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 (Fee Required)
For the quarterly period ended March 31, 1998
|_| Transition report under Section 13 or 15(d) of the Securities
Exchange Act of 1934
(No Fee Required)
For the transition period from _______ to _______.
Commission File No. 333-44393
EUROPEAN MICRO HOLDINGS, INC.
(Name of Registrant as Specified in Its Charter)
NEVADA 65-0803752
- ------ ----------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
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 |_| No |X|
There were 4,000,000 shares of Common Stock outstanding as of April 6,
1998, the effective date of the Registrant's Registration Statement (the
"Registration Statement") on Form S-1 filed by the Registrant on January 16,
1998 (File No. 333-44393). The number of shares of Common Stock outstanding as
of April 6, 1998 does not reflect the sale of any shares of Common Stock
pursuant to the Registration Statement.
EUROPEAN MICRO HOLDINGS, INC.
PART I
FINANCIAL INFORMATION
- ---------------------
ITEM 1. FINANCIAL STATEMENTS.
--------------------
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets as of June 30, 1997
and March 31, 1998...................................................3
Consolidated Statements of Earnings for the three
and nine months ended March 31, 1997 and 1998........................4
Consolidated Statement of Changes in Shareholders' Equity
for the nine months ended March 31, 1998.............................5
Consolidated Statements of Cash Flows for the nine months
ended March 31, 1997 and 1998........................................6
Notes to Consolidated Financial Statements..............................7
2
EUROPEAN MICRO HOLDINGS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
MARCH 31, JUNE 30,
1998 1997
ASSETS
CURRENT ASSETS:
Cash $ 613 288
Trade receivables, net 6,760 2,956
Discounted trade receivables 5,009 2,779
Due from related parties 59 569
Inventories, net 4,037 1,560
Deferred tax asset 3 -
Prepaid expenses 214 75
Other current assets 2,387 37
------- -------
TOTAL CURRENT ASSETS 19,082 8,264
Property and equipment, net 599 389
Investments 212 191
------- -------
TOTAL ASSETS $19,893 8,844
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Bank overdraft $ 4,279 1,034
Discount creditor 4,007 2,223
Trade payables 676 2,038
Other current liabilities 2,280 376
Due to related parties 958 188
Income taxes payable 2,019 375
Deferred income taxes - 54
------- ------
TOTAL CURRENT LIABILITIES 14,219 6,288
Long term borrowings 84 45
------- -------
TOTAL LIABILITIES 14,303 6,333
------- -------
Commitments & contingencies - -
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 at, 1997 and 1998, shares issued
and outstanding, 4,000,000 at 1998 and 1997 40 40
Additional paid in capital 1,624 1,624
Retained earnings 3,850 826
Cumulative foreign currency translation adjustment 76 21
------- -------
TOTAL SHAREHOLDERS' EQUITY 5,590 2,511
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $19,893 8,844
======= =======
3
EUROPEAN MICRO HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED) (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
1998 1997 1998 1997
SALES:
Net sales $27,422 13,571 59,571 33,165
Net sales to related parties 11,708 - 25,667 65
------- ------ ------ ------
Total net sales 39,130 13,571 85,238 33,230
------- ------ ------ ------
COST OF GOODS SOLD:
Cost of goods sold (20,936) (12,117) (48,990) (29,455)
Cost of goods sold to related parties (11,613) - (25,287) (65)
------ ------ ------ ------
Cost of goods sold (32,549) (12,117) (74,277) (29,520)
------ ------ ------ ------
GROSS PROFIT 6,581 1,454 10,961 3,710
OPERATING EXPENSES:
Selling, general and
administrative expenses (2,842) (822) (5,248) (2,338)
Expenses attributable to
related parties (31) (32) (104) (104)
