U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(MARK ONE)
Quarterly Report Pursuant to Section 13 or 15(d) of Securities
Exchange Act of 1934
For the quarterly period ended March 31, 2000
Transition report under Section 13 or 15(d) of the Securities Exchange
Act of 1934 (No Fee Required)
For the transition period from _______ to _______.
Commission File No. 333-44393
EUROPEAN MICRO HOLDINGS, INC.
(Name of Registrant as Specified in Its Charter)
<TABLE>
<CAPTION>
NEVADA 65-0803752
- ------ ----------
<S> <C>
(State or Other Jurisdiction of Incorporation (I.R.S. Employer Identification No.)
or Organization)
6073 N.W. 167th Street, UNIT C-25, Miami, Florida 33015
- ------------------------------------------------- -----
(Address of Principal Executive Offices) (Zip Code)
</TABLE>
(305) 825-2458
--------------
(Issuer's Telephone Number, Including Area Code)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months, and (2)
has been subject to such filing requirements for the past 90 days.
Yes (X) No ( )
There were 4,933,900 shares of Common Stock, par value $0.01 per share,
outstanding as of May 15, 2000.
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM FINANCIAL STATEMENTS.
INDEX TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Consolidated Condensed Balance Sheets as of March 31, 2000 and June 30, 1999...3
Consolidated Condensed Statements of Operations for the three and nine months
ended March 31, 2000 and 1999..................................................4
Consolidated Statement of Shareholders' Equity for the nine months ended
March 31, 2000.................................................................5
Consolidated Condensed Statements of Cash Flows for the nine months ended
March 31, 2000 and 1999........................................................6
Notes to the Consolidated Condensed Financial Statements.......................8
2
<PAGE>
EUROPEAN MICRO HOLDINGS, INC.
<TABLE>
<CAPTION>
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands, except share data)
(UNAUDITED)
MARCH 31, 2000 JUNE 30, 1999
-----------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $2,726 $3,168
Restricted Cash 381 379
Trade receivables, net 9,934 14,938
Due from related parties 47 1,128
Inventories, net 7,820 7,232
Prepaid expenses 316 402
Other current assets 590 562
------------- -----------
TOTAL CURRENT ASSETS 21,814 27,809
Property and equipment, net 3,719 612
Goodwill, net 2,714 1,675
Investments in and advances to unconsolidated subsidiaries 643 753
Other assets 34 -
------------- -----------
TOTAL ASSETS $28,924 $30,849
============= ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings $7,294 $8,614
Current portion of long-term borrowings 1,591 -
Trade payables 2,614 3,734
Accrued expenses and other current liabilities 1,996 2,851
Due to related parties 4 633
Income taxes payable 234 383
------------- -----------
TOTAL CURRENT LIABILITIES 13,733 16,215
Long-term borrowings 1,735 23
Other liabilities - 268
------------- -----------
TOTAL LIABILITIES $15,468 $16,506
------------- -----------
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 9,177 8,979
Accumulated other comprehensive loss (307) (312)
Retained earnings 4,537 5,627
------------- -----------
TOTAL SHAREHOLDERS' EQUITY 13,456 14,343
------------- -----------
COMMITMENTS AND CONTINGENCIES
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $28,924 $30,849
============= ===========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
3
<PAGE>
EUROPEAN MICRO HOLDINGS, INC.
<TABLE>
<CAPTION>
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
--------------------------------- ---------------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
SALES:
Net sales $23,917 $31,269 $89,313 $86,990
Net sales to related parties 437 7,196 2,350 9,783
------ ------ ------ -----
Total net sales 24,354 38,465 91,663 96,773
------ ------ ------ -----
COST OF GOODS SOLD:
Cost of goods sold (22,050) (28,388) (80,095) (78,927)
Cost of goods sold to related parties (449) (7,148) (2,311) (9,714)
------ ------ ------ -----
Total cost of goods sold (22,499) (35,536) (82,406) (88,641)
------ ------ ------ -----
GROSS PROFIT 1,855 2,929 9,257 8,132
OPERATING EXPENSES:
Selling, general and administrative expenses (3,323) (2,831) (9,747) (6,698)
------ ------ ------ -----
INCOME (LOSS) FROM OPERATIONS (1,468) 98 (490) 1,434
Interest income 10 18 70 65
Interest expense (148) (95) (676) (215)
Equity in net income (loss) of unconsolidated
subsidiaries (3) 2 (3) (45)
------ ------ ------ -----
INCOME (LOSS) BEFORE INCOME TAXES (1,609) 23 (1,099) 1,239
Income tax expense (benefit) (301) 1 (9) 471
------ ------ ------ -----
NET INCOME (LOSS) $(1,308) $22 $(1,090) $768
====== ====== ======= -----
Net income (loss) per share - basic $(0.26) $0.00 $(0.22) $0.15
====== ====== ======= -----
Net income (loss) per share - diluted $(0.26) $0.00 $(0.22) $0.15
====== ====== ======= -----
</TABLE>
See accompanying notes to consolidated condensed financial statements.
4
<PAGE>
EUROPEAN MICRO HOLDINGS, INC.
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(In thousands, except share data)
(Unaudited)
ADDITIONAL ACCUMULATED OTHER TOTAL
PAID-IN COMPREHENSIVE RETAINED SHAREHOLDERS'
COMMON STOCK CAPITAL INCOME (LOSS) EARNINGS EQUITY
-------------------------------------------------------------------------------------------------
SHARES AMOUNT
------ ------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1999 4,933,900 $49 $8,979 $(312) $5,627 $14,343
Comprehensive loss:
Net loss - - - - (1,090) (1,090)
Other comprehensive income,
foreign currency
translation adjustment - - - 5 - 5
--------- ---- ------ ------ ------- -------
Total comprehensive
loss - - - 5 (1,090) (1,085)
Adjustment to accrued offering
costs - - 156 - - 156
Compensation charge in relation
to share options issued to
non-employees - - 42 - - 42
--------- ---- ------ ------ ------- -------
Balance at March 31, 2000 4,933,900 $49 $9,177 $(307) $4,537 $13,456
========= ==== ====== ====== ======= =======
</TABLE>
See accompanying notes to consolidated condensed financial statements.
5
<PAGE>
EUROPEAN MICRO HOLDINGS, INC.
<TABLE>
<CAPTION>
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
NINE MONTHS ENDED MARCH 31,
----------------------------------------------------
2000 1999
---- ----
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $(1,090) $768
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET CASH PROVIDED BY
(USED IN) OPERATING ACTIVITIES
Depreciation and amortization 435 278
Amortization of expense related to contingent
earn-out provisions 47 -
Deferred income taxes (13) (14)
Equity in net loss of unconsolidated subsidiaries 3 45
Compensation charge for non-employee stock options 42 156
CHANGES IN ASSETS AND LIABILITIES, NET OF EFFECTS FROM ACQUISITIONS
Restricted cash - (387)
Trade receivables 5,724 (1,886)
Due from related parties 1,081 (1,670)
Inventories 1,329 (7,022)
Prepaid expenses and other current assets 294 1,727
Trade payables (2,266) (1,013)
Accrued expenses and other current liabilities (809) (800)
Due to related parties (629) 1,704
Income taxes payable (149) (100)
----- -----
NET CASH PROVIDED BY (USED IN ) OPERATING ACTIVITIES 3,999 (8,214)
----- -----
INVESTING ACTIVITIES:
Purchase of fixed assets (3,069) (213)
Sale of fixed assets 42 -
Payment for acquisition, net of cash acquired (1,834) (819)
Repayment (advances) to unconsolidated affiliate 100 (350)
----- -----
NET CASH USED IN INVESTING ACTIVITIES (4,761) (1,382)
----- -----
FINANCING ACTIVITIES:
Short-term borrowings, net (2,568) 7,215
Proceeds from long-term borrowings 3,585 -
Repayment of long term borrowings (628)
Issuance of common stock, net - (25)
Repayment of capital leases (58) (24)
----- -----
NET CASH PROVIDED BY FINANCING ACTIVITIES 331 7,166
----- -----
Exchange rate changes (11) (202)
----- -----
NET DECREASE IN CASH: (442) (2,632)
Cash at beginning of period 3,168 5,012
----- -----
CASH AT END OF PERIOD $2,726 $2,380
===== =====
6
<PAGE>
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Fair value of assets acquired $3,314 $4,533
Goodwill 1,418 1,705
Fair value of liabilities assumed (2,817) (4,322)
Notes issued for consideration 0 (964)
----- -----
Cash paid for acquisitions $1,915 $952
Less cash acquired (81) (133)
----- -----
Net cash paid for acquisitions $1,834 $819
===== =====
Interest paid $667 $239
===== =====
Taxes paid $182 $567
===== =====
</TABLE>
See accompanying notes to consolidated condensed financial statements.
7
<PAGE>
EUROPEAN MICRO HOLDINGS, INC.
NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1 INTERIM FINANCIAL STATEMENTS
The accompanying unaudited interim financial statements have been prepared
pursuant to the rules and regulations for reporting on Form 10-Q. Accordingly,
certain information and notes required by generally accepted accounting
principles for complete financial statements are not included herein. The
interim statements should be read in conjunction with the Company's financial
statements and notes thereto included in the Company's 1999 Annual Report on
Form 10-K.
In the Company's opinion, all adjustments necessary for a fair presentation of
these interim statements have been included and are of a normal and recurring
nature.
Certain fiscal 1999 amounts have been reclassified to conform to the current
year presentation.
2 INVENTORY
Inventories consist of the following (in thousands):
March 31, 2000 June 30, 1999
-------------- -------------
Finished goods and goods for resale $7,904 $7,348
Less: Allowance for inventory obsolescence (84) (116)
----- -----
$7,820 $7,232
====== ======
A roll forward of allowance for obsolescence is as follows (in thousands):
March 31, 2000 June 30, 1999
-------------- -------------
Balance at beginning of period $116 $9
Foreign currency translation adjustment 2 -
Provision for obsolescence 234 602
Amounts written off (268) (495)
---- ----
Balance at end of period $84 $116
=== ====
3 PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
March 31, 2000 June 30, 1999
-------------- -------------
Buildings and leasehold improvements $2,797 $-
Furniture, fixtures and equipment 1,521 994
Vehicles and other 453 416
----- -----
4,771 1,410
Less: accumulated depreciation (1,052) (798)
----- -----
$3,719 $612
====== =====
8
<PAGE>
EUROPEAN MICRO HOLDINGS, INC.
NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
3 PROPERTY AND EQUIPMENT (CONTINUED)
On July 16, 1999, European Micro Plc, a wholly-owned subsidiary of the Company
("EUROPEAN MICRO UK"), purchased the office building in which it had previously
leased space for a purchase price of 1,705,000 pounds sterling ($2,709,000 at
exchange rate on March 31, 2000). The purchase price was financed in part by a
loan in the amount of 1,312,000 pounds sterling ($2,085,000 at exchange rate on
March 31, 2000). This loan calls for monthly payments of principal and interest
in the amount of 15,588 pounds sterling ($24,768 at March 31, 2000) and matures
in July 2009. The mortgage loan note bears interest at a fixed rate of 7.598%.
Depreciation expense was $315,000 and $243,000 for the periods ended March 31,
2000 and March 31, 1999, respectively.
4 GOODWILL
On October 26, 1998, European Micro UK acquired all of the outstanding shares of
capital stock of Sunbelt (UK) Limited ("SUNBELT"). The Sunbelt purchase price
(to be settled in pounds sterling) is comprised of a guaranteed portion and two
contingent earn-out payments. The guaranteed portion of the purchase price,
which was based upon Sunbelt's net book value at closing and a multiple of its
fiscal year 1998 pre-tax earnings, was 940,000 pounds sterling (approximately
$1,493,000 at exchange rate on March 31, 2000). Of this guaranteed amount,
approximately 360,000 pounds sterling 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 ($381,000 at
exchange rate on March 31, 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 March 31, 2000. The
note payable and the cash balances are reflected on the accompanying
consolidated condensed balance sheet at March 31, 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.
During November 1999, purchase accounting adjustments were made to the
calculation of the guaranteed portion and the two contingent earn-out amounts.
These adjustments were derived from the recalculation of fiscal year 1998 pretax
earnings of Sunbelt resulting in a reduction of 166,000 pounds sterling
($264,000 at exchange rate on March 31, 2000) to goodwill. The portion of the
guaranteed consideration due at the end of the first contingent earn-out period
which ran from November 1, 1998 to October 31, 1999, was paid in November 1999
in the amount of 53,708 pounds sterling ($85,336 at exchange rate on March 31,
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 ($303,194 at exchange
rate on March 31, 2000).
The unpaid balance of the guaranteed purchase price of 152,656 pounds sterling
($242,555 at exchange rate on March 31, 2000) is reflected in goodwill, net and
accrued expenses and other current liabilities on the accompanying consolidated
condensed balance sheet at March 31, 2000. The second contingent earn-out
payment has not been recognized in the accompanying consolidated condensed
financial statements as the payment of such amounts are not, in the opinion of
management, determinable beyond a reasonable doubt.
