
with the lender to amend the agreements to adjust the financial covenant
requirements. While management believes such discussions will result in amended
covenant requirements which the Company will be able to achieve, there can be no
assurances that the Company will be successful in these negotiations.

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 $2.0 million. The
Company has used the proceeds to fund operations and provide working capital to
European Micro UK, Nor'Easter and Colchester.

Long-term funding is supplied to the Company in the form of capital lease
agreements and term loans. The lease 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 December 31, 1999,
the borrowings were $95,000, of which $32,000 was due after more than one year.

A term loan was obtained on October 29, 1999, in the amount of $1,500,000. The
term loan is to be repaid with quarterly payments of $125,000 over three years.
The term loan bears interest at the one-month LIBOR plus two and one-quarter
percentage points (2.25%). One-month LIBOR at December 31, 1999 was 5.8%. The
first payment on the term loan was made on November 30, 1999, bringing the
balance down to $1,375,000. The term loan is secured by substantially all of the
assets of the Company. As partial security for this loan, Messrs. Gallagher and
Shields pledged to the lender a portion of their shares of common stock of the
Company. In the event the Company defaults on this loan, the lender may
foreclose on all or a portion of the pledged securities. Such an event may cause
a change of control in the Company because Messrs. Gallagher and Shields
together own 71% of the Company's outstanding common stock. The term loan
agreement includes certain financial and non-financial covenants and
restrictions. The agreement also contains a provision whereby the lender can
declare a default based on subjective criteria. The term loan agreement is with
the same lender as the Nor'easter Micro and American Micro line of credit
facilities discussed above. Further, the term loan credit agreement contains
similar loan covenant requirements. As such, the Company has obtained a waiver
of these events of non-compliance for the December 31, 1999 reporting period.
The total amount outstanding under the term loan agreement is reflected in
current maturities of long-term debt at December 31, 1999, because of the
likelihood of covenant violation at the next quarterly reporting date absent an
amendment to the term loan agreement.

On July 1, 1999, the Company acquired AMCC for a purchase price of $1,131,00
plus an earn-out. See "Related Party Transactions." 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, additional borrowings, or the issuance of shares of
common stock.

21
<PAGE>
EUROPEAN MICRO HOLDINGS, INC.

On July 16, 1999, European Micro UK purchased the office building in which it
had previously been leasing space for 1,705,000 pounds sterling ($2,787,000 at
December 31, 1999). The purchase price was financed in part by a loan in the
amount of 1,312,000 pounds sterling ($2,144,000 at December 31, 1999). This loan
calls for monthly payments of principal and interest in the amount of 15,588
pounds sterling ($25,478 at December 31, 1999) and matures in July 2009. The
mortgage loan note bears interest at a fixed rate of 7.598%.

Net cash provided by operating activities during the six-month period to
December 31, 1999 amounted to $3.8 million. Significant factors providing cash
were a decrease in trade receivables, net of effects from acquisitions, of $5.5
million, a decrease in inventory, net of effects from acquisitions, of $1.5
million and a decrease in due from related parties, net of effects from
acquisitions, of $1.1 million. The amount of cash provided by the Company's
operations was partially offset by a reduction in trade payables, net of effects
from acquisition, of $3.7 million and a reduction in accrued expenses and other
current liabilities, net of the effects from acquisitions, of $1.2 million.

Cash used in investing activities amounted to $4.2 million. This primarily
consisted of expenditures on fixed assets of $3.0 million, largely the purchase
of European Micro UK's office building and the acquisition of AMCC for $1.2
million.

Cash used by financing activities amounted to $1.1 million. This primarily
consisted of $4.2 million used to pay down short-term borrowings, net. The
Company also used $300,000 to pay down long term borrowings assumed from the
acquisition of AMCC, $125,000 to pay down the term loan and $100,000 to pay down
the mortgage loan on the building. This was offset by $2.1 million provided by
proceeds from the mortgage loan secured by European Micro UK's office building
and $1.5 million provided by a term loan.

Overall, the Company experienced a net decrease in cash of $1.3 million for the
six-month period ended December 31, 1999.

ASSET MANAGEMENT

INVENTORY. European Micro's goal is to achieve high inventory turns and to
maintain a low level of inventory on hand and thereby reduce the Company's
working capital requirements. The Company's strategy to achieve this goal is to
both effectively manage its inventory and achieve high order fill rates.
Inventory levels may vary from period to period, due to many factors, including
increases or decreases in sales levels, 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 670 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, Nor'Easter's and American Micro'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 and the U.S.
dollar. Because the functional currency of the Company's main operating
subsidiary, European Micro UK, is the U.K. pound sterling, currency fluctuations
of the pound sterling relative to the U.S. dollar may have a material adverse
affect 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.

