U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(MARK ONE)
|X| Quarterly Report Pursuant to Section 13 or 15(d) of Securities
Exchange Act of 1934
For the quarterly period ended September 30, 2000
|_| Transition report under Section 13 or 15(d) of the Securities Exchange
Act of 1934 (No Fee Required)
For the transition period from _______ to _______.
Commission File No. 333-44393
EUROPEAN MICRO HOLDINGS, INC.
-----------------------------
(Name of Registrant as Specified in Its Charter)
NEVADA 65-0803752
- ------ ----------
(State or Other Jurisdiction of Incorporation (I.R.S. Employer Identification No.)
or Organization)
6073 N.W. 167TH STREET, UNIT C-25, MIAMI, FLORIDA 33015
- ------------------------------------------------- -----
(Address of Principal Executive Offices) (Zip Code)
(305) 825-2458
--------------
(Issuer's Telephone Number, Including Area Code)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months, and (2) has been
subject to such filing requirements for the past 90 days. Yes |X| No |_|
There were 4,933,900 shares of Common Stock, par value $0.01 per share,
outstanding as of November 17, 2000.
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
Independent Auditors' Review Report..........................................3
Consolidated Condensed Balance Sheets as of September 30, 2000 and
June 30, 2000................................................................4
Consolidated Condensed Statements of Operations for the three
months ended September 30, 2000 and 1999.....................................5
Consolidated Statement of Changes in Shareholders' Equity
for the three months ended September 30, 2000................................6
Consolidated Condensed Statements of Cash Flows for the three months
ended September 30, 2000 and 1999............................................7
Notes to Consolidated Condensed Financial Statements.........................9
2
INDEPENDENT AUDITORS' REVIEW REPORT
The Board of Directors and Shareholders
European Micro Holdings, Inc.:
We have reviewed the consolidated condensed balance sheet of European Micro
Holdings, Inc. and subsidiaries (the "Company") as of September 30, 2000, and
the related consolidated condensed statements of operations, shareholders'
equity and cash flows for the three-month periods ended September 30, 2000 and
1999. These consolidated condensed financial statements are the responsibility
of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the consolidated condensed financial statements referred to above for
them to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of European Micro Holdings, Inc. and
subsidiaries as of June 30, 2000, and the related consolidated statements of
operations, shareholders' equity, and cash flows for the year then ended (not
presented herein); and in our report dated August 24, 2000, except as to notes
3, 9, and 10, which were as of October 5, 2000, we expressed an unqualified
opinion on those consolidated financial statements. In our opinion, the
information set forth in the accompanying condensed consolidated balance sheet
as of June 30, 2000, is fairly stated, in all material respects, in relation to
the consolidated balance sheet from which it has been derived.
Nashville, Tennessee
November 17, 2000
3
EUROPEAN MICRO HOLDINGS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
SEPTEMBER 30, 2000 JUNE 30, 2000
-----------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash $582 $1,222
Restricted Cash 355 364
Trade receivables, net 12,594 13,160
Inventories, net 7,471 6,194
Prepaid expenses 400 322
Income Taxes Receivable 899 909
Other current assets 682 765
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TOTAL CURRENT ASSETS 22,983 22,936
Property and equipment, net 3,819 3,927
Goodwill, net 2,732 2,808
Investments in and advances to unconsolidated subsidiaries 0 252
Other assets 284 290
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TOTAL ASSETS $29,818 $30,213
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LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings $12,300 $11,903
Current portion of long-term borrowings 697 678
Trade payables 1,660 2,256
Accrued expenses and other current liabilities 1,608 1,882
Due to related parties 293 11
Income taxes payable - -
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TOTAL CURRENT LIABILITIES 16,558 16,730
Long-term borrowings 2,235 2,373
Other liabilities - -
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TOTAL LIABILITIES $18,793 $19,103
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SHAREHOLDERS' EQUITY:
Preferred stock $0.01 par value shares: 1,000,000 authorized, no
shares issued and outstanding - -
Common stock $0.01 par value shares: 20,000,000 authorized,
Shares issued and outstanding 4,933,900 49 49
Additional paid-in capital 9,512 9,191
Prepaid offering costs (Note 10) (208) -
Accumulated other comprehensive income (loss) (680) (550)
Retained earnings 2,352 2,420
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TOTAL SHAREHOLDERS' EQUITY 11,025 11,110
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COMMITMENTS, CONTINGENCIES AND SUBSEQUENT EVENTS - -
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $29,818 $30,213
======= ========
See accompanying notes to consolidated condensed financial statements.
4
EUROPEAN MICRO HOLDINGS, INC.
CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
(In thousands, except per share data)
(UNAUDITED)
THREE MONTHS ENDED SEPTEMBER 30,
-------------------------------------------
2000 1999
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SALES:
Net sales $29,014 $31,745
Net sales to related parties 54 1,019
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Total net sales 29,068 32,764
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COST OF GOODS SOLD:
Cost of goods sold (25,858) (28,076)
Cost of goods sold to related parties (54) (991)
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Total cost of goods sold (25,912) (29,067)
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GROSS PROFIT 3,156 3,697
OPERATING EXPENSES:
Selling, general and administrative expenses (2,883) (3,066)
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INCOME FROM OPERATIONS 273 631
Interest income 15 39
Interest expense (311) (219)
Equity in net loss of unconsolidated subsidiaries - (2)
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INCOME (LOSS) BEFORE INCOME TAXES (23) 449
Income tax expense (45) (242)
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NET INCOME (loss) $(68) $207
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Net income (loss) per share - basic $(0.01) $0.04
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Net income (loss) per share - diluted $(0.01) $0.04
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See accompanying notes to consolidated condensed financial statements.
5
EUROPEAN MICRO HOLDINGS, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(In thousands, except share data)
(Unaudited)
ACCUMULATED
ADDITIONAL PREPAID OTHER TOTAL
PAID-IN OFFERING COMPREHENSIVE RETAINED SHAREHOLDERS'
COMMON STOCK CAPITAL COSTS INCOME (LOSS) EARNINGS EQUITY
-------------------------------------------------------------------------------------------------
SHARES AMOUNT
Balance at June 30, 2000 4,933,900 $49 $9,191 - $(550) $2,420 $11,110
Comprehensive Income (loss):
Net income (loss) - - - - - (68) (68)
Other comprehensive income,
foreign currency
translation adjustment - - - - (130) - (130)
-----------------------------------------------
Total comprehensive income (loss) - - - - (130) (68) (198)
Prepaid offering costs-options issued - - 208 (208) - - -
Compensation charge in relation
to share options issued to
non-employees - - (113) - - - (113)
-------------------------------------------------------------------------------------------------
Balance at September 30, 2000 4,933,900 $49 $9,512 $ (208) $(680) $2,352 $11,025
=================================================================================================
See accompanying notes to consolidated condensed financial statements.
6
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(UNAUDITED)
THREE MONTHS ENDED SEPTEMBER 30,
----------------------------------------------------
2000 1999
---- ----
OPERATING ACTIVITIES:
Net income (loss) $(68) $207
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES
Depreciation and amortization 160 134
Amortization of expense related to contingent earn-out provisions - 47
Deferred income taxes (23) (7)
Equity in net loss of unconsolidated subsidiaries - 2
Provision for Note Receivable impairment 252 -
Compensation charge for non-employee stock options 113 14
CHANGES IN ASSETS AND LIABILITIES
Trade receivables 566 1,341
Due from related parties - 1,128
Inventories (1,277) 1,740
Prepaid expenses and other current assets 28 157
Income Tax Receivable 10 -
Trade payables (596) 397
Due to related parties 282 295
Income taxes payable - 294
Accrued expenses and other current liabilities (274) (622)
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NET CASH PROVIDED BY (USED IN ) OPERATING ACTIVITIES (827) 5,127
------ -----
INVESTING ACTIVITIES:
Purchase of fixed assets (144) (2,998)
Sale of fixed assets 46 21
Payment for acquisition, net of cash acquired - (1,220)
------ -----
NET CASH USED IN INVESTING ACTIVITIES (98) (4,197)
------ -----
FINANCING ACTIVITIES:
Short-term borrowings, net 397 (1,073)
Proceeds from long-term borrowings (159) 2,429
Issuance of common stock, net - -
Repayment of capital leases, net - (20)
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NET CASH PROVIDED BY FINANCING ACTIVITIES 238 1,336
------ -----
Exchange rate changes 47 241
------ -----
NET INCREASE (DECREASE) IN CASH: (640) 2,507
Cash at beginning of period 1,222 3,168
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CASH AT END OF PERIOD $582 $5,675
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7
EUROPEAN MICRO HOLDINGS, INC.
Non-cash investing and financing activities:
Fair value of assets acquired $ - $3,314
Goodwill - 804
Fair value of liabilities assumed - (2,817)
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Cash paid for acquisitions - 1,301
Less cash acquired - (81)
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Net cash paid for acquisitions $ - $1,220
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Interest paid $311 $219
------ -----
Taxes paid $84 $5
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See accompanying notes to consolidated condensed financial statements.
8
EUROPEAN MICRO HOLDINGS, INC.
NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1 INTERIM FINANCIAL STATEMENTS
The accompanying unaudited interim financial statements have been prepared
pursuant to the rules and regulations for reporting on Form 10-Q. Accordingly,
certain information and notes required by generally accepted accounting
principles for complete financial statements are not included herein. The
interim statements should be read in conjunction with the Company's financial
statements and notes thereto included in the Company's 2000 Annual Report on
Form 10-K.
In the Company's opinion, all adjustments necessary for a fair presentation of
these interim statements have been included and are of a normal and recurring
nature.
2 LIQUIDITY
The Company suffered operating losses during fiscal year 2000 and in the first
quarter of 2001. Ongoing legal costs associated with the litigation related to
Big Blue Europe, the costs associated with the Company's electronic commerce
strategy, increases in general overhead costs, and increased interest expense
due primarily to increased borrowings, coupled with decreasing sales volumes and
gross profit margins, have negatively impacted operating results. These factors
may continue to impact the Company's operations.
The Company was not in compliance with certain loan agreement financial
covenants during fiscal year 2000. While the Company has obtained waivers from
these covenant violations existing at June 30, 2000, in most instances the
waivers only address the covenant-reporting period ending thereon. Also, the
Company was not in compliance with certain loan agreement financial covenants at
September 30, 2000. The Company has obtained waivers of certain of these
covenant violations existing at September 30, 2000. With the exception of the
European Micro UK Inventory Facility discussed below and in Note 6 to the
Consolidated Condensed Financial Statements, management believes that the
Company will be able to comply with the provisions of its debt agreements,
including financial covenants, during the remainder of the fiscal 2001. However,
compliance with these financial covenants during fiscal 2001 will require
improved operating results compared to fiscal 2000. Management has initiated
certain actions to increase the likelihood of attaining these improved operating
results. Such actions include, among other things, (i) modifying the terms of
certain financial covenants (ii) entering into the Equity Credit Line (See Note
10 to the Consolidated Condensed Financial Statements), (ii) temporarily
suspending activities related to its electronic commerce strategy until specific
funding can be obtained (see Note 11 to the Consolidated Condensed Financial
Statements), (iii) obtaining extensions of the due date for any payment of
contingent earn-out amounts relating to calendar year 2000 under the American
Micro purchase agreement (see Note 5 to the Consolidated Condensed Financial
Statements), (iv) adjusting staffing levels, and (v) implementing steps to
increase sales volume and lower inventory levels. No assurances can be given
that management's initiatives will be successful, and that loan agreement
defaults will not occur in the future.