9
<PAGE>
4 GOODWILL (CONTINUED)
On November 12, 1998, European Micro UK acquired the assets of H&B Trading
International BV ("H&B"). The acquisition of H&B was accounted for as a
purchase. The base purchase price, subject to adjustment, of approximately
125,000 Dutch guilders ($54,000 at exchange rate on March 31, 2000) exceeded the
estimated value of net assets acquired by approximately 85,000 Dutch guilders
($37,000 at exchange rate on March 31, 2000), which is being amortized on a
straight-line basis over 20 years. If certain financial performance criteria are
met for the fiscal year ended June 30, 2000, additional consideration of
approximately 75,000 Dutch guilders ($32,000 at exchange rate on March 31, 2000)
will be paid. The financial criteria for the period ended June 30, 1999 was not
met, therefore, the additional consideration was not accrued or paid. The year
2000 contingent consideration has not been reflected in the accompanying
consolidated condensed financial statements as the calculation of such amounts
are not determinable at this point in time. The results of operations of H&B
have been included in the accompanying financial statements from the date of
acquisition.
The Company acquired American Surgical Supply Corp. of Florida d/b/a/ American
Micro Computer Center ("AMCC"), in a merger on July 1, 1999. The transaction was
structured as a merger of AMCC with and into the newly formed, wholly owned
subsidiary of the Company. Upon consummation of the merger, the subsidiary's
name was changed to American Micro Computer Center, Inc. ("AMERICAN MICRO"). The
purchase price for AMCC was equal to $1,131,000, plus an earn-out amount payable
in cash or shares of the Company's common stock (at the Company's discretion)
equal to two times the after-tax earnings of American Micro in calendar year
1999 and two times the after-tax earnings of American Micro in calendar year
2000. The portion of the purchase price paid at closing was funded through the
Company's working capital. In addition, the Company assumed all outstanding
indebtedness of AMCC, including a shareholder loan in the approximate amount of
$289,000. This loan 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 shareholders have
fifteen days to make arrangements to sell such shares over the next forty
trading days. If the sale of such shares results in net proceeds of less than
the purchase price, then the Company will pay the difference in cash to AMCC's
shareholders.
The acquisition of AMCC was accounted for as a purchase. The base purchase
price, inclusive of transaction costs, of approximately $1,301,000 exceeded the
estimated fair market value of net assets acquired by approximately $804,000,
which constitutes goodwill and which is being amortized on a straight-line basis
over 20 years. The results of operations of American Micro, since acquisition,
have been included in the accompanying consolidated financial statements. The
contingent earn-out payment relating to two times the after tax earnings for
calendar year 1999 of $601,044 (2 x $300,522) 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. Purchase accounting
adjustments have not been finalized.
The following summarized unaudited pro forma financial information assumes the
acquisitions of Sunbelt and AMCC occurred on July 1, 1998 (in thousands, except
share data):
NINE MONTHS
ENDED MARCH 31, 1999
--------------------
Total net sales $122,515
Net income $813
Earnings per share:
Basic $0.16
Diluted $0.16
The pro forma financial information is based on certain assumptions and
estimates, and do not reflect any benefits from economies which might be
achieved from the combined operations. The pro forma results do not necessarily
represent results which would have occurred if the acquisition had taken place
on the basis assumed above, nor are they indicative of the results of future
operations.
10
<PAGE>
EUROPEAN MICRO HOLDINGS, INC.
NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
4 GOODWILL (CONTINUED)
A roll forward of goodwill is as follows (in thousands):
March 31, 2000
--------------
Balance at beginning of period (7/1/99) $1,675
Foreign currency translation 5
Purchase accounting adjustments (264)
Additions 1,418
Amortization (120)
-----
Balance at end of period (3/31/00) $2,714
======
5 SHORT-TERM BORROWINGS
Short-term borrowings consists of the following (in thousands):
March 31, 2000 June 30, 1999
-------------- -------------
Bank lines of credit:
European Micro UK facility $ - $1,581
Nor'Easter Micro facility 600 -
American Micro facility 1,249 -
----- -----
Total bank lines of credit 1,849 1,581
Receivable financing 4,768 7,033
Other short-term borrowings 677 -
----- -----
Total short-term borrowings $7,294 $8,614
====== ======
European Micro UK has a bank line of credit (the "EUROPEAN MICRO UK Facility")
which is secured by a mortgage debenture on all the assets of European Micro UK
and is subordinate to the receivable financing and the capital leases. The
European Micro UK Facility is subject to review in July each year and has been
renewed to July 2000. This facility has total availability to the Company at
March 31, 2000 of 1.2 million pounds sterling ($1.9 million at March 31, 2000).
Interest is charged on the bank line of credit at 1.25% over the bank borrowing
rate of 6% at March 31, 2000 and 5% at June 30, 1999.
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 matures on October 28,
2000, and each bears interest at 0.5% over the bank borrowing rate of 9.0% at
March 31, 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 March 31, 2000, the
Company was not in compliance with certain of the financial covenants in the
agreements. Given the Company's current and expected operating results, it is
likely that the Company will remain out of
11
<PAGE>
EUROPEAN MICRO HOLDINGS, INC.
NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
5 SHORT-TERM BORROWINGS (CONTINUED)
compliance with such covenant requirements. As a result, the Company is in
discussion with the lender to amend the agreements and to adjust the financial
covenant requirements. There can be no assurances that the Company will be
successful in these negotiations.
Receivable financing represents borrowings of European Micro UK secured by
various trade receivables totaling $5.6 million at March 31, 2000 and $8.3
million at June 30, 1999. Trade receivables can be financed up to the lower of
85% of the value of the trade receivables balance or 6.2 million pounds sterling
at March 31, 2000 ($9.9 million at March 31, 2000). The trade receivable
financing increased from a maximum of 5.5 million pounds sterling at June 30,
1999 ($8.7 million at June 30, 1999). This facility can be terminated by either
party giving three months' notice. The finance company which provides the
receivable financing facility has full recourse to European Micro UK with
respect to any doubtful or unrecovered amounts. Interest is charged on the
receivable financing balance at 1.25% above the bank borrowing rate of 6% at
March 31, 2000, and 5% at June 30, 1999.
European Micro UK also had a revolving credit agreement, secured against
inventory. The facility allowed European Micro UK to borrow up to 3.5 million
pounds sterling ($5.6 million at March 31, 2000) to assist in the purchase of
inventory. To date, no borrowings have been drawn down on this line. This
revolving credit agreement has expired and European Micro UK is negotiating to
renew the facility.
Other short-term borrowings represent various notes payable of American Micro.
The maturity dates of the notes range from on demand to June 30, 2000. The
interest rates range from 10.5% to 12%.
6 LONG-TERM BORROWINGS
Long-term borrowings consists of the following (in thousands):
March 31, 2000 June 30, 1999
-------------- -------------
Mortgage loan note $2,007 $-
Term loan 1,250 -
Other long-term borrowings 69 23
------ ---
$3,326 $23
Less current maturities of long-term
borrowings (1,591) -
------ ---
Total long-term borrowings $1,735 $23
====== ===
The mortgage loan note is secured by a mortgage on the office building of
European Micro UK. The note calls for monthly payments of principal and interest
in the amount of 15,588 pounds sterling ($24,768 at March 31, 2000) and matures
in July 2009. The mortgage loan note bears interest at a fixed rate of 7.598%.
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. Given European Micro UK's current and expected operating results, it is
likely that European Micro UK will be out of compliance with one of the covenant
requirements at June 30, 2000. The Company is evaluating options to address this
expected instance of non-compliance. See "Note 11 to the Consolidated Condensed
Financial Statements."
12
<PAGE>
EUROPEAN MICRO HOLDINGS, INC.
NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
6 LONG-TERM BORROWINGS (CONTINUED)
The term loan was obtained 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 March 31, 2000 was 6.1288%. The
term loan is secured by substantially all of the assets of the Company. As
partial security for this loan, Messrs. Gallagher and Shields pledged to the
lender a portion of their shares of common stock of the Company. In the event
the Company defaults on this loan, the lender may foreclose on all or a portion
of the pledged securities. Such an event may cause a change of control in the
Company because Messrs. Gallagher and Shields together own 71% of the Company's
outstanding common stock.
The term loan agreement is with the same lender as the Nor'Easter Micro and
American Micro line of credit facilities discussed in Note 5. Further, the term
loan credit agreement contains similar loan covenant requirements. As such, the
Company was not in compliance with such covenants for the March 31, 2000
reporting period. The Company has not received a waiver of the non-compliance
with the financial covenants, therefore the total amount outstanding under the
term loan agreement is reflected in current maturities of long term debt at
March 31, 2000. The agreement also contains a provision whereby the lender can
declare a default based on subjective criteria. The Company is in discussion
with the lender to amend the agreements and adjust the financial covenant
requirements. There can be no assurances that the Company will be successful in
these negotiations.
In conjunction with the purchase of AMCC, the Company assumed a note payable to
John P. Gallagher, the father of John B. Gallagher, who is a significant
shareholder, co-chairman, and co-president of the Company. This note was paid in
full during November 1999.
7 EARNINGS PER SHARE
The calculation of earnings per share are detailed in the table below:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
-----------------------------------------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
EARNINGS (LOSS)
Net income (in thousands) $(1,308) $22 $(1,090) $768
--------- --------- --------- ---------
WEIGHTED AVERAGE NUMBER OF SHARES
Outstanding common stock during the period 4,933,900 4,933,900 4,933,900 4,933,900
Contingently issuable shares 24,392 42,983 74,504 20,206
--------- --------- --------- ---------
BASIC WEIGHTED AVERAGE NUMBER OF SHARES 4,958,292 4,976,883 5,008,404 4,954,106
Effect of dilutive stock options and other contingent shares - 43,670 - 24,206
--------- --------- --------- ---------
DILUTED WEIGHTED AVERAGE NUMBER OF SHARES 4,958,292 5,020,553 5,008,404 4,978,312
========= ========= ========= =========
Basic earnings (loss) per share $(0.26) $0.00 $(0.22) $0.15
========= ========= ========= =========
Diluted earnings (loss) per share $(0.26) $0.00 $(0.22) $0.15
========= ========= ========= =========
</TABLE>
13
<PAGE>
EUROPEAN MICRO HOLDINGS, INC.
NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
7 EARNINGS PER SHARE (CONTINUED)
During the three-month period ended March 31, 2000, the Company issued options
to purchase up to 10,000 shares of Common Stock at exercise prices ranging from
$9.00 to $9.25 per share. The above dilutive earnings per share calculations for
the three-month and nine-month periods ended March 31, 2000, exclude the effect
of options to purchase 329,000 shares of common stock at exercise prices ranging
from $10.00 to $12.00 per share, due to the fact they were anti-dilutive (i.e.,
the exercise price was greater than the average market price for the respective
periods). The above dilutive earnings per share calculations for the three-month
and nine-month periods ended March 31, 1999, exclude the effect of options to
purchase 20,000 shares of common stock at an exercise price of $11.00 per share,
due to the fact they were anti-dilutive. Also see "Note 4 (Goodwill) to the
Consolidated Condensed Financial Statements" related to contingently issuable
shares related to acquisitions. However, the effect of contingent shares related
to the payment due after the first contingent earn-out period of the Sunbelt
acquisition has not been included in the three month period ended March 31,
2000, as such payment was paid in cash in November 1999. Also the effect of the
contingent shares related to the second contingent earn-out of the Sunbelt
acquisition are not included, as the conditions necessary for such contingent
shares to be issued have not been met as of March 31, 2000. However, the effect
of contingent shares related to the guaranteed earn-out amount payable after the
second contingent earn-out period is included. The effect of contingent shares
related to the first earn-out of American Micro is not included in the
three-month period ended March 31, 2000, as such payment was paid in cash in
March 2000. The effect of contingent shares related to the second earn-out of
American Micro is not included. The second earn-out of American Micro is based
on two times the after-tax earnings of American Micro for calendar year 2000. As
such, the calculation of the amount of such contingent shares to be issued is
not determinable.
8 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 4 (Goodwill) to the Consolidated Condensed Financial
Statements." Technology Express is owned and controlled by Harry D. Shields,
who is Co-President and Co-Chairman of the Company. Prior to its acquisition
on July 1, 1999, AMCC was controlled 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):
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
-------------------------------------------------
2000 1999 2000 1999
---- ---- ---- ----
SALES TO:
AMCC N/A $4,107 N/A $4,508
Technology Express $437 3,089 $2,350 5,275
------ ----- ------ ------
$437 $7,196 $2,350 $9,783
====== ===== ====== ======
PURCHASES FROM:
AMCC N/A $790 N/A $920
Technology Express $1,407 1,712 $3,131 15,264
------ ----- ------ ------
$1,407 $2,502 $3,131 $16,184
====== ===== ====== ======
14
<PAGE>
EUROPEAN MICRO HOLDINGS, INC.
NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
8 RELATED PARTY TRANSACTIONS (CONTINUED)
Due from related parties was comprised of the following balances (in thousands):
MARCH 31, 2000 JUNE 30, 1999
-------------- -------------
AMCC N/A $974
Technology Express $47 154
--- ---
$47 $1,128
=== ======
Due to related parties was comprised of the following balances (in thousands):
MARCH 31, 2000 JUNE 30, 1999
-------------- -------------
AMCC N/A $3
Technology Express $4 630
-- ---
$4 $633
== ====
The entities listed above are related to the Company in the following manner:
AMCC
AMCC is a distributor of computer hardware based in Miami, Florida. John B.
