SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NO. 0-23949
EUROPEAN MICRO HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Nevada 65-0803752
(State or Other Jurisdiction (I.R.S. Employer Identification Number)
of Incorporation or Organization)
6073 N.W. 167th Street, Unit C-25, Miami, Florida 33015
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (305) 825-2458
Securities registered pursuant to Section 12(g)
of the Act:
Common Stock, par value $0.01 per share
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months, and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ___
The aggregate market value of the voting common stock held by
non-affiliates of the Registrant on September 29, 2000, was $7,994,272 based on
the average bid and asked prices on such date of $5.50.
The Registrant had 4,933,900 shares of Common Stock, par value $0.01
per share, outstanding on September 29, 2000.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the definitive proxy or information statement for the 2000
Annual Meeting of Stockholders to be filed by the Registrant with the Securities
and Exchange Commission under Regulation 14A are incorporated by reference in
Part III of this Form 10-K Report.
<PAGE>
PART I
ITEM 1. BUSINESS.
GENERAL DESCRIPTION OF BUSINESS
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS. THIS FILING CONTAINS
FORWARD-LOOKING STATEMENTS, INCLUDING STATEMENTS REGARDING, AMONG OTHER THINGS,
(A) EUROPEAN MICRO HOLDINGS, INC.'S ("EUROPEAN MICRO" OR THE "COMPANY")
PROJECTED SALES AND PROFITABILITY, (B) THE COMPANY'S GROWTH STRATEGIES, (C)
ANTICIPATED TRENDS IN THE COMPANY'S INDUSTRY, (D) THE COMPANY'S FUTURE FINANCING
PLANS, (E) THE COMPANY'S ANTICIPATED NEEDS FOR WORKING CAPITAL AND ITS ABILITY
TO COMPLY WITH THE FINANCIAL COVENANTS CONTAINED IN LOAN AGREEMENTS AND (F)
BENEFITS RELATED TO THE ACQUISITIONS OF AMERICAN SURGICAL SUPPLY CORP. OF
FLORIDA D/B/A AMERICAN MICRO COMPUTER CENTER ("AMCC"), SUNBELT (UK) LIMITED
("SUNBELT") AND H&B TRADING INTERNATIONAL ("H&B"). IN ADDITION, WHEN USED IN
THIS FILING, THE WORDS "BELIEVES," "ANTICIPATES," "INTENDS," "IN ANTICIPATION
OF," "EXPECTS," AND SIMILAR WORDS ARE INTENDED TO IDENTIFY CERTAIN
FORWARD-LOOKING STATEMENTS. THESE FORWARD-LOOKING STATEMENTS ARE BASED LARGELY
ON THE COMPANY'S EXPECTATIONS AND ARE SUBJECT TO A NUMBER OF RISKS AND
UNCERTAINTIES, MANY OF WHICH ARE BEYOND THE COMPANY'S CONTROL. ACTUAL RESULTS
COULD DIFFER MATERIALLY FROM THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF
CHANGES IN TRENDS IN THE ECONOMY AND THE COMPANY'S INDUSTRY, REDUCTIONS IN THE
AVAILABILITY OF FINANCING AND AVAILABILITY OF COMPUTER PRODUCTS ON TERMS AS
FAVORABLE AS EXPERIENCED BY THE COMPANY IN PRIOR PERIODS AND OTHER FACTORS. IN
LIGHT OF THESE RISKS AND UNCERTAINTIES, THERE CAN BE NO ASSURANCE THAT THE
FORWARD-LOOKING STATEMENTS CONTAINED IN THIS FILING WILL IN FACT OCCUR. THE
COMPANY DOES NOT UNDERTAKE ANY OBLIGATION TO PUBLICLY RELEASE THE RESULTS OF ANY
REVISIONS TO THESE FORWARD-LOOKING STATEMENTS THAT MAY BE MADE TO REFLECT ANY
FUTURE EVENTS OR CIRCUMSTANCES.
UNLESS THE CONTEXT OTHERWISE REQUIRES AND EXCEPT AS OTHERWISE
SPECIFIED, REFERENCES HEREIN TO "EUROPEAN MICRO" OR THE "COMPANY" INCLUDE
EUROPEAN MICRO HOLDINGS, INC. AND ITS FIVE 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), AMERICAN MICRO COMPUTER CENTER, INC., A FLORIDA CORPORATION
("AMERICAN MICRO"), ENGENIS.COM LTD., A COMPANY ORGANIZED UNDER THE LAWS OF THE
UNITED KINGDOM ("ENGENIS"), (COLLECTIVELY, THE FIVE WHOLLY-OWNED SUBSIDIARIES
ARE REFERRED TO AS THE "SUBSIDIARIES").
OVERVIEW
The Company is an independent distributor of microcomputer products,
including personal computers, memory modules, disc drives and networking
products, to customers mainly in Western Europe and to customers and related
parties in the United States and Asia. The Company's customers consist of more
than 770 value-added resellers, corporate resellers, retailers, direct marketers
and distributors. The Company generally does not sell to end-users.
Substantially all of the products sold by the Company are manufactured by
well-recognized manufacturers such as IBM, Compaq and Hewlett-Packard, although
the Company generally does not obtain its inventory directly from such
manufacturers. The Company monitors the geographic pricing strategies related to
such products, currency fluctuations and product availability in an attempt to
obtain inventory at favorable prices from other distributors, resellers and
wholesalers.
The Company considers itself to be a focused distributor, as opposed
to a broadline distributor, dealing with a limited and select group of products
from a limited and select group of leading manufacturers. The Company believes
that being a focused distributor enables it to respond more quickly to customer
requests and gives it greater availability of products, access to products and
improved pricing. The Company believes that as a focused distributor it has been
able to develop greater expertise in the products which it sells. The Company
places significant emphasis on market awareness and planning and actively shares
this knowledge with its customers in order to further enhance trading relations.
The Company strives to monitor and react quickly to market trends in order to
enable its multilingual sales team to maintain the highest levels of customer
service.
European Micro Holdings, Inc. was organized under the laws of the
State of Nevada in December 1997 and is the parent of European Micro UK,
Nor'Easter, Colchester, American Micro and Engenis. European Micro UK was
organized under the laws of the United Kingdom in 1991 to serve as an
independent distributor of microcomputer products to customers mainly in Western
Europe and to related parties in the United States. Nor'Easter was organized
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under the laws of the State of Nevada on December 26, 1997 to serve as an
independent distributor of microcomputer products in the United States.
Colchester was organized under the laws of Singapore in November 1998 to serve
as an independent distributor of microcomputer products in Asia. American Micro
was organized under the laws of the State of Florida on June 24, 1999 to acquire
AMCC and now serves as an independent distributor of microcomputer products in
the United States. Premier Pages, Ltd. was formed on January 28, 2000 and later
changed their name to Engenis.com Ltd on June 23, 2000. Engenis.com Ltd. was
formed under the laws of the United Kingdom to serve as a business-to-business
electronic commerce trading company.
European Micro UK is the parent of European Micro GmbH ("EUROPEAN
MICRO GERMANY"), Sunbelt and European Micro B.V. ("EUROPEAN MICRO HOLLAND") and
has a 50% joint venture interest in Big Blue Europe, B.V. ("BIG BLUE EUROPE").
European Micro Germany was organized under the laws of Germany in 1993 and
operates as a sales office in Dusseldorf, Germany. As of August 2000, the
Company closed the sales operations of European Micro Germany. Customers of
European Micro Germany will be handled through European Micro UK. All products
sold by European Micro Germany were procured and shipped from the facilities of
European Micro UK. Sunbelt is a company registered in England and Wales, which
was established in 1992 and is based in Wimbledon, England. Sunbelt operated as
a distributor of microcomputer products to dealers, value-added resellers and
mass merchants throughout Western Europe. Except for the distribution of its
Nova brand products (which was discontinued effective January 2000), Sunbelt's
distribution operations were integrated with and into the operations of European
Micro UK. European Micro Holland was organized under the laws of Holland in
1995, and operates as a sales office near Amsterdam, Holland. Big Blue Europe
was organized under the laws of Holland in January 1997 and is a computer parts
distributor with offices located near Amsterdam, Holland, selling primarily to
computer maintenance companies. Big Blue Europe has no affiliation with
International Business Machines Corporation.
European Micro Holding's headquarters are located at 6073 N.W. 167th
Street, Unit C-25, Miami, Florida 33015, and its telephone number is (305)
825-2458.
INDUSTRY
The microcomputer products industry has grown significantly in recent
years, primarily due to increasing worldwide demand for computer products and
the use of distribution channels by manufacturers for the distribution of
products. There are two traditional distribution channels in the microcomputer
industry: (i) those that sell directly to end-users ("RESELLERS") and (ii) those
that sell to resellers ("DISTRIBUTORS"). Distributors generally purchase a wide
range of products in bulk directly from manufacturers and then ship products in
smaller quantities to many different types of resellers, which typically include
dealers, value-added resellers, system integrators, mail order resellers,
computer products superstores and mass merchants. European Micro is an
independent distributor and generally does not purchase products directly from
manufacturers but purchases from other distributors.
The Company operates in a fragmented industry, where little
information is available regarding its competitors and which the Company
believes is not dominated by one or a small number of competitors. As a result,
the Company's competitive position is not known or reasonably ascertainable.
Information is available, however, for other distributors of computer products,
although the Company does not compete directly with these companies. These
companies include: Ingram Micro, Inc. and Tech Data Corporation.
There are a number of emerging trends in the microcomputer industry.
Some manufacturers have implemented direct sales business models and reduced the
number of distributors to which they distribute product. These efforts have been
facilitated by the use of the Internet, among other things, and have reduced the
availability of products in the surplus or after-market. The Company has
historically relied upon the surplus or after-market to obtain products for
resale. The Company expects these trends to continue for the foreseeable future.
Despite the continuing difficulties in the industry, the Company
believes that the microcomputer products industry is still well suited for
distributors because of the large number of fragmented resellers in the
industry. As a result, it is cost efficient for manufacturers to outsource a
portion of their distribution, credit, inventory, marketing and customer support
requirements to distributors. In addition, resellers traditionally have not been
able to efficiently establish direct purchasing relationships with each
manufacturer because of the large number of manufacturers in the industry.
Instead, resellers have traditionally relied on distributors to satisfy a
significant portion of their product, financing, marketing and technical support
needs. The Company believes that resellers rely on distributors for inventory
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management and credit rather than stocking large inventories themselves and
maintaining credit lines to finance their working capital needs.
STRATEGY
The Company's objectives are to continue to strengthen its position
as a distributor of microcomputer products within Western Europe, the United
States and Asia. It also proposes to diversify its international trading
operations into product lines outside the microcomputer industry. These
objectives are constrained by current liquidity considerations of the Company.
Therefore, the following strategies are dependent on obtaining the necessary
funding:
GROWTH THROUGH START-UPS AND ACQUISITIONS. The Company hopes to
expand into new markets and products through a combination of start-up companies
and acquisitions of existing distributors, although there can be no assurance
that any acquisitions can be consummated on terms satisfactory to the Company.
The Company intends to evaluate acquisition candidates outside the microcomputer
industry to diversify its operations and to take advantage of its ability to
source inventory worldwide. The Company expects to seek acquisition candidates
which have strong entrepreneurial management teams with experience in the local
markets and the potential to benefit from the economies of scale that the
Company could provide through its existing infrastructure. The Company intends
that any acquisitions will adopt its policies and financial reporting procedures
but operate as autonomous business units. During the last three fiscal years,
the Company has formed Nor'Easter located in New Hampshire and Colchester
located in Singapore. Also, the Company has acquired Sunbelt located in
Wimbledon, England and AMCC located in Miami, Florida.
FURTHER DEVELOP NEW INTERNATIONAL MARKETS. The Company has, to date,
focused its activities on the distribution of microcomputer products mainly in
Western Europe and the United States. More recently, the Company has been
working on new opportunities in Asia and Eastern Europe. During Fiscal 1999,
Colchester began operations in Singapore. Colchester will source product for the
Company and will act as an independent distributor throughout Asia. The Company
believes that its success in the culturally and linguistically diverse markets
of Western Europe will be advantageous to the Company in expanding into new
regions.
BUSINESS TO BUSINESS ELECTRONIC COMMERCE STRATEGY. The Company has
initiated a business to business electronic commerce strategy, which is focused
on creating a global, value-added, information technology equipment and service
trading community. The company has hired Cap Gemini, a leading European
management consultancy and information technology services firm, to assist it in
the implementation of this plan. The Company has incurred the sum of 755,000
pounds sterling ($1,143,000 at exchange rate on June 30, 2000) for feasibility
studies and business process design. This amount is reflected in selling,
general and administrative expenses on the accompanying consolidated statements
of operations for the year ended June 30, 2000. The Company has capitalized the
sum of 229,000 pounds sterling ($347,000 at exchange rate on June 30, 2000)
related to the actual software development. This amount is reflected in property
and equipment, net on the accompanying consolidated balance sheet at June 30,
2000. During May 2000, the Company temporarily halted the ongoing development
being performed by Cap Gemini until specific funding is obtained to complete the
project. There can be no assurances that the Company will be successful in
obtaining funding for this project. In the event the project is not continued by
November 30, 2000, the Company will incur a termination fee to Cap Gemini of
150,000 pounds sterling ($226,995 at exchange rate on June 30, 2000). If paid,
this fee would be credited against future invoices of Cap Gemini upon the
continuation of the project. During the last calendar quarter of 2000, the
Company will re-evaluate and re-define, where necessary, the current assumptions
and propositions, based on changes in the market over the last few months. This
planning will include detailing the project based on the Company's ability to
fund the project from current working capital, if funding is still not available
at the originally planned project level.
FOCUSED DISTRIBUTION. The Company's strategy is to operate as a
focused distributor by addressing each national market in which it operates with
a limited and select group of products from a limited and select group of high
quality manufacturers. The Company believes this strategy helps it achieve a
degree of strength within its chosen markets. The Company also believes that
this strategy will further enhance its relationships with both its suppliers and
customers. In addition, the Company intends to seek new products and suppliers
that will reflect the requirements of the marketplace while at the same time
remaining a focused distributor. The Company believes that this focused approach
also results in more effective asset management. Generally, because popular
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products from leading manufacturers are in greater demand, the Company believes
that this results in more efficient inventory management by virtue of greater
inventory turns and, therefore, lower working capital requirements.
PRODUCTS AND CUSTOMERS
The Company's sales consist of computer hardware products, such as
personal computers, memory modules, disc drives and networking products, which
are sold to a customer base of more than 770 value-added resellers, corporate
resellers, retailers, direct marketers and distributors. The Company's customers
typically rely on distributors as their principal source of microcomputer
products.
The Company typically purchases its products from distributors and
other suppliers in large quantities. As a focused distributor, the Company
focuses on a limited and select group of products from a limited and select
group of high quality manufacturers. As a result, the Company carries fewer
individual products from fewer manufacturers than broadline distributors. The
Company believes that this policy enables it to better understand the products
it sells and the geographical areas in which it operates.
The Company finances a significant portion of its total sales by
extending trade credit. The Company attempts to minimize the risk of such credit
by, among other things, monitoring the credit worthiness of its customers and
insuring some of its accounts receivable. European Micro UK has sought to insure
substantially all of its accounts receivable. Nor'Easter, Colchester and
American Micro generally do not insure their accounts receivable. For the fiscal
year ended June 30, 2000, no single customer accounted for more than
approximately 4.1% of the Company's total net sales. Technology Express, a
company wholly-owned by Harry D. Shields, who is also Co-President, Co-Chairman
and a Director of the Company, accounted for about 2.1%, 6.0% and 17.2% of total
net sales for the fiscal year ended June 30, 2000, 1999 and 1998, respectively.
The Company does not believe the loss of any customer would have a material
adverse effect on its business, financial condition or results of operations.
The Company's backlog orders are not considered material to its business.
The Company's operations involve a single industry segment, the
distribution of microcomputer products. Historically, the Company has operated
in one geographic area--the United Kingdom--and has exported products from the
United Kingdom to other European countries and to related parties in the United
States. With the addition of Nor'Easter and American Micro in the United States,
and the addition of Colchester in Singapore, the Company's sales to third
parties in the United States and Asia have increased.
The Company's net sales from operations outside the United States are
primarily denominated in currencies other than United States dollar.
Accordingly, the Company's operations outside the United States impose risks
upon its business as a result of exchange rate fluctuations.
SOURCES OF SUPPLY
The Company obtains its products from distributors and other
suppliers throughout the world in an attempt to obtain products at favorable
prices while also maintaining continuity of supply. The Company generally makes
its purchases based on the most favorable combination of prices, quantities and
product selection, and therefore its suppliers are constantly changing. The
Company does not believe that the loss of any single supplier would have a
material adverse effect on its operations. For the fiscal year ended June 30,
2000, the Company obtained 42.2% of its products from ten suppliers (38.4%
excluding Technology Express). For the fiscal year ended June 30, 1999, the
Company obtained 58.4% of its products from ten suppliers (45.7% excluding
Technology Express). For the fiscal year ended June 30, 1998, the Company
obtained 87.2% of its products from ten suppliers (80.4% excluding Technology
Express). The continued decrease in the percentage of products sourced from the
top ten suppliers in 2000 is the result of an increase in the number of
suppliers attributable to the start-up growth of Nor'Easter and Colchester. The
Company does not generally obtain products directly from manufacturers and
generally does not enter into any long-term or distribution agreements with its
suppliers. In some cases suppliers are also customers. Whenever possible,
products are purchased with the benefit of price protection so that the Company
will receive the benefit of a price reduction by the manufacturer.
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Suppliers deliver products against purchase orders tendered by the
Company. The Company often requests specific delivery dates in its purchase
orders and lead times for delivery from suppliers are typically short. Delivery
is, however, subject to availability, and, while suppliers have no liability to
the Company for failure to meet a delivery date, orders may be canceled by the
Company where the terms of an order have not been met. From time to time the
Company experiences delivery delays and inventory shortages. The Company
believes that these delays and shortages are common to other distributors of
microcomputer products. The Company does not, like many of its competitors, rely
on a single contractual source of product supply.
Historically, the Company has paid for a significant amount of
product on delivery, a practice which leads to lower prices and earlier delivery
dates. The Company's suppliers have increased available credit commensurate with
its growth and the Company expects to continue to take advantage of credit
purchases.