Another factor that could negatively impact the Company's liquidity is the terms
of the borrowing arrangements of European Micro UK. As disclosed in Notes 6 and
7 to the Consolidated Condensed Financial Statements, certain of European Micro
UK's borrowing capacity is subject to termination by the borrower at such
lender's sole discretion. As disclosed in Note 6 to the Consolidated Condensed
Financial Statements, European Micro UK was not in compliance with certain
financial convenants of the European Micro UK Inventory Facility at September
30, 2000. As a result, European Micro UK will not be able to borrow against this
revolving credit agreement until such time that it is in compliance with such
financial covenants. Further, the American Micro and Nor-Easter line of credit
and the European Micro Holdings, Inc. term loan contain subjective acceleration
clauses. These factors increase the liquidity risk to the Company. Management
believes that, based on the projected fiscal year 2001 operating results of the
Company and its relationship with the creditors, its existing credit
arrangements will remain effective during fiscal 2001.
3 INVENTORY
Inventories consist of the following (in thousands):
SEPTEMBER 30, 2000 JUNE 30, 2000
------------------ -------------
Finished goods and goods for resale $7,606 $6,818
Less: Allowance for inventory obsolescence (135) (624)
------ ------
$7,471 $6,194
====== ======
A roll forward of allowance for obsolescence is as follows (in thousands):
THREE MONTHS ENDED TWELVE MONTHS ENDED
SEPTEMBER 30, 2000 JUNE 30, 2000
------------------ -------------
Balance at beginning of period $624 $116
Foreign currency translation adjustment (15) (3)
9
EUROPEAN MICRO HOLDINGS, INC.
NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Provision for obsolescence 137 929
Amounts written off (611) (418)
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Balance at end of period $135 $624
====== ======
4 PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
SEPTEMBER 30, 2000 JUNE 30, 2000
------------------ -------------
Buildings and leasehold improvements $2,628 $2,694
Furniture, fixtures and equipment 1,848 1,866
Vehicles and other 454 447
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4,930 5,007
Less: accumulated depreciation (1,111) (1,080)
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NET BOOK VALUE $3,819 $3,927
====== ======
10
EUROPEAN MICRO HOLDINGS, INC.
NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
On July 16, 1999, European Micro Plc, a wholly-owned subsidiary of the Company
("EUROPEAN MICRO UK"), purchased the office building in which it had previously
leased space for a purchase price of 1,705,000 pounds sterling ($2,518,000 at
exchange rate on September 30, 2000). The purchase price was financed in part by
a mortgage loan note in the amount of 1,312,000 pounds sterling ($1,937,000 at
exchange rate on September 30, 2000) (See Note 7, to the Consolidated Condensed
Financial Statements).
At September 30, 2000 and June 30, 2000, vehicles with a cost of approximately
$219,000 and $212,000, and accumulated depreciation of approximately $70,000 and
$129,000, respectively, were held under capital leases.
Depreciation expense was $120,000 and $101,000 for the periods ended September
30, 2000 and 1999, respectively.
5 GOODWILL
On October 26, 1998, European Micro UK acquired all of the outstanding shares of
capital stock of Sunbelt (UK) Limited ("SUNBELT"). The Sunbelt purchase price
(to be settled in pounds sterling) is comprised of a guaranteed portion and two
contingent earn-out payments. The guaranteed portion of the purchase price,
which was based upon Sunbelt's net book value at closing and a multiple of its
fiscal year 1998 pre-tax earnings, was 940,000 pounds sterling (approximately
$1,388,000 at exchange rate on September 30, 2000). Of this guaranteed amount,
approximately 360,000 pounds sterling (approximately $532,000 at exchange rate
on September 30, 2000) was paid in cash at closing. The unpaid balance of the
guaranteed consideration includes a note payable to the former 40% Sunbelt
shareholder in the amount of 240,163 pounds sterling ($355,000 at exchange rate
on September 30, 2000) to be repaid in November 2005, subject to early repayment
at the option of the note holder at any time after June 1, 1999. Such note
payable is secured by a cash account of equal amount at September 30, 2000. The
note payable and the cash balances are reflected on the accompanying
consolidated condensed balance sheet at September 30, 2000, in accrued expenses
and other current liabilities and restricted cash, respectively. The Company has
the option of paying future amounts due to the former Sunbelt shareholders in
common stock. If the Company elects to pay any portion of the purchase price in
shares of the Company's common stock, then Sunbelt's shareholders have fifteen
days to make arrangements to sell such shares over the next forty trading days.
If the sale of such shares results in net proceeds of less than the purchase
price, then the Company will pay the difference in cash to Sunbelt's
shareholders. The Company also entered into employment agreements with the two
former shareholders of Sunbelt. The Company discontinued Sunbelt's Nova line of
products effective January 31, 2000. With the closure of the Nova line of
products, the employment agreement with one of the former shareholders was
terminated. Also, in July 2000 the employment agreement with the other former
shareholder was terminated.
During November 1999, purchase accounting adjustments were made to the
calculation of the guaranteed portion and the two contingent earn-out amounts.
These adjustments resulted from the recalculation of fiscal year 1998 pretax
earnings of Sunbelt, resulting in a reduction of 134,000 pounds sterling
($198,000 at exchange rate on September 30, 2000) to the guaranteed portion and
32,000 pounds sterling ($47,000 at exchange rate on September 30, 2000) to the
contingent consideration. The portion of the guaranteed consideration due at the
end of the first contingent earn-out period, which ran from November 1, 1998 to
October 31, 1999, was paid in November 1999 in the amount of 53,708 pounds
sterling ($79,000 at exchange rate on September 30, 2000). Also, the portion of
the first contingent earn-out payment related to employee retention and the
volume of purchases from the Far East was paid in November 1999 in the amount of
190,820 pounds sterling ($282,000 at exchange rate on September 30, 2000).
The unpaid balance of the guaranteed purchase price of 152,656 pounds sterling
($225,000 at exchange rate on September 30, 2000), and the portion of the second
contingent earn-out payment related to the volume purchases from the Far-East of
129,758 pounds sterling ($192,000 at exchange rate on September 30, 2000) is
reflected in goodwill, net and accrued expenses and other current liabilities on
the accompanying consolidated condensed balance sheet at September 30, 2000 as
the contingency has been met. At September 30, 2000, all contingent
consideration related to the Sunbelt acquisition has either been paid or
accrued. Goodwill from this transaction is being amortized on a straight-line
basis over 20 years.
On November 12, 1998, European Micro UK acquired the assets of H&B Trading
International BV ("H&B"). The acquisition of H&B was accounted for as a
purchase. The base purchase price, subject to adjustment, of approximately
125,000 Dutch guilders ($50,000 at exchange rate on September 30, 2000) exceeded
the estimated value of net assets acquired by approximately 85,000 Dutch
guilders ($34,000 at exchange rate on September 30, 2000), which is being
amortized on a straight-line basis over 20 years. The financial criteria for the
period ended September 30, 2000 and 1999 were not met, therefore, the additional
consideration was not accrued or paid.
11
EUROPEAN MICRO HOLDINGS, INC.
NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
The Company acquired American Surgical Supply Corp. of Florida d/b/a/ American
Micro Computer Center ("AMCC"), in a merger on July 1, 1999. The transaction was
structured as a merger of AMCC with and into the newly formed, wholly owned
subsidiary of the Company. Upon consummation of the merger, the subsidiary's
name was changed to American Micro Computer Center, Inc. ("AMERICAN MICRO"). The
purchase price for AMCC was equal to $1,131,000, plus an earn-out amount payable
in cash or shares of the Company's common stock (at the Company's discretion)
equal to two times the after-tax earnings of American Micro in calendar year
1999 and two times the after-tax earnings of American Micro in calendar year
2000. The portion of the purchase price paid at closing was funded through the
Company's working capital. In addition, the Company assumed all outstanding
indebtedness of AMCC, including a shareholder loan in the approximate amount of
$289,000. This loan was owed to the father of John B. Gallagher, the Company's
Co-President, Co-Chairman and significant shareholder. This note was repaid in
full in November 1999. If the Company elects to pay any portion of the purchase
price in shares of the Company's common stock, then AMCC's former shareholders
have fifteen days to make arrangements to sell such shares over the next forty
trading days. If the sale of such shares results in net proceeds of less than
the purchase price, then the Company will pay the difference in cash to AMCC's
shareholders.
The acquisition of AMCC was accounted for as a purchase. The base purchase
price, inclusive of transaction costs, of approximately $1,315,000 exceeded the
estimated fair market value of net assets acquired by approximately $817,000,
which constitutes goodwill and which is being amortized on a straight-line basis
over 20 years. The results of operations of American Micro, since acquisition,
have been included in the accompanying consolidated condensed financial
statements. The contingent earn-out payment relating to two times the after tax
earnings for calendar year 1999 of approximately $600,000 was paid in March 2000
and is reflected in goodwill, net. The contingent earn-out payment relating to
two times the after tax earnings for calendar year 2000 has not been recognized
in the accompanying consolidated condensed financial statements as the
calculation of such amounts are not determinable at this point in time. The
second earn-out payment will be due in monthly principal payments of $50,000,
plus interest at 8% commencing on March 1, 2001 and continuing until July 1,
2001 at which time the amount is due in full subject to financial covenant
restrictions. Such payment will be offset by a $261,000 receivable due from
AMCC's former shareholders.
The results of operations of the above entities have been included in the
accompanying consolidated condensed financial statements from the dates of
acquisition.
A roll forward of goodwill is as follows (in thousands):
THREE MONTHS ENDED TWELVE MONTHS ENDED
SEPTEMBER 30, 2000 JUNE 30, 2000
Balance at beginning of period $2,808 $1,675
Foreign currency translation adjustment (42) (84)
Purchase accounting adjustments - (251)
Additions - 1,616
Amortization (34) (148)
------ ------
Balance at end of period $2,732 $2,808
====== ======
12
EUROPEAN MICRO HOLDINGS, INC.
NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
6 SHORT-TERM BORROWINGS
Short-term borrowings consists of the following (in thousands):
SEPTEMBER 30, 2000 JUNE 30, 2000
------------------ -------------
Bank line of credit
European Micro UK Working Capital facility $2,366 $1,959
Nor'Easter Micro facility 1,325 975
American Micro facility 1,064 992
------ -------
Total bank lines of credit 4,755 3,926
Receivable financing 6,874 7,303
Other short-term borrowings 671 674
------ -------
Total short-term borrowings $12,300 $11,903
======= =======
European Micro UK has a bank line of credit (the "EUROPEAN MICRO UK WORKING
CAPITAL FACILITY") which is secured by a mortgage debenture on all the assets of
European Micro UK and is subordinate to the receivable financing and the capital
leases. The facility, which is subject to review in July each year, has been
extended to September 2001 and is due on demand. Maximum borrowing capacity
under this facility is 2.0 million pounds sterling ($3.0 million at exchange
rate on September 30, 2000). Interest is charged at 1.25% over the
bank-borrowing rate of 6% at September 30, 2000 and 6% at June 30, 2000.