Gallagher, who is Co-Chairman, Co-President, a Director and shareholder (owning
39% of the outstanding shares) of European Micro Holdings, Inc., was until July
1, 1999, the president of AMCC and owned 50% of the outstanding shares of
capital stock in that company. See "Note 4 (Goodwill) to the Consolidated
Condensed Financial Statements" regarding the acquisition of AMCC. Frank Cruz,
who is Chief Operating Officer of European Micro Holdings, Inc., has been an
employee of AMCC since 1994.
TECHNOLOGY EXPRESS
Until 1996, Technology Express was a full service authorized reseller of
computers and related products based in Nashville, Tennessee, selling primarily
to end-users. Technology Express was sold to Inacom Computers in 1996.
Concurrently with the sale, Mr. Shields founded a new computer company with the
name Technology Express. This company is a distributor of computer products and
does not sell to end-users. Harry D. Shields, who is Co-Chairman, Co-President,
a Director and shareholder (owning 32% of the outstanding shares) of European
Micro Holdings, Inc., is president of Technology Express and owns 100% of the
outstanding shares of capital stock of that company. Jay Nash, who is Chief
Financial Officer, Treasurer and Secretary of European Micro Holdings, Inc., has
been an employee of Technology Express since 1992.
15
<PAGE>
EUROPEAN MICRO HOLDINGS, INC.
NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
9 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 229,212 pounds sterling ($364,195 at exchange rate on March 31,
2000), related to the feasibility studies and business process design. This
amount is reflected in selling, general and administrative expenses on the
accompanying consolidated condensed Statement of Operations for the three and
nine months ended March 31, 2000 and 1999. The Company has capitalized the sum
of 48,809 pounds sterling ($77,553 at exchange rate on March 31, 2000), related
to the actual software development. This amount is reflected in property and
equipment, net on the accompanying consolidated condensed balance sheet at March
31, 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.
10 CONTINGENCIES
European Micro UK and the Company have each demanded payment from Big Blue
Europe, a 50% owned joint venture in which the Company has a capital investment
at March 31, 2000 of $143,000, for their loans made in the amounts of $150,000
and $350,000, respectively. Big Blue Europe is currently under a court order
prohibiting payment of these amounts. The 50% shareholders of Big Blue Europe,
its principals, Jeff and Marie Alnwick, and Big Blue Europe, derivatively, have
filed a lawsuit against the Company, European Micro UK, John B. Gallagher and
Harry D. Shields alleging fraud, aiding and abetting fraud, misappropriation of
trade secrets, breach of fiduciary duty, aiding and abetting breach of fiduciary
duty, breach of contract and tortious interference with contract. The complaint
states that the plaintiffs seek $10 million or more in damages. The suit was
filed in the United States District Court of the Eastern District of New York,
Case # 99 CV 7380 (E.D.N.Y.) (ADS). The factual allegations underlying the
lawsuit stem from European Micro UK's joint venture interest in Big Blue Europe.
The Company has a pending motion to dismiss the complaint and has requested the
New York court to refer the case to the courts of Holland upon the doctrine of
FORUM NON CONVENIENS. The Company believes that the allegations specified in the
complaint are without merit and intends to vigorously defend the suit. As a
consequence of some of the allegations in such complaint, Messrs. Gallagher and
Shields and European Micro UK have filed an action in the United Kingdom for
defamation against the Alnwicks and others. For the three and nine months ended
March 31, 2000, the Company has incurred $331,000 and $537,000 of legal
expenses, respectively, related to such lawsuit.
11 LIQUIDITY
The Company has suffered losses in the current quarter and is out of compliance
with loan covenants of certain of its debt agreements. In addition, certain
other loan agreements contain contractual provisions which allow the lender to
accelerate the maturity of such borrowings. These matters raise substantial
doubt about the ability of the Company to continue as a going concern. The
Company is in discussion with the lender to amend the agreements and to adjust
the financial covenant requirements of the loan agreements. The Company has
delayed the business to business electronic commerce strategy (as discussed in
Note 9 to the Consolidated Condensed Financial Statements) until specific
funding is available. Currently, the Company is pursuing specific funding for
the business to business electronic commerce strategy through the venture
capital markets in the United States and United Kingdom. Additionally, the
Company is taking steps to reduce the average level of inventory, thus reducing
its dependence on debt financing.
16
<PAGE>
EUROPEAN MICRO HOLDINGS, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
INTRODUCTORY STATEMENTS
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS. THIS QUARTERLY REPORT CONTAINS
FORWARD-LOOKING STATEMENTS, INCLUDING STATEMENTS REGARDING, AMONG OTHER THINGS,
(A) EUROPEAN MICRO HOLDINGS, INC.'S ("EUROPEAN MICRO" OR THE "COMPANY")
PROJECTED SALES AND PROFITABILITY, (B) THE COMPANY'S GROWTH STRATEGIES, (C)
ANTICIPATED TRENDS IN THE COMPANY'S INDUSTRY, (D) THE COMPANY'S FUTURE FINANCING
PLANS, AND (E) THE COMPANY'S ANTICIPATED NEEDS FOR WORKING CAPITAL. IN ADDITION,
WHEN USED IN THIS QUARTERLY REPORT, THE WORDS "BELIEVES," "ANTICIPATES,"
"INTENDS," "IN ANTICIPATION OF," "EXPECTS," AND SIMILAR WORDS ARE INTENDED TO
IDENTIFY CERTAIN FORWARD-LOOKING STATEMENTS. THESE FORWARD-LOOKING STATEMENTS
ARE BASED LARGELY ON THE COMPANY'S EXPECTATIONS AND ARE SUBJECT TO A NUMBER OF
RISKS AND UNCERTAINTIES, MANY OF WHICH ARE BEYOND THE COMPANY'S CONTROL. ACTUAL
RESULTS COULD DIFFER MATERIALLY FROM THESE FORWARD-LOOKING STATEMENTS AS A
RESULT OF CHANGES IN TRENDS IN THE ECONOMY AND THE COMPANY'S INDUSTRY,
REDUCTIONS IN THE AVAILABILITY OF FINANCING AND AVAILABILITY OF COMPUTER
PRODUCTS ON TERMS AS FAVORABLE AS EXPERIENCED BY THE COMPANY IN PRIOR PERIODS
AND OTHER FACTORS. IN LIGHT OF THESE RISKS AND UNCERTAINTIES, THERE CAN BE NO
ASSURANCE THAT THE FORWARD-LOOKING STATEMENTS CONTAINED IN THIS QUARTERLY REPORT
WILL IN FACT OCCUR. THE COMPANY DOES NOT UNDERTAKE ANY OBLIGATION TO PUBLICLY
RELEASE THE RESULTS OF ANY REVISIONS TO THESE FORWARD-LOOKING STATEMENTS TO
REFLECT ANY FUTURE EVENTS OR CIRCUMSTANCES.
UNLESS THE CONTEXT OTHERWISE REQUIRES AND EXCEPT AS OTHERWISE SPECIFIED,
REFERENCES HEREIN TO "EUROPEAN MICRO" OR THE "COMPANY" INCLUDE EUROPEAN MICRO
HOLDINGS, INC. AND ITS FOUR WHOLLY-OWNED SUBSIDIARIES, EUROPEAN MICRO PLC, A
COMPANY ORGANIZED UNDER THE LAWS OF THE UNITED KINGDOM ("EUROPEAN MICRO UK"),
NOR'EASTER MICRO, INC., A NEVADA CORPORATION ("NOR'EASTER"), COLCHESTER
ENTERPRISE PTE. LTD., A COMPANY ORGANIZED UNDER THE LAWS OF SINGAPORE
("COLCHESTER"), AND AMERICAN MICRO COMPUTER CENTER, INC., A FLORIDA
CORPORATION ("AMERICAN MICRO") (COLLECTIVELY, THE FOUR WHOLLY-OWNED
SUBSIDIARIES ARE REFERRED TO AS THE "SUBSIDIARIES").
OVERVIEW
The Company is an independent distributor of microcomputer products, including
personal computers, memory modules, disc drives and networking products, to
customers mainly in Western Europe and to customers and to a related party in
the United States. The Company's customers consist of more than 680 value-added
resellers, corporate resellers, retailers, direct marketers and distributors.
The Company does not sell to end-users. Substantially all of the products sold
by the Company are manufactured by well-recognized manufacturers such as IBM,
Compaq and Hewlett-Packard, although the Company generally does not obtain its
inventory directly from such manufacturers. The Company monitors the geographic
pricing strategies related to such products, currency fluctuations and product
availability in order to obtain inventory at favorable prices from other
distributors, resellers and wholesalers.
The Company considers itself to be a focused distributor, as opposed to a
broadline distributor, dealing with a limited and select group of products from
a limited and select group of leading manufacturers. The Company believes that
being a focused distributor enables it to respond more quickly to customer
requests and gives it greater availability of products, access to products and
improved pricing. The Company believes that as a focused distributor it has been
able to develop greater expertise in the products which it sells. The Company
places significant emphasis on market awareness and planning and actively shares
this knowledge with its customers in order to further enhance trading relations.
The Company strives to monitor and react quickly to market trends in order to
enable its multilingual sales team to maintain the highest levels of customer
service.
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 accrued
the sum of 229,212 pounds sterling ($364,195 at exchange rate on March 31,
2000), related to the feasibility studies and business process design. This
amount is reflected in selling, general and administrative expenses on the
accompanying consolidated condensed Statement of Operations for the three and
nine months ended March 31, 2000 and 1999. The Company has capitalized the sum
of 48,809 pounds sterling ($77,553 at exchange rate on March 31, 20000, related
to the actual software development. This amount is reflected in property and
equipment, net on the accompanying consolidated condensed balance sheet at March
31, 2000. During May 2000, the Company suspended the ongoing development being
performed by Cap Gemini until specific funding is obtained to complete the
project.
17
<PAGE>
EUROPEAN MICRO HOLDINGS, INC.
European Micro Holdings, Inc. was organized under the laws of the State of
Nevada in December 1997 and is the parent of European Micro UK, Nor'Easter,
Colchester and American Micro. European Micro UK was organized under the laws of
the United Kingdom in 1991 to serve as an independent distributor of
microcomputer products to customers mainly in Western Europe and to related
parties in the United States. Nor'Easter was organized under the laws of the
State of Nevada on December 26, 1997 to serve as an independent distributor of
microcomputer products in the United States. Colchester was organized under the
laws of Singapore in November 1998 to serve as an independent distributor of
microcomputer products in Asia. American Micro was formed on June 24, 1999 to
acquire AMCC and now serves as an independent distributor in the United States.
European Micro UK is the parent of European Micro GmbH ("EUROPEAN MICRO
GERMANY"), Sunbelt and European Micro B.V. ("EUROPEAN MICRO HOLLAND") and has a
50% joint venture interest in Big Blue Europe, B.V. ("BIG BLUE EUROPE").
European Micro Germany was organized under the laws of Germany in 1993 and
operates as a sales office in Dusseldorf, Germany. All products sold by European
Micro Germany are procured and shipped from the facilities of European Micro UK.
Sunbelt is a company registered in England and Wales, which was established in
1992 and is based in Wimbledon, England. Sunbelt operated as a distributor of
microcomputer products to dealers, value-added resellers and mass merchants
throughout Western Europe. Except for the distribution of its Nova brand
products, Sunbelt's distribution operations were integrated with and into the
operations of European Micro UK. Sunbelt discontinued the Nova product line
effective January 31, 2000. European Micro Holland was formed in 1995 and
acquired the assets of H&B. European Micro UK acquired these assets on November
12, 1998. Big Blue Europe was organized under the laws of Holland in January
1997 and is a computer parts distributor with offices located near Amsterdam,
Holland. Big Blue Europe has no affiliation with International Business Machines
Corporation.
European Micro Holding's headquarters are located at 6073 N.W. 167th Street,
Unit C-25, Miami, Florida 33015, and its telephone number is (305) 825-2458.
RESULTS OF OPERATIONS
The following table sets forth, for the periods presented, the percentage of net
sales represented by certain items in the Company's Consolidated Condensed
Statements of Operations:
<TABLE>
<CAPTION>
PERCENTAGE OF NET SALES
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales to third parties 98.2% 81.3% 97.4% 89.9%
Net sales to related parties 1.8% 18.7% 2.6% 10.1%
----- ----- ----- -----
Total net sales 100.0% 100.0% 100.0% 100.0%
----- ----- ----- -----
Cost of goods sold to third parties (90.6%) (73.8%) (87.4%) (81.6%)
Cost of goods sold to related parties (1.8%) (18.6%) (2.5%) (10.0%)
----- ----- ----- -----
Total cost of goods sold (92.4%) (92.4%) (89.9%) (91.6%)
----- ----- ----- -----
Gross profit 7.6% 7.6% 10.1% 8.4%
Total operating expenses (13.6%) (7.3%) (10.6%) (6.9%)
----- ----- ----- -----
Income (loss) from operations (6.0%) 0.3% (0.5%) 1.5%
18
<PAGE>
EUROPEAN MICRO HOLDINGS, INC.