------ ------ ------ ------
Total operating expenses (2,873) (854) (5,352) (2,442)
------ ------ ------ ------
OPERATING PROFIT 3,708 600 5,609 1,268
Interest expense, net (117) (93) (328) (145)
Equity in net income (loss) of
unconsolidated affiliate 2 (49) 23 (49)
------ ------ ------ ------
INCOME BEFORE INCOME TAXES 3,593 458 5,304 1,074
Taxes on income (1,213) (167) (1,770) (402)
------ ------ ------ ------
NET INCOME $2,380 291 3,534 672
====== ====== ====== ======
BASIC AND DILUTED EARNINGS PER SHARE $ 0.60 0.07 0.88 0.17
====== ====== ===== ======
4
EUROPEAN MICRO HOLDINGS, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
CUMULATIVE
RETAINED FOREIGN
ADDITIONAL EARNINGS CURRENCY TOTAL
PAID IN ACCUMULATED TRANSLATION SHAREHOLDERS'
COMMON STOCK CAPITAL LOSSES) ADJUSTMENT EQUITY
Shares Amount
Balance at June 30, 1997 4,000,000 $40 1,624 826 21 2,511
Net income - - - 3,534 - 3,534
Dividends declared ($0.14 per
share) - - - (550) - (550)
Foreign currency translation - - - 40 55 95
adjustment - - - 40 55 95
--------- --- ----- ----- -- -----
Balance at March 31, 1998 4,000,000 $40 1,624 3,850 76 5,590
========= === ===== ===== == =====
5
EUROPEAN MICRO HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
MARCH 31,
1998 1997
OPERATING ACTIVITIES:
Net income $3,534 672
ADJUSTMENTS TO RECONCILE NET INCOME
TO NET CASH (USED IN) PROVIDED BY
OPERATING ACTIVITIES
Depreciation and other 120 126
Provision for deferred taxes (57) 33
Equity in net loss (income) of (21) 49
unconsolidated affiliate
CHANGES IN ASSETS AND LIABILITIES
Trade receivables (6,034) (3,095)
Due from related parties 510 708
Inventory (2,477) 60
Other current assets (2,489) (218)
Trade payables (1,362) 310
Due to related parties 770 (725)
Taxes payable 1,644 51
Other net 1,879 214
------ ------
NET CASH (USED IN) PROVIDED BY
OPERATING ACTIVITIES (3,983) (1,815)
------ ------
INVESTING ACTIVITIES:
Purchase of fixed assets (451) (196)
Sale of fixed assets 121 34
Investment in unconsolidated affiliate - (264)
------ ------
NET CASH USED IN INVESTING ACTIVITIES (330) (426)
------ ------
FINANCING ACTIVITIES:
Dividends paid (550) (416)
Repayment of capital 64 -
leases, net
Change in bank overdraft 3,245 (424)
Change in discounting creditor 1,784 3,037
------ ------
NET CASH PROVIDED BY (USED IN ) 4,543 2,197
FINANCING ACTIVITIES
Exchange rate changes 95 (125)
------ ------
NET (DECREASE) INCREASE IN CASH 325 (169)
Cash at beginning of period 288 322
------ ------
CASH AT END OF PERIOD $613 153
====== ======
Interest paid 117 145
====== ======
Taxes paid 261 397
====== ======
6
EUROPEAN MICRO HOLDINGS, INC.
NOTES TO THE CONSOLIDATED 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 Registration
Statement on Form S-1 which was filed on January 16, 1998 (the "Registration
Statement") and was declared effective on April 6, 1998 by the Securities and
Exchange Commission.
In the Company's opinion, all adjustments necessary for a fair presentation of
these interim statements have been included and are of a normal and recurring
nature.
2 INVENTORY
Inventories comprise (in thousands):
MARCH 31, JUNE 30,
1998 1997
Finished goods and goods for resale $4,411 1,595
Less: Allowance for inventory obsolescence (374) (35)
------ -----
$4,037 1,560
====== =====
As of June 30, 1997, the Company's inventory was insured against theft or damage
to the extent of $1,560,000. The maximum value of inventory insured under the
Company's insurance cover in place at June 30, 1997 was $2,900,000. As at March
31, 1998, the insured value of inventory was $7,536,000.
Obsolescence comprise (in thousands):
MARCH 31, JUNE 30,
1998 1997
Beginning balance $35 116
Provision for obsolescence 422 (81)
Amounts written off (83) -
---- ---
Ending balance $374 35
==== ===
7
EUROPEAN MICRO HOLDINGS, INC.