Substantially all of the products purchased by the Company are
trademarked or copyrighted products which may have been sold to distributors by
the manufacturers and resold to the Company. From time to time, trademark or
copyright owners and their licensees and trade associations have initiated
litigation or administrative agency proceedings seeking to halt the importation
of such products into many of the countries in which the Company operates. There
can be no assurance that future judicial, legislative or administrative agency
action in such countries, including possible import, export, tariff or other
trade restrictions, will not limit or eliminate some of the Company's sources of
supply or other business activities. In addition, there can be no assurance that
the Company's business activities will not become the subject of legal or
administrative actions brought by manufacturers, distributors or others based on
violations of trademark or copyright rights or other laws. Such judicial,
legislative, administrative or legal actions could have a material adverse
effect on the Company's business, financial condition and results of operations.
The Company sells products in the United States and expects to continue to do so
in the future. United States trademark and copyright owners and their licensees
and trade associations in other industries have initiated litigation or
administrative agency proceedings seeking to halt the importation into the
United States of foreign manufactured or previously exported trademarked or
copyrighted products. Such actions in the United States may prevent the Company
from selling certain products in the United States.
The Company continues to closely monitor European and UK legal
decisions in respect of the importation of trademarked goods into the European
Economic Area ("EEA"). The approach of the European Courts has allowed trademark
owners to prevent re-importation without consent. However, a recent decision of
an English Court has placed the strictest possible interpretation on that
approach. The Company has historically not encountered any problems from its
suppliers as a result of these legal decisions but the Company has obtained a
significant amount of its inventory from outside the EEA. Any disruption in the
Company's ability to source goods from outside the EEA will have a material
adverse effect on the Company's business, financial condition and results of
operations.
SALES AND MARKETING
In order to address the individual customs, practices and business
conventions in the countries in which the Company operates, the Company employs
a sales staff conversant in Chinese, Dutch, English, French, German, Italian and
Spanish and with a general knowledge of the applicable markets. Oversight and
strategic direction are provided by senior management of the Company.
SALES. The Company markets its products to distributors and
resellers, not end-users. As of June 30, 2000, the Company distributed products
to more than 770 value-added resellers, corporate resellers, retailers, direct
marketers and distributors. The Company's customers typically place orders
through a sales representative. The Company maintains detailed information
regarding its current inventory levels and pricing. The Company has historically
experienced a reduction in demand during the summer months.
MARKETING. The Company's marketing department monitors and evaluates
national market trends, price movements and changes in product specifications.
It is also responsible for developing and implementing the Company's advertising
programs. The marketing department routinely queries the Company's customer base
to ascertain how customers value its products, services, sales and support
compared to its competitors. The feedback allows the Company to constantly
tailor its business to its customers' needs. In 1996, European Micro introduced
the Premier Dealers Club to attract small and medium sized resellers by offering
them value-added procurement services that they were not enjoying from their
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current broadline distributors. Members of the Premier Dealers Club agree to
purchase a target amount of products from the Company for a given period and
those members achieving such goals earn rebates. Members also enjoy priority
access to products in short supply, expedited shipment of orders, monthly
analysis of purchases and rebates earned, internet ordering, marketing
information and purchasing and outsourcing assistance.
COMPETITION
The Company operates in an industry which is characterized by intense
competition based on price, product availability and delivery times. Its
competitors include manufacturers and international distributors. Some
competitors have greater financial and administrative resources than the
Company. The Company believes availability of the right product at the right
price is the key element of competitiveness and attempts to differentiate itself
from its competitors by providing a select number of products from a few name
brand manufacturers and maintaining a sufficient inventory of such products.
Furthermore, the Company believes that it enhances its competitive position by
providing responsible and responsive customer service through its sales
personnel.
INTELLECTUAL PROPERTY
The Company is attempting to build a brand name in the microcomputer
industry. To that end, the Company has applied for trademark protection both in
the United Kingdom and within the European Community. The Company is currently
evaluating and will continue to evaluate the need to apply for trademark
protection in the United States and in other countries as the Company expands.
The following is a summary of the trademarks which the Company has applied for
and their current status:
<TABLE>
<CAPTION>
TRADEMARK CLASS(1) NO. APPLICANT DATE OF FILING COMMENTS
--------- -------- --- --------- -------------- --------
<S> <C> <C> <C> <C> <C>
European Micro 9 438689 European Micro UK 12-23-96 U.K. Trademark granted
European Micro [Plc] & Logo 9 2119204 European Micro UK 12-20-96 U.K. Trademark granted
Premier Dealers Club & Logo 9 2152310 European Micro UK 11-29-97 U.K. Trademark granted
Premier Dealers Club & Logo 9 695072 European Micro UK 12-1-97 Community Trademark
pending
</TABLE>
---------------------
(1) Class 9 covers computer software, computer peripherals, parts and
accessories for all such goods.
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EMPLOYEES
On September 29, 2000, the Company and its subsidiaries had the
number of full-time employees set forth in the following table:
NAME NUMBER OF EMPLOYEES
---- -------------------
European Micro Holdings, Inc. 5
European Micro UK 30
European Micro Germany 1
European Micro Holland 1
Nor-Easter 8
Big Blue Europe 15
Colchester 3
American Micro 26
--
TOTAL 89
==
Of the total number of full-time employees, thirty work in marketing
and sales, ten in warehousing and delivery and forty-nine are employed in
administrative and other support positions. None of the Company's employees are
represented by unions. There has been no disruption of operations due to a labor
dispute. Management considers its relations with its employees to be good.
CERTAIN BUSINESS RISK FACTORS
The Company is subject to various risks which may have a material
adverse effect on its business, financial condition and results of operations,
and may result in a decline in the Company's stock price. Certain risks are
discussed below:
WE DO NOT HAVE LONG-TERM CONTRACTS WITH SUPPLIERS, WHICH COULD HARM OUR ABILITY
TO OBTAIN INVENTORY IN ADEQUATE QUANTITIES
We are an independent distributor of personal computers and related
products. We have not entered and do not expect to enter into any long-term
distribution arrangements with our suppliers. Rather, we depend almost entirely
on the availability of product in the surplus market. The microcomputer products
industry is characterized by periods of severe product shortages and customer
backlog due to suppliers' difficulty in projecting demand. There can be no
assurance that suppliers will be able to maintain an adequate supply of products
that will adequately fulfill all of our customer orders on a timely basis. Our
failure to obtain adequate product in required quantities would result in lower
sales and harm customer goodwill. Moreover, because we do not utilize supplier
contracts, we do not enjoy the traditional benefits that they provide, such as
inventory price protection, market development funds or extended payment terms.
A SIGNIFICANT PORTION OF OUR SALES IS DENOMINATED IN FOREIGN CURRENCIES, AND A
STRENGTHENING OF THE U.S. DOLLAR RELATIVE TO FOREIGN CURRENCIES MAY REDUCE OUR
SALES AND EARNINGS
A significant portion of our sales is denominated in foreign
currencies (approximately 66.6% at June 30, 2000), such as the British pound and
the European Economic Union's Euro. If the U.S. dollar strengthens against such
foreign currencies, then our sales and earnings for financial reporting purposes
will be lower. Our sales and earnings may also be lower due to fluctuations
between foreign currencies because on many occasions inventory is bought and
sold in different foreign currencies. Accordingly, if the foreign currencies in
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which a significant amount of sales are made weaken relative to the foreign
currencies in which inventory is purchased, then our company's sales and
earnings will be lower.
WE ARE DEPENDENT UPON CERTAIN KEY PERSONNEL, THE LOSS OF WHOM WOULD BE DIFFICULT
OR IMPOSSIBLE TO REPLACE
Our success to date has been significantly dependent on the
contributions of John B. Gallagher and Harry D. Shields, our founders. The loss
of the services of either person would be difficult or impossible to replace.
Our success also depends to a significant extent upon a number of other key
employees, and the loss of the services of one or more other key employees would
be difficult to replace. We maintain key-man life insurance policies on the
lives of Messrs. Gallagher and Shields. In addition, our future success will
depend in part upon our ability to attract and retain additional highly-skilled
professional, managerial, sales and marketing personnel. Competition for such
personnel is intense. There can be no assurance that we will be successful in
attracting, training and retaining the personnel that we require for our
business and planned growth.
WE RELY ON KEY SUPPLIERS, THE LOSS OF WHICH MAY HARM OUR ABILITY TO OBTAIN
PRODUCTS FOR RESALE AT FAVORABLE PRICES OR AT ALL
We do not manufacture any of our own products but rather resell
products purchased from suppliers. For the year ended June 30, 2000, we obtained
42.2% of our products from ten suppliers (38.5% excluding Technology Express).
Accordingly, we are highly dependent upon such suppliers and the loss of a
combination of suppliers would harm our ability to obtain products for resale at
favorable prices or at all.
WE RELY ON CERTAIN KEY PRODUCTS AND OUR INABILITY TO OBTAIN ADEQUATE QUANTITIES
OF SUCH PRODUCTS AT FAVORABLE PRICES OR AT ALL WOULD RESULT IN LOWER SALES AND
PROFITS
For the fiscal year ended June 30, 2000, our ten best selling
products accounted for a large portion of its net sales. Accordingly, our
inability to obtain adequate supplies of these products would result in lower
sales and profits.
WE REPLY ON CERTAIN KEY CUSTOMERS, THE LOSS OF A COMBINATION OF SUCH CUSTOMERS
WOULD RESULT IN LOWER SALES AND PROFITS
For the fiscal year ended June 30, 2000, our ten largest third party
customers accounted for 24.6% of net sales. None of these customers individually
accounted for more than about 4.1% of such net sales. However, we are highly
dependent upon such customers and the loss of a combination of such customers
would result in lower sales and profits.
THE INTERESTS OF OUR MANAGEMENT MAY CONFLICT WITH THE INTERESTS OF OUR COMPANY
AND THE INTERESTS OF OUR OTHER STOCKHOLDERS
Our directors and executive officers beneficially own approximately
71% of our company's outstanding common stock. These directors and executive
officers, acting together, have the ability to elect at least a majority of our
directors. They also have the ability to determine the outcome of most corporate
actions requiring stockholder approval, including our merger with or into
another entity, a sale of substantially all of our assets and amendments to our
articles of incorporation. The decisions of these stockholders may conflict with
our company's interests or those of our other stockholders.
WE HAVE NARROW PROFIT MARGINS, WHICH MEANS THAT VARIATIONS IN SALES AND
OPERATING COSTS GREATLY IMPACTS OUR PROFITABILITY
As a result of intense price competition in the microcomputer
products industry, our company has had, and expects to continue to have, narrow
gross profit and operating profit margins. These narrow margins magnify the
impact on operating results of variations in sales and operating costs, which
greatly impacts our profitability. Our gross margin was 9.8% in the year ended
June 30, 2000.
9
<PAGE>
OUR BUSINESS REQUIRES ACCESS TO CAPITAL TO PURCHASE PRODUCT IN BULK TO OBTAIN
FAVORABLE PRICES, THE ABSENCE OF SUCH CAPITAL WOULD PROHIBIT US FROM BUYING
PRODUCT AT FAVORABLE PRICES
Our business often requires the volume buying of discounted products.
This requires us to have sufficient available cash or financing. Our inability
to have available cash or financing would prevent us from taking advantage of
such discounted prices on a timely basis.
THERE ARE RISKS ASSOCIATED WITH INDEBTEDNESS, INCLUDING INTEREST RATE AND
DEFAULT RISKS
We have incurred substantial amounts of indebtedness in our
operations in recent years. Accordingly, we have dedicated an increasing portion
of cash flow to servicing such indebtedness. Such indebtedness exposes our
company to the risk of increasing interest rates, as well as default risks. Our
company's assets secure such indebtedness. Moreover, the indebtedness imposes
significant restrictions on our company and requires compliance with certain
financial covenants. As of June 30, 2000, our company was not in compliance with
six of the financial covenants in the loan agreements. Our company has received
a waiver through July 1, 2001 of three of the covenants related to the mortgage
loan and a waiver as of June 30, 2000 for three covenants related to the
Nor'Easter and American Micro facilities and the term loan. Our company and
lender have amended the term loan agreement in October 2000 to adjust the
financial covenant requirements. In addition, our company entered into new asset
based revolving credit facilities for each of American Micro and Nor-Easter.
There can be no assurances that we will be able to comply with such adjusted
covenants. If funding is insufficient, we may be required to delay, reduce the
scope of or eliminate some or all of our expansion plans and it could have a
material adverse effect on our financial condition and results of operations.
10
<PAGE>
ITEM 2. PROPERTIES.
The corporate headquarters of European Micro Holdings, Inc. is
located in Miami, Florida. Approximately 350 square feet is dedicated to
management offices.
European Micro's facilities are described below:
<TABLE>
<CAPTION>
LOCATION SQUARE FEET LEASE EXPIRATION
-------- ----------- ----------------
<S> <C> <C> <C>
Manchester, UK(warehouse)(1) 8,000 2002
Manchester, UK (offices)(1) 7,734 N/A
Dusseldorf, Germany (offices)(2) 1,360 2005
Amsterdam, Netherlands
(offices and warehouse)(3) 18,000 2002
Singapore (office)(4) 500 2001
Miami, Florida (offices and warehouse)(5 & 6) 6500 2002
Nashville, Tennessee (offices)(6) 350 2001
Wimbledon, UK (offices and warehouse)(7) 5,813 2008
Portsmouth, New Hampshire
(offices and warehouse)(8) 7,700 2005
</TABLE>
-------------------------
(1) European Micro UK
(2) European Micro Germany
(3) European Micro Holland & Big Blue Europe 50% Joint Venture
(4) Colchester
(5) American Micro
(6) European Micro Holdings, Inc.
(7) Sunbelt
(8) Nor'Easter
All properties are leased except as noted below.
The Company utilizes approximately 350 square feet of office space
and certain equipment owned by Technology Express for which it is not charged a
fee.
On July 16, 1999, European Micro UK purchased the office building in
which they had previously been leasing space for 1,705,000 pounds sterling
($2,580,000 at June 30, 2000). The purchase price was financed in part by a loan
in the amount of 1,312,000 pounds sterling ($1,985,000 at June 30, 2000) at an
annual interest rate of 7.6%, payable over ten years. The total square footage
of the building is 11,603, of which 3,867 square feet is being leased to
unrelated third parties. European Micro UK continues to lease its warehouse
space.
The Company considers its existing facilities to be adequate for its
foreseeable needs.
ITEM 3. LEGAL PROCEEDINGS.
On November 12, 1999, Jeffrey and Marie Alnwick (the "ALNWICKS") and
a New York corporation, Big Blue Products, commenced an action individually and
derivatively for the Dutch company, Big Blue Europe, against the Company and its
founders and officers, John B. Gallagher and Harry D. Shields in the United
States District Court, Eastern District of New York, Jeffrey Alnwick and Marie
Alnwick v. European Micro Holdings, Inc., Eastern District of New York, Docket
No. 99 CV 7380 (the "ALNWICK LITIGATION").
The complaint alleges thirty-three causes of action. Plaintiffs
claim, in substance, that defendants breached oral and written agreements
relating to the management, operation and funding of Big Blue Europe.
Specifically, plaintiffs allege that defendants breached the joint venture
agreement by which Big Blue Europe was formed, a licensing agreement for use of
11
<PAGE>
the "Big Blue" service mark in Europe, a non-competition agreement preventing
Big Blue Europe from operating in the United States and several capital
contribution agreements. Plaintiffs also claim that defendants breached their
fiduciary duties to the Alnwicks, engaged in fraudulent acts, aided and abetted
breaches of fiduciary duties by others, misappropriated trade secrets and
interfered with the employment contract of Big Blue Europe's managing director.
The complaint seeks unspecified compensatory and punitive damages, as well as
injunctive relief restraining defendants from acting in violation of the alleged
agreements.
Defendants have moved to dismiss the complaint principally on the
basis of forum non-conveniens in favor of existing proceedings in the
Netherlands (commenced by European Micro UK), where a Dutch court has appointed
an independent director to oversee operations of the company. Defendants argue
that any dispute between the shareholders and directors of the Dutch company,
Big Blue Europe, which operates pursuant to Dutch law, should be resolved by a
Dutch court.
The Company and its affiliated defendants intent to contest the
claims in the Alnwick Litigation vigorously, whether asserted in the United
States or in the Netherlands courts.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's shares of Common Stock began trading on the Nasdaq
National Market on June 12, 1998, under the symbol "EMCC." The Company's high
and low bid prices by quarter during fiscal 2000, 1999 and 1998 are presented as
follows:
<TABLE>
<CAPTION>
FISCAL YEAR 2000(1)
HIGH LOW
---- ---
<S> <C> <C> <C>
First Quarter (July 1999 to September 1999) $10.25 $6.50
Second Quarter (October 1999 to December 1999) 8.875 4.031
Third Quarter (January 2000 to March 2000) 16.50 5.00
Fourth Quarter (April 2000 to June 2000) 11.625 2.50
FISCAL YEAR 1999(1)
HIGH LOW
---- ---
First Quarter (July 1998 to September 1998) $11.375 $4.50
Second Quarter (October 1998 to December 1998) 15.75 8.00
Third Quarter (January 1999 to March 1999) 13.75 8.50
Fourth Quarter (April 1999 to June 1999) 10.50 7.00
FISCAL YEAR 1998(1)
HIGH LOW
---- ---
Fourth Quarter ( June 1998) $11.00 $9.9375
</TABLE>
-------------------------
(1) The Company was not listed on any national exchange or inter-dealer
quotation system until June 12, 1998, subsequent to the close of its initial
public offering. Therefore, the stock prices for the quarter ended June 30, 1998
reflect approximately 12 trading days. These quotations reflect inter-dealer
prices, without retail mark-up, mark-down or commission, and may not necessarily
represent actual transactions.
On September 11, 2000, the Company had approximately 43 shareholders
of record. The Company believes that it has in excess of 500 beneficial owners.
12
<PAGE>
DIVIDENDS
During the fiscal years ended June 30, 2000 and 1999, no dividends
were declared or paid. On February 9, 1998, the Company declared and paid a cash
dividend of $550,000 or $0.1375 per share of Common Stock. The dividends per
share were calculated based on 4,000,000 shares of Common Stock outstanding.
These dividends were declared and paid prior to the Company's initial public
offering. The Company currently intends to retain future earnings to fund its
operations and does not expect such earnings to be distributed in the future to
shareholders as dividends. The declaration and payment by the Company of any
future dividends and the amount thereof will depend upon the Company's results
of operations, financial condition, cash requirements, future prospects,
limitations imposed by credit agreements or senior securities and other factors
deemed relevant by the Board of Directors. The Company's loan agreements with
SouthTrust Bank prohibit the payment of dividends. The declaration and payment
of dividends, if at all, by the Company will be at the discretion of the Board
of Directors.