Interest income 0.0% 0.1% 0.1% 0.1%
Interest expense (0.6%) (0.3%) (0.8%) (0.2%)
Equity in net income (loss) of unconsolidated
subsidiary (0.0%) 0.0% 0.0% (0.1%)
----- ----- ----- -----
Income (loss) before income taxes (6.6%) 0.1% (1.2%) 1.3%
Income tax expense (benefit) (1.2%) 0.0% (0.0%) 0.5%
----- ----- ----- -----
Net income (loss) (5.4%) 0.1% (1.2%) 0.8%
===== ===== ===== =====
</TABLE>
THREE-MONTH PERIODS ENDED MARCH 31, 2000 AND 1999
TOTAL NET SALES. Total net sales decreased $14.1 million, or 36.7%, from $38.5
million in the three-month period ended March 31, 1999 to $24.4 million in the
comparable period in 2000. Excluding net sales to related parties, net sales
decreased $7.4 million, or 23.5%, from $31.3 million in the three-month period
ended March 31, 1999 to $23.9 million in the comparable period in 2000. This
decrease was attributable to a reduction of $5.3 million in the Premier Dealers
Club, a reduction of $300,000 from Sunbelt's Nova line of products, a reduction
of $9.6 million from European Micro UK's trading sales (excluding Sunbelt's
trading sales) and a reduction of $2.1 million in Nor'Easter's sales. This
decrease was partially offset by the addition of Sunbelt's trading sales
(accounting for approximately $2.2 million), the addition of Colchester's sales
(accounting for approximately $2.7 million) and the addition of American Micro's
sales (accounting for approximately $5.0 million)
Net sales to related parties decreased $6.8 million, or 93.9%, in the
three-month period ended March 31, 2000 from the comparable period in 1999. This
decrease is attributable to the acquisition of AMCC on July 1, 1999, and
therefore, net sales to American Micro are excluded from net sales to related
party. Also, sales to Technology Express have decreased as product availability
decreased. Until July 1, 1999, the related parties consisted of a group of
entities in which an ownership interest was held by either of the two primary
shareholders of the Company, John B. Gallagher or Harry D. Shields. See "Note 8
(Related party transactions) to the Consolidated Condensed Financial
Statements." Since the acquisition of AMCC, the sole related party is Technology
Express, Inc. In order to facilitate fast and efficient international
transactions, the Company expects to continue to act as a supplier for and
purchaser from Technology Express. Prices for purchases from and sales to
Technology Express are expected to remain at one percent over cost but
exceptions may be made in times of short supply, to cover assembly costs and to
reward one another for exceptional low cost purchases. The Company believes that
its reliance on related party purchases and sales will continue to decline,
although the Company's sales will be lower in future periods if the Company is
unable to sell product to Technology Express as it has historically done.
Likewise, the Company's profitability may be lower in future periods if it is
unable to purchase products from Technology Express because the Company may not
be able to obtain such product from other sources or if available, on as
favorable terms.
There can be no assurance that the Company will be able to maintain the level of
sales achieved in this period or past periods because of seasonal variations in
the demand for the products and services offered by the Company, the
introduction of new hardware and software technologies and products offering
improved features and functionality, the introduction of new products and
services by the Company and its competitors, the loss or consolidation of a
significant supplier or customer, changes in the level of operating expenses,
inventory adjustments, product supply constraints and competitive conditions,
including pricing, interest rate fluctuations, the impact of acquisitions,
currency fluctuations and general economic conditions.
GROSS PROFIT. Gross profit decreased $1.1 million, or 36.7%, from $2.9 million
in the three-month period ended March 31, 1999 to $1.8 million in the comparable
period in 2000. Gross profit excluding related party transactions decreased $1.0
million, or 35.2%, from $2.9 million in the three-month period ended March 31,
1999 to $1.9 million the comparable period in 2000. This decrease is primarily
due to a decrease at European Micro UK of $1.6 million and a decrease at
Nor'Easter of $200,000. This decrease was partially offset by the addition of
Colchester with $220,000 in gross profit and the addition of American Micro with
$575,000 in gross profit.
Gross profit attributable to related party sales was $(12,000) in the
three-month period ended March 31, 2000. This represents a gross margin of
approximately (2.7%). Gross profit included a sale to Technology Express of
product at a price below cost. As discussed above, the mark-up on sales to
related parties is typically
19
<PAGE>
EUROPEAN MICRO HOLDINGS, INC.
one percent over cost. Therefore, the gross profit on sales to third parties is
typically higher than the gross profit earned on sales to related parties.
Gross margins remained constant at 7.6% in the three-month period ended March
31, 1999 and in the comparable period in 2000. Excluding related party
transactions, gross margin decreased from 9.2% in the three-month period ended
March 31, 1999 to 7.7% in the comparable period in 2000. This decrease is
related to a reduction in demand and price competition related to the slowdown.
Foreign exchange gains and losses, net, changed from a loss of $354,000 in
the three-month period ended March 31, 1999 to a loss of $144,000 in the
comparable period in 2000. This favorable movement was attributable to the
weakening of the U.K. pound sterling relative to the Euro and the
strengthening of the U.K. pound sterling against the U.S. dollar.
OPERATING EXPENSES. Operating expenses as a percentage of total net sales
increased from 7.4% in the three-month period ended March 31, 1999 to 13.6% in
the comparable period in 2000. This increased percentage was the result of
increases in operating expenses, primarily caused by $331,000 of legal expenses
incurred by the Company in connection with the Big Blue lawsuit and $364,000 of
expenses incurred with the feasibility studies and business process design for
the Company's business to business electronic commerce project. Helping to
offset the increase in operating expenses was a decrease in commissions and
bonus payments to employees, which are tied to the Company's gross profit and
gross margin.
INTEREST EXPENSE. Interest expense increased by $53,000 from $95,000 in
three-month period ended March 31, 1999 to $148,000 in the comparable period in
2000. This was attributable to increased borrowings during the period because of
increased average accounts receivable and inventory balances, the purchase of
the office building and the acquisitions of Sunbelt and AMCC.
INCOME TAXES. Income taxes as a percentage of income (loss) before income taxes
decreased from 4.3% in the three-month period ended March 31, 1999 to an income
tax benefit of 22% in the comparable period in 2000. For the period ended March
31, 1999, the Company had accrued a tax benefit based on the estimate that the
Company would have consolidated U.S. taxable income for fiscal 1999. However,
for the fiscal year ended June 30, 1999, the Company had a U.S. consolidated
loss. The Company has not accrued a tax benefit for the U.S. operating losses in
the three-month period ended March 31, 2000. For the three-month period ended
March 31, 2000, European Micro UK incurred a loss from operations and therefore
accrued a tax benefit in the three-month period based on previous operating
profits.
INTEREST IN JOINT VENTURE. The Company's share of income (loss) from Big Blue
decreased from income of $2,000 in the three-month period ended March 31, 1999
to a loss of $(3,000) in the comparable period in 2000.
NINE-MONTH PERIODS ENDED MARCH 31, 2000 AND 1999
TOTAL NET SALES. Total net sales decreased $5.1 million, or 5.3%, from $96.8
million in the nine-month period ended March 31, 1999 to $91.7 million in the
comparable period in 2000. Excluding net sales to related parties, net sales
increased $2.3 million, or 2.7%, from $87 million in the nine-month period ended
March 31, 1999 to $89.3 million in the comparable period in 2000. This increase
was attributable to the addition of Sunbelt's trading sales (accounting for
approximately $5.4 million), the addition of Colchester's sales (accounting for
approximately $6.1 million) and the addition of American Micro's sales
(accounting for approximately $14.4 million). This increase was partially offset
by a reduction of $18.6 million in European Micro UK's trading sales (excluding
Sunbelt's trading sales), a decrease in the Premier Dealers Club (accounting for
approximately $5.4 million) and a reduction of $4.2 million in Nor'Easter's
sales.
Net sales to related parties decreased $7.4 million, or 76.0%, in the nine-month
period ended March 31, 1999 from the comparable period in 1999. This decrease is
attributable to the acquisition of AMCC on July 1, 1999, and therefore, net
sales to American Micro are excluded from net sales to related party. Also,
sales to Technology Express have decrease as product availability decreased.
Until July 1, 1999, the related parties consisted of a group of entities in
which an ownership interest was held by either of the two primary shareholders
of the Company, John B. Gallagher or Harry D. Shields. See "Note 8 (Related
party transactions) to the Consolidated Condensed Financial Statements."
There can be no assurance that the Company will be able to maintain the level of
sales achieved in this period or past periods because of seasonal variations in
the demand for the products and services offered by the Company, the
introduction of new hardware and software technologies and products offering
improved features and functionality, the introduction of new products and
20
<PAGE>
EUROPEAN MICRO HOLDINGS, INC.
services by the Company and its competitors, the loss or consolidation of a
significant supplier or customer, changes in the level of operating expenses,
inventory adjustments, product supply constraints and competitive conditions,
including pricing, interest rate fluctuations, the impact of acquisitions,
currency fluctuations and general economic conditions.
GROSS PROFIT. Gross profit increased $1.1 million, or 13.8%, from $8.1 million
in the nine-month period ended March 31, 1999 to $9.2 million in the comparable
period in 2000. Gross profit excluding related party transactions increased $1.1
million, or 14.3%, from $8.1 million in the nine-month period ended March 31,
1999 to $9.2 million the comparable period in 2000. This increase is primarily
due to the addition of Colchester with $400,000 in gross profit, the addition of
American Micro with $1.6 million in gross profit and a decrease at European
Micro UK of $900,000.
Gross profit attributable to related party sales was $38,000 in the nine-month
period ended March 31, 2000. This represents a gross margin of approximately
1.6%. As discussed above, the mark-up on sales to related parties is typically
one percent over cost. Therefore, the gross profit on sales to third parties is
typically higher than the gross profit earned on sales to related parties.
Gross margins increased by 170 basis points from 8.4% in the nine-month period
ended March 31, 1999 to 10.1% in the comparable period in 2000. Excluding
related party transactions, gross margin increased from 9.3% in the nine-month
period ended March 31, 1999 to 10.3% in the comparable period in 2000. This
change is related to the shortage of memory products in the quarter ended
December 31, 1999, resulting in higher selling prices and gross margin. However,
the increase was partially offset by lower selling prices and gross margin on
most products in the quarter ended March 31, 2000.
Foreign exchange gains and losses, net, changed from a loss of $538,000 in
the nine-month period ended March 31, 1999 to a loss of $226,000 in the
comparable period in 2000. This favorable movement was attributable to the
weakening of the U.K. pound sterling relative to the Euro and the
strengthening of the U.K. pound sterling against the U.S. dollar.
OPERATING EXPENSES. Operating expenses as a percentage of total net sales
increased from 6.9% in the nine-month period ended March 31, 1999 to 10.6% in
the comparable period in 2000. This increased percentage was the result of
increases in operating expenses, primarily caused by $537,000 of legal expenses
incurred by the Company in connection with the Big Blue lawsuit and $364,000 of
expenses incurred with the feasibility studies and business process design for
the Company's business to business electronic commerce project. Moreover,
American Micro's operating expenses, which were included in the Company's
consolidated financial statements for period ended March 2000 had a higher level
of operating expenses relative to sales than that of the Company.
INTEREST EXPENSE. Interest expense increased by $461,000 from $215,000 in
nine-month period ended March 31, 1999 to $676,000 in the comparable period in
2000. This was attributable to increased borrowings during the period because of
increased average accounts receivable and inventory balances, the purchase of
the office building and the acquisitions of Sunbelt and AMCC.
INCOME TAXES. Income taxes as a percentage of income (loss) before income taxes
decreased from 38% in the nine-month period ended March 31, 1999 to an income
tax benefit of less than 1% in the comparable period in 2000. For the period
ended March 31, 1999, the Company had accrued a tax benefit based on the
estimate that the Company would have consolidated U.S. taxable income for fiscal
1999. However, for the fiscal year ended June 30, 1999, the Company had a U.S.
consolidated loss. The Company has not accrued a tax benefit for the U.S.
operating losses in the nine-month period ended March 31, 2000. For the
nine-month period ended March 31, 2000 European Micro UK has had income before
income taxes of approximately $730,000. The management chargebacks from the
European Micro Holdings, Inc. for the nine months ended March 31, 2000 are more
than the $730,000 in income. Therefore, for the nine-month period ended March
31, 2000, European Micro UK has accrued a tax benefit of approximately $9,000.
INTEREST IN JOINT VENTURE. The Company's share of income (loss) from Big Blue
decreased from a loss of $(45,000) in the nine-month period ended March 31, 1999
to a loss of $(3,000) in the comparable period in 2000.
SEASONALITY
The Company typically experiences variability in its total net sales and net
income on a quarterly basis as a result of many factors. These include, but are
not limited to, seasonal variations in demand for the products and services
offered by the Company, the introduction of new hardware and software
technologies and products offering improved features and functionality, the
21
<PAGE>
EUROPEAN MICRO HOLDINGS, INC.
introduction of new products and services by the Company and its competitors,
the loss or consolidation of a significant supplier or customer, changes in the
level of operating expenses, inventory adjustments, product supply constraints
and competitive conditions, including pricing, interest rate fluctuations, the
impact of acquisitions, currency fluctuations and general economic conditions.
Historical operating results have reflected a reduction in demand in Europe
during the summer months.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary cash requirements are for operating expenses, funding
accounts receivable, the purchase of inventory to support growth, taking greater
advantage of available cash discounts offered by certain of the Company's
suppliers for early payment and making acquisitions. The Company has
historically funded these cash requirements through a combination of loans,
internally generated cash flow and the net proceeds of its initial public
offering.
