Registration No. 333-48756
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1 TO FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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<CAPTION>
EUROPEAN MICRO HOLDINGS, INC.
(Name of Small Business Issuer in Our Charter)
<S> <C> <C>
NEVADA 5045 65-0803752
(State or Other Jurisdiction of Incorporation (Primary Standard Industrial (I.R.S. Employer Identification No.)
or Organization) Classification Code Number)
JOHN B. GALLAGHER
6073 N.W. 167TH STREET, UNIT C-25 6073 N.W. 167TH STREET, UNIT C-25
MIAMI, FLORIDA 33015 MIAMI, FLORIDA 33015
(305) 825-2458 (305) 825-2458
(Address and telephone number of Principal (Name, address and telephone number of agent
Executive Offices and Principal Place of Business) _______________________ for service)
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COPIES TO:
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Clayton E. Parker, Esq.
Troy J. Rillo, Esq.
Kirkpatrick & Lockhart LLP
201 S. Biscayne Boulevard, Suite 2000
Miami, Florida 33131
Telephone No.: (305) 539-3300
Telecopier No.: (305) 358-7095
Approximate date of commencement of proposed sale to the public: AS SOON AS
PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. [X]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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PROSPECTUS Subject to Completion, dated November 29, 2000
EUROPEAN MICRO HOLDINGS, INC. [LOGO]
7,958,333 SHARES OF COMMON STOCK
This prospectus relates to the resale of up to 7,958,333 shares of our
company's common stock by certain persons who are, or will become, stockholders
of our company. Of that total, certain selling stockholders will resell up to
7,833,333 shares of common stock in this offering that were purchased from us in
a private offering under an equity line of credit. Our company is not selling
any shares of common stock in this offering and therefore will not receive any
proceeds from this offering. We will, however, receive proceeds from the sale of
common stock under the equity line of credit. All costs associated with this
registration will be borne by our company. Our company has also agreed to pay
the May Davis Group, Inc. and the Persia Consulting Group, Inc. fees of 7% and
1%, respectively, of the proceeds raised by us under the equity line of credit.
The Persia Consulting Group will also receive warrants to purchase one percent
of the total number of shares of common stock issued under the equity line of
credit.
The shares of common stock are being offered for sale on a "best
efforts" basis by the selling stockholders at prices established on the Nasdaq
National Market System during the term of this offering. There are no minimum
purchase requirements. These prices will fluctuate based on the demand for the
shares of common stock.
The selling stockholders consist of:
o Spinneret Financial System, Ltd., which intends to resell up to
6,666,667 shares of common stock to be issued under an equity
line of credit agreement, dated August 24, 2000.
o The Persia Consulting Group, Inc., which intends to resell up to
262,666 shares of common stock to be issued upon exercise of
options and warrants issued in connection with the equity line of
credit.
o Mark Angelo, Hunter Singer, Joseph Donahue and Robert Farrell,
all of whom intend to resell up to 904,000 shares of common stock
to be issued upon exercise of warrants issued in connection with
the equity line of credit.
o John P. Gallagher, who intends to resell up to 50,000 shares of
common stock he received with respect to a loan from John B.
Gallagher, his son and an officer of our company.
o Laurel Lee Wells, who intends to resell up to 75,000 shares of
common stock she received with respect to a marital obligation
from John B. Gallagher, an officer of our company.
Spinneret Financial System, Ltd. is an "underwriter" within the meaning
of the Securities Act of 1933 in connection with the resale of common stock
under the equity line of credit agreement. Spinneret Financial will pay our
company 88% of the market price of our company's common stock. The 12% discount
on the purchase of the common stock to be received by Spinneret Financial will
be an underwriting discount.
Our common stock is listed on the Nasdaq National Market System under
the symbol "EMCC." The closing price was $4.03 on October 23, 2000.
THESE SECURITIES ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK.
PLEASE REFER TO "RISK FACTORS" BEGINNING ON PAGE 5.
PRICE TO PUBLIC* PROCEEDS TO SELLING STOCKHOLDERS
Per share $4.03 $23,207,976
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TOTAL $4.03 $23,207,976
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* This represents the resale of 5,633,803 shares of common stock by Spinneret
Financial and 125,000 shares of common stock by John P. Gallagher and
Laurel Lee Wells. Spinneret Financial's shares of common stock is based on
it purchasing all $20 million of common stock under the equity line of
credit for a 12% discount to the $4.03 market price on October 23, 2000, or
$3.55 per share. Upon resale, assuming no change in the market price,
Spinneret Financial would receive $22.7 million in net proceeds. This table
excludes up to 1,166,666 shares of common stock that may be sold upon the
exercise of the options and warrants. As indicated above, the price to the
public will fluctuate based on prices that can be obtained on the Nasdaq
National Market System. For the purposes of this table, we have used the
average of the closing bid and asked prices as of October 23, 2000.
No underwriter or any other person has been engaged to facilitate the
sale of the shares of common stock in this offering. This offering will
terminate 30 months after the accompanying registration statement is declared
effective. None of the proceeds from the sale of stock by the selling
stockholders will be placed in escrow, trust or any similar account.
THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS
HAVE NOT APPROVED OR DISAPPROVED OF THESE SECURITIES, OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this prospectus is ____________, 2000.
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TABLE OF CONTENTS
PROSPECTUS SUMMARY.............................................................3
RISK FACTORS...................................................................5
FORWARD-LOOKING STATEMENTS....................................................11
SELLING STOCKHOLDERS..........................................................12
USE OF PROCEEDS...............................................................13
DILUTION......................................................................13
DIVIDEND POLICY...............................................................13
CAPITALIZATION................................................................14
SELECTED CONSOLIDATED FINANCIAL DATA..........................................15
SUPPLEMENTARY FINANCIAL INFORMATION...........................................16
EQUITY LINE OF CREDIT.........................................................17
PLAN OF DISTRIBUTION..........................................................21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.................................................................23
BUSINESS......................................................................35
MANAGEMENT....................................................................43
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................................49
STOCK OWNERSHIP...............................................................51
COMPARATIVE STOCK PERFORMANCE.................................................53
MARKET FOR OUR COMMON STOCK...................................................54
DESCRIPTION OF CAPITAL STOCK..................................................55
EXPERTS.......................................................................58
LEGAL MATTERS.................................................................58
WHERE YOU CAN FIND MORE INFORMATION...........................................58
CONSOLIDATED FINANCIAL STATEMENTS............................................F-1
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We are a reporting company and have distributed to our stockholders
annual reports containing audited financial statements. Our annual report on
Form 10-K for the fiscal year ended June 30, 2000 was filed with the Securities
and Exchange Commission on October 11, 2000.
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PROSPECTUS SUMMARY
OUR COMPANY
Our company is an independent distributor of microcomputer products,
including personal computers, memory modules, disc drives and networking
products. We sell products to customers mainly in Western Europe and the United
States. Our customer base consists of more than 770 value-added resellers,
corporate resellers, retailers, direct marketers and distributors. We do not
sell to end-users. Substantially all of the products sold by us are manufactured
by well-recognized manufacturers, such as IBM, Compaq, Hewlett-Packard and 3Com.
Generally, we purchase our inventory from other distributors, resellers and
wholesalers. We believe that our strategic advantage lies in our ability to take
advantage of pricing differences in various geographic locations, currency
fluctuations and product availability. We believe this strategy allows us to
purchase inventory at more favorable prices than would otherwise be available.
We consider ourselves to be a focused distributor, dealing with a more
limited and select group of products than broadline distributors. We believe
that being a focused distributor enables us to respond more quickly to customer
requests and gives us greater access to products and improved pricing. We
believe that as a focused distributor we have been able to develop greater
expertise in the products we sell. Our company places significant emphasis on
market awareness and planning and actively shares this knowledge with customers
in order to further enhance our business relationships. Our company strives to
monitor and react quickly to market trends to enable our multilingual sales team
to maintain the highest levels of customer service.
OUR STRATEGY
Our strategy is to continue to strengthen our position as a distributor
of microcomputer products within Western Europe, the United States and Asia. We
also propose to diversify our international trading operations into product
lines outside the microcomputer industry. Our ability to carry out the following
strategies is dependent on us obtaining adequate funding:
GROWTH THROUGH START-UPS AND ACQUISITIONS. We desire to expand into new
markets and products through a combination of start-up companies and
acquisitions of existing distributors. We intend to evaluate acquisition
candidates outside the microcomputer industry to diversify our operations and to
take advantage of our ability to source inventory worldwide. We expect to seek
acquisition candidates that have strong entrepreneurial management teams with
experience in the local markets and the potential to benefit from the economies
of scale that we could provide through our existing infrastructure.
FURTHER DEVELOP NEW INTERNATIONAL MARKETS. To date, our activities have
focused on the distribution of microcomputer products mainly in Western Europe
and the United States. More recently, we have been working on new opportunities
in Asia and Eastern Europe. We hope to expand our operations in these markets by
building on our success in the diverse markets of Western Europe.
BUSINESS-TO-BUSINESS ELECTRONIC COMMERCE STRATEGY. We have initiated a
business-to-business electronic commerce strategy, which is focused on creating
a global, value-added, information technology equipment and service trading
community.
FOCUSED DISTRIBUTION. We intend to continue our strategy of operating
as a focused distributor. In addition, we intend to expand our product offering
to meet market demands while remaining a focused distributor. We believe this
strategy helps enables us to respond more quickly to customer requests and gives
us greater access to products and better pricing.
ABOUT US
Our principal office is located at 6073 N.W. 167th Street, Unit C-25,
Miami, Florida 33015, telephone number (305) 825-2458. For a copy of this
prospectus, please contact us at the above address and phone number.
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THE OFFERING
This offering relates to the resale of common stock by certain persons
who are, or will become, stockholders of our company. The selling stockholders
consist of:
o Spinneret Financial System, Ltd., which intends to resell up to
6,666,667 shares of common stock to be issued under an equity
line of credit agreement, dated August 24, 2000.
o The Persia Consulting Group, Inc., which intends to resell up to
262,666 shares of common stock to be issued upon exercise of
options and warrants issued in connection with the equity line of
credit.
o Mark Angelo, Hunter Singer, Joseph Donahue and Robert Farrell,
all of whom intend to resell up to 904,000 shares of common stock
to be issued upon exercise of warrants issued in connection with
the equity line of credit.
o John P. Gallagher, who intends to resell up to 50,000 shares of
common stock he received with respect to a loan from John B.
Gallagher, his son and an officer of our company.
o Laurel Lee Wells, who intends to resell up to 75,000 shares of
common stock she received with respect to a marital obligation
from John B. Gallagher, an officer of our company.
Pursuant to the equity line of credit, we may, at our discretion,
periodically issue and sell to Spinneret Financial System, Ltd. shares of common
stock for a total purchase price of $20 million. Spinneret Financial will
purchase each share of common stock for 88% of the market price. Spinneret
Financial intends to resell any shares purchased under the equity line of credit
at the market price. In connection with this transaction, our company granted to
May Davis Group, Inc. warrants to purchase 500,000 share of common stock at an
exercise price of $7.00 per share and 500,000 shares of common stock at an
exercise price of $10.00 per share. Subsequently, the May Davis Group
transferred these warrants to Mark Angelo, Hunter Singer, Joseph Donahue, Robert
Farrell and the Persia Consulting Group. We also granted options to purchase
100,000 shares of common stock at a purchase price of $4.55 per share to the
Persia Consulting Group for assisting us in obtaining the equity line of credit.
Persia Consulting is also entitled to warrants to purchase one percent of the
total number of shares of common stock issued under the equity line of credit.
One-half of these warrants will have an exercise price of $7.00 per share and
one-half will have an exercise price of $10.00 per share. This prospectus
relates to the shares of common stock to be issued under the equity line of
credit and upon the exercise of the options and warrants.
COMMON STOCK OFFERED 7,958,333 shares by our
selling stockholders
OFFERING PRICE Market price
COMMON STOCK OUTSTANDING BEFORE THE OFFERING 4,933,900 as of October 23,
2000
COMMON STOCK OUTSTANDING AFTER THE OFFERING(1) 12,767,233
USE OF PROCEEDS We will not receive any
proceeds of the shares
offered by the selling
stockholders. Any proceeds
we receive from the sale of
common stock under the
equity line of credit and
the exercise of warrants
will be used for general
corporate purposes.
RISK FACTORS The securities offered
hereby involve a high degree
of risk. See "Risk Factors."
NASDAQ NATIONAL MARKET SYSTEM SYMBOL EMCC
PLAN OF DISTRIBUTION The selling stockholders
must sell the shares
registered in this offering
through registered brokers
or dealers.
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(1) Includes 7,833,333 shares of common stock issuable under the equity
line of credit and upon exercise of associated options and warrants.
Excludes 380,500 shares of common stock, of which 330,500 shares are
issuable upon exercise of outstanding options under our 1998 Stock
Incentive Plan and 50,000 shares are issuable upon exercise of
outstanding warrants under a consulting agreement.
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RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW BEFORE
PURCHASING OUR COMMON STOCK. OUR MOST SIGNIFICANT RISKS AND UNCERTAINTIES ARE
DESCRIBED BELOW; HOWEVER, THEY ARE NOT THE ONLY ONES WE FACE. IF ANY OF THE
FOLLOWING RISKS ACTUALLY OCCUR, OUR BUSINESS, FINANCIAL CONDITION OR RESULTS OF
OPERATIONS COULD BE MATERIALLY ADVERSELY AFFECTED, THE TRADING PRICE OF OUR
COMMON STOCK COULD DECLINE AND YOU MAY LOSE ALL OR PART OF YOUR INVESTMENT.
RISKS RELATED TO OUR BUSINESS
IF WE CONTINUE TO INCUR OPERATING LOSSES FOR A PERIOD LONGER THAN ANTICIPATED,
OR IN AN AMOUNT GREATER THAN ANTICIPATED, WE MAY BE UNABLE TO COMPLY WITH
CERTAIN FINANCIAL COVENANTS ON OUR BANK INDEBTEDNESS
We incurred a net loss of $3.2 million during Fiscal 2000. Our
operating results have been adversely impacted by ongoing legal costs related to
Big Blue Europe, the costs associated with our electronic commerce project,
increases in our general overhead costs and interest expense and a decrease in
sales. The development of our business-to-business electronic commerce project
will require substantial expenditures over the next several years. If the time
required to return our operations to profitability takes longer, or if such
expenditures are greater, than we currently anticipate, then we may be unable to
comply with certain financial covenants on our bank indebtedness. Such an event
would be a default under our bank loans and could result in the foreclosure of
our assets or other actions that would severely harm our company.
WE DO NOT HAVE LONG-TERM CONTRACTS WITH SUPPLIERS, WHICH COULD HARM OUR ABILITY
TO OBTAIN INVENTORY IN ADEQUATE QUANTITIES OR AT FAVORABLE PRICES
We are an independent distributor of personal computers and related
products. We have not entered and do not expect to enter into any long-term
distribution arrangements with our suppliers. Rather, we depend almost entirely
on the availability of product in the surplus market. 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 our suppliers will be able to maintain an adequate supply of
products that will adequately fulfill all of our customer orders on a timely
basis. Our failure to obtain adequate product in required quantities or at
favorable prices would result in lower sales and earnings. Moreover, because we
do not utilize supplier contracts, we do not enjoy the traditional benefits that
they provide, such as inventory price protection, market development funds or
extended payment terms.
CURRENCY FLUCTUATIONS MAY NEGATIVELY AFFECT OUR FINANCIAL CONDITION
For financial reporting purposes, our sales and expenses are
denominated in U.S. dollars. However, significant portions of our operations are
denominated in foreign currencies (approximately 66.6% at June 30, 2000), such
as the British pound and the European Economic Union's Euro. Currency
fluctuations may have a negative impact on our financial condition. For example,
a strengthening of the U.S. dollar against the U.K. pound sterling would result
in lower sales and earnings for financial reporting purposes. Similarly, our
sales and earnings may also be lower due to fluctuations between foreign
currencies because we often buy and sell inventory in different foreign
currencies. Accordingly, a strengthening of a currency in which inventory is
purchased against a currency in which sales are made would result in lower sales
and earnings.
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WE ARE INVOLVED IN A LITIGATION PROCEEDING REGARDING BIG BLUE EUROPE
Our company and two of our officers and directors are defendants in a
lawsuit brought by our joint venture partners in Big Blue Europe. A detailed
description of the lawsuit is contained in the "Legal Proceedings" section of
this prospectus. Although we believe the allegations made in the lawsuit are
without merit, we have incurred significant costs in defending it and expect to
incur additional defense costs in the future. In the event of an adverse outcome
our financial results would be adversely effected, which could result in a
decline in our stock price.
WE COULD FAIL TO ATTRACT OR RETAIN KEY PERSONNEL
Our success has been significantly dependent on the contributions of
John B. Gallagher and Harry D. Shields, our founders. Our success also depends
to a significant extent upon a number of other key employees. The loss of the
services of any of these people could materially harm our business because of
the cost and time necessary to replace and train such personnel. Such a loss
would also divert management attention away from operational issues. We maintain
key-man life insurance policies on the lives of Messrs. Gallagher and Shields.
In addition, our future success will depend in part upon our ability to
attract and retain additional highly-skilled professional, managerial, sales and
marketing personnel. Competition for such personnel is intense. Our failure to
attract and retain such personnel may limit the rate at which we can generate
sales and expand our business operations to new products or markets.
WE RELY ON KEY SUPPLIERS, THE LOSS OF A COMBINATION OF SUCH SUPPLIERS MAY HARM
OUR ABILITY TO OBTAIN PRODUCTS FOR RESALE AT FAVORABLE PRICES OR AT ALL
We do not manufacture any of our own products but rather resell
products purchased from suppliers. For the year ended June 30, 2000, we obtained
42.2% of our products from ten suppliers (38.4% excluding Technology Express).
Accordingly, we are highly dependent upon such suppliers and the loss of a
combination of such suppliers would harm our ability to obtain products for
resale at favorable prices or at all.
WE RELY ON CERTAIN KEY PRODUCTS AND OUR INABILITY TO OBTAIN ADEQUATE QUANTITIES
OF SUCH PRODUCTS AT FAVORABLE PRICES OR AT ALL WOULD RESULT IN LOWER SALES AND
PROFITS
For the fiscal year ended June 30, 2000, our ten best selling products
accounted for a large amount of our net sales. Historically, inadequate supplies
of products have characterized the microcomputer products industry. Accordingly,
our inability to obtain adequate supplies of these products would result in
lower sales and earnings.
WE RELY ON CERTAIN KEY CUSTOMERS, THE LOSS OF A COMBINATION OF SUCH CUSTOMERS
WOULD RESULT IN LOWER SALES AND EARNINGS
For the fiscal year ended June 30, 2000, our ten largest third party
customers accounted for 24.6% of net sales. None of these customers individually
accounted for more than about 4.1% of such net sales. However, we are highly
dependent upon such customers and the loss of a combination of such customers
would result in lower sales and earnings.
THE INTERESTS OF OUR MANAGEMENT MAY CONFLICT WITH THE INTERESTS OF OUR COMPANY
AND THE INTERESTS OF OUR OTHER STOCKHOLDERS
Our directors and executive officers beneficially own approximately 71%
of our company's outstanding common stock, excluding the shares to be issued
under the equity line of credit or upon the exercise of options and warrants.
These directors and executive officers, acting together, have the ability to
elect at least a majority of our directors. They also have the ability to
determine the outcome of most corporate actions requiring stockholder approval,
including our merger with or into another entity, a sale of substantially all of
our assets and amendments to our articles of incorporation. The decisions of
these stockholders may conflict with our company's interests or those of our
other stockholders.
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WE HAVE NARROW PROFIT MARGINS, WHICH MEANS THAT VARIATIONS IN SALES AND
OPERATING COSTS GREATLY IMPACTS OUR PROFITABILITY
As a result of intense price competition in the microcomputer products
industry, our company has had, and expects to continue to have, narrow gross
profit and operating profit margins. These narrow margins magnify the impact on
our profitability of variations in sales and operating costs.
OUR BUSINESS REQUIRES ACCESS TO CAPITAL TO PURCHASE PRODUCT IN BULK TO OBTAIN
FAVORABLE PRICES, THE ABSENCE OF SUCH CAPITAL WOULD PROHIBIT US FROM BUYING
PRODUCT AT FAVORABLE PRICES
Our business often requires the volume buying of discounted products.
This requires us to have sufficient available cash or financing. Our inability
to have available cash or financing would prevent us from taking advantage of
such discounted prices on a timely basis.
THERE ARE RISKS ASSOCIATED WITH INDEBTEDNESS, INCLUDING INTEREST RATE AND
DEFAULT RISKS
We have incurred substantial amounts of indebtedness in our operations
in recent years. Accordingly, we have dedicated an increasing portion of cash
flow to servicing such indebtedness. Such indebtedness exposes our company to
the risk of increasing interest rates, as well as default risks. Our company's
assets secure such indebtedness. Moreover, the indebtedness imposes significant
restrictions on our company and requires compliance with certain financial
covenants. As of June 30, 2000, our company was not in compliance with six of
the financial covenants in our loan agreements. Each of the lenders waived this
non-compliance. In October 2000, SouthTrust Bank amended the existing term loan
agreement with our company to adjust the financial covenants. In addition, we
replaced the existing revolving credit facilities with new asset based revolving
credit facilities for each of American Micro and Nor-Easter. As of September 30,
2000, we were not in compliance with certain financial covenants contained in
the Nor-Easter and American Micro lines of credit. In addition, we were not in
compliance with certain financial covenants contained in the term loan to
European Micro Holdings, Inc. We have obtained waivers from these covenant
violations existing at September 30, 2000. Also, at September 30, 2000, European
Micro UK was not in compliance with certain financial covenants of a revolving
credit agreement intended to assist in the purchase of inventory. From June 30,
2000 to September 30, 2000, no amounts were outstanding under the agreement. As
a result, European Micro UK will not be able to borrow against this revolving
credit agreement until it is in compliance with such financial covenants. There
can be no assurances that we will be able to comply with such adjusted
covenants, which would result in a default in these loan agreements.
WE FACE SUBSTANTIAL COMPETITION IN OUR BUSINESS
We operate in an industry which is characterized by intense competition
based on price, product availability and delivery times. We have numerous
competitors in the United States and abroad that include, among others,
manufacturers and international distributors. Many of our current and future
competitors have longer operating histories, significantly greater financial,
technical and marketing resources and significantly greater name recognition
than us and, therefore, have a significantly greater ability to obtain product
in short supply or at favorable prices. In addition, many of these competitors
may be able to respond more quickly than us to new or emerging technologies and
to devote greater resources than us to the development, promotion and sale of
their products. Such competition could result in price reductions, reduced
margins or loss of market share, any of which would materially harm our
business.
WE DO NOT ANTICIPATE DISTRIBUTING ANY DIVIDENDS TO OUR STOCKHOLDERS
It is unlikely that an investor in our stock will derive current income
from dividends resulting from ownership of our stock. This means that your
potential for economic gain from ownership of our stock depends on an
appreciation in the value of our stock and will only be realized upon a sale of
the stock at a price higher than your purchase price.
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OUR RIGHT TO ISSUE PREFERRED STOCK AND OTHER ANTI-TAKEOVER PROVISIONS COULD MAKE
A THIRD-PARTY ACQUISITION OF US DIFFICULT AND OTHERWISE ADVERSELY AFFECT COMMON
STOCKHOLDERS
Our board of directors is authorized to designate and issue up to
1,000,000 shares of preferred stock as to which the board can determine the
price, rights, preferences and privileges of those shares without any further
vote or action by the stockholders. If you own common stock, your ownership
rights will be subject to, and may be adversely affected by, the rights of the
owners of preferred stock that we may issue in the future. As a result, the
issuance of preferred stock could have a material adverse effect on the market
value of the common stock. An additional issuance of preferred stock would give
us financial flexibility for possible acquisitions and other corporate purposes.
However, it could make it more difficult for a third party to acquire a majority
of our outstanding voting stock.
Our articles of incorporation provide that our board of directors is
divided into three classes, each serving staggered three-year terms.
Accordingly, stockholders may elect only a minority of our board at any annual
meeting, which may have the effect of delaying or preventing changes in
management or control.
Further, we are subject to the anti-takeover provisions of the Nevada
Revised Statutes. Under this law, if anyone becomes an "interested stockholder"
in our company, we may not enter a "business combination" with that person for
three years without special approval. These provisions could delay or prevent a
change of control. Certain other provisions of our articles of incorporation and
bylaws, including those providing for preferred stock, could also delay or
prevent changes of control or management. These provisions could adversely
affect the market price of the common stock.
WE MAY BE REQUIRED TO CURTAIL CERTAIN PLANNED EXPANSION IF WE FAIL TO OBTAIN
SIGNIFICANT FUNDING UNDER THE EQUITY LINE OF CREDIT
Our planned expansion requires us to obtain significant funding. If we
are unable to raise significant funding under the equity line of credit, then we
may be required to curtail our planned expansion, including our e-commerce
initiative and pursuit of acquisitions. Such an outcome may adversely affect the
market price of our common stock.
OUR COMMON STOCK PRICE IS LIKELY TO BE HIGHLY VOLATILE
The market price of our common stock is likely to be highly volatile.
In addition to various risks described elsewhere in this prospectus, the
following factors could also cause price volatility:
o Announcements that we or our competitors make concerning
operating results, product availability, technological
innovations or new commercial products;
o Changes in or adoption of new government regulations;
o Our product mix;
o Regulatory actions;
o Variations in operating results; and
o Actual, announced or threatened litigation.
Extreme price and volume fluctuations occur in the stock market from
time to time. These extreme fluctuations are often unrelated to the actual
performance of the affected issuers. These broad market fluctuations may
adversely affect the market price of our common stock.
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RISKS RELATED TO THIS OFFERING
FUTURE SALES BY OUR STOCKHOLDERS MAY ADVERSELY AFFECT OUR STOCK PRICE AND OUR
ABILITY TO RAISE FUNDS IN NEW STOCK OFFERINGS
Sales of our common stock in the public market following this offering
could lower the market price of our common stock. Sales may also make it more
difficult for us to sell equity securities or equity-related securities in the
future at a time and price that our management deems acceptable or at all. Of
the 4,933,900 shares of common stock outstanding as of October 23, 2000
(assuming no exercise of options or warrants), 933,900 shares are freely
tradable without restriction, unless purchased by our "affiliates." The
remaining 4,000,000 shares of common stock held by existing stockholders are
"restricted securities" and may be resold in the public market only if
registered or pursuant to an exemption from registration. Of that total,
3,875,000 of these restricted securities are immediately eligible for resale
under Rule 144, subject to the volume limitations and other resale requirements.
The remaining 125,000 of these restricted securities are being registered in
this offering and, upon effectiveness, may be immediately resold in the public
market.
Upon completion of this offering, and assuming all shares registered in
this offering are resold in the public market, there will be an additional
7,833,333 shares of common stock outstanding (including options and warrants
issued in connection with the equity line of credit). All of these shares of
common stock may be immediately resold in the public market upon effectiveness
of the accompanying registration statement and the sale to the investor under
the terms of the equity line of credit agreement. These consist of 6,666,667
shares of common stock to be issued under the equity line of credit and
1,166,666 share of common stock to be issued upon exercise of options and
warrants issued in connection with the equity line of credit.
In addition, we have issued options to purchase a total of 330,500
shares of our common stock at exercise prices ranging from $7.0625 to $12.00 per
share under our 1998 Stock Incentive Plan. Of that total, options to purchase
88,750 shares of common stock are vested and the underlying shares of common
stock have been registered for resale and may be resold in the market without
limitation. The shares underlying unvested options are also registered for
resale and may be resold in the market once vested pursuant to the terms of the
applicable option agreements. We have also issued warrants to purchase a total
of 50,000 shares of our common stock at an exercise price of $4.00 per share
under a consulting agreement. These warrants will vest in the future upon the
occurrence of certain events. All shares issued upon the exercise of the
warrants will be restricted securities and may be resold in the public market
only if registered or pursuant to an exemption from registration.
EXISTING STOCKHOLDERS MAY EXPERIENCE SIGNIFICANT DILUTION FROM OUR SALE OF
SHARES UNDER THE EQUITY LINE OF CREDIT OR THE EXERCISE OF WARRANTS
The sale of shares pursuant to the equity line of credit will have a
dilutive impact on our stockholders. As a result, our net income per share could
decrease in future periods, and the market price of our common stock could
decline. In connection with the equity line of credit, we issued warrants to
purchase 500,000 shares of common stock at an exercise price of $7.00 per share
and 500,000 shares of common stock at an exercise price of $10.00 per share. The
issuance of such shares under the equity line of credit and the shares issuable
upon exercise of the warrants would have a further dilutive effect on our common
stock and could lower the price of our common stock. In addition, the lower our
stock price is the more shares of common stock we will have to issue under the
equity line of credit. If our stock price is lower, then our existing
stockholders would experience greater dilution.
THE INVESTOR UNDER THE EQUITY LINE OF CREDIT WILL PAY LESS THAN THE
THEN-PREVAILING MARKET PRICE OF OUR COMMON STOCK
The common stock to be issued under the equity line of credit will be
issued at a 12% discount to the then-prevailing market price of the common
stock. These discounted sales could cause the price of our common stock to
decline.
THE SELLING STOCKHOLDERS INTEND TO SELL THEIR SHARES OF COMMON STOCK IN THE
MARKET, WHICH SALES MAY CAUSE OUR STOCK PRICE TO DECLINE
9
<PAGE>
The selling stockholders intend to sell in the public market the shares
of common stock being registered in this offering. That means that up to
7,958,333 shares of common stock, the number of shares being registered in this
offering, may be sold. Such sales may cause our stock price to decline.
OUR COMMON STOCK HAS BEEN RELATIVELY THINLY TRADED AND WE CANNOT PREDICT THE
EXTENT TO WHICH A TRADING MARKET WILL DEVELOP
Before this offering, our common stock has traded on the Nasdaq
National Market System. Our common stock is thinly traded compared to larger
more widely known companies in our industry, such as Tech Data Corp. or Ingram
Micro, Inc. Thinly traded common stock can be more volatile than common stock
trading in an active public market. We cannot predict the extent to which an
active public market for the common stock will develop or be sustained after
this offering.
THE PRICE YOU PAY IN THIS OFFERING WILL FLUCTUATE
The price in this offering will fluctuate based on the prevailing
market price of the common stock on the Nasdaq National Market System.
Accordingly, the price you pay in this offering may be higher or lower than the
prices paid by other people participating in this offering.