Notes to the Consolidated Financial Statements (CONTINUED)
3 OTHER CURRENT ASSETS
Other current assets comprise (in thousands):
MARCH 31, JUNE 30,
1998 1997
Amounts due re price protection $1,382 -
Deferred issuance costs carried forward 854 -
Other 151 37
------ ---
$2,387 37
====== ===
3 OTHER CURRENT LIABILITIES
Other current liabilities comprise (in thousands):
MARCH 31, JUNE 30,
1998 1997
Accrued expenses $1,186 215
VAT payable 690 33
PAYE and NIC 311 63
Hire purchase and capital leases 69 44
Others 24 21
------ ----
$2,280 376
====== ====
4 SUBSEQUENT EVENTS
On April 6, 1998, the Registration Statement on Form S-1 in connection with an
initial public offering referred to in Note 1 was declared effective by the
Securities and Exchange Commission. As of the date hereof, the Company has not
received any proceeds in connection with the offering as the closing has not yet
taken place.
8
EUROPEAN MICRO HOLDINGS, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
--------------------------------------------------------------------
INTRODUCTORY STATEMENTS
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS. This Quarterly Report
contains forward-looking statements, including statements regarding, among other
things, (a) European Micro Holdings, Inc.'s ("European Micro" or the "Company")
projected sales and profitability, (b) the Company's growth strategies, (c)
anticipated trends in the Company's industry and (d) the Company's future
financing plans. In addition, when used in this Quarterly Report, the words
"believes," "anticipates," "intends," "in anticipation of," "expects," and
similar words are intended to identify certain forward-looking statements. These
forward-looking statements are based largely on the Company's expectations and
are subject to a number of risks and uncertainties, many of which are beyond the
Company's control. Actual results could differ materially from these
forward-looking statements as a result of changes in trends in the economy and
the Company's industry, reductions in the availability of financing and
availability of computer products on terms as favorable as experienced by the
Company in prior periods and other factors. In light of these risks and
uncertainties, there can be no assurance that the forward-looking statements
contained in this Quarterly Report will in fact occur. The Company does not
undertake any obligation to publicly release the results of any revisions to
these forward-looking statements that may be made to reflect any future events
or circumstances.
In the three-month period ended March 31, 1998, the Company experienced
unusually strong operating results due to exceptional opportunities which may
not be indicative of future operating results. In particular, the Company notes
that in the period it purchased computer peripherals on extremely favorable
terms and subsequently sold in the period. The Company does not expect to be
able to regularly purchase, if ever, computer peripherals or other products on
terms as favorable as purchased in the three-month period ended March 31, 1998.
As a result, the Company's operating results for the period may not be
indicative of future operating results. The Company expects its profitability
when measured as a percentage of net sales (i.e. gross margin, return on sales
or otherwise) to be significantly lower in future periods than experienced by
the Company in the three-month period ended March 31, 1998.
OVERVIEW
European Micro is an independent distributor of microcomputer products,
including personal computers, memory modules, disc drives and networking
products, selling products primarily to customers in Western Europe and to
related parties in the United States. European Micro has pursued and expects to
continue to pursue a strategy of purchasing product for resale on the worldwide
surplus or aftermarket, as opposed to purchasing product for resale directly
from manufacturers. European Micro's ability to purchase products for resale in
these markets has to date enabled European Micro to significantly increase net
sales and achieve strong operating results, although such operating results may
not be indicative of future results.
European Micro Holdings, Inc. was formed in December 1997 to serve as a
holding company of two wholly owned subsidiaries, European Micro Plc, a public
limited company organized under the laws of the United Kingdom ("European Micro
9
EUROPEAN MICRO HOLDINGS, INC.
UK"), and Nor'easter Micro, Inc., a Nevada corporation ("Nor'easter"). To date,
the Company has derived substantially all of its operating income and cash flow
from European Micro UK. Nor'easter was formed in December 1997 to serve as an
independent distributor of microcomputer products in the United States.
Nor'easter is a startup company which has not materially contributed to or
affected the Company's business, financial condition and results of operations
in the three-month period ended March 31, 1998.
A majority of the Company's sales were denominated in currencies other
than the United States dollar. Changes in the value of foreign currencies
relative to the United States dollar could adversely affect the Company's
results of operations and cash position. When possible, the Company engages in
currency hedging transactions primarily through the purchase and sale of forward
exchange contracts intended to reduce these risks, although there can be no
assurance that the Company's hedging transactions will be successful in reducing
such risks. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Currency Risk Management."