Short-term working capital requirements of European Micro UK are funded by a
combination of line of credit facilities together with accounts receivable
financing. In both cases, the amounts drawn down accrue the same rate of
interest based on a markup over the bank borrowing rate in the United Kingdom.
The bank line of credit was 1.2 million pounds sterling ($1.9 million) at March
31, 2000. The accounts receivable financing provides for a borrowing base of 85%
of accounts receivable, with a limit of 6.2 million pounds sterling ($9.9
million on March 31, 2000). The limit on trade receivables financing increased
from a maximum of 5.5 million pounds sterling at June 30, 1999 ($8.7 million at
June 30, 1999). European Micro UK also had a revolving credit agreement, secured
against inventory. The facility allowed European Micro UK to borrow up to 3.5
million pounds sterling ($5.6 million at March 31, 2000) to assist in the
purchase of inventory. To date, no borrowings have been drawn down on this line.
This revolving credit agreement has expired and European Micro UK is negotiating
to renew.
Short-term working capital requirements of the Company's operations based in the
United States are funded by two lines of credit. On October 29, 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 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 matures on October 28, 2000, and each bears interest at 0.5% over the
bank borrowing rate of 9.0% at March 31, 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 March 31, 2000, the Company was not in compliance with certain
of the financial covenants in the agreements. The Company is in discussions with
the lender to amend the agreements and adjust the financial covenant
requirements. There can be no assurance that the Company will be successful in
these negotiations.
In addition, in June 1998, the Company received $9.3 million in gross proceeds
from its initial public offering of 933,900 shares of common stock. The Company
incurred total expenses in connection with the offering of $2.0 million. The
Company has used the proceeds to acquire Sunbelt and American Micro and to fund
operations and provide working capital to European Micro UK, Nor'Easter and
Colchester.
Certain long-term funding is supplied to the Company in the form of capital
lease agreements and term loans. The lease agreements are secured by vehicles
owned by the Company. The agreements are usually for 36 months from the date of
purchase and are typically for 80% of the purchase value of the vehicle. All but
two of the agreements are subject to variable rate interest. As of March 31,
2000, the borrowings were $68,000, of which $25,000 was due after more than one
year.
A term loan was obtained 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 March 31, 2000 was 6.1325%. Two
payments have been made, bringing the balance down to $1,250,000 at March 31,
2000. 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 have also personally guaranteed a portion of this
term loan. 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
22
<PAGE>
EUROPEAN MICRO HOLDINGS, INC.
agreement includes certain financial and non-financial covenants and
restrictions. The agreement also contains a provision whereby the lender can
declare a default based on subjective criteria. The term loan agreement is with
the same lender as the Nor'easter Micro and American Micro line of credit
facilities discussed above. Further, the term loan credit agreement contains
similar loan covenant requirements. As such, the Company was not in compliance
for the March 31, 2000 reporting period, and therefore the total amount
outstanding under the term loan agreement is reflected in current maturities of
long-term debt at March 31, 2000. The Company is in discussion with the lender
to amend the agreements and adjust the financial covenant requirements. There
can be no assurances that the Company will be successful in these negotiations.
On July 1, 1999, the Company acquired AMCC for a purchase price of $1,131,000
plus an earn-out. See "Related Party Transactions." The portion of the purchase
price paid at closing was funded through the Company's working capital. The
contingent earn-out payment relating to two times the after tax earnings for
calendar year 1999 of 601,044 was paid in March. The remaining earn-out portion
of the purchase price is expected to be funded through the Company's working
capital or additional borrowings.
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 ($2,709,000 at
March 31, 2000). The purchase price was financed in part by a loan in the amount
of 1,312,000 pounds sterling ($2,085,000 at March 31, 2000). This loan calls for
monthly payments of principal and interest in the amount of 15,588 pounds
sterling ($24,768 at March 31, 2000) and matures in July 2009. The mortgage loan
note bears interest at a fixed rate of 7.598%. 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. Given European Micro
UK's current and expected operating results, it is likely that European Micro UK
will be out of compliance with one of the covenant requirements at June 30,
2000. The Company is evaluating options to address this expected instance of
non-compliance. See "Note 11 to the Consolidated Condensed Financial
Statements."
The Company has suffered losses in the current quarter and is out of compliance
with loan covenants of certain of its debt agreements. In addition, certain
other loan agreements contain contractual provisions which allow the lender to
accelerate the maturity of such borrowings. These matters raise substantial
doubt about the ability of the Company to continue as a going concern. The
Company is in discussion with the lender to amend the agreements and to adjust
the financial covenant requirements of the loan agreements. The Company has
delayed the business to business electronic commerce strategy until specific
funding is available. Currently the Company is pursuing specific funding for the
business to business electronic commerce strategy through the venture capital
markets in the United States and United Kingdom. Additionally, the Company is
taking steps to reduce the average level of inventory, thus reducing its
dependence on debt financing.
Net cash provided by operating activities during the nine-month period to March
31, 2000 amounted to $4.0 million. Significant factors providing cash were a
decrease in trade receivables, net of effects from acquisitions, of $5.7
million, a decrease in inventory, net of effects from acquisitions, of $1.3
million and a decrease in due from related parties, net of effects from
acquisitions, of $1.1 million. The amount of cash provided by the Company's
operations was partially offset by a net loss of $1.1 million, a reduction in
trade payables, net of effects from acquisition, of $2.3 million and a reduction
in accrued expenses and other current liabilities, net of the effects from
acquisitions, of $800,000.
Cash used in investing activities amounted to $4.8 million. This primarily
consisted of expenditures on fixed assets of $3.1 million, largely the purchase
of European Micro UK's office building and the acquisition of AMCC for $1.8
million.
Cash provided by financing activities amounted to $331,000. This primarily
consisted of $2.6 million used to pay down short-term borrowings, net. The
Company also used $300,000 to pay down long term borrowings assumed from the
acquisition of AMCC, $250,000 to pay down the term loan and $77,000 to pay down
the mortgage loan on the building. This was offset by $2.1 million provided by
proceeds from the mortgage loan secured by European Micro UK's office building
and $1.5 million provided by a term loan.
Overall, the Company experienced a net decrease in cash of $442,000 for the
nine-month period ended March 31, 2000.
23
<PAGE>
EUROPEAN MICRO HOLDINGS, INC.
ASSET MANAGEMENT
INVENTORY. European Micro's goal is to achieve high inventory turns and to
maintain a low level of inventory on hand and thereby reduce the Company's
working capital requirements. The Company's strategy to achieve this goal is to
both effectively manage its inventory and achieve high order fill rates.
Inventory levels may vary from period to period, due to many factors, including
increases or decreases in sales levels, the Company's practice of making
large-volume purchases when it deems such purchases to be attractive, new
products and changes in the Company's product mix.
ACCOUNTS RECEIVABLE. The Company sells its products and services to a customer
base of more than 680 value-added resellers, corporate resellers, retailers and
direct marketers. The Company offers credit terms to qualifying customers and
also sells on a pre-pay and cash-on-delivery basis. With respect to credit
sales, the Company attempts to control its bad debt exposure by monitoring
customers' creditworthiness and, where practicable, through participation in
credit associations that provide customer credit rating information for certain
accounts. Also, substantially all of European Micro UK's accounts receivables
are insured. Nor'Easter, Colchester and American Micro generally do not insure
their accounts receivable.
CURRENCY RISK MANAGEMENT
REPORTING CURRENCY. European Micro Holding's, Nor'Easter's and American Micro's
reporting and functional currency, as defined by Statement of Financial
Accounting Standards No. 52, is the U.S. dollar. The functional currency of
European Micro UK is the U.K. pound sterling and Colchester is the Singapore
dollar. European Micro UK and Colchester translate into the reporting currency
by measuring assets and liabilities using the exchange rates in effect at the
balance sheet date and results of operations using the average exchange rates
prevailing during the period.
HEDGING AND CURRENCY MANAGEMENT ACTIVITIES. The Company occasionally hedges to
guard against currency fluctuations between the U.K. pound sterling and the U.S.
dollar. Because the functional currency of the Company's main operating
subsidiary, European Micro UK, is the U.K. pound sterling, currency fluctuations
of the pound sterling relative to the U.S. dollar may have a material adverse
affect on the Company's business, financial condition and results of operations.
The Company may engage in hedging activities in the future, although no
assurances can be given that it will engage in such activities and if it does so
that such activities will be successful.
Generally, the Company's policy is not to hedge specifically against individual
daily transactions. Instead, the exposure to a currency is determined every two
to three days. This is done by comparing the bank account balances and account
receivables with accounts payable, all in the same currency to create a
"natural" hedge. Thereafter, to the extent that a bank balance and the account
receivable are not totally offset by the accounts payable, there would be a need
to cover the residual credit balance with a forward currency contract. The
Company tends to concentrate its currency management into six currencies: U.K.
pound sterling, U.S. dollar, Dutch guilder, Canadian dollar, Singapore dollar
and German Mark. It normally deems the exposure in other currencies to be
minimal. However, when the Company buys products in other currencies, the
Company may, in conjunction with current market advice, book a forward contract
to cover current and some anticipated future purchases.
DERIVATIVE INSTRUMENTS. SFAS No. 133, "Accounting for Derivate Instruments and
Hedging Activities", was issued in June 1998 and as amended by SFAS No. 137, is
effective for fiscal years beginning after June 15, 2000. The standard
establishes accounting and reporting standards for derivative instruments and
hedging activities. The Company is currently reviewing the likely financial
statement impact and the level of disclosure currently provided in its financial
statements.
ECONOMIC AND MONETARY UNION. On January 1, 1999, eleven of the fifteen member
countries of the European Union established fixed conversion rates between their
existing sovereign currencies and a new currency called the "Euro." These
countries adopted the Euro as their common legal currency on that date. The Euro
is trading on currency exchanges and is available for non-cash transactions.
Until January 1, 2002, the existing sovereign currencies will remain legal
tender in these countries. On January 1, 2002, the Euro is scheduled to replace
the sovereign legal currencies of these countries. Through the operations of
European Micro UK, the Company has significant operations within the European
Union, including many of the countries which adopted the Euro. The Company
continues to evaluate the impact that the Euro is having on its continuing
business operations and no assurances can be given that the Euro will not have a
material adverse affect on the Company's business, financial condition and
results of operations. However, the Company does not expect the Euro to have a
material affect on its competitive position as a result of price transparency
within the European Union because the Company does not rely on currency
imbalances in purchasing inventory from within the European Union. On an ongoing
24
<PAGE>
EUROPEAN MICRO HOLDINGS, INC.
basis, the Company cannot accurately predict the impact the Euro will have on
currency exchange rates or the Company's currency exchange rate risk. The
Internal Revenue Service ("IRS") has requested comments on various tax issues
raised by the Euro conversion. The IRS is expected to publish guidelines on this
issue soon and, until such time, the Company cannot predict whether the IRS
guidelines will have any tax consequences on the Company.
RELATED PARTY TRANSACTIONS
In order to achieve attractive prices from suppliers, the Company must commit to
purchasing large quantities of product. To accomplish this, the Company polls
all the Subsidiaries and Technology Express for informal commitments to help
distribute that product. Thereafter, the purchasing entity, would obtain the
product, examine the product for damage and authenticity, and then supervise the
shipping to the other Subsidiaries and the related party. In such capacity, the
purchasing entity acts as a "purchasing agent" for the other Subsidiaries and
the related party.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
----------------------------------------------------------
The Company utilizes derivative financial instruments in the form of forward
exchange contracts for the purpose of economic hedges of anticipated sale and
purchase transactions. In addition, the Company enters into economic hedges for
the purpose of hedging foreign currency market exposures of underlying assets,
liabilities and other obligations which exist as part of its ongoing business
operations. See "Currency Risk Management."
Where the foreign currency exposure is covered by a forward foreign exchange
contract, the asset, liability or other obligation is recorded at the contracted
rate each month end and the resultant mark-to-market gains and losses are
recognized as cost of sales in the current period, generally consistent with the
period in which the gain or loss of the underlying transaction is recognized.
Cash flows associated with derivative transactions are classified in the
statement of cash flows in a manner consistent with those of the exposure being
hedged.
EXCHANGE RATE SENSITIVITY
On March 31, 2000, the Company did not have any open forward exchange contracts.
Gains and losses in respect of the foreign exchange transactions were as follows
(in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, NINE MONTHS ENDED MARCH 31,
2000 1999 2000 1999
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Loss on foreign exchange
transactions $(144) $(354) $(226) $(538)
===== ===== ===== =====
</TABLE>
25
<PAGE>
EUROPEAN MICRO HOLDINGS, INC.
PART II
ITEM 1. LEGAL PROCEEDINGS.
European Micro UK and the Company have each demanded payment from Big Blue
Europe for loans made in the amounts of $150,000 and $350,000, respectively. Big
Blue Europe is currently under a court order prohibiting payment of these loans.
The 50% shareholders of Big Blue Europe, its principals, Jeff and Marie Alnwick,
and Big Blue Europe, derivatively, have filed a lawsuit against the Company,
European Micro UK, John B. Gallagher and Harry D. Shields alleging fraud, aiding
and abetting fraud, misappropriation of trade secrets, breach of fiduciary duty,
aiding and abetting breach of fiduciary duty, breach of contract and tortious
interference with contract. The complaint states that the plaintiffs seek $10
million or more in damages. The suit was filed in the United States District
Court of the Eastern District of New York, Case # 99 CV 7380 (E.D.N.Y.) (ADS).