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

22
<PAGE>
EUROPEAN MICRO HOLDINGS, INC.

receivables with accounts payable, all in the same currency to create a
"natural" hedge. Thereafter, to the extent that a bank balance and the account
receivable are not totally offset by the accounts payable, there would be a need
to cover the residual credit balance with a forward currency contract. The
Company tends to concentrate its currency management into six currencies: U.K.
pound sterling, U.S. dollar, Dutch guilder, Canadian dollar, Singapore dollar
and German Mark. It normally deems the exposure in other currencies to be
minimal. However, when the Company buys products in other currencies, the
Company may, in conjunction with current market advice, book a forward contract
to cover current and some anticipated future purchases.

ECONOMIC AND MONETARY UNION. On January 1, 1999, eleven of the fifteen member
countries of the European Union established fixed conversion rates between their
existing sovereign currencies and a new currency called the "Euro." These
countries adopted the Euro as their common legal currency on that date. The Euro
is trading on currency exchanges and is available for non-cash transactions.
Until January 1, 2002, the existing sovereign currencies will remain legal
tender in these countries. On January 1, 2002, the Euro is scheduled to replace
the sovereign legal currencies of these countries. Through the operations of
European Micro UK, the Company has significant operations within the European
Union, including many of the countries which adopted the Euro. The Company
continues to evaluate the impact that the Euro is having on its continuing
business operations and no assurances can be given that the Euro will not have a
material adverse affect on the Company's business, financial condition and
results of operations. However, the Company does not expect the Euro to have a
material affect on its competitive position as a result of price transparency
within the European Union because the Company does not rely on currency
imbalances in purchasing inventory from within the European Union. 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.

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.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

The Company utilizes derivative financial instruments in the form of forward
exchange contracts for the purpose of economic hedges of anticipated sale and
purchase transactions. In addition, the Company enters into economic hedges for
the purpose of hedging foreign currency market exposures of underlying assets,
liabilities and other obligations which exist as part of its ongoing business
operations. See "Currency Risk Management."

Where the foreign currency exposure is covered by a forward foreign exchange
contract, the asset, liability or other obligation is recorded at the contracted
rate each month end and the resultant mark-to-market gains and losses are
recognized as cost of sales in the current period, generally consistent with the
period in which the gain or loss of the underlying transaction is recognized.
Cash flows associated with derivative transactions are classified in the
statement of cash flows in a manner consistent with those of the exposure being
hedged.

EXCHANGE RATE SENSITIVITY

On December 31, 1999, the Company did not have any open forward exchange
contracts. Gains and losses in respect of the foreign exchange transactions were
as follows (in thousands):

THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1999 1998 1999 1998
------------------------------------------------------
Gain (Loss) on foreign
exchange transactions $160 $(52) $(82) $(184)
==== ==== ==== =====

23
<PAGE>

EUROPEAN MICRO HOLDINGS, INC.

PART II

ITEM 1. LEGAL PROCEEDINGS.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.

(a), (b), (c) and (d). None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

(a) The Company held its 1999 Annual Meeting of Stockholders on November 15,
1999.

(b) At the annual meeting, the stockholders re-elected the Class II directors
named in the following table by the vote set forth in such table for a
three-year term to expire in 2002. The names of the directors whose terms of
office as directors continued after the meeting were: John B. Gallagher, Jr.,
Harry D. Shields, Bernadette Spofforth and Laurence Gilbert.

NAME: FOR: AGAINST: WITHHELD:
----- ---- -------- ---------

Barrett Sutton 4,876,571 0 11,100
Kyle Saxon 4,876,571 0 11,100

(c) The only matter voted upon at the Annual Meeting of Stockholders was the
election of the directors mentioned in the above table. Such table also sets
forth the number of votes for, against or withheld for such directors.

(d) None.

The foregoing matters are described in detail in the Company's Proxy Statement
dated October 29, 1999 for the 1999 Annual Meeting of Stockholders.

ITEM 5. OTHER INFORMATION.

None.

24
<PAGE>
EUROPEAN MICRO HOLDINGS, INC.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.

(a) Exhibits.

<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION LOCATION
- --- ----------- --------
<S> <C> <C>

2.01 Agreement for the Acquisition of Sunbelt (UK) Incorporated by reference to Exhibit 2.01
Limited by European Micro Plc dated October 26, to Registrant's Form 10-Q for the quarter
1998 ended September 30, 1998.