RESULTS OF OPERATIONS
The following table sets forth, for the periods presented, the percentage
of net sales represented by certain items in European Micro's Consolidated
Statements of Earnings:
PERCENTAGE OF NET SALES
(UNAUDITED) (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
1998 1997 1998 1997
---- ---- ---- ----
Net sales to third parties 70.1% 100.0% 69.9% 99.8%
Net sales to related parties 29.9% 0.0% 30.1% 0.2%
------ ------ ------- ------
Total net sales 100.0% 100.0% 100.0% 100.0%
------ ------ ------- ------
Cost of goods sold to third
parties (53.5%) (89.3%) (57.4%) (88.6%)
Cost of goods sold to
related parties (29.7%) (0.0%) (29.7%) (0.2%)
------ ------ ------- ------
Total cost of goods sold (83.2%) (89.3%) (87.1%) (88.8%)
------ ------ ------ ------
Gross profit 16.8% 10.7% 12.9% 11.2%
Operating expenses (7.3%) (6.3%) (6.3%) (7.4%)
------ ------ ------- ------
Operating profit 9.5% 4.4% 6.6% 3.8%
Interest expense (0.3%) (0.7%) (0.4%) (0.4%)
Share of (loss)/ income in the
in the unconsolidated affiliate 0.0% (0.4%) 0.0% (0.1%)
------ ------ ------ ------
Income before income taxes 9.2% 3.3% 6.2% 3.2%
Provision for income taxes (3.1%) (1.2%) (2.1%) (1.2%)
------ ------ ------- ------
Net Income 6.1% 2.1% 4.1% 2.0%
====== ====== ====== ======
10
EUROPEAN MICRO HOLDINGS, INC.
THREE-MONTH PERIOD ENDED MARCH 31, 1998 AND 1997
TOTAL NET SALES. Total net sales increased $25.6 million, or 188.3%, from
$13.6 million in the three-month period ended March 31, 1997 to $39.1 million in
the comparable period in 1998. This increase was attributable to sales to
related parties (accounting for approximately $11.7 million) and the purchase of
computer peripherals which were acquired by the Company on exceptional terms
(accounting for approximately $13.8 million) and subsequently sold. There can be
no assurance that the Company will be able to maintain the level of sales or
sales growth achieved in this period because the Company does not expect to be
able to achieve the exceptional opportunities in connection with the purchase of
peripherals or other products on terms as favorable as achieved in the
three-month period ended March 31, 1998.
Net sales to related parties increased to $11.7 million in the three-month
period ended March 31, 1998. This increase is attributable to purchases of
computer peripherals made on behalf of related parties. The related parties
consist of a group of entities in which an ownership interest is held by either
of the two primary shareholders of the Company, John B. Gallagher or Harry D.
Shields. In order to facilitate fast and efficient international transactions,
each member of the group has acted as a supplier for, and purchaser from, the
other members of the group. The group has attempted to price inter-group sales
at one percent above the selling group member's cost, although the group has
made numerous exceptions in times of short supply, to cover assembly costs and
to reward certain group members for exceptional low-cost purchases. None of the
members of the group are under any legal obligation to continue to act as a
supplier for or purchaser from the other members of the group. If the Company is
unable to sell product to other members of the group, the Company's revenues
will be significantly reduced and its business, financial condition and results
of operations will be materially adversely affected.
Excluding net sales to related parties, net sales increased $13.8 million,
or 102.1%, from $13.6 million in the three-month period ended March 31, 1997 to
$27.4 million in the comparable period in 1998. This is largely attributable to
the purchase and subsequent sale of computer peripherals during the period. The
Company does not expect to be able to regularly purchase computer peripherals
and other products on terms as favorable as achieved in the three-month period
ended March 31, 1998.
GROSS PROFIT. Gross profit increased $5.1 million, or 340.0%, from $1.5
million in the three-month period ended March 31, 1997 to $6.6 million in the
comparable period in 1998 due principally to greater sales in the period,
including the purchase of computer peripherals which were acquired by the
Company on exceptional terms and subsequently sold. Gross profit excluding
related party transactions increased $5.0 million, or 333.3%, from $1.5 million
11
EUROPEAN MICRO HOLDINGS, INC.
in the three-month period ended March 31, 1997 to $6.5 million the comparable
period in 1998. Gross profit attributable to related party sales was not
significant in the three-month period ended March 31, 1998. The Company's gross
profit in the period was unusually high due to the favorable terms the Company
was able purchase computer peripherals for in the period. The Company expects
its gross profit to be significantly lower in future periods because it does not
expect to achieve the exceptional opportunities in connection with the purchase
of computer peripherals and other products on terms as favorable as achieved in
the three-month period ended March 31, 1998.