The factual allegations underlying the lawsuit stem from European Micro UK's
joint venture interest in Big Blue Europe. The Company has a pending motion to
dismiss the complaint and has requested the New York court to refer the case to
the courts of Holland upon the doctrine of FORUM NON CONVENIENS. The Company
believes that the allegations specified in the complaint are without merit and
intends to vigorously defend the suit. As a consequence of some of the
allegations in such complaint, Messrs. Gallagher and Shields and European Micro
UK have filed an action in the United Kingdom for defamation against the
Alnwicks and others.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
(a), (b), (c) and (d). None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
The Company obtained a term loan and two lines of credit on October 28, 1999.
The term loan is in the amount of $1.5 million and is to be repaid in quarterly
installments of $125,000 each over three years. The term loan is secured by
substantially all of the assets of the Company. The two lines of credit are used
to finance the operations American Micro and Nor'Easter and are secured by
accounts receivable and inventory. 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. For a detailed description of the term loan see "Note 6 to
the Consolidated Condensed Financial Statements - Long-term borrowings." For a
detailed description of the two lines of credit see "Note 5 to the Consolidated
Condensed Financial Statements - Short-term borrowings."
Each of the term loan and the two lines of credit 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 March 31, 2000, the Company was not in compliance with the "Minimum Net
Equity" and "Interest Coverage Ratio" Covenants. Given the Company's current and
expected operating results, it is likely that the Company will remain out of
compliance with such covenants at fiscal year end.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
ITEM 5. OTHER INFORMATION.
None.
26
<PAGE>
EUROPEAN MICRO HOLDINGS, INC.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION LOCATION
- --- ----------- --------
<S> <C> <C>
2.01 Agreement for the Acquisition of Sunbelt (UK) Incorporated by reference to Exhibit 2.01
Limited by European Micro Plc dated October 26, to Registrant's Form-10-Q for the quarter
1998 ended September 30, 1998.
2.02 Merger Agreement re: AMCC dated June 29, 1999 Incorporated by reference to Exhibit 2.02
to Registrant's Form 10-K for the year
ended June 30, 1999.
2.03 Plan of Merger re: AMCC dated June 29, 1999 Incorporated by reference to Exhibit 2.03
to Registrant's From 10-K for the year
ended June 30, 1999.
2.04 Articles of Merger re: AMCC dated June 29, 1999 Incorporated by reference to Exhibit 2.04
to Registrant's Form 10-K for the year
ended June 30, 1999.
3.01 Articles of Incorporation Incorporated by reference to Exhibit No.
3.01 to Registrant's Registration
Statement (the "Registration Statement")
on Form S-1 (Registration Number
333-44393).
3.02 Certificate of Amendment of Articles of Incorporated by reference to Exhibit 3.02
Incorporation to Registrant's Form 10-Q for the quarter
ended March 31, 1998.
3.03 Bylaws Incorporated by reference to Exhibit No.
3.02 to the Registration Statement.
4.01 Form of Stock Certificate Incorporated by reference to Exhibit No.
4.01 to the Registration Statement.
4.02 1998 Stock Incentive Plan Incorporated by reference to Exhibit No.
4.02 to the Registration Statement.
4.03 1998 Stock Employee Stock Purchase Plan Incorporated by reference to Exhibit No.
4.03 to the Registration Statement.
4.04 Form of Lock-up Agreement Incorporated by reference to Exhibit No.
4.04 to the Registration Statement.
10.01 Form of Advice of Borrowing Terms with National Incorporated by reference to Exhibit No.
Westminster Bank Plc 10.01 to the Registration Statement.
10.02 Invoice Discounting Agreement with Lombard NatWest Incorporated by reference to Exhibit No.
Discounting Limited, dated November 21, 1996 10.02 to the Registration Statement.
10.03 Commercial Credit Insurance, policy number 60322, Incorporated by reference to Exhibit No.
with Hermes Kreditversicherungs-AG dated 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
27
<PAGE>
EUROPEAN MICRO HOLDINGS, INC.
EXHIBIT
NO. DESCRIPTION LOCATION
- --- ----------- --------
10.05 Consignment Agreement with European Micro Computer Incorporated by reference to Exhibit No.
B.V., dated January 1996 10.05 to the Registration Statement.
10.06 Shareholders' Cross-Purchase Agreement by and Incorporated by reference to Exhibit No.
between Jeffrey Gerard Alnwick, Marie Alnwick, 10.07 to the Registration Statement.
European Micro Plc and Big Blue Europe, B.V. dated
August 21, 1997
10.07 Trusteed Shareholders Cross-Purchase Agreement by Incorporated by reference to Exhibit No.
and between John B. Gallagher, Harry D. Shields, 10.08 to the Registration Statement.
Thomas H. Minkoff, Trustee of the Gallagher Family
Trust, Robert H. True and Stuart S. Southard,
Trustees of the Henry Daniel Shields 1997
Irrevocable Educational Trust, European Micro
Holdings, Inc. and SunTrust Bank, Nashville, N.A.,
as Trustee dated January 31, 1998
10.08 Executive Employment Agreement between John B. Incorporated by reference to Exhibit No.
Gallagher and European Micro Holdings, Inc. 10.09 to the Registration Statement.
effective as of January 1, 1998
10.09 Executive Employment Agreement between Harry D. Incorporated by reference to Exhibit No.
Shields and European Micro Holdings, Inc. 10.10 to the Registration Statement.
effective as of January 1, 1998
10.10 Contract of Employment Agreement between Laurence Incorporated by reference to Exhibit No.
Gilbert and European Micro UK dated March 14, 1998 10.11 to the Registration Statement.
10.11 Contract of Employment between Bernadette Incorporated by reference to Exhibit No.
Spofforth and European Micro UK dated April 30, 10.12 to the Registration Statement.
1996
10.12 Subscription Agreement by and between John B. Incorporated by reference to Exhibit No.
Gallagher, Harry D. Shields, Thomas H. Minkoff, 10.13 to the Registration Statement.
Trustee of the Gallagher Family Trust, Robert H.
True and Stuart S. Southard, Trustees of the Henry
Daniel Shields 1997 Irrevocable Educational Trust,
European Micro Holdings, Inc. effective as of
January 31, 1998
10.13 Administrative Services Contract by and between Incorporated by reference to Exhibit No.
European Micro Holdings, Inc. and European Micro 10.14 to the Registration Statement.
Plc effective as of January 1, 1998
10.14 Escrow Agreement between European Micro Holdings, Incorporated by reference to Exhibit No.
Inc., Tarpon Scurry Investments, Inc. and The 10.15 to the Registration Statement.
Chase Manhattan dated as of March 24, 1998
10.15 Form of Indemnification Agreements with officers Incorporated by reference to Exhibit No.
and directors 10.16 to the Registration Statement.
28
<PAGE>
EUROPEAN MICRO HOLDINGS, INC.
EXHIBIT
NO. DESCRIPTION LOCATION
- --- ----------- --------
10.16 Form of Transfer Agent Agreement with Chase Mellon Incorporated by reference to Exhibit No.
Shareholder Services, L.L.C. 10.17 to the Registration Statement.
10.17 Form of Credit Agreement by and between European Incorporated by reference to Exhibit No.
Micro UK and National Westminster Bank Plc 10.17 to the Annual Report on Form 10-K
for the fiscal year ended June
30, 1998 filed with the
Commission on September 28, 1998.
10.18 Consulting Contract dated September 10, 1998 by Incorporated by reference to Exhibit 10.19
and between European Micro Holdings, Inc. and The to Registrant's Form 10-Q for the quarter
Equity Group ended September 30, 1998.
10.19 Service Agreement dated October 28, 1998 by and Incorporated by reference to Exhibit 10.20
between European Micro Holdings, Inc. and Michael to Registrant's Form 10-Q for the quarter
Gesner ended September 30, 1998.
10.20 Service Agreement dated October 28, 1998 by and Incorporated by reference to Exhibit 10.21
between European Micro Plc and Gerard O'Rourke to Registrant's Form 10-Q for the quarter
ended September 30, 1998.
10.21 Employment Agreement dated July 1, 1999 between Incorporated by reference to Exhibit 10.21
John B. Gallagher and American Micro to Registrant's Form 10-K for the year
ended June 30, 1999.
10.22 Loan and Security Agreement dated October 29, 1999 Incorporated by reference to Exhibit 10.22
among American Micro, the Company, Nor'Easter and to Registrant's Form 10-Q for the quarter
SouthTrust Bank, N.A. re: Line of Credit to ended September 30, 1999.
American Micro
10.23 Loan Agreement dated October 29, 1999 among the Incorporated by reference to Exhibit 10.23
Company, American Micro, Nor'Easter and SouthTrust to Registrant's Form 10-Q for the quarter
Bank, N.A. re: Term Loan to the Company ended September 30, 1999.
10.24 Loan Agreement dated October 29, 1999 among Incorporated by reference to Exhibit 10.24
Nor'Easter, the Company, American Micro and to Registrant's Form 10-Q for the quarter
SouthTrust Bank, N.A. re: Line of Credit to ended September 30, 1999.
Nor'Easter
10.25 Specific Agreement for the Provision of Provided herewith.
Professional Services dated as of March 17, 2000
between the Company and Cap Gemini UK plc
11.01 Statement re: Computation of Earnings Provided herewith.
15.01 Letter re: Unaudited Financial Information Provided herewith.
18.01 Letter re Change in Accounting Principles Not applicable.
19.01 Report Furnished to Security Holders Not applicable.
22.01 Published Report Regarding Matters Submitted to Not applicable.
Vote of Security Holders
23.01 Consents of experts and counsel Not applicable.
24.01 Power of Attorney Not applicable.
27.01 Financial Data Schedule Provided herewith.
</TABLE>
(b) Reports on Form 8-K.
29
<PAGE>
EUROPEAN MICRO HOLDINGS, INC.
None.
30
<PAGE>
EUROPEAN MICRO HOLDINGS, INC.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Dated: May 15, 2000 EUROPEAN MICRO HOLDINGS, INC.
By: /s/ John B. Gallagher
------------------------
John B. Gallagher, Co-President
31
SPECIFIC AGREEMENT FOR THE PROVISION
OF PROFESSIONAL SERVICES
EXHIBIT 10.25
-------------
BETWEEN:CAP GEMINI UK PLC ("CAP GEMINI")
OF: Cap Gemini House, 130 Shaftesbury Avenue, London W1V 8HH
AND European Micro Holdings Inc ("THE CUSTOMER")
OF: 20 - 24 Church Street, Altrincham, Cheshire, WA14 4DW
Commencement Date:
(If no date is inserted the Commencement Date shall be
the date of Cap Gemini signature below.)
AGREEMENT
Cap Gemini shall provide services ("THE SERVICES") to the Customer as set out in
the Schedule from the Commencement Date on the terms set out herein and in Cap
Gemini "General Terms and Conditions" (Reference Stan 13_amended, dated
24.02.00)
<PAGE>
SPECIFIC AGREEMENT FOR THE PROVISION
OF PROFESSIONAL SERVICES
1 FEES
1.1 The Customer shall pay to Cap Gemini the fee rates ("THE FEE RATES")
attached in respect of the Services provided by Cap Gemini personnel on a
time and materials basis. Cap Gemini records of such time and materials
shall, in the absence of manifest error, be conclusive and binding proof
of the Services provided. Invoices shall be raised at the end of each
calendar month in respect of Services provided during that month.
1.2 The Customer shall make additional payments in respect of the the cost of
travel, hotel and other expenses properly incurred by Cap Gemini staff.
1.3 The Fee Rates and any other charges specified herein may be varied by Cap
Gemini at its discretion from time to time but not more frequently than
every six (6) months from the publication date of the attached Fee Rates.
1.4 Any work done by Cap Gemini outside the scope of the Services at the
request or with the agreement of the Customer shall unless otherwise
agreed be performed and fees therefore shall be paid in accordance with
this Agreement.
1.5 Notwithstanding any other provision of this Specific Agreement or the Cap
Gemini General Terms and Conditions referred to above Cap Gemini shall be
entitled to charge for time spent by its personnel while they are
available for work at the Customer's premises but are unable to provide
services because of a failure by the Customer to meet its obligations.
2 PERSONNEL
2.1 Cap Gemini will provide the personnel required to fulfil the Services and
at all times the conditions of employment of Cap Gemini apply to such
personnel. However, Cap Gemini staff shall when working on the Customer's
premises conform to the general working terms and conditions of the
Customer provided that Cap Gemini has been informed in writing of such
terms and conditions.
2.2 Staff are assigned to projects at their current grades and if a person is
promoted during a project one (1) month's notice of the new fee rate will
be given to the Customer. If the Customer does not agree with the new rate
Cap Gemini will offer a replacement in the same grade as that from which
the person concerned has been promoted.
2.3 There is no deduction for fees for special holidays given by the Customer
to its own staff or for up to the equivalent of two (2) days per quarter
when a person attends Cap Gemini training and meetings. Fees are deducted
however for each day that a person is absent from the assignment due to
holidays, sickness or for any other reasons not referred to in this
Sub-Clause.