2.02 Merger Agreement re: AMCC dated June 29, 1999 Incorporated by reference to Exhibit 2.02
to Registrant's From 10-K for the year
ended June 30, 1999.

2.03 Plan of 1999 Merger re: AMCC dated June 29, 1999 Incorporated by reference to Exhibit 2.03
to Registrant's From 10-K for the year
ended June 30, 1999.

2.04 Articles of Merger re: AMCC dated June 29, 1999 Incorporated by reference to Exhibit 2.04
to Registrant's Form 10-K for the year
ended June 30, 1999.

3.01 Articles of Incorporation Incorporated by reference to Exhibit No.
3.01 to Registrant's Registration
Statement (the "Registration Statement")
on Form S-1 (Registration Number
333-44393).

3.02 Certificate of Amendment of Articles of Incorporated by reference to Exhibit 3.02
Incorporation to Registrant's Form 10-Q for the quarter
ended March 31, 1998.

3.03 Bylaws Incorporated by reference to Exhibit No.
3.02 to the Registration Statement.

4.01 Form of Stock Certificate Incorporated by reference to Exhibit No.
4.01 to the Registration Statement.

4.02 1998 Stock Incentive Plan Incorporated by reference to Exhibit No.
4.02 to the Registration Statement.

4.03 1998 Stock Employee Stock Purchase Plan Incorporated by reference to Exhibit No.
4.03 to the Registration Statement.

4.04 Form of Lock-up Agreement Incorporated by reference to Exhibit No.
4.04 to the Registration Statement.

10.01 Form of Advice of Borrowing Terms with National Incorporated by reference to Exhibit No.
Westminster Bank Plc 10.01 to the Registration Statement.

10.02 Invoice Discounting Agreement with Lombard NatWest Incorporated by reference to Exhibit No.
Discounting Limited, dated November 21, 1996 10.02 to the Registration Statement.

10.03 Commercial Credit Insurance, policy number 60322, Incorporated by reference to Exhibit No.
with Hermes Kreditversicherungs-AG dated 10.03 to the Registration Statement.
August 1, 1995

10.04 Commercial Credit Insurance, policy number 82692, Incorporated by reference to
with Hermes Kreditversicherungs-AG Exhibit No. 10.04 to the Registration Statement.
dated August 1, 1995

25
<PAGE>
EUROPEAN MICRO HOLDINGS, INC.
EXHIBIT
NO. DESCRIPTION LOCATION
- --- ----------- --------

10.05 Consignment Agreement with European Micro Computer Incorporated by reference to Exhibit No.
B.V., dated January 1996 10.05 to the Registration Statement.

10.06 Shareholders' Cross-Purchase Agreement by and Incorporated by reference to Exhibit No.
between Jeffrey Gerard Alnwick, Marie Alnwick, 10.07 to the Registration Statement.
European Micro Plc and Big Blue Europe, B.V. dated
August 21, 1997

10.07 Trusteed Shareholders Cross-Purchase Agreement by Incorporated by reference to Exhibit No.
and between John B. Gallagher, Harry D. Shields, 10.08 to the Registration Statement.
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.
Gallagher and European Micro Holdings, Inc. 10.09 to the Registration Statement.
effective as of January 1, 1998

10.09 Executive Employment Agreement between Harry D. Incorporated by reference to Exhibit No.
Shields and European Micro Holdings, Inc. 10.10 to the Registration Statement.
effective as of January 1, 1998

10.10 Contract of Employment Agreement between Laurence Incorporated by reference to
Gilbert and European Micro UK dated Exhibit No. 10.11 to the Registration Statement.
March 14, 1998

10.11 Contract of Employment between Bernadette Incorporated by reference to Exhibit No.
Spofforth and European Micro UK dated April 30, 10.12 to the Registration Statement.
1996

10.12 Subscription Agreement by and between John B. Incorporated by reference to Exhibit No.
Gallagher, Harry D. Shields, Thomas H. Minkoff, 10.13 to the Registration Statement.
Trustee of the Gallagher Family Trust, Robert H.
True and Stuart S. Southard, Trustees of the Henry
Daniel Shields 1997 Irrevocable Educational Trust,
European Micro Holdings, Inc. effective as of
January 31, 1998

10.13 Administrative Services Contract by and between Incorporated by reference to Exhibit No.
European Micro Holdings, Inc. and European Micro 10.14 to the Registration Statement.
Plc effective as of January 1, 1998

10.14 Escrow Agreement between European Micro Holdings, Incorporated by reference to Exhibit No.
Inc., Tarpon Scurry Investments, Inc. and The 10.15 to the Registration Statement.
Chase Manhattan dated as of March 24, 1998

10.15 Form of Indemnification Agreements with officers Incorporated by reference to Exhibit No.
and directors 10.16 to the Registration Statement.