Gross margin increased from 10.7% in the three-month period ended March
31, 1997 to 16.8% in the comparable period in 1998. Excluding related party
transactions, gross margin increased from 10.7% in the three-month period ended
March 31, 1997 to 23.7% in the comparable period in 1998. This increase was
largely attributable to higher gross margins associated with the purchase and
subsequent sale of computer peripherals which the Company purchased on
exceptional terms. The Company expects its gross margin to be significantly
lower in future periods because it does not expect to be able to make purchases
similar to that achieved in the three-month period ended March 31, 1998.
OPERATING EXPENSES. Operating expenses as a percentage of total net sales
increased from 6.3% in the three-month period ended March 31, 1997 to 7.3% in
the comparable period in 1998. Excluding related party transactions, operating
expenses as a percentage of net sales increased from 6.1% in the three-month
period ended March 31, 1997 to 10.4% in the comparable period in 1998. Operating
expenses increased primarily due to higher commission and bonus compensation
paid during the period. The Company's commission and bonus compensation is based
on the Company's gross margin. For the reasons set forth above, the Company
achieved higher gross margins in the period which resulted in higher commission
and bonus compensation in the period.
INTEREST EXPENSE. Interest expense increased by $24,000 from $93,000 in
three-month period ended March 31, 1997 to $117,000 in the comparable period in
1998. This was attributable to increased borrowings by the Company to fund its
inventory and accounts receivable.
INCOME TAXES. Income taxes as a percentage of earnings before income taxes
decreased from 36.5% in the three-month period ended March 31, 1997 to 33.8% in
the comparable period in 1998. The decrease was primarily attributable to a
decrease in the amount of disallowed travel and entertainment expenditures for
corporate income tax purposes. The effective rate of income tax may increase as
a result of the change in structure and the mix of sales across the various
countries to which the Company sells its products.
INTEREST IN JOINT VENTURE. The Company's share of income or loss from Big
Blue Europe, B.V., a 50% joint venture, increased from a loss of $49,000 in the
three-month period ended March 31, 1997 to a gain of $2,000 in the comparable
period in 1998. These earnings are attributed to the business maturing past the
start-up stage. The Company expects this trend to continue as Big Blue Europe,
B.V. attracts more customers and further strengthens existing relationships.
12
EUROPEAN MICRO HOLDINGS, INC.
NINE-MONTH PERIOD ENDED MARCH 31, 1998 AND 1997
TOTAL NET SALES. Total net sales increased $52 million, or 156.5%, from
$33.2 million in the nine-month period ended March 31, 1997 to $85.2 million in
the comparable period in 1998. Excluding net sales to related parties, net sales
increased $26.4 million, or 79.6%, from $33.2 million in the nine-month period
ended March 31,1997 to $59.6 million in comparable period in 1998. The increase
in net sales was attributable to sales to related parties (accounting for
approximately $25.6 million), the purchase of computer peripherals on
exceptional terms and subsequently sold in the period (accounting for
approximately $13.8 million), the broadening of the Company's product base
(accounting for approximately $6.0 million), the return of some key personnel
from temporary leave (accounting for approximately $4.0 million) and the growth
of the Premier Dealers Division (accounting for approximately $2.6 million).
There can be no assurance that the Company will be able to maintain the level of
sales or sales growth achieved in this period because the Company does not
expect to be able to regularly purchase peripherals and other products on terms
as favorable as achieved in the three-month period ended March 31, 1998.
Net sales to related parties increased $25.6 million from $65,000 in the
nine-month period ended March 31,1997 to $25.7 million in the comparable period
in 1998. This increase is attributable to purchases of computer peripherals made
on behalf of related parties and subsequently sold them which in turn sold them
to third parties.