RECENT SALES OF UNREGISTERED SECURITIES
None.
ITEM 6. SELECTED FINANCIAL DATA.
SELECTED CONSOLIDATED FINANCIAL DATA
($ IN THOUSANDS, EXCEPT PER SHARE DATA)
The following statement of operations and balance sheet data of the
Company is set forth below for each year in the five-year period ended June 30,
2000. The information presented is derived from the audited consolidated
financial statements of the Company and should be read in conjunction with the
consolidated Financial Statements as of June 30, 2000 and 1999 and each of the
years in the three-year period ended June 30, 2000 and the Notes thereto
included elsewhere in this filing.
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
2000 1999 1998 1997 1996
------------------ ----------------- ----------------- ---------------- ---------------
STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C>
Net Sales $115,493 $132,206 $111,453 $46,655 $40,348
Income (loss) from operations (2,699) 1,935 7,232 2,051 1,478
Net income (loss) (3,207) 854 4,485 1,034 845
Net income (loss) per share
(basic and diluted) (0.64) 0.17 1.10 0.26 0.21
Dividends per share $0.00 $0.00 $0.14 $0.14 $0.24
Weighted average common shares
outstanding, basic 5,008,151 4,978,614 4,066,524 4,000,000 4,000,000
Weighted average common shares
outstanding, diluted 5,008,151 4,989,961 4,087,466 4,000,000 4,000,000
JUNE 30,
2000 1999 1998 1997 1996
------------------- ---------------- ------------------ ----------------- -------------
BALANCE SHEET DATA:
Working capital $6,206 $11,844 $12,959 $1,976 $1,474
Total assets 30,213 30,599 19,204 8,844 7,857
Long-term debt, net of
current portion 2,373 23 84 45 37
Shareholders' equity 11,110 14,343 13,680 2,511 1,769
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following information should be read in conjunction with the
consolidated financial statements of the Company and the notes thereto appearing
elsewhere in this filing.
13
<PAGE>
Certain statements within this Item and throughout this Annual Report
on Form 10-K and the documents incorporated herein are "forward-looking
statements" as described in the "safe harbor" provision of the Private
Securities Litigation Reform Act of 1995. These statements involve a number of
risks and uncertainties and actual results could differ materially from those
projected.
The following table sets forth, for the periods presented, the
percentage of net sales represented by certain items in the Company's
Consolidated Statements of Operations:
PERCENTAGE OF NET SALES
<TABLE>
<CAPTION>
YEARS ENDING JUNE 30,
---------------------
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Net sales 98.0% 88.4% 73.9%
Net sales to related parties 2.0 11.6 26.1
------- ------- -------
Total net sales 100.0 100.0 100.0
------- ------- -------
Cost of goods sold (88.2) (80.1) (61.4)
Cost of goods sold to related parties (2.0) (11.5) (25.7)
------- ------- -------
Total cost of goods sold (90.2) (91.6) (87.1)
------- ------- -------
Gross profit 9.8 8.4 12.9
Operating expenses (12.2) (6.9) (6.4)
------- ------- -------
Income (loss) from operations (2.4) 1.5 6.5
Interest income 0.1 - -
Interest expense (0.8) (0.3) (0.4)
Equity in net income (loss) of
unconsolidated subsidiaries (0.2) - -
------- ------- -------
Income (loss) before income taxes (3.3) 1.2 6.1
Income tax expense 0.5 (0.6) (2.1)
------- ------- -------
Net Income (loss) (2.8)% 0.6% 4.0%
------- ------- -------
</TABLE>
YEARS ENDED JUNE 30, 2000 AND 1999
TOTAL NET SALES. Total net sales decreased $16.7 million, or 12.6%,
from $132.2 million in the year ended June 30, 1999 to $115.5 million in the
comparable period in 2000. Excluding net sales to related parties, net sales
decreased $3.7 million, or 3.2%, from $116.9 million in the year ended June 30,
1999 to $113.1 million in the comparable period in 2000. This decrease was
attributable to a reduction of $9.1 million in the Premier Dealers Club, a
reduction of $18 million from European Micro UK's sales (excluding Sunbelt's
sales) and a reduction of $6.6 million in Nor'Easter's sales. The decrease in
sales at European Micro UK and Nor'Easter is a result of lower quantities of
product available in the surplus or aftermarket supply channel. This decrease
was mostly offset by the addition of Sunbelt's sales for a full year (accounting
for approximately $2.3 million), the addition of Colchester's sales for a full
year (accounting for approximately $7.3 million) and the addition of American
Micro's sales (accounting for approximately $20.4 million).
Net sales to related parties decreased $13.0 million from $15.3
million in the year ended June 30, 1999 to $2.3 million in the comparable period
in 2000. This decrease is attributable to the acquisition of AMCC on July 1,
1999, and therefore, net sales to American Micro subsequent to acquisition are
14
<PAGE>
no longer included in the consolidated financial statements. Also, sales to
Technology Express have decreased as product availability decreased.
GROSS PROFIT. Gross profit increased $265,000, or 2.4%, from $11.1
million in the year ended June 30, 1999 to $11.4 million in the comparable
period in 2000. Gross profit excluding related party transactions increased
$300,000, or 2.8%, from $11.0 million in the year ended June 30, 1999 to $11.3
million in the comparable period in 2000. This increase is primarily due to an
increase in gross profits at American Micro ($2.4 million), Colchester
($350,000) and Nor'Easter ($100,000). This increase was partially offset by
decreases in gross profits at European Micro UK ($2.3 million).
Gross profit attributable to related party sales decreased $47,000 or
49.0%, from $96,000 in the year ended June 30, 1999 to $49,000 in the comparable
period in 2000. As discussed above, this decrease is attributable to the
acquisition of AMCC on July 1, 1999, resulting in transactions with American
Micro being excluded from the consolidated financial statements subsequent to
acquisition.
Gross margins increased from 8.4% in the year ended June 30, 1999 to
9.8% in the comparable period in 2000. Excluding related party transactions,
gross margin increased from 9.4% in the year ended June 30, 1999 to 10.0% in the
comparable period in 2000. This change 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 during the remainder of the
fiscal year.
Foreign exchange losses, net, decreased from a loss of $579,000 in
the year ended June 30, 1999 to a loss of $325,000 in the comparable period in
2000. This favorable movement was attributable to the strengthening of the U.K.
pound sterling relative to the Euro and the weakening of the U.K. pound sterling
relative to the U.S. dollar.
OPERATING EXPENSES. Operating expenses as a percentage of total net
sales increased from 6.9% in the year ended June 30, 1999 to 12.2% in the
comparable period in 2000. This increase was the result of a decrease in total
net sales (accounting for 1.5% increase) and increases in operating expenses,
primarily caused by the legal expenses incurred by the Company in connection
with the Big Blue lawsuit and the expenses incurred with the evaluation and
feasibility study for the business to business electronic commerce project.
INTEREST EXPENSE. Interest expense increased by $518,000 from
$446,000 in the year ended June 30, 1999 to $964,000 in the comparable period in
2000. This was attributable to increased borrowings 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.
INTEREST IN UNCONSOLIDATED SUBSIDIARY. The Company's share of loss
from Big Blue Europe increased from a loss of $32,000 in the year ended June 30,
1999 to a loss of $188,000 in the comparable period in 2000. This increased loss
is attributed to the lack of direction at Big Blue Europe as a result of the
disagreements of the owners and the accompanying lawsuit. During the year ended
June 30, 2000, European Micro UK made an unsecured loan to Big Blue Europe in
the amount of $150,000. This loan is due on demand and has an annual interest
rate of 9.25%, payable quarterly. During the year ended June 30, 1999, the
Company made an unsecured loan to Big Blue Europe in the amount of $350,000.
This loan is due on demand and has an annual interest rate of 9.25%, payable
quarterly. Due to the uncertainties with the Big Blue Europe lawsuit and the
operating results of Big Blue Europe, the Company has recorded an allowance for
the loans to Big Blue Europe of $200,000. The associated charge to operations is
included in fiscal 2000 operating expenses.
INCOME TAXES. Income taxes as a percentage of income (loss) before
income taxes decreased from 46.8% in the year ended June 30, 1999, to an income
tax benefit of 15.1% in the comparable period in 2000. This change was primarily
attributable to accruing a tax benefit related to the losses at European Micro
UK, however the Company has not accrued a tax benefit for operating losses in
the United States or Singapore as realization is not considered more likely than
not.
15
<PAGE>
YEARS ENDED JUNE 30, 1999 AND 1998
TOTAL NET SALES. Total net sales increased $20.8 million, or 18.6%,
from $111.4 million in the year ended June 30, 1998 to $132.2 million in the
comparable period in 1999. Excluding net sales to related parties, net sales
increased $34.5 million, or 41.9%, from $82.4 million in the year ended June 30,
1998 to $116.9 million in the comparable period in 1999. This increase was
attributable to the start-up growth of Nor'Easter which started its operations
in February 1998 (accounting for approximately $22.3 million), the addition of
Sunbelt's trading sales (accounting for approximately $10.8 million), the growth
of the Premier Dealers Club (accounting for approximately $6.6 million) and the
additional sales from Sunbelt's Nova line of products (accounting for
approximately $1.5 million). This increase was offset by a reduction in European
Micro UK's trading sales of $6.7 million which was primarily due to the
exceptional quarter ended March 31, 1998 when the Company made a one-time
purchase of computer peripherals at favorable prices which were later sold at a
significant mark-up.
Net sales to related parties decreased $13.8 million from $29.1 in
the year ended June 30, 1998 to $15.3 million in the comparable period in 1999.
This decrease is primarily attributable to large purchases of computer
peripherals made on behalf of related parties in the year ended June 30, 1998
compared to the same period in 1999. In addition, the Company's purchases from
related parties increased by $7.6 million in the year ended June 30, 1999 from
the comparable period in 1998.
GROSS PROFIT. Gross profit decreased $3.3 million, or 22.9%, from
$14.4 million in the year ended June 30, 1998 to $11.1 million in the comparable
period in 1999. Gross profit excluding related party transactions decreased to
$11.0 million for the year ended June 30, 1999 from $14.0 million in the same
period of the prior year. This decrease is primarily due to a large volume
purchase of computer peripherals in the prior year period which were purchased
by the Company on exceptional terms and later sold at a significant mark-up. In
addition, this decrease is partially the result of a shift in market conditions,
resulting in a downward pressure on margins due to currency fluctuations,
product availability and changes in geographic pricing strategies of
manufacturers and suppliers of the Company's products. Gross profit was
unusually high in the period ended June 30, 1998 due to the purchase of computer
peripherals on favorable terms. As indicated in its previous filings, the
Company expected its gross profit to be significantly lower in periods after
fiscal 1998 because it did not expect to be able to regularly purchase computer
peripherals and other products on terms as favorable as achieved in the period
ended June 30, 1998.
Gross profit attributable to related party sales decreased $318,000,
or 76.8%, from $414,000 in the year ended June 30, 1998 to $96,000 in the
comparable period in 1999. The mark-up on sales to related parties is typically
one percent over cost. Therefore, the gross profit on sales to third parties is
typically higher than the gross profit earned on sales to related parties. This
represents a gross margin of approximately 0.6%.
Gross margins decreased from 12.9% in the year ended June 30, 1998 to
8.4% in the comparable period in 1999. Excluding related party transactions,
gross margin decreased from 17.0% in the year ended June 30, 1998 to 9.4% in the
comparable period in 1999. The decrease in gross margins was attributable to
higher than usual margins caused by the purchase of computer peripherals in
1998, which were purchased by the Company on exceptional trading terms and
subsequently sold at significant mark-ups.
Foreign exchange losses, net, increased from a loss of $510,000 in
the year ended June 30, 1998 to a loss of $579,000 in the comparable period in
1999. This increase was attributable to a strengthening of the U.S. dollar
relative to the U.K. pound sterling and a weakening of the Euro relative to
other European currencies. These movements created unfavorable purchasing and
selling conditions. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Currency Risk Management."
OPERATING EXPENSES. Operating expenses as a percentage of total net
sales increased from 6.4% in the year ended June 30, 1998 to 6.9% in the
comparable period in 1999. Commissions and bonus payments to employees decreased
as these payments are tied to the Company's gross profit and gross margin. This
decrease was offset by increased operating expenses related to the opening of
the Singapore office in November 1998 and administrative expenses incurred by
European Micro Holdings, Inc., which began operations in January 1998, but did
not start to incur substantial expenses until April 1998.
16
<PAGE>
INTEREST EXPENSE. Interest expense decreased by $13,000 from $459,000
in the year ended June 30, 1998 to $446,000 in the comparable period in 1999.
This was attributable to decreased borrowings by the Company to fund its
inventory and accounts receivable after the receipt of funds from the Company's
initial public offering.
INTEREST IN UNCONSOLIDATED SUBSIDIARY. The Company's share of income
or loss from Big Blue Europe changed from a gain of $3,000 in the year ended
June 30, 1998 to a loss of $32,000 in the comparable period in 1999. This
reduction in earnings is attributed to an increased provision for inventory
obsolescence. During the year ended June 30, 1999, the Company made an unsecured
loan to Big Blue Europe in the amount of $350,000. This loan is due on demand
and has an annual interest rate of 9.25%, payable quarterly.
INCOME TAXES. Income taxes as a percentage of earnings before income
taxes increased from 34.0% in the year ended June 30, 1998 to 46.8% in the
comparable period in 1999. This increase was primarily attributable to the
increase in the tax provision for European Micro Germany related to transfer
pricing from European Micro UK, changes in the valuation allowance and other
nondeductible expenses. The Company's effective income tax rate may increase or
decrease in the future as a result of the Company's product mix and variations
in the countries to which the Company sells its products.
NEW ACCOUNTING PRONOUNCEMENTS
DERIVATIVE INSTRUMENTS
SFAS No. 133, "Accounting for Derivate Instruments and Hedging
Activities," was issued in June 1998 and as amended by SFAS No. 137, is
effective for fiscal years beginning after June 15, 2000. SFAS No. 138
"Accounting for Certain Derivative Instruments and Certain Hedging Activities",
an amendment of FASB No. 135, was issued June 2000. These statements were
adopted effective July 1, 2000, but will not materially impact the Company's
consolidated financial statements. These standards establish accounting and
reporting standards for derivative instruments and hedging activities.
REVENUE RECOGNITION
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin 101, "Revenue Recognition in Financial Statements." The
effective date has been deferred with respect to the Company to the fourth
fiscal quarter of 2001 pending additional interpretive guidance. The Company is
not able to quantify the impact of SAB 101 at this time. However, there is at
least one issue that could have a material impact on the Company's consolidated
financial statements. For European Micro UK the standard practice is to
recognize revenue on shipment. However, title to the goods is retained until
full payment is received from the customer to perfect the Company's interest in
the goods. Under possible interpretations, European Micro UK would not be able
to recognize revenue until full payment is received. In the transition year,
revenues would be lower as all sales on the net terms not collected by year-end
would not be recognized.
SEASONALITY
The Company typically experiences variations in its total net sales
and net income on a quarterly basis as a result of many factors. These include,
but are not limited to, seasonal variations in demand for the products and
services offered by the Company, the introduction of new hardware and software
technologies and products offering improved features and functionality, the
introduction of new products and services by the Company and its competitors,
the loss or consolidation of a significant supplier or customer, changes in the
level of operating expenses, inventory adjustments, product supply constraints,
competitive conditions including pricing, interest rate fluctuations, the impact
of acquisitions, currency fluctuations and general economic conditions.
Historical operating results have included a reduction in demand in Europe
during the summer months.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary cash requirements are for operating expenses,
funding accounts receivable, the purchase of inventory to support operations,
taking greater advantage of available cash discounts offered by certain of the
Company's suppliers for early payment, acquisitions and debt service. The
Company has historically funded these cash requirements through a combination of
17
<PAGE>
loans, internally generated cash flow and the net proceeds of its initial public
offering.
GENERAL. The Company has suffered operating losses in the current
fiscal year. Ongoing legal costs associated with the litigation related to Big
Blue Europe, the costs associated with the Company's electronic commerce
strategy, increases in general overhead costs, and increased interest expense
due primarily to increased borrowings, coupled with decreasing sales volumes and
gross profit margins, have negatively impacted operating results. These factors
may continue to impact the Company's operations.
The Company was not in compliance with certain loan agreement
financial covenants during fiscal year 2000. While the Company has obtained
waivers from these covenant violations existing at June 30, 2000, in most
instances the waivers only address the covenant reporting period ending thereon.
Management believes that the Company will be able to comply with its debt
agreements, including financial covenants, during the fiscal year ending June
30, 2001. However, compliance with these financial covenants during fiscal 2001
will require improved operating results compared to fiscal 2000. Management has
initiated certain actions to increase the likelihood of attaining these improved
operating results. Such actions include, among other things, (i) modifying the
terms of certain financial covenants, (ii) entering into the Equity Credit Line,
(iii) temporarily suspending activities related to its electronic commerce
strategy until specific funding can be obtained, (iv) obtaining extensions of
the due date for payment of contingent earn-out amounts relating to calendar
year 2000 under the American Micro purchase agreement, (v) adjusting staffing
levels, and (vi) implementing steps to increase sales volume and lower inventory
levels. No assurances can be given that management's initiatives will be
successful, and that loan agreement defaults will not occur in the future.
Another factor that could negatively impact the Company's liquidity
is the terms of the borrowing arrangements of European Micro UK. Certain of
European Micro UK's borrowing capacity is subject to termination by the lender
at lender's sole discretion. Further, the American Micro and Nor-Easter line of
credit facilities and the European Micro Holdings, Inc. term loan contain
subjective acceleration clauses. These factors increase the liquidity risk to
the Company. Management believes that, based on the projected fiscal year 2001
operating results of the Company and its relationship with the creditors, its
existing credit arrangements will remain effective during fiscal 2001.