European Micro UK also has a revolving credit agreement (the "EUROPEAN MICRO UK
INVENTORY FACILITY") secured against "general corporate assets". The facility
allowed European Micro UK to borrow up to 2.0 million pounds sterling ($3.0
million at exchange rate on September 30, 2000) to assist in the purchase of
inventory. The bank has agreed to extend this credit agreement to July 1, 2001.
From June 30, 2000 to September 30, 2000, no amounts were outstanding under the
agreement. The agreement includes various financial covenants. At September 30,
2000, European Micro UK was not in compliance with certain financial covenants
of the European Micro UK Inventory Facility. As a result, European Micro UK will
not be able to borrow against this revolving credit agreement until it is in
compliance with such financial covenants.
Total combined borrowings under the European Micro UK Working Capital Facility
and the European Micro UK Inventory Facility cannot exceed 2.0 million pounds
sterling at any date.
The Company also obtained two lines of credit on October 28, 1999, to finance
operations based in the United States. American Micro and Nor'Easter each
obtained a line of credit, secured by accounts receivable and inventory. Amounts
available under each of the line of credit agreements are based upon eligible
accounts receivable and inventory, up to a maximum borrowing amount of $1.5
million for each agreement. Each of these lines of credit was to mature on
October 28, 2000. Interest accrued at 0.5% over the bank-borrowing rate of 9.5%
at September 30, 2000. As partial security for these loans, Messrs. Gallagher
and Shields pledged to the lender a portion of their shares of common stock of
the Company. In the event the Company defaults on one or more of these loans,
the lender may foreclose on all or a portion of the pledged securities. Such an
event may cause a change of control in the Company because Messrs. Gallagher and
Shields together own 71% of the Company's outstanding common stock. The lines of
credit agreements include certain financial and non-financial covenants and
restrictions. The agreements also contain a provision whereby the lender can
declare a default based on subjective criteria.
On October 5, 2000, the Company received a waiver of the covenant violations
existing at the June 30, 2000 reporting date for the American Micro and
Nor'Easter lines of credit. The Company and the bank terminated the existing
lines of credit and entered into a new borrowing arrangement whereby each of
American Micro and Nor'Easter have a working capital line of credit equal to the
lesser of (i) $1.5 million or (ii) the sum of 85% of eligible accounts
receivable, plus the lesser of 50% of eligible inventory or $750,000. Interest
will be paid monthly at a floating rate of 0.5% over the bank's base rate. The
term of the new arrangements is for one year from the closing date. The new
facilities also require the companies to maintain depository accounts at the
bank, whose daily receipts will be applied against outstanding borrowings under
the lines of credit. As a result, the borrowings are classified as current
liabilities on the Company's consolidated condensed balance sheet at September
30, 2000. The new facilities also place certain restrictions on the companies'
ability to pay dividends and to make capital expenditures, among other things,
and also include
13
EUROPEAN MICRO HOLDINGS, INC.
NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
a provision whereby the lender can declare a default based on subjective
criteria. Collateral under the new credit line facilities consists of a first
priority lien on all assets of American Micro and Nor'Easter. Messrs. Gallagher
and Shields guaranteed the obligations under these arrangements. Mr. Shields has
pledged personal assets as additional collateral and has further agreed to
maintain certain personal financial statement liquidity levels. These borrowings
are cross-collateralized and cross-defaulted with borrowings under the $1.5
million term loan to European Micro Holdings, Inc. discussed in Note 7 to the
Consolidated Condensed Financial Statements. As of September 30, 2000, the
Company was not in compliance with certain of the revised loan agreement
financial covenants. The Company has obtained waivers from these covenant
violations existing at September 30, 2000.
Receivable financing represents borrowings secured by various trade receivables
of European Micro UK totaling $8.1 million at September 30, 2000 and $8.6
million at June 30, 2000. The accounts receivable financing provides for a
borrowing base of 85% of accounts receivable, with a limit of 6.2 million pounds
sterling ($9.2 million at exchange rate on September 30, 2000). This facility
can be terminated by either party giving three months' notice. The finance
company which provides the receivable financing facility has full recourse to
European Micro UK with respect to any doubtful or unrecovered amounts. Interest
is charged on the receivable financing balance at 1.25% above the bank borrowing
rate of 6% at September 30, 2000, and 6% at June 30, 2000.
Other short-term borrowings represent various unsecured notes payable of
American Micro. The maturity dates of the notes range from on demand to June 30,
2001. The interest rates range from 11% to 12%.
7 LONG-TERM BORROWINGS
Long-term borrowings consists of the following (in thousands):
SEPTEMBER 30, 2000 JUNE 30, 2000
------------------ -------------
Mortgage loan note $1,796 $1,877
Note payable 1,000 1,125
Other long-term borrowings 136 49
------ ------
$2,932 $3,051
Less current maturities of long-term borrowings (697) (678)
------ ------
Total long-term borrowings $2,235 $2,373
====== ======
European Micro UK purchased the office building in which it had previously
leased space for a purchase price of 1,705,000 pounds sterling ($2,518,000 at
exchange rate on September 30, 2000). The purchase price was financed in part by
a mortgage loan note in the amount of 1,312,000 pounds sterling ($1,937,000 at
exchange rate on September 30, 2000). This mortgage loan note bears interest at
a fixed rate of 7.6%, with monthly payments of principal and interest of 15,588
pounds sterling ($23,000 at exchange rate on September 30, 2000), and matures in
July 2009. The mortgage loan note includes certain financial and non-financial
covenants and restrictions. The agreement also contains a provision whereby the
lender can declare a default based on subjective criteria. The financial
covenants are measured using the financial results of European Micro UK as of
each fiscal year end. Based upon European Micro UK's fiscal year end operating
results, European Micro UK was out of compliance with certain of the covenant
requirements at June 30, 2000. The Company has obtained a waiver through July 1,
2001 of this non-compliance.
European Micro Holdings, Inc. obtained the term loan on October 28, 1999, in the
amount of $1,500,000. The term loan is to be repaid with quarterly payments of
$125,000 over three years. The term loan bears interest at the one-month LIBOR
plus two and one-quarter percentage points (2.25%). One-month LIBOR at September
30, 2000 was 6.6%. The term loan is secured by substantially all of the assets
of the Company. As partial security for this loan, Messrs. Gallagher and Shields
pledged to the lender a portion of their shares of common stock of the Company.
Messrs. Gallagher and Shields guaranteed the obligations under the term loan. In
addition, Mr. Shield has pledged personal assets as additional collateral and
has further agreed to maintain certain personal financial statement liquidity
levels. In the event the Company defaults on this loan, the lender may foreclose
14
EUROPEAN MICRO HOLDINGS, INC.
NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
on all or a portion of the pledged securities. Such an event may cause a change
of control in the Company because Messrs. Gallagher and Shields together own 71%
of the Company's outstanding common stock.
The term loan agreement is with the same lender as the Nor'Easter Micro and
American Micro line of credit facilities discussed in Note 6 to the Consolidated
Condensed Financial Statements. The agreement also contains a provision whereby
the lender can declare a default based on subjective criteria. Further, the term
loan credit agreement contains similar loan covenant requirements and is
cross-collateralized and cross-defaulted with the line of credit facilities. As
such, the Company was not in compliance for the June 30, 2000 reporting period.
On October 5, 2000, the Company received a waiver of the non-compliance with the
financial covenants as of June 30, 2000, and also entered into an amendment to
the term loan agreement that, among other things, established revised financial
covenants. As of September 30, 2000, the Company was not in compliance with
certain of the revised loan agreement financial covenants. The Company has
obtained waivers from these covenant violations existing at September 30, 2000.
8 EARNINGS PER SHARE
The calculation of earnings per share is detailed in the table below:
THREE MONTHS ENDED
SEPTEMBER 30,
-----------------------------------
2000 1999
---- ----
EARNINGS
Net income (loss) (in thousands) (68) $207
--------- ---------
WEIGHTED AVERAGE NUMBER OF SHARES
Outstanding common stock during the period 4,933,900 4,933,900
Contingently issuable shares 68,054 85,107
--------- ---------
BASIC WEIGHTED AVERAGE NUMBER OF SHARES 5,001,954 5,019,007
Effect of dilutive stock options and other contingent shares - 995
--------- ---------
DILUTED WEIGHTED AVERAGE NUMBER OF SHARES 5,001,954 5,020,002
========= =========
Basic earnings per share ($0.01) $0.04
========= =========
Diluted earning per share ($0.01) $0.04
========= =========
During the three-month period-ended September 30, 2000, the Company issued
warrants and options to purchase 1,185,000 shares of its common stock at
exercise prices ranging from $4.55 to $10.00. The above dilutive earnings per
share calculations exclude the effect of warrants and options to purchase
1,185,000 and 339,000 shares of common stock for the three-month period ended
September 30, 2000 and 1999, respectively, at exercise prices ranging from $4.55
to $12.00 and $9.1875 to $12.00, respectively, because they were anti-dilutive.
Also, see Note 5 to the Consolidated Condensed Financial Statements related to
contingently issuable shares related to an acquisition. The effect of contingent
shares related to the guaranteed earn-out amount not paid at the closing of the
Sunbelt acquisition and the effect of satisfactory completion of part of the
second contingent earn-out has been included in the above basic earnings per
share calculations. The effect of contingent shares related to the first
earn-out of American Micro is not included, as such payment was paid in cash in
March 2000. The effect of contingent shares related to second earn-out of
American Micro is not included, as the amount of such contingent shares to be
issued is unable to be determined. Also see Notes 10 and 13.
9 RELATED PARTY TRANSACTIONS
Until July 1, 1999, European Micro Holdings, Inc. belonged to a group of related
companies (the "GROUP"). The Group was comprised of Technology Express, Inc.
located in Nashville, Tennessee ("TECHNOLOGY EXPRESS"), and, until July 1, 1999,
AMCC which was purchased by European Micro Holdings, Inc. See Note 5 to the
Consolidated Condensed Financial Statements. Technology Express is owned and
controlled by Harry D. Shields, who is Co-President and Co-Chairman of the
Company. Prior to its acquisition on July 1, 1999, AMCC was owned 50% by John B.
Gallagher, who is a Co-President and Co-Chairman of the Company.
15
EUROPEAN MICRO HOLDINGS, INC.
NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
The rates charged on related party sales are lower than they would be in
arms-length transactions. The Company has an oral bulk buying arrangement with
the remaining related party, Technology Express, which gives the Company the
benefit of buying large job-lots at more competitive prices than it would
otherwise be possible to do and then immediately sell part of the purchase to
the related party.
Related party transactions are summarized as follows (in thousands):
THREE MONTHS ENDED
SEPTEMBER 30,
-----------------------------------
2000 1999
---- ----
SALES TO:
Technology Express $54 $1,019
====== ======
PURCHASES FROM:
Technology Express $1,564 $1,768
====== ======
Due to related parties comprised of following balances (in thousands):
SEPTEMBER 30, 2000 JUNE 30, 2000
------------------ -------------
Technology Express $293 $11
==== ===
The entity listed above is related to the Company in the following manner:
TECHNOLOGY EXPRESS
Until 1996, Technology Express was a full service authorized reseller of
computers and related products based in Nashville, Tennessee, selling primarily
to end-users. Technology Express was sold to Inacom Computers in 1996.