10.16 Form of Transfer Agent Agreement with Chase Mellon Incorporated by reference to Exhibit No.
Shareholder Services, L.L.C. 10.17 to the Registration Statement.

26
<PAGE>

EUROPEAN MICRO HOLDINGS, INC.
EXHIBIT
NO. DESCRIPTION LOCATION
- --- ----------- --------

10.17 Form of Credit Agreement by and between European Incorporated by reference to Exhibit No.
Micro UK and National Westminster Bank Plc 10.17 to the Annual Report on Form 10-K
for the fiscal year ended June
30, 1998 filed with the
Commission on September 28, 1998.

10.18 Consulting Contract dated September 10, 1998 by Incorporated by reference to Exhibit 10.19
and between European Micro Holdings, Inc. and The to Registrant's Form 10-Q for the quarter
Equity Group ended September 30, 1998.

10.19 Service Agreement dated October 28, 1998 by and Incorporated by reference to Exhibit 10.20
between European Micro Holdings, Inc. and Michael to Registrant's Form 10-Q for the quarter
Gesner ended September 30, 1998.

10.20 Service Agreement dated October 28, 1998 by and Incorporated by reference to Exhibit 10.21
between European Micro Plc and Gerard O'Rourke to Registrant's Form 10-Q for the quarter
ended September 30, 1998.

10.21 Employment Agreement dated July 1, 1999 between Incorporated by reference to Exhibit 10.21
John B. Gallagher and American Micro to Registrant's Form 10-K for the year
ended June 30, 1999.

10.22 Loan and Security Agreement dated October 29, 1999 Incorporated by reference to Exhibit 10.22
among American Micro, the Company, Nor'Easter and to Registrant's Form 10-Q for the quarter
SouthTrust Bank, N.A. re: Line of Credit to ended September 30, 1999.
American Micro

10.23 Loan Agreement dated October 29, 1999 among the Incorporated by reference to Exhibit 10.23
Company, American Micro, Nor'Easter and SouthTrust to Registrant's Form 10-Q for the quarter
Bank, N.A. re: Term Loan to the Company ended September 30, 1999.

10.24 Loan Agreement dated October 29, 1999 among Incorporated by reference to Exhibit 10.24
Nor'Easter, the Company, American Micro and to Registrant's Form 10-Q for the quarter
SouthTrust Bank, N.A. re: Line of Credit to ended September 30, 1999.
Nor'Easter

11.01 Statement re: Computation of Earnings Provided herewith.

15.01 Letter re: Unaudited Financial Information Provided herewith.

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 to Not applicable.
Vote of Security Holders

23.01 Consents of experts and counsel Not applicable.

24.01 Power of Attorney Not applicable.

27.01 Financial Data Schedule Provided herewith.
</TABLE>

(b) Reports on Form 8-K.

None.

27
<PAGE>

EUROPEAN MICRO HOLDINGS, INC.

SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

Dated: February 14, 2000 EUROPEAN MICRO HOLDINGS, INC.

By: /s/ John B. Gallagher
--------------------------
John B. Gallagher, Co-President

EUROPEAN MICRO HOLDINGS, INC.

EXHIBIT 11.01

STATEMENT RE: COMPUTATION OF EARNINGS

The calculation of earnings per share are detailed in the table below:

WEIGHTED AVERAGE NUMBER OF SHARES
Outstanding common stock during the period 4,933,900 4,933,900 4,933,900 4,933,900
Contingently issuable shares 114,011 - 99,559 -
--------- --------- --------- ---------

BASIC WEIGHTED AVERAGE NUMBER OF SHARES 5,047,911 4,933,900 5,033,459 4,933,900
Effect of dilutive stock options and other contingent shares - 17,926 497 8,963
--------- --------- --------- ---------

DILUTED WEIGHTED AVERAGE NUMBER OF SHARES 5,047,911 4,951,826 5,033,956 4,942,863
========= ========= ========= =========

Basic earnings per share $0.00 $0.00 $0.04 $0.15
========= ========= ========= =========

Diluted earning per share $0.00 $0.00 $0.04 $0.15
========= ========= ========= =========
</TABLE>