WORKING CAPITAL. Working capital requirements of European Micro UK
are funded by a combination of line of credit facilities, together with accounts
receivable financing. In both cases, the amounts drawn down accrue the same rate
of interest based on a markup over the bank borrowing rate in the United
Kingdom. The bank line of credit was 2.0 million pounds sterling ($3.0 million)
at June 30, 2000. The accounts receivable financing provides for a borrowing
base of 85% of accounts receivable, with a limit of 6.2 million pounds sterling
($9.4 million on June 30, 2000). The limit on trade receivables financing
increased from a maximum of 5.5 million pounds sterling at June 30, 1999 ($8.3
million at June 30, 1999). This facility can be terminated by either party
giving three months' notice. The finance company which provides the receivable
financing facility has full recourse to European Micro UK with respect to any
doubtful or unrecovered amounts. Interest is charged on the receivable financing
balance at 1.25% above the bank borrowing rate of 6% at June 30, 2000, and 5% at
June 30, 1999. 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 ($5.3 million at June 30, 2000) to assist in the
purchase of inventory. This revolving credit agreement expired in August 2000
and was renewed, through July 1, 2001, by European Micro UK in September 2000 to
allow for borrowings up to 2.0 million pounds sterling ($3.0 million at June 30,
2000) which are secured by the general corporate assets of European Micro UK.
Borrowings under the bank line of credit and revolving credit agreement are
capped at a maximum of 2.0 million pounds sterling outstanding under the
combined facilities at any point in time.
Working capital requirements of the Company's operations based in the
United States are funded by two lines of credit. On October 28, 1999, American
Micro and Nor'Easter each obtained a line of credit secured by accounts
receivable and inventory. Amounts available under each of the line of credit
agreements are based upon eligible accounts receivable and inventory, up to a
maximum borrowing amount of $1.5 million for each agreement. Each of these lines
of credit were to mature on October 28, 2000. Interest accrues at 0.5% over the
bank borrowing rate of 9.5% at June 30, 2000. As partial security for these
loans, Messrs. Gallagher and Shields pledged to the lender a portion of their
shares of common stock of the Company. In the event the Company defaults on one
18
<PAGE>
or more of these loans, the lender may foreclose on all or a portion of the
pledged securities. Such an event may cause a change of control in the Company
because Messrs. Gallagher and Shields together own 71% of the Company's
outstanding common stock. The lines of credit agreements include certain
financial and non-financial covenants and restrictions. The agreements also
contain a provision whereby the lender can declare a default based on subjective
criteria. As of June 30, 2000, the Company was not in compliance with certain of
the financial covenants in the agreements.
On October 5, 2000, the Company received a waiver of the covenant
violations for the June 30, 2000 reporting date for the American Micro and
Nor'Easter lines of credit. The Company and the bank terminated the existing
lines of credit and entered into a new borrowing arrangement whereby each of
American Micro and Nor'Easter will have a working capital line of credit equal
to the lesser of (i) $1.5 million or (ii) the sum of 85% of eligible accounts
receivable, plus the lesser of 50% of eligible inventory or $750,000. Interest
will be paid monthly at a floating rate of 50 basis points over the bank's base
rate. The term of the new arrangements is for one year from the closing date.
The new facilities also require the companies to maintain depository accounts at
the bank, whose daily receipts will be applied against outstanding borrowings
under the lines of credit. As a result, the borrowings are classified as current
liabilities on the Company's consolidated balance sheet at June 30, 2000. The
new facilities also place certain restrictions on the companies' ability to pay
dividends and to make capital expenditures, among other things, and includes a
provision whereby the lender can declare a default based on subjective criteria.
Collateral under the new credit line facilities consists of a first priority
lien on all assets of American Micro and Nor'Easter. Messrs. Gallagher and
Shields guaranteed the borrowings under these arrangements. These borrowings are
cross-collateralized and cross-defaulted with borrowings under the $1.5 million
term loan to European Micro Holdings, Inc.
LONG-TERM CAPITAL. The Company's long-term capital needs have
historically been met from the sales of securities and long-term borrowings. In
June 1998, the Company received $9.3 million in gross proceeds from its initial
public offering of 933,900 shares of common stock. The Company incurred total
expenses in connection with the offering of $2.2 million. The Company has used
the proceeds to 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 June
30, 2000, the borrowings were $49,000, of which $19,000 was due after more than
one year.
On October 28, 1999, the Company obtained a $1.5 million term loan.
The term loan agreement is with the same lender as the Nor'easter Micro and
American Micro line of credit facilities discussed above. Further, the term loan
credit agreement contains similar loan covenant requirements. The term loan is
to be repaid with quarterly payments of $125,000 over three years. The term loan
bears interest at the one-month LIBOR plus two and one-quarter percentage points
(2.25%). One-month LIBOR at June 30, 2000 was 6.67%. Three payments have been
made, bringing the balance down to $1,125,000 at June 30, 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. In addition, Mr. Shields has
pledged personal assets as additional collateral and has further agreed to
maintain certain personal financial statement liquidity levels. In the event the
Company defaults on this loan, the lender may foreclose on all or a portion of
the pledged securities. Such an event may cause a change of control in the
Company because Messrs. Gallagher and Shields together own 71% of the Company's
outstanding common stock. The term loan agreement includes certain financial and
non-financial covenants and restrictions. The agreement also contains a
provision whereby the lender can declare a default based on subjective criteria.
As described above, the Company was not in compliance with loan covenants for
the June 30, 2000 reporting period. The Company has received a waiver of the
non-compliance with the financial covenants. The amended borrowing agreement
with the lender includes revised financial covenants.
On July 1, 1999, the Company acquired AMCC for a purchase price of
$1,131,00, plus an earn-out. 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
approximately $600,000 was paid in March 2000. The remaining earn-out portion of
the purchase price relating to two times the after tax earnings for calendar
19
<PAGE>
year 2000 is expected to be funded through the Company's working capital, and a
note payable to the former shareholders of AMCC. Pursuant to the original merger
agreement, the remaining earn-out portion was to be due no later than May 1,
2001. The former shareholders of AMCC have agreed that, until July 1, 2001 and
thereafter for so long as the repayment of the earn-out is limited by the loan
covenants with SouthTrust Bank, the Company will pay the shareholders $50,000
per month, plus 8% interest, commencing April 1, 2001. The remaining unpaid
earn-out amount will be payable July 1, 2001 to the extent not limited by such
covenants.
On July 16, 1999, European Micro UK purchased the office building in
which it had previously been leasing space for 1,705,000 pounds sterling
($2,580,000 at June 30, 2000). The purchase price was financed in part by a loan
in the amount of 1,312,000 pounds sterling ($1,985,000 at June 30, 2000). This
loan calls for monthly payments of principal and interest in the amount of
15,588 pounds sterling ($23,589 at June 30, 2000) and matures in July 2009. The
mortgage loan note bears interest at a fixed rate of 7.6%. The mortgage loan
note includes certain financial and non-financial covenants and restrictions.
The agreement also contains a provision whereby the lender can declare a default
based on subjective criteria. The financial covenants are measured using the
financial results of European Micro UK as of each fiscal year end. Based upon
European Micro UK's fiscal year end operating results, European Micro UK was out
of compliance with one of the covenant requirements at June 30, 2000. The
Company has obtained a waiver through July 1, 2001 of this non-compliance.
On August 24, 2000, European Micro Holdings, Inc. entered into an
Equity Line of Credit (the "EQUITY CREDIT LINE"). Pursuant to the Equity Credit
Line, an institutional investor agreed to acquire up to $20 million of the
Company's common stock at a purchase price equal to 88% of the market price of
such stock, as defined in the agreement. The timing of each sale and the number
of shares to be sold is at the discretion of the Company, subject to various
conditions, including shareholder approval and an effective registration of the
shares. The dollar amount that the Company can request under any individual sale
is subject to the average trading volume of the Company's common stock for the
preceding 25-day trading period. The maximum term of the Equity Credit Line is
30 months from the date of the agreement. The agreement contains various
representations, warranties and covenants by the Company, including limitations
on the Company's ability to sell common stock or common stock equivalents, sell
assets, merge, or enter into certain other transactions.
FISCAL YEAR ENDED JUNE 30, 2000. Net cash used in operating
activities for fiscal 2000 amounted to $1.2 million. Significant factors in the
use of cash were a net loss in the period of $3.2 million, a decrease in trade
payables, net of effects from acquisitions, of $2.4 million, a decrease in
accrued expenses and other liabilities, net of effects from acquisitions, of
$1.1 million, and a decrease in income taxes payable, net of effects from
acquisitions of $0.4 million. The amount of cash used in the Company's
operations was partially offset by a decrease in trade receivables, net of
effects from acquisitions, of $2.5 million, a decrease is due from related party
of $1.1 million and a decrease in inventory, net of effects from acquisitions,
of $3.0 million.
Cash used in investing activities amounted to $5.3 million. This
consisted of expenditures on fixed assets of $3.4 million, largely the purchase
of European Micro UK's office building, the sale of fixed assets of $56,000, the
acquisitions of American Micro of $1.8 million and an advance to Big Blue Europe
of $150,000.
Cash provided by financing activities was $4.7 million, of which $2.0
million was provided by an increase in the short-term borrowings, net and $3.5
million was provided by proceeds from long-term borrowings. These long-term
borrowings consisted of $2.1 million provided by the proceeds from the mortgage
loan secured by European Micro UK's office building and $1.5 million provided by
a term loan. Repayments on long-term borrowings were $110,000 to pay down the
mortgage loan on the building, $375,000 to pay down the term loan and $300,000
to pay down borrowings assumed from the acquisition of AMCC.
FISCAL YEAR ENDED JUNE 30, 1999. Net cash used in operating
activities for fiscal 1999 amounted to $8.8 million. Significant factors in the
use of cash were a decrease in trade payables, net of effects from acquisitions,
of $1.1 million, an increase in inventories, net of effects from acquisitions of
$5.4 million and an increase of trade receivables, net of effects from
acquisitions of $3.0 million. The decrease in trade payables was largely
attributable to paying down the large payables balance that was acquired in the
Sunbelt acquisition. The increase in inventory was largely attributable to large
quantity purchases of computer products at prices which the Company considered
to be favorable and a relatively low level of inventory at June 30, 1998. The
increase in trade receivables is largely attributable to the increase in third
party sales. The amount of cash used in the Company's operations was partially
20
<PAGE>
offset by net income in the period of $854,000, cash generated from a reduction
in other current assets of $1.8 million, primarily related to the prepayment of
inventory at June 30, 1998 of $2.0 million.
Cash used in investing activities amounted to $1.2 million. This
consisted of expenditures on fixed assets of $155,000, the sale of fixed assets
of $7,000, the acquisitions of Sunbelt and H&B of $720,000 and an advance to Big
Blue Europe of $350,000.
Cash provided by financing activities was $8.5 million, of which $7.0
million was provided by an increase in the accounts receivable financing
facility and $1.6 million was provided by an increase in the bank line of
credit.
FISCAL YEAR ENDED JUNE 30, 1998. Cash provided by operating
activities for fiscal 1998 amounted to $1.6 million. Significant factors in the
generation of cash were net income for the year of $4.5 million and an increase
in taxes payable of $2.2 million. The cash provided by operations was partially
offset primarily by the increases in trade receivables of $2.3 million, which
was a result of the considerable increase in business during the period,
including significant UK sales with longer credit terms and an advance payment
made for the purchase of inventory of $2.0 million. The advance payment was made
to take advantage of favorable pricing. Further, cash was used to pay down trade
payables by $400,000 and an increase in due from related parties of $329,000.
Cash used in investing activities amounted to $421,000. This was
attributed to the purchase of fixed assets amounting to $596,000 less the sale
of fixed assets of $175,000. The purchase of fixed assets consisted primarily of
expenditures for office improvements (as the Company moved onto an additional
floor at their Manchester, England office) of $150,000, new computers and office
equipment of $103,000, a forklift for the warehouse of $22,000, and new vehicles
of $286,000. The sale of fixed assets consisted primarily of used vehicles
traded for the purchase of new vehicles.
Cash provided by financing activities amounted to $3.4 million. This
was primarily the result of the receipt of net proceeds from the initial
offering of $7.1 million ($9.3 million proceeds less expenses of $2.2 million).
Cash used in financing activities amounted to $3.8 million to repay the
short-term financing facilities and the payment of a cash dividend of $550,000
prior to the Company's initial public offering.
ASSET MANAGEMENT
INVENTORY. The Company's goal is to achieve high inventory turns and
maintain a low inventory level and thereby reduce the Company's working capital
requirements. The Company's strategy to achieve this goal is to effectively
manage its inventory and to achieve high order fill rates. Inventory levels may
vary from period to period, due to factors including increases or decreases in
sales levels, the Company's practice of making large-volume purchases when it
deems such purchases to be attractive, new products and changes in the Company's
product mix.
ACCOUNTS RECEIVABLE. The Company sells its products and services to a
customer base of more than 770 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.
21
<PAGE>
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 European Micro Holding's
main operating subsidiary, European Micro UK, is the U.K. pound sterling,
currency fluctuations of the U.K. pound sterling relative to the U.S. dollar may
have a material adverse effect on the Company's business, financial condition
and results of operations. The Company may engage in hedging activities in the
future, although no assurances can be given that it will engage in such
activities and if it does so that such activities will be successful.
Generally, the Company's policy is not to hedge specifically against
individual daily transactions. Instead, the exposure to a currency is determined
every two to three days. This is done by comparing the bank account balances and
account receivables with accounts payable, all in the same currency to create a
"natural" hedge. Thereafter, to the extent that a bank balance and the account
receivable are not totally offset by the accounts payable, there would be a need
to cover the residual credit balance with a forward currency contract. The
Company tends to concentrate its currency management into seven currencies:
Euro, U.K. pound sterling, U.S. dollar, Dutch guilder, Canadian dollar,
Singapore dollar and German Mark. It normally deems the exposure in other
currencies to be minimal. However, when the Company buys products in other
currencies, the Company may, in conjunction with current market advice, book a
forward contract to cover current and some anticipated future purchases.
ECONOMIC AND MONETARY UNION. On January 1, 1999, eleven of the
fifteen member countries of the European Union established fixed conversion
rates between their existing sovereign currencies and a new currency called the
"Euro." These countries adopted the Euro as their common legal currency on that
date. The Euro is trading on currency exchanges and is available for non-cash
transactions. Until January 1, 2002, the existing sovereign currencies will
remain legal tender in these countries. On January 1, 2002, the Euro is
scheduled to replace the sovereign legal currencies of these countries. Through
the operations of European Micro UK, the Company has significant operations
within the European Union, including many of the countries which adopted the
Euro. The Company continues to evaluate the impact that the Euro will have on
its continuing business operations and no assurances can be given that the Euro
will not have a material adverse effect on the Company's business, financial
condition and results of operations. However, the Company does not expect the
Euro to have a material effect on its competitive position as a result of price
transparency within the European Union because the Company does not rely on
currency imbalances in purchasing inventory from within the European Union. In
the first two quarters of trading, the Euro devalued against sterling by 12.2%,
adversely affecting the value of the Company's trade receivables denominated in
Euros. Going forward, the Company cannot accurately predict the impact the Euro
will have on currency exchange rates or the Company's currency exchange rate
risk. The Internal Revenue Service ("IRS") has requested comments on various tax
issues raised by the Euro conversion. The IRS is expected to publish guidelines
on this issue and, until such time, the Company cannot predict whether the IRS
guidelines will have any tax consequences on the Company.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company utilizes derivative financial instruments in the form of
forward exchange contracts for the purpose of economic hedges of anticipated
sale and purchase transactions. In addition, the Company enters into economic
hedges for the purposes of hedging foreign currency market exposures of
underlying assets, liabilities and other obligations which exist as part of its
ongoing business operations. See "Currency Risk Management."
Where the foreign currency exposure is covered by a forward foreign
exchange contract the asset, liability or other obligation is recorded at the
contracted rate each month end and the resultant mark-to-market gains and losses
are recognized as cost of sales in the current period, generally consistent with
the period in which the gain or loss of the underlying transaction is
recognized. Cash flows associated with derivative transactions are classified in
the statement of cash flows in a manner consistent with those of the exposure
being hedged.
EXCHANGE RATE SENSITIVITY
The table below summarizes information on foreign currency forward
exchange agreements. The table presents the notional amounts and weighted
average exchange rates by expected (contractual) maturity dates (in thousands
22
<PAGE>
except exchange rates). The fair value has been determined by applying the
mid-price of the spread on the buy or sell rates, as appropriate, of the
relevant foreign currency at the balance sheet date. The mid-price used is that
quoted by the Financial Times.
<TABLE>
<CAPTION>
EXPECTED
MATURITY OR
TRANSACTION DATE FAIR VALUE
FOREIGN CURRENCY EXCHANGE CONTRACTS
JUNE 30, 2000
<S> <C> <C>
(Receive $US / pay(pound)) July 19, 2000
Contract amount (in thousands) $2,000 $2,012
Average contractual exchange rate 1.5045 $US /(pound)1
JUNE 30, 1999
(Receive(pound)/pay euro) July 9, 1999
Contract amount (in thousands) (pound)1,000 (pound)1,027
Average contractual exchange rate 1.5635 euro /(pound)1
(Receive(pound)/pay euro) July 12, 1999
Contract amount (in thousands) (pound)1,000 (pound)1,015
Average contractual exchange rate 1.546 euro /(pound)1
</TABLE>
Foreign currency losses, net were $325,000 in 2000, $579,000 in 1999
and $510,000 in 1998.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The consolidated financial statements of the Company appear beginning
at page F-1. Certain quarterly financial data is set forth below.
<TABLE>
<CAPTION>
($ IN THOUSANDS, EXCEPT PER SHARE DATA)
NET INCOME (LOSS) PER SHARE
JUNE 30, 2000 NET SALES GROSS PROFIT NET INCOME (BASIC AND DILUTED)
------------- --------- ------------ ---------- -------------------
<S> <C> <C> <C> <C>
First Quarter $32,764 3,697 207 $ 0.04
Second Quarter 34,545 3,704 11 0.00
Third Quarter 24,354 1,855 (1,308) (0.26)
Fourth Quarter 23,830 2,095 (2,117) (0.42)
NET INCOME PER SHARE
JUNE 30, 1999 NET SALES GROSS PROFIT NET INCOME (BASIC AND DILUTED)
------------- --------- ------------ ---------- ------------
First Quarter $29,297 2,945 722 $0.15
Second Quarter 29,011 2,258 24 0.00
Third Quarter 38,465 2,929 22 0.00
Fourth Quarter 35,433 2,954 86 0.02
23
<PAGE>
NET INCOME PER SHARE
JUNE 30, 1998 NET SALES GROSS PROFIT NET INCOME (BASIC AND DILUTED)
------------- --------- ------------ ---------- -------------------
First Quarter $24,107 1,839 485 $0.12
Second Quarter 22,002 2,541 669 0.16
Third Quarter 39,130 6,581 2,380 0.59
Fourth Quarter 26,214 3,434 951 0.23
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
ITEM 11. EXECUTIVE COMPENSATION.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information called for by Items 10, 11, 12 and 13 of this Part
III is incorporated herein by reference to the Company's Proxy Statement for its
Annual Meeting of Stockholders to be held on October 30, 2000.