Concurrently with the sale, Mr. Shields founded a new computer company with the
name Technology Express. This company is a distributor of computer products and
does not sell to end-users. Harry D. Shields, who is Co-Chairman, Co-President,
a Director and shareholder (owning 32% of the outstanding shares) of European
Micro Holdings, Inc., is president of Technology Express and owns 100% of the
outstanding shares of capital stock of that company. Jay Nash, who is Chief
Financial Officer, Treasurer and Secretary of European Micro Holdings, Inc., has
been an employee of Technology Express since 1992.
FACILITIES AND EQUIPMENT
The Company utilizes approximately 350 square feet of office space and certain
equipment owned by Technology Express for which it is not charged a fee.
EMPLOYMENT AGREEMENTS
The Company has entered into various employment agreements with certain officers
of the Company.
16
EUROPEAN MICRO HOLDINGS, INC.
NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
10 EQUITY LINE OF CREDIT
On August 24, 2000, European Micro Holdings, Inc. entered into an Equity Line of
Credit (the "EQUITY CREDIT LINE"). Pursuant to the Equity Credit Line, an
institutional investor agreed to acquire up to $20 million of the Company's
common stock at a purchase price equal to 88% of the market price of such stock,
as defined in the agreement. The timing of each sale and the number of shares to
be sold is at the discretion of the Company, subject to various conditions,
including an effective registration of the shares. Dollar amounts that the
Company can request under any individual sale is subject to the average trading
volume of the Company's common stock for the preceding 25-day trading period.
The maximum term of the Equity Credit Line is 30 months from the date of the
agreement. The agreement contains various representations, warranties and
covenants by the Company, including limitations on the Company's ability to sell
common stock or common stock equivalents, sell assets, merge, etc. In connection
with entering into the Equity Credit Line, the Company also entered into a
Placement Agent Agreement. Under the Placement Agent Agreement, the agent will
receive a commission equal to 7% of the gross proceeds from each advance under
the Equity Credit Line.
The Company has issued to the placement agent two warrants to purchase a total
of 1,000,000 shares of the Company's common stock. The Class A Warrant allows
the holder to purchase 500,000 shares of common stock at an exercise price of
$7.00 (subject to certain anti-dilution adjustments) commencing with the first
advance under the Equity Credit Line. If the warrant shares are not covered by
an effective registration statement for the resale of the warrant shares, the
holder can elect a cash-less exercise. The warrants expire five years from the
issuance date. The Company can force conversion of the warrants if the closing
price of its common stock is $10.00 or higher for ten consecutive trading days.
The Class B Warrant allows the holder to purchase 500,000 shares of common stock
at an exercise price of $10.00 (subject to similar anti-dilution adjustments).
The other terms of the Class B Warrant are similar to the Class A Warrant,
except that the Class B Warrants are exercisable pro-rata to the ratio of the
advances drawn under the Equity Credit Line, and except that the Company can
force conversion of the warrants if the closing price of its common stock is
$15.00 or higher for ten consecutive trading days.
The Company has granted the Equity Credit Line investor and the placement agent
certain registration rights. Pursuant to the registration rights agreements, the
Company is obligated to, among other things, register the sale of the investors
shares sold to such investor under the Equity Credit Line and the sale of shares
of common stock underlying the warrants. On October 27, 2000, the Company filed
a registration statement with the Securities and Exchange Commission to register
all such shares.
On August 8, 2000, in connection with the Equity Credit Line, the Company
entered into a consulting arrangement with a third party whereby such party
would provide certain financing and capital market consultation. In connection
with the arrangement, the Company paid to the consultant $10,000 in cash
compensation. The Company also issued to the consultant options to purchase
100,000 shares of its common stock at an exercise price of $4.55. Management has
attributed $208,000 of the value of these options as incremental costs directly
attributable to the signing of the Equity Credit Line, and as such, has
reflected such amounts as prepaid offering costs in the accompanying
Consolidated Condensed Balance Sheet at September 30, 2000. The remaining
$105,000 option value attributed to general consulting services has been
expensed in the quarter ended September 30, 2000. In addition, the Company will
pay to the consultant cash payments and warrants to purchase common shares of
the Company. Each cash and warrant payment will equal 1% of the dollars amounts
drawn by the Company under the Equity Credit Line.
11 BUSINESS-TO-BUSINESS ELECTRONIC COMMERCE STRATEGY
The Company has initiated a business-to-business electronic commerce strategy,
which is focused on creating a global, value-added, information technology
equipment and service trading community. The company has hired Cap Gemini, a
leading European management consultancy and information technology services
firm, to assist it in the implementation of this plan. The Company has incurred
the sum of 755,000 pounds sterling ($1,115,000 at exchange rate on September 30,
2000) related to the feasibility studies and business process design. This
amount was reflected in selling, general and administrative expenses on the
accompanying consolidated statements of operations for the year ended June 30,
2000. The Company has capitalized the sum of 229,000 pounds sterling ($338,000
at exchange rate on September 30, 2000) related to the actual software
development. This amount is reflected in property and equipment, net on the
accompanying consolidated condensed balance sheets at September 30, 2000 and
June 30, 2000. During May 2000, the Company temporarily halted the ongoing
development being performed by Cap Gemini until specific funding is obtained to
complete the project. No further expenses have been incurred in the three months
ended September 30, 2000. There can be no assurances that the Company will be
successful in obtaining funding for this project. In the event the project is
not continued by November 30, 2000, the Company will incur a termination fee to
Cap Gemini of 150,000 pounds sterling ($221,500 at exchange rate on September
30, 2000). If paid, this fee would be credited against future invoices of Cap
Gemini upon the continuation of the project. By December 31, 2000, the Company
intends to re-evaluate and re-define where necessary the current assumptions
based on changes in the market over the last few months. This planning will
include detailing the project based on the Company's ability to fund the project
from current working capital, if other funding is still not available.
17
EUROPEAN MICRO HOLDINGS, INC.
NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
12 COMMITMENTS AND CONTINGENCIES
On November 12, 1999, Jeffrey and Marie Alnwick (the "ALNWICKS") and a New York
corporation, Big Blue Products, commenced an action individually and
derivatively for the Dutch company, Big Blue Europe, against our company and our
founders and officers, John B. Gallagher and Harry D. Shields, in the United
States District Court, Eastern District of New York, Jeffrey Alnwick and Marie
Alnwick v. European Micro Holdings, Inc., Eastern District of New York, Docket
No. 99 CV 7380 (the "ALNWICK LITIGATION").
The complaint alleges thirty-three causes of action. Plaintiffs claim, in
substance, that defendants breached oral and written agreements relating to the
management, operation and funding of Big Blue Europe. Specifically, plaintiffs
alleged that defendants breached the joint venture agreement by which Big Blue
Europe was formed, a licensing agreement for use of the "Big Blue" service mark
in Europe, a non-competition agreement allegedly preventing Big Blue Europe from
operating in the United States and several capital contribution agreements.
Plaintiffs also claimed that defendants breached their fiduciary duties to the
Alnwicks, engaged in fraudulent acts, aided and abetted breaches of fiduciary
duties by others, misappropriated trade secrets and interfered with the
employment contract of Big Blue Europe's managing director. The complaint seeks
unspecified compensatory and punitive damages, as well as injunctive relief
restraining defendants from acting in violation of the alleged agreements.
Defendants have moved to dismiss the complaint principally on the basis of forum
non-conveniens in favor of existing proceedings in the Netherlands (commenced by
European Micro UK), where a Dutch court has appointed an independent director to
oversee the operations of the company. Defendants argue that any dispute between
the stockholders and directors of Big Blue Europe, which operates pursuant to
Dutch law, should be resolved by a Dutch court.
Defendants intend to contest the claims in the Alnwicks Litigation vigorously,
whether asserted in the United States or in the Netherlands courts. For the
three-month period ended September 30, 2000, the Company has incurred
approximately $119,000 in costs related to such lawsuit. Management does not
believe that the ultimate outcome of this litigation will result in a material
liability to the Company.
Due to the continued uncertainty of the outcome of the pending lawsuit and the
difficulties of managing operations of Big Blue Europe during the dispute, the
Company has recorded during the three-month period ended September 30, 2000 an
additional $252,000 provision for doubtful accounts related to the notes
receivable owed to the Company. At September 30, 2000, valuation allowances have
been established for all amounts due from Big Blue Europe.
18
EUROPEAN MICRO HOLDINGS, INC.
(13) SUBSEQUENT EVENTS
On October 11, 2000, the Company entered into a consulting agreement for general
consulting services and advice with respect to capital markets, corporate
finance, acquisitions and financing. The Company will pay the consultant $5,000
per month for four months, subject to extension at the Company's option. In
addition, the Company granted to the consultant warrants to acquire 50,000
shares of the Company's common stock at $4.00 per share. Warrants to acquire
25,000 common shares become exercisable when the closing bid price of the
Company's common stock is $10.00 or higher per share for twelve consecutive
trading days in the eight month period after the effective date of the Company's
Registration Statement on Form S-1 in connection with the Equity Credit Line
discussed in Note 10 to the Consolidated Condensed Financial Statements.
Warrants to acquire the other 25,000 common shares become exercisable upon the
later occurrence of the successful consummation of (a) a financing transaction
or (b) an acquisition, each as defined in the agreement. The agreement also
calls for additional cash consideration to be paid by the Company in the event
of a successful financing transaction related to the acquisition.
(14) OTHER ACCOUNTING MATTERS
Effective July 1, 2000, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 133, Accounting for Derivative and Hedging Activities, as
amended by SFAS No. 138. The Statement requires the recognition of all
derivatives on the balance sheet at fair value. The Company's derivatives are
primarily forward foreign exchange contracts. The Company's forward foreign
exchange contracts have been designated as economic hedges of anticipated sales
and purchase transactions. In addition, the Company enters utilizes forward
foreign exchange contracts as an economic hedge against foreign currency market
exposures of underlying assets liabilities and other obligations. Effective in
the first quarter of fiscal 2001, changes in the fair value of these
derivatives, have been recorded through earnings. At September 30, 2000, the
Company did not have any open forward foreign exchange contracts . Foreign
currency losses, net were $151,000 and $242,000 for the three months ended
September 30, 2000 and 1999, respectively. The effect of the adoption of the new
Statements was immaterial.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin 101, "Revenue Recognition in Financial Statements." The effective date
has been deferred with respect to the Company to the fourth fiscal quarter of
2001 pending additional interpretive guidance. The Company is not able to
quantify the impact of SAB 101 at this time. However, there is at least one
issue that could have a material impact on the Company's consolidated condensed
financial statements. For European Micro UK the standard practice is to
recognize revenue on shipment. However, title to the goods is retained until
full payment is received from the customer to perfect the Company's interest in
the goods. Under possible interpretations, European Micro UK would not be able
to recognize revenue until full payment is received. In the transition year,
revenues would be lower as all sales on the net terms not collected by year-end
would not be recognized.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
INTRODUCTORY STATEMENTS
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS. THIS QUARTERLY REPORT CONTAINS
FORWARD-LOOKING STATEMENTS, INCLUDING STATEMENTS REGARDING, AMONG OTHER THINGS,
(A) EUROPEAN MICRO HOLDINGS, INC.'S ("EUROPEAN MICRO" OR THE "COMPANY")
PROJECTED SALES AND PROFITABILITY, (B) THE COMPANY'S GROWTH STRATEGIES, (C)
ANTICIPATED TRENDS IN THE COMPANY'S INDUSTRY, (D) THE COMPANY'S FUTURE FINANCING
PLANS, AND (E) THE COMPANY'S ANTICIPATED NEEDS FOR WORKING CAPITAL AND ITS
ABILITY TO COMPLY WITH THE FINANCIAL COVENANTS IN THE COMPANY'S LOAN AGREEMENT.