2.4 Cap Gemini reserves the right to substitute new personnel for the
personnel assigned to the Customer from time to time and the Customer may
request such a substitution. In either event the Customer may not refuse
alternative personnel offered by Cap Gemini unless it gives good reasons
in writing to the satisfaction of Cap Gemini for its refusal within ten
(10) days of first meeting the proposed substitute.
2.5 The Customer hereby acknowledges that the members of staff provided by Cap
Gemini hereunder are charged out at either the short term or long term
rates provided for by the Fee Rates in accordance with the expected
duration of this Agreement as represented by the Customer to Cap Gemini.
In the event of the Customer wishing Cap Gemini to withdraw some of its
staff prior to the termination hereof the Customer shall first give to Cap
Gemini.
(i) not less than fourteen (14) days written notice of such withdrawal in
the case of staff provided at short term fee rates; and
(ii) not less than three (3) months written notice of such withdrawal in
the case of staff provided at long term fee rates.
3 THE SERVICES
3.1 Cap Gemini will agree a procedure for monitoring the progress of the
Services with the Customer. This will include regular review meetings
attended by representatives of the Customer and Cap Gemini authorised to
make decisions with respect to the provision of the Services.
3.2 Where the Services comprise the development or modification of a computer
system, on completion of each stage of the development or modification,
the Customer shall undertake a review of work completed to date, changes
in requirements, revised resource estimates and schedules, and
responsibility for outstanding tasks. Such stages may include business and
functional system design, computer system design, program development,
acceptance testing and implementation.
3.3 Each system developed or modified by Cap Gemini hereunder shall be deemed
to be handed over when the systems documentation agreed to be produced by
Cap Gemini has been delivered to the Customer and that system has been
installed on the Customer's processor in readiness for acceptance testing
or would have been so installed were it not for a failure on the part of
the Customer to co-operate in or allow such installation.
3.4 At the acceptance testing stage of each system developed or modified the
Customer must ensure by setting up comprehensive test data that each
system performs in accordance with the relevant systems documentation. The
acceptance testing must be completed within two (2) weeks of Cap Gemini
handing over the relevant system. The Customer must express in writing
full and precise details of any failure on the part of that system to
conform to the relevant systems documentation. If any such failure
prevents the Customer from continuing acceptance testing a part of the
system the specified period in respect of that part will be extended by
the time it takes Cap Gemini to correct such failure to allow for the
completion of acceptance testing of that part of the system once the
failure has been corrected.
3.5 Each system developed or modified by Cap Gemini hereunder shall be deemed
to be accepted and Cap Gemini obligations in respect of the development
and modification of that system discharged on the first to occur of the
following.
(i) completion of acceptance testing including correction of failures
notified in writing to Cap Gemini; or
(ii) the end of the two (2) week period without acceptance tests having
been run or without the Customer having expressed in writing to Cap
Gemini any dissatisfaction in respect of such system; or
(iii)the Customer modifying the system or using it other than for the
purposes of acceptance testing or training.
4 INTELLECTUAL PROPERTY RIGHTS
The intellectual property rights in any original programs, specifications,
designs or reports wholly created in the course of supplying the Services
will become the property of the Customer upon payment of any monies due.
However wherever a program, specification, design or report is an
adaptation of or is derived from existing materials the ownership of such
intellectual property rights in those programs, specifications, designs or
reports remains with the owner thereof and is not affected by the supply
of the Services notwithstanding that a significant amount of original
material unique to the Customer has been incorporated in a process of
modification. Nothing herein shall prevent Cap Gemini from using the
knowledge and know-how of a non confidential or non proprietary nature
gained in building all programs, specifications, designs or reports
referred to in this paragraph in any combination or permutation when
providing services to others.
5 TERMINATION
In addition to the termination provisions contained in the Cap Gemini
General Terms and Conditions referred to above and without prejudice to
any rights contained herein or accrued hereunder either party shall be
entitled to terminate this Agreement by giving to the other party four (4)
weeks notice in writing in the initial 18 week period and three (3)
month's notice in writing thereafter of its intention to terminate.
Page 2 of 4
<PAGE>
SPECIFIC AGREEMENT FOR THE PROVISION
OF PROFESSIONAL SERVICES
6 COMPUTER TIME
Both parties recognise that availability of adequate computer time is an
essential requirement for program development. If the Customer's program
development is being carried out by Cap Gemini on the Customer's computer
and sufficient computer time is not made available or if Cap Gemini for
reasons outside Cap Gemini's control, is prevented from making use of
computer time that the Customer is providing, then Cap Gemini reserves the
right to charge for resources assigned even if not utilised.
7 REPRESENTATIONS AND WARRANTIES
Except as set out below or else where in this Agreement or in the Cap
Gemini General Terms and Conditions there are no representations or
warranties which have been made by Cap Gemini in respect of the Services
and upon which the Customer has relied in entering into this Agreement.
8 THE YEAR 2000
The software utilised by the Customer (including any software which is
stored on any medium or device and/or embedded within any apparatus)
(together "Programs") may have been written using dates with no century
(i.e. 95 rather than 1995) in order to save space in the files and memory.
Cap Gemini shall not be responsible for making changes to the Programs to
accommodate the change of century. Where changes are needed, they do not
form part of the Services.
9 EUROPEAN ECONOMIC AND MONETARY UNION
Cap Gemini shall not be responsible for making changes to the Programs (as
that term is defined in clause 8) or maintaining them or installing new
Programs or hardware so as to ensure any requirement for European Euro
processing or any requirement of cross compatibility or transition between
any existing unit of currency and the European Euro. Where changes or
maintenance or new installations are needed, they do not form part of the
Services.
Page 3 of 4
<PAGE>
SIGNED ON BEHALF OF CAP GEMINI: SIGNED ON BEHALF OF THE CUSTOMER:
SIGNATURE SIGNATURE
------------------------ ------------------------
NAME NAME
------------------------ ------------------------
DATE DATE
------------------------ ------------------------
( CAP GEMINI UK PLC 2000
Page 4 of 4
<PAGE>
GENERAL TERMS AND CONDITIONS
1. DEFINITIONS
For the purposes of these general terms and conditions ("these Terms") and any
Specific Agreement (as hereinafter defined) the following words have the
following meaning: -
"AUTHORISED REPRESENTATIVE" means any director or other duly authorised employee
of Cap Gemini or any Cap Gemini Company or of the Customer.
"CONTRACT" means these Terms and any relevant Specific Agreement.
"CUSTOMER" means a person to whom Cap Gemini supplies Products or Services.
"CAP GEMINI" means Cap Gemini UK plc.
"CAP GEMINI COMPANY" means the holding company or any subsidiary company of Cap
Gemini within the definition contained in Section 736 Companies Act 1985.
"PARTIES" means Cap Gemini and the Customer.
"PARTY" means either Cap Gemini or the Customer.
"PRODUCTS" means any products to be supplied by Cap Gemini to a Customer
including but not limited to hardware, software and documentation.
"SPECIFIC AGREEMENT" means an agreement in writing between the Parties including
any incorporated schedules, relating to the supply of Services or Products which
references these Terms.
"SERVICES" means any services to be provided by Cap Gemini to a Customer.
2. CONTRACT
2.1 Any Specific Agreement submitted by Cap Gemini to the Customer shall
constitute an offer made on the terms and conditions contained therein and
these Terms. In the event of inconsistency between the terms of a Specific
Agreement and these Terms the Specific Agreement shall prevail.
2.2 Any supply of Services or Products by Cap Gemini otherwise than under a
Specific Agreement shall be covered by these Terms.
2.3 The Contract constitutes the entire agreement between the Parties with
respect to the subject matter contained herein. All other terms, and all
conditions and warranties whether express or implied, statutory or
otherwise, and all representations, statements, negotiations,
understandings and undertakings either written or oral made before or after
the date of any Specific Agreement are excluded and superseded except where
they appear herein or in any Specific Agreement or are specifically agreed
after the date of any Specific Agreement in writing by an Authorised
Representative from both Parties or are implied and the exclusion of which
is not permitted by Law. The Parties acknowledge that no reliance is placed
on any representations made but not embodied in the Contract.
2.4 No estimate or budgetary quotation which is given to the Customer in
connection with the supply of Services or Products shall be construed as
part of these Terms unless specifically incorporated in writing into the
Contract. Any estimate or budgetary quotation shall not be deemed open for
acceptance by the Customer.
2.5 Cap Gemini may at any time request a Cap Gemini Company to act as its agent
in the performance of any Specific Agreement and such Cap Gemini Company
shall have authority to sign any Specific Agreement as agent for Cap
Gemini.
3. LIABILITY AND INDEMNITY
3.1 This Clause 3 prevails over all other clauses in the Contract.
3.2 Neither Party excludes or limits its liability to the other Party for death
or personal injury caused by its negligence, or fraudulent
misrepresentation.
3.3 The aggregate liability of either Party in respect of loss or damage to
tangible property of the other Party caused by its negligence shall not
exceed five million pounds ((pound)5,000,000).
3.4 Except as provided in Clauses 3.2 and 3.3, the liability of either Party
for a claim made by the other Party in respect of loss or damage suffered
by that Party flowing from any one event or series of connected events
shall not exceed the higher of (a) the total payments made by the Customer
under the relevant Specific Agreement(s) during the two (2) years
immediately prior to written notification of the claim, or (b) the sum of
five hundred thousand pounds ((pound)500,000), however that liability
arises including (without limitation) breach of contract, tort,
misrepresentation or breach of statutory duty.
3.5 Except as provided in Clauses 3.2 and 3.3, where the Parties have not
signed a Specific Agreement but Cap Gemini has supplied Products or
Services under these Terms, the liability of either Party for a claim made
by the other Party in respect of loss or damage suffered by that Party
flowing from any one event or series of connected events shall not exceed
five hundred thousand pounds ((pound)500,000) however that liability arises
including (without limitation) breach of contract, tort, misrepresentation
or breach of statutory duty.
3.6 Neither Party shall be liable to the other Party for any loss of profit,
production, anticipated savings, goodwill or business opportunities or any
type of indirect, economic or consequential loss even if that loss or
damage was reasonably foreseeable or that Party was aware of the
possibility of that loss or damage arising.
4. CONFIDENTIALITY
4.1 The Parties agree to treat in confidence the other's data documentation and
information which is marked confidential or which is by its nature clearly
confidential ("Confidential Information"). The Parties further agree not to
disclose any Confidential Information to any other person other than its
own employees under conditions of confidentiality and then only to the
extent required for proper implementation and utilisation and the proper
performance of any Specific Agreement. If Cap Gemini appoints a Cap Gemini
Company to supply Services or Products Cap Gemini may disclose such
Confidential Information to that company to enable it to supply any
Services or Products under the same conditions of confidentiality. Nothing
shall prevent Cap Gemini from using the knowledge and know-how gained in
providing the Services in any combination or permutation for any other
purpose.
4.2 Nothing contained herein shall be construed to impose a confidentiality
obligation on a Party in respect of:-
(a) any matter appearing in public literature or otherwise within the
public domain unless the information is in the public domain as a
result of a breach of this Agreement or any Specific Agreement by that
Party; or
(b) any information or knowledge possessed by that Party prior to
disclosure to it by the other or rightfully acquired from sources other
than the other Party; or
(c) any information or knowledge acquired in a bona fide arm's length
transaction by the Party making the disclosure.
4.3 Upon any termination of this Contract, each Party shall cause all
Confidential Information belonging to the other Party in whatever medium it
is recorded or held to be returned, deleted or destroyed according to the
written instructions of the other Party.
4.4 Cap Gemini reserves the right to sub-contract all or any part of its rights
and obligations under these Terms or any Specific Agreement and any such
sub-contractor may be passed such confidential information as may be
necessary for such purpose. For the avoidance of doubt Cap Gemini will
ensure that any such sub-contractor will be bound to confidential
undertakings provisioned no less onerous as stated herein.
4.5 The provisions of this Clause 4 shall continue after the termination of the
Contract.
5. INTELLECTUAL PROPERTY RIGHTS
5.1 The Customer acknowledges that it owns no copyright or other intellectual
property rights in any of the Products including but not limited to
copyright in documentation and programs in either eye-readable or in
machine-readable form.
5.2 The Customer shall not delete proprietary information or trade mark notices
if any appearing on any documentation supplied to it by Cap Gemini at any
time. Further, the Customer will ensure that all copies of documentation
made by it under the provisions hereof or any Specific Agreement shall
carry a copyright notice in a form approved by Cap Gemini.
5.3 The Customer undertakes that it shall ensure that its employees will not
make copies in whole or in part of any Products or of any know-how relating
thereto or any other material provided or in any way obtained in
eye-readable form except for the Customer's own use whether supplied before
on or after the date of any Specific Agreement and ownership of such copies
shall vest in Cap Gemini.
Page 5 of 2
<PAGE>
GENERAL TERMS AND CONDITIONS
6. PRICES, FEES AND PAYMENT
6.1 The prices or fees chargeable by Cap Gemini in respect of the supply of
Services or Products are calculated with specific reference to the
obligations undertaken and warranties and representations made by Cap
Gemini.
6.2 Payment of invoices shall be made within twenty one (21) days of the
invoice date. Cap Gemini shall have the right to charge interest from the
invoice date on overdue invoices without further notice at a rate of four
(4) per cent per annum over the base rate of Midland Bank plc for the time
being in force.