GROSS PROFIT. Gross profit increased $7.3 million, or 195.4%, from $3.7
million in the nine-month period ended March 31, 1997 to $11 million in the
comparable period in 1998. Gross profit excluding related party transactions
increased to $10.6 million the nine-month period ended March 31, 1998 from $3.7
million in the same period of the prior year. The Company's gross profit in the
current period was unusually high due to the favorable terms the Company was
able to purchase computer peripherals for in the three-month period ended March
31, 1998. The Company expects its gross profit to be significantly lower in
future periods because it does not expect to be able to regularly purchase
computer peripherals and other products on terms as favorable as purchased in
the three-month period ended march 31, 1998.
Gross margins increased from 11.2% in the nine-month period ended March
31, 1997 to 12.9% in the comparable period in 1998. Excluding related party
transactions, gross margin increased from 11.2% in the nine-month period ended
March 31, 1997 to 17.8% in the comparable period in 1998. The increase in gross
margins was attributable to higher than usual margins caused by the purchase of
computer peripherals in the period which were purchased by the Company on
exceptional terms and subsequently sold. The Company expects its gross margin to
be significantly lower in future periods because it does not expect to be able
to regularly purchase products on as favorable terms as that experienced in the
period.
OPERATING EXPENSES. Operating expenses as a percentage of total net sales
decreased from 7.3% in the nine-month period ended March 31, 1997 to 6.3% in the
comparable period in 1998 due primarily to the increase in total net sales
relative to operating expenses. Operating expenses consist primarily of fixed
costs, such as wages, salaries, rents and rates. Excluding related party
transactions, operating expenses as a percentage of net sales increased from
13
EUROPEAN MICRO HOLDINGS, INC.
7.0% in the nine-month period ended March 31, 1997 to 8.8% in the comparable
period in 1998. Operating expenses as a percentage of net sales increased due to
higher commission and bonus compensation paid during the period. The Company's
commission and bonus compensation is based on the Company's gross margin. For
the reasons set forth above, the Company achieved higher gross margins in the
period which resulted in higher commission and bonus compensation.
INTEREST EXPENSE. Interest expense increased by $183,000 from $145,000 in
nine-month period ended March 31, 1997 to $328,000 in the comparable period in
1998. This was attributable to increased borrowings by European Micro to fund
its inventory and accounts receivable.
INCOME TAXES. Income taxes as a percentage of earnings before income taxes
decreased from 37.4% in the nine-month period ended March 31, 1997 to 33.4% in
the comparable period in 1998. This decrease was attributable to a reduction in
the amount of disallowed travel and entertainment expenditures for corporate
income tax purposes. The effective rate of income tax may increase in the future
periods as a result of the change in structure and the mix of sales across the
various countries to which the Company sells its products.
INTEREST IN JOINT VENTURE. European Micro's share of income or loss from
Big Blue Europe, B.V. increased from a loss of $49,000 in the nine-month period
ended March 31, 1997 to a gain of $23,000 in the comparable period in 1998.
These earnings are attributable to the business maturing past the start-up
stage. The Company expects this trend to continue as Big Blue Europe, B.V.
attracts more customers and further strengthens existing relationships.
SEASONALITY
European Micro typically experiences variability in its total net sales
and net income on a quarterly basis as a result of many factors. These include,
but are not limited to, seasonal variations in demand for the products and
services offered by the Company, the introduction of new hardware and software
technologies and products offering improved features and functionality, the
introduction of new products and services by the Company and its competitors,
the loss or consolidation of a significant supplier or customer, changes in the
level of operating expenses, inventory adjustments, product supply constraints,
competitive conditions including pricing, interest rate fluctuations, the impact
of acquisitions, currency fluctuations and general economic conditions.
Historical operating results have included a reduction in demand in Europe
during the summer months.
LIQUIDITY AND CAPITAL RESOURCES
Short-term working capital requirements are funded by a combination of
overdraft facilities provided by National Westminster Bank Plc together with
accounts receivable financing provided by Lombard NatWest. Both of these
facilities are set and reviewed annually. Short-term obligations must be repaid
within one year. In both cases, the amounts drawn down attract the same rate of
interest based on a markup over the bank borrowing rate in the United Kingdom.
The overdraft facility was $830,000 in fiscal 1997 and was increased to $2.0
million during the nine-month period ended March 31, 1998. The accounts
receivable financing provides for draw-down of 80% of trade receivables.
14
EUROPEAN MICRO HOLDINGS, INC.