IN ADDITION, WHEN USED IN THIS QUARTERLY REPORT, THE WORDS "BELIEVES,"
"ANTICIPATES," "INTENDS," "IN ANTICIPATION OF," "EXPECTS," AND SIMILAR WORDS ARE
INTENDED TO IDENTIFY CERTAIN FORWARD-LOOKING STATEMENTS. THESE FORWARD-LOOKING
STATEMENTS ARE BASED LARGELY ON THE COMPANY'S EXPECTATIONS AND ARE SUBJECT TO A
NUMBER OF RISKS AND UNCERTAINTIES, MANY OF WHICH ARE BEYOND THE COMPANY'S
CONTROL. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THESE FORWARD-LOOKING
STATEMENTS AS A RESULT OF CHANGES IN TRENDS IN THE ECONOMY AND THE COMPANY'S
INDUSTRY, REDUCTIONS IN THE AVAILABILITY OF FINANCING AND AVAILABILITY OF
19
COMPUTER PRODUCTS ON TERMS AS FAVORABLE AS EXPERIENCED BY THE COMPANY IN PRIOR
PERIODS AND OTHER FACTORS. IN LIGHT OF THESE RISKS AND UNCERTAINTIES, THERE CAN
BE NO ASSURANCE THAT THE FORWARD-LOOKING STATEMENTS CONTAINED IN THIS QUARTERLY
REPORT WILL IN FACT OCCUR. THE COMPANY DOES NOT UNDERTAKE ANY OBLIGATION TO
PUBLICLY RELEASE THE RESULTS OF ANY REVISIONS TO THESE FORWARD-LOOKING
STATEMENTS TO REFLECT ANY FUTURE EVENTS OR CIRCUMSTANCES.
UNLESS THE CONTEXT OTHERWISE REQUIRES AND EXCEPT AS OTHERWISE SPECIFIED,
REFERENCES HEREIN TO "EUROPEAN MICRO" OR THE "COMPANY" INCLUDE EUROPEAN MICRO
HOLDINGS, INC. AND ITS 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"), AND 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
We are an independent distributor of microcomputer products, including personal
computers, memory modules, disc drives and networking products, to customers
mainly in Western Europe and the United States. Our customers consist of more
than 770 value-added resellers, corporate resellers, retailers, direct marketers
and distributors. We generally do not sell to end-users. Substantially all of
the products sold by us are manufactured by well-recognized manufacturers, such
as IBM, Compaq and Hewlett-Packard, although we generally do not obtain our
inventory directly from such manufacturers. We monitor the geographic pricing
strategies related to such products, currency fluctuations and product
availability in an attempt to obtain inventory at favorable prices from other
distributors, resellers and wholesalers.
We consider ourselves to be a focused distributor, as opposed to a broadline
distributor, dealing with a limited and select group of products from a limited
and select group of leading manufacturers. We believe that being a focused
distributor enables us to respond more quickly to customer requests and gives us
greater availability of products, access to products and improved pricing. We
believe that as a focused distributor we have been able to develop greater
expertise in the products that we sell. Our company places significant emphasis
on market awareness and planning and shares this knowledge with our customers to
enhance business relations. We strive to monitor and react quickly to market
trends in order to enable our multilingual sales team to maintain the highest
levels of customer service.
European Micro Holdings, Inc. was organized under the laws of the State of
Nevada in December 1997 and is the parent of European Micro UK, Nor'Easter,
Colchester, American Micro and Engenis. European Micro UK was organized under
the laws of the United Kingdom in 1991 to serve as an independent distributor of
microcomputer products to customers mainly in Western Europe and to related
parties in the United States. Nor'Easter was organized under the laws of the
State of Nevada on December 26, 1997 to serve as an independent distributor of
microcomputer products in the United States. Colchester was organized under the
laws of Singapore in November 1998 to serve as an independent distributor of
microcomputer products in Asia. American Micro was organized under the laws of
the State of Florida on June 24, 1999 to acquire AMCC and now serves as an
independent distributor of microcomputer products in the United States. Premier
Pages, Ltd. was formed on January 28, 2000 and later changed its name to
Engenis.com, Ltd. on June 23, 2000. Engenis was formed under the laws of the
United Kingdom to serve as a business-to-business electronic commerce trading
company.
20
EUROPEAN MICRO HOLDINGS, INC.
European Micro UK is the parent of European Micro GmbH ("EUROPEAN MICRO
GERMANY"), Sunbelt and European Micro B.V. ("EUROPEAN MICRO HOLLAND") and has a
50% joint venture interest in Big Blue Europe, B.V. ("BIG BLUE EUROPE").
European Micro Germany was organized under the laws of Germany in 1993 and until
August 2000 operated as a sales office in Dusseldorf, Germany. In August 2000,
we closed the office and consolidated the sales operations of European Micro
Germany. Customers of European Micro Germany will be handled through European
Micro UK. All products sold by European Micro Germany were procured and shipped
from the facilities of European Micro UK. Sunbelt is a company registered in
England and Wales, which was established in 1992 and is based in Wimbledon,
England. Sunbelt operated as a distributor of microcomputer products to dealers,
value-added resellers and mass merchants throughout Western Europe. Except for
the distribution of our Nova brand products (which was discontinued in January
2000), Sunbelt's distribution operations were integrated with and into the
operations of European Micro UK. European Micro Holland was organized under the
laws of Holland in 1995, and operates as a sales office near Amsterdam, Holland.
Big Blue Europe was organized under the laws of Holland in January 1997 and is a
computer parts distributor with offices located near Amsterdam, Holland, selling
primarily to computer maintenance companies.
European Micro Holding's headquarters are located at 6073 N.W. 167th Street,
Unit C-25, Miami, Florida 33015, and our telephone number is (305) 825-2458.
RESULTS OF OPERATIONS
The following table sets forth, for the periods presented, the percentage of net
sales represented by certain items in the Company's Consolidated Condensed
Statements of Operations:
PERCENTAGE OF NET SALES
THREE MONTHS ENDED
SEPTEMBER 30,
------------------------
2000 1999
Net sales to third parties 99.8% 96.9%
Net sales to related parties 0.2% 3.1%
------ ------
Total net sales 100.0% 100.0%
------ ------
Cost of goods sold to third (89.0%) (85.7%)
parties
Cost of goods sold to (0.2%) (3.0%)
related parties ------ ------
Total cost of goods sold (89.2%) (88.7%)
------ ------
Total gross profit 10.9% 11.3%
Total operating expenses (9.9%) (9.4%)
------ ------
Operating profit 1.0% 1.9%
Interest income 0.1% 0.1%
Interest expense (1.1%) (0.7%)
Equity in loss of - -
unconsolidated affiliate ------ ------
Income before income taxes 0.0% 1.3%
Income taxes (0.2%) (0.7%)
------ ------
Net income (loss) (0.2%) 0.6%
====== ======
21
EUROPEAN MICRO HOLDINGS, INC.
THREE-MONTH PERIOD ENDED SEPTEMBER 30, 2000 AND 1999
TOTAL NET SALES. Total net sales decreased $3.7 million, or 11.3%, from $32.8
million in the three-month period ended September 30, 1999 to $29.1 million in
the comparable period in 2000. Excluding net sales to related parties, net sales
decreased $2.7 million, or 8.6%, from $31.7 million in the three-month period
ended September 30, 1999 to $29.0 million in the comparable period in 2000. This
decrease was attributable to a decrease in sales of $5.4 million at European
Micro UK due to the comparison to the sales run up caused by the impending
millennium, and a decrease of $800,000 at American Micro due to a shift from
selling server options and other computer parts and concentrating on configuring
and selling complete systems. This decrease of net sales was partially offset by
an increase in sales of $700,000 at Nor'Easter and $2.8 million at Colchester.
This increase at Colchester is due to Colchester selling within the Asian region
as compared to being mainly a supplier for other Subsidiaries in 1999.
Net sales to related parties decreased $965,000, or 94.7%, from $1.0 million in
the three-month period ended September 30, 1999, to $54,000 in the comparable
period in 2000. Sales to Technology Express have decreased as product
availability decreased.
GROSS PROFIT. Gross profit decreased $541,000, or 14.6%, from $3.7 million in
the three-month period ended September 30, 1999, to $3.2 million in the
comparable period in 2000. Gross profit excluding related party transactions
decreased $513,000, or 14.0%, from $3.7 million in the three-month period ended
September 30, 1999 to $3.2 million the comparable period in 2000. This decrease
was attributable to a decrease of $1.3 million at European Micro UK due to the
decrease in sales in addition to a decrease in gross margin from 12.3% to 10.1%.
This decrease in gross margin mainly resulted from the devaluation of the
British pound sterling and the Euro against the U.S. dollar. The majority of
purchases during the quarter ended September 30, 2000 were denominated in U.S.
dollar. This decrease was partially offset by an increase of $160,000 at
Nor'Easter, $200,000 at Colchester and $400,000 at American Micro. Nor'Easter's
gross profit increased due to higher sales volume and an increase in gross
margin from 5.0% to 7.8%. Colchester's gross profit increased due to higher
sales volume and in addition to an increase in gross margin from 3.9% to 5.8%.
American Micro's gross profit increased even with lower sales volume by
increasing the gross margin from 10.1% to 21.5% by changing the product mix from
low margin components to higher margin complete systems.
Gross profit attributable to related party sales decreased $28,000, or 100%,
from $28,000 in the three-month period ended September 30, 1999, to zero in the
comparable period in 2000. As discussed above, this decrease is attributable to
decreased sales due to a lack of product availability.
Gross margins decreased by 0.4% from 11.3% in the three-month period ended
September 30, 1999 to 10.9% in the comparable period in 2000. Excluding related
party transactions, gross margin decreased from 11.6% in the three-month period
ended September 30, 1999 to 10.9% in the comparable period in 2000. This change
is related to the normal fluctuations in purchasing opportunities and sales
demand from quarter to quarter.
Foreign exchange gains and losses, net, changed from a loss of $242,000 in the
three-month period ended September 30, 1999, to a loss of $151,000 in the
comparable period in 2000. This adverse movement was attributable to the
weakening of the Euro relative to the British pound sterling, causing a
devaluation of sales made in European currencies, and the strengthening of the
U.S. dollar relative to the Euro and the British pound sterling, making
purchases denominated in U.S. dollars more expensive.
OPERATING EXPENSES. Operating expenses as a percentage of total net sales
increased from 9.4% in the three-month period ended September 30, 1999 to 9.9%
in the comparable period in 2000. This increase was partially attributable to
expensing $105,000 related to the value of the Persia stock options attributed
to general consulting services. This increase was also attributable to an
increase in operating expenses as a percentage of total net sales from 8.7% to
10.6% at American Micro, which is due to a decrease in sales as operating
expenses remain constant. Operating expenses as a percentage of total net sales
increase from 3.1% to 5.1% at Nor'Easter, which is due to an increase in
operating expenses of approximately $111,000 from $125,000 in the three-month
period ended September 30, 1999 to $236,000 in the comparable period in 2000.