ITEM 14. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1)(2) FINANCIAL STATEMENTS. See index to consolidated financial
statements and supporting schedules.
(a)(3) EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION LOCATION
--- ----------- --------
<S> <C> <C>
2.01 Agreement for the Acquisition of Sunbelt (UK) Incorporated by reference to Exhibit 2.01
Limited by European Micro Plc dated October 26, to Registrant's Form 10-Q for the quarter
1998 ended September 30, 1998.
2.02 Merger Agreement re: AMCC dated June 29, 1999 Incorporated by reference to Exhibit 2.02
to Registrant's From 10-K for the year
ended June 30, 1999.
2.03 Plan of 1999 Merger re: AMCC dated June 29, 1999 Incorporated by reference to Exhibit 2.03
to Registrant's From 10-K for the year
ended June 30, 1999.
2.04 Articles of Merger re: AMCC dated June 29, 1999 Incorporated by reference to Exhibit 2.04
to Registrant's Form 10-K for the year
ended June 30, 1999.
3.01 Articles of Incorporation Incorporated by reference to Exhibit No.
3.01 to Registrant's Registration
Statement (the "Registration Statement")
on Form S-1 (Registration Number
333-44393).
24
<PAGE>
EXHIBIT
NO. DESCRIPTION LOCATION
--- ----------- --------
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
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
25
<PAGE>
EXHIBIT
NO. DESCRIPTION LOCATION
--- ----------- --------
10.10 Contract of Employment Agreement between Laurence Incorporated by reference to Exhibit No.
Gilbert and European Micro UK dated March 14, 1998 10.11 to the Registration Statement.
10.11 Subscription Agreement by and between John B. Incorporated by reference to Exhibit No.
Gallagher, Harry D. Shields, Thomas H. Minkoff, 10.13 to the Registration Statement.
Trustee of the Gallagher Family Trust, Robert H.
True and Stuart S. Southard, Trustees of the Henry
Daniel Shields 1997 Irrevocable Educational Trust,
European Micro Holdings, Inc. effective as of
January 31, 1998
10.12 Administrative Services Contract by and between Incorporated by reference to Exhibit No.
European Micro Holdings, Inc. and European Micro 10.14 to the Registration Statement.
Plc effective as of January 1, 1998
10.13 Escrow Agreement between European Micro Holdings, Incorporated by reference to Exhibit No.
Inc., Tarpon Scurry Investments, Inc. and The 10.15 to the Registration Statement.
Chase Manhattan dated as of March 24, 1998
10.14 Form of Indemnification Agreements with officers Incorporated by reference to Exhibit No.
and directors 10.16 to the Registration Statement.
10.15 Form of Transfer Agent Agreement with Chase Mellon Incorporated by reference to Exhibit No.
Shareholder Services, L.L.C. 10.17 to the Registration Statement.
10.16 Form of Credit Agreement by and between European Incorporated by reference to Exhibit No.
Micro UK and National Westminster Bank Plc 10.17 to the Annual Report on Form 10-K
for the fiscal year ended June
30, 1998 filed with the
Commission on September 28, 1998.
10.17 Consulting Contract dated September 10, 1998 by Incorporated by reference to Exhibit 10.19
and between European Micro Holdings, Inc. and The to Registrant's Form 10-Q for the quarter
Equity Group ended September 30, 1998.
10.18 Employment Agreement dated July 1, 1999 between Incorporated by reference to Exhibit 10.21
John B. Gallagher and American Micro to Registrant's Form 10-K for the year
ended June 30, 1999.
10.19 Revolving Loan Agreement dated October 5, 2000 Provided herewith.
between American Micro and SouthTrust Bank re:
Line of Credit to American Micro
10.20 First Amendment to Loan Agreement dated October 5, Provided herewith.
2000 among the Company, American Micro, Nor'Easter
and SouthTrust Bank, N.A. re: Term Loan to the
Company
10.21 Revolving Loan Agreement dated October 5, 2000 Provided herewith.
between Nor'Easter and SouthTrust Bank re: Line of
Credit to Nor'Easter
10.22 Loan Agreement dated October 28, 1999 among the Incorporated by reference to Exhibit 10.23
Company, American Micro, Nor'Easter and SouthTrust to Registrant's Form 10-Q for the quarter
Bank, N.A. re: Term Loan to the Company ended September 30, 1999.
26
<PAGE>
EXHIBIT
NO. DESCRIPTION LOCATION
--- ----------- --------
10.23 Security Agreement dated October 5, 2000 between Provided herewith.
Nor'Easter and SouthTrust Bank
10.24 Security Agreement dated October 5, 2000 between Provided herewith.
American Micro and SouthTrust Bank
10.25 Line of Credit Note given by Nor'Easter to Provided herewith.
SouthTrust Bank
10.26 Line of Credit Note given by American Micro to Provided herewith.
SouthTrust Bank
10.27 Unconditional Guaranty given by Harry Shields to Provided herewith.
SouthTrust Bank Re: American Micro
10.28 Unconditional Guaranty given by John Gallagher to Provided herewith.
SouthTrust Bank Re: American Micro
10.29 Amended and Restated Unlimited Guaranty Agreement Provided herewith.
dated October 5, 2000 between Harry Shields and
SouthTrust Bank
10.30 Amended and Restated Unlimited Guaranty Agreement Provided herewith.
dated October 5, 2000 between John Gallagher and
SouthTrust Bank
10.31 Unconditional Guaranty given by John Gallagher to Provided herewith.
SouthTrust Bank Re: Nor'Easter
10.32 Unconditional Guaranty given by Harry Shields to Provided herewith.
SouthTrust Bank Re: Nor'Easter
10.33 Specific Agreement for the Provision of Incorporated by reference to Exhibit 10.25
Professional Services dated as of March 17, 2000 to Registrant's Form 10-Q for the quarter
between the Company and Cap Gemini UK Plc ended March 31, 2000.
10.34 Equity Line of Credit Agreement dated as of August Provided herewith.
24, 2000, between the Company and Spinneret
Financial System, Ltd.
10.35 Registration Rights Agreement dated as of August Provided herewith.
24, 2000, between the Company and Spinneret
Financial System, Ltd.
10.36 Warrant to Purchase Common Stock dated as of Provided herewith.
August 24, 2000, given by the Company to the May
Davis Group, Inc.
10.37 Warrant to Purchase Common Stock dated as of Provided herewith.
August 24, 2000, given by the Company to the May
Davis Group, Inc.
10.38 Registration Rights Agreement dated as of August Provided herewith.
24, 2000, between the Company and the May Davis
Group, Inc.
10.39 Placement Agent Agreement dated as of August 24, Provided herewith.
2000, between the Company and the May Davis Group,
Inc.
11.01 Statement re: Computation of Earnings Provided herewith.
27
<PAGE>
EXHIBIT
NO. DESCRIPTION LOCATION
--- ----------- --------
15.01 Letter re: Unaudited Financial Information Not applicable.
18.01 Letter re Change in Accounting Principles Not applicable.
19.01 Report Furnished to Security Holders Not applicable.
22.01 Published Report Regarding Matters Submitted to Not applicable.
Vote of Security Holders
23.01 Consents of experts and counsel Provided herewith.
24.01 Power of Attorney Not applicable.
27.01 Financial Data Schedule Provided herewith.
(b) Reports on Form 8-K.
None.
</TABLE>
28
<PAGE>
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereto duly authorized.
Date: October 11, 2000.
EUROPEAN MICRO HOLDINGS, INC.
By: /s/ John B. Gallagher
-------------------------------------
John B. Gallagher
Co-President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Harry D. Shields
------------------------------- Co-Chairman; October 11, 2000
Harry D. Shields Co-President
Principal
Executive
Officer);
Director
/s/ John B. Gallagher
------------------------------- Co-Chairman; October 11, 2000
John B. Gallagher Co-President
(Principal
Executive
Officer);
Director
/s/ Jay Nash
------------------------------- Chief Financial October 11, 2000
Jay Nash Officer
and Controller
(Principal
Financial
Officer and
Controller)
/s/ Laurence Gilbert
------------------------------- Director October 11, 2000
Laurence Gilbert
/s/ Kyle R. Saxon
------------------------------- Director October 11, 2000
Kyle R. Saxon
/s/ Barrett Sutton
------------------------------- Director October 11, 2000
Barrett Sutton
28
<PAGE>
INDEX TO THE FINANCIAL STATEMENTS
EUROPEAN MICRO HOLDINGS, INC.
Independent Auditors' Report F-2
Consolidated Balance Sheets as of June 30, 2000 and 1999 F-3
Consolidated Statements of Operations for the years ended
June 30, 2000, 1999 and 1998 F-4
Consolidated Statements of Changes in Shareholders' Equity
for the years ended June 30, 2000, 1999 and 1998 F-5
Consolidated Statements of Cash Flows for the years ended
June 30, 2000, 1999 and 1998 F-6
Notes to Consolidated Financial Statements F-8
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and the Shareholders of
European Micro Holdings, Inc.
We have audited the consolidated balance sheets of European Micro Holdings, Inc.
and subsidiaries as of June 30, 2000 and 1999, and the related consolidated
statements of operations, shareholders' equity, and cash flows for each of the
years in the three-year period ended June 30, 2000. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of European Micro
Holdings, Inc. and subsidiaries as of June 30, 2000 and 1999 and the results of
their operations and their cash flows for each of the years in the three-year
period ended June 30, 2000 in conformity with accounting principles generally
accepted in the United States of America.
/s/ KPMG LLP
Nashville, Tennessee
August 24, 2000, except as to notes 3, 9 and 10,
which are as of October 5, 2000
F-2
<PAGE>
<TABLE>
<CAPTION>
EUROPEAN MICRO HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<S> <C> <C>
JUNE 30, 2000 JUNE 30, 1999
-----------------------------------------
ASSETS
CURRENT ASSETS:
Cash $1,222 $3,168
Restricted Cash 364 379
Trade receivables, net 13,160 14,938
Due from related parties - 1,128
Inventories, net 6,194 7,232
Prepaid expenses 322 402
Income taxes receivable 909 -
Other current assets 765 562
--------- ---------
TOTAL CURRENT ASSETS 22,936 27,809
Property and equipment, net 3,927 612
Goodwill, net 2,808 1,675
Investments in and advances to unconsolidated subsidiaries 252 503
Other assets 290 -
------ ------
TOTAL ASSETS $30,213 $30,599
======= -------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings $11,903 $8,614
Current portion of long-term borrowings 678 -
Trade payables 2,256 3,484
Accrued expenses and other current liabilities 1,882 2,851
Due to related parties 11 633
Income taxes payable - 383
--------- ---------
TOTAL CURRENT LIABILITIES 16,730 15,965
Long-term borrowings 2,373 23
Other liabilities - 268
--------- ---------
TOTAL LIABILITIES $19,103 $16,256
--------- ---------
SHAREHOLDERS' EQUITY:
Preferred stock $0.01 par value shares: 1,000,000 authorized no shares
issued and outstanding - -
Common stock $0.01 par value shares: 20,000,000 authorized,
4,933,900 shares issued and outstanding, 49 49
Additional paid-in capital 9,191 8,979
Accumulated other comprehensive loss (550) (312)
Retained earnings 2,420 5,627
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 11,110 14,343
--------- ---------
COMMITMENTS, CONTINGENCIES AND SUBSEQUENT EVENTS
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $30,213 $30,599
======== ========
See accompanying notes to consolidated financial statements.
</TABLE>
F-3
<PAGE>
EUROPEAN MICRO HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
YEARS ENDED JUNE 30,
---------------------------------------------------
2000 1999 1998
---- ---- ----
SALES:
Net sales $113,124 $116,866 $82,361
Net sales to related parties 2,369 15,340 29,092
-------- -------- --------
Total net sales 115,493 132,206 111,453
-------- -------- --------
COST OF GOODS SOLD:
Cost of goods sold (101,822) (105,876) (68,380)
Cost of goods sold to related parties (2,320) (15,244) (28,678)
-------- -------- --------
Total cost of goods sold (104,142) (121,120) (97,058)
-------- -------- --------
GROSS PROFIT 11,351 11,086 14,395
OPERATING EXPENSES:
Selling, general and administrative
expenses (14,050) (9,151) (7,059)
-------- -------- --------
Expenses attributable to related
parties - - (104)
-------- -------- --------
Total operating expenses (14,050) (9,151) (7,163)
-------- -------- --------
INCOME (LOSS) FROM OPERATIONS (2,699) 1,935 7,232
Interest income 74 147 22
Interest expense (964) (446) (459)
Equity in net (loss) income of
unconsolidated subsidiaries (188) (32) 3
-------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES (3,777) 1,604 6,798
Income tax (expense) benefit 570 (750) (2,313)
-------- -------- --------
NET INCOME (LOSS) $(3,207) $854 $4,485
======== ======== ========
Net income (loss) per share - basic $(0.64) $0.17 $1.10
======== ======== ========
Net income (loss) per share - diluted $(0.64) $0.17 $1.10
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION> EUROPEAN MICRO HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands, except share data)
<S> <C> <C> <C> <C> <C>
ACCUMULATED
ADDITIONAL OTHER TOTAL
PAID-IN COMPREHENSIVE RETAINED SHAREHOLDERS'
COMMON STOCK CAPITAL INCOME (LOSS) EARNINGS EQUITY
----------------------- ------------- ------------------ ------------- ----------------
SHARES AMOUNT
------ ------
---------------------------------------------------------------------------------------
Balance at June 30, 1997 4,000,000 $40 $1,624 $21 $826 $2,511
---------------------------------------------------------------------------------------
Comprehensive Income:
Net income - - - - 4,485 4,485
Other comprehensive income
for foreign currency
translation adjustment - - - 35 40 75
-------------------------------------------------
Total comprehensive income - - - 35 4,525 4,560
Dividends declared ($0.14 per
share) - - - - (550) (550)
Issuance of common stock, net of
$2,180 in offering costs 933,900 9 7,150 - - 7,159
Compensation charge in relation
to share options issued to non-
employees - - 28 - (28) -
---------------------------------------------------------------------------------------
Balance at June 30, 1998 4,933,900 $49 $8,802 $56 $4,773 $13,680
---------------------------------------------------------------------------------------
Comprehensive Income:
Net income - - - - 854 854
Other comprehensive income
for foreign currency
translation adjustment - - - (368) - (368)
-------------------------------------------------
Total comprehensive income - - - (368) 854 486
Additional offering costs - - (25) - - (25)
Compensation charge in relation to
share options issued to non-
employees - - 202 - - 202
---------------------------------------------------------------------------------------
Balance at June 30, 1999 4,933,900 $49 $8,979 $(312) $5,627 $14,343
---------------------------------------------------------------------------------------
Comprehensive Income:
Net loss (3,207) (3,207)
Other comprehensive income
for foreign currency
translation adjustment (238) - (238)
-------------------------------------------------
Total comprehensive loss (238) (3,207) (3,445)
Adjustment to accrued offering costs
Compensation charge in relation to 156 156
share options issued to
non-employees 56 56
---------------------------------------------------------------------------------------
Balance at June 30, 2000 4,933,900 $49 $9,191 $(550) $2,420 $11,110
=======================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
EUROPEAN MICRO HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<S> <C> <C> <C>
YEARS ENDED JUNE 30,
--------------------------------------------------
2000 1999 1998
---- ---- ----
OPERATING ACTIVITIES:
Net income (loss) $(3,207) $854 $4,485
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET CASH (USED
IN) PROVIDED BY OPERATING ACTIVITIES
Depreciation and amortization 553 323 192
Amortization expense related to contingent
earn-out provisions 47 112 -
Deferred income taxes (194) (15) (80)
Equity in net loss (income) of
unconsolidated subsidiaries 188 32 (3)
Compensation charge for non-employee stock options 56 202 -
Provision for note receivable impairment 200 - -
CHANGES IN ASSETS AND LIABILITIES, NET OF EFFECTS FROM
ACQUISITIONS
Restricted cash - (379) -
Trade receivables 2,498 (3,034) (2,250)
Due from related parties 1,128 (230) (329)
Inventories 2,955 (5,407) (155)
Prepaid expenses and other current assets 38 1,840 (2,651)
Income taxes receivable (909) - -
Trade payables (2,374) (1,139) (400)
Accrued expenses and other liabilities (1,127) (168) 585
Due to related parties (622) 395 50
Income taxes payable (383) (2,194) 2,202
------- ------- -------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (1,153) (8,808) 1,646
------- ------- -------
INVESTING ACTIVITIES:
Purchase of fixed assets (3,407) (155) (596)
Sale of fixed assets 56 7 175
Advances to unconsolidated subsidiaries (150) (350) -
Payment for acquisitions, net of cash acquired (1,834) (720) -
------- ------- -------
NET CASH USED IN INVESTING ACTIVITIES (5,335) (1,218) (421)
------- ------- -------
FINANCING ACTIVITIES:
Short-term borrowings, net 2,040 8,614 (3,257)
Proceeds from long-term borrowings 3,485 - -
Repayment of long-term borrowings (785) - -
Dividends paid - - (550)
Issuance of common stock, net - (25) 7,159
Repayment of capital leases (72) (74) 65
------- ------- -------
NET CASH PROVIDED BY FINANCING ACTIVITIES 4,668 8,515 3,417
------- ------- -------
Exchange rate changes (126) (333) 82
------- ------- -------
NET INCREASE (DECREASE) IN CASH (1,946) (1,844) 4,724
Cash at beginning of year 3,168 5,012 288
------- ------- -------
CASH AT END OF YEAR $1,222 $3,168 $5,012
======= ======= =======
</TABLE>
F-6
<PAGE>
<TABLE>
<CAPTION>
EUROPEAN MICRO HOLDINGS, INC. AND SUBSIDIARIES
<S> <C> <C> <C>
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Fair value of assets acquired $3,314 $4,302 -
Goodwill 1,418 1,731 -
Fair value of liabilities assumed (2,817) (4,103) -
Notes issued for consideration - (1,083) -
------- ------- -------
Cash paid for acquisitions $1,915 $847 -
Less cash acquired (81) (127) -
------- ------- -------
Net cash paid for acquisitions $1,834 $720 -
======= ======= =======
Interest paid $532 $513 $478
======= ======= =======
Taxes paid $1,022 $2,637 $191
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
EUROPEAN MICRO HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1 DESCRIPTION OF BUSINESS
On December 23, 1997, European Micro Holdings, Inc. was incorporated
and 4,000,000 shares of common stock with a par value of $0.01 per
share were issued. The 4,000,000 shares were issued to the shareholders
of European Micro Plc in exchange for the entire issued share capital
of that company on January 31, 1998. European Micro Holdings, Inc. and
its subsidiaries are hereinafter referred to as "European Micro" or
"the Company." The following companies' results of operations and
financial position have been included in the consolidated financial
statements as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
COMMENCED
COMPANIES INCORPORATED TRADING ACQUIRED
--------------- -------------------------------------
European Micro Holdings, Inc. 1997 1998 -
Nor'Easter Micro Inc. 1997 1998 -
European Micro Plc 1991 1992 -
European Micro GmbH 1993 1993 -
European Micro BV 1997 1997 -
Colchester Enterprise Pte. Ltd. 1998 1999 -
Sunbelt (UK) Limited - - October 26, 1998
American Micro Computer Center, Inc. - - July 1, 1999
Engenis.com Ltd. 2000 - -
</TABLE>
European Micro operates in a single industry trading computer
components. In principle the Company purchases components from
international suppliers, including related parties, and sells them in
local markets. The main trading company, European Micro Plc, has its
principal operations in Altrincham, England with its subsidiaries
operating in Germany and Holland. Nor'Easter Micro Inc. has its
operations in Portsmouth, New Hampshire. Colchester Enterprise Pte.