Long-term funding is supplied to the Company in the form of capital lease
agreements. Long-term obligations are due for repayment in more than one year.
These agreements are made through both Lloyds Bowmaker and NatWest Vehicle
Solutions, and are secured by vehicles owned by the Company. The agreements are
usually for thirty six months from the date of purchase and are typically for
80% of the purchase value of the vehicle. All but one of the agreements are
subject to variable rate interest. As of March 31, 1998, the borrowings were
$153,000, of which $84,000 was due after more than one year.
European Micro's typical principal need for additional working capital in
fiscal 1998 is expected to be for the purchase of additional inventory to
support growth and to take greater advantage of available cash discounts offered
by certain of European Micro's suppliers for early payment. European Micro is
seeking additional cash for this purpose through the Company's initial public
offering and its existing bank credit lines, but there can be no assurance that
financing will be available on terms acceptable to European Micro. The
unavailability of such financing could adversely affect the Company.
Net cash used in operating activities during the nine-month period to
March 31, 1998 amounted to $3,983,000. Significant factors in the use of cash
were an increase in trade receivables of $6,034,000, an increase in inventory of
$2,477,000, an increase in other current assets of $2,489,000, and a decrease in
trade payables of $1,362,000. The increase in trade receivables was largely
attributable to the increase in net sales primarily in the three-month period
ended March 31, 1998. The increase in inventory was largely attributable to
large quantity purchases of computer products at prices which the Company
considered to be favorable. Many of these purchases were paid for upon receipt
of the products, resulting in a decrease in trade payables. The increase in
other current assets is largely attributable to an increase in receivables due
from suppliers under price protection agreements and the costs incurred and
deferred in connection with the Company's initial public offering. The amount of
cash used in the Company's operations were partially offset by net income in the
period of $3,534,000, cash generated from an increase in payables due to related
parties of $770,000, a reduction in amounts due from related parties of
$510,000, accrued but unpaid taxes of $1,644,000 (due to the increase in net
income) and other accrued but unpaid payables of $1,879,000 consisting primarily
of an increase in the value added tax payable and commission and bonus
compensation payable.
Cash used in investing activities amounted to $330,000, consisting
primarily of expenditures on vehicles of $270,000, fixtures and fittings of
$120,000 and office equipment of $61,000. Cash used in investing activities was
partially offset by the sale of vehicles of $121,000.
Cash provided by financing activities was $4,543,000, of which $3,245,000
was provided by the Company's drawdown of its bank overdraft facility and an
increase in the Lombard NatWest debt discounting facility of $1,784,000. Cash
provided by financing activities was partially offset by dividend payments of
$550,000.
15
EUROPEAN MICRO HOLDINGS, INC.
ASSET MANAGEMENT
INVENTORY. European Micro's goal is to achieve high inventory turns and
maintain a low number of stock keeping units and thereby reduce European Micro's
working capital requirements. European Micro's strategy to achieve this goal is
to both effectively manage its inventory and achieve high order fill rates.
Inventory levels may vary from period to period, due to factors including
increases or decreases in sales levels, European Micro's practice of making
large-volume purchases when it deems such purchases to be attractive, new
products and changes in European Micro's product mix.
ACCOUNTS RECEIVABLE. European Micro sells its products and services to a
customer base of more than 250 value-added resellers, corporate resellers,
retailers and direct marketers. European Micro offers credit terms to qualifying
customers and also sells on a pre-pay and cash-on-delivery basis. With respect
to credit sales, European Micro attempts to control its bad debt exposure by
monitoring customers' creditworthiness and, where practicable, through
participation in credit associations that provide customer credit rating
information for certain accounts. Substantially all of European Micro's accounts
receivables are insured and its positive credit results have allowed European
Micro to enjoy what it believes to be one of the most competitive insurance
rates in the industry.
CURRENCY RISK MANAGEMENT
REPORTING CURRENCY. European Micro Holdings, Inc.'s and Nor'easter Micro,
Inc. reporting and functional currency, as defined by Statement of Financial
Accounting Standards No. 52, is the United States Dollar. The functional
currency of European Micro UK is the United Kingdom Pound Sterling. European
Micro UK translates 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. European Micro Holdings,
Inc. has not yet attempted to protect European Micro UK's Pounds Sterling
based assets from long term swings against the United States Dollar. This
may be given some consideration in