This increase in expenses is due to moving their operations to a new building,
which has higher monthly rent, an increase in depreciation expense related to
new equipment and leasehold improvements and an increase in gross profit
therefore increasing commission and bonus expense, which are a function of gross
profit. This increase was partially offset by a decrease in operating expenses
as a percentage of total net sales from 8.7% to 7.8% at European Micro UK, which
is due to a decrease in operating expenses of approximately $650,000 from $2.0
million in the three-month period ended September 30, 1999 to $1.3 million in
the comparable period in 2000. This decrease in expenses is due to the closure
of Sunbelt's operations in January 2000 and the decrease in gross profit reduced
commission and bonus expense, which are a function of gross profit. Also, this
decrease was attributable to a decrease in operating expenses as a percentage of
22
EUROPEAN MICRO HOLDINGS, INC.
total net sales from 23.8% to 4.2% at Colchester, which is due to a large
increase in sales, as operating expenses remain constant.
INTEREST EXPENSE. Interest expense increased by $92,000 from $219,000 in
three-month period ended September 30, 1999 to $311,000 in the comparable period
in 2000. This was attributable to an increased reliance on short-term borrowings
to finance accounts receivable and inventory balances.
INTEREST IN JOINT VENTURE. During the year ended June 30, 2000, European Micro
UK made an unsecured loan to Big Blue Europe in the amount of $150,000. This
loan is due on demand and has an annual interest rate of 9.25%, payable
quarterly. During the year ended June 30, 1999, the Company made an unsecured
loan to Big Blue Europe in the amount of $350,000. This loan is due on demand
and has an annual interest rate of 9.25%, payable quarterly. Due to the
continued uncertainties with the Big Blue Europe lawsuit, and the possible
liquidation of Big Blue Europe, the Company recorded an allowance for the
remaining balance of the loans to Big Blue Europe of $252,000. The associated
charge to operations is included in Company's operating expenses for the
three-months ended September 30, 2000. At September 30, 2000, the Company has
provided an allowance for all advances to Big Blue Europe.
INCOME TAXES. Income taxes as a percentage of income (loss) before income taxes
increased from 53.9% in the three-month period ended September 30, 1999 to
195.6% in the comparable period in 2000. For both periods the Company has not
accrued a tax expense or benefit for the U.S. operations. The lower percentage
for the three-month period ended September 30, 2000 reflects the effects of a
net operating loss for the U.S. operations being greater than the taxable income
at European Micro UK.
SEASONALITY
We typically experience variations in our total net sales and net income on a
quarterly basis as a result of many factors. These include seasonal variations
in demand for our products and services, the introduction of new hardware and
software technologies and products offering improved features and functionality,
the introduction of new products and services by us and our competitors, the
loss or consolidation of a significant supplier or customer, changes in the
level of operating expenses, inventory adjustments, product supply constraints,
pricing, interest rate fluctuations, the impact of acquisitions, currency
fluctuations and general economic conditions. Historical operating results have
included a reduction in demand in Europe during the summer months.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL. Our company suffered an operating loss in fiscal 2000 and the first
quarter of fiscal 2001. Our operating results have been adversely impacted by
ongoing legal costs related to Big Blue Europe, the costs associated with our
electronic commerce strategy, increases in general overhead costs and interest
expense and a decrease in sales. These factors may continue to impact our
operations in fiscal 2001.
We were not in compliance with certain financial covenants contained in our loan
documents during fiscal 2000. The lenders waived any noncompliance with these
financial covenants that existed on June 30, 2000. In most cases, however, these
waivers do not relate to any future reporting period. Also, the Company was not
in compliance with certain loan agreement financial covenants at September 30,
2000. The Company has obtained waivers of certain of these covenant violations
existing at September 30, 2000. The Loan agreement for which a waiver was not
obtained did not have an outstanding balance due. With the exception of the
European Micro UK Inventory Facility discussed below and in Note 6 to the
Consolidated Condensed Financial Statements, management believes that the
Company will be able to comply with the provisions of its debt agreements,
including financial covenants, during the remainder of the fiscal 2001. However,
compliance with these financial covenants during Fiscal 2001 will require
improved operating results compared to Fiscal 2000. Management has initiated
certain actions to increase the likelihood of attaining these improved operating
results. Such actions include, among other things, (i) modifying the terms of
certain financial covenants, (ii) entering into the equity line of credit, (iii)
temporarily suspending activities related to our electronic commerce strategy
until specific funding can be obtained, (iv) obtaining extensions of the due
date for payment of contingent earn-out amounts relating to calendar year 2000
under the American Micro purchase agreement, (v) adjusting staffing levels, and
(vi) implementing steps to increase sales and lower inventory levels. No
assurances can be given that management's initiatives will be successful or that
loan agreement defaults will not occur in the future.
Another factor that could negatively impact on our liquidity position is the
terms of the borrowing arrangements of European Micro UK. Certain of European
Micro UK's borrowing capacity are subject to termination by the lender at its
sole discretion. As disclosed in Note 6 to the Consolidated Condensed Financial
Statements, European Micro UK was not in compliance with certain financial
covenants of the European Micro UK Inventory Facility at September 30, 2000. The
balance at September 30, 2000 was 0. As a result, European Micro UK will not be
able to borrow against this revolving credit agreement until such time that it
is in compliance with such financial covenants. Further, the American Micro and
Nor-Easter line of credit facilities and the European Micro Holdings, Inc. term
loan contain subjective acceleration clauses. These factors increase the
liquidity risk to our Company. Management believes that, based on the projected
fiscal year 2001 operating results of our Company and our relationship with the
creditors, our existing credit arrangements will remain effective during fiscal
2001.
23
EUROPEAN MICRO HOLDINGS, INC.
CASH REQUIREMENTS. Our primary cash requirements are for operating expenses,
funding accounts receivable, purchasing inventory, acquisitions and debt
service. We have historically funded these cash requirements through a
combination of loans, internally generated cash flow and the net proceeds of our
initial public offering.
WORKING CAPITAL. Working capital requirements of European Micro UK are funded by
a combination of line of credit facilities, together with accounts receivable
financing. In both cases, the amounts drawn down accrue the same rate of
interest based on a markup over the bank-borrowing rate in the United Kingdom.
The bank line of credit was 2.0 million pounds sterling ($3.0 million) at
September 30, 2000. The accounts receivable financing provides for a borrowing
base of 85% of accounts receivable, with a limit of 6.2 million pounds sterling
($9.2 million on September 30, 2000). This facility can be terminated by either
party giving three months' notice. The finance company that provides the
receivable financing facility has full recourse to European Micro UK with
respect to any doubtful or unrecovered amounts. Interest is charged on the
receivable financing balance at 1.25% above the bank-borrowing rate of 6% at
September 30, 2000. European Micro UK also had a revolving credit agreement
secured against inventory. The facility allowed European Micro UK to borrow up
to 3.5 million pounds sterling ($5.2 million at September 30, 2000) to assist in
the purchase of inventory. This revolving credit agreement expired in August
2000 and was renewed, through July 1, 2001, by European Micro UK in September
2000 to allow for borrowings up to 2.0 million pounds sterling ($3.0 million at
September 30, 2000) that are secured by the general corporate assets of European
Micro UK. Borrowings under the bank line of credit and revolving credit
agreement are capped at a maximum of 2.0 million pounds sterling outstanding
under the combined facilities at any point in time. At September 30, 2000,
European Micro UK was not in compliance with certain financial covenants of this
revolving credit agreement. Due to the non-compliance European Micro UK will not
be able to borrow against this revolving credit agreement until it is in
compliance with such financial covenants.
Working capital requirements of our U.S. operations are funded by two lines of
credit. On October 28, 1999, American Micro and Nor'Easter each obtained a line
of credit secured by accounts receivable and inventory. Amounts available under
each of the line of credit agreements were based upon eligible accounts
receivable and inventory, up to a maximum borrowing amount of $1.5 million for
each agreement. Each of these lines of credit was to mature on October 28, 2000.
Interest accrued at 0.5% over the bank-borrowing rate of 9.5% at September 30,
2000. As partial security for these loans, Messrs. Gallagher and Shields pledged
to the lender a portion of their shares of common stock of our company. In the
event that we defaulted on one or more of these loans, the lender could have
foreclosed on all or a portion of the pledged securities. Such an event could
have caused a change of control in our company because Messrs. Gallagher and
Shields together own 71% of our outstanding common stock. The lines of credit
agreements included certain financial and non-financial covenants and
restrictions. The agreements also contained a provision whereby the lender could
have declared a default based on subjective criteria. As of June 30, 2000, we
were not in compliance with certain of the financial covenants in the
agreements.
On October 5, 2000, we received a waiver of the covenant violations existing at
the June 30, 2000 reporting date for the American Micro and Nor'Easter lines of
credit. Our company and the bank terminated the existing lines of credit and
entered into a new borrowing arrangement whereby each of American Micro and
Nor'Easter have a working capital line of credit equal to the lesser of (i) $1.5
million or (ii) the sum of 85% of eligible accounts receivable, plus the lesser
of 50% of eligible inventory or $750,000. Interest will be paid monthly at a
floating rate of .5% over the bank's base rate. The term of the new arrangements
is for one year from the closing date. The new facilities also require the
companies to maintain depository accounts at the bank, whose daily receipts will
be applied against outstanding borrowings under the lines of credit. As a
result, the borrowings are classified as current liabilities on our consolidated
condensed balance sheet at September 30, 2000. The new facilities also place
certain restrictions on our ability to pay dividends and to make capital
expenditures, among other things, and includes a provision whereby the lender
can declare a default based on subjective criteria. Collateral under the new
credit line facilities consists of a first priority lien on all assets of
American Micro and Nor'Easter. Messrs. Gallagher and Shields guaranteed the
borrowings under these arrangements. Mr. Shields has pledged personal assets as
additional collateral and has further agreed to maintain certain personal
financial statement liquidity levels. These borrowings are cross-collateralized
and cross-defaulted with borrowings under the $1.5 million term loan to European
Micro Holdings, Inc. We were not in compliance with certain loan agreement
financial covenants at September 30, 2000. The Company has obtained waivers from
these covenant violations existing at September 30, 2000.
LONG-TERM CAPITAL. Our long-term capital needs have historically been met from
the sales of securities and long-term borrowings. In June 1998, we received $9.3
million in gross proceeds from our initial public offering of 933,900 shares of
common stock. Our company incurred total expenses in connection with the
offering of $2.2 million. These proceeds have been used to acquire Sunbelt and
American Micro and to fund operations.
24
EUROPEAN MICRO HOLDINGS, INC.