Ltd. has its operations in Singapore. American Micro Computer Center,
Inc. has its operations in Miami, Florida.
The parent company holds a 50% interest in a joint venture company, Big
Blue Europe BV. Big Blue Europe BV commenced operations in January 1997
and has been included in these consolidated financial statements under
the equity method of accounting. Big Blue Europe BV operates in the
same industry as the Company.
2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The major accounting policies followed in the preparation of the
consolidated financial statements referred to above are set out below:
PRINCIPLES OF CONSOLIDATION
The consolidated results of the Company are in accordance with
accounting principles generally accepted in the United States and
include the results of operations of its wholly owned subsidiaries,
which it controls. All significant intercompany balances and
transactions are eliminated in consolidation.
The Company's investment in Big Blue Europe BV is accounted for under
the equity method.
USE OF ESTIMATES
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities and the
disclosure of contingent assets and liabilities to prepare these
consolidated financial statements in conformity with generally accepted
accounting principles. Actual results could differ from those
estimates.
F-8
<PAGE>
EUROPEAN MICRO HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE AND EXPENSE RECOGNITION
Revenues are recognized at the time the goods are shipped. Revenues
from related parties are recognized when the products are sold by the
related parties to third parties. Discount and customer rebates are
deducted from sales revenue when earned. Costs of goods sold include
material and freight costs. Selling, general and administrative costs
are charged to expense as incurred.
INVENTORIES
Inventories are stated at the lower of cost or market value. Cost is
determined using the weighted average cost method.
PROPERTY & EQUIPMENT
Property and equipment are recorded at cost. Property and equipment
held under capital leases are stated at the present value of minimum
lease payments at the inception of the related leases. Depreciation is
calculated using the straight line method over their estimated useful
lives as follows: Furniture, fixtures & equipment, 2-7 years and motor
vehicles and other, 4 years. Property and equipment held under capital
leases and leasehold improvements to property under operating leases
are amortized on a straight-line basis over the shorter of the lease
term or estimated useful life of the assets.
The costs of ordinary maintenance and repairs are charged to expense as
incurred.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews long-lived assets and certain identifiable
intangibles for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If such assets are considered to
be impaired, the impairment to be recognized is measured by the amount
by which the carrying amount of the assets exceed the fair value of the
assets. Assets to be disposed of are reported at the lower of the
carrying amount or fair value less costs to sell.
GOODWILL
Goodwill, which represents the excess of purchase price over fair value
of net assets acquired, is amortized on a straight-line basis over the
expected periods to be benefited, generally 20 years. The Company
assesses the recoverability of this intangible asset by determining
whether the amortization of the goodwill balance over its remaining
life can be recovered through undiscounted future operating cash flows
of the acquired operation. The amount of goodwill impairment, if any,
is measured based on projected discounted future operating cash flows
using a discount rate reflecting the Company's average cost of funds.
The assessment of the recoverability of goodwill will be impacted if
estimated future operating cash flows are not achieved.
INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered
or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes
the enactment date.
F-9
<PAGE>
EUROPEAN MICRO HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FINANCIAL INSTRUMENTS
The Company enters into foreign currency exchange contracts to reduce
exposure to foreign currency fluctuations associated with the
settlement of inter-company receivables and payables denominated in
foreign currencies. Foreign exchange contracts generally have
maturities of less than one year and are accounted for on the fair
value method. Gains and losses resulting from these instruments are
recognized in the same period as the underlying foreign currency
transaction gains and losses and are included in cost of sales. The
Company does not use foreign currency exchange contracts or other
derivative financial instruments for speculative or trading purposes.
The notional amount of the Company's foreign exchange contracts at June
30, 2000 and 1999 was $2,000,000 and $3,225,000, respectively, versus a
fair value of $2,012,000 and $3,159,000, respectively.
The Company has other financial instruments consisting of cash and cash
equivalents, trade receivables, accounts payable, and borrowings. The
fair value of the Company's financial instruments based on current
market indicators or quotes from brokers approximates their carrying
amount.
FOREIGN CURRENCY
Revenues, costs and expenses of the Company's international operations
denominated in foreign currencies are translated to U.S. dollars at
average rates of exchange prevailing during the year. Realized and
unrealized gains and losses on foreign currency transactions and
forward exchange contracts are included in cost of sales. Assets and
liabilities are translated at the exchange rate on the balance sheet
date. Translation adjustments resulting from this process are
accumulated and reported in shareholders' equity.
STOCK OPTION PLANS
The Company accounts for its compensation and stock option plans in
accordance with the provisions of Accounting Principals Board ("APB")
Option No. 25, Accounting for Stock Issued to Employees, and related
interpretations. As such, compensation expense would be recorded on the
date of grant only if the current market price of the underlying stock
exceeded the exercise price. In accordance with the SFAS No. 123,
Accounting for Stock-Based Compensation, the Company provides pro forma
net income and pro forma earnings per share disclosures for employee
stock option grants made in 1998 and subsequent years as if the fair
value based method defined in SFAS No. 123 had been applied.
The value of stock options granted to non-employees, calculated using
the black scholes option pricing model, are expensed over the vesting
period.
EARNINGS PER SHARE
Basic earnings per share is computed based on the weighted average
shares outstanding, including contingently issuable shares for which
all contingencies have been met, and excludes any potential dilution.
Diluted earnings per share reflects the potential dilution from the
exercise or conversion of all dilutive securities into common stock
based on the average market price of common shares outstanding during
the period.
On incorporation of European Micro Holdings, Inc. in December 1997,
4,000,000 ordinary shares were issued with par value $0.01 per share.
The 4,000,000 shares were issued to the shareholders of European Micro
Plc in exchange for the entire issued share capital of that company on
January 31, 1998.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the
current year presentation.
F-10
<PAGE>
EUROPEAN MICRO HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NEW ACCOUNTING PRONOUNCEMENTS
DERIVATIVE INSTRUMENTS
SFAS No. 133, "Accounting for Derivate Instruments and Hedging
Activities," was issued in June 1998 and as amended by SFAS No. 137, is
effective for fiscal years beginning after June 15, 2000. SFAS No. 138
"Accounting for Certain Derivative Instruments and Certain Hedging
Activities", an amendment of FASB No. 135, was issued June 2000. These
statements will be adopted effective July 1, 2000, but will not
materially impact the Company's consolidated financial statements.
These standards establish accounting and reporting standards for
derivative instruments and hedging activities.
REVENUE RECOGNITION
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin 101, "Revenue Recognition in Financial Statements."
The effective date has been deferred with respect to the Company to the
fourth fiscal quarter of 2001 pending additional interpretive guidance.
The Company is not able to quantify the impact of SAB 101 at this time.
However, there is at least one issue that could have a material impact
on the Company's consolidated financial statements. For European Micro
UK the standard practice is to recognize revenue on shipment. However,
title to the goods is retained until full payment is received from the
customer to perfect the Company's interest in the goods. Under possible
interpretations, European Micro UK would not be able to recognize
revenue until full payment is received. In the transition year,
revenues would be lower as all sales on the net terms not collected by
year-end would not be recognized.
3 LIQUIDITY
The Company has suffered operating losses in the current fiscal year.
Ongoing legal costs associated with the litigation related to Big Blue
Europe, the costs associated with the Company's electronic commerce
strategy, increases in general overhead costs, and increased interest
expense due primarily to increased borrowings, coupled with decreasing
sales volumes and gross profit margins, have negatively impacted
operating results. These factors may continue to impact the Company's
operations.
The Company was not in compliance with certain loan agreement financial
covenants during fiscal year 2000. While the Company has obtained
waivers from these covenant violations existing at June 30, 2000, in
most instances the waivers only address the covenant reporting period
ending thereon. Management believes that the Company will be able to
comply with its debt agreements, including financial covenants, during
the fiscal year ending June 30, 2001. However, compliance with these
financial covenants during fiscal 2001 will require improved operating
results compared to fiscal 2000. Management has initiated certain
actions to increase the likelihood of attaining these improved
operating results. Such actions include, among other things, (i)
modifying the terms of certain financial covenants, (ii) entering into
the Equity Credit Line (see note 19), (iii) temporarily suspending
activities related to its electronic commerce strategy until specific
funding can be obtained (see note 12), (iv) obtaining extensions of the
due date for payment of contingent earn-out amounts relating to
calendar year 2000 under the American Micro purchase agreement (see
note 7), (v) adjusting staffing levels, and (vi) implementing steps to
increase sales volume and lower inventory levels. No assurances can be
given that management's initiatives will be successful, and loan
agreement defaults will not occur in the future.
Another factor that could negatively impact the Company's liquidity is
the terms of the borrowing arrangements of European Micro Plc. As
disclosed in notes 9 and 10, certain of this subsidiary's borrowing
capacity is subject to termination by the lender at such lender's sole
discretion. Further, the American Micro and Nor-Easter line of credit
facilities and the European Micro Holdings, Inc. term loan contain
subjective acceleration clauses. These factors increase the liquidity
risk to the Company. Management believes that, based on the projected
fiscal year 2001 operating results of the Company and its relationship
with the creditors, that its existing credit arrangements will remain
effective during fiscal 2001.
F-11
<PAGE>
EUROPEAN MICRO HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4 TRADE RECEIVABLES, NET
Trade receivables consist of the following (in thousands):
<TABLE>
<CAPTION>
<S> <C> <C>
JUNE 30,
-------------------------------
2000 1999
---- ----
Total trade receivables $13,229 $15,017
Less: Allowance for doubtful receivables (69) (79)
------- -------
$13,160 $14,938
======= =======
At June 30, 2000, trade receivables are pledged as collateral against
borrowings (see note 9).
A roll forward of the allowance for doubtful trade receivables is as
follows (in thousands):
JUNE 30,
------------------------
2000 1999
---- ----
Balance at beginning of year $79 $23
Foreign currency translation adjustment (3) -
Acquisitions 116 11
Provision for bad debt 80 56
Amounts written off (203) (11)
------ -----
Balance at end of year $69 $79
====== =====
5 INVENTORIES
Inventories consist of the following (in thousands):
JUNE 30,
-------------------------
2000 1999
---- ----
Finished goods and goods for resale $6,818 $7,348
Less: Allowance for inventory obsolescence (624) (116)
------- ------
$6,194 $7,232
======= ======
</TABLE>
F-12
<PAGE>
EUROPEAN MICRO HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5 INVENTORIES (CONTINUED)
A roll forward of allowance for obsolescence is as follows (in
thousands):
JUNE 30,
------------------------
2000 1999
---- ----
Balance at beginning of year $116 $9
Foreign currency translation adjustments (3) 0
Provision for obsolescence 929 602
Amounts written off (418) (495)
------ -----
Balance at end of year $624 $116
====== =====
6 PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
JUNE 30,
------------------------
2000 1999
---- ----
Buildings and leasehold improvements $2,694 $-
Furniture, fixtures and equipment (note 12) 1,866 994
Vehicles and other 447 416
------ ------
5,007 1,410
Less: accumulated depreciation (1,080) (798)
------ ------
NET BOOK VALUE $3,927 $612
======= ======
On July 16, 1999, European Micro Plc, a wholly-owned subsidiary of the
Company ("EUROPEAN MICRO UK"), purchased the office building in which
it had previously leased space for a purchase price of 1,705,000 pounds
sterling ($2,580,000 at exchange rate on June 30, 2000). The purchase
price was financed in part by a mortgage loan note in the amount of
1,312,000 pounds sterling (see note 10).
At June 30, 2000 and 1999, vehicles with a cost of approximately
$212,000 and $248,000, and accumulated depreciation of approximately
$129,000 and $117,000, respectively, were held under capital leases.
Depreciation expense was $405,000, $267,000 and $192,000 for the years
ended June 30, 2000, 1999, and 1998, respectively.
F-13
<PAGE>
EUROPEAN MICRO HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7 GOODWILL
On October 26, 1998, European Micro UK acquired all of the outstanding
shares of capital stock of Sunbelt (UK) Limited ("SUNBELT"). The
Sunbelt purchase price (to be settled in pounds sterling) is comprised
of a guaranteed portion and two contingent earn-out payments. The
guaranteed portion of the purchase price, which was based upon
Sunbelt's net book value at closing and a multiple of its fiscal year
1998 pre-tax earnings, was 940,000 pounds sterling (approximately
$1,423,000 at exchange rate on June 30, 2000). Of this guaranteed
amount, approximately 360,000 pounds sterling (approximately $545,000
at exchange rate on June 30, 2000) was paid in cash at closing. The
unpaid balance of the guaranteed consideration includes a note payable
to the former 40% Sunbelt shareholder in the amount of 240,163 pounds
sterling ($364,000 at exchange rate on June 30, 2000) to be repaid in
November 2005, subject to early repayment at the option of the note
holder at any time after June 1, 1999. Such note payable is secured by
a cash account of equal amount at June 30, 2000. The note payable and
the cash balances are reflected on the accompanying consolidated
balance sheet at June 30, 2000, in accrued expenses and other current
liabilities and restricted cash, respectively. The Company has the
option of paying future amounts due to the former Sunbelt shareholders
in common stock of European Micro Holdings, Inc. If the Company elects
to pay any portion of the purchase price in shares of the Company's
common stock, then Sunbelt's shareholders have fifteen days to make
arrangements to sell such shares over the next forty trading days. If
the sale of such shares results in net proceeds of less than the
purchase price, then the Company will pay the difference in cash to
Sunbelt's shareholders. The Company also entered into employment
agreements with the two former shareholders of Sunbelt. The Company
discontinued Sunbelt's Nova line of products effective January 31,
2000. With the closure of the Nova line of products, the employment
agreement with one of the former shareholders was terminated. Also, in
July 2000, the employment agreement with the other former shareholder
was terminated.
During November 1999, purchase accounting adjustments were made to the
calculation of the guaranteed portion and the two contingent earn-out
amounts. These adjustments resulted from the recalculation of fiscal
year 1998 pretax earnings of Sunbelt, resulting in a reduction of
134,000 pounds sterling ($203,000 at exchange rate on June 30, 2000) to
the guaranteed portion and 32,000 pounds sterling ($48,000 at exchange
rate on June 30, 2000) to the contingent consideration. The portion of
the guaranteed consideration due at the end of the first contingent
earn-out period, which ran from November 1, 1998 to October 31, 1999,
was paid in November 1999 in the amount of 53,708 pounds sterling
($81,276 at exchange rate on June 30, 2000). Also, the portion of the
first contingent earn-out payment related to employee retention and the
volume of purchases from the Far East, was paid in November 1999 in the
amount of 190,820 pounds sterling ($288,768 at exchange rate on June
30, 2000).
The unpaid balance of the guaranteed purchase price of 152,656 pounds
sterling ($231,014 at exchange rate on June 30, 2000), and the portion
of the second contingent earn-out payment related to the volume
purchases from the Far-East of 129,758 pounds sterling ($196,363 at
exchange rate on June 30, 2000) is reflected in goodwill, net and
accrued expenses and other current liabilities on the accompanying
consolidated balance sheet at June 30, 2000 as the contingency has been
met. At June 30, 2000 all contingent consideration related to the
Sunbelt acquisition has either been paid or accrued. Goodwill from this
transaction is being amortized on a straight-line basis over 20 years.
On November 12, 1998, European Micro UK acquired the assets of H&B
Trading International BV ("H&B"). The acquisition of H&B was accounted
for as a purchase. The base purchase price, subject to adjustment, of
approximately 125,000 Dutch guilders ($54,000 at exchange rate on June
30, 2000) exceeded the estimated value of net assets acquired by
approximately 85,000 Dutch guilders ($37,000 at exchange rate on June
30, 2000), which is being amortized on a straight-line basis over 20
years. The financial criteria for the period ended June 30, 2000 and
1999 were not met, therefore, the additional consideration was not
accrued or paid.
The Company acquired American Surgical Supply Corp. of Florida d/b/a/
American Micro Computer Center ("AMCC"), in a merger on July 1, 1999.
The transaction was structured as a merger of AMCC with and into the
newly formed, wholly owned subsidiary of the Company. Upon consummation
of the merger, the subsidiary's name was changed to American Micro
Computer Center, Inc. ("AMERICAN MICRO"). The purchase price for AMCC
F-14
<PAGE>
EUROPEAN MICRO HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7 GOODWILL (CONTINUED)
was equal to $1,131,000, plus an earn-out amount payable in cash or
shares of the Company's common stock (at the Company's discretion)
equal to two times the after-tax earnings of American Micro in calendar
year 1999 and two times the after-tax earnings of American Micro in
calendar year 2000. The portion of the purchase price paid at closing
was funded through the Company's working capital. In addition, the
Company assumed all outstanding indebtedness of AMCC, including a
shareholder loan in the approximate amount of $289,000. This loan was
owed to the father of John B. Gallagher, the Company's Co-President,
Co-Chairman and significant shareholder. This note was repaid in full
in November 1999. If the Company elects to pay any portion of the
purchase price in shares of the Company's common stock, then AMCC's
former shareholders have fifteen days to make arrangements to sell such
shares over the next forty trading days. If the sale of such shares
results in net proceeds of less than the purchase price, then the
Company will pay the difference in cash to AMCC's shareholders.