10
<PAGE>
FORWARD-LOOKING STATEMENTS
FORWARD-LOOKING STATEMENTS
Information included or incorporated by reference in this prospectus
may contain forward-looking statements within the meaning of Section 27A of the
Securities Act and Section 21E of the Exchange Act. This information may involve
known and unknown risks, uncertainties and other factors which may cause our
actual results, performance or achievements to be materially different from the
future results, performance or achievements expressed or implied by any
forward-looking statements. Forward-looking statements, which involve
assumptions and describe our future plans, strategies and expectations, are
generally identifiable by use of the words "may," "will," "should," "expect,"
"anticipate," "estimate," "believe," "intend" or "project" or the negative of
these words or other variations on these words or comparable terminology.
This filing contains forward-looking statements, including statements
regarding, among other things, (a) our projected sales and profitability, (b)
our growth strategies, (c) anticipated trends in our industry, (d) our future
financing plans, (e) our anticipated needs for working capital and ability to
comply with the financial covenants contained in loan agreements and (f) the
benefits related to the acquisitions of American Micro, Sunbelt and H&B Trading.
These statements may be found under "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business," as well as in
this prospectus generally. Actual events or results may differ materially from
those discussed in forward-looking statements as a result of various factors,
including, without limitation, the risks outlined under "Risk Factors" and
matters described in this prospectus generally. 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. In addition to the information
expressly required to be included in this filing, we will provide such further
material information, if any, as may be necessary to make the required
statements, in light of the circumstances under which they are made, not
misleading.
11
<PAGE>
SELLING STOCKHOLDERS
The following table presents information regarding the selling
stockholders. Pursuant to the equity line of credit, Spinneret Financial has
agreed to purchase up to $20 million of common stock from our company. The
Persia Consulting Group and John P. Gallagher are consultants to our company and
American Micro, respectively. John P. Gallagher is the father of John B.
Gallagher, our Co-Chairman and Co-President, and was an officer, director and
50% stockholder of American Micro until we acquired it on July 1, 1999. Except
as noted above, none of the other selling stockholders has held a position or
office, or had any other material relationship, with our company.
<TABLE>
<CAPTION>
PERCENTAGE OF
OUTSTANDING
SHARES SHARES TO BE SHARES TO BE
BENEFICIALLY ACQUIRED UNDER THE ACQUIRED UNDER SHARES TO BE
SELLING OWNED BEFORE EQUITY LINE OF THE EQUITY LINE SOLD IN THE
STOCKHOLDER OFFERING CREDIT(1) OF CREDIT(2) OFFERING
----------- ------------ ------------------ --------------- --------------
<S> <C> <C> <C> <C>
Spinneret Financial System, Ltd. 0 6,666,667 57.5% 6,666,667
Mark Angelo(3) 0 226,000 4.4% 226,000
Hunter Singer(3) 0 226,000 4.4% 226,000
Joseph Donahue(3) 0 226,000 4.4% 226,000
Robert Farrell(3) 0 226,000 4.4% 226,000
Persia Consulting Group(3) 0 262,666 5.1% 262,666
John P. Gallagher 50,000 0 1.0% 50,000
Laurel Lee Wells 75,000 0 1.5% 75,000
</TABLE>
-----------------
(1) Reflects the number of shares that could be purchased under the equity
line of credit or upon the exercise of options and warrants issued in
connection with the equity line of credit.
(2) Percentage of outstanding shares is based on 4,933,900 shares of common
stock outstanding as of October 23, 2000, together with the maximum
number of shares of common stock that may be purchased by each selling
stockholder from our company under the equity line of credit or upon
exercise of related options and warrants. The shares to be issued to
each selling stockholder under the equity line of credit or upon
exercise of related options and warrants are treated as outstanding for
the purpose of computing that person's percentage ownership, but are not
treated as outstanding for the purpose of computing the percentage
ownership of any other selling stockholder.
(3) These represent the number of shares of common stock to be issued upon
exercise of options and warrants issued in connection with the equity
line of credit.
12
<PAGE>
USE OF PROCEEDS
This prospectus relates to shares of our common stock that may be
offered and sold from time to time by selling stockholders. There will be no
proceeds to our company from the sale of shares of common stock in this
offering. However, our company will receive the proceeds from the sale of common
stock to Spinneret Financial under the equity line of credit, as well as the
proceeds, if any, relating to the exercise of outstanding options and warrants
held by Mark Angelo, Hunter Singer, Joseph Donahue, Robert Farrell and the
Persia Consulting Group. The purchase price under the equity line of credit will
be equal to 88% of then market price of our common stock on the Nasdaq National
Market System. All proceeds from the sale of common stock, less estimated
offering expenses of $75,000 and placement agent and consultant fees of 8% of
the gross proceeds, under the equity line of credit and from the exercise of
options and warrants will be used for general corporate purposes.
DILUTION
Since this offering is being made solely by selling stockholders and
none of the proceeds will be paid to our company, our net tangible book value
will be unaffected by this offering. Our net tangible book value, however, will
be impacted by the common stock to be issued under the equity line of credit and
upon exercise of options and warrants issued in connection with the equity line
of credit. As a result, the selling stockholders receiving common stock under
the equity line of credit or upon exercise of options and warrants will
experience significant dilution per share. Our existing stockholders, however,
would experience an increase in net tangible book value per share if the net
proceeds received by our company under the equity line of credit or upon
exercise of the options and warrants exceeded our net tangible book value per
share on the date such proceeds are received.
The net tangible book value of our company as of both September 30,
2000 and June 30, 2000 was $8.3 million or $1.68 per share of common stock. Net
tangible book value is determined by dividing the tangible book value of our
company (total tangible assets less total liabilities) by the number of
outstanding shares of our common stock.
DIVIDEND POLICY
We have not declared or paid any dividends on our common stock during
Fiscal 1999 and Fiscal 2000. Following this offering, our dividend practices
with respect to our common stock will be determined and may be changed from time
to time by our board of directors. We will base any issuance of dividends upon
our earnings, financial condition, capital requirements and other factors
considered important by our board of directors. Nevada law and our articles of
incorporation do not require our board of directors to declare dividends on our
common stock. Our loan agreements with SouthTrust Bank prohibit us from paying
dividends. We expect to retain all earnings, if any, generated by our operations
for the development and growth of our business and do not anticipate paying any
dividends to our stockholders for the foreseeable future.
13
<PAGE>
CAPITALIZATION
The following table shows as of September 30, 2000 our actual
capitalization and our pro forma capitalization after giving effect to the
issuance of a total of 6,790,141 shares of our common stock, consisting of the
sale of 5,633,803 shares of our common stock under the equity line of credit and
the issuance of 1,156,338 shares of our common stock upon the exercise of
options and warrants issued in connection with the equity line of credit. These
options and warrants consist of: (i) 100,000 options held by Persia Consulting,
(ii) 226,000 warrants held by Mark Angelo, (iii) 226,000 warrants held by Hunter
Singer, (iv) 226,000 warrants held by Joseph Donahue, (v) 226,000 warrants held
by Robert Farrell and (vi) 152,338 warrants held by Persia Consulting Group. The
100,000 options are exercisable at $4.55 per share, 528,169 warrants are
exercisable at $7.00 per share and 528,169 warrants are exercisable at $10.00
per share. This information assumes a purchase price under the equity line of
credit of $3.55 per share, 88% of the closing price of our common stock as of
October 23, 2000, less estimated offering expenses of $75,000 and placement
agent and consulting fees of 8% of the gross proceeds received under the equity
line of credit. The number of shares assumed to be resold for the purposes of
this table is less than the total number of shares being registered in this
offering because (i) the assumed price of $3.55 used in this table is greater
than the $3.00 price used to calculate the maximum number of shares that may be
resold under the equity line of credit and (ii) the shares held by John P.
Gallagher and Laurel Lee Wells are excluded from this table because they are
already outstanding.
<TABLE>
($ IN THOUSANDS, EXCEPT SHARE DATA)
<CAPTION>
SEPTEMBER 30, 2000
---------------------------------
ACTUAL PRO FORMA
-------------- ---------------
<S> <C> <C>
Long-term obligations, net of current portion........ $2,235 $2,235
Stockholders' equity:
Preferred Stock, $0.01 par value, 1,000,000
shares authorized, none issued on a pro forma
basis ......................................... -- --
Common Stock, par value $0.01 per share;
20,000,000 shares authorized, 4,933,900 shares
outstanding actual and 11,724,041 shares
outstanding pro forma....................... 49 117
Additional paid-in capital...................... 9,512 36,995
Prepaid offering costs.......................... (208) --
Accumulated other comprehensive loss............ (680) (680)
Retained earnings............................... 2,352 2,352
-------------- ---------------
Total stockholders' equity................... 11,025 38,784
-------------- ---------------
Total capitalization.................... $13,260 $41,019
============== ===============
</TABLE>
(1) Excludes 380,500 shares of common stock, of which 330,500 shares
are issuable upon exercise of outstanding options under our 1998 Stock Incentive
Plan and 50,000 shares are issuable upon exercise of outstanding warrants under
a consulting agreement.
(2) The pro forma amounts above assume the 1% cash and 1% warrant
consideration paid to Persia Consulting are accounted for as offering costs. All
or a portion of such consideration may ultimately be accounted for by our
company as operating costs.
14
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
($ In Thousands, Except Share Data)
The following statement of operations and balance sheet data of our
company is set forth below for each year in the five-year period ended June 30,
2000. The information presented is derived from the audited consolidated
financial statements of our company and should be read in conjunction with the
consolidated financial statements as of June 30, 2000 and 1999 and each of the
years in the three-year period ended June 30, 2000 and the Notes thereto
included elsewhere in this filing.
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
2000 1999 1998 1997 1996
---------------- ------------- --------------- -------------- ------------
STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C>
Net Sales $115,493 $132,206 $111,453 $46,655 $40,348
Income (loss) from operations (2,699) 1,935 7,232 2,051 1,478
Net income (loss) (3,207) 854 4,485 1,034 845
Net income (loss) per share
(basic and diluted) (0.64) 0.17 1.10 0.26 0.21
Dividends per share $0.00 $0.00 $0.14 $0.14 $0.24
Weighted average common shares
outstanding, basic 5,008,151 4,978,614 4,066,524 4,000,000 4,000,000
Weighted average common shares
outstanding, diluted 5,008,151 4,989,961 4,087,466 4,000,000 4,000,000
JUNE 30,
2000 1999 1998 1997 1996
---------------- -------------- --------------- -------------- ------------
BALANCE SHEET DATA:
Working capital $6,206 $11,844 $12,959 $1,976 $1,474
Total assets 30,213 30,599 19,204 8,844 7,857
Long-term debt, net of
current portion 2,373 23 84 45 37
Stockholders' equity 11,110 14,343 13,680 2,511 1,769
</TABLE>
15
<PAGE>
SUPPLEMENTARY FINANCIAL INFORMATION
Certain quarterly financial information regarding our company is set
forth below.
<TABLE>
<CAPTION>
NET INCOME (LOSS) PER
NET INCOME SHARE (BASIC AND
SEPTEMBER 30, 2000 NET SALES GROSS PROFIT (LOSS) DILUTED)
------------------ --------- ------------ ------ --------
<S> <C> <C> <C> <C>
First Quarter $29,068 3,156 (68) $(0.01)
($ IN THOUSANDS, EXCEPT SHARE DATA)
NET INCOME NET INCOME (LOSS) PER SHARE
JUNE 30, 2000 NET SALES GROSS PROFIT (LOSS) (BASIC AND DILUTED)
------------- --------- ------------ ------ -------------------
First Quarter $32,764 3,697 207 $0.04
Second Quarter 34,545 3,704 11 0.00
Third Quarter 24,354 1,855 (1,308) (0.26)
Fourth Quarter 23,830 2,095 (2,117) (0.42)
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
</TABLE>
16
<PAGE>
EQUITY LINE OF CREDIT
Pursuant to the equity line of credit, we may, at our discretion,
periodically issue and sell to Spinneret Financial System, Ltd. shares of common
stock for a total purchase price of $20 million. If our company requests an
advance under the equity line of credit, Spinneret Financial will purchase each
share of common stock for 88% of the market price. Spinneret Financial intends
to resell any shares purchased under the equity line of credit at the market
price. In connection with this transaction, our company granted to May Davis
Group, Inc. warrants to purchase 500,000 share of common stock at an exercise
price of $7.00 per share and 500,000 shares of common stock at an exercise price
of $10.00 per share. Subsequently, the May Davis Group transferred these
warrants to Mark Angelo, Hunter Singer, Joseph Donahue, Robert Farrell and the
Persia Consulting Group. Mark Angelo, Hunter Singer, Joseph Donahue and Robert
Farrell are employees of the May Davis Group, Inc. We also granted options to
purchase 100,000 shares of common stock at a purchase price of $4.55 per share
to the Persia Consulting Group for assisting us in obtaining the equity line of
credit. These options vested on August 24, 2000 and become exercisable on August
24, 2001. Persia Consulting is also entitled to warrants to purchase one percent
of the total number of shares of common stock issued under the equity line of
credit. One-half of these warrants will have an exercise price of $7.00 per
share and one-half will have an exercise price of $10.00 per share. This
prospectus relates to the shares of common stock to be issued under the equity
line of credit and upon the exercise of the options and warrants.
The effectiveness of the issuance of common stock pursuant to the
equity line of credit and the warrants is conditioned upon us registering with
the Securities and Exchange Commission the sale of the common stock by Spinneret
Financial. We received stockholder approval at our company's annual meeting held
on October 30, 2000.
ADVANCES. Pursuant to the equity line of credit, we may periodically
sell shares of our common stock to Spinneret Financial to raise capital to fund
our working capital needs. The periodic sale of shares is known as an advance.
We may request an advance every 15 days.
MECHANICS. We may, at our discretion, request advances from Spinneret
Financial by written notice, specifying the amount requested up to the maximum
advance amount. A closing will be held 25 days after such written notice at
which time we will deliver shares of common stock and Spinneret Financial will
pay the advance amount. We have the ability to determine when and if we desire
to draw an advance. There is no minimum advance requirement. Under certain
circumstances, we may withdraw an advance without penalty.
COMMITMENT PERIOD. We may request an advance at any time during the
commitment period. The commitment period begins on the date the Securities and
Exchange Commission first declares the accompanying registration statement
effective. The commitment period expires on the earliest to occur of (i) the
date on which Spinneret Financial has made advances totaling $20 million or (ii)
February 23, 2003 (i.e. 30 months from the date of the equity line of credit).
MAXIMUM ADVANCE AMOUNT. We may not request advances in excess of a
total of $20 million. In addition, each individual advance is subject to a
maximum advance amount based on the 25-day average daily volume of our common
stock. The 25-day average daily volume is equal to the bid price of our common
stock multiplied by the volume for each of the 25 trading days preceding our
request for an advance. The maximum advance amount for each individual advance
is determined according to the following table:
25-DAY AVERAGE VOLUME MAXIMUM ADVANCE AMOUNT
--------------------- ----------------------
$25,000 - $50,000 $100,000
$50,001 - $100,000 $200,000
$100,001 - $200,000 $350,000
$200,001 - $300,000 $500,000
$300,001 - $400,000 $650,000
$400,001 - $500,000 $900,000
$500,001 - $600,000 $1,200,000
$600,001 - $800,000 $1,500,000
$800,001 - $1,000,000 $1,750,000
$1,000,001 and Over $2,000,000
By way of illustration only, if we had requested an advance on October
13, 2000, then the 25-day average volume would have been approximately $39,115.
Accordingly, the maximum advance amount would have been $100,000.
PURCHASE PRICE. The purchase price for the shares of common stock to be
sold under the equity line of credit is equal to 88% of the market price on the
Nasdaq National Market or other principal trading market. The market price is
defined as the average of the three lowest closing bid prices of the common
stock over the ten trading days subsequent to the date on which we notify
Spinneret Financial of an advance. Note that the net proceeds to be received by
our company will be lower than the purchase price due to our obligation to pay a
placement agent fee of 7% of each advance to the May Davis Group, Inc.
NUMBER OF SHARES TO BE ISSUED. We cannot predict the actual number of
shares of common stock that will be issued pursuant to the equity line of
credit, in part, because the purchase price of the shares will fluctuate based
on prevailing market conditions and we have not determined the total amount of
advances we intend to draw. Nonetheless, we can estimate the number of shares of
common stock that will be issued using certain assumptions. Assuming we drew
down the entire $20 million available under the equity line of credit in a
single advance (which is not permitted under the terms of the equity line of
credit) at $5.00 per share, then we would issue 4,000,000 shares of common stock
to Spinneret Financial, plus warrants to purchase 1,000,000 shares of common
stock to the May Davis Group, Inc. and warrants to purchase 40,000 shares of
common stock to the Persia Consulting Group, Inc. The warrants to the Persia
Consulting Group are in addition to options to purchase 100,000 shares of common
stock held by the Persia Consulting Group on the date hereof. These shares would
represent 44.8% of our outstanding capital stock (51.0% if the shares to be
issued upon exercise of the options and warrants are taken into account) upon
issuance. To assist our stockholders in evaluating the number of shares of
common stock that could be issued to Spinneret Financial and the May Davis
Group, Inc. at various prices, we have prepared the following table. This table
shows the number of shares of our common stock that would be issued with and
without the warrants at various prices.
<TABLE>
<CAPTION>
PURCHASE PRICE: $3.00 $4.00 $5.00 $6.00 $7.00
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
NO. OF SHARES(1): 6,666,667 5,000,000 4,000,000 3,333,333 2,857,143
TOTAL OUTSTANDING
EXCLUDING OPTIONS AND
WARRANTS(2): 11,600,567 9,933,900 8,933,900 8,267,233 7,791,043
PERCENT OUTSTANDING
EXCLUDING OPTIONS AND
WARRANTS(3): 57.5% 50.3% 44.8% 40.3% 36.7%
NO. OF OPTIONS AND
WARRANTS(4): 1,166,666 1,150,000 1,140,000 1,133,334 1,128,571
TOTAL OUTSTANDING
INCLUDING OPTIONS AND
WARRANTS(4): 12,767,233 11,083,900 10,073,900 9,400,567 8,919,614
PERCENT OUTSTANDING
INCLUDING OPTIONS AND
WARRANTS(4)(5): 61.4% 55.5% 51.0% 47.5% 44.7%
</TABLE>
----------------------
(1) Represents the number of shares of common stock to be issued to
Spinneret Financial at the prices set forth in the table.
(2) Represents the total number of shares of common stock outstanding after
the issuance of the shares to Spinneret Financial and excludes the
issuance of shares to the May Davis Group, Inc. upon the exercise of
warrants granted to it.
(3) Represents the shares of common stock to be issued as a percentage of
the total number shares outstanding, EXCLUDING the warrants issued to
the May Davis Group, Inc.
(4) Represents the total number of shares of common stock outstanding after
the issuance of the shares to Spinneret Financial, INCLUDING the
issuance of shares to the May Davis Group, Inc. upon the exercise of
warrants granted to it. Also includes the issuance of shares to the
Persia Consulting Group, Inc. upon the exercise of warrants granted to
it.
(5) Represents the shares of common stock to be issued as a percentage of
the total number shares outstanding, INCLUDING the warrants issued to
the May Davis Group, Inc. and the Persia Consulting Group, Inc.
REGISTRATION RIGHTS. We granted to Spinneret Financial certain
registration rights. We are also obligated to register the shares of common
stock to be issued to the May Davis Group, Inc. upon exercise of the warrants.
The registration statement accompanying this prospectus will register such
shares upon effectiveness. May Davis Group's registration rights were
subsequently transferred along with the warrants to Mark Angelo, Hunter Singer,
Joseph Donahue, Robert Farrell and the Persia Consulting Group. The cost of this
registration will be borne by us.
NET PROCEEDS. We cannot predict the total amount of proceeds to be
raised in this transaction, in part, because we have not determined the total
amount of the advances we intend to draw. However, we expect to incur expenses
of approximately $75,000, consisting primarily of professional fees incurred in
connection with registering Spinneret Financial's shares in this offering. In
addition, we are obligated to pay the May Davis Group, Inc. a cash placement
agent fee and Persia Consulting Group a cash consulting agent fee equal to 7%
and 1%, respectively, of each advance.
USE OF PROCEEDS. We intend to use the net proceeds received under the
equity line of credit for general corporate purposes.
PLACEMENT AGENT. We retained the May Davis Group, Inc. to act as our
placement agent in connection with the equity line of credit. We will pay a cash
placement agent fee to the May Davis Group, Inc. equal to 7% of each advance.
Further, we granted to the May Davis Group, Inc. warrants to purchase 1,000,000
shares of common stock, of which warrants to purchase 500,000 shares have an
exercise price of $7.00 per share (the "CLASS A WARRANT") and 500,000 shares
have an exercise price of $10.00 per share (the "CLASS B WARRANT"). The Class A
Warrants will become exercisable upon us drawing the initial advance under the
equity line of credit. The Class B Warrants will become exercisable pro rata on
the basis of the number of shares of common stock to be issued in connection
with each advance. Subsequently, the warrants were transferred by the May Davis
Group, Inc. to the following:
NUMBER OF CLASS A NUMBER OF CLASS B
NAME: WARRANTS: WARRANTS:
----- --------- ---------
Mark Angelo 113,000 113,000
Hunter Singer 113,000 113,000
Joseph Donahue 113,000 113,000
Robert Farrell 113,000 113,000
Persia Consulting Group 48,000 48,000
The exercise price of the warrants will be reduced if our company
issues or sells shares of common stock for, or issues securities convertible
into shares of common stock with a conversion or exercise price of, less than
the average closing bid prices of our common stock for the ten trading days
immediately preceding the date of issuance, or in the case of options issued to
employees after 30 days of the employees start date, the closing bid price on
19
<PAGE>
the date of issuance. In such event, the exercise price of the warrants will be
reduced to the price at which such common stock was issued or sold or to the
exercise price of such convertible securities. All warrants are exercisable for
five years after the date of issuance. The holders of the warrants may, under
certain circumstances, exercise the warrants pursuant to a cashless exercise.
We have the right to force exercise of the Class A Warrants and Class B
Warrants if the closing bid price of our common stock is $10.00 and $15.00,
respectively, or higher per share for ten consecutive trading days.
STOCKHOLDER APPROVAL. The issuance of the common stock under the equity
line of credit and pursuant to the exercise of the warrants was subject to us
obtaining the affirmative vote of a majority of our outstanding shares of common
stock. Our stockholders approved this issuance at our annual meeting held on
October 30, 2000.
20
<PAGE>
PLAN OF DISTRIBUTION
The selling stockholders have advised us that the sale or distribution
of our company's common stock owned by the selling stockholders may be effected
directly to purchasers by the selling stockholders or by pledgees, donees,
transferees or other successors in interest, as principals or through one or
more underwriters, brokers, dealers or agents from time to time in one or more
transactions (which may involve crosses or block transactions) (i) on the Nasdaq
National Market System or in any other market on which the price of our
company's shares of common stock are quoted or (ii) in transactions otherwise
than on the Nasdaq National Market System or in any other market on which the
price of our company's shares of common stock are quoted. Any of such
transactions may be effected at market prices prevailing at the time of sale, at
prices related to such prevailing market prices, at varying prices determined at
the time of sale or at negotiated or fixed prices, in each case as determined by
the selling stockholders or by agreement between the selling stockholders and
underwriters, brokers, dealers or agents, or purchasers. If the selling
stockholders effect such transactions by selling their shares of our company's
common stock to or through underwriters, brokers, dealers or agents, such
underwriters, brokers, dealers or agents may receive compensation in the form of
discounts, concessions or commissions from the selling stockholders or
commissions from purchasers of common stock for whom they may act as agent
(which discounts, concessions or commissions as to particular underwriters,
brokers, dealers or agents may be in excess of those customary in the types of
transactions involved). The selling stockholders and any brokers, dealers or
agents that participate in the distribution of the common stock may be deemed to
be underwriters, and any profit on the sale of common stock by them and any
discounts, concessions or commissions received by any such underwriters,
brokers, dealers or agents may be deemed to be underwriting discounts and
commissions under the Securities Act.
Spinneret Financial System, Ltd. is an "underwriter" within the meaning
of the Securities Act of 1933 in connection with the resale of common stock
under the equity line of credit agreement. Spinneret Financial will pay our
company 88% of the market price of our company's common stock. The 12% discount
on the purchase of the common stock to be received by Spinneret Financial will
be an underwriting discount. In connection with the equity line of credit,
Persia Consulting assisted us in obtaining the equity line of credit. In
consideration of such assistance, as well as other services rendered, we paid
Persia Consulting a consulting fee consisting of $10,000, plus the issuance of
options to purchase 100,000 shares of common stock at $4.55 per share. Persia
Consulting will be paid additional fees consisting of a cash payment of 1% of
the gross proceeds raised in the equity line of credit, plus warrants to
purchase one percent of the number of shares issued under the equity line of
credit. We also retained the May Davis Group, Inc. as our placement agent in
connection with the equity line of credit. For its services, the May Davis Group
will be paid a placement agent fee consisting of a cash payment of 7% of the
gross proceeds raised in the equity line of credit, plus 1,000,000 warrants.
One-half of these warrants have an exercise price of $7.00 per share and
one-half have an exercise price of $10.00 per share.
Under the securities laws of certain states, the shares of common stock
may be sold in such states only through registered or licensed brokers or
dealers. We will inform the selling stockholders that any underwriters, brokers,
dealers or agents effecting transactions on behalf of the selling stockholders
must be registered to sell securities in all fifty states. In addition, in
certain states the shares of common stock may not be sold unless the shares have
been registered or qualified for sale in such state or an exemption from
registration or qualification is available and is complied with.
We will pay all the expenses incident to the registration, offering and
sale of the shares of common stock to the public hereunder other than
commissions, fees and discounts of underwriters, brokers, dealers and agents. We
have agreed to indemnify certain selling stockholders and their controlling
persons against certain liabilities, including liabilities under the Securities
Act. We estimate that the expenses of the offering to be borne by us will be
approximately $75,000, as well as placement agent and consulting fees of 8% of
the gross proceeds received under the equity line of credit. We will not receive
any proceeds from the sale of any of the shares of common stock by the selling
stockholders. We will, however, receive proceeds from the sale of common stock
under the equity line of credit.
We will inform the selling stockholders that the anti-manipulation
provisions of Regulation M under the Exchange Act may apply to purchases and
sales of shares of common stock by the selling stockholders, and that there are
restrictions on market-making activities by persons engaged in the distribution
21
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of the shares. We will advise the selling stockholders that if a particular
offer of common stock is to be made on terms constituting a material change from
the information set forth above with respect to the Plan of Distribution, then
to the extent required, a Prospectus Supplement must be distributed setting
forth such terms and related information as required.
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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 OUR COMPANY AND THE NOTES THERETO APPEARING
ELSEWHERE IN THIS PROSPECTUS.
The following table sets forth, for the periods presented, the
percentage of net sales represented by certain items in our company's
consolidated statements of operations:
<TABLE>
PERCENTAGE OF NET SALES
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED JUNE 30,
------------- -------------------
2000 1999 2000 1999 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net sales 99.8% 96.9% 98.0% 88.4% 73.9%
Net sales to related parties 0.2 3.1 2.0 11.6 26.1
------- ------- ------- ------- -------
Total net sales 100.0 100.0 100.0 100.0 100.0
------- ------- ------- ------- -------
Cost of goods sold (89.0) (85.7) (88.2) (80.1) (61.4)
Cost of goods sold to related parties (0.2) (3.0) (2.0) (11.5) (25.7)
------- ------- ------- ------- -------
Total cost of goods sold (89.2) (88.7) (90.2) (91.6) (87.1)
------- ------- ------- ------- -------
Gross profit 10.9 11.3 9.8 8.4 12.9
Operating expenses (9.9) (9.4) (12.2) (6.9) (6.4)
------- ------- ------- ------- -------
Income (loss) from operations 1.0 1.9 (2.4) 1.5 6.5
Interest income 0.1 0.1 0.1 - -
Interest expense (1.1) (0.7) (0.8) (0.3) (0.4)
Equity in net income (loss) of
unconsolidated subsidiaries -- -- (0.2) - -
------- ------- ------- ------- -------
Income (loss) before income taxes 0.0 1.3 (3.3) 1.2 6.1
Income tax expense (0.2) (0.7) 0.5 (0.6) (2.1)
------- ------- ------- ------- -------
Net Income (loss) (0.2)% 0.6% (2.8)% 0.6% 4.0%
------- ------- ------- ------- -------
</TABLE>
THREE-MONTH PERIOD ENDED SEPTEMBER 30, 2000 AND 1999
TOTAL NET SALES. Total net sales decreased $3.7 million, or 11.3%, from
$32.8 million in the three-month period ended September 30, 1999 to $29.1
million in the comparable period in 2000. Excluding net sales to related
parties, net sales decreased $2.7 million, or 8.6%, from $31.7 million in the
three-month period ended September 30, 1999 to $29.0 million in the comparable
period in 2000. This decrease was attributable to a decrease in sales of $5.4
million at European Micro UK due to the comparison to the sales run up caused by
the impending millennium, and a decrease of $800,000 at American Micro due to a
shift from selling server options and other computer parts and concentrating on
configuring and selling complete systems. This decrease of net sales was
partially offset by an increase in sales of $700,000 at Nor'Easter and $2.8
million at Colchester. This increase at Colchester is due to Colchester selling
within the Asian region as compared to being mainly a supplier for other
Subsidiaries in 1999.
23
<PAGE>
Net sales to related parties decreased $965,000, or 94.7%, from $1.0
million in the three-month period ended September 30, 1999, to $54,000 in the
comparable period in 2000. Sales to Technology Express have decreased as product
availability decreased.
GROSS PROFIT. Gross profit decreased $541,000, or 14.6%, from $3.7
million in the three-month period ended September 30, 1999, to $3.2 million in
the comparable period in 2000. Gross profit excluding related party transactions
decreased $513,000, or 14.0%, from $3.7 million in the three-month period ended
September 30, 1999 to $3.2 million the comparable period in 2000. This decrease
was attributable to a decrease of $1.3 million at European Micro UK due to the
decrease in sales in addition to a decrease in gross margin from 12.3% to 10.1%.
This decrease in gross margin mainly resulted from the devaluation of the
British pound sterling and the Euro against the U.S. dollar. The majority of
purchases during the quarter ended September 30, 2000 were denominated in U.S.
dollar. This decrease was partially offset by an increase of $160,000 at
Nor'Easter, $200,000 at Colchester and $400,000 at American Micro. Nor'Easter's
gross profit increased due to higher sales volume and an increase in gross
margin from 5.0% to 7.8%. Colchester's gross profit increased due to higher
sales volume and in addition to an increase in gross margin from 3.9% to 5.8%.