On October 28, 1999, we obtained a $1.5 million term loan. The term loan
agreement is with the same lender as the Nor'easter Micro and American Micro
line of credit facilities discussed above. Further, the term loan contains
similar loan covenants. The term loan is to be repaid with quarterly payments of
$125,000 over three years. The term loan bears interest at the one-month LIBOR,
plus 2.25%. One-month LIBOR at September 30, 2000 was 6.62%. At September 30,
2000, the outstanding balance on the term loan was $1,000,000. The term loan is
secured by substantially all of the assets of our company. As partial security
for this loan, Messrs. Gallagher and Shields pledged to the lender a portion of
their shares of common stock of our company. In addition, Mr. Shields has
pledged personal assets as additional collateral and has further agreed to
maintain certain personal financial statement liquidity levels. In the event we
default on this loan, the lender may foreclose on all or a portion of the
pledged securities. Such an event may cause a change of control in our company
because Messrs. Gallagher and Shields together own 71% of our outstanding common
stock. The term loan agreement includes certain financial and non-financial
covenants and restrictions. The agreement also contains a provision whereby the
lender can declare a default based on subjective criteria. As described above,
we were not in compliance with the loan covenants on June 30, 2000. The lender
waived this non-compliance in October 2000 and amended the term loan agreement,
including revising the financial covenants. As of September 30, 2000, we were
not in compliance with certain of the revised loan agreement financial
covenants. Our company has obtained waivers from these covenant violations
existing at September 30, 2000.
On July 1, 1999, we acquired American Micro for a purchase price of $1,131,00,
plus an earn-out. The portion of the purchase price paid at closing was funded
through our working capital. The contingent earn-out payment relating to two
times the after tax earnings for calendar year 1999 of approximately $600,000
was paid in March 2000. The remaining earn-out portion of the purchase price
relating to two times the after tax earnings for calendar year 2000 is expected
to be funded through our working capital and a note payable to the former
stockholders of American Micro. Pursuant to the original merger agreement, the
remaining earn-out portion was to be due no later than May 1, 2001. The former
stockholders of American Micro have agreed that, until July 1, 2001 and
thereafter for so long as the repayment of the earn-out is limited by the loan
covenants with SouthTrust Bank, we will pay the stockholders $50,000 per month,
plus 8% interest, commencing April 1, 2001. The remaining unpaid earn-out amount
will be payable July 1, 2001 to the extent not limited by such covenants.
On July 16, 1999, European Micro UK purchased the office building in which it
had previously been leasing space for 1,705,000 pounds sterling ($2,518,000 at
September 30, 2000). The purchase price was financed in part by a loan in the
amount of 1,312,000 pounds sterling ($1,937,000 at September 30, 2000). This
loan calls for monthly payments of principal and interest in the amount of
15,588 pounds sterling ($23,019 at September 30, 2000) and matures in July 2009.
The mortgage loan bears interest at a fixed rate of 7.6%. The mortgage loan
includes certain financial and non-financial covenants and restrictions. The
agreement also contains a provision whereby the lender can declare a default
based on subjective criteria. The financial covenants are measured using the
financial results of European Micro UK as of each fiscal year end. Based upon
European Micro UK's fiscal year end operating results, European Micro UK was out
of compliance with certain of the covenant requirements at June 30, 2000. The
lender waived this non-compliance through July 1, 2001.
On August 24, 2000, European Micro Holdings, Inc. entered into an equity line of
credit with Spinneret Financial System, Ltd. Pursuant to the equity line of
credit, Spinneret Financial agreed to acquire up to $20 million of our common
stock at a purchase price equal to 88% of the market price of such stock. The
timing of each sale and the number of shares to be sold is at our discretion,
subject to various conditions, including an effective registration of the
shares. The dollar amount that our company can request under any individual sale
is subject to the average trading volume of our common stock for the preceding
25-day trading period. The maximum term of the equity line of credit is 30
months from the date of the agreement. The agreement contains various
representations, warranties and covenants by us, including limitations on our
ability to sell common stock or common stock equivalents, sell assets, merge, or
enter into certain other transactions.
Net cash used by operating activities during the three-month period to September
30, 2000 amounted to $827,000. Significant factors in the use of cash were an
increase in inventory of $1.3 million, a decrease in trade payables of $596,000,
and a decrease in accrued expenses and other current liabilities of $274,000.
The amount of cash used by the Company's operations was partially offset by a
net income before non-cash expenses in the period of $434,000 and a decrease in
trade receivables of $566,000.
Cash used in investing activities amounted to $98,000. This primarily consisted
of expenditures on fixed assets of $144,000, net the sale of fixed assets of
$46,000.
Cash provided by financing activities amounted to $238,000. This primarily
consisted of $397,000 provided by short-term borrowings and payments on
long-term debt of $159,000.
25
EUROPEAN MICRO HOLDINGS, INC.
Overall, the Company experienced a net decrease in cash of $640,000 for the
three-month period ended September 30, 2000.
ASSET MANAGEMENT
INVENTORY. Our goal is to achieve high inventory turns and maintain a low
inventory level and thereby reduce our working capital requirements. Our
strategy to achieve this goal is to effectively manage our inventory and to
achieve high order fill rates. Inventory levels may vary from period to period,
due to factors including increases or decreases in sales levels, our practice of
making large-volume purchases when it deems such purchases to be attractive, new
products and changes in our product mix.
ACCOUNTS RECEIVABLE. We sell products and services to a customer base of more
than 770 value-added resellers, corporate resellers, retailers and direct
marketers. We offer credit terms to qualifying customers and also sell on a
pre-pay and cash-on-delivery basis. With respect to credit sales, we attempt to
control our bad debt exposure by monitoring customers' creditworthiness and,
where practicable, through participation in credit associations that provide
customer credit rating information for certain accounts. Also, substantially all
of European Micro UK's accounts receivables are insured. Nor'Easter, Colchester
and American Micro generally do not insure their accounts receivable.
CURRENCY RISK MANAGEMENT
REPORTING CURRENCY. European Micro Holding's, Nor'Easter's and American Micro's
reporting and functional currency, as defined by Statement of Financial
Accounting Standards No. 52, is the U.S. dollar. The functional currency of
European Micro UK is the U.K. pound sterling and Colchester is the Singapore
dollar. European Micro UK and Colchester translate into the reporting currency
by measuring assets and liabilities using the exchange rates in effect at the
balance sheet date and results of operations using the average exchange rates
prevailing during the period.
HEDGING AND CURRENCY MANAGEMENT ACTIVITIES. We occasionally hedge to guard
against currency fluctuations between the U.K. pound sterling and the U.S.
dollar. Because the functional currency of our company's main operating
subsidiary, European Micro UK, is the U.K. pound sterling, currency fluctuations
of the U.K. pound sterling relative to the U.S. dollar may have a material
adverse effect on our business, financial condition and results of operations.
We may engage in hedging activities in the future, although no assurances can be
given that it will engage in such activities and if we do so that such
activities will be successful.
Generally, our policy is not to hedge specifically against individual daily
transactions. Instead, the exposure to a currency is determined every two to
three days. This is done by comparing the bank account balances and account
receivables with accounts payable, all in the same currency to create a
"natural" hedge. Thereafter, to the extent that a bank balance and the account
receivable are not totally offset by the accounts payable, there would be a need
to cover the residual credit balance with a forward currency contract. We tend
to concentrate our currency management into seven currencies: Euro, U.K. pound
sterling, U.S. dollar, Dutch guilder, Canadian dollar, Singapore dollar and
German Mark. We normally deem the exposure in other currencies to be minimal.
However, when we buy products in other currencies, we may, in conjunction with
current market advice, book a forward contract to cover current and some
anticipated future purchases.
ECONOMIC AND MONETARY UNION. On January 1, 1999, eleven of the fifteen member
countries of the European Union established fixed conversion rates between their
existing sovereign currencies and a new currency called the "Euro." These
countries adopted the Euro as their common legal currency on that date. The Euro
is trading on currency exchanges and is available for non-cash transactions.
Until January 1, 2002, the existing sovereign currencies will remain legal
tender in these countries. On January 1, 2002, the Euro is scheduled to replace
the sovereign legal currencies of these countries. Through the operations of
European Micro UK, we have significant operations within the European Union,
including many of the countries that adopted the Euro. We continue to evaluate
the impact that the Euro will have on our continuing business operations and no
assurances can be given that the Euro will not have a material adverse effect on
our business, financial condition and results of operations. However, we do not
expect the Euro to have a material effect on our competitive position as a
result of price transparency within the European Union because we do not rely on
currency imbalances in purchasing inventory from within the European Union. In
the first seven quarters of trading, the Euro devalued against sterling by
19.1%, adversely affecting the value of our trade receivables denominated in
Euros. Going forward, we cannot accurately predict the impact the Euro will have
on currency exchange rates or our currency exchange rate risk. The Internal
Revenue Service ("IRS") has requested comments on various tax issues raised by
the Euro conversion. The IRS is expected to publish guidelines on this issue
and, until such time, we cannot predict whether the IRS guidelines will have any
tax consequences on us.
26
EUROPEAN MICRO HOLDINGS, INC.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We utilize derivative financial instruments in the form of forward foreign
exchange contracts for the purpose of economic hedges of anticipated sale and
purchase transactions. In addition, we enter into economic hedges for the
purposes of hedging foreign currency market exposures of underlying assets,
liabilities and other obligations that exist as part of its ongoing business
operations.
Where the foreign currency exposure is covered by a forward foreign exchange
contract the asset, liability or other obligation is recorded at the contracted
rate each month end and the resultant mark-to-market gains and losses are
recognized as cost of sales in the current period, generally consistent with the
period in which the gain or loss of the underlying transaction is recognized.
Cash flows associated with derivative transactions are classified in the
statement of cash flows in a manner consistent with those of the exposure being
hedged.
EXCHANGE RATE SENSITIVITY
On September 30, 2000, the Company did not have any open forward foreign
exchange contracts. Foreign currency losses, net were $151,000 "for the 3 months
ended" September 30, 2000, and $242,000 for the comparable period in 1999.
27
EUROPEAN MICRO HOLDINGS, INC.
PART II
ITEM 1. LEGAL PROCEEDINGS.
On November 12, 1999, Jeffrey and Marie Alnwick (the "ALNWICKS") and a New York
corporation, Big Blue Products, commenced an action individually and
derivatively for the Dutch company, Big Blue Europe, against our company and our
founders and officers, John B. Gallagher and Harry D. Shields in the United
States District Court, Eastern District of New York, Jeffrey Alnwick and Marie
Alnwick v. European Micro Holdings, Inc., Eastern District of New York, Docket
No. 99 CV 7380 (the "ALNWICK LITIGATION").
The complaint alleges thirty-three causes of action. Plaintiffs claim, in
substance, that defendants breached oral and written agreements relating to the
management, operation and funding of Big Blue Europe. Specifically, plaintiffs
alleged that defendants breached the joint venture agreement by which Big Blue
Europe was formed, a licensing agreement for use of the "Big Blue" service mark
in Europe, a non-competition agreement preventing Big Blue Europe from operating
in the United States and several capital contribution agreements. Plaintiffs
also claimed that defendants breached their fiduciary duties to the Alnwicks,
engaged in fraudulent acts, aided and abetted breaches of fiduciary duties by
others, misappropriated trade secrets and interfered with the employment
contract of Big Blue Europe's managing director. The complaint seeks unspecified
compensatory and punitive damages, as well as injunctive relief restraining
defendants from acting in violation of the alleged agreements.
Defendants have moved to dismiss the complaint principally on the basis of forum
non-conveniens in favor of existing proceedings in the Netherlands (commenced by
European Micro UK), where a Dutch court has appointed an independent director to
oversee the operations of the company. Defendants argue that any dispute between
the stockholders and directors of the Dutch company, Big Blue Europe, which
operates pursuant to Dutch law, should be resolved by a Dutch court.