The acquisition of AMCC was accounted for as a purchase. The base
purchase price, inclusive of transaction costs, of approximately
$1,315,000 exceeded the estimated fair market value of net assets
acquired by approximately $817,000, which constitutes goodwill and
which is being amortized on a straight-line basis over 20 years. The
results of operations of American Micro, since acquisition, have been
included in the accompanying financial statements. The contingent
earn-out payment relating to two times the after tax earnings for
calendar year 1999 of approximately $600,000 was paid in March 2000 and
is reflected in goodwill, net. The contingent earn-out payment relating
to two times the after tax earnings for calendar year 2000 has not been
recognized in the accompanying consolidated condensed financial
statements as the calculation of such amounts are not determinable at
this point in time. The second earn-out payment will be due in monthly
principal payments of $50,000, plus interest at 8% until July 1, 2001
at which time the amount is due in full subject to financial covenant
restrictions. Such payment will be offset by a $259,000 receivable due
from AMCC's previous owners.
The results of operations of the above entities have been included in
the accompanying consolidated financial statements from the respective
dates of acquisition.
The following summarized unaudited pro forma financial information
assumes the acquisition of Sunbelt and AMCC occurred on July 1, 1998 ($
in thousands, except share data):
YEAR ENDED
----------
JUNE 30, 1999
-------------
Total net sales $137,960
Net income $1,149
Earnings per share:
Basic $0.23
Diluted $0.23
The pro forma amounts are based on certain assumptions and estimates,
and do not reflect any benefits from economies which might be achieved
from the combined operations. The pro forma results do not necessarily
represent results which would have occurred if the acquisition had
taken place on the basis assumed above, nor are they indicative of the
results of future operations.
A roll forward of goodwill is as follows (in thousands):
YEAR ENDED
----------
JUNE 30, 2000
-------------
Balance at beginning of year $1,675
Foreign currency translation adjustment (84)
Purchase accounting adjustments (251)
Additions 1,616
Amortization (148)
-------
Balance at end of year $2,808
=======
F-15
<PAGE>
EUROPEAN MICRO HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8 INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED SUBSIDIARIES
During the year ended June 30, 1997 the Company purchased 50% of the
issued share capital in Big Blue Europe BV. Big Blue Europe BV
commenced trading in January 1997. A roll forward of the investment is
as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
--------------------
2000 1999
---- ----
<S> <C> <C>
Cost of investment in and advances to unconsolidated
subsidiaries brought forward $503 $194
Foreign currency translation adjustment (13) (9)
Equity in net loss of unconsolidated subsidiaries (188) (32)
Advance 150 350
Allowance for uncollectable advances (200) -
----- -----
Investment in and advances to unconsolidated
subsidiaries at end of year $252 $503
===== =====
</TABLE>
The equity share of loss is based on the results of Big Blue Europe BV.
Unaudited earnings data for Big Blue Europe BV for fiscal years 2000,
1999 and 1998 is set out below (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED
JUNE 30,
-----------------------------------
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Net sales $4,219 $4,101 $1,910
Cost of goods sold (3,310) (3,068) (1,394)
------- ------- -------
Gross profit 909 1,033 516
Operating expenses (1,198) (1,133) (507)
------- ------- -------
Income (loss) before income taxes (289) (100) 9
Income tax expense (benefit) 87 (36) 3
NET (LOSS) INCOME $(376) $(64) $6
------- ------- -------
Equity in net (loss) income of unconsolidated
subsidiary $(188) $(32) $3
======= ======= =======
</TABLE>
9 SHORT-TERM BORROWINGS
Short-term borrowings consists of the following (in thousands):
JUNE 30, 2000 JUNE 30, 1999
------------- -------------
Bank lines of credit:
European Micro UK Working
Capital facility $1,959 $1,581
Nor'Easter Micro facility 975 -
American Micro facility 992 -
------ ------
Total bank lines of credit 3,926 1,581
Receivable financing 7,303 7,033
Other short-term borrowings 674 -
------- ------
Total short-term borrowings $11,903 $8,614
======= ======
F-16
<PAGE>
EUROPEAN MICRO HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9 SHORT-TERM BORROWINGS (CONTINUED)
European Micro UK has a bank line of credit (the "EUROPEAN MICRO UK
WORKING CAPITAL FACILITY") which is secured by a mortgage debenture on
all the assets of European Micro UK and is subordinate to the
receivable financing and the capital leases. The facility, which is
subject to review in July each year, has been extended to September
2001 and is due on demand. Maximum borrowing capacity under this
facility is 2.0 million pounds sterling ($3.0 million at exchange rate
on June 30, 2000). Interest is charged at 1.25% over the bank borrowing
rate of 6% at June 30, 2000 and 5% at June 30, 1999.
European Micro UK also had a revolving credit agreement (the "EUROPEAN
MICRO UK INVENTORY FACILITY") secured against general corporate assets.
The facility allowed European Micro UK to borrow up to 3.5 million
pounds sterling ($5.3 million at exchange rate on June 30, 2000) to
assist in the purchase of inventory. At June 30, 2000, no amounts were
outstanding under the agreement. This revolving credit agreement
expired in August 2000. The bank has agreed to extend the credit
agreement to July 1, 2001 in the amount of 2.0 million pounds sterling
($3.0 million at exchange rate on June 30, 2000). The agreement
includes various financial covenants.
Total combined borrowings under the European Micro UK Working Capital
Facility and the European Micro UK Inventory Facility cannot exceed 2.0
million pounds sterling at any date.
The Company also obtained two lines of credit on October 28, 1999, to
finance operations based in the United States. American Micro and
Nor'Easter each obtained a line of credit, secured by accounts
receivable and inventory. Amounts available under each of the line of
credit agreements are based upon eligible accounts receivable and
inventory, up to a maximum borrowing amount of $1.5 million for each
agreement. Each of these lines of credit were to mature on October 28,
2000. Interest accrues at 0.5% over the bank borrowing rate of 9.5% at
June 30, 2000. As partial security for these loans, Messrs. Gallagher
and Shields pledged to the lender a portion of their shares of common
stock of the Company. In the event the Company defaults on one or more
of these loans, the lender may foreclose on all or a portion of the
pledged securities. Such an event may cause a change of control in the
Company because Messrs. Gallagher and Shields together own 71% of the
Company's outstanding common stock. The lines of credit agreements
include certain financial and non-financial covenants and restrictions.
The agreements also contain a provision whereby the lender can declare
a default based on subjective criteria. As of June 30, 2000, the
Company was not in compliance with certain of the financial covenants
in the agreements.
On October 5, 2000, the Company received a waiver of the covenant
violations for the June 30, 2000 reporting date for the American Micro
and Nor'Easter lines of credit. The Company and the bank terminated the
existing lines of credit and entered into a new borrowing arrangement
whereby each of American Micro and Nor'Easter will have a working
capital line of credit equal to the lesser of (i) $1.5 million or (ii)
the sum of 85% of eligible accounts receivable, plus the lesser of 50%
of eligible inventory or $750,000. Interest will be paid monthly at a
floating rate of 50 basis points over the bank's base rate. The term of
the new arrangements is for one year from the closing date. The new
facilities also require the companies to maintain depository accounts
at the bank, whose daily receipts will be applied against outstanding
borrowings under the lines of credit. As a result, the borrowings are
classified as current liabilities on the Company's consolidated balance
sheet at June 30, 2000. The new facilities also place certain
restrictions on the companies' ability to pay dividends and to make
capital expenditures, among other things, and also include a provision
whereby the lender can declare a default based on subjective criteria.
Collateral under the new credit line facilities consists of a first
priority lien on all assets of American Micro and Nor'Easter. Messrs.
Gallagher and Shields guaranteed the borrowings under these
arrangements. Mr. Shields has pledged personal assets as additional
collateral and has further agreed to maintain certain personal
financial statement liquidity levels. These borrowings are
cross-collateralized and cross-defaulted with borrowings under the $1.5
million term loan to European Micro Holdings, Inc. discussed in note
10.
F-17
<PAGE>
EUROPEAN MICRO HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9 SHORT-TERM BORROWINGS (CONTINUED)
Receivable financing represents borrowings secured by various trade
receivables of European Micro UK totaling $8.6 million at June 30, 2000
and $8.3 million at June 30, 1999. The accounts receivable financing
provides for a borrowing base of 85% of accounts receivable, with a
limit of 6.2 million pounds sterling ($9.4 million at exchange rate on
June 30, 2000). The limit on trade receivables financing increased from
a maximum of 5.5 million pounds sterling at June 30, 1999 ($8.3 million
at exchange rate on June 30, 1999). This facility can be terminated by
either party giving three months' notice. The finance company which
provides the receivable financing facility has full recourse to
European Micro UK with respect to any doubtful or unrecovered amounts.
Interest is charged on the receivable financing balance at 1.25% above
the bank borrowing rate of 6% at June 30, 2000, and 5% at June 30,
1999.
Other short-term borrowings represent various unsecured notes payable
of American Micro. The maturity dates of the notes range from on demand
to June 30, 2001. The interest rates range from 11% to 12%.
10 LONG-TERM BORROWINGS
Long-term borrowings consists of the following (in thousands):
JUNE 30, 2000 JUNE 30, 1999
------------- -------------
Mortgage loan note $1,877 $-
Term loan 1,125 -
Other long-term borrowings 49 23
------ ----
$3,051 $23
Less current maturities of long-term
borrowings (678) -
------ ----
Total long-term borrowings $2,373 $23
====== ====
Principal maturities of long-term debt (excluding capitalized lease
obligations) at June 30, 2000 for the succeeding five fiscal years are
as follows (in thousands):
2001 $678
2002 678
2003 296
2004 184
2005 197
Thereafter 1,018
European Micro UK purchased the office building in which it had
previously leased space for a purchase price of 1,705,000 pounds
sterling ($2,580,000 at exchange rate on June 30, 2000). The purchase
price was financed in part by a mortgage loan note in the amount of
1,312,000 pounds sterling ($1,985,000 at exchange rate on June 30,
2000). This mortgage loan note bears interest at a fixed rate of 7.6%,
calls for monthly payments of principal and interest in the amount of
15,588 pounds sterling ($23,589 at exchange rate on June 30, 2000), and
matures in July 2009. The mortgage loan note includes certain financial
and non-financial covenants and restrictions. The agreement also
contains a provision whereby the lender can declare a default based on
subjective criteria. The financial covenants are measured using the
financial results of European Micro UK as of each fiscal year end.
Based upon European Micro UK's fiscal year end operating results,
European Micro UK was out of compliance with certain of the covenant
requirements at June 30, 2000. The Company has obtained a waiver
through July 1, 2001 of this non-compliance.
F-18
<PAGE>
EUROPEAN MICRO HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10 LONG-TERM BORROWINGS (CONTINUED)
The term loan was obtained by European Micro Holdings on October 28,
1999, in the amount of $1,500,000. The term loan is to be repaid with
quarterly payments of $125,000 over three years. The term loan bears
interest at the one-month LIBOR plus two and one-quarter percentage
points (2.25%). One-month LIBOR at June 30, 2000 was 6.7%. The term
loan is secured by substantially all of the assets of the Company. As
partial security for this loan, Messrs. Gallagher and Shields pledged
to the lender a portion of their shares of common stock of the Company.
In addition, Mr. Shields has pledged personal assets as additional
collateral and has further agreed to maintain certain personal
financial statement liquidity levels. In the event the Company defaults
on this loan, the lender may foreclose on all or a portion of the
pledged securities. Such an event may cause a change of control in the
Company because Messrs. Gallagher and Shields together own 71% of the
Company's outstanding common stock.
The term loan agreement is with the same lender as the Nor'Easter Micro
and American Micro line of credit facilities discussed in Note 9, and
is cross-collateralized and cross-defaulted with these line of credit
facilities. The agreement also contains a provision whereby the lender
can declare a default based on subjective criteria. Further, the term
loan credit agreement contains loan covenant requirements. The Company
was not in compliance with certain financial covenants for the June 30,
2000 reporting period. On October 5, 2000 the Company received a waiver
of the non-compliance with the financial covenants as of June 30, 2000.
The Company also entered into an amendment to the term loan agreement
which among other things, established revised financial covenants.
In conjunction with the purchase of AMCC, the Company assumed a note
payable to John P. Gallagher, the father of John B. Gallagher, who is a
significant shareholder, co-chairman, and co-president of the Company.
This note was paid in full during November 1999.
11 TAXES ON INCOME
Income tax expense (benefit) consists of the following (in thousands):
YEARS ENDED JUNE 30,
-----------------------------------
2000 1999 1998
---- ---- ----
Current
Federal and State $ - $ - $ -
Foreign (376) 765 2,393
Deferred
Federal and State - - -
Foreign (194) (15) (80)
------- ------- ------
Total income tax expense (benefit) $(570) $750 $2,313
======= ======= ======
Provision has not been made for U.S. or additional foreign taxes on
approximately $3,672,000, $5,613,000, and $4,652,000 at June 30, 2000,
1999, and 1998 respectively, of undistributed earnings of foreign
subsidiaries, as those earnings are intended to be permanently
reinvested.
A reconciliation between actual income taxes and amounts computed by
applying the federal statutory rate of 34% to earnings before income
taxes is summarized as follows (in thousands):
F-19
<PAGE>
EUROPEAN MICRO HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11 TAXES ON INCOME (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------------------
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
US federal statutory rate on earnings (loss)
before income taxes $(1,284) $545 $2,311
State income tax (67) - -
Difference in foreign versus U.S. federal
income tax rate 51 43 (204)
Change in valuation allowance 896 74 -
Foreign non -deductible expenses (166) 88 206
------- ------ ------
Income tax expense (benefit) $(570) $750 $2,313
======= ====== ======
</TABLE>
Sources of deferred tax assets are as follows (in thousands):
JUNE 30,
--------------------------
2000 1999
---- ----
DEFERRED TAX ASSETS:
Property and equipment, principally due to
differences in depreciation $ 9 $ 42
Net operating loss carry forwards 949 64
Other 247 9
----- ----
Total gross deferred tax assets 1,205 115
Valuation allowance (970) (74)
----- ----
Net deferred tax assets $235 $41
===== ====
The Company has U.S. federal net operating loss carryforwards of
approximately $948,000, which will begin to expire in 2019. Management
believes that it is more likely than not that the results of operations
will generate sufficient taxable income to realize deferred tax assets
after giving consideration to the valuation allowance. The valuation
allowance, which increased in fiscal year 2000 by $896,000, has been
provided for U.S. deferred tax assets as recoverability is not deemed
to be more likely than not.
12 BUSINESS TO BUSINESS ELECTRONIC COMMERCE STRATEGY
The Company has initiated a business to business electronic commerce
strategy, which is focused on creating a global, value-added,
information technology equipment and service trading community. The
company has hired Cap Gemini, a leading European management consultancy
and information technology services firm, to assist it in the
implementation of this plan. The Company has incurred the sum of
755,000 pounds sterling ($1,143,000 at exchange rate on June 30, 2000),
related to the feasibility studies and business process design. This
amount is reflected in selling, general and administrative expenses on
the accompanying consolidated statements of operations for the year
ended June 30, 2000. The Company has capitalized the sum of 229,000
pounds sterling ($347,000 at exchange rate on June 30, 2000), related
to the actual software development. This amount is reflected in
property and equipment, net on the accompanying consolidated balance
sheet at June 30, 2000. During May 2000, the Company temporarily halted
F-20
<PAGE>
EUROPEAN MICRO HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12 BUSINESS TO BUSINESS ELECTRONIC COMMERCE STRATEGY (CONTINUED)
the ongoing development being performed by Cap Gemini until specific
funding is obtained to complete the project. There can be no assurances
that the Company will be successful in obtaining funding for this
project. In the event the project is not continued by November 30,
2000, the Company will incur a termination fee to Cap Gemini of 150,000
pounds sterling ($226,995 at exchange rate on June 30, 2000). If paid,
this fee would be credited against future invoices of Cap Gemini upon
the continuation of the project. During the last calendar quarter of
2000, the Company will re-evaluate and re-define, where necessary, the
current assumptions and propositions, based on changes in the market
over the last few months. This planning will include detailing the
project based on the Company's ability to fund the project from current
working capital, if other funding is still not available.
13 COMMITMENTS AND CONTINGENCIES
On November 12, 1999, Jeffrey and Marie Alnwick (the "ALNWICKS") and a
New York corporation, Big Blue Products, commenced an action
individually and derivatively for the Dutch company, Big Blue Europe,
against the Company and its founders and officers, John B. Gallagher
and Harry D. Shields in the United States District Court, Eastern
District of New York, Jeffrey Alnwick and Marie Alnwick v. European
Micro Holdings, Inc., Eastern District of New York, Docket No. 99 CV
7380 (the "ALNWICK LITIGATION").
The complaint alleges thirty-three causes of action. Plaintiffs claim,
in substance, that defendants breached oral and written agreements
relating to the management, operation and funding of Big Blue Europe.
Specifically, plaintiffs allege that defendants breached the joint
venture agreement by which Big Blue Europe was formed, a licensing
agreement for use of the "Big Blue" service mark in Europe, a
non-competition agreement preventing Big Blue Europe from operating in
the United States and several capital contribution agreements.
Plaintiffs also claim that defendants breached their fiduciary duties
to the Alnwicks, engaged in fraudulent acts, aided and abetted breaches
of fiduciary duties by others, misappropriated trade secrets and
interfered with the employment contract of Big Blue Europe's managing
director. The complaint seeks unspecified compensatory and punitive
damages, as well as injunctive relief restraining defendants from
acting in violation of the alleged agreements.
Defendants have moved to dismiss the complaint principally on the basis
of forum non-conveniens in favor of existing proceedings in the
Netherlands (commenced by European Micro UK), where a Dutch court has
appointed an independent director to oversee operations of the company.
Defendants argue that any dispute between the shareholders and
directors of the Dutch company, Big Blue Europe, which operates
pursuant to Dutch law, should be resolved by a Dutch court.
The Company and its affiliated defendants intend to contest the claims
in the Alnwick Litigation vigorously, whether asserted in the United
States or in the Netherlands courts. For the year ended June 30, 2000,
the company has incurred approximately $800,000 in costs related to
such lawsuit. Management does not believe that the ultimate outcome of
this litigation will result in a material liability to the Company.
Due to the uncertainty of the outcome of the pending lawsuit and the
difficulties of managing the operations of Big Blue Europe BV during
dispute, the Company has recorded an allowance of $200,000 against
notes receivable totaling $500,000.