American Micro's gross profit increased even with lower sales volume by
increasing the gross margin from 10.1% to 21.5% by changing the product mix from
low margin components to higher margin complete systems.
Gross profit attributable to related party sales decreased $28,000, or
100%, from $28,000 in the three-month period ended September 30, 1999, to zero
in the comparable period in 2000. As discussed above, this decrease is
attributable to decreased sales due to a lack of product availability.
Gross margins decreased by 0.4% from 11.3% in the three-month period
ended September 30, 1999 to 10.9% in the comparable period in 2000. Excluding
related party transactions, gross margin decreased from 11.6% in the three-month
period ended September 30, 1999 to 10.9% in the comparable period in 2000. This
change is related to the normal fluctuations in purchasing opportunities and
sales demand from quarter to quarter.
Foreign exchange gains and losses, net, changed from a loss of $242,000
in the three-month period ended September 30, 1999, to a loss of $151,000 in the
comparable period in 2000. This adverse movement was attributable to the
weakening of the Euro relative to the British pound sterling, causing a
devaluation of sales made in European currencies, and the strengthening of the
U.S. dollar relative to the Euro and the British pound sterling, making
purchases denominated in U.S. dollars more expensive.
OPERATING EXPENSES. Operating expenses as a percentage of total net
sales increased from 9.4% in the three-month period ended September 30, 1999 to
9.9% in the comparable period in 2000. This increase was partially attributable
to expensing $105,000 related to the value of the Persia stock options
attributed to general consulting services. This increase was also attributable
to an increase in operating expenses as a percentage of total net sales from
8.7% to 10.6% at American Micro, which is due to a decrease in sales as
operating expenses remain constant. Operating expenses as a percentage of total
net sales increase from 3.1% to 5.1% at Nor'Easter, which is due to an increase
in operating expenses of approximately $111,000 from $125,000 in the three-month
period ended September 30, 1999 to $236,000 in the comparable period in 2000.
This increase in expenses is due to moving their operations to a new building,
which has higher monthly rent, an increase in depreciation expense related to
new equipment and leasehold improvements and an increase in gross profit
therefore increasing commission and bonus expense, which are a function of gross
profit. This increase was partially offset by a decrease in operating expenses
as a percentage of total net sales from 8.7% to 7.8% at European Micro UK, which
is due to a decrease in operating expenses of approximately $650,000 from $2.0
million in the three-month period ended September 30, 1999 to $1.3 million in
the comparable period in 2000. This decrease in expenses is due to the closure
of Sunbelt's operations in January 2000 and the decrease in gross profit reduced
commission and bonus expense, which are a function of gross profit. Also, this
decrease was attributable to a decrease in operating expenses as a percentage of
total net sales from 23.8% to 4.2% at Colchester, which is due to a large
increase in sales, as operating expenses remain constant.
INTEREST EXPENSE. Interest expense increased by $92,000 from $219,000
in three-month period ended September 30, 1999 to $311,000 in the comparable
period in 2000. This was attributable to an increased reliance on short-term
borrowings to finance accounts receivable and inventory balances.
24
<PAGE>
INTEREST IN JOINT VENTURE. During the year ended June 30, 2000,
European Micro UK made an unsecured loan to Big Blue Europe in the amount of
$150,000. This loan is due on demand and has an annual interest rate of 9.25%,
payable quarterly. 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. Due to the
continued uncertainties with the Big Blue Europe lawsuit, and the possible
liquidation of Big Blue Europe, the Company recorded an allowance for the
remaining balance of the loans to Big Blue Europe of $252,000. The associated
charge to operations is included in Company's operating expenses for the
three-months ended September 30, 2000. At September 30, 2000, the Company has
provided an allowance for all advances to Big Blue Europe.
INCOME TAXES. Income taxes as a percentage of income (loss) before
income (loss) taxes increased from 53.9% in the three-month period ended
September 30, 1999 to 195.6% in the comparable period in 2000. For both periods
the Company has not accrued a tax expense or benefit for the U.S. operations.
The lower percentage for the three-month period ended September 30, 2000
reflects the effects of a net operating loss for the U.S. operations being
greater than the taxable income at European Micro UK.
YEARS ENDED JUNE 30, 2000 AND 1999
TOTAL NET SALES. Total net sales decreased $16.7 million, or 12.6%,
from $132.2 million in the year ended June 30, 1999 to $115.5 million in the
comparable period in 2000. Excluding net sales to related parties, net sales
decreased $3.7 million, or 3.2%, from $116.9 million in the year ended June 30,
1999 to $113.1 million in the comparable period in 2000. This decrease was
attributable to a reduction of $9.1 million in the Premier Dealers Club, a
reduction of $18 million from European Micro UK's sales (excluding Sunbelt's
sales) and a reduction of $6.6 million in Nor'Easter's sales. The decrease in
sales at European Micro UK and Nor'Easter was a result of lower quantities of
product available in the surplus or aftermarket supply channel. This decrease
was mostly offset by the addition of $2.3 million of Sunbelt's sales for a full
year, the addition of $7.3 million of Colchester's sales for a full year and the
addition of $20.4 million of American Micro's sales.
Net sales to related parties decreased $13.0 million from $15.3 million
in the year ended June 30, 1999 to $2.3 million in the comparable period in
2000. This decrease was attributable to the acquisition of American Micro on
July 1, 1999, and therefore, net sales to American Micro after the acquisition
are no longer included in the consolidated financial statements. Also, sales to
Technology Express have decreased due to product shortages.
GROSS PROFIT. Gross profit increased $265,000, or 2.4%, from $11.1
million in the year ended June 30, 1999 to $11.4 million in the comparable
period in 2000. Gross profit excluding related party transactions increased
$300,000, or 2.8%, from $11.0 million in the year ended June 30, 1999 to $11.3
million in the comparable period in 2000. This increase was primarily due to an
increase of $2.4 million, $350,000 and $100,000 in gross profits at American
Micro, Colchester and Nor'Easter, respectively. This increase was partially
offset by a decrease of $2.3 million in gross profits at European Micro UK.
Gross profit attributable to related party sales decreased $47,000, or
49.0%, from $96,000 in the year ended June 30, 1999 to $49,000 in the comparable
period in 2000. As discussed above, this decrease was attributable to the
acquisition of American Micro on July 1, 1999.
Gross margins increased from 8.4% in the year ended June 30, 1999 to
9.8% in the comparable period in 2000. Excluding related party transactions,
gross margin increased from 9.4% in the year ended June 30, 1999 to 10.0% in the
comparable period in 2000. This change was related to the shortage of memory
products in the quarter ended December 31, 1999, resulting in higher selling
prices and gross margins. However, the increase was partially offset by lower
selling prices and gross margins on most products during the remainder of the
fiscal year.
Foreign exchange losses, net, decreased from a loss of $579,000 in the
year ended June 30, 1999 to a loss of $325,000 in the comparable period in 2000.
This favorable movement was attributable to the strengthening of the U.K. pound
sterling against the Euro and the weakening of the U.K. pound sterling against
the U.S. dollar.
25
<PAGE>
OPERATING EXPENSES. Operating expenses as a percentage of total net
sales increased from 6.9% in the year ended June 30, 1999 to 12.2% in the
comparable period in 2000. This increase was the result of a decrease in total
net sales (accounting for 1.5% increase) and increases in operating expenses,
primarily caused by the legal expenses incurred by our company in connection
with the Big Blue lawsuit and the expenses incurred with the evaluation and
feasibility study for our business-to-business electronic commerce trading
community.
INTEREST EXPENSE. Interest expense increased by $518,000 from $446,000
in the year ended June 30, 1999 to $964,000 in the comparable period in 2000.
This was attributable to increased borrowings related to funding our accounts
receivable and the purchase of inventory and the U.K. office building, as well
as the purchase of Sunbelt and American Micro.
INTEREST IN UNCONSOLIDATED SUBSIDIARY. Our company's share of loss from
Big Blue Europe increased from a loss of $32,000 in the year ended June 30, 1999
to a loss of $188,000 in the comparable period in 2000. This increased loss was
attributed to the lack of direction at Big Blue Europe as a result of the
disagreements its owners and the accompanying lawsuit. During the year ended
June 30, 2000, European Micro UK made an unsecured loan to Big Blue Europe in
the amount of $150,000. This loan was due on demand and has an annual interest
rate of 9.25%, payable quarterly. During the year ended June 30, 1999, our
company made an unsecured loan to Big Blue Europe in the amount of $350,000.
This loan was due on demand and has an annual interest rate of 9.25%, payable
quarterly. Due to the uncertainties associated with the Big Blue Europe lawsuit
and the operating results of Big Blue Europe, our company has recorded an
allowance of $200,000 for the loans to Big Blue Europe. The associated charge to
operations was included in fiscal 2000 operating expenses.
INCOME TAXES. Income taxes as a percentage of income (loss) before
income taxes decreased from 46.8% in the year ended June 30, 1999, to an income
tax benefit of 15.1% in the comparable period in 2000. This change was primarily
attributable to the accrual of a tax benefit related to the losses at European
Micro UK. We have not, however, accrued a tax benefit for operating losses in
the United States or Singapore as realization of such tax benefit to be more
likely than not.
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
attributable to the start-up growth of Nor'Easter which started 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 we made a one-time purchase of
computer peripherals at favorable prices which were later sold at a significant
mark-up.
Net sales to related parties decreased $13.8 million from $29.1 million
in the year ended June 30, 1998 to $15.3 million in the comparable period in
1999. This decrease was 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, our 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 was primarily due to a large volume
purchase of computer peripherals in the prior year period that were purchased by
us on exceptional terms and later sold at a significant mark-up. In addition,
this decrease was partially the result of a shift in market conditions,
resulting in a downward pressure on margins due to currency fluctuations,
26
<PAGE>
product availability and changes in geographic pricing strategies of
manufacturers and suppliers of our 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 our previous filings, we expected gross profit
to be significantly lower in periods after fiscal 1998 because we did not expect
to be able to regularly purchase computer peripherals and other products on
terms as favorable as achieved in the year 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. 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 us on exceptional 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.
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 our gross profit and gross margin. This 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 us to fund our inventory and
accounts receivable after the receipt of funds from our initial public offering.
INTEREST IN UNCONSOLIDATED SUBSIDIARY. Our 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
was attributed to an increased provision for inventory obsolescence. During the
year ended June 30, 1999, we 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.
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. Our effective income tax rate may increase or decrease
in the future as a result of our product mix and variations in the countries to
which we sell our products.
NEW ACCOUNTING PRONOUNCEMENTS
Effective July 1, 2000, our company adopted Statement of Financial
Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and
Hedging Activities, as amended by SFAS No. 138. The Statement requires the
recognition of all derivatives on the balance sheet at fair value. Our company's
derivatives are primarily forward foreign exchange contracts. Our forward
foreign exchange contracts have been designated as economic hedges of
anticipated sales and purchase transactions. In addition, we utilize forward
foreign exchange contracts as an economic hedge against foreign currency market
exposures of underlying assets liabilities and other obligations. Effective in
the first quarter of fiscal 2001, changes in the fair value of these
derivatives, have been recorded through earnings. At September 30, 2000, we did
not have any open forward foreign exchange contracts. Foreign currency losses,
net were $151,000 and $242,000 for the three months ended September 30, 2000 and
1999, respectively. The effect of the adoption of the new Statements was
immaterial.
27
<PAGE>
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin 101, "Revenue Recognition in Financial Statements." The
effective date of this Bulletin for us is the fourth fiscal quarter of 2001. We
do not expect this Bulletin to materially impact our consolidated financial
statements.
SEASONALITY
We typically experience variations in our total net sales and net
income on a quarterly basis as a result of many factors. These include seasonal
variations in demand for our products and services, the introduction of new
hardware and software technologies and products offering improved features and
functionality, the introduction of new products and services by us and our
competitors, the loss or consolidation of a significant supplier or customer,
changes in the level of operating expenses, inventory adjustments, product
supply constraints, pricing, interest rate fluctuations, the impact of
acquisitions, currency fluctuations and general economic conditions. Historical
operating results have included a reduction in demand in Europe during the
summer months.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL. Our company suffered an operating loss in fiscal 2000 and the
first quarter of fiscal 2001. Our operating results have been adversely impacted
by ongoing legal costs related to Big Blue Europe, the costs associated with our
electronic commerce strategy, increases in general overhead costs and interest
expense and a decrease in sales. These factors may continue to impact our
operations in fiscal 2001.
We were not in compliance with certain financial covenants contained in
our loan documents during fiscal 2000. The lenders waived any noncompliance with
these financial covenants that existed on June 30, 2000. In most cases, however,
these waivers do not relate to any future reporting period. Also, the Company
was not in compliance with certain loan agreement financial covenants at
September 30, 2000. The Company has obtained waivers of certain of these
covenant violations existing at September 30, 2000. The loan agreement for which
a waiver was not obtained did not have an outstanding balance due. With the
exception of the European Micro UK Inventory Facility discussed below and in
Note 6 to the Consolidated Condensed Financial Statements, management believes
that the Company will be able to comply with the provisions of its debt
agreements, including financial covenants, during the remainder of fiscal 2001.
However, compliance with these financial covenants during Fiscal 2001 will
require improved operating results compared to Fiscal 2000. Management has
initiated certain actions to increase the likelihood of attaining these improved
operating results. Such actions include, among other things, (i) modifying the
terms of certain financial covenants, (ii) entering into the equity line of
credit, (iii) temporarily suspending activities related to our electronic
commerce strategy until specific funding can be obtained, (iv) obtaining
extensions of the due date for payment of contingent earn-out amounts relating
to calendar year 2000 under the American Micro purchase agreement, (v) adjusting
staffing levels, and (vi) implementing steps to increase sales and lower
inventory levels. No assurances can be given that management's initiatives will
be successful or that loan agreement defaults will not occur in the future.
Another factor that could negatively impact on our liquidity position
is the terms of the borrowing arrangements of European Micro UK. Certain of
European Micro UK's borrowing capacity are subject to termination by the lender
at its sole discretion. As disclosed in Note 6 to the Consolidated Condensed
Financial Statements, European Micro UK was not in compliance with certain
financial covenants of the European Micro UK Inventory Facility at September 30,
2000. As a result, European Micro UK will not be able to borrow against this
revolving credit agreement until such time that it is in compliance with such
financial covenants. As a result, European Mico UK will not be able to borrow
against this revolving credit agreement until such time that is is i compliance
with such financial covenants. Further, the American Micro and Nor-Easter line
of credit facilities and the European Micro Holdings, Inc. term loan contain
subjective acceleration clauses. These factors increase the liquidity risk to
our company. Management believes that, based on the projected fiscal year 2001
operating results of our Company and our relationship with the creditors, our
existing credit arrangements will remain effective during fiscal 2001.
CASH REQUIREMENTS. Our primary cash requirements are for operating
expenses, funding accounts receivable, purchasing inventory, acquisitions and
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debt service. We have historically funded these cash requirements through a
combination of loans, internally generated cash flow and the net proceeds of our
initial public offering.
WORKING CAPITAL. 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 2.0 million pounds sterling ($3.0 million)
at September 30, 2000. The accounts receivable financing provides for a
borrowing base of 85% of accounts receivable, with a limit of 6.2 million pounds
sterling ($9.2 million on September 30, 2000). This facility can be terminated
by either party giving three months' notice. The finance company that 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 6% at
September 30, 2000. 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 ($5.2 million at September 30, 2000) to assist in
the purchase of inventory. This revolving credit agreement expired in August
2000 and was renewed, through July 1, 2001, by European Micro UK in September
2000 to allow for borrowings up to 2.0 million pounds sterling ($3.0 million at
September 30, 2000) that are secured by the general corporate assets of European
Micro UK. Borrowings under the bank line of credit and revolving credit
agreement are capped at a maximum of 2.0 million pounds sterling outstanding
under the combined facilities at any point in time. At September 30, 2000,
European Micro UK was not in compliance with certain financial covenants of this
revolving credit agreement. Due to the non-compliance European Micro UK will not
be able to borrow against this revolving credit agreement until it is in
compliance with such financial covenants.
Working capital requirements of our U.S. operations are funded by two
lines of credit. On October 28, 1999, 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 were based upon eligible
accounts receivable and inventory, up to a maximum borrowing amount of $1.5
million for each agreement. Each of these lines of credit was to mature on
October 28, 2000. Interest accrued at 0.5% over the bank-borrowing rate of 9.5%
at September 30, 2000. As partial security for these loans, Messrs. Gallagher
and Shields pledged to the lender a portion of their shares of common stock of
our company. In the event that we defaulted on one or more of these loans, the
lender could have foreclosed on all or a portion of the pledged securities. Such
an event could have caused a change of control in our company because Messrs.
Gallagher and Shields together own 71% of our outstanding common stock. The
lines of credit agreements included certain financial and non-financial
covenants and restrictions. The agreements also contained a provision whereby
the lender could have declared a default based on subjective criteria. As of
June 30, 2000, we were not in compliance with certain of the financial covenants
in the agreements.
On October 5, 2000, we received a waiver of the covenant violations
existing at the June 30, 2000 reporting date for the American Micro and
Nor'Easter lines of credit. Our company and the bank terminated the existing
lines of credit and entered into a new borrowing arrangement whereby each of
American Micro and Nor'Easter have a working capital line of credit equal to the
lesser of (i) $1.5 million or (ii) the sum of 85% of eligible accounts
receivable, plus the lesser of 50% of eligible inventory or $750,000. Interest
will be paid monthly at a floating rate of 0.5% over the bank's base rate. The
term of the new arrangements is for one year from the closing date. The new
facilities also require the companies to maintain depository accounts at the
bank, whose daily receipts will be applied against outstanding borrowings under
the lines of credit. As a result, the borrowings are classified as current
liabilities on our consolidated condensed balance sheet at September 30, 2000.
The new facilities also place certain restrictions on our ability to pay
dividends and to make capital expenditures, among other things, and includes a
provision whereby the lender can declare a default based on subjective criteria.
Collateral under the new credit line facilities consists of a first priority
lien on all assets of American Micro and Nor'Easter. Messrs. Gallagher and
Shields guaranteed the borrowings under these arrangements. Mr. Shields has
pledged personal assets as additional collateral and has further agreed to
maintain certain personal financial statement liquidity levels. These borrowings
are cross-collateralized and cross-defaulted with borrowings under the $1.5
million term loan to European Micro Holdings, Inc. We were not in compliance
with certain loan agreement financial covenants at September 30, 2000. The
Company has obtained waivers from these covenant violations existing at
September 30, 2000.
LONG-TERM CAPITAL. Our long-term capital needs have historically been
met from the sales of securities and long-term borrowings. In June 1998, we
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received $9.3 million in gross proceeds from our initial public offering of
933,900 shares of common stock. Our company incurred total expenses in
connection with the offering of $2.2 million. These proceeds have been used to
acquire Sunbelt and American Micro and to fund operations.
On October 28, 1999, we obtained a $1.5 million term loan. 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 contains
similar loan covenants. 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 2.25%. One-month LIBOR at September 30, 2000 was 6.62%. At September 30,
2000, the outstanding balance on the term loan was $1,000,000. The term loan is
secured by substantially all of the assets of our company. As partial security
for this loan, Messrs. Gallagher and Shields pledged to the lender a portion of
their shares of common stock of our company. In addition, Mr. Shields has
pledged personal assets as additional collateral and has further agreed to
maintain certain personal financial statement liquidity levels. In the event we
default 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 our company
because Messrs. Gallagher and Shields together own 71% of our 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. As described above,
we were not in compliance with the loan covenants on June 30, 2000. The lender
waived this non-compliance in October 2000 and amended the term loan agreement,
including revising the financial covenants. As of September 30, 2000, we were
not in compliance with certain of the revised loan agreement financial
covenants. Our company has obtained waivers from these covenant violations
existing at September 30, 2000.
On July 1, 1999, we acquired American Micro for a purchase price of
$1,131,000, plus an earn-out. The portion of the purchase price paid at closing
was funded through our working capital. The contingent earn-out payment relating
to two times the after tax earnings for calendar year 1999 of approximately
$600,000 was paid in March 2000. The remaining earn-out portion of the purchase
price relating to two times the after tax earnings for calendar year 2000 is
expected to be funded through our working capital and a note payable to the
former stockholders of American Micro. Pursuant to the original merger
agreement, the remaining earn-out portion was to be due no later than May 1,
2001. The former stockholders of American Micro have agreed that, until July 1,
2001 and thereafter for so long as the repayment of the earn-out is limited by
the loan covenants with SouthTrust Bank, we will pay the stockholders $50,000
per month, plus 8% interest, commencing April 1, 2001. The remaining unpaid
earn-out amount will be payable July 1, 2001 to the extent not limited by such
covenants.
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
($2,518,000 at September 30, 2000). The purchase price was financed in part by a
loan in the amount of 1,312,000 pounds sterling ($1,937,000 at September 30,
2000). This loan calls for monthly payments of principal and interest in the
amount of 15,588 pounds sterling ($23,019 at September 30, 2000) and matures in
July 2009. The mortgage loan bears interest at a fixed rate of 7.6%. The
mortgage loan 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 financial covenants are
measured using the financial results of European Micro UK as of each fiscal year
end. Based upon European Micro UK's fiscal year end operating results, European
Micro UK was out of compliance with certain of the covenant requirements at June
30, 2000. The lender waived this non-compliance through July 1, 2001.
On August 24, 2000, European Micro Holdings, Inc. entered into an
equity line of credit with Spinneret Financial System, Ltd. Pursuant to the
equity line of credit, Spinneret Financial agreed to acquire up to $20 million
of our common stock at a purchase price equal to 88% of the market price of such
stock. The timing of each sale and the number of shares to be sold is at our
discretion, subject to various conditions, including an effective registration
of the shares. The dollar amount that our company can request under any
individual sale is subject to the average trading volume of our common stock for
the preceding 25-day trading period. The maximum term of the equity line of
credit is 30 months from the date of the agreement. The agreement contains
various representations, warranties and covenants by us, including limitations
on our ability to sell common stock or common stock equivalents, sell assets,
merge, or enter into certain other transactions.
THREE MONTHS' ENDED SEPTEMBER 30, 2000. Net cash used by operating
activities during the three-month period to September 30, 2000 amounted to
$827,000. Significant factors in the use of cash were an increase in inventory
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of $1.3 million, a decrease in trade payables of $596,000, and a decrease in
accrued expenses and other current liabilities of $274,000. The amount of cash
used by the Company's operations was partially offset by a net income before
non-cash expenses in the period of $434,000 and a decrease in trade receivables
of $566,000.
Cash used in investing activities amounted to $98,000. This primarily
consisted of expenditures on fixed assets of $144,000, net the sale of fixed
assets of $46,000.
Cash provided by financing activities amounted to $238,000. This
primarily consisted of $397,000 provided by short-term borrowings and payments
on long-term debt of $159,000.
Overall, the Company experienced a net decrease in cash of $640,000 for
the three-month period ended September 30, 2000.
FISCAL YEAR ENDED JUNE 30, 2000. Net cash used in operating activities
for Fiscal 2000 amounted to $1.2 million. Significant factors in the use of cash
were a net loss in the period of $3.2 million, a decrease in trade payables, net
of effects from acquisitions, of $2.4 million, a decrease in accrued expenses
and other liabilities, net of effects from acquisitions, of $1.1 million, and a
decrease in income taxes payable, net of effects from acquisitions of $0.4
million. The amount of cash used in our operations was partially offset by a
decrease in trade receivables, net of effects from acquisitions, of $2.5
million, a decrease is due from related party of $1.1 million and a decrease in
inventory, net of effects from acquisitions, of $3.0 million.
Cash used in investing activities amounted to $5.3 million. This
consisted of expenditures on fixed assets of $3.4 million, largely the purchase
of European Micro UK's office building, the sale of fixed assets of $56,000, the
acquisitions of American Micro of $1.8 million and an advance to Big Blue Europe
of $150,000.
Cash provided by financing activities was $4.7 million, of which $2.0
million was provided by an increase in the short-term borrowings, net and $3.5
million was provided by proceeds from long-term borrowings. These long-term
borrowings consisted of $2.1 million provided by the proceeds from the mortgage
loan secured by European Micro UK's office building and $1.5 million provided by
a term loan. Repayments on long-term borrowings were $110,000 to pay down the
mortgage loan on the building, $375,000 to pay down the term loan and $300,000
to pay down borrowings assumed from the acquisition of AMCC.
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 a 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
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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 that we 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 our 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 an increase in taxes
payable of $2.2 million. The cash provided by operations was partially offset
primarily by the increases in trade receivables of $2.3 million, which was a
result of the considerable increase in business during the period, including
significant UK sales with longer credit terms and an advance payment made for
the purchase of inventory of $2.0 million. The advance payment was made to take
advantage of favorable pricing. Further, cash was used to pay down trade
payables by $400,000 and an increase in due from related parties of $329,000.
Cash used in investing activities amounted to $421,000. This was
attributed to the purchase of fixed assets amounting to $596,000 less the sale
of fixed assets of $175,000. The purchase of fixed assets consisted primarily of
expenditures for office improvements (as we moved onto an additional floor at
our Manchester, England office) of $150,000, new computers and office equipment
of $103,000, a forklift for the warehouse of $22,000, and new vehicles of
$286,000. The sale of fixed assets consisted primarily of used vehicles traded
for the purchase of new vehicles.
Cash provided by financing activities amounted to $3.4 million. This
was primarily the result of the receipt of net proceeds from the initial
offering of $7.1 million ($9.3 million proceeds less expenses of $2.2 million).
Cash used in financing activities amounted to $3.8 million to repay the
short-term financing facilities and the payment of a cash dividend of $550,000
prior to our initial public offering.
ASSET MANAGEMENT
INVENTORY. Our goal is to achieve high inventory turns and maintain a
low inventory level and thereby reduce our working capital requirements. Our
strategy to achieve this goal is to effectively manage our 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, our practice of
making large-volume purchases when it deems such purchases to be attractive, new
products and changes in our product mix.
ACCOUNTS RECEIVABLE. We sell products and services to a customer base
of more than 770 value-added resellers, corporate resellers, retailers and
direct marketers. We offer credit terms to qualifying customers and also sell on
a pre-pay and cash-on-delivery basis. With respect to credit sales, we attempt
to control our 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. We occasionally hedge to
guard against currency fluctuations between the U.K. pound sterling and the U.S.
dollar. Because the functional currency of our company'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 our business, financial condition and results of operations.
We may engage in hedging activities in the future, although no assurances can be
given that we will engage in such activities and if we do so that such
activities will be successful.
Generally, our 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. We tend
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to concentrate our currency management into seven currencies: Euro, U.K. pound
sterling, U.S. dollar, Dutch guilder, Canadian dollar, Singapore dollar and
German Mark. We normally deem the exposure in other currencies to be minimal.
However, when we buy products in other currencies, we 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, we have significant operations within the
European Union, including many of the countries that adopted the Euro. We
continue to evaluate the impact that the Euro will have on our continuing
business operations and no assurances can be given that the Euro will not have a
material adverse effect on our business, financial condition and results of
operations. However, we do not expect the Euro to have a material effect on our
competitive position as a result of price transparency within the European Union
because we do 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 12.2%, adversely affecting the value of our trade
receivables denominated in Euros. Going forward, we cannot accurately predict
the impact the Euro will have on currency exchange rates or our 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 and, until such time, we cannot predict whether
the IRS guidelines will have any tax consequences on us.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We utilize derivative financial instruments in the form of forward
exchange contracts for the purpose of economic hedges of anticipated sale and
purchase transactions. In addition, we enter into economic hedges for the
purposes of hedging foreign currency market exposures of underlying assets,
liabilities and other obligations that 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
AS OF SEPTEMBER 30, 2000. On September 30, 2000, the Company did not
have any open forward foreign exchange contracts. Foreign currency losses, net
were $151,000 for the three-months ended September 30, 2000, and $242,000 for
the comparable period in 1999.
AS OF JUNE 30, 2000. 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.
33
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<TABLE>
EXPECTED
MATURITY OR
TRANSACTION DATE FAIR VALUE
---------------- ----------
<CAPTION>
FOREIGN CURRENCY EXCHANGE CONTRACTS
<S> <C> <C>
JUNE 30, 2000
(Receive $US / pay(pound)) July 19, 2000
Contract amount (in thousands) $2,000 $2,012
Average contractual exchange rate 1.5045 $US /(pound)1
JUNE 30, 1999
(Receive(pound)/pay euro) July 9, 1999
Contract amount (in thousands) (pound)1,000 (pound)1,027
Average contractual exchange rate 1.5635 euro /(pound)1
(Receive(pound)/pay euro) July 12, 1999
Contract amount (in thousands) (pound)1,000 (pound)1,015
Average contractual exchange rate 1.546 euro /(pound)1
</TABLE>
Foreign currency losses, net were $325,000 in 2000, $579,000 in 1999 and
$510,000 in 1998.
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BUSINESS
OVERVIEW
We are an independent distributor of microcomputer products, including
personal computers, memory modules, disc drives and networking products, to
customers mainly in Western Europe and the United States. Our customers consist
of more than 770 value-added resellers, corporate resellers, retailers, direct
marketers and distributors. We generally do not sell to end-users. Substantially
all of the products sold by us are manufactured by well-recognized
manufacturers, such as IBM, Compaq and Hewlett-Packard, although we generally do
not obtain our inventory directly from such manufacturers. We monitor 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.
We consider ourselves 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. We believe that being a
focused distributor enables us to respond more quickly to customer requests and
gives us greater availability of products, access to products and improved
pricing. We believe that as a focused distributor we have been able to develop
greater expertise in the products that we sell. Our company places significant
emphasis on market awareness and planning and shares this knowledge with our
customers to enhance business relations. We strive to monitor and react quickly
to market trends in order to enable our 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, American Micro and Engenis. 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 organized under the laws of
the State of Florida on June 24, 1999 to acquire AMCC and now serves as an
independent distributor of microcomputer products in the United States. Premier
Pages, Ltd. was formed on January 28, 2000 and later changed its name to
Engenis.com, Ltd. on June 23, 2000. Engenis.com, Ltd. was formed under the laws
of the United Kingdom to serve as a business-to-business electronic commerce
trading company.