During the three-month period ended December 31, 1999, the Company issued
options to purchase up to 2,500 shares of Common Stock at an exercise price of
$8.00 per share. The above dilutive earnings per share calculations for the
three-month and six-month periods ended December 31, 1999, exclude the effect of
options to purchase 349,000 and 341,500 shares of common stock, respectively, at
exercise prices ranging from $7.50 to $12.00 per share, due to the fact they
were anti-dilutive (i.e., the exercise price was greater than the average market
price for the respective period). The above dilutive earnings per share
calculations for the three-month and six-month periods ended December 31, 1998,
exclude the effect of options to purchase 20,000 and 20,000 shares of common
stock, respectively, at exercise prices ranging from $9.19 to $11.00 per share,
due to the fact they were anti-dilutive. Also see "Note 4 (Goodwill) to the
Consolidated Condensed Financial Statements" related to contingently issuable
shares related to acquisitions. However, the effect of contingent shares related
to the payment due after the first contingent earn-out period of the Sunbelt
acquisition has not been included in the three month period ended December 31,
1999 as such payment was paid in cash in November 1999. Also the effect of the
contingent shares related to the second contingent earn-out of the Sunbelt
acquisition are not included, as the conditions necessary for such contingent
shares to be issued have not been met as of December 31, 1999. However, the
effect of contingent shares related to the guaranteed earn-out amount payable
after the second contingent earn-out period is included. The effect of
contingent shares related to the first earn-out of American Micro is included in
the three-month period ended December 31, 1999. The effect of contingent shares
related to second earn-out of American Micro is not included, as determination
of the amount of such contingent shares to be issued are not determinable.

EUROPEAN MICRO HOLDINGS, INC.

EXHIBIT 15.01

INDEPENDENT ACCOUNTANTS' REPORT

We have reviewed the accompanying consolidated condensed balance sheet of
European Micro Holdings, Inc. and consolidated subsidiaries as of December 31,
1999, and the related statements of operations for the three-month and six-month
periods then ended, and the related consolidated condensed statements of
stockholders' equity and cash flows for the six-month period then ended. These
financial statements are the responsibility of the company's management.

We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should
be made to the accompanying consolidated condensed financial statements for them
to be in conformity with generally accepted accounting principles.

As disclosed in Notes 5 and 6, the Company was in default with respect to
certain loan covenants in two of its line of credit agreements and a term loan
agreement. The Company's non-compliance with such covenants has been waived by
the lender for the December 31, 1999 reporting period. Given the Company's
current and expected operating results, it is likely that the Company will be
out of compliance with such covenant requirements at the next quarterly
reporting date. As a result, the Company is in discussion with the lender to
amend the loan agreements to adjust the financial covenant requirements. While
management believes such discussions will result in amended covenant
requirements which the Company will be able to achieve, there can be no
assurance that the Company will be successful in these negotiations.

We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of European Microholdings, Inc. and
subsidiaries as of June 30, 1999, and the related consolidated statements of
operations, shareholders' equity, and cash flows for the year then ended (not
presented herein); and in our report dated August 20, 1999, we expressed an
unqualified opinion on those consolidated financial statements. In our opinion,
the information set forth in the accompanying consolidated condensed balance
sheet at June 30, 1999, is fairly stated, in all material respects, in relation
to the consolidated balance sheet from which it has been derived.

/s/ KPMG LLP
KPMG LLP

Nashville, TN
February 6, 2000, except as to notes 5 and 6 which are as of February 14, 2000.

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF OPERATIONS OF THE
COMPANY AND THE NOTES THERETO SET FORTH IN THIS FILING. THIS INFORMATION IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL INFORMATION.
</LEGEND>

<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> OCT-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 2,212
<SECURITIES> 0
<RECEIVABLES> 10,192
<ALLOWANCES> 104
<INVENTORY> 7,637
<CURRENT-ASSETS> 20,846
<PP&E> 4,777
<DEPRECIATION> 992
<TOTAL-ASSETS> 28,129
<CURRENT-LIABILITIES> 11,344
<BONDS> 1,769
0
0
<COMMON> 49
<OTHER-SE> 14,967
<TOTAL-LIABILITY-AND-EQUITY> 28,129
<SALES> 34,546
<TOTAL-REVENUES> 34,546
<CGS> 30,841
<TOTAL-COSTS> 3,357
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 22
<INTEREST-EXPENSE> 289
<INCOME-PRETAX> 61
<INCOME-TAX> 50
<INCOME-CONTINUING> 11
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11
<EPS-BASIC> 0.00
<EPS-DILUTED> 0.00

</TABLE>