Our company and our affiliated defendants intend to contest the claims in the
Alnwick Litigation vigorously, whether asserted in the United States or in the
Netherlands courts.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
(a), (b), (c) and (d). None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
At September 30, 2000, European Micro UK was not in compliance with certain
financial covenants contained in the European Micro UK Inventory Facility. From
June 30, 2000 to September 30, 2000, no amounts were outstanding under the
agreement. As a result of this non-compliance, European Micro UK will not be
able to borrow against this revolving credit agreement until it is in compliance
with such financial covenants. See Note 6 to the Consolidated Condensed
Financial Statements.
As of September 30, 2000, the Company was not in compliance with certain
financial covenants contained in the Nor-Easter and American Micro lines of
credit. In addition, the Company was not in compliance with certain financial
covenants contained in the European Micro Holdings' term loan. The Company has
obtained waivers from these covenant violations existing at September 30, 2000.
See Notes 6 and 7 to the Consolidated Condensed Financial Statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
(a) The Company held its 2000 Annual Meeting of Stockholders on October 30,
2000.
(b) At the annual meeting, the stockholders re-elected the Class III directors
named in the following table by the vote set forth in such table for a
three-year term to expire in 2003. The names of the directors whose terms of
office as directors continued after the meeting were: Barrett Sutton, Kyle
Saxon, and Laurence Gilbert.
NAME: FOR: AGAINST: WITHHELD:
----- ---- -------- ---------
Harry D. Shields 3,506,246 0 26,950
John B. Gallagher, Jr. 3,506,246 0 26,950
28
EUROPEAN MICRO HOLDINGS, INC.
(c) The only other matter voted upon at the Annual Meeting of Stockholders was
to approve the issuance of shares of the Company's common stock pursuant to an
Equity Line of Credit Agreement (the "EQUITY LINE OF CREDIT") dated as of August
24, 2000, between the Company and Spinneret Financial System, Ltd., as well as
the issuance of shares of the Company's common stock pursuant to the exercise of
warrants issued in connection with the Equity Line of Credit.
The following table sets forth the number of votes for, against or withheld.
FOR: ABSTAIN:
3,505,946 27,250
(d) None.
The foregoing matters are described in detail in the Company's Proxy Statement
dated October 19, 2000 for the 2000 Annual Meeting of Stockholders.
ITEM 5. OTHER INFORMATION.
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
EXHIBIT
NO. DESCRIPTION LOCATION
- --- ----------- --------
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.
2.05 Amendment to Merger Agreement re: AMCC dated Incorporated by reference to Exhibit 2.05
October 2, 2000 to Registrant's
Registration Statement on Form
S-1 filed on October 27, 2000.
3.01 Articles of Incorporation Incorporated by reference to Exhibit No.
3.01 to Registrant's Registration
Statement (the "Registration Statement")
on Form S-1 (Registration Number
333-44393).
3.02 Certificate of Amendment of Articles of Incorporated by reference to Exhibit 3.02
Incorporation to Registrant's Form 10-Q for the quarter
ended March 31, 1998.
29
EXHIBIT
NO. DESCRIPTION LOCATION
- --- ----------- --------
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 Stockholders' Cross-Purchase Agreement by and Incorporated by reference to Exhibit No.
between Jeffrey Gerard Alnwick, Marie Alnwick, 10.07 to the Registration Statement.
European Micro Plc and Big Blue Europe, B.V. dated
August 21, 1997
10.07 Trusteed Stockholders Cross-Purchase Agreement by Incorporated by reference to Exhibit No.
and between John B. Gallagher, Harry D. Shields, 10.08 to the Registration Statement.
Thomas H. Minkoff, Trustee of the Gallagher Family
Trust, Robert H. True and Stuart S. Southard,
Trustees of the Henry Daniel Shields 1997
Irrevocable Educational Trust, European Micro
Holdings, Inc. and SunTrust Bank, Nashville, N.A.,
as Trustee dated January 31, 1998
10.08 Executive Employment Agreement between John B. Incorporated by reference to Exhibit No.
Gallagher and European Micro Holdings, Inc. 10.09 to the Registration Statement.
effective as of January 1, 1998
10.09 Executive Employment Agreement between Harry D. Incorporated by reference to Exhibit No.
Shields and European Micro Holdings, Inc. 10.10 to the Registration Statement.
effective as of January 1, 1998
10.10 Contract of Employment Agreement between Laurence Incorporated by reference to Exhibit No.
Gilbert and European Micro UK dated March 14, 1998 10.11 to the Registration Statement.
30
EXHIBIT
NO. DESCRIPTION LOCATION
- --- ----------- --------
10.11 Subscription Agreement by and between John B. Incorporated by reference to Exhibit No.
Gallagher, Harry D. Shields, Thomas H. Minkoff, 10.13 to the Registration Statement.
Trustee of the Gallagher Family Trust, Robert H.
True and Stuart S. Southard, Trustees of the Henry
Daniel Shields 1997 Irrevocable Educational Trust,
European Micro Holdings, Inc. effective as of
January 31, 1998
10.12 Administrative Services Contract by and between Incorporated by reference to Exhibit No.
European Micro Holdings, Inc. and European Micro 10.14 to the Registration Statement.
Plc effective as of January 1, 1998
10.13 Escrow Agreement between European Micro Holdings, Incorporated by reference to Exhibit No.
Inc., Tarpon Scurry Investments, Inc. and The 10.15 to the Registration Statement.
Chase Manhattan dated as of March 24, 1998
10.14 Form of Indemnification Agreements with officers Incorporated by reference to Exhibit No.
and directors 10.16 to the Registration Statement.
10.15 Form of Transfer Agent Agreement with Chase Mellon Incorporated by reference to Exhibit No.
Stockholder Services, L.L.C. 10.17 to the Registration Statement.
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 Incorporated by reference to Exhibit 10.19
between American Micro and SouthTrust Bank re: to Registrant's Form 10-K for the year
Line of Credit to American Micro ended June 30, 2000.
10.20 First Amendment to Loan Agreement dated October 5, Incorporated by reference to Exhibit 10.20
2000 among the Company, American Micro, Nor'Easter to Registrant's Form 10-K for the year
and SouthTrust Bank, N.A. re: Term Loan to the ended June 30, 2000.
Company
10.21 Revolving Loan Agreement dated October 5, 2000 Incorporated by reference to Exhibit 10.21
between Nor'Easter and SouthTrust Bank re: Line of to Registrant's Form 10-K for the year
Credit to Nor'Easter ended June 30, 2000.
10.22 Loan Agreement dated October 28, 1999 among the Incorporated by reference to Exhibit 10.23
Company, American Micro, Nor'Easter and SouthTrust to Registrant's Form 10-Q for the quarter
Bank, N.A. re: Term Loan to the Company ended September 30, 1999.
10.23 Security Agreement dated October 5, 2000 between Incorporated by reference to Exhibit 10.23
Nor'Easter and SouthTrust Bank to Registrant's Form 10-K for the year
ended June 30, 2000.
10.24 Security Agreement dated October 5, 2000 between Incorporated by reference to Exhibit 10.24
American Micro and SouthTrust Bank to Registrant's Form 10-K for the year
ended June 30, 2000.
10.25 Line of Credit Note given by Nor'Easter to Incorporated by reference to Exhibit 10.25
SouthTrust Bank to Registrant's Form 10-K for the year
ended June 30, 2000.
31
EXHIBIT
NO. DESCRIPTION LOCATION
- --- ----------- --------
10.26 Line of Credit Note given by American Micro to Incorporated by reference to Exhibit 10.26
SouthTrust Bank to Registrant's Form 10-K for the year
ended June 30, 2000.
10.27 Unconditional Guaranty given by Harry Shields to Incorporated by reference to Exhibit 10.27
SouthTrust Bank Re: American Micro to Registrant's Form 10-K for the year
ended June 30, 2000.
10.28 Unconditional Guaranty given by John Gallagher to Incorporated by reference to Exhibit 10.28
SouthTrust Bank Re: American Micro to Registrant's Form 10-K for the year
ended June 30, 2000.
10.29 Amended and Restated Unlimited Guaranty Agreement Incorporated by reference to Exhibit 10.29
dated October 5, 2000 between Harry Shields and to Registrant's Form 10-K for the year
SouthTrust Bank ended June 30, 2000.
10.30 Amended and Restated Unlimited Guaranty Agreement Incorporated by reference to Exhibit 10.30
dated October 5, 2000 between John Gallagher and to Registrant's Form 10-K for the year
SouthTrust Bank ended June 30, 2000.
10.31 Unconditional Guaranty given by John Gallagher to Incorporated by reference to Exhibit 10.31
SouthTrust Bank Re: Nor'Easter to Registrant's Form 10-K for the year
ended June 30, 2000.
10.32 Unconditional Guaranty given by Harry Shields to Incorporated by reference to Exhibit 10.32
SouthTrust Bank Re: Nor'Easter to Registrant's Form 10-K for the year
ended June 30, 2000.
10.33 Specific Agreement for the Provision of Incorporated by reference to Exhibit 10.25
Professional Services dated as of March 17, 2000 to Registrant's Form 10-Q for the quarter
between the Company and Cap Gemini UK Plc ended March 31, 2000.
10.34 Equity Line of Credit Agreement dated as of August Incorporated by reference to Exhibit 10.34
24, 2000, between the Company and Spinneret to Registrant's Form 10-K for the year
Financial System, Ltd. ended June 30, 2000.
10.35 Registration Rights Agreement dated as of August Incorporated by reference to Exhibit 10.35
24, 2000, between the Company and Spinneret to Registrant's Form 10-K for the year
Financial System, Ltd. ended June 30, 2000.
10.36 Warrant to Purchase Common Stock dated as of Incorporated by reference to Exhibit 10.36
August 24, 2000, given by the Company to Spinneret to Registrant's Form 10-K for the year
Financial System, Ltd. ended June 30, 2000.
10.37 Warrant to Purchase Common Stock dated as of Incorporated by reference to Exhibit 10.37
August 24, 2000, given by the Company to the May to Registrant's Form 10-K for the year
Davis Group, Inc. ended June 30, 2000.
10.38 Registration Rights Agreement dated as of August Incorporated by reference to Exhibit 10.38
24, 2000, between the Company and the May Davis to Registrant's Form 10-K for the year
Group, Inc. ended June 30, 2000.
10.39 Placement Agent Agreement dated as of August 24, Incorporated by reference to Exhibit 10.39
2000, between the Company and the May Davis Group, to Registrant's Form 10-K for the year
Inc. ended June 30, 2000.
11.01 Statement re: Computation of Earnings Provided herewith.
15.01 Letter re: Unaudited Financial Information Not applicable.
32
EXHIBIT
NO. DESCRIPTION LOCATION
- --- ----------- --------
18.01 Letter re Change in Accounting Principles Not applicable.
19.01 Report Furnished to Security Holders Not applicable.
21.01 Subsidiaries of the Registrant Not applicable.
22.01 Published Report Regarding Matters Submitted to Not applicable.
Vote of Security Holders
23.01 Consent of Experts Not applicable.
24.01 Power of Attorney Not applicable.
27.01 Financial Data Schedule Provided herewith.
(b) Reports on Form 8-K.
None.
33
EUROPEAN MICRO HOLDINGS, INC.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Dated: November 20, 2000 EUROPEAN MICRO HOLDINGS, INC.
By: /s/ John B. Gallagher
------------------------
John B. Gallagher, Co-President
34