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 until
August 2000 operated as a sales office in Dusseldorf, Germany. In August 2000,
we closed the office and consolidated the sales operations of European Micro
Germany. Customers of European Micro Germany will be handled through European
Micro UK. All products sold by European Micro Germany were 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 operated as a distributor of microcomputer products to dealers,
value-added resellers and mass merchants throughout Western Europe. Except for
the distribution of our Nova brand products (which was discontinued in January
2000), Sunbelt's distribution operations were integrated with and into the
operations of European Micro UK. European Micro Holland was organized under the
laws of Holland in 1995, and operates as a sales office near Amsterdam, Holland.
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.
European Micro Holding's headquarters are located at 6073 N.W. 167th
Street, Unit C-25, Miami, Florida 33015, and our telephone number is (305)
825-2458.
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INDUSTRY
The microcomputer products industry has grown significantly in recent
years, primarily due to increasing worldwide demand for computer products and
the use of distribution channels by manufacturers for the distribution of
products. There are two traditional distribution channels in the microcomputer
industry: (i) those that sell directly to end-users ("RESELLERS") and (ii) those
that sell to resellers ("DISTRIBUTORS"). Distributors generally purchase a wide
range of products in bulk directly from manufacturers and then ship products in
smaller quantities to many different types of resellers, which typically include
dealers, value-added resellers, system integrators, mail order resellers,
computer products superstores and mass merchants. We are an independent
distributor and generally do not purchase products directly from manufacturers
but purchase products from other distributors in what is referred to as the
surplus or after-market.
We operate in a fragmented industry, where little information is
available regarding our competitors and that we believe is not dominated by one
or a small number of competitors. As a result, our competitive position is not
known or reasonably ascertainable. Information is available, however, for other
distributors of computer products, although we do not compete directly with
these companies. These companies include: Ingram Micro, Inc. 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. We have historically
relied upon the surplus or after-market to obtain products for resale. We expect
these trends to continue for the foreseeable future.
Despite the continuing difficulties in the industry, we believe 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. Our 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
Our objectives are to continue to strengthen our position as a
distributor of microcomputer products within Western Europe and the United
States and to expand into Asia and other markets. We also propose to diversify
our international trading operations into product lines outside the
microcomputer industry. These objectives are constrained by current liquidity
considerations. Therefore, the following strategies are dependent on us
obtaining the necessary funding:
GROWTH THROUGH START-UPS AND ACQUISITIONS. We hope to expand into new
markets and products through a combination of start-up companies and
acquisitions of existing distributors. We intend to evaluate acquisition
candidates outside the microcomputer industry to diversify our operations and to
take advantage of our ability to source inventory worldwide. We expect to seek
acquisition candidates that have strong entrepreneurial management teams with
experience in the local markets and the potential to benefit from the economies
of scale that we could provide through our existing infrastructure. We intend
that any acquisitions will adopt our policies and financial reporting procedures
but operate as autonomous business units. During the last three fiscal years,
our company has formed Nor'Easter located in New Hampshire and Colchester
located in Singapore. Also, we have acquired Sunbelt located in Wimbledon,
England and American Micro located in Miami, Florida.
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FURTHER DEVELOP NEW INTERNATIONAL MARKETS. To date, we have focused our
activities on the distribution of microcomputer products mainly in Western
Europe and the United States. More recently, we have been working on new
opportunities in Asia and Eastern Europe. During Fiscal 1999, Colchester began
operations in Singapore. Colchester will source product for us and will act as
an independent distributor throughout Asia. We believe that our success in the
culturally and linguistically diverse markets of Western Europe will be
advantageous to us in expanding into new markets.
BUSINESS-TO-BUSINESS ELECTRONIC COMMERCE STRATEGY. We have initiated a
business-to-business electronic commerce strategy, which is focused on creating
a global, value-added, information technology equipment and service trading
community. We have hired Cap Gemini Ernst & Young, a leading European management
consultancy and information technology services firm, to assist in the
implementation of this plan. Our company has incurred the sum of 755,000 pounds
sterling ($1,115,000 at exchange rate on September 30, 2000) for feasibility
studies and business process design. This amount is reflected in selling,
general and administrative expenses on the accompanying consolidated statements
of operations for the year ended June 30, 2000. Our company has capitalized the
sum of 229,000 pounds sterling ($338,000 at exchange rate on September 30, 2000)
related to software development. This amount is reflected in property and
equipment, net on the accompanying consolidated balance sheet at September 30,
2000. During May 2000, we temporarily halted development until specific funding
is obtained to complete the project. There can be no assurances that we will be
successful in obtaining funding for this project. In the event the project is
not continued by November 30, 2000, we will incur a termination fee to Cap
Gemini of 150,000 pounds sterling ($221,500 at exchange rate on September 30,
2000). If paid, this fee would be credited against future invoices of Cap Gemini
upon the continuation of the project. During the last calendar quarter of 2000,
we will re-evaluate and re-define, where necessary, the current assumptions and
propositions, based on changes in the market over the last few months. This
planning will include detailing the project based on our ability to fund the
project from current working capital, if funding is still not available at the
planned level.
FOCUSED DISTRIBUTION. Our strategy is to operate as a focused
distributor by addressing each national market in which we operate with a
limited and select group of products from a limited and select group of high
quality manufacturers. We believe this strategy helps us achieve a degree of
strength within our chosen markets. We also believe that this strategy will
further enhance our relationship with both our suppliers and customers. In
addition, we intend to seek new products and suppliers that will reflect the
requirements of the marketplace while at the same time remaining a focused
distributor. We believe that this focused approach also results in more
effective asset management. Generally, because popular products from leading
manufacturers are in greater demand, we believe that this results in more
efficient inventory management by virtue of greater inventory turns and,
therefore, lower working capital requirements.
PRODUCTS AND CUSTOMERS
Our sales consist of computer hardware products, such as personal
computers, memory modules, disc drives and networking products, which are sold
to a customer base of more than 770 value-added resellers, corporate resellers,
retailers, direct marketers and distributors. Our customers typically rely on
distributors as their principal source of microcomputer products.
We typically purchase products from distributors and other suppliers in
large quantities. As a focused distributor, we focus on a limited and select
group of products from a limited and select group of high quality manufacturers.
As a result, we carry fewer individual products from fewer manufacturers than
broadline distributors. We believe that this policy enables us to better
understand the products we sell and the geographical areas in which we operate.
We finance a significant portion of our total sales by extending trade
credit. We attempt to minimize the risk of such credit by, among other things,
monitoring the credit worthiness of our customers and insuring some of our
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, 2000,
no single customer accounted for more than approximately 4.1% of our total net
sales. Technology Express, a company wholly-owned by Harry D. Shields, who is
also Co-President, Co-Chairman and a Director of our company, accounted for
about 2.1%, 6.0% and 17.2% of total net sales for the fiscal years ended June
30, 2000, 1999 and 1998, respectively. Our company does not believe the loss of
any customer would have a material adverse effect on our business, financial
37
<PAGE>
condition or results of operations. Our backlog orders are not considered
material to our business.
Our operations involve a single industry segment--the distribution of
microcomputer products. Historically, we have operated in one geographic
area--the United Kingdom--and have exported products from the United Kingdom to
other European countries and tO related parties in the United States. With the
addition of Nor'Easter and American Micro in the United States, and the addition
of Colchester in Singapore, our sales to third parties in the United States and
Asia have increased. For additional information regarding our industry segment
and financial information about geographic areas, see Note 16 to the
Consolidated Financial Statements for the fiscal year ended June 30, 2000.
Our net sales from operations outside the United States are primarily
denominated in currencies other than United States dollar. Accordingly, our
operations outside the United States impose risks upon our business as a result
of exchange rate fluctuations.
SOURCES OF SUPPLY
We obtain products from distributors and other suppliers throughout the
world in an attempt to obtain products at favorable prices and to maintain an
adequate supply. We generally make purchases based on the most favorable
combination of prices, quantities and product selection, and therefore our
suppliers are constantly changing. We do not believe that the loss of any single
supplier would have a material adverse effect on our operations. For the fiscal
year ended June 30, 2000, we obtained 42.2% of our products from ten suppliers
(38.4% excluding Technology Express). For the fiscal year ended June 30, 1999,
we obtained 58.4% of our products from ten suppliers (45.7% excluding Technology
Express). For the fiscal year ended June 30, 1998, we obtained 87.2% of our
products from ten suppliers (80.4% excluding Technology Express). This decrease
in the percentage of products sourced from the top ten suppliers over the last
three years has resulted from an increase in the number of suppliers
attributable to the start-up growth of Nor'Easter and Colchester. We do not
generally obtain products directly from manufacturers and do not enter into any
distribution agreements with our suppliers. In some cases suppliers are also
customers. Whenever possible, products are purchased with the benefit of price
protection so that we will receive the benefit of a price reduction by the
manufacturer.
Suppliers deliver products against purchase orders tendered by us. We
often request specific delivery dates in our 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 us for failure to meet a
delivery date, we may cancel orders where the terms of an order have not been
met. From time to time we experience delivery delays and inventory shortages. We
believe that these delays and shortages are common to other distributors of
microcomputer products. We do not, like many of our competitors, rely on a
single contractual source of product supply.
Historically, we have paid for a significant amount of product on
delivery, a practice that leads to lower prices and earlier delivery dates. Our
suppliers have increased available credit commensurate with our growth and we
expect to continue to take advantage of credit purchases.
Substantially all of the products purchased by us are trademarked or
copyrighted products that may have been sold to distributors by manufacturers
and resold to us. 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 we operate. 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
limit or eliminate some of our sources of supply or other business activities.
In addition, there can be no assurance that our 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 would
negatively impact our company and business. We sell products in the United
States and expect 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 us from selling certain products in the United States.
38
<PAGE>
We continue 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 into the EEA without the owners' consent. However, a
recent decision of an English Court has placed the strictest possible
interpretation on that approach. Historically, we have not encountered any
problems from our suppliers as a result of these legal decisions but we obtain a
significant amount of our inventory from outside the EEA. Any disruption in our
ability to source goods from outside the EEA will severely harm our company and
business.
SALES AND MARKETING
In order to address the individual customs, practices and business
conventions in the countries in which we operate, we employ a sales staff
conversant in Chinese, Dutch, English, French, German, Italian and Spanish and
with a general knowledge of the business customs in such countries. Oversight
and strategic direction are provided by senior management of our company.
SALES. We market our products to distributors and resellers, not
end-users. As of June 30, 2000, we distributed products to more than 770
value-added resellers, corporate resellers, retailers, direct marketers and
distributors. Our customers typically place orders through a sales
representative. We maintain detailed information regarding our current inventory
levels and pricing. We have historically experienced a reduction in demand
during the summer months.
MARKETING. Our marketing department monitors and evaluates national
market trends, price movements and changes in product specifications. It is also
responsible for developing and implementing our advertising programs. The
marketing department routinely queries our customer base to ascertain how
customers value our products, services, sales and support compared to our
competitors. The feedback allows us to tailor our business to our customers'
needs. In 1996, we 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 us for a
given period and those members achieving such goals earn rebates. Members also
enjoy priority access to products in short supply, expedited shipment of orders,
monthly analysis of purchases and rebates earned, internet ordering, marketing
information and purchasing and outsourcing assistance.
COMPETITION
We operate in an industry which is characterized by intense competition
based on price, product availability and delivery times. Our competitors include
manufacturers and international distributors. Some competitors have greater
financial and administrative resources than us. We believe availability of the
right product at the right price is the key element of competitiveness and
attempt to differentiate ourself from our competitors by providing a select
number of products from a few name brand manufacturers and maintaining a
sufficient inventory of such products. Furthermore, we believe that our
competitive position is enhanced by providing responsible and responsive
customer service through our sales personnel.
INTELLECTUAL PROPERTY
We are attempting to build a brand name in the microcomputer industry.
To that end, we have applied for trademark protection both in the United Kingdom
and within the European Community. We are evaluating and will continue to
evaluate the need to apply for trademark protection in the United States and in
other countries. The following is a summary of the trademarks that we have
applied for and their current status:
39
<PAGE>
<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
pending
</TABLE>
---------------------
(1) Class 9 covers computer software, computer peripherals, parts and
accessories for all such goods.
EMPLOYEES
On September 30, 2000, we 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 30
European Micro Germany 1
European Micro Holland 1
Nor-Easter 8
Big Blue Europe 15
Colchester 3
American Micro 26
--
TOTAL 89
==
Of the total number of full-time employees, thirty work in marketing
and sales, ten in warehousing and delivery and forty-nine are employed in
administrative and other support positions. None of our employees are
represented by unions. There has been no disruption of operations due to a labor
dispute. Management considers our relations with employees to be good.
PROPERTIES
The corporate headquarters of European Micro Holdings, Inc. is located
in Miami, Florida. Approximately 350 square feet is dedicated to management
offices.
40
<PAGE>
<TABLE>
<CAPTION>
European Micro's facilities are described below:
LOCATION SQUARE FEET LEASE EXPIRATION
-------- ----------- ----------------
<S> <C> <C> <C>
Manchester, UK(warehouse)(1) 8,000 2002
Manchester, UK (offices)(1) 7,734 N/A
Dusseldorf, Germany (offices)(2) 1,360 2005
Amsterdam, Netherlands
(offices and warehouse)(3) 18,000 2002
Singapore (office)(4) 500 2001
Miami, Florida (offices and warehouse)(5 & 6) 6,500 2002
Nashville, Tennessee (offices)(6) 350 2001
Wimbledon, UK (offices and warehouse)(7) 5,813 2008
Portsmouth, New Hampshire
(offices and warehouse)(8) 7,700 2005
</TABLE>
-------------------------
(1) European Micro UK
(2) European Micro Germany
(3) European Micro Holland & Big Blue Europe 50% Joint Venture
(4) Colchester
(5) American Micro
(6) European Micro Holdings, Inc.
(7) Sunbelt
(8) Nor'Easter
All properties are leased except as noted below.
The Company utilizes approximately 350 square feet of office space and
certain equipment owned by Technology Express for which it is not charged a fee.
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
($2,580,000 at June 30, 2000). The purchase price was financed in part by a loan
in the amount of 1,312,000 pounds sterling ($1,985,000 at June 30, 2000) at an
annual interest rate of 7.6%, payable over ten years. The total square footage
of the building is 11,603, of which 3,867 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.
LEGAL PROCEEDINGS
On November 12, 1999, Jeffrey and Marie Alnwick (the "ALNWICKS") and a
New York corporation, Big Blue Products, commenced an action individually and
derivatively for the Dutch company, Big Blue Europe, against our company and our
founders and officers, John B. Gallagher and Harry D. Shields in the United
States District Court, Eastern District of New York, Jeffrey Alnwick and Marie
Alnwick v. European Micro Holdings, Inc., Eastern District of New York, Docket
No. 99 CV 7380 (the "ALNWICK LITIGATION").
The complaint alleges thirty-three causes of action. Plaintiffs claim,
in substance, that defendants breached oral and written agreements relating to
the management, operation and funding of Big Blue Europe. Specifically,
plaintiffs alleged that defendants breached the joint venture agreement by which
Big Blue Europe was formed, a licensing agreement for use of the "Big Blue"
service mark in Europe, a non-competition agreement preventing Big Blue Europe
from operating in the United States and several capital contribution agreements.
Plaintiffs also claimed that defendants breached their fiduciary duties to the
Alnwicks, engaged in fraudulent acts, aided and abetted breaches of fiduciary
duties by others, misappropriated trade secrets and interfered with the
employment contract of Big Blue Europe's managing director. The complaint seeks
unspecified compensatory and punitive damages, as well as injunctive relief
restraining defendants from acting in violation of the alleged agreements.
41
<PAGE>
Defendants have moved to dismiss the complaint principally on the basis
of forum non-conveniens in favor of existing proceedings in the Netherlands
(commenced by European Micro UK), where a Dutch court has appointed an
independent director to oversee the operations of the company. Defendants argue
that any dispute between the stockholders and directors of the Dutch company,
Big Blue Europe, which operates pursuant to Dutch law, should be resolved by a
Dutch court.
Our company and our affiliated defendants intend to contest the claims
in the Alnwick Litigation vigorously, whether asserted in the United States or
in the Netherlands courts.
42
<PAGE>
MANAGEMENT
The executive officers and directors of our company and their ages as
of October 23, 2000, are as follows:
NAME AGE POSITION
---- --- --------
Harry D. Shields 50 Co-Chairman, Co-President and Director
John B. Gallagher 45 Co-Chairman, Co-President and Director
Jay Nash 38 Chief Financial Officer, Controller,
Secretary and Treasurer
Frank Cruz 35 Chief Operating Officer
Laurence Gilbert 55 Director
Kyle R. Saxon 49 Director
Barrett Sutton 49 Director
HARRY D. SHIELDS is co-founder of our company and European Micro UK. He
has served as Co-Chairman, Co-President and Director of our company since it was
formed in December 1997. Mr. Shields has also served as Co-Chairman and Director
of European Micro UK since it was formed in 1991. Mr. Shields has been Vice
President and a Director of American Micro Computer Center, Inc. since 1999. He
has served as President of Technology Express, a computer distributor, since
1986, and was a Director of Ameritech Exports, a computer distributor, from 1992
to 1997. Mr. Shields has a Bachelor of Arts from DePaul University and a Masters
of Science from the University of Tennessee.
JOHN B. GALLAGHER is co-founder of our and European Micro UK. He has
served as Co-Chairman, Co-President and Director of our company since it was
formed in December 1997. Mr. Gallagher has also served as Co-Chairman and
Director of European Micro UK since it was formed in 1991 and as President,
Secretary, Treasurer and Director of American Micro Computer Center, Inc., a
computer distributor, since 1999. Between 1989 and 1999, Mr. Gallagher served as
President of American Surgical Supply Corp. of Florida d/b/a American Micro
Computer Center ("AMCC") until it was acquired by us in 1999 and changed its
name to American Micro Computer Center, Inc. He was a Director and President of
Ameritech Exports, a computer distributor, from 1992 to 1997. Mr. Gallagher is a
non-practicing attorney with a Bachelor of Arts and a Juris Doctorate from the
University of Florida.
JAY NASH has been Chief Financial Officer, Controller, Secretary and
Treasurer of our company since January 1998. He has also been Assistant
Secretary and a Director of American Micro Computer Center, Inc. since 1999. He
has served as Vice President of Technology Express, Inc., a computer
distributor, since 1992 and was an accountant with Jacques Miller, an accounting
firm, from 1986 to 1992 and KPMG LLP, an accounting firm, from 1983 to 1986. Mr.
Nash is a Certified Public Accountant with a Bachelor of Science in Accounting
from the University of Tennessee.
FRANK CRUZ has been Chief Operating Officer of our company since
November 1998 and has served in the operations of our company since October
1997. He has also been a Director of American Micro Computer Center, Inc. since
1999. From 1996 to present, Mr. Cruz has been involved in the operations of AMCC
and from 1994 to 1996 he was International Sales Manager of AMCC. From 1996 to
1997, Mr. Cruz was General Manager of AmeriTech Exports, a computer distributor,
and from 1988 to 1994 he was Regional Sales Manager of Promark Distributors, a
computer distributor.
43
<PAGE>
LAURENCE GILBERT has been a Director of our company since January 1998.
He has been Managing Director of European Micro UK since 1996. He was Finance
Director to a group (the "GROUP") of related companies called the Micro Computer
Center Group from 1995 to 1996, which consisted of our company, AMCC, Technology
Express and Ameritech Exports. He served as a management consultant from 1994 to
1995 and Managing Director of Gilbert Lawton Ltd., a management-consulting firm,
from 1991 to 1994. Mr. Gilbert is a Chartered Accountant.
KYLE R. SAXON has been a Director of our company since January 1998. He
has also been a Director of European Micro UK since March 1998. He has been a
stockholder and vice president with the law firm of Catlin Saxon Tuttle Evans
Fink & Kolski, P.A. since 1988. Mr. Saxon has a Bachelor of Science in Business
Administration and a Juris Doctorate from the University of Florida.
BARRETT SUTTON has been a Director of our company since February 1998.
He has also been a Director of European Micro UK since March 1998. Mr. Sutton is
currently a member of the law firm of Waller, Lansden, Dortch & Davis PLLC. From
January 1, 1998 to August 31, 2000, he had been a partner at the law firm of
Tuke Yopp & Sweeney, Plc. Between 1995 and 1998, he was an attorney, Executive
Vice-President and General Counsel for General Capital Corporation and Gen Cap
America, Inc. He practiced law with the firm of White & Reasor from 1981 to
1994. Mr. Sutton has a Bachelor of Arts from Vanderbilt University and a Juris
Doctorate from the University of Virginia.
DIRECTORS
Our board of directors consists of six seats, divided into three
classes of two members each. The terms of office of the three classes of
directors (Class I, Class II and Class III) end in successive years. The terms
of the Class I, Class II and Class III directors expire in 2001, 2002 and 2003,
respectively. The Class III directors were reelected at our annual meeting of
stockholders held on October 30, 2000. There is one vacancy in Class I. Pursuant
to our bylaws, a majority of the remaining five members of the Board may appoint
a successor to fill the Class I vacancy.
As of the date of this prospectus, the name, class and expiration date
of the directors are as follows:
CLASS I CLASS II CLASS III
------- -------- ---------
(Terms expiring 2001) (Terms expiring 2002) (Terms expiring 2003)
Laurence Gilbert Barrett Sutton John B. Gallagher
Vacant Kyle R. Saxon Harry D. Shields
COMMITTEES
The Board has standing Compensation, Stock Option, Audit, and
Acquisition Committees. The Board does not have a nominating committee, such
function being reserved to the full Board of Directors. Committee memberships
are as follows:
<TABLE>
<CAPTION>
COMPENSATION COMMITTEE STOCK OPTION COMMITTEE AUDIT COMMITTEE ACQUISITION COMMITTEE
---------------------- ---------------------- --------------- ---------------------
<S> <C> <C> <C>
John B. Gallagher (Chairman) Kyle Saxon (Chairman) Kyle Saxon (Chairman) Kyle Saxon (Chairman)
Harry D. Shields Barrett Sutton Barrett Sutton Barrett Sutton
Barrett Sutton Laurence Gilbert
Kyle Saxon
</TABLE>
COMPENSATION COMMITTEE. The Compensation Committee is charged with
reviewing and making recommendations concerning our general compensation
strategy, establishing salaries for officers, reviewing employee benefit plans
(other than the benefit plans reserved for the Stock Option Committee as
described below) and approving certain employment contracts. The Compensation
Committee met on one occasion during Fiscal 2000.
44
<PAGE>
STOCK OPTION COMMITTEE. The Stock Option Committee reviews, approves,
recommends and administers our 1998 Stock Incentive Plan and 1998 Employee Stock
Purchase Plan. The Stock Option Committee met on two occasions during Fiscal
2000.
AUDIT COMMITTEE. The Audit Committee's functions are to recommend the
appointment of independent accountants, review the arrangements for and scope of
the audit by independent accountants, consider the adequacy of the system of
internal accounting controls, and discuss with management and the independent
accountants our annual financial statements and key accounting and reporting
matters. The Audit Committee met on three occasions during Fiscal 2000.
ACQUISITION COMMITTEE. The Acquisition Committee was formed on February
2, 1999 to evaluate and determine whether we should acquire American Surgical
Supply Corp. of Florida d/b/a American Micro Computer Center and, if so, on what
terms. The acquisition was completed on July 1, 1999. The Acquisition Committee
remains in effect to carryout certain obligations in connection with this
acquisition. The Acquisition Committee met on one occasion during Fiscal 2000.
COMPENSATION OF DIRECTORS
BASE COMPENSATION. Non-employee directors receive $1,000 for attendance
at Board of Directors and Committee (other than Acquisition Committee) meetings
whether in person or by telephone and are reimbursed for all out-of-pocket
expenses incurred in attending such meetings. Directors who are also employees
of our company receive no additional compensation for service as directors.
Acquisition Committee members receive $150 per hour for their services on that
committee.
OPTIONS. Each non-employee director receives an automatic grant of
options to purchase 5,000 shares of common stock for each year of service on the
Board. In addition, each non-employee director receives options to purchase
10,000 shares of common stock upon his or her initial election to the Board. All
options granted have an exercise price equal to the fair market value on the
date of grant, vest after one year of service on the Board and have a ten-year
term. In Fiscal 2000, the options to purchase 5,000 shares of common stock
granted to each of Messrs. Sutton and Saxon had exercise prices of $9.25 and
$9.00 per share, respectively.
In addition to the options described above, on August 21, 2000, the
Board granted options to three Board members. Messrs. Gilbert, Sutton and Saxon
received options to purchase 20,000, 5,000 and 5,000 shares of common stock,
respectively. These options have an exercise price of $7.0625 per share, have a
ten-year life and vest 25% immediately and 25% every six months thereafter.
1998 STOCK INCENTIVE PLAN
OVERVIEW OF THE 1998 INCENTIVE PLAN. Incentive compensation for
non-employee directors, executives and other key employees is provided under our
1998 Incentive Plan. The purpose of the 1998 Plan is to (a) increase the
proprietary and vested interest of our non-employee directors in the growth and
performance of our company, (b) assist in attracting and retaining highly
competent employees, (c) provide an incentive for motivating selected officers
and other key employees of our company, (d) achieve long-term corporate
objectives and (e) enable cash incentive awards to qualify as performance-based
for purposes of the tax deduction limitations under Section 162(m) of the
Internal Revenue Code of 1986, as amended.
Eligible participants include our non-employee directors and such
officers and other key employees as the plan administrator may designate from
time to time. The 1998 Incentive Plan will continue in effect until terminated
by its terms or, if earlier, by the Board of Directors.
45
<PAGE>
ADMINISTRATION. The 1998 Plan is administered by a plan administrator,
which is currently the Stock Option Committee of the Board of Directors. The
plan administrator has been granted exclusive and final authority under the 1998
Incentive Plan with respect to all determinations, interpretations and other
actions affecting the 1998 Plan and its participants.
SHARES SUBJECT TO THE 1998 INCENTIVE PLAN. 500,000 shares of our common
stock have been authorized to be issued under the 1998 Plan. Such authorized
shares will be appropriately adjusted to reflect adjustments (if any) to our
capital structure. As of October 23, 2000, 330,500 options have been issued
under the 1998 Plan.
1998 EMPLOYEE STOCK PURCHASE PLAN
We have also adopted the 1998 Employee Stock Purchase Plan. A total of
50,000 shares of common stock have been reserved for issuance under the Purchase
Plan. The Purchase Plan will permit eligible employees of our company to
purchase common stock at a discount through accumulated payroll deductions.
Employees are generally eligible to participate in the Purchase Plan after
twelve months of full-time employment with our company. The Purchase Plan will
be implemented through sequential offering periods, each of which is
approximately three months in duration. Participants will purchase shares of
common stock on the last day of each offering period. Employees may end their
participation in the Purchase Plan at any time during an offering period and
participation ends automatically upon the participant's termination of
employment. The Purchase Plan has never been implemented.
EXECUTIVE COMPENSATION
The following table sets forth compensation information for the three
fiscal years ended June 30, 2000 for our Chief Executive Officers, the two other
executive officers of our company and two most highly compensated executive
officers of European Micro UK for Fiscal 2000.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM
COMPENSATION
NAME AND PRINCIPAL POSITION(S) FISCAL OTHER ANNUAL NO. OF STOCK
------------------------------ ------- COMPENSATION OPTIONS ALL OTHER
YEAR SALARY BONUS (1) GRANTED (2) COMPENSATION
---- ------ ----- --- ----------- ------------
<S> <C> <C> <C> <C> <C>
John B. Gallagher 2000 $370,667(3) $0 $0 0 $0
Co-Chairman and Co-President 1999 225,000 100,000 0 0 0
1998 87,500 0 0 0 0
Harry D. Shields 2000 $266,667 $0 $0 0 $0
Co-Chairman and Co-President 1999 225,000 100,000 0 0 0
1998 87,500 0 0 0 0
Jay Nash 2000 $54,167 $5,000 $0 0 $0
Chief Financial Officer, 1999 50,000 5,000 0 0 0
Controller,
Secretary and Treasurer 1998 16,666 0 0 10,000 0
Frank Cruz 2000 $100,310(3) $15,000 $0 0 $0
Chief Operating Officer 1999 45,000 10,000 28,030 0 0
1998 3,750 0 0 10,000 0
Laurence Gilbert 2000 $95,592 $159,650 $21,374 0 $0
Managing Director (4) 1999 98,154 178,136 20,450 0 0
1998 100,293 561,358 16,351 25,000 0
Bernadette Spofforth 2000 $95,592 $208,383 $23,858 0 $0
Director of Sales (5) 1999 49,077 322,987 23,329 0 0
1998 59,716 832,017 18,475 50,000 0
</TABLE>
-----------------------
46
<PAGE>
(1) This consists primarily of employee benefits, including the use of a
company owned car, pension plan and medical insurance.
(2) Options to purchase shares of common stock granted pursuant to the 1998
Incentive Plan. Messrs. Nash, Cruz and Gilbert were granted options to
purchase shares of our common stock on August 21, 2000, after the end of
our 2000 fiscal year. Accordingly, these options are excluded from the
table. See "Option Grants in Fiscal 2000."
(3) Mr. Gallagher's salary includes an annual salary of $104,000 paid by
American Micro Computer Center, Inc., a wholly-owned subsidiary of our
company, in Fiscal 2000. Mr. Cruz' salary also includes $29,093 paid by
American Micro Computer Center, Inc.
(4) Mr. Gilbert is the Managing Director of European Micro UK.
(5) Ms. Spofforth was the Director of Sales of European Micro UK until June
25, 2000. She is no longer employed by European Micro UK.
OPTION GRANTS IN FISCAL 2000
During Fiscal 2000, we did not grant options to any of the named
executive officers. On August 21, 2000, after the end of our 2000 fiscal year
end, Messrs. Nash, Cruz and Gilbert received options to purchase 5,000, 5,000
and 20,000 shares, respectively, at an exercise price of $7.0625 per share.
These options vest 25% on August 21, 2000, 25% on February 21, 2001, 25% on
August 21, 2001 and 25% on February 21, 2002. These options have a ten-year
term.
OPTION EXERCISES AND VALUES FOR FISCAL 2000
The following table sets forth information with respect to option
exercises during Fiscal 2000 by each of the named executive officers who hold
options and the status of their options at June 30, 2000.
<TABLE>
<CAPTION>
NO. OF UNEXERCISED VALUE OF UNEXERCISED IN-THE-
OPTIONS AT JUNE 30, 2000 MONEY OPTIONS AT JUNE 30, 2000
SHARES ACQUIRED VALUE
NAME ON EXERCISE (#) REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE(1)
<S> <C> <C> <C> <C> <C> <C>
Jay Nash -0- -0- -0- 10,000 -0- $0
Frank Cruz -0- -0- -0- 10,000 -0- 0
Laurence Gilbert -0- -0- -0- 25,000 -0- 0
</TABLE>
----------------
(1) None of the options were in-the-money as of June 30, 2000.