The Company leases offices and certain equipment under non-cancelable
operating leases and vehicles under capital leases. Future minimum
lease payments under non-cancelable operating leases and capital leases
as of June 30, 2000 in aggregate for each of the five succeeding years
is as follows (in thousands):
F-21
<PAGE>
EUROPEAN MICRO HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13 COMMITMENTS AND CONTINGENCIES (CONTINUED)
CAPITAL OPERATING
June 30,
2001 $34 $347
2002 22 276
2003 - 200
2004 - 152
2005 - 128
Thereafter - 150
----- ------
Total minimum lease payments $56 $1,253
===== ======
Less amount representing interest at rates
ranging from 4.4% to 5.1% (7)
Present value of net minimum capital 49
lease payments (30)
Current portion, included in accrued expenses ----
and other current liabilities
Total obligations under capital leases $19
excluding current portion ====
Rental expense for the years ended June 30, 2000, 1999 and 1998 was
$260,000, $180,000, and $136,000, respectively.
14 FOREIGN EXCHANGE CONTRACTS
The Company utilizes derivative financial instruments in the form of
forward exchange contracts for the purpose of economic hedges of
anticipated sale and purchase transactions. In addition the Company
enters into economic hedges for the purposes of hedging foreign
currency market exposures of underlying assets, liabilities and other
obligations, which exist as part of its ongoing business operations.
Where the foreign currency exposure is covered by a forward foreign
exchange contract the asset, liability or other obligation is recorded
at the contracted rate each month end and the resultant mark-to-market
gains and losses are recognized as cost of sales in the current period,
generally consistent with the period in which the gain or loss of the
underlying transaction is recognized. Cash flows associated with
derivative transactions are classified in the statement of cash flows
in a manner consistent with those of the exposure being hedged.
EXCHANGE RATE SENSITIVITY
The table below summarizes information on foreign currency exchange
contracts. The table presents the notional amounts and weighted average
exchange rates by expected (contractual) maturity dates (in thousands
except exchange rates).
EXPECTED
MATURITY OR
TRANSACTION DATE FAIR VALUE
------------------- ------------
FOREIGN CURRENCY EXCHANGE CONTRACTS
JUNE 30, 2000
(Receive $US/pay(pound)) July 19, 2000
Contract amount $2,000 $2,012
Average contractual
exchange rate 1.5045 $US /(pound)1
F-22
<PAGE>
EUROPEAN MICRO HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14 FOREIGN EXCHANGE CONTRACTS (CONTINUED)
EXCHANGE RATE SENSITIVITY (CONTINUED)
The fair value has been determined by applying the mid-price of the
spread on the buy or sell rates as appropriate, of the relevant foreign
currency at the balance sheet date. The mid-price used is that quoted
by the Financial Times.
Foreign exchange losses, net were $325,000, $579,000 and $510,000 for
years ending June 30, 2000, 1999 and 1998, respectively.
15 RELATED PARTY INFORMATION
Until July 1, 1999, European Micro Holdings, Inc. belonged to a group
of related companies (the "GROUP"). The Group was comprised of
Technology Express, Inc. located in Nashville, Tennessee ("TECHNOLOGY
EXPRESS"), and, until July 1, 1999, AMCC which was purchased by
European Micro Holdings, Inc. See Note 7. Technology Express is owned
and controlled by Harry D. Shields, who is Co-President and Co-Chairman
of the Company. Prior to its acquisition on July 1, 1999, AMCC was
owned 50% by John B. Gallagher, who is a Co-President and Co-Chairman
of the Company.
The rates charged on related party sales are lower than they would be
in arms-length transactions. The Company has a bulk buying arrangement
with the remaining related party, Technology Express, which gives the
Company the benefit of buying large job-lots at more competitive prices
than it would otherwise be possible to do and then immediately sell
part of the purchase to the related party.
Related party transactions are summarized as follows (in thousands):
YEARS ENDED JUNE 30,
------------------------------------
2000 1999 1998
---- ---- ----
SALES
American Micro Computer Center $ - $7,356 $9,875
Technology Express 2,369 7,984 19,217
-------- ------- --------
$2,369 $15,340 $29,092
======== ======== ========
PURCHASES
American Micro Computer Center $ - $1,339 $507
Technology Express 3,986 15,559 8,749
-------- ------- --------
$3,986 $16,898 $9,256
======== ======== ========
OPERATING EXPENSES
CONSULTANCY FEES
American Micro Computer Center $ - $ - $45
Technology Express - - 45
-------- ------ -------
- 90
-------- ------ -------
MANAGEMENT FEES
Technology Express - - 14
-------- ------ -------
$ - $ - $104
======== ====== =======
F-23
<PAGE>
EUROPEAN MICRO HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15 RELATED PARTY INFORMATION (CONTINUED)
DUE FROM/TO RELATED PARTIES
a) Due from related parties consists of the following (in thousands):
JUNE 30,
--------------------------------
2000 1999
---- ----
American Micro Computer Center $ - $974
Technology Express - 154
-------- -------
$ - $1,128
======== =======
b) Due to related parties consists of following (in thousands):
JUNE 30,
---------------------------------
2000 1999
---- ----
American Micro Computer Center $ - $ 3
Technology Express 11 630
-------- -------
$ 11 $633
======== =======
FACILITIES AND EQUIPMENT
The Company utilizes approximately 350 square feet of office space and
certain equipment owned by Technology Express for which it is not
charged a fee.
EMPLOYMENT AGREEMENTS
The Company has entered into various employment agreements with certain
officers of the Company.
NATURE OF RELATED PARTY RELATIONSHIPS
The entities listed above are related to the company in the following
manner:
AMCC
AMCC is a distributor of computer hardware based in Miami, Florida.
John B. Gallagher, who is Co-Chairman, Co-President, a Director and
shareholder (owning 39% of the outstanding shares) of European Micro
Holdings, Inc., was until July 1, 1999, the president of AMCC and owned
50% of the outstanding shares of capital stock in that company. See
Note 7. Frank Cruz, who is Chief Operating Officer of European Micro
Holdings, Inc., has been an employee of AMCC since 1994.
TECHNOLOGY EXPRESS
Until 1996, Technology Express was a full service authorized reseller
of computers and related products based in Nashville, Tennessee,
selling primarily to end-users. Technology Express was sold to Inacom
Computers in 1996. Concurrently with the sale, Mr. Shields founded a
new computer company with the name Technology Express. This company is
a distributor of computer products and does not sell to end-users.
Harry D. Shields, who is Co-Chairman, Co-President, a Director and
shareholder (owning 32% of the outstanding shares) of European Micro
Holdings, Inc., is president of Technology Express and owns 100% of the
outstanding shares of capital stock of that company. Jay Nash, who is
Chief Financial Officer, Treasurer and Secretary of European Micro
F-24
<PAGE>
EUROPEAN MICRO HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15 RELATED PARTY INFORMATION (CONTINUED)
Holdings, Inc., has been an employee of Technology Express since 1992.
16 SEGMENT INFORMATION
The Company operates predominately in a single industry segment as a
wholesale distributor of computer-based technology products and
services. Geographic areas in which the Company operates include North
America (United States and Canada), Europe (Austria, Belgium, Denmark,
Finland, France, Germany, Great Britain, Greece, Holland, Ireland,
Italy, Luxembourg, the Netherlands, Portugal, Spain, and Sweden), and
Other (Singapore). The Company's reportable operating segments are
based on geographic location generating the revenue, and the measure of
segment profit is income from operations. The accounting policies of
the segments are the same as those described in Note 2 - Summary of
Significant Accounting Policies.
Financial information by geographic segments is as follows (in
thousands):
YEARS ENDED JUNE 30,
-------------------------------------------
2000 1999 1998
---- ---- ----
NET SALES:
North America $ 38,560 $ 48,994 $ 3,559
Europe 65,822 70,262 107,894
Other 11,111 12,950 -
-----------------------------------------
Total $ 115,493 $ 132,206 $ 111,453
-----------------------------------------
INCOME (LOSS) FROM
OPERATIONS:
North America $ (1,835) $ (1,293) $ (212)
Europe (723) 3,340 7,444
Other (141) (112) -
-----------------------------------------
Total $ (2,699) $ 1,935 $ 7,232
-----------------------------------------
IDENTIFIABLE ASSETS:
North America $ 8,402 $ 10,594 $ 8,645
Europe 20,701 19,334 10,559
Other 1,110 671 -
-----------------------------------------
Total $ 30,213 $ 30,599 $ 19,204
-----------------------------------------
The following table summarizes purchases from major suppliers in excess
of 10% for the period as a percentage of total purchases:
YEARS ENDED JUNE 30,
----------------------------------
2000 1999 1998
---- ---- ----
RELATED PARTY
Technology Express - 12.7% -
THIRD PARTIES
Supplier A - 10.3% 38.9%
B - - 14.0%
C - - 10.0%
D - 10.9% -
F-25
<PAGE>
EUROPEAN MICRO HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16 SEGMENT INFORMATION (CONTINUED)
The Company did not have any suppliers where purchases were in excess
of 10% as a percentage of total sales in the years ended June 30, 2000.
The following table summarizes sales to major customers (sales in
excess of 10% for the period) as a percentage of total sales:
YEARS ENDED JUNE 30,
------------------------------------------
2000 1999 1998
---- ---- ----
RELATED PARTY
Technology Express - - 17.2%
The Company did not have any customers with sales in excess of 10% as a
percentage of total sales in the years ended June 30, 2000 or 1999.
17 EARNINGS PER SHARE
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
----------------------------------------------
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
EARNINGS
Net income (loss) (in thousands) $(3,207) $854 $4,485
========= ========= =========
WEIGHTED AVERAGE NUMBER OF SHARES
Outstanding common stock during the period 4,933,900 4,933,900 4,066,524
Contingently issuable shares 74,251 44,714 -
--------- --------- ---------
BASIC WEIGHTED AVERAGE NUMBER OF SHARES 5,008,151 4,978,614 4,066,524
Effect of dilutive stock options and other
contingent shares - 11,347 20,942
--------- --------- ---------
DILUTED WEIGHTED AVERAGE NUMBER OF SHARES 5,008,151 4,989,961 4,087,466
========= ========= =========
Basic earnings per share $(0.64) $0.17 $1.10
========= ========= =========
Diluted earning per share $(0.64) $0.17 $1.10
========= ========= =========
</TABLE>
During the year-ended June 30, 2000, the Company issued options to
purchase 20,000 shares of its common stock at exercise prices ranging
from $7.50 to $9.25. The above dilutive earnings per share calculations
exclude the effect of options to purchase 330,500 and 45,000 for the
years ended June 30, 2000 and 1999, respectively, shares of common
stock at exercise prices ranging from $7.50 to $12.00 because they were
anti-dilutive. Also see Note 7 related to contingently issuable shares
related to an acquisition. The effect of contingent shares related to
the guaranteed earn-out amount not paid at the closing of the Sunbelt
acquisition and the effect of satisfactory completion of part of the
second contingent earn-out has been included in the above basic
earnings per share calculations. The effect of contingent shares
related to the first earn-out of American Micro is not included, as
such payment was paid in cash in March 2000. The effect of contingent
shares related to second earn-out of American Micro is not included, as
the amount of such contingent shares to be issued is unable to be
determined. See note 19.
F-26
<PAGE>
EUROPEAN MICRO HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18 STOCKHOLDERS' EQUITY, STOCK OPTIONS AND INCENTIVE PLANS
EMPLOYEE STOCK PURCHASE PLAN
In January 1998, European Micro Holdings, Inc. adopted the 1998
Employee Stock Purchase Plan (the "employee plan"). A total of 50,000
common shares have been reserved for issuance under the plan. The
shares issued under the employee plan will be purchased at 85% of
market value or such higher percentage (not in excess of 100%) as may
be established by the employee plan committee. The employee plan shall
remain in effect until terminated by an action of the Board. No shares
had been issued at June 30, 2000.
STOCK INCENTIVE PLAN
In January 1998, European Micro Holdings, Inc. adopted the 1998 Stock
Incentive Plan (the "Plan"). A total of 500,000 common shares have been
reserved for issuance under the Plan. The committee may grant to such
participants as the committee may select options entitling the
participants to purchase shares of common stock for the Company in such
numbers, at such prices and on such terms and subject to such
conditions, consistent with the terms of the Plan, as may be
established by the committee. The Plan shall remain in effect until
terminated by an action of the Board.
The per share weighted average fair value of stock options granted
during 2000 and 1999 were $7.76 and $8.09, respectively. The preceding
results were calculated with the use of the Black-Scholes
option-pricing model. The assumptions were used for the years ended
June 30, 2000 and 1999, respectively: (1) risk-free interest rates of
5.5% to 6.2% and 4.7%; (2) dividend yield of 0.0%; (3) expected lives
of 7 years; and (4) volatility of 128% and 84%. Results may vary
depending on the assumptions applied within the model.
The Company applies APB Opinion No. 25 in accounting for its plan and,
accordingly, no compensation cost has been recognized for its stock
options issued to employees with a stock price at market value on the
date of grant in the consolidated financial statements. Had the Company
determined compensation cost based on the fair value of the date of
grant for its stock options under SFAS No. 123, the Company's net
income would have been reduced to the pro forma amounts indicated below
(in thousands, except per share data):
YEARS ENDED JUNE 30,
-----------------------------------
2000 1999 1998
---- ---- ----
NET INCOME:
As reported $(3,207) $854 $4,485
Pro forma $(3,551) $466 $4,431
EARNINGS PER SHARE - BASIC:
As reported $(0.64) $0.17 $1.10
Pro forma $(0.71) $0.09 $1.09
EARNINGS PER SHARE - DILUTED:
As reported $(0.64) $0.17 $1.10
Pro forma $(0.71) $0.09 $1.08
Compensation cost arising during the year ended June 30, 2000 and June
30, 1999 in relation to stock options granted to non-employees during
the year amounted to $56,000 and $202,000, respectively. The vesting
period for stock options granted to non-employees varies between 1 and
6 years.
F-27
<PAGE>
EUROPEAN MICRO HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18 STOCKHOLDERS' EQUITY, STOCK OPTIONS AND INCENTIVE PLANS (CONTINUED)
A summary of the Company's stock option plan is as follows:
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
WEIGHTED WEIGHTED WEIGHTED
NUMBER AVERAGE NUMBER AVERAGE NUMBER AVERAGE
OF EXERCISE OF EXERCISE OF EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
Outstanding at beginning of year 339,000 $10.07 294,000 $10.00 -
Granted 20,000 $8.38 45,000 $10.51 294,000 $10.00
Exercised - - -
Forfeited 28,500 $10.21 - -
-------- ------- -------
OUTSTANDING AT YEAR END 330,500 $9.95 339,000 $10.07 294,000 $10.00
Available for grant at year end 169,500 161,000 206,000
</TABLE>
OPTIONS OUTSTANDING
A summary of the options outstanding at June 30, 2000 is presented
below:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------------------------------------- ------------------------------
NUMBER WEIGHTED WEIGHTED NO. WEIGHTED
RANGE OF OUTSTANDING AT AVERAGE AVERAGE EXERCISABLE AT AVERAGE
EXERCISE PRICES 6/30/00 REMAINING LIFE EXERCISE PRICE AT 6/30/00 EXERCISE PRICE
<S> <C> <C> <C> <C> <C> <C>
$7.50 - $12.00 330,500 8.11 $9.95 60,000 $10.19
</TABLE>
19 SUBSEQUENT EVENTS
On August 24, 2000, European Micro Holdings, Inc. entered into an
Equity Line of Credit (the "Equity Credit Line"). Pursuant to the
Equity Credit Line, an institutional investor agreed to acquire up to
$20 million of the Company's common stock at a purchase price equal to
88% of the market price of such stock, as defined in the agreement. The
timing of each sale and the number of shares to be sold is at the
discretion of the Company, subject to various conditions, including
shareholder approval and an effective registration of the shares. The
dollar amount that the Company can request under any individual sale is
subject to the average trading volume of the Company's common stock for
the preceding 25-day trading period. The maximum term of the Equity
Credit Line is 30 months from the date of the agreement. The agreement
contains various representations, warranties and covenants by the
Company, including limitations on the Company's ability to sell common
stock or common stock equivalents, sell assets, merge, etc.
In connection with entering into the Equity Credit Line, the Company
also entered into a Placement Agent Agreement. Under the Placement
Agent Agreement, the agent will receive a commission equal to 7% of the
gross proceeds from each advance under the Equity Credit Line.
F-28
<PAGE>
EUROPEAN MICRO HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19 SUBSEQUENT EVENTS (CONTINUED)
The Company has issued to the placement agent two warrants to purchase
a total of 1,000,000 shares of the Company's common stock. The Class A
Warrant allows the holder to purchase 500,000 shares of common stock at
an exercise price of $7.00 (subject to certain anti-dilution
adjustments) commencing with the first advance under the Equity Credit
Line. If the warrant shares are not covered by an effective
registration statement for the resale of the warrant shares, the holder
can elect a cash-less exercise provision. The warrants expire five
years from the issuance date. The Company can force conversion of the
warrants if the closing price of its common stock is $10.00 or higher
for ten consecutive trading days. The Class B Warrant allows the holder
to purchase 500,000 shares of common stock at an exercise price of
$10.00 (subject to similar anti-dilution adjustments). The other terms
of the Class B Warrant are similar to the Class A Warrant, except that
the Class B Warrants are exercisable pro-rate to the ratio of the
advances drawn under the Equity Credit Line, and except that the
Company can force conversion of the warrants if the closing price of
its common stock is $15.00 or higher for ten consecutive trading days.
The Company has granted the Equity Credit Line investor and the
placement agent certain registration rights. Pursuant to the
registration rights agreements, the Company is obligated to, among
other things, register the sale of the investors shares sold to such
investor under the Equity Credit Line and the sale of shares of common
stock underlying the warrants.
On August 8, 2000, the Company entered into a consulting arrangement
with a third party whereby such party would provide certain financing
and capital market consultation. In connection with the arrangement,
the Company will pay to the consultant $10,000 in cash compensation.
The Company also issued to the consultant options to purchase 100,000
shares of its common stock at an exercise price of $4.55. The
expiration date of the options is August 8, 2010. All options vested on
the closing of the Equity Line of Credit agreement. The consultant
agreed not to exercise any options during the first twelve months
following the grant date. In addition, the Company will pay to the
consultant a cash payment and warrants to purchase common shares of the
Company. Each cash and warrant payment will equal 1% of the dollars
amounts drawn by the Company under the Equity Credit Line.
F-29