6.3 Amounts payable by the Customer are exclusive of value added tax and other
taxes duties levies or other deductions or withholdings. The Customer shall
be obliged to pay in accordance with Clause 6.2 above any such taxes or
other amounts notified to it by Cap Gemini.
7. CUSTOMER OBLIGATIONS
7.1 Wherever required in respect of the supply of Services or Products the
Customer shall provide Cap Gemini staff, employees, agents and
sub-contractors with such accommodation computer resources and other
facilities as may be necessary, during and outside normal office hours, for
such staff, employees, agents and sub-contractors to supply the Services or
Products. The accommodation shall be suitably equipped and shall provide
facilities for making and receiving telephone calls to and from Cap Gemini
in private.
7.2 Support services to be provided by Cap Gemini, including but not limited
to, project management, planning and review, preparation of user
documentation and computer installation and operation shall be as agreed in
writing. Any support services not so agreed upon shall be furnished by the
Customer.
7.3 The Customer shall advise Cap Gemini of all rules and regulations relating
to the conduct of the Customer's employees and of specific regulations or
practices which Cap Gemini personnel should comply with. Cap Gemini
personnel shall use reasonable endeavourS to comply with such rules and
regulations whenever they are on the Customer's premises. The Customer
shall take all reasonable precautions to ensure the health and safety of
Cap Gemini staff, employees, agents and sub-contractors while they are on
the Customer's premises.
7.4 The Customer shall give prompt attention to any matter raised by Cap Gemini
relating to the obligations of the Customer under this Clause.
8. PERSONNEL
Without in any way restricting the right of an employee freely to accept
employment and change employment if either Party induces an employee of the
other Party to enter its service at any time during the supply of the
Services or Products then that Party shall pay to the other an amount being
equivalent to the employee's net annual salary in recognition only of the
disruption that such inducement would cause to the efficient conduct of the
other Party's business.
9. TERMINATION
9.1 Cap Gemini shall be entitled by notice in writing, without prejudicing any
rights contained herein or accrued hereunder or under a Specific Agreement,
to terminate forthwith any provision of the Services or supply of Products
if any invoice raised by Cap Gemini is still outstanding after thirty (30)
days and the Customer continues to be in default for thirty (30) days after
written notice of default has been given to it by Cap Gemini.
9.2 Without prejudicing any rights hereunder either Party shall be entitled to
terminate forthwith any provision of the Services or supply of Products by
notice in writing:-
(a) if the other Party has committed a material breach or persistent
breaches of these Terms or any Specific Agreement and continues such
default for thirty (30) days after written notice has been given to
such Party with a request that such material breach or persistent
breaches are rectified and no such rectification takes place; or
(b) upon the other Party passing a resolution for winding up (save for the
purpose of amalgamation or reconstruction and where the amalgamated or
reconstructed company agrees to adhere to these Terms and any Specific
Agreement) or suffering a winding-up order being made against it or
going into administration; or
(c) if a receiver or administrative receiver is appointed or an
encumbrancer takes possession of the undertaking or assets (or any part
thereof) of the other Party; or
(d) if the other Party is unable to pay its debt (within the meaning of
Section 123 of the Insolvency Act 1986 or any statutory re-enactment or
modification thereof) or ceases to or threatens to cease to carry out
its business or enters into a composition with its creditors; or
(e) within six (6) months of distress or execution being levied against any
property of the other Party.
10. FORCE MAJEURE
10.1 Neither Party will be liable for delay in performing obligations or for
failure to perform obligations if the delay or failure resulted from
circumstances beyond its reasonable control including but not limited to,
act of God or governmental act, flood, fire, explosion, accident, civil
commotion, industrial dispute, or transportation or communications
problems, or impossibility of obtaining materials.
10.2 Each Party agrees to give written notice as soon as reasonably possible to
the other on becoming aware of an event of force majeure and such notice
shall contain details of the circumstances giving rise to the event of
force majeure.
11. NOTICE
11.1 Any notice given under this Agreement must be given in writing and sent or
delivered by hand, post, or facsimile to the other Party at the address
stated in the Agreement (or any other address notified for this purpose by
that Party) provided that any;
(a) notice delivered by hand shall be deemed to have been given when
deposited at the appropriate address;
(b) notice sent by post shall be deemed to have been given forty eight (48)
hours after a first class registered letter is posted to the
appropriate address; and
(c) notice sent by facsimile shall be deemed to have been given on
transmission to the correct number, provided that such notice is
confirmed within forty eight (48) hours as in a) or b) above.
12. GENERAL
12.1 No failure, delay or indulgence on the part of either Party in exercising
any power or right under this Contract shall operate as a waiver of such
power or right.
12.2 No single or partial exercise of any power or right by either Party shall
preclude any other or further exercise thereof or the exercise of any other
such power or right under this Contract.
12.3 If any provision of this Contract shall be held by a court of competent
jurisdiction to be invalid or voidable such provision shall be struck out
and the remainder thereof shall stand in full force and effect.
12.4 The Customer shall fully indemnify and hold Cap Gemini harmless in respect
of any claims by third parties which are caused by or arise from any act or
omission of Cap Gemini or of any employee, agent or sub-contractor carried
out pursuant to instructions of the Customer.
12.5 In the event of there being any deficiency in the supply by Cap Gemini of
any Services or Products Cap Gemini shall always be afforded a reasonable
opportunity to correct such deficiency.
12.6 Neither party may assign this Contract or any of its rights and obligations
hereunder without the prior written consent of the other provided that
neither party shall require consent for assignment within its own group of
companies (for the avoidance of doubt group of companies shall mean
subsidiary companies as defined by section 736 of the Companies act 1980).
12.7 Clause headings are inserted for convenience of reference only and shall
have no effect in interpreting these Terms or any Specific Agreement.
12.8 A reference to a clause or a schedule in any Specific Agreement shall mean
a reference to a clause in or a schedule set out within that Specific
Agreement unless it is stated to the contrary.
12.9 Any publicity to be issued in connection with this Contract (including any
dispute arising) shall only be issued subject to prior written consent from
the Parties, such consent shall not be unreasonably withheld.
Page 6 of 2
<PAGE>
GENERAL TERMS AND CONDITIONS
12.10 In the event of frustration of this Contract each Party shall be relieved
of the requirement to perform obligations as from the date of frustration
and the Customer shall be obliged to pay Cap Gemini all sums already due
and payable as at the date of frustration together with payment for all
work done and all expenses incurred by Cap Gemini up to the date of
frustration whether or not payment would otherwise have been due and
payable as at that date.
12.11 No alteration or addition to these Terms shall be valid unless agreed in
writing by the Authorised Representatives.
12.12 Where the Customer issues a purchase order to Cap Gemini relating to the
Services or Products, the Customer agrees that unless otherwise agreed the
terms of such purchase order shall not apply and such purchase order shall
be accepted by Cap Gemini for the sole purpose of referencing invoices.
12.13 This Contract shall be governed by English law. The Parties will seek to
resolve disputes between them by an Alternative Dispute Resolution ("ADR")
technique recommended by the Centre for Dispute Resolution ("CEDR"). If
the Parties fail to settle the dispute within thirty (30) days following
their agreement to involve CEDR or either Party refuses to submit to ADR,
the dispute shall be referred to the non-exclusive jurisdiction of the
English courts.
Page 7 of 2
<TABLE>
EUROPEAN MICRO HOLDINGS, INC.
EXHIBIT 11.01
STATEMENT RE: COMPUTATION OF EARNINGS
The calculation of earnings per share are detailed in the table below:
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
-----------------------------------------------------------
2000 1999 2000 1999
---- ---- ---- ----
EARNINGS (LOSS)
<S> <C> <C> <C> <C>
Net income (in thousands) $ (1,308) $ 22 $ (1090) $ 768
---------- ---------- ---------- ----------
WEIGHTED AVERAGE NUMBER OF SHARES
Outstanding common stock during the period 4,933,900 4,933,900 4,933,900 4,933,900
Contingently issuable shares 24,392 42,983 74,504 20,206
---------- ---------- ---------- ----------
BASIC WEIGHTED AVERAGE NUMBER OF SHARES 4,958,292 4,976,883 5,008,404 4,954,106
Effect of dilutive stock options and other contingent shares - 43,670 - 24,206
---------- ---------- ---------- ----------
DILUTED WEIGHTED AVERAGE NUMBER OF SHARES 4,958,292 5,020,553 5,008,404 4,978,312
========== ========== ========== ==========
Basic earnings (loss) per share $ (0.26) $ 0.00 $ (0.22) $ 0.15
========== ========== ========== ==========
Diluted earnings (loss) per share $ (0.26) $ 0.00 $ (0.22) $ 0.15
========== ========== ========== ==========
</TABLE>
During the three-month period ended March 31, 2000, the Company issued options
to purchase up to 10,000 shares of Common Stock at exercise prices ranging from
$9.00 to $9.25 per share. The above dilutive earnings per share calculations for
the three-month and nine-month periods ended March 31, 2000, exclude the effect
of options to purchase 329,000 shares of common stock at exercise prices ranging
from $10.00 to $12.00 per share, due to the fact they were anti-dilutive (i.e.,
the exercise price was greater than the average market price for the respective
periods). The above dilutive earnings per share calculations for the three-month
and nine-month periods ended March 31, 1999, exclude the effect of options to
purchase 20,000 shares of common stock at an exercise price of $11.00 per share,
due to the fact they were anti-dilutive. Also see "Note 4 (Goodwill) to the
Consolidated Condensed Financial Statements" related to contingently issuable
shares related to acquisitions. However, the effect of contingent shares related
to the payment due after the first contingent earn-out period of the Sunbelt
acquisition has not been included in the three month period ended March 31,
2000, as such payment was paid in cash in November 1999. Also the effect of the
contingent shares related to the second contingent earn-out of the Sunbelt
acquisition are not included, as the conditions necessary for such contingent
shares to be issued have not been met as of March 31, 2000. However, the effect
of contingent shares related to the guaranteed earn-out amount payable after the
second contingent earn-out period is included. The effect of contingent shares
related to the first earn-out of American Micro is not included in the
three-month period ended March 31, 2000, 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 are not determinable.
EUROPEAN MICRO HOLDINGS, INC.
INDEPENDENT ACCOUNTANTS' REPORT
EXHIBIT 15.01
We have reviewed the accompanying consolidated condensed balance sheet of
European Micro Holdings, Inc. and subsidiaries as of March 31, 2000, and the
related consolidated condensed statements of operations for the three-month and
nine-month periods then ended, and the related consolidated condensed statements
of stockholders' equity and cash flows for the nine-month period then ended.
These financial statements are the responsibility of the company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying consolidated condensed financial statements for them
to be in conformity with generally accepted accounting principles.
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, 1999, and the related consolidated statements of
operations, shareholders' equity, and cash flows for the year then ended (not
presented herein); and in our report dated August 20, 1999, we expressed an
unqualified opinion on those consolidated financial statements. In our opinion,
the information set forth in the accompanying consolidated condensed balance
sheet at June 30, 1999, is fairly stated, in all material respects, in relation
to the consolidated balance sheet from which it has been derived.
The accompanying consolidated condensed financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
11 to the consolidated condensed financial statements, the Company has suffered
losses from operations in the current quarter and is out of compliance with loan
covenants of certain of its debt agreements. In addition, certain other loan
agreements contain contractual provisions which allow the lender to accelerate
the maturity of such borrowings. Such conditions indicate that the Company may
be unable to continue as a going concern. Management's plans in regard to these
matters are also described in Note 11. The consolidated condensed financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
/s/ KPMG
Nashville, TN
May 8, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheets and consolidated statement of operations of the
Company and the notes thereto set forth in the Prospectus. This information is
qualified in its entirety by reference to such financial information.
</LEGEND>
<CIK> 0001052914
<NAME> European Micro Holdings, Inc.
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> JUN-30-1999 JUN-30-1999
<PERIOD-START> JAN-01-2000 JUL-01-1999
<PERIOD-END> MAR-31-2000 MAR-31-2000
<CASH> 3,107 3,547
<SECURITIES> 0 0
<RECEIVABLES> 10,028 15,017
<ALLOWANCES> 94 79
<INVENTORY> 7,820 7,232
<CURRENT-ASSETS> 21,814 27,809
<PP&E> 4,771 1410
<DEPRECIATION> 1,052 798
<TOTAL-ASSETS> 28,774 30,599
<CURRENT-LIABILITIES> 13,583 15,965
<BONDS> 1,735 23
0 0
0 0
<COMMON> 49 49
<OTHER-SE> 13,407 14,294
<TOTAL-LIABILITY-AND-EQUITY> 28,774 30,599
<SALES> 24,354 91,663
<TOTAL-REVENUES> 24,354 91,663
<CGS> 22,499 82,406
<TOTAL-COSTS> 3,323 9,747
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 7 45
<INTEREST-EXPENSE> 148 676
<INCOME-PRETAX> (1,609) (1,099)
<INCOME-TAX> (301) (9)
<INCOME-CONTINUING> (1,308) (1,090)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,308) (1,090)
<EPS-BASIC> (0.26) (0.22)
<EPS-DILUTED> (0.26) (0.22)
</TABLE>