EMPLOYMENT AGREEMENTS WITH THE CHIEF EXECUTIVE OFFICERS. We have
entered into five-year employment agreements with each of Messrs. Gallagher and
Shields. Pursuant to the agreements, each executive is employed as Co-Chairman
and Co-President of our company. These agreements were effective as of January
1, 1998, and each provided for initial annual base salaries of $175,000, plus
annual cost of living adjustments and other increases to be determined at any
time or from time to time by the Board of Directors or any committee thereof. On
January 31, 1999, the annual base salaries for each of Messrs. Gallagher and
Shields were increased to $275,000. Effective May 1, 2000, Messrs. Gallagher and
Shields voluntarily decreased their annual base salaries from $275,000 to
$225,000. In addition, each executive is entitled to annual incentive bonus
compensation in an amount to be determined by the Board of Directors or a
committee thereof.
Each agreement further provides that each of Messrs. Gallagher and
Shields will devote a significant amount of his working time and efforts to the
business and affairs of our company (which means no less than 50% of his working
time). Each of Messrs. Gallagher and Shields may devote a reasonable amount of
time and effort to their business affairs disclosed to the Board.
The agreements also provide that upon termination of employment without
"cause" or termination by the executive for "good reason" (which includes a
change of control of our company), the executive is entitled to receive, in
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addition to all accrued or earned but unpaid salary, bonus or benefits, an
amount equal to three times the compensation such executive would be entitled to
receive in the then current fiscal year, including base salary and incentive
bonus compensation. For the purposes of the employment agreements, the amount of
incentive bonus compensation each executive would be entitled to receive in the
then current fiscal year is equal to the largest amount accrued for any of the
two most recently completed fiscal years. In addition, we will pay certain
relocation expenses incurred by the executive with respect to a change of
principal residence and will indemnify the executive for any loss sustained in
the sale of his principal residence. The agreements also provide that the
executive will not compete with our company during his employment (except for
activities disclosed to the Board of Directors) and for two years thereafter
unless we terminate the executive without "cause" or the executive terminates
his employment for "good reason."
In addition, the agreements grant each of Messrs. Gallagher and Shields
demand and piggy-back registration rights with respect to the shares of common
stock held by each. Each executive may individually require us to file a
registration statement with respect to these shares on an annual basis.
Moreover, each executive may include these shares in certain other offerings by
our company.
On July 1, 1999, Mr. Gallagher entered into a two-year employment
agreement with American Micro Computer Center, Inc., a wholly-owned subsidiary
of our company. American Micro was formed to acquire American Surgical Supply
Corp. of Florida d/b/a American Micro Computer Center, an entity in which Mr.
Gallagher served as President, a Director and a fifty-percent stockholder.
Pursuant to this agreement, Mr. Gallagher is employed as President of American
Micro. This agreement provides for an annual base salary of $104,000, which is
in addition to the annual base salary paid by us. Except with respect to his
duties to our company, Mr. Gallagher must devote substantially all of his
business time to the business affairs of American Micro.
EMPLOYMENT AGREEMENTS WITH OTHER NAMED EXECUTIVE OFFICERS. European
Micro UK has entered into an employment agreement with Mr. Laurence Gilbert.
Pursuant to the agreement, Mr. Gilbert is employed as Managing Director of
European Micro UK. Mr. Gilbert's agreement was effective January 1, 1998, will
continue until terminated by either party delivering not less than six months'
written notice to the other party and provides for an annual base salary of
(pound)60,000 (approximately $96,000 assuming an exchange rate of $1.60 to
(pound)1.00) plus a bonus based on the level of net profit earned by European
Micro UK. The minimum bonus is (pound)30,000 (apPROXIMately $48,000 assuming an
exchange rate of $1.60 to (pound)1.00). Mr. Gilbert is also entitled to the use
of a vehicle owned by European MICRO UK under the terms of his employment
agreement.
Neither Jay Nash nor Frank Cruz has entered into employment agreements
with our company. Mr. Nash is employed by our company on a part-time basis. Mr.
Nash is also employed by Technology Express, Inc., an entity in which Mr.
Shields is the President and sole stockholder. Mr. Cruz is also employed by
American Micro, a wholly-owned subsidiary of our company formed to acquire AMCC,
and, prior to that, he was employed by American Surgical Supply Corp. of Florida
d/b/a American Micro Computer Center, an entity in which Mr. Gallagher was the
President and a fifty percent stockholder until it was acquired by us on July 1,
1999.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During Fiscal 2000, our Compensation Committee was comprised of John B.
Gallagher, Harry D. Shields, Barrett Sutton and Kyle R. Saxon. Each of Messrs.
Gallagher and Shields is a Co-Chairman, Co-President and Director of our company
and Co-Chairman of each of the subsidiaries. In addition, Technology Express,
Inc., an entity controlled by Mr. Shields, has purchased and sold products to
and from us. All of these transactions are described in the Section entitled
"Certain Relationships and Related Transaction." The Compensation Committee is
responsible for making recommendations to the Board of Directors regarding
compensation arrangements for our officers.
INDEMNIFICATION
Pursuant to indemnification agreements entered into with each of the
directors, our company has agreed to indemnify each director, to the fullest
extent permitted by law, from and against any and all claims of any type arising
from or related to his past or future acts or omissions as a director or officer
of our company and any of our subsidiaries, including liability under the
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Securities Act of 1933. In addition, our company has agreed to advance all
expenses of each director as they are incurred and in advance of the final
disposition of any claim. Insofar as indemnification for liabilities arising
under the Securities Act of 1933 may be permitted to directors, officers or
persons controlling the registrant pursuant to the foregoing provisions, our
company has been informed that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act of 1933 and is therefore unenforceable.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On February 2, 1999, our Board formed an Acquisition Committee
consisting solely of independent directors to evaluate and determine whether we
should acquire American Surgical Supply Corp. of Florida d/b/a American Micro
Computer Center ("AMCC") and, if so, on what terms. The members of the committee
are Kyle R. Saxon and Barrett Sutton. The committee members were compensated at
$150 per hour each for their service on the committee. John B. Gallagher, who is
a significant stockholder, Co-Chairman and Co-President of our company, was the
President and a Director of AMCC and owned fifty percent of our outstanding
capital stock. Frank Cruz, who is the Chief Operating Officer of our company,
has been an employee of AMCC since 1994. He is currently an employee of American
Micro, the newly-formed, wholly-owned subsidiary of our company formed to
acquire AMCC. The remaining fifty percent of AMCC's outstanding capital stock
was owned by Mr. Gallagher's father. The committee's charter authorized it to
take any action it deemed necessary to properly evaluate and determine whether
we should acquire AMCC, including hiring independent advisors and ensuring that
any such transaction was fair to us and our stockholders from a financial point
of view. The committee hired independent legal counsel and an independent
financial advisor to render a fairness opinion. On July 1, 1999, we acquired
AMCC.
The transaction was structured as a merger of AMCC with and into
American Micro, a newly-formed, wholly-owned subsidiary of our company.
According to the merger agreement, the purchase price for AMCC was equal to
$1,130,660, plus an earn-out amount payable in cash or shares of our common
stock (at our 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. In addition, we assumed all outstanding
indebtedness of AMCC, including a stockholder loan in the approximate amount of
$289,000. This loan was owed to the father of John B. Gallagher, Co-Chairman of
our company. If we elect to pay any portion of the purchase price in shares of
common stock, then AMCC's stockholders 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 we will pay the
difference in cash to AMCC's stockholders. The earn-out amount paid for calendar
1999 was approximately $600,000. The former stockholders of AMCC have agreed
that, until July 1, 2001 and thereafter for so long as the repayment of the
earn-out is limited by the loan covenants with SouthTrust Bank, we will pay the
stockholders $50,000 per month, plus 8% interest, commencing April 1, 2001. The
remaining unpaid earn-out amount will be payable July 1, 2001 to the extent not
limited by such covenants.
In connection with the merger agreement, our company assumed the real
property lease of AMCC. John B. Gallagher and his father, John P. Gallagher,
lease this property to AMCC. The lease will expire on August 31, 2002, subject
two successive renewal options of three years each. The lease payments are
$5,250 per month, plus a cost adjustment.
During Fiscal 2000, our company and our subsidiaries have acted as
suppliers for, and purchasers from, Technology Express, Inc. Harry D. Shields,
who is the Co-Chairman, Co-President, director and a significant stockholder
(owning approximately 32.0% of the outstanding shares of common stock) of our
company, is President of Technology Express, and owns all of the outstanding
capital stock of that company. In addition, Jay Nash, who is Chief Financial
Officer, Controller, Secretary and Treasurer of our company, has been an officer
of Technology Express since 1992. Sales between our company and our subsidiaries
and Technology Express are typically priced at one percent above cost, although
exceptions are sometimes made in times of short supply and other circumstances.
This mark-up has enabled us to buy and sell product quickly and efficiently in
order to take advantage of bulk purchases, logistics and financing that may not
otherwise be available to us.
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Related party transactions are summarized as follows (in thousands):
THREE MONTHS ENDED SEPTEMBER
30,
2000 1999
---- ----
Sales to Technology Express $54 $1.019
Purchases from Technology Express 1,564 1,768
Due to/from related parties was comprised of the following balances (in
thousands):
SEPT. 30, 2000 JUNE 30, 2000
Accounts Receivable from Technology Express(1) $0 $0
Accounts Payable to Technology Express(2) 293 11
-------------------
(1) The largest aggregate amount of indebtedness owed from Technology
Express to us between July 1, 1999 and June 30, 2000 was approximately
$736,000. These amounts represent receivables incurred in the ordinary
course of business for sales of product by us to the related parties.
(2) The largest aggregate amount of indebtedness owed by us to Technology
Express between July 1, 1999 and June 30, 2000 was approximately
$1,500,000. These amounts represent payables incurred in the ordinary
course of business of business for sales of product by the related
parties to us.
Related party purchases and sales during Fiscal 2000 are as follows (in
thousands):
FISCAL 2000
Sales to Technology Express $2,369
Purchases from Technology Express 3,986
50
<PAGE>
STOCK OWNERSHIP
BENEFICIAL OWNERS
The following table shows persons (other than directors and executive
officers) who owned beneficially more than five percent of our common stock as
of October 23, 2000.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY PERCENT
NAME AND ADDRESS OWNED OF CLASS
<S> <C> <C> <C>
Stuart S. Southard and Robert H. True, Trustees of the 1997 390,804 7.9%
Henry Daniel Shields Irrevocable Educational Trust
614 Fourth Avenue
Nashville, Tennessee 37210
</TABLE>
DIRECTORS AND EXECUTIVE OFFICERS
The following table shows the amount of common stock of our company
beneficially owned by our directors, the executive officers named in the Summary
Compensation Table and by all directors and executive officers as a group as of
October 23, 2000. Unless otherwise indicated, beneficial ownership is direct and
the person indicated has sole voting and investment power. As of October 23,
2000, we had 4,933,900 shares of common stock outstanding.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY ACQUIRABLE WITHIN 60 PERCENT OF
NAME AND ADDRESS OWNED DAYS(1) CLASS
<S> <C> <C> <C> <C>
John B. Gallagher 1,775,000 -- 36.0%
Harry D. Shields 1,577,696 -- 32.0%
Jay Nash -- 1,250 *
Frank Cruz -- 1,250 *
Laurence Gilbert -- 5,000 *
Kyle Saxon 2,700 16,250 *
Barrett Sutton -- 16,250 *
All officers and directors as a group 3,355,396 40,000 68.3%
</TABLE>
-----------------------
* Indicates that the ownership percent is less than one percent (1%).
(1) Reflects the number of shares that could be purchased by exercise of
options available at October 23, 2000 or within 60 days thereafter under
our 1998 Stock Incentive Plan.
CHANGES IN CONTROL
The issuance of common stock under the equity line of credit agreement
and upon the exercise of options and warrants issued in connection therewith may
result in a change of control. This prospectus relates to, among other things,
the resale of up to 7,833,333 newly-issued shares of common stock, which if
issued would represent 61.4% of our outstanding common stock. If such shares
were purchased by one investor, or two or more investors working together, then
a change of control may result.
In addition, Messrs. Gallagher and Shields have pledged $3.0 million of
common stock to SouthTrust Bank. The number of pledged shares may fluctuate
based on the market price of our common stock. These shares secure a portion of
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<PAGE>
our company's indebtedness with SouthTrust Bank. If our company defaults on this
indebtedness, then SouthTrust Bank may foreclose on these shares of common
stock. Such an event may result in a change of control.
52
<PAGE>
COMPARATIVE STOCK PERFORMANCE
The following graph compares the performance of our company's common
stock against the Nasdaq Stock Market (U.S.) Index and a peer group for the
period commencing with the consummation of our initial public offering on June
12, 1998 and ending June 30, 2000. The peer group consists of Ingram Micro,
Inc., Tech Data Corporation and Liuski International Inc. Historically, our peer
group included CHS Electronics, Inc., a company that is the subject of a
liquidating plan of reorganization. As a result, we have removed CHS
Electronics, Inc. The peer group information set forth below excludes CHS
Electronics, Inc. for each period specified.
The graph assumes that $100 was invested on June 12, 1998, and that
dividends were reinvested.
COMPARISON OF CUMULATIVE TOTAL RETURN
AMONG EUROPEAN MICRO HOLDINGS, INC.,
THE NASDAQ STOCK MARKET (U.S.) INDEX AND A PEER GROUP
JUNE 12, JUNE 30,
1998 1998 1999 2000
---- ---- ---- ----
European Micro Holdings, Inc. 100 102.50 70.00 65.00
Peer Group 100 110.21 72.27 62.23
Nasdaq Stock Market (U.S.) Index 100 108.98 156.93 231.81
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<PAGE>
MARKET FOR OUR COMMON STOCK
Our shares of common stock began trading on the Nasdaq National Market
on June 12, 1998, under the symbol "EMCC." Our company's high and low bid prices
by quarter during fiscal 2000, 1999 and 1998 are presented as follows:
FISCAL YEAR 2001(1)
HIGH LOW
---- ---
First Quarter (July 2000 to September 2000) $9.125 $3.00
FISCAL YEAR 2000(1)
HIGH LOW
---- ---
First Quarter (July 1999 to September 1999) $10.25 $6.50
Second Quarter (October 1999 to December 1999) 8.875 4.031
Third Quarter (January 2000 to March 2000) 16.50 5.00
Fourth Quarter (April 2000 to June 2000) 11.625 2.50
FISCAL YEAR 1999(1)
HIGH LOW
---- ---
First Quarter (July 1998 to September 1998) $11.375 $4.50
Second Quarter (October 1998 to December 1998) 15.75 8.00
Third Quarter (January 1999 to March 1999) 13.75 8.50
Fourth Quarter (April 1999 to June 1999) 10.50 7.00
FISCAL YEAR 1998(1)
HIGH LOW
---- ---
Fourth Quarter ( June 1998) $11.00 $9.9375
-------------------------
(1) We were 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 11, 2000, we had approximately 43 shareholders of record.
We believe that we have in excess of 500 beneficial owners.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
Our company's authorized capital stock consists of 20,000,000 shares of
common stock, par value $0.01 per share, and 1,000,000 shares of preferred
stock, par value $0.01 per share, of which 4,933,900 shares of common stock were
issued and outstanding on October 23, 2000. In this offering, we may issue up to
an additional 7,833,333 shares of common stock, consisting of 6,666,667 shares
of common stock under, and 1,166,666 shares of common stock upon the exercise of
options and warrants issued in connection with, the equity line of credit. The
rights and preferences of the preferred stock will be determined upon issuance
by our Board of Directors. The following description is a summary of the capital
stock of our company and contains the material terms of the capital stock.
Additional information can be found in the Articles of Incorporation and Bylaws,
which were filed as exhibits to our original Registration Statement on Form S-1
with the Securities and Exchange Commission.
COMMON STOCK
Each share of common stock entitles the holder to one vote on each
matter submitted to a vote of our stockholders, including the election of
directors. There is no cumulative voting. Subject to preferences that may be
applicable to any outstanding preferred stock, the holders of common stock are
entitled to receive ratably such dividends, if any, as may be declared from time
to time by the Board of Directors out of funds legally available therefore.
Holders of common stock shall have no preemptive, conversion or other
subscription rights. There are no redemption or sinking fund provisions
available to the common stock. In the event of liquidation, dissolution or
winding up of our company, the holders of common stock are entitled to share
ratably in all assets remaining after payment of liabilities, subject to prior
distribution rights of preferred stock, if any, then outstanding.
PREFERRED STOCK
The Board of Directors is authorized, subject to any limitations
prescribed by the Nevada Revised Statutes ("NRS"), or the rules of any quotation
system or national securities exchange on which stock of our company may be
quoted or listed, to provide for the issuance of shares of preferred stock in
one or more series; to establish from time to time the number of shares to be
included in each such series; to fix the rights, powers, preferences, and
privileges of the shares of such series, without any further vote or action by
the stockholders. Depending upon the terms of the preferred stock established by
the Board of Directors, any or all series of preferred stock could have
preference over the common stock with respect to dividends and other
distributions and upon liquidation of our company or could have voting or
conversion rights that could adversely affect the holders of the outstanding
common stock. We have no present plans to issue any shares of preferred stock.
OPTIONS
We have issued options to purchase 330,500 shares of common stock under
our 1998 Stock Incentive Plan. In addition, we have issued options to purchase
100,000 shares of common stock to the Persia Consulting Group. These options
were issued outside the plan and become exercisable one year from the date of
issuance. Accordingly, as of October 23, 2000, we have outstanding options to
purchase a total of 430,500 shares of common stock. All options have a ten-year
term. A summary of our outstanding options is set forth below:
NO. OF OPTIONS: EXERCISE PRICES:
-------------- ---------------
5,000 $12.00
5,000 $10.25
215,500 $10.00
5,000 $9.25
5,000 $9.00
2,500 $8.00
7,500 $7.50
85,000 $7.06
100,000 $4.55
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<PAGE>
WARRANTS
Under the equity line of credit, we issued warrants to the May Davis
Group, Inc. to purchase up to 1,00,000 shares of common stock, of which 500,000
have an exercise price of $7.00 per share and 500,000 have an exercise price of
$10.00 per share. Subsequently, the May Davis Group, Inc. transferred these
warrants to Mark Angelo, Hunter Singer, Joseph Donahue, Robert Farrell and the
Persia Consulting Group, Inc.
In addition, in connection with the equity line of credit, we will
issue warrants to the Persia Consulting Group, Inc. The number of warrants will
be equal to one percent of the amount of each advance, one-half of which will
have an exercise price of $7.00 per share and one-half of which will have an
exercise price of $10.00 per share.
In October 2000, we entered into a consulting agreement under which we
are obligated to grant to a consultant warrants to purchase 50,000 shares of
common stock at an exercise price of $4.00 per share. Warrants to purchase
25,000 shares become exercisable when the closing bid price of our company's
common stock is $10.00 per share or higher for twelve consecutive trading days
in the eight month period after the effective date of the accompanying
registration statement. Warrants to purchase the remaining 25,000 shares become
exercisable upon the later of the successful consummation of (a) a financing
transaction or (b) an acquisition, as specified in the consulting agreement.
LIMITATION OF LIABILITY; INDEMNIFICATION
As permitted by the NRS, the Articles of Incorporation provide that
directors of our company shall not be personally liable to us or our
stockholders for monetary damages for breach of fiduciary duty as a director to
the fullest extent permitted by the NRS (which currently provides that such
liability may be so limited, except for: (i) acts or omissions which involve
intentional misconduct, fraud or a knowing violation of law; or (ii) the payment
of distributions in violation of NRS 78.300.
Each person who is or was a party to any action by reason of the fact
that such person is or was a director or officer of our company shall be
indemnified and held harmless by us to the fullest extent permitted by the NRS.
This right to indemnification also includes the right to have paid by us the
expenses incurred in connection with any such proceeding in advance of its final
disposition, to the fullest extent permitted by the NRS. In addition, we may, by
action of the Board of Directors, provide indemnification to such other
employees and agents of our company to such extent as the Board of Directors
determines to be appropriate under the NRS.
As a result of this provision, our company and our stockholders may be
unable to obtain monetary damages from a director for breach of his duty of
care. Although stockholders may continue to seek injunctive and other equitable
relief for an alleged breach of fiduciary duty by a director, stockholders may
not have any effective remedy against the challenged conduct if equitable
remedies are unavailable.
REGISTRATION RIGHTS
In January 1998, each of Messrs. Gallagher and Shields was granted
certain registration rights, including demand and piggy-back registration
rights. Each of Messrs. Gallagher and Shields may exercise such rights once each
per calendar year. We will pay all expenses (other than underwriting discounts
and commissions of the selling stockholders) in connection with up to two
requested registrations, as well as any registrations pursuant to the exercise
of piggyback rights. We also will agree to indemnify such persons against
certain liabilities, including liabilities arising under the Securities Act of
1933, as amended. The registration rights granted to Messrs. Gallagher and
Shields will remain as long as he remains an "affiliate" of our company for
purposes of Rule 144.
In addition, we have granted certain registration rights to Spinneret
Financial and the May Davis Group, Inc. The May Davis Group, Inc. transferred
these rights to Mark Angelo, Hunter Singer, Joseph Donahue, Robert Farrell and
the Persia Consulting Group.
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ANTI-TAKEOVER EFFECTS OF PROVISIONS OF THE ARTICLES OF INCORPORATION AND BY-LAWS
The following provisions of our Articles of Incorporation and By-laws
could discourage potential acquisition proposals and could delay or prevent a
change in control. Such provisions may also have the effect of preventing
changes in the management.
DIRECTORS. Our Articles of Incorporation divides our company's Board of
Directors into three classes with regular three year staggered terms. Pursuant
to Section 78.335 of the NRS, any director may be removed from office by the
vote of stockholders representing two-thirds of the outstanding shares of common
stock. In addition, all vacancies on the Board of Directors may be filled by a
majority of directors even if a quorum of directors is not possible. The
authority of the Board of Directors to fill vacancies may result in a majority
of remaining directors without having been elected by stockholders. Stockholders
have no right to compel an election in such cases. Any vacancies (including
those caused by an increase in the number of directors), however, may be filled
by a majority of the remaining directors and therefore the nominees of a
dissident stockholder may be precluded from filling any vacancies. Consequently,
a stockholder interested in gaining control of our company will only be able to
elect a minority of our company's Board of Directors in any given year.
Consequently, two annual meetings will be necessary for such a stockholder to
gain control of our company's Board of Directors. There is currently a vacancy
on the Board as a result of the resignation of Bernadette Spofforth.
AUTHORIZED BUT UNISSUED STOCK. The authorized but unissued shares of
common stock and preferred stock are available for future issuance without
stockholder approval. These additional shares may be utilized for a variety of
corporate purposes, including future public offerings to raise additional
capital, corporate acquisitions and employee benefit plans.
BLANK CHECK PREFERRED STOCK. The existence of authorized but unissued
and unreserved shares of preferred stock may enable the Board of Directors to
issue shares to persons friendly to current management, which would render more
difficult or discourage an attempt to obtain control of our company by means of
a proxy contest, tender offer, merger or otherwise, and thereby protect the
continuity of our management.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is ChaseMellon
Stockholder Services, L.L.C. Its address is 4 Station Square, Third Floor,
Pittsburgh, Pennsylvania 15219-1173.
57
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EXPERTS
The consolidated financial statements of European Micro Holdings, Inc.
and subsidiaries as of June 30, 2000 and 1999, and for each of the years in the
three-year period ended June 30, 2000, have been included herein and in the
registration statement in reliance upon the report of KPMG LLP, independent
certified public accountants, appearing elsewhere herein, and upon the authority
of said firm as experts in accounting and auditing.
With respect to the unaudited interim financial information for the
periods ended September 30, 2000 and 1999, included herein, the independent
certified public accountants have reported that they applied limited procedures
in accordance with professional standards for a review of such information.
However, their separate report included in the Company's quarterly report on
Form 10-Q for the quarter ended September 30, 2000, and included herein, states
that they did not audit and they do not express an opinion on that interim
financial information. Accordingly, the degree of reliance on their report on
such information should be restricted in light of the limited nature of the
review procedures applied. The accountants are not subject to the liability
provisions of section 11 of the Securities Act of 1933 for their report on the
unaudited interim financial information because that report is not a "report" or
a "part" of the registration statement prepared or certified by the accountants
within the meaning of sections 7 and 11 of the Act.
LEGAL MATTERS
Kirkpatrick & Lockhart LLP, Miami, Florida, will pass upon the validity
of the shares of common stock offered under this prospectus.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a
registration statement on Form S-1 under the Securities Act with respect to the
common stock offered under this prospectus. This prospectus does not contain all
of the information set forth in the registration statement and the exhibits. We
have omitted certain terms in accordance with the rules and regulations of the
Securities and Exchange Commission. You can find additional information with
respect to our company and the common stock in the registration statement, which
you may inspect without charge, at the at the Public Reference Room of the
Securities and Exchange Commission at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and copies of all or any part of the registration
statement may be obtained from the Public Reference Section of the Commission
upon the payment of the fees prescribed by the Commission. You may obtain
information on the operation of the Public Reference Room by calling the
Commission at 1-800-SEC-0330. The registration statement is also publicly
available through the Securities and Exchange Commission's web site located at
http://www.sec.gov.
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EUROPEAN MICRO HOLDINGS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Financial Statements as of September 30, 2000
Independent Auditors' Review Report..........................................F-2
Consolidated Condensed Balance Sheets as of September 30, 2000 and
June 30, 2000................................................................F-3
Consolidated Condensed Statements of Operations for the three
months ended September 30, 2000 and 1999.....................................F-4
Consolidated Statement of Changes in Shareholders' Equity
for the three months ended September 30, 2000................................F-5
Consolidated Condensed Statements of Cash Flows for the three months
ended September 30, 2000 and 1999............................................F-6
Notes to Consolidated Condensed Financial Statements.........................F-8
Financial Statements as of June 30, 2000
Independent Auditor's Report................................................F-19
Consolidated Balance Sheets as of June 30, 2000 and 1999....................F-20
Consolidated Statements of Operations for the years ended June 30, 2000,
1999 and 1998...............................................................F-21
Consolidated Statements of Changes in Shareholders' Equity for the
years ended June 30, 2000, 1999 and 1998....................................F-22
Consolidated Statements of Cash Flows for the years ended
June 30, 2000, 1999 and 1998................................................F-23
Notes to Consolidated Financial Statements..................................F-24
F-1
<PAGE>
EUROPEAN MICRO HOLDINGS, INC.
INDEPENDENT AUDITORS' REVIEW REPORT
The Board of Directors and Shareholders
European Micro Holdings, Inc.
We have reviewed the consolidated condensed balance sheet of European Micro
Holdings, Inc. and subsidiaries (the "Company") as of September 30, 2000, and
the related consolidated condensed statements of operations, shareholders'
equity and cash flows for the three-month periods ended September 30, 2000 and
1999. These consolidated condensed financial statements are the responsibility
of the Company's management.
We conducted our review in accordance with the 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 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 consolidated condensed financial statements referred to above for
them to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of European Micro Holdings, Inc. and
subsidiaries as of June 30, 2000, 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 24, 2000, except as to notes
3, 9, and 10, which were as of October 5, 2000, we expressed an unqualified
opinion on those consolidated financial statements. In our opinion, the
information set forth in the accompanying condensed consolidated balance sheet
as of June 30, 2000, is fairly stated, in all material respects, in relation to
the consolidated balance sheet from which it has been derived.
/s/ KPMG LLP
Nashville, Tennessee
November 17, 2000
F-2
<PAGE>
EUROPEAN MICRO HOLDINGS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
SEPTEMBER 30, 2000 JUNE 30, 2000
---------------------------------------
ASSETS
CURRENT ASSETS:
Cash $582 $1,222
Restricted Cash 355 364
Trade receivables, net 12,594 13,160
Inventories, net 7,471 6,194
Prepaid expenses 400 322
Income Taxes Receivable 899 909
Other current assets 682 765
---------- ----------
TOTAL CURRENT ASSETS 22,983 22,936
Property and equipment, net 3,819 3,927
Goodwill, net 2,732 2,808
Investments in and advances to
unconsolidated subsidiaries 0 252
Other assets 284 290
---------- ----------
TOTAL ASSETS $29,818 $30,213
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings $12,300 $11,903
Current portion of long-term
borrowings 697 678
Trade payables 1,660 2,256
Accrued expenses and other
current liabilities 1,608 1,882
Due to related parties 293 11
Income taxes payable - -
---------- ----------
TOTAL CURRENT LIABILITIES 16,558 16,730
Long-term borrowings 2,235 2,373
Other liabilities - -
---------- ----------
TOTAL LIABILITIES $18,793 $19,103
---------- ----------
SHAREHOLDERS' EQUITY:
Preferred stock $0.01 par
value shares: 1,000,000
authorized, no shares
issued and outstanding - -
Common stock $0.01 par value
shares: 20,000,000
authorized,
Shares issued and
outstanding 4,933,900 49 49
Additional paid-in capital 9,512 9,191
Prepaid offering costs (Note 10) (208) -
Accumulated other
comprehensive income (loss) (680) (550)
Retained earnings 2,352 2,420
---------- ----------
TOTAL SHAREHOLDERS' EQUITY 11,025 11,110
---------- ----------
COMMITMENTS, CONTINGENCIES AND SUBSEQUENT EVENTS - -
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $29,818 $30,213
========== ==========
See accompanying notes to consolidated condensed financial statements.
F-3
<PAGE>
EUROPEAN MICRO HOLDINGS, INC.
CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
(In thousands, except per share data)
(UNAUDITED)
THREE MONTHS ENDED SEPTEMBER 30,
---------------------------------------
2000 1999
---- ----
SALES:
Net sales $29,014 $31,745
Net sales to related parties 54 1,019
---------- ----------
Total net sales 29,068 32,764
---------- ----------
COST OF GOODS SOLD:
Cost of goods sold (25,858) (28,076)
Cost of goods sold to related parties (54) (991)
---------- ----------
Total cost of goods sold (25,912) (29,067)
---------- ----------
GROSS PROFIT 3,156 3,697
OPERATING EXPENSES:
Selling, general and
administrative expenses (2,883) (3,066)
---------- ----------
INCOME FROM OPERATIONS 273 631
Interest income 15 39
Interest expense (311) (219)
Equity in net loss of
unconsolidated subsidiaries - (2)
---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES (23) 449
Income tax expense (45) (242)
---------- ----------
NET INCOME (LOSS) $(68) $207
========== ==========
Net income (loss) per
share - basic $(0.01) $0.04
========== ==========
Net income (loss) per
share - diluted $(0.01) $0.04
========== ==========
See accompanying notes to consolidated condensed financial statements.
F-4
<PAGE>
EUROPEAN MICRO HOLDINGS, INC.
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(In thousands, except share data)
(Unaudited)
ACCUMULATED
ADDITIONAL PREPAID OTHER TOTAL
PAID-IN OFFERING COMPREHENSIVE RETAINED SHAREHOLDERS'
COMMON STOCK CAPITAL COSTS INCOME (LOSS) EARNINGS EQUITY
-------------------------------------------------------------------------------------------------
SHARES AMOUNT
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 2000 4,933,900 $49 $9,191 - $(550) $2,420 $11,110
Comprehensive Income (loss):
Net income (loss) - - - - - (68) (68)
Other comprehensive income,
foreign currency
translation adjustment - - - - (130) - (130)
-----------------------------------------------
Total comprehensive income
(loss) - - - - (130) (68) (198)
Prepaid offering costs -
options issued - - 208 (208) - - -
Compensation charge in relation
to share options issued to
non-employees - -- 113 - - - 113
-------------------------------------------------------------------------------------------------
Balance at September 30, 2000 4,933,900 $49 $9,512 $(208) $(680) $2,352 $11,025
=================================================================================================
</TABLE>
See accompanying notes to consolidated condensed financial statements.
F-5
<PAGE>
EUROPEAN MICRO HOLDINGS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(UNAUDITED)
THREE MONTHS ENDED SEPTEMBER 30,
------------------------------------
2000 1999
---- ----
OPERATING ACTIVITIES:
Net income (loss) $(68) $207
ADJUSTMENTS TO RECONCILE NET INCOME TO
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES
Depreciation and amortization 160 134
Amortization of expense related
to contingent earn-out provisions -- 47
Deferred income taxes (23) (7)
Equity in net loss of
unconsolidated subsidiaries -- 2
Provision for Note Receivable
impairment 252 --
Compensation charge for
non-employee stock options 113 14
CHANGES IN ASSETS AND LIABILITIES
Trade receivables 566 1,341
Due from related parties -- 1,128
Inventories (1,277) 1,740
Prepaid expenses and other
current assets 28 157
Income Tax Receivable 10 --
Trade payables (596) 397
Due to related parties 282 295
Income taxes payable -- 294
Accrued expenses and other
current liabilities (274) (622)
---------- ----------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES (827) 5,127
---------- ----------
INVESTING ACTIVITIES:
Purchase of fixed assets (144) (2,998)
Sale of fixed assets 46 21
Payment for acquisition,
net of cash acquired -- (1,220)
---------- ----------
NET CASH USED IN INVESTING ACTIVITIES (98) (4,197)
---------- ----------
FINANCING ACTIVITIES:
Short-term borrowings, net 397 (1,073)
Proceeds from long-term borrowings (159) 2,429
Issuance of common stock, net -- --
Repayment of capital leases, net -- (20)
---------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 238 1,336
---------- ----------
Exchange rate changes 47 241
NET INCREASE (DECREASE) IN CASH: (640) 2,507
Cash at beginning of period 1,222 3,168
---------- ----------
CASH AT END OF PERIOD $582 $5,675
========== ==========
F-6
<PAGE>
EUROPEAN MICRO HOLDINGS, INC.
Non-cash investing and
financing activities:
Fair value of assets acquired $ -- $3,314
Goodwill -- 804
Fair value of liabilities assumed -- (2,817)
---------- ----------
Cash paid for acquisitions -- 1,301
Less cash acquired -- (81)
---------- ----------
Net cash paid for acquisitions $ -- $1,220
========== ==========
Interest paid $311 $219
========== ==========
Taxes paid $84 $5
========== ==========
See accompanying notes to consolidated condensed financial statements.
F-7
<PAGE>
EUROPEAN MICRO HOLDINGS, INC.
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 2000 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 LIQUIDITY
The Company suffered operating losses during fiscal year 2000 and in the first
quarter of 2001. Ongoing legal costs associated with the litigation related to
Big Blue Europe, the costs associated with the Company's electronic commerce
strategy, increases in general overhead costs, and increased interest expense
due primarily to increased borrowings, coupled with decreasing sales volumes and
gross profit margins, have negatively impacted operating results. These factors
may continue to impact the Company's operations.
The Company was not in compliance with certain loan agreement financial
covenants during fiscal year 2000. While the Company has obtained waivers from
these covenant violations existing at June 30, 2000, in most instances the
waivers only address the covenant-reporting period ending thereon. Also, the
Company was not in compliance with certain loan agreement financial covenants at
September 30, 2000. The Company has obtained waivers of certain of these
covenant violations existing at September 30, 2000. With the exception of the
European Micro UK Inventory Facility discussed below and in Note 6 to the
Consolidated Condensed Financial Statements, management believes that the
Company will be able to comply with the provisions of its debt agreements,
including financial covenants, during the remainder of the fiscal 2001. However,
compliance with these financial covenants during fiscal 2001 will require
improved operating results compared to fiscal 2000. Management has initiated
certain actions to increase the likelihood of attaining these improved operating
results. Such actions include, among other things, (i) modifying the terms of
certain financial covenants (ii) entering into the Equity Credit Line (See Note
10 to the Consolidated Condensed Financial Statements), (ii) temporarily
suspending activities related to its electronic commerce strategy until specific
funding can be obtained (see Note 11 to the Consolidated Condensed Financial
Statements), (iii) obtaining extensions of the due date for any payment of
contingent earn-out amounts relating to calendar year 2000 under the American
Micro purchase agreement (see Note 5 to the Consolidated Condensed Financial
Statements), (iv) adjusting staffing levels, and (v) implementing steps to
increase sales volume and lower inventory levels. No assurances can be given
that management's initiatives will be successful, and that loan agreement
defaults will not occur in the future.
Another factor that could negatively impact the Company's liquidity is the terms
of the borrowing arrangements of European Micro UK. As disclosed in Notes 6 and
7 to the Consolidated Condensed Financial Statements, certain of European Micro
UK's borrowing capacity is subject to termination by the borrower at such
lender's sole discretion. As disclosed in Note 6 to the Consolidated Condensed
Financial Statements, European Micro UK was not incompliance with certain
financial covenants of the European Micro UK Inventory Facility at September 30,
2000. As a result, European Micro UK will not be able to borrow against this
revolving credit agreement until such time that it is in compliance with such
financial covenants. Further, the American Micro and Nor-Easter line of credit
and the European Micro Holdings, Inc. term loan contain subjective acceleration
clauses. These factors increase the liquidity risk to the Company. Management
believes that, based on the projected fiscal year 2001 operating results of the
Company and its relationship with the creditors, its existing credit
arrangements will remain effective during fiscal 2001.
F-8
<PAGE>
EUROPEAN MICRO HOLDINGS, INC.
3 INVENTORY
Inventories consist of the following (in thousands):
SEPTEMBER 30, 2000 JUNE 30, 2000
------------------ -------------
Finished goods and goods
for resale $7,606 $6,818
Less: Allowance for
inventory obsolescence (135) (624)
---------- ----------
$7,471 $6,194
========== ==========
A roll forward of allowance for obsolescence is as follows (in thousands):
THREE MONTHS TWELVE MONTHS
ENDED ENDED
SEPTEMBER 30, 2000 JUNE 30, 2000
------------------ -------------
Balance at beginning
of period $624 $116
Foreign currency
translation adjustment (15) (3)
Provision for obsolescence 137 929
Amounts written off (611) (418)
---------- ----------
Balance at end of period $135 $624
========== ==========
4 PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
SEPTEMBER 30, 2000 JUNE 30, 2000
------------------ -------------
Buildings and leasehold improvements $2,628 $2,694
Furniture, fixtures and equipment 1,848 1,866
Vehicles and other 454 447
---------- ----------
4,930 5,007
Less: accumulated depreciation (1,111) (1,080)
---------- ----------
NET BOOK VALUE $3,819 $3,927
========== ==========
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 ($2,518,000 at
exchange rate on September 30, 2000). The purchase price was financed in part by
a mortgage loan note in the amount of 1,312,000 pounds sterling ($1,937,000 at
exchange rate on September 30, 2000) (See Note 7 to the Consolidated Condensed
Financial Statements).
At September 30, 2000 and June 30, 2000, vehicles with a cost of approximately
$219,000 and $212,000, and accumulated depreciation of approximately [$70,000]
and $129,000, respectively, were held under capital leases.
Depreciation expense was $120,000 and $101,000 for the periods ended September
30, 2000 and 1999, respectively.
5 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
F-9
<PAGE>
EUROPEAN MICRO HOLDINGS, INC.
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
$1,388,000 at exchange rate on September 30, 2000). Of this guaranteed amount,
approximately 360,000 pounds sterling (approximately $532,000 at exchange rate
on September 30, 2000) 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 ($355,000 at exchange rate
on September 30, 2000) 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 September 30, 2000. The
note payable and the cash balances are reflected on the accompanying
consolidated condensed balance sheet at September 30, 2000, 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. If the Company elects to pay any portion of the purchase price in
shares of the Company's common stock, then Sunbelt'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 Sunbelt's
shareholders. The Company also entered into employment agreements with the two
former shareholders of Sunbelt. The Company discontinued Sunbelt's 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 was
terminated. Also, in July 2000 the employment agreement with the other former
shareholder was 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 resulted from the recalculation of fiscal year 1998 pretax
earnings of Sunbelt, resulting in a reduction of 134,000 pounds sterling
($198,000 at exchange rate on September 30, 2000) to the guaranteed portion and
32,000 pounds sterling ($47,000 at exchange rate on September 30, 2000) to the
contingent consideration. 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 ($79,000 at exchange rate on September 30, 2000). 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 ($282,000 at exchange rate on September 30, 2000).
The unpaid balance of the guaranteed purchase price of 152,656 pounds sterling
($225,000 at exchange rate on September 30, 2000), and the portion of the second
contingent earn-out payment related to the volume purchases from the Far-East of
129,758 pounds sterling ($192,000 at exchange rate on September 30, 2000) is
reflected in goodwill, net and accrued expenses and other current liabilities on
the accompanying consolidated condensed balance sheet at September 30, 2000 as
the contingency has been met. At September 30, 2000, all contingent
consideration related to the Sunbelt acquisition has either been paid or
accrued. Goodwill from this transaction is being amortized on a straight-line
basis over 20 years.
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 ($50,000 at exchange rate on September 30, 2000) exceeded
the estimated value of net assets acquired by approximately 85,000 Dutch
guilders ($34,000 at exchange rate on September 30, 2000), which is being
amortized on a straight-line basis over 20 years. The financial criteria for the
period ended September 30, 2000 and 1999 were not met, therefore, the additional
consideration was not accrued or paid.
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 was 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 former 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 $1,315,000 exceeded the
estimated fair market value of net assets acquired by approximately $817,000,
F-10
<PAGE>
EUROPEAN MICRO HOLDINGS, INC.
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 consolidated condensed financial
statements. The contingent earn-out payment relating to two times the after tax
earnings for calendar year 1999 of approximately $600,000 was paid in March 2000
and is reflected in goodwill, net. 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. The
second earn-out payment will be due in monthly principal payments of $50,000,
plus interest at 8% commencing on March 1, 2001 and continuing until July 1,
2001 at which time the amount is due in full subject to financial covenant
restrictions. Such payment will be offset by a $261,000 receivable due from
AMCC's former shareholders.
The results of operations of the above entities have been included in the
accompanying consolidated condensed financial statements from the dates of
acquisition.
A roll forward of goodwill is as follows (in thousands):
THREE MONTHS TWELVE MONTHS
ENDED ENDED
SEPTEMBER 30, 2000 JUNE 30, 2000
------------------ -------------
Balance at beginning of period $2,808 $1,675
Foreign currency translation adjustment (42) (84)
Purchase accounting adjustments -- (251)
Additions -- 1,616
Amortization (34) (148)
---------- ----------
Balance at end of period $2,732 $2,808
========== ==========
6 SHORT-TERM BORROWINGS
Short-term borrowings consists of the following (in thousands):
SEPTEMBER 30, 2000 JUNE 30, 2000
------------------ -------------
Bank line of credit
European Micro UK Working
Capital facility $2,366 $1,959
Nor'Easter Micro facility 1,325 975
American Micro facility 1,064 992
---------- ----------
Total bank lines of credit 4,755 3,926
Receivable financing 6,874 7,303
Other short-term borrowings 671 674
---------- ----------
Total short-term borrowings $12,300 $11,903
========== ==========
European Micro UK has a bank line of credit (the "EUROPEAN MICRO UK WORKING
CAPITAL 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 facility, which is subject to review in July each year, has been
extended to September 2001 and is due on demand. Maximum borrowing capacity
under this facility is 2.0 million pounds sterling ($3.0 million at exchange
rate on September 30, 2000). Interest is charged at 1.25% over the
bank-borrowing rate of 6% at September 30, 2000 and 6% at June 30, 2000.
European Micro UK also has a revolving credit agreement (the "EUROPEAN MICRO UK
INVENTORY FACILITY") secured against general corporate assets. The facility
allowed European Micro UK to borrow up to 2.0 million pounds sterling ($3.0
million at exchange rate on September 30, 2000) to assist in the purchase of
inventory. The bank has agreed to extend this credit agreement to July 1, 2001.
From June 30, 2000 to September 30, 2000, no amounts were outstanding under the
agreement. The agreement includes various financial covenants. At September 30,
2000, European Micro UK was not in compliance with certain financial covenants
F-11
<PAGE>
EUROPEAN MICRO HOLDINGS, INC.
of the European Micro UK Inventory Facility. As a result, European Micro UK will
not be able to borrow against this revolving credit agreement until it is in
compliance with such financial covenants.
Total combined borrowings under the European Micro UK Working Capital Facility
and the European Micro UK Inventory Facility cannot exceed 2.0 million pounds
sterling at any date.
The Company also obtained two lines of credit on October 28, 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 for each agreement. Each of these lines of credit was to mature on
October 28, 2000. Interest accrued at 0.5% over the bank-borrowing rate of 9.5%
at September 30, 2000. 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.
On October 5, 2000, the Company received a waiver of the covenant violations
existing at the June 30, 2000 reporting date for the American Micro and
Nor'Easter lines of credit. The Company and the bank terminated the existing
lines of credit and entered into a new borrowing arrangement whereby each of
American Micro and Nor'Easter have a working capital line of credit equal to the
lesser of (i) $1.5 million or (ii) the sum of 85% of eligible accounts
receivable, plus the lesser of 50% of eligible inventory or $750,000. Interest
will be paid monthly at a floating rate of 0.5% over the bank's base rate. The
term of the new arrangements is for one year from the closing date. The new
facilities also require the companies to maintain depository accounts at the
bank, whose daily receipts will be applied against outstanding borrowings under
the lines of credit. As a result, the borrowings are classified as current
liabilities on the Company's consolidated condensed balance sheet at September
30, 2000. The new facilities also place certain restrictions on the companies'
ability to pay dividends and to make capital expenditures, among other things,
and also include a provision whereby the lender can declare a default based on
subjective criteria. Collateral under the new credit line facilities consists of
a first priority lien on all assets of American Micro and Nor'Easter. Messrs.
Gallagher and Shields guaranteed the obligations under these arrangements. Mr.
Shields has pledged personal assets as additional collateral and has further
agreed to maintain certain personal financial statement liquidity levels. These
borrowings are cross-collateralized and cross-defaulted with borrowings under
the $1.5 million term loan to European Micro Holdings, Inc. discussed in Note 7
to the Consolidated Condensed Financial Statements. As of September 30, 2000,
the Company was not in compliance with certain of the revised loan agreement
financial covenants. The Company has obtained waivers from these covenants
violations existing at September 30, 2000.
Receivable financing represents borrowings secured by various trade receivables
of European Micro UK totaling $8.1 million at September 30, 2000 and $8.6
million at June 30, 2000. The accounts receivable financing provides for a
borrowing base of 85% of accounts receivable, with a limit of 6.2 million pounds
sterling ($9.2 million at exchange rate on September 30, 2000). 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 6% at September 30, 2000, and 6% at June 30, 2000.
Other short-term borrowings represent various unsecured notes payable of
American Micro. The maturity dates of the notes range from on demand to June 30,
2001. The interest rates range from 11% to 12%.
7 LONG-TERM BORROWINGS
Long-term borrowings consists of the following (in thousands):
SEPTEMBER 30, 2000 JUNE 30, 2000
------------------ -------------
Mortgage loan note $1,796 $1,877
Note payable 1,000 1,125
Other long-term borrowings 136 49
---------- ----------
$2,932 $3,051
F-12
<PAGE>
EUROPEAN MICRO HOLDINGS, INC.
Less current maturities of
long-term borrowings (697) (678)
---------- ----------
Total long-term borrowings $2,235 $2,373
========== ==========
European Micro UK purchased the office building in which it had previously
leased space for a purchase price of 1,705,000 pounds sterling ($2,518,000 at
exchange rate on September 30, 2000). The purchase price was financed in part by
a mortgage loan note in the amount of 1,312,000 pounds sterling ($1,937,000 at
exchange rate on September 30, 2000). This mortgage loan note bears interest at
a fixed rate of 7.6%, with monthly payments of principal and interest of 15,588
pounds sterling ($23,000 at exchange rate on September 30, 2000), and matures in
July 2009. The mortgage loan note 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 financial
covenants are measured using the financial results of European Micro UK as of
each fiscal year end. Based upon European Micro UK's fiscal year end operating
results, European Micro UK was out of compliance with certain of the covenant
requirements at June 30, 2000. The Company has obtained a waiver through July 1,
2001 of this non-compliance.
European Micro Holdings, Inc. obtained the term loan on October 28, 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 September
30, 2000 was 6.6%. 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.
Messrs. Gallagher and Shields guaranteed the obligations under the term loan. In
addition, Mr. Shield has pledged personal assets as additional collateral and
has further agreed to maintain certain personal financial statement liquidity
levels. 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 is with the same lender as the Nor'Easter Micro and
American Micro line of credit facilities discussed in Note 6 to the Consolidated
Condensed Financial Statements. The agreement also contains a provision whereby
the lender can declare a default based on subjective criteria. Further, the term
loan credit agreement contains similar loan covenant requirements and is
cross-collateralized and cross-defaulted with the line of credit facilities. As
such, the Company was not in compliance for the June 30, 2000 reporting period.
On October 5, 2000, the Company received a waiver of the non-compliance with the
financial covenants as of June 30, 2000, and also entered into an amendment to
the term loan agreement that, among other things, established revised financial
covenants. As of September 30, 2000, the Company was not in compliance with
certain of the revised loan agreement financial covenants. The Company has
obtained waivers from these covenant violations existing at September 30, 2000.
F-13
<PAGE>
EUROPEAN MICRO HOLDINGS, INC.
8 EARNINGS PER SHARE
The calculation of earnings per share is detailed in the table below:
THREE MONTHS ENDED SEPTEMBER 30,
-----------------------------------
2000 1999
---- ----
EARNINGS
Net income (loss) (in thousands) $(68) $207
---------- ----------
WEIGHTED AVERAGE NUMBER OF SHARES
Outstanding common stock during
the period 4,933,900 4,933,900
Contingently issuable shares 68,054 85,107
---------- ----------
BASIC WEIGHTED AVERAGE NUMBER OF SHARES 5,001,954 5,019,007
Effect of dilutive stock options and
other contingent shares -- 995
---------- ----------
DILUTED WEIGHTED AVERAGE NUMBER OF SHARES 5,001,954 5,020,002
========== ==========
Basic earnings per share $(0.01) $0.04
========== ==========
Diluted earning per share $(0.01) $0.04
========== ==========
During the three-month period-ended September 30, 2000, the Company issued
warrants and options to purchase 1,185,000 shares of its common stock at
exercise prices ranging from $4.55 to $10.00. The above dilutive earnings per
share calculations exclude the effect of warrants and options to purchase
1,185,000 and 339,000 shares of common stock for the three-month period ended
September 30, 2000 and 1999, respectively, at exercise prices ranging from $4.55
to $12.00 and $9.1875 to $12.00, respectively, because they were anti-dilutive.
Also, see Note 5 to the Consolidated Condensed Financial Statements 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
second contingent earn-out has been included in the above basic earnings per
share calculations. The effect of contingent shares related to the first
earn-out of American Micro is not included, as such payment was paid in cash in
March 2000. The effect of contingent shares related to second earn-out of
American Micro is not included, as the amount of such contingent shares to be
issued is unable to be determined. Also see Notes 10 and 13.
9 RELATED PARTY TRANSACTIONS
Until July 1, 1999, European Micro Holdings, Inc. belonged to a group of related
companies (the "GROUP"). The Group was 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 5 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. Prior to its acquisition on July 1, 1999, AMCC was owned 50% by John B.
Gallagher, who is a Co-President and Co-Chairman of the Company.
The rates charged on related party sales are lower than they would be in
arms-length transactions. The Company has an oral 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.
F-14
<PAGE>
EUROPEAN MICRO HOLDINGS, INC.
Related party transactions are summarized as follows (in thousands):
THREE MONTHS ENDED
SEPTEMBER 30,
-----------------------------------
2000 1999
---- ----
SALES TO:
Technology Express $54 $1,019
========== ==========
PURCHASES FROM:
Technology Express $1,564 $1,768
========== ==========
Due to related parties comprised of following balances (in thousands):
SEPTEMBER 30, 2000 JUNE 30, 2000
------------------ -------------
Technology Express $293 $11
========== ==========
The entity listed above is related to the Company in the following manner:
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.
FACILITIES AND EQUIPMENT
The Company utilizes approximately 350 square feet of office space and certain
equipment owned by Technology Express for which it is not charged a fee.
EMPLOYMENT AGREEMENTS
The Company has entered into various employment agreements with certain officers
of the Company.
F-15
<PAGE>
EUROPEAN MICRO HOLDINGS, INC.
10 EQUITY LINE OF CREDIT
On August 24, 2000, European Micro Holdings, Inc. entered into an Equity Line of
Credit (the "EQUITY CREDIT LINE"). Pursuant to the Equity Credit Line, an
institutional investor agreed to acquire up to $20 million of the Company's
common stock at a purchase price equal to 88% of the market price of such stock,
as defined in the agreement. The timing of each sale and the number of shares to
be sold is at the discretion of the Company, subject to various conditions,
including an effective registration of the shares. Dollar amounts that the
Company can request under any individual sale is subject to the average trading
volume of the Company's common stock for the preceding 25-day trading period.
The maximum term of the Equity Credit Line is 30 months from the date of the
agreement. The agreement contains various representations, warranties and
covenants by the Company, including limitations on the Company's ability to sell
common stock or common stock equivalents, sell assets, merge, etc. In connection
with entering into the Equity Credit Line, the Company also entered into a
Placement Agent Agreement. Under the Placement Agent Agreement, the agent will
receive a commission equal to 7% of the gross proceeds from each advance under
the Equity Credit Line.
The Company has issued to the placement agent two warrants to purchase a total
of 1,000,000 shares of the Company's common stock. The Class A Warrant allows
the holder to purchase 500,000 shares of common stock at an exercise price of
$7.00 (subject to certain anti-dilution adjustments) commencing with the first
advance under the Equity Credit Line. If the warrant shares are not covered by
an effective registration statement for the resale of the warrant shares, the
holder can elect a cash-less exercise. The warrants expire five years from the
issuance date. The Company can force conversion of the warrants if the closing
price of its common stock is $10.00 or higher for ten consecutive trading days.
The Class B Warrant allows the holder to purchase 500,000 shares of common stock
at an exercise price of $10.00 (subject to similar anti-dilution adjustments).
The other terms of the Class B Warrant are similar to the Class A Warrant,
except that the Class B Warrants are exercisable pro-rata to the ratio of the
advances drawn under the Equity Credit Line, and except that the Company can
force conversion of the warrants if the closing price of its common stock is
$15.00 or higher for ten consecutive trading days.
The Company has granted the Equity Credit Line investor and the placement agent
certain registration rights. Pursuant to the registration rights agreements, the
Company is obligated to, among other things, register the sale of the investors
shares sold to such investor under the Equity Credit Line and the sale of shares
of common stock underlying the warrants. On October 27, 2000, the Company filed
a registration statement with the Securities and Exchange Commission to register
all such shares.
On August 8, 2000, in connection with the Equity Credit Line, the Company
entered into a consulting arrangement with a third party whereby such party
would provide certain financing and capital market consultation. In connection
with the arrangement, the Company paid to the consultant $10,000 in cash
compensation. The Company also issued to the consultant options to purchase
100,000 shares of its common stock at an exercise price of $4.55. Management has
attributed $208,000 of the value of these options as incremental costs directly
attributable to the signing of the Equity Credit Line, and as such, has
reflected such amounts as prepaid offering costs in the accompanying
Consolidated Condensed Balance Sheet at September 30, 2000. The remaining
$105,000 option value attributed to general consulting services has been
expensed in the quarter ended September 30, 2000. In addition, the Company will
pay to the consultant cash payments and warrants to purchase common shares of
the Company. Each cash and warrant payment will equal 1% of the dollars amounts
drawn by the Company under the Equity Credit Line.
11 BUSINESS-TO-BUSINESS ELECTRONIC COMMERCE STRATEGY
The Company has initiated a business-to-business electronic commerce strategy,
which is focused on creating a global, value-added, information technology
equipment and service trading community. The company has hired Cap Gemini, a
leading European management consultancy and information technology services
firm, to assist it in the implementation of this plan. The Company has incurred
the sum of 755,000 pounds sterling ($1,115,000 at exchange rate on September 30,
2000) related to the feasibility studies and business process design. This
amount was reflected in selling, general and administrative expenses on the
accompanying consolidated statements of operations for the year ended June 30,
2000. The Company has capitalized the sum of 229,000 pounds sterling ($338,000
at exchange rate on September 30, 2000) related to the actual software
development. This amount is reflected in property and equipment, net on the
accompanying consolidated condensed balance sheets at September 30, 2000 and
June 30, 2000. During May 2000, the Company temporarily halted the ongoing
development being performed by Cap Gemini until specific funding is obtained to
complete the project. No further expenses have been incurred in the three months
ended September 30, 2000. There can be no assurances that the Company will be
successful in obtaining funding for this project. In the event the project is
not continued by November 30, 2000, the Company will incur a termination fee to
Cap Gemini of 150,000 pounds sterling ($221,500 at exchange rate on September
30, 2000). If paid, this fee would be credited against future invoices of Cap
Gemini upon the continuation of the project. By December 31, 2000, the Company
F-16
<PAGE>
EUROPEAN MICRO HOLDINGS, INC.
intends to re-evaluate and re-define where necessary the current assumptions
based on changes in the market over the last few months. This planning will
include detailing the project based on the Company's ability to fund the project
from current working capital, if other funding is still not available.
12 COMMITMENTS AND CONTINGENCIES
On November 12, 1999, Jeffrey and Marie Alnwick (the "ALNWICKS") and a New York
corporation, Big Blue Products, commenced an action individually and
derivatively for the Dutch company, Big Blue Europe, against our company and our
founders and officers, John B. Gallagher and Harry D. Shields, in the United
States District Court, Eastern District of New York, Jeffrey Alnwick and Marie
Alnwick v. European Micro Holdings, Inc., Eastern District of New York, Docket
No. 99 CV 7380 (the "ALNWICK LITIGATION").
The complaint alleges thirty-three causes of action. Plaintiffs claim, in
substance, that defendants breached oral and written agreements relating to the
management, operation and funding of Big Blue Europe. Specifically, plaintiffs
alleged that defendants breached the joint venture agreement by which Big Blue
Europe was formed, a licensing agreement for use of the "Big Blue" service mark
in Europe, a non-competition agreement allegedly preventing Big Blue Europe from
operating in the United States and several capital contribution agreements.
Plaintiffs also claimed that defendants breached their fiduciary duties to the
Alnwicks, engaged in fraudulent acts, aided and abetted breaches of fiduciary
duties by others, misappropriated trade secrets and interfered with the
employment contract of Big Blue Europe's managing director. The complaint seeks
unspecified compensatory and punitive damages, as well as injunctive relief
restraining defendants from acting in violation of the alleged agreements.
Defendants have moved to dismiss the complaint principally on the basis of forum
non-conveniens in favor of existing proceedings in the Netherlands (commenced by
European Micro UK), where a Dutch court has appointed an independent director to
oversee the operations of the company. Defendants argue that any dispute between
the stockholders and directors of Big Blue Europe, which operates pursuant to
Dutch law, should be resolved by a Dutch court.
Defendants intend to contest the claims in the Alnwicks Litigation vigorously,
whether asserted in the United States or in the Netherlands courts. For the
three-month period ended September 30, 2000, the Company has incurred
approximately $119,000 in costs related to such lawsuit. Management does not
believe that the ultimate outcome of this litigation will result in a material
liability to the Company.
Due to the continued uncertainty of the outcome of the pending lawsuit and the
difficulties of managing operations of Big Blue Europe during the dispute, the
Company has recorded during the three-month period ended September 30, 2000 an
additional $252,000 provision for doubtful accounts related to the notes
receivable owed to the Company. At September 30, 2000, valuation allowances have
been established for all amounts due from Big Blue Europe.
13 SUBSEQUENT EVENTS
On October 11, 2000, the Company entered into a consulting agreement for general
consulting services and advice with respect to capital markets, corporate
finance, acquisitions and financing. The Company will pay the consultant $5,000
per month for four months, subject to extension at the Company's option. In
addition, the Company granted to the consultant warrants to acquire 50,000
shares of the Company's common stock at $4.00 per share. Warrants to acquire
25,000 common shares become exercisable when the closing bid price of the
Company's common stock is $10.00 or higher per share for twelve consecutive
trading days in the eight month period after the effective date of the Company's
Registration Statement on Form S-1 in connection with the Equity Credit Line
discussed in Note 10 to the Consolidated Condensed Financial Statements.
Warrants to acquire the other 25,000 common shares become exercisable upon the
later occurrence of the successful consummation of (a) a financing transaction
or (b) an acquisition, each as defined in the agreement. The agreement also
calls for additional cash consideration to be paid by the Company in the event
of a successful financing transaction related to the acquisition.
14 OTHER ACCOUNTING MATTERS
Effective July 1, 2000, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 133, Accounting for Derivative and Hedging Activities, as
amended by SFAS No. 138. The Statement requires the recognition of all
derivatives on the balance sheet at fair value. The Company's derivatives are
primarily forward foreign exchange contracts. The Company's forward foreign
exchange contracts have been designated as economic hedges of anticipated sales
and purchase transactions. In addition, the Company enters utilizes forward
foreign exchange contracts as an economic hedge against foreign currency market
F-17
EUROPEAN MICRO HOLDINGS, INC.
exposures of underlying assets liabilities and other obligations. Effective in
the first quarter of fiscal 2001, changes in the fair value of these
derivatives, have been recorded through earnings. At September 30, 2000, the
Company did not have any open forward foreign exchange contracts. Foreign
currency losses, net were $151,000 and $242,000 for the three months ended
September 30, 2000 and 1999, respectively. The effect of the adoption of the new
Statements was immaterial.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin 101, "Revenue Recognition in Financial Statements." The effective date
has been deferred with respect to the Company to the fourth fiscal quarter of
2001 pending additional interpretive guidance. The Company is not able to
quantify the impact of SAB 101 at this time. However, there is at least one
issue that could have a material impact on the Company's consolidated condensed
financial statements. For European Micro UK the standard practice is to
recognize revenue on shipment. However, title to the goods is retained until
full payment is received from the customer to perfect the Company's interest in
the goods. Under possible interpretations, European Micro UK would not be able
to recognize revenue until full payment is received. In the transition year,
revenues would be lower as all sales on the net terms not collected by year-end
would not be recognized.
F-18
<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, 2000 and 1999, 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, 2000. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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, 2000 and 1999 and the results of
their operations and their cash flows for each of the years in the three-year
period ended June 30, 2000 in conformity with accounting principles generally
accepted in the United States of America.
/s/ KPMG LLP
Nashville, Tennessee
August 24, 2000, except as to notes 3, 9 and 10, which are as of October 5, 2000
F-19
<PAGE>
EUROPEAN MICRO HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
JUNE 30, 2000 JUNE 30, 1999
-----------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $1,222 $3,168
Restricted Cash 364 379
Trade receivables, net 13,160 14,938
Due from related parties - 1,128
Inventories, net 6,194 7,232
Prepaid expenses 322 402
Income taxes receivable 909 -
Other current assets 765 562
------- -------
TOTAL CURRENT ASSETS 22,936 27,809
Property and equipment, net 3,927 612
Goodwill, net 2,808 1,675
Investments in and advances to unconsolidated subsidiaries 252 503
Other assets 290 -
------- -------
TOTAL ASSETS $30,213 $30,599
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings $11,903 $8,614
Current portion of long-term borrowings 678 -
Trade payables 2,256 3,484
Accrued expenses and other current liabilities 1,882 2,851
Due to related parties 11 633
Income taxes payable - 383
------- -------
TOTAL CURRENT LIABILITIES 16,730 15,965
Long-term borrowings 2,373 23
Other liabilities - 268
TOTAL LIABILITIES $19,103 $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 9,191 8,979
Accumulated other comprehensive loss (550) (312)
Retained earnings 2,420 5,627
------- -------
TOTAL SHAREHOLDERS' EQUITY 11,110 14,343
------- -------
COMMITMENTS, CONTINGENCIES AND SUBSEQUENT EVENTS
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $30,213 $30,599
======= =======
See accompanying notes to consolidated financial statements.
</TABLE>
F-20
<PAGE>
EUROPEAN MICRO HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
---------------------------------------------------
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
SALES:
Net sales $113,124 $116,866 $82,361
Net sales to related parties 2,369 15,340 29,092
-------- -------- -------
Total net sales 115,493 132,206 111,453
-------- -------- -------
COST OF GOODS SOLD:
Cost of goods sold (101,822) (105,876) (68,380)
Cost of goods sold to related parties (2,320) (15,244) (28,678)
--------- --------- --------
Total cost of goods sold (104,142) (121,120) (97,058)
-------- -------- -------
GROSS PROFIT 11,351 11,086 14,395
OPERATING EXPENSES:
Selling, general and administrative
expenses (14,050) (9,151) (7,059)
Expenses attributable to
related parties - - (104)
-------- -------- -------
Total operating expenses (14,050) (9,151) (7,163)
-------- -------- -------
INCOME (LOSS) FROM OPERATIONS (2,699) 1,935 7,232
Interest income 74 147 22
Interest expense (964) (446) (459)
Equity in net (loss) income of
unconsolidated subsidiaries (188) (32) 3
-------- -------- -------
INCOME (LOSS) BEFORE INCOME TAXES (3,777) 1,604 6,798
Income tax (expense) benefit 570 (750) (2,313)
-------- -------- -------
NET INCOME (LOSS) $(3,207) $854 $4,485
======== ======== =======
Net income (loss) per share - basic $(0.64) $0.17 $1.10
======== ======== =======
Net income (loss) per share - diluted $(0.64) $0.17 $1.10
======== ======== =======
See accompanying notes to consolidated financial statements.
</TABLE>
F-21
<PAGE>
<TABLE>
<CAPTION>
EUROPEAN MICRO HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands, except share data)
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, 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
---------------------------------------------------------------------------------------
Comprehensive Income:
Net loss (3,207) (3,207)
Other comprehensive income
for foreign currency
translation adjustment (238) - (238)
------------------ ------------- ----------------
Total comprehensive loss (238) (3,207) (3,445)
Adjustment to accrued offering costs
156 156
Compensation charge in relation to
share options issued to
non-employees 56 56
---------------------------------------------------------------------------------------
Balance at June 30, 2000 4,933,900 $49 $9,191 $(550) $2,420 $11,110
=======================================================================================
See accompanying notes to consolidated financial statements.
</TABLE>
F-22
<PAGE>
EUROPEAN MICRO HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
---------------------------------------------------
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $(3,207) $854 $4,485
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET CASH (USED
IN) PROVIDED BY OPERATING ACTIVITIES
Depreciation and amortization 553 323 192
Amortization expense related to contingent
earn-out provisions 47 112 -
Deferred income taxes (194) (15) (80)
Equity in net loss (income) of
unconsolidated subsidiaries 188 32 (3)
Compensation charge for non-employee stock options 56 202 -
Provision for note receivable impairment 200 - -
CHANGES IN ASSETS AND LIABILITIES, NET OF EFFECTS FROM
ACQUISITIONS
Restricted cash - (379) -
Trade receivables 2,498 (3,034) (2,250)
Due from related parties 1,128 (230) (329)
Inventories 2,955 (5,407) (155)
Prepaid expenses and other current assets 38 1,840 (2,651)
Income taxes receivable (909) - -
Trade payables (2,374) (1,139) (400)
Accrued expenses and other liabilities (1,127) (168) 585
Due to related parties (622) 395 50
Income taxes payable (383) (2,194) 2,202
-------- ------- ------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (1,153) (8,808) 1,646
-------- ------- ------
INVESTING ACTIVITIES:
Purchase of fixed assets (3,407) (155) (596)
Sale of fixed assets 56 7 175
Advances to unconsolidated subsidiaries (150) (350) -
Payment for acquisitions, net of cash acquired (1,834) (720) -
-------- ------- ------
NET CASH USED IN INVESTING ACTIVITIES (5,335) (1,218) (421)
-------- ------- ------
FINANCING ACTIVITIES:
Short-term borrowings, net 2,040 8,614 (3,257)
Proceeds from long-term borrowings 3,485 - -
Repayment of long-term borrowings (785) - -
Dividends paid - - (550)
Issuance of common stock, net - (25) 7,159
Repayment of capital leases (72) (74) 65
-------- ------- ------
NET CASH PROVIDED BY FINANCING ACTIVITIES 4,668 8,515 3,417
-------- ------- ------
Exchange rate changes (126) (333) 82
-------- ------- ------
NET INCREASE (DECREASE) IN CASH (1,946) (1,844) 4,724
Cash at beginning of year 3,168 5,012 288
-------- ------- ------
CASH AT END OF YEAR $1,222 $3,168 $5,012
======== ======= ======
</TABLE>
F-23
<PAGE>
EUROPEAN MICRO HOLDINGS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
NON-CASH INVESTING AND FINANCING ACTIVITIES:
<S> <C> <C> <C>
Fair value of assets acquired $3,314 $4,302 -
Goodwill 1,418 1,731 -
Fair value of liabilities assumed (2,817) (4,103) -
Notes issued for consideration - (1,083) -
-------- ------- ------
Cash paid for acquisitions $1,915 $847 -
Less cash acquired (81) (127) -
-------- ------- ------
Net cash paid for acquisitions $1,834 $720 -
======== ======= ======
Interest paid $532 $513 $478
======== ======= ======
Taxes paid $1,022 $2,637 $191
======== ======= ======
See accompanying notes to consolidated financial statements.
</TABLE>
F-24
<PAGE>
EUROPEAN MICRO HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1 DESCRIPTION OF BUSINESS
On December 23, 1997, European Micro Holdings, Inc. was incorporated and
4,000,000 shares of common stock with a par value of $0.01 per share
were issued. The 4,000,000 shares were issued to the shareholders of
European Micro Plc in exchange for the entire issued share capital of
that company on January 31, 1998. 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:
<TABLE>
<CAPTION>
COMMENCED
COMPANIES INCORPORATED TRADING ACQUIRED
------------------------------------------------------
<S> <C> <C> <C>
European Micro Holdings, Inc. 1997 1998 -
Nor'Easter Micro Inc. 1997 1998 -
European Micro Plc 1991 1992 -
European Micro GmbH 1993 1993 -
European Micro BV 1997 1997 -
Colchester Enterprise Pte. Ltd. 1998 1999 -
Sunbelt (UK) Limited - - October 26, 1998
American Micro Computer Center, Inc. - - July 1, 1999
Engenis.com Ltd. 2000 - -
</TABLE>
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 Germany and Holland. Nor'Easter Micro Inc. has its
operations in Portsmouth, New Hampshire. Colchester Enterprise Pte. Ltd.
has its operations in Singapore. American Micro Computer Center, Inc.
has its operations in Miami, Florida.
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.
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-25
<PAGE>
EUROPEAN MICRO HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 and
freight costs. Selling, general and administrative costs are charged to
expense as incurred.
INVENTORIES
Inventories are stated at the lower of cost or market value. Cost is
determined using the weighted average cost method.
PROPERTY & 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 and leasehold improvements to property under operating 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.
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.
F-26
<PAGE>
EUROPEAN MICRO HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 notional amount of the
Company's foreign exchange contracts at June 30, 2000 and 1999 was
$2,000,000 and $3,225,000, respectively, versus a fair value of
$2,012,000 and $3,159,000, respectively.
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.
The value of stock options granted to non-employees, calculated using
the black scholes option pricing model, are expensed over the vesting
period.
EARNINGS PER SHARE
Basic earnings per share is computed based on the weighted average
shares outstanding, including contingently issuable shares for which all
contingencies have been met, 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.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the
current year presentation.
F-27
<PAGE>
EUROPEAN MICRO HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NEW ACCOUNTING PRONOUNCEMENTS
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. SFAS No. 138
"Accounting for Certain Derivative Instruments and Certain Hedging
Activities", an amendment of FASB No. 135, was issued June 2000. These
statements will be adopted effective July 1, 2000, but will not
materially impact the Company's consolidated financial statements. These
standards establish accounting and reporting standards for derivative
instruments and hedging activities.
REVENUE RECOGNITION
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin 101, "Revenue Recognition in Financial Statements."
The effective date has been deferred with respect to the Company to the
fourth fiscal quarter of 2001 pending additional interpretive guidance.
The Company is not able to quantify the impact of SAB 101 at this time.
However, there is at least one issue that could have a material impact
on the Company's consolidated financial statements. For European Micro
UK the standard practice is to recognize revenue on shipment. However,
title to the goods is retained until full payment is received from the
customer to perfect the Company's interest in the goods. Under possible
interpretations, European Micro UK would not be able to recognize
revenue until full payment is received. In the transition year, revenues
would be lower as all sales on the net terms not collected by year-end
would not be recognized.
3 LIQUIDITY
The Company has suffered operating losses in the current fiscal year.
Ongoing legal costs associated with the litigation related to Big Blue
Europe, the costs associated with the Company's electronic commerce
strategy, increases in general overhead costs, and increased interest
expense due primarily to increased borrowings, coupled with decreasing
sales volumes and gross profit margins, have negatively impacted
operating results. These factors may continue to impact the Company's
operations.
The Company was not in compliance with certain loan agreement financial
covenants during fiscal year 2000. While the Company has obtained
waivers from these covenant violations existing at June 30, 2000, in
most instances the waivers only address the covenant reporting period
ending thereon. Management believes that the Company will be able to
comply with its debt agreements, including financial covenants, during
the fiscal year ending June 30, 2001. However, compliance with these
financial covenants during fiscal 2001 will require improved operating
results compared to fiscal 2000. Management has initiated certain
actions to increase the likelihood of attaining these improved operating
results. Such actions include, among other things, (i) modifying the
terms of certain financial covenants, (ii) entering into the Equity
Credit Line (see note 19), (iii) temporarily suspending activities
related to its electronic commerce strategy until specific funding can
be obtained (see note 12), (iv) obtaining extensions of the due date for
payment of contingent earn-out amounts relating to calendar year 2000
under the American Micro purchase agreement (see note 7), (v) adjusting
staffing levels, and (vi) implementing steps to increase sales volume
and lower inventory levels. No assurances can be given that management's
initiatives will be successful, and loan agreement defaults will not
occur in the future.
Another factor that could negatively impact the Company's liquidity is
the terms of the borrowing arrangements of European Micro Plc. As
disclosed in notes 9 and 10, certain of this subsidiary's borrowing
capacity is subject to termination by the lender at such lender's sole
discretion. Further, the American Micro and Nor-Easter line of credit
facilities and the European Micro Holdings, Inc. term loan contain
subjective acceleration clauses. These factors increase the liquidity
risk to the Company. Management believes that, based on the projected
fiscal year 2001 operating results of the Company and its relationship
with the creditors, that its existing credit arrangements will remain
effective during fiscal 2001.
F-28
<PAGE>
EUROPEAN MICRO HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4 TRADE RECEIVABLES, NET
Trade receivables consist of the following (in thousands):
JUNE 30,
------------------------
2000 1999
---- ----
Total trade receivables $13,229 $15,017
Less: Allowance for doubtful receivables (69) (79)
------- -------
$13,160 $14,938
======= =======
At June 30, 2000, trade receivables are pledged as collateral against
borrowings (see note 9).
A roll forward of the allowance for doubtful trade receivables is as
follows (in thousands):
JUNE 30,
-----------------------------
2000 1999
---- ----
Balance at beginning of year $79 $23
Foreign currency translation adjustment (3) -
Acquisitions 116 11
Provision for bad debt 80 56
Amounts written off (203) (11)
------ -----
Balance at end of year $69 $79
====== =====
5 INVENTORIES
Inventories consist of the following (in thousands):
JUNE 30,
-----------------------------
2000 1999
---- ----
Finished goods and goods for resale $6,818 $7,348
Less: Allowance for inventory obsolescence (624) (116)
------ -----
$6,194 $7,232
====== =====
F-29
<PAGE>
EUROPEAN MICRO HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5 INVENTORIES (CONTINUED)
A roll forward of allowance for obsolescence is as follows (in
thousands):
JUNE 30,
-----------------------------
2000 1999
---- ----
Balance at beginning of year $116 $9
Foreign currency translation adjustments (3) 0
Provision for obsolescence 929 602
Amounts written off (418) (495)
----- -----
Balance at end of year $624 $116
===== =====
6 PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
JUNE 30,
-----------------------------
2000 1999
---- ----
Buildings and leasehold improvements $2,694 $-
Furniture, fixtures and equipment (note 12) 1,866 994
Vehicles and other 447 416
------- -----
5,007 1,410
Less: accumulated depreciation (1,080) (798)
------- -----
NET BOOK VALUE $3,927 $612
======= =====
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 ($2,580,000 at exchange rate on June 30, 2000). The purchase
price was financed in part by a mortgage loan note in the amount of
1,312,000 pounds sterling (see note 10).
At June 30, 2000 and 1999, vehicles with a cost of approximately
$212,000 and $248,000, and accumulated depreciation of approximately
$129,000 and $117,000, respectively, were held under capital leases.
Depreciation expense was $405,000, $267,000 and $192,000 for the years
ended June 30, 2000, 1999, and 1998, respectively.
F-30
<PAGE>
EUROPEAN MICRO HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7 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 $1,423,000 at
exchange rate on June 30, 2000). Of this guaranteed amount,
approximately 360,000 pounds sterling (approximately $545,000 at
exchange rate on June 30, 2000) 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
($364,000 at exchange rate on June 30, 2000) 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, 2000. The note payable and the cash balances
are reflected on the accompanying consolidated balance sheet at June 30,
2000, 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. If the Company elects to pay any portion of the purchase
price in shares of the Company's common stock, then Sunbelt'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 Sunbelt's shareholders. The Company also
entered into employment agreements with the two former shareholders of
Sunbelt. The Company discontinued Sunbelt's 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
was terminated. Also, in July 2000, the employment agreement with the
other former shareholder was 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 resulted from the recalculation of fiscal
year 1998 pretax earnings of Sunbelt, resulting in a reduction of
134,000 pounds sterling ($203,000 at exchange rate on June 30, 2000) to
the guaranteed portion and 32,000 pounds sterling ($48,000 at exchange
rate on June 30, 2000) to the contingent consideration. 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
($81,276 at exchange rate on June 30, 2000). 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 ($288,768 at exchange rate on June 30,
2000).
The unpaid balance of the guaranteed purchase price of 152,656 pounds
sterling ($231,014 at exchange rate on June 30, 2000), and the portion
of the second contingent earn-out payment related to the volume
purchases from the Far-East of 129,758 pounds sterling ($196,363 at
exchange rate on June 30, 2000) is reflected in goodwill, net and
accrued expenses and other current liabilities on the accompanying
consolidated balance sheet at June 30, 2000 as the contingency has been
met. At June 30, 2000 all contingent consideration related to the
Sunbelt acquisition has either been paid or accrued. Goodwill from this
transaction is being amortized on a straight-line basis over 20 years.
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 ($54,000 at exchange rate on June
30, 2000) exceeded the estimated value of net assets acquired by
approximately 85,000 Dutch guilders ($37,000 at exchange rate on June
30, 2000), which is being amortized on a straight-line basis over 20
years. The financial criteria for the period ended June 30, 2000 and
1999 were not met, therefore, the additional consideration was not
accrued or paid.
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
F-31
<PAGE>
EUROPEAN MICRO HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7 GOODWILL (CONTINUED)
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 was 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 former 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
$1,315,000 exceeded the estimated fair market value of net assets
acquired by approximately $817,000, 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 approximately $600,000 was paid in March 2000 and is reflected
in goodwill, net. 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.
The second earn-out payment will be due in monthly principal payments of
$50,000, plus interest at 8% until July 1, 2001 at which time the amount
is due in full subject to financial covenant restrictions. Such payment
will be offset by a $259,000 receivable due from AMCC's previous owners.
The results of operations of the above entities have been included in
the accompanying consolidated financial statements from the respective
dates of acquisition.
The following summarized unaudited pro forma financial information
assumes the acquisition of Sunbelt and AMCC occurred on July 1, 1998 ($
in thousands, except share data):
YEAR ENDED
JUNE 30, 1999
-------------
Total net sales $137,960
Net income $1,149
Earnings per share:
Basic $0.23
Diluted $0.23
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 $1,675
Foreign currency translation adjustment (84)
Purchase accounting adjustments (251)
Additions 1,616
Amortization (148)
------
Balance at end of year $2,808
======
F-32
<PAGE>
EUROPEAN MICRO HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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):
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
--------------------
2000 1999
---- ----
<S> <C> <C>
Cost of investment in and advances to unconsolidated
subsidiaries brought forward $503 $194
Foreign currency translation adjustment (13) (9)
Equity in net loss of unconsolidated subsidiaries (188) (32)
Advance 150 350
Allowance for uncollectable advances (200) -
----- ----
Investment in and advances to unconsolidated
subsidiaries at end of year $252 $503
===== ====
The equity share of loss is based on the results of Big Blue Europe BV. Unaudited earnings data
for Big Blue Europe BV for fiscal years 2000, 1999 and 1998 is set out below (in thousands):
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED
JUNE 30,
-------------------------------------------------
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Net sales $4,219 $4,101 $1,910
Cost of goods sold (3,310) (3,068) (1,394)
------- ------- -------
Gross profit 909 1,033 516
Operating expenses (1,198) (1,133) (507)
------- ------- -------
Income (loss) before income taxes (289) (100) 9
Income tax expense (benefit) 87 (36) 3
------- ------- -------
NET (LOSS) INCOME $(376) $(64) $6
------- ------- -------
Equity in net (loss) income of unconsolidated
subsidiary $(188) $(32) $3
======= ======= =======
</TABLE>
9 SHORT-TERM BORROWINGS
Short-term borrowings consists of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30, 2000 JUNE 30, 1999
------------- -------------
<S> <C> <C>
Bank lines of credit:
European Micro UK Working Capital facility $1,959 $1,581
Nor'Easter Micro facility 975 -
American Micro facility 992 -
------- ------
Total bank lines of credit 3,926 1,581
Receivable financing 7,303 7,033
Other short-term borrowings 674 -
------- ------
Total short-term borrowings $11,903 $8,614
======= ======
</TABLE>
F-33
<PAGE>
EUROPEAN MICRO HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9 SHORT-TERM BORROWINGS (CONTINUED)
European Micro UK has a bank line of credit (the "European Micro UK
Working Capital 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 facility, which is subject to
review in July each year, has been extended to September 2001 and is due
on demand. Maximum borrowing capacity under this facility is 2.0 million
pounds sterling ($3.0 million at exchange rate on June 30, 2000).
Interest is charged at 1.25% over the bank borrowing rate of 6% at June
30, 2000 and 5% at June 30, 1999.
European Micro UK also had a revolving credit agreement (the "European
Micro UK Inventory Facility") secured against general corporate assets.
The facility allowed European Micro UK to borrow up to 3.5 million
pounds sterling ($5.3 million at exchange rate on June 30, 2000) to
assist in the purchase of inventory. At June 30, 2000, no amounts were
outstanding under the agreement. This revolving credit agreement expired
in August 2000. The bank has agreed to extend the credit agreement to
July 1, 2001 in the amount of 2.0 million pounds sterling ($3.0 million
at exchange rate on June 30, 2000). The agreement includes various
financial covenants.
Total combined borrowings under the European Micro UK Working Capital
Facility and the European Micro UK Inventory Facility cannot exceed 2.0
million pounds sterling at any date.
The Company also obtained two lines of credit on October 28, 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 for each
agreement. Each of these lines of credit were to mature on October 28,
2000. Interest accrues at 0.5% over the bank borrowing rate of 9.5% at
June 30, 2000. 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 June 30, 2000, the Company
was not in compliance with certain of the financial covenants in the
agreements.
On October 5, 2000, the Company received a waiver of the covenant
violations for the June 30, 2000 reporting date for the American Micro
and Nor'Easter lines of credit. The Company and the bank terminated the
existing lines of credit and entered into a new borrowing arrangement
whereby each of American Micro and Nor'Easter will have a working
capital line of credit equal to the lesser of (i) $1.5 million or (ii)
the sum of 85% of eligible accounts receivable, plus the lesser of 50%
of eligible inventory or $750,000. Interest will be paid monthly at a
floating rate of 50 basis points over the bank's base rate. The term of
the new arrangements is for one year from the closing date. The new
facilities also require the companies to maintain depository accounts at
the bank, whose daily receipts will be applied against outstanding
borrowings under the lines of credit. As a result, the borrowings are
classified as current liabilities on the Company's consolidated balance
sheet at June 30, 2000. The new facilities also place certain
restrictions on the companies' ability to pay dividends and to make
capital expenditures, among other things, and also include a provision
whereby the lender can declare a default based on subjective criteria.
Collateral under the new credit line facilities consists of a first
priority lien on all assets of American Micro and Nor'Easter. Messrs.
Gallagher and Shields guaranteed the borrowings under these
arrangements. Mr. Shields has pledged personal assets as additional
collateral and has further agreed to maintain certain personal financial
statement liquidity levels. These borrowings are cross-collateralized
and cross-defaulted with borrowings under the $1.5 million term loan to
European Micro Holdings, Inc. discussed in note 10.
F-34
<PAGE>
EUROPEAN MICRO HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9 SHORT-TERM BORROWINGS (CONTINUED)
Receivable financing represents borrowings secured by various trade
receivables of European Micro UK totaling $8.6 million at June 30, 2000
and $8.3 million at June 30, 1999. The accounts receivable financing
provides for a borrowing base of 85% of accounts receivable, with a
limit of 6.2 million pounds sterling ($9.4 million at exchange rate on
June 30, 2000). The limit on trade receivables financing increased from
a maximum of 5.5 million pounds sterling at June 30, 1999 ($8.3 million
at exchange rate on 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 6% at June 30, 2000, and 5% at June 30, 1999.
Other short-term borrowings represent various unsecured notes payable of
American Micro. The maturity dates of the notes range from on demand to
June 30, 2001. The interest rates range from 11% to 12%.
10 LONG-TERM BORROWINGS
Long-term borrowings consists of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30, 2000 JUNE 30, 1999
------------- -------------
<S> <C> <C>
Mortgage loan note $1,877 $-
Term loan 1,125 -
Other long-term borrowings 49 23
------ ----
$3,051 $23
Less current maturities of long-term borrowings (678) -
------ ----
Total long-term borrowings $2,373 $23
====== ====
</TABLE>
Principal maturities of long-term debt (excluding capitalized lease
obligations) at June 30, 2000 for the succeeding five fiscal years are
as follows (in thousands):
2001 $678
2002 678
2003 296
2004 184
2005 197
Thereafter 1,018
European Micro UK purchased the office building in which it had
previously leased space for a purchase price of 1,705,000 pounds
sterling ($2,580,000 at exchange rate on June 30, 2000). The purchase
price was financed in part by a mortgage loan note in the amount of
1,312,000 pounds sterling ($1,985,000 at exchange rate on June 30,
2000). This mortgage loan note bears interest at a fixed rate of 7.6%,
calls for monthly payments of principal and interest in the amount of
15,588 pounds sterling ($23,589 at exchange rate on June 30, 2000), and
matures in July 2009. The mortgage loan note 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 financial covenants are measured using the
financial results of European Micro UK as of each fiscal year end. Based
upon European Micro UK's fiscal year end operating results, European
Micro UK was out of compliance with certain of the covenant requirements
at June 30, 2000. The Company has obtained a waiver through July 1, 2001
of this non-compliance.
F-35
<PAGE>
EUROPEAN MICRO HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10 LONG-TERM BORROWINGS (CONTINUED)
The term loan was obtained by European Micro Holdings on October 28,
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 June 30, 2000 was 6.7%. 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
addition, Mr. Shields has pledged personal assets as additional
collateral and has further agreed to maintain certain personal financial
statement liquidity levels. 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 is with the same lender as the Nor'Easter Micro
and American Micro line of credit facilities discussed in Note 9, and is
cross-collateralized and cross-defaulted with these line of credit
facilities. The agreement also contains a provision whereby the lender
can declare a default based on subjective criteria. Further, the term
loan credit agreement contains loan covenant requirements. The Company
was not in compliance with certain financial covenants for the June 30,
2000 reporting period. On October 5, 2000 the Company received a waiver
of the non-compliance with the financial covenants as of June 30, 2000.
The Company also entered into an amendment to the term loan agreement
which among other things, established revised financial covenants.
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.
11 TAXES ON INCOME
Income tax expense (benefit) consists of the following (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
------------------------------------------
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Current
Federal and State $ - $ - $ -
Foreign (376) 765 2,393
Deferred
Federal and State - - -
Foreign (194) (15) (80)
------ ------ -------
Total income tax expense (benefit) $(570) $750 $2,313
====== ====== =======
</TABLE>
Provision has not been made for U.S. or additional foreign taxes on
approximately $3,672,000, $5,613,000, and $4,652,000 at June 30, 2000,
1999, and 1998 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):
F-36
<PAGE>
EUROPEAN MICRO HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11 TAXES ON INCOME (CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
------------------------------------------
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
US federal statutory rate on earnings (loss)
before income taxes $(1,284) $545 $2,311
State income tax (67) - -
Difference in foreign versus U.S. federal
income tax rate 51 43 (204)
Change in valuation allowance 896 74 -
Foreign non -deductible expenses (166) 88 206
------- ---- ------
Income tax expense (benefit) $(570) $750 $2,313
======= ==== ======
</TABLE>
Sources of deferred tax assets are as follows (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
----------------------------
2000 1999
---- ----
<S> <C> <C>
DEFERRED TAX ASSETS:
Property and equipment, principally due to
differences in depreciation $ 9 $ 42
Net operating loss carry forwards 949 64
Other 247 9
----- -----
Total gross deferred tax assets 1,205 115
Valuation allowance (970) (74)
----- -----
Net deferred tax assets $ 235 $ 41
===== =====
</TABLE>
The Company has U.S. federal net operating loss carryforwards of
approximately $948,000, 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, which increased in fiscal year 2000 by $896,000, has been
provided for U.S. deferred tax assets as recoverability is not deemed
to be more likely than not.
12 BUSINESS TO BUSINESS ELECTRONIC COMMERCE STRATEGY
The Company has initiated a business to business electronic commerce
strategy, which is focused on creating a global, value-added,
information technology equipment and service trading community. The
company has hired Cap Gemini, a leading European management consultancy
and information technology services firm, to assist it in the
implementation of this plan. The Company has incurred the sum of
755,000 pounds sterling ($1,143,000 at exchange rate on June 30, 2000),
related to the feasibility studies and business process design. This
amount is reflected in selling, general and administrative expenses on
the accompanying consolidated statements of operations for the year
ended June 30, 2000. The Company has capitalized the sum of 229,000
pounds sterling ($347,000 at exchange rate on June 30, 2000), related
to the actual software development. This amount is reflected in
property and equipment, net on the accompanying consolidated balance
sheet at June 30, 2000. During May 2000, the Company temporarily
F-37
<PAGE>
EUROPEAN MICRO HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12 BUSINESS TO BUSINESS ELECTRONIC COMMERCE STRATEGY (CONTINUED)
halted the ongoing development being performed by Cap Gemini until
specific funding is obtained to complete the project. There can be no
assurances that the Company will be successful in obtaining funding for
this project. In the event the project is not continued by November 30,
2000, the Company will incur a termination fee to Cap Gemini of 150,000
pounds sterling ($226,995 at exchange rate on June 30, 2000). If paid,
this fee would be credited against future invoices of Cap Gemini upon
the continuation of the project. During the last calendar quarter of
2000, the Company will re-evaluate and re-define, where necessary, the
current assumptions and propositions, based on changes in the market
over the last few months. This planning will include detailing the
project based on the Company's ability to fund the project from current
working capital, if other funding is still not available.
13 COMMITMENTS AND CONTINGENCIES
On November 12, 1999, Jeffrey and Marie Alnwick (the "Alnwicks") and a
New York corporation, Big Blue Products, commenced an action
individually and derivatively for the Dutch company, Big Blue Europe,
against the Company and its founders and officers, John B. Gallagher
and Harry D. Shields in the United States District Court, Eastern
District of New York, Jeffrey Alnwick and Marie Alnwick v. European
Micro Holdings, Inc., Eastern District of New York, Docket No. 99 CV
7380 (the "Alnwick Litigation").
The complaint alleges thirty-three causes of action. Plaintiffs claim,
in substance, that defendants breached oral and written agreements
relating to the management, operation and funding of Big Blue Europe.
Specifically, plaintiffs allege that defendants breached the joint
venture agreement by which Big Blue Europe was formed, a licensing
agreement for use of the "Big Blue" service mark in Europe, a
non-competition agreement preventing Big Blue Europe from operating in
the United States and several capital contribution agreements.
Plaintiffs also claim that defendants breached their fiduciary duties
to the Alnwicks, engaged in fraudulent acts, aided and abetted breaches
of fiduciary duties by others, misappropriated trade secrets and
interfered with the employment contract of Big Blue Europe's managing
director. The complaint seeks unspecified compensatory and punitive
damages, as well as injunctive relief restraining defendants from
acting in violation of the alleged agreements.
Defendants have moved to dismiss the complaint principally on the basis
of forum non-conveniens in favor of existing proceedings in the
Netherlands (commenced by European Micro UK), where a Dutch court has
appointed an independent director to oversee operations of the company.
Defendants argue that any dispute between the shareholders and
directors of the Dutch company, Big Blue Europe, which operates
pursuant to Dutch law, should be resolved by a Dutch court.
The Company and its affiliated defendants intend to contest the claims
in the Alnwick Litigation vigorously, whether asserted in the United
States or in the Netherlands courts. For the year ended June 30, 2000,
the company has incurred approximately $800,000 in costs related to
such lawsuit. Management does not believe that the ultimate outcome of
this litigation will result in a material liability to the Company.
Due to the uncertainty of the outcome of the pending lawsuit and the
difficulties of managing the operations of Big Blue Europe BV during
dispute, the Company has recorded an allowance of $200,000 against
notes receivable totaling $500,000.
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, 2000 in aggregate for each of the five succeeding years
is as follows (in thousands):
F-38
<PAGE>
EUROPEAN MICRO HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13 COMMITMENTS AND CONTINGENCIES (CONTINUED)
CAPITAL OPERATING
------- ---------
2001 $34 $347
2002 22 276
2003 - 200
2004 - 152
2005 - 128
Thereafter - 150
----- ------
Total minimum lease payments $56 $1,253
===== ======
Less amount representing interest at
rates Ranging from 4.4% to 5.1% (7)
-----
Present value of net minimum capital lease
payments 49
Current portion, included in accrued expenses
and other current liabilities (30)
-----
Total obligations under capital leases
excluding current portion $19
=====
Rental expense for the years ended June 30, 2000, 1999 and 1998 was
$260,000, $180,000, and $136,000, respectively.
14 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, 2000
(Receive $US / pay(pound)) July 19, 2000
Contract amount $2,000 $2,012
Average contractual
exchange rate 1.5045 $US /(pound)1
F-39
<PAGE>
EUROPEAN MICRO HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14 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 $325,000, $579,000 and $510,000 for
years ending June 30, 2000, 1999 and 1998, respectively.
15 RELATED PARTY INFORMATION
Until July 1, 1999, European Micro Holdings, Inc. belonged to a group
of related companies (the "Group"). The Group was 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 7. Technology Express is owned
and controlled by Harry D. Shields, who is Co-President and Co-Chairman
of the Company. Prior to its acquisition on July 1, 1999, AMCC was
owned 50% by John B. Gallagher, who is a Co-President and Co-Chairman
of the Company.
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):
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
--------------------------------------------
<S> <C> <C> <C>
2000 1999 1998
---- ---- ----
SALES
American Micro Computer Center $ - $7,356 $9,875
Technology Express 2,369 7,984 19,217
-------- ------- -------
$2,369 $15,340 $29,092
======== ======= =======
PURCHASES
American Micro Computer Center $ - $1,339 $507
Technology Express 3,986 15,559 8,749
-------- ------- -------
$3,986 $16,898 $9,256
======== ======= =======
OPERATING EXPENSES
CONSULTANCY FEES
American Micro Computer Center $ - $ - $45
Technology Express - - 45
-------- ------ -------
- - 90
======== ====== =======
MANAGEMENT FEES
Technology Express - - 14
-------- ------ -------
$ - $ - $104
======== ====== =======
</TABLE>
F-40
<PAGE>
EUROPEAN MICRO HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15 RELATED PARTY INFORMATION (CONTINUED)
DUE FROM/TO RELATED PARTIES
a) Due from related parties consists of the following (in thousands):
JUNE 30,
--------------------------------
2000 1999
---- ----
American Micro Computer Center $ - $974
Technology Express - 154
------- -------
$ - $1,128
b) Due to related parties consists of following (in thousands):
JUNE 30,
--------------------------------
2000 1999
---- ----
American Micro Computer Center $ - $ 3
Technology Express 11 630
------- -------
$ 11 $ 633
======= =======
FACILITIES AND EQUIPMENT
The Company utilizes approximately 350 square feet of office space and
certain equipment owned by Technology Express for which it is not
charged a fee.
EMPLOYMENT AGREEMENTS
The Company has entered into various employment agreements with certain
officers of the Company
NATURE OF RELATED PARTY RELATIONSHIPS
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 7. 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
F-41
<PAGE>
EUROPEAN MICRO HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15 RELATED PARTY INFORMATION (CONTINUED)
Holdings, Inc., has been an employee of Technology Express since 1992.
16 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):
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
---------------------------------------------------------------
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
NET SALES:
North America $ 38,560 $ 48,994 $ 3,559
Europe 65,822 70,262 107,894
Other 11,111 12,950 -
-----------------------------------------------------------
Total $ 115,493 $ 132,206 $ 111,453
-----------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS:
North America $ (1,835) $ (1,293) $ (212)
Europe (723) 3,340 7,444
Other (141) (112) -
-----------------------------------------------------------
Total $ (2,699) $ 1,935 $ 7,232
-----------------------------------------------------------
IDENTIFIABLE ASSETS:
North America $ 8,402 $ 10,594 $ 8,645
Europe 20,701 19,334 10,559
Other 1,110 671 -
-----------------------------------------------------------
Total $ 30,213 $ 30,599 $ 19,204
-----------------------------------------------------------
The following table summarizes purchases from major suppliers in excess of 10% for the period as a
percentage of total purchases:
</TABLE>
YEARS ENDED JUNE 30,
-------------------------------------------
2000 1999 1998
---- ---- ----
RELATED PARTY
Technology Express - 12.7% -
THIRD PARTIES
Supplier A - 10.3% 38.9%
B - - 14.0%
C - - 10.0%
D - 10.9% -
F-42
<PAGE>
EUROPEAN MICRO HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16 SEGMENT INFORMATION (CONTINUED)
The Company did not have any suppliers where purchases were in excess
of 10% as a percentage of total sales in the years ended June 30, 2000.
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,
-------------------------------------------
2000 1999 1998
---- ---- ----
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, 2000 or 1999.
17 EARNINGS PER SHARE
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-----------------------------------------------
EARNINGS 2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Net income (loss) (in thousands) $(3,207) $854 $4,485
======== ========= ==========
WEIGHTED AVERAGE NUMBER OF SHARES
Outstanding common stock during the period 4,933,900 4,933,900 4,066,524
Contingently issuable shares 74,251 44,714 -
--------- --------- ---------
BASIC WEIGHTED AVERAGE NUMBER OF SHARES 5,008,151 4,978,614 4,066,524
Effect of dilutive stock options and other
contingent shares - 11,347 20,942
--------- --------- ---------
DILUTED WEIGHTED AVERAGE NUMBER OF SHARES 5,008,151 4,989,961 4,087,466
========= ========= =========
Basic earnings per share $(0.64) $0.17 $1.10
========= ========= =========
Diluted earning per share $(0.64) $0.17 $1.10
========= ========= =========
During the year-ended June 30, 2000, the Company issued options to purchase 20,000 shares of its
common stock at exercise prices ranging from $7.50 to $9.25. The above dilutive earnings per share
calculations exclude the effect of options to purchase 330,500 and 45,000 for the years ended June
30, 2000 and 1999, respectively, shares of common stock at exercise prices ranging from $7.50 to
$12.00 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 second contingent earn-out has been included in the above basic earnings per share
calculations. The effect of contingent shares related to the first earn-out of American Micro is not
included, as such payment was paid in cash in March 2000. The effect of contingent shares related to
second earn-out of American Micro is not included, as the amount of such contingent shares to be
issued is unable to be determined. See note 19.
</TABLE>
F-43
<PAGE>
EUROPEAN MICRO HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18 STOCKHOLDERS' EQUITY, STOCK OPTIONS AND INCENTIVE PLANS
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, 2000.
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 2000 and 1999 were $7.76 and $8.09, 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, 2000 and 1999, respectively: (1) risk-free interest rates of
5.5% to 6.2% and 4.7%; (2) dividend yield of 0.0%; (3) expected lives
of 7 years; and (4) volatility of 128% and 84%. 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):
YEARS ENDED JUNE 30,
------------------------------
2000 1999 1998
---- ---- ----
NET INCOME:
As reported $(3,207) $854 $4,485
Pro forma $(3,551) $466 $4,431
EARNINGS PER SHARE - BASIC:
As reported $(0.64) $0.17 $1.10
Pro forma $(0.71) $0.09 $1.09
EARNINGS PER SHARE - DILUTED:
As reported $(0.64) $0.17 $1.10
Pro forma $(0.71) $0.09 $1.08
Compensation cost arising during the year ended June 30, 2000 and June
30, 1999 in relation to stock options granted to non-employees during
the year amounted to $56,000 and $202,000, respectively. The vesting
period for stock options granted to non-employees varies between 1 and
6 years.
F-44
<PAGE>
<TABLE>
<CAPTION>
EUROPEAN MICRO HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18 STOCKHOLDERS' EQUITY, STOCK OPTIONS AND INCENTIVE PLANS (CONTINUED)
A summary of the Company's stock option plan is as follows:
2000 1999 1998
---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
WEIGHTED WEIGHTED WEIGHTED
NUMBER AVERAGE NUMBER AVERAGE NUMBER AVERAGE
OF EXERCISE OF EXERCISE OF EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
Outstanding at beginning of year 339,000 $10.07 294,000 $10.00 -
Granted 20,000 $8.38 45,000 $10.51 294,000 $10.00
Exercised - - -
Forfeited 28,500 $10.21 - -
------- ------- -------
OUTSTANDING AT YEAR END 330,500 $9.95 339,000 $10.07 294,000 $10.00
Available for grant at year end 169,500 161,000 206,000
</TABLE>
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
A summary of the options outstanding at June 30, 2000 is presented below:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-----------------------------------------------------------------------------------------------------------------
NUMBER WEIGHTED WEIGHTED NO. WEIGHTED
RANGE OF EXERCISE OUTSTANDING AT AVERAGE AVERAGE EXERCISABLE AVERAGE
PRICES 6/30/00 REMAINING LIFE EXERCISE PRICE AT 6/30/00 EXERCISE PRICE
<S> <C> <C> <C> <C> <C>
$7.50 - $12.00 330,500 8.11 $9.95 60,000 $10.19
19 SUBSEQUENT EVENTS
On August 24, 2000, European Micro Holdings, Inc. entered into an Equity Line of Credit (the "Equity Credit
Line"). Pursuant to the Equity Credit Line, an institutional investor agreed to acquire up to $20 million of the
Company's common stock at a purchase price equal to 88% of the market price of such stock, as defined in the
agreement. The timing of each sale and the number of shares to be sold is at the discretion of the Company,
subject to various conditions, including shareholder approval and an effective registration of the shares. The
dollar amount that the Company can request under any individual sale is subject to the average trading volume of
the Company's common stock for the preceding 25-day trading period. The maximum term of the Equity Credit Line is
30 months from the date of the agreement. The agreement contains various representations, warranties and
covenants by the Company, including limitations on the Company's ability to sell common stock or common stock
equivalents, sell assets, merge, etc.
In connection with entering into the Equity Credit Line, the Company also entered into a Placement Agent
Agreement. Under the Placement Agent Agreement, the agent will receive a commission equal to 7% of the gross
proceeds from each advance under the Equity Credit Line.
</TABLE>
F-45
<PAGE>
EUROPEAN MICRO HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19 SUBSEQUENT EVENTS (CONTINUED)
The Company has issued to the placement agent two warrants to purchase
a total of 1,000,000 shares of the Company's common stock. The Class A
Warrant allows the holder to purchase 500,000 shares of common stock at
an exercise price of $7.00 (subject to certain anti-dilution
adjustments) commencing with the first advance under the Equity Credit
Line. If the warrant shares are not covered by an effective
registration statement for the resale of the warrant shares, the holder
can elect a cash-less exercise provision. The warrants expire five
years from the issuance date. The Company can force conversion of the
warrants if the closing price of its common stock is $10.00 or higher
for ten consecutive trading days. The Class B Warrant allows the holder
to purchase 500,000 shares of common stock at an exercise price of
$10.00 (subject to similar anti-dilution adjustments). The other terms
of the Class B Warrant are similar to the Class A Warrant, except that
the Class B Warrants are exercisable pro-rate to the ratio of the
advances drawn under the Equity Credit Line, and except that the
Company can force conversion of the warrants if the closing price of
its common stock is $15.00 or higher for ten consecutive trading days.
The Company has granted the Equity Credit Line investor and the
placement agent certain registration rights. Pursuant to the
registration rights agreements, the Company is obligated to, among
other things, register the sale of the investors shares sold to such
investor under the Equity Credit Line and the sale of shares of common
stock underlying the warrants.
On August 8, 2000, the Company entered into a consulting arrangement
with a third party whereby such party would provide certain financing
and capital market consultation. In connection with the arrangement,
the Company will pay to the consultant $10,000 in cash compensation.
The Company also issued to the consultant options to purchase 100,000
shares of its common stock at an exercise price of $4.55. The
expiration date of the options is August 8, 2010. All options vested on
the closing of the Equity Line of Credit agreement. The consultant
agreed not to exercise any options during the first twelve months
following the grant date. In addition, the Company will pay to the
consultant a cash payment and warrants to purchase common shares of the
Company. Each cash and warrant payment will equal 1% of the dollars
amounts drawn by the Company under the Equity Credit Line.
F-46
<PAGE>
WE HAVE NOT AUTHORIZED ANY DEALER,
SALESPERSON OR OTHER PERSON TO PROVIDE
ANY INFORMATION OR MAKE ANY
REPRESENTATIONS ABOUT EUROPEAN MICRO
HOLDINGS, INC. EXCEPT THE INFORMATION OR
REPRESENTATIONS CONTAINED IN THIS
PROSPECTUS. YOU SHOULD NOT RELY ON ANY
ADDITIONAL INFORMATION OR
REPRESENTATIONS IF MADE.
This prospectus does not constitute an ------------------
offer to sell, or a solicitation of an
offer to buy any securities: PROSPECTUS
o except the common stock offered by ------------------
this prospectus;
o in any jurisdiction in which the
offer or solicitation is not
authorized; 7,958,333 SHARES OF COMMON STOCK
o in any jurisdiction where the
dealer or other salesperson is not
qualified to make the offer or
solicitation;
o to any person to whom it is
unlawful to make the offer or
solicitation; or
o to any person who is not a United
States resident or who is outside
the jurisdiction of the United
States. __________, 2000
The delivery of this prospectus or any
accompanying sale does not imply that:
o there have been no changes in the
affairs of European Micro Holdings,
Inc. after the date of this
prospectus; or
o the information contained in this
prospectus is correct after the
date of this prospectus.
I-1
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth estimated expenses expected to be
incurred in connection with the issuance and distribution of the securities
being registered.
Securities and Exchange Commission Registration Fee.... $9,742
Printing and Engraving Expenses........................ $7,500
Accounting Fees and Expenses........................... 30,000
Legal Fees and Expenses................................ 25,258
Blue Sky Qualification Fees and Expenses............... $2,500
Total.............................................. $75,000
All amounts except the Securities and Exchange Commission Registration
Fee are estimated. No portion of the expenses associated with this offering will
be borne by the selling stockholders.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Pursuant to indemnification agreements entered into with each of the
directors, our company has agreed to indemnify each director, to the fullest
extent permitted by law, from and against any and all claims of any type arising
from or related to his past or future acts or omissions as a director or officer
of our company and any of our subsidiaries. In addition, our company has agreed
to advance all expenses of each director as they are incurred and in advance of
the final disposition of any claim.
Pursuant to our Articles of Incorporation, our company is obligated to
indemnify each of our directors and officers to the fullest extent permitted by
law with respect to all liability and loss suffered, and reasonable expense
incurred, by such person in any action, suit or proceeding in which such person
was or is made or threatened to be made a party or is otherwise involved by
reason of the fact that such person is or was a director or officer of our
company. The Articles of Incorporation further eliminate the personal liability
of a director or an officer to our company or to any of our stockholders for
monetary damage for a breach of fiduciary duty as a director or an officer,
except for: (i) acts or omissions which involve intentional misconduct, fraud or
a knowing violation of law; or (ii) the payment of distributions in violation of
Section 78.300 of Nevada Revised Statutes ("NRS"). We are also obligated to pay
the reasonable expenses of indemnified directors or officers in defending such
proceedings if the indemnified party agrees to repay all amounts advanced should
it be ultimately determined that such person is not entitled to indemnification.
We also maintain an insurance policy covering directors and officers
under which the insurer agrees to pay, subject to certain exclusions, for any
claim made against the directors and officers of our company for a wrongful act
for which they may become legally obligated to pay or for which we are required
to indemnify our directors and officers.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
On January 31, 1998, our company issued an aggregate of 4,000,000
shares of common stock to John B. Gallagher (1,900,000 shares), Harry D. Shields
(1,602,696 shares), Thomas H. Minkoff, as Trustee of the Gallagher Family Trust
(100,000) and Stuart S. Southard and Robert H, True, Trustees of the 1997 Henry
Daniel Shields Irrevocable Educational Trust (397,304) in exchange for all of
their shares of ordinary stock of European Micro UK. This transaction was exempt
from registration under Section 4(2) and Rule 506 of the Securities Act of 1933.
All stockholders were accredited investors within the meaning of the Securities
Act of 1933.
On August 23, 2000, we granted options to purchase 100,000 shares of
common stock at a purchase price of $4.55 per share to the Persia Consulting
II-1
<PAGE>
Group for assisting us in obtaining the equity line of credit. Persia Consulting
is also entitled to warrants to purchase one percent of the total number of
shares of common stock issued under the equity line of credit. One-half of these
warrants will have an exercise price of $7.00 per share and one-half will have
an exercise price of $10.00 per share. No options or warrants have been
exercised as of the date hereof.
Pursuant to the equity line of credit, we may, at our discretion,
periodically issue and sell to Spinneret Financial System, Ltd. shares of common
stock for a total purchase price of $20 million. Spinneret Financial will
purchase each share of common stock issued to them for 88% of the market price.
Spinneret Financial intends to resell any shares purchased under the equity line
of credit at the market price. In connection with this transaction, our company
granted to May Davis Group, Inc. warrants to purchase 500,000 share of common
stock at an exercise price of $7.00 per share and 500,000 shares of common stock
at an exercise price of $10.00 per share. Subsequently, the May Davis Group
transferred these warrants to Mark Angelo, Hunter Singer, Joseph Donahue, Robert
Farrell and the Persia Consulting Group. No shares of common stock and no
warrants have been exercised as of the date hereof.
In October 2000, we entered into a consulting agreement under which we
are obligated to grant to a consultant warrants to purchase 50,000 shares of
common stock at an exercise price of $4.00 per share. Warrants to purchase
25,000 shares become exercisable when the closing bid price of our company's
common stock is $10.00 per share or higher for twelve consecutive trading days
in the eight month period after the effective date of the accompanying
registration statement. Warrants to purchase the remaining 25,000 shares become
exercisable upon the later of the successful consummation of (a) a financing
transaction or (b) an acquisition, as specified in the consulting agreement.
All of the above transactions were exempt from registration under
Section 4(2) and Rule 506 of the Securities Act of 1933. All investors were, in
our reasonable belief, accredited investors within the meaning of the Securities
Act of 1933.
This prospectus relates to, among other things, the shares of common
stock to be issued under the equity line of credit and upon the exercise of the
options and warrants issued in connection therewith.
II-2
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) The following exhibits are filed as part of this registration
statement:
<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
1998 the quarter 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.
2.05 Amendment to Merger Agreement re: AMCC dated Incorporated by reference to Exhibit 2.05
October 2, 2000 to Registrant's Registration Statement on
Form S-1 filed with the SEC on October 27,
2000.
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.
5.01 Opinion re: Legality Incorporated by reference to Exhibit No.
5.01 to the Registration Statement on Form
S-1 filed with the SEC on October 27, 2000
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.
II-3
<PAGE>
EXHIBIT
-------
NO. DESCRIPTION LOCATION
--- ----------- --------
10.03 Commercial Credit Insurance, policy number 60322, Incorporated by reference to Exhibit No.
with Hermes Kreditversicherungs-AG dated August 1, 10.03 to the Registration Statement.
1995
10.04 Commercial Credit Insurance, policy number 82692, Incorporated by reference to Exhibit No.
with Hermes Kreditversicherungs-AG dated August 1, 10.04 to the Registration Statement.
1995
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 Stockholders' 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 Stockholders 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 Exhibit No.
Gilbert and European Micro UK dated March 14, 1998 10.11 to the Registration Statement.
10.11 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
10.12 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
10.13 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
10.14 Form of Indemnification Agreements with officers Incorporated by reference to Exhibit No.
and directors 10.16 to the Registration Statement.
10.15 Form of Transfer Agent Agreement with Chase Mellon Incorporated by reference to Exhibit No.
Stockholder Services, L.L.C. 10.17 to the Registration Statement.
II-4
<PAGE>
EXHIBIT
-------
NO. DESCRIPTION LOCATION
--- ----------- --------
10.16 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 SEC on September 28, 1998.
10.17 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.
10.18 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.
10.19 Revolving Loan Agreement dated October 5, 2000 Incorporated by reference to Exhibit 10.19
between American Micro and SouthTrust Bank re: to Registrant's Form 10-K for the year
Line of Credit to American Micro ended June 30, 2000.
10.20 First Amendment to Loan Agreement dated October 5, Incorporated by reference to Exhibit 10.20
2000 among the Company, American Micro, Nor'Easter to Registrant's Form 10-K for the year
and SouthTrust Bank, N.A. re: Term Loan to the ended June 30, 2000.
Company
10.21 Revolving Loan Agreement dated October 5, 2000 Incorporated by reference to Exhibit 10.21
between Nor'Easter and SouthTrust Bank re: Line to Registrant's Form 10-K for the year
of Credit to Nor'Easter ended June 30, 2000.
10.22 Loan Agreement dated October 28, 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.
10.23 Security Agreement dated October 5, 2000 between Incorporated by reference to Exhibit 10.23
Nor'Easter and SouthTrust Bank to Registrant's Form 10-K for the year
ended June 30, 2000.
10.24 Security Agreement dated October 5, 2000 between Incorporated by reference to Exhibit 10.24
American Micro and SouthTrust Bank to Registrant's Form 10-K for the year
ended June 30, 2000.
10.25 Line of Credit Note given by Nor'Easter to Incorporated by reference to Exhibit 10.25
SouthTrust Bank to Registrant's Form 10-K for the year
ended June 30, 2000.
10.26 Line of Credit Note given by American Micro to Incorporated by reference to Exhibit 10.26
SouthTrust Bank to Registrant's Form 10-K for the year
ended June 30, 2000.
10.27 Unconditional Guaranty given by Harry Shields to Incorporated by reference to Exhibit 10.27
SouthTrust Bank Re: American Micro to Registrant's Form 10-K for the year
ended June 30, 2000.
10.28 Unconditional Guaranty given by John Gallagher to Incorporated by reference to Exhibit 10.28
SouthTrust Bank Re: American Micro to Registrant's Form 10-K for the year
ended June 30, 2000.
10.29 Amended and Restated Unlimited Guaranty Incorporated by reference to Exhibit 10.29
Agreement dated October 5, 2000 between Harry to Registrant's Form 10-K for the year
Shields and SouthTrust Bank ended June 30, 2000.
II-5
<PAGE>
EXHIBIT
-------
NO. DESCRIPTION LOCATION
--- ----------- --------
10.30 Amended and Restated Unlimited Guaranty Incorporated by reference to Exhibit 10.30
Agreement dated October 5, 2000 between John to Registrant's Form 10-K for the year
Gallagher and SouthTrust Bank ended June 30, 2000.
10.31 Unconditional Guaranty given by John Gallagher to Incorporated by reference to Exhibit 10.31
SouthTrust Bank Re: Nor'Easter to Registrant's Form 10-K for the year
ended June 30, 2000.
10.32 Unconditional Guaranty given by Harry Shields to Incorporated by reference to Exhibit 10.32
SouthTrust Bank Re: Nor'Easter to Registrant's Form 10-K for the year
ended June 30, 2000.
10.33 Specific Agreement for the Provision of Incorporated by reference to Exhibit 10.25
Professional Services dated as of March 17, 2000 to Registrant's Form 10-Q for the quarter
between the Company and Cap Gemini UK Plc ended March 31, 2000.
10.34 Equity Line of Credit Agreement dated as of August Incorporated by reference to Exhibit 10.34
24, 2000, between the Company and Spinneret to Registrant's Form 10-K for the year
Financial System, Ltd. ended June 30, 2000.
10.35 Registration Rights Agreement dated as of August Incorporated by reference to Exhibit 10.35
24, 2000, between the Company and Spinneret to Registrant's Form 10-K for the year
Financial System, Ltd. ended June 30, 2000.
10.36 Warrant to Purchase Common Stock dated as of Incorporated by reference to Exhibit 10.36
August 24, 2000, given by the Company to Spinneret to Registrant's Form 10-K for the year
Financial System, Ltd. ended June 30, 2000.
10.37 Warrant to Purchase Common Stock dated as of Incorporated by reference to Exhibit 10.37
August 24, 2000, given by the Company to the May to Registrant's Form 10-K for the year
Davis Group, Inc. ended June 30, 2000.
10.38 Registration Rights Agreement dated as of August Incorporated by reference to Exhibit 10.38
24, 2000, between the Company and the May Davis to Registrant's Form 10-K for the year
Group, Inc. ended June 30, 2000.
10.39 Placement Agent Agreement dated as of August 24, Incorporated by reference to Exhibit 10.39
2000, between the Company and the May Davis to Registrant's Form 10-K for the year
Group, Inc. ended June 30, 2000.
11.01 Statement re: Computation of Earnings Incorporated by reference to Exhibit 11.01
to Registrant's Registration Statement
on Form S-1 filed with the SEC on October 27,
2000.
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.
21.01 Subsidiaries of the Registrant Incorporated by reference to Exhibit 21.01
to Registrant's Registration Statement on
Form S-1 filed with the SEC on October 27,
2000.
22.01 Published Report Regarding Matters Submitted to Not applicable.
Vote of Security Holders
23.01 Consent of KPMG LLP Provided herewith.
II-6
<PAGE>
EXHIBIT
-------
NO. DESCRIPTION LOCATION
--- ----------- --------
23.02 Consent of Kirkpatrick & Lockhart LLP Incorporated by reference to Exhibit 23.02
to Registrant's Registration Statement on
Form S-1 filed with the SEC on October 27,
2000.
24.01 Power of Attorney Incorporated by reference to Exhibit 24.01
to Registrant's Registration Statement on
Form S-1 filed with the SEC on October 27,
2000.
27.01 Financial Data Schedule Provided herewith.
</TABLE>
ITEM 28. UNDERTAKINGS
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in
the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement;
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement;"
(2) That, for the purpose of determining any liability under
the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall
be deemed to be the initial BONA FIDE offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at
the termination of the offering.
(4) If the registrant is a foreign private issuer, to file a
post-effective amendment to the registration statement to include any
financial statements required by Rule 3-19 of this chapter at the start
of any delayed offering or throughout a continuous offering. Financial
statements and information otherwise required by Section 10(a)(3) of
the Act need not be furnished, PROVIDED, that the registrant includes
in the prospectus, by means of a post-effective amendment, financial
statements required pursuant to this paragraph (a)(4) and other
information necessary to ensure that all other information in the
prospectus is at least as current as the date of those financial
statements. Notwithstanding the foregoing, with respect to registration
statements on Form F-3, a post-effective amendment need not be filed to
include financial statements an information required by Section
10(a)(3) of the Act or Rule 3-19 of this chapter if such financial
statements and information are contained in periodic reports filed with
or furnished to the Commission by the registrant pursuant to Section 13
or Section 15(d) of the Securities Exchange Act of 1934 that are
incorporated by reference in the Form F-3.
II-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Registration Statement to be signed on our
behalf by the undersigned, thereunto duly authorized, in Miami, Florida on
November 29, 2000.
EUROPEAN MICRO HOLDINGS, INC.
By: /s/ JOHN B. GALLAGHER
---------------------------------------
John B. Gallagher, Co-Chairman and Co-
President (Principal Executive Officer)
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
* Co-Chairman; Co-President (Principal
-------------------------- Executive Officer); Director November 29, 2000
Harry D. Shields
/s/ John B. Gallagher Co-Chairman; Co-President (Principal
-------------------------- Executive Officer); Director November 29, 2000
John B. Gallagher
* Chief Financial Officer and
-------------------------- Controller (Principal Financial
Jay Nash Officer and Controller) November 29, 2000
* Director November 29, 2000
--------------------------
Laurence Gilbert
* Director November 29, 2000
--------------------------
Kyle R. Saxton
* Director November 29, 2000
--------------------------
Barrett Sutton
</TABLE>
* /s/ John B. Gallagher
-----------------------------------
John B. Gallagher pursuant to a Power of Attorney
Dated as of October 27, 2000
II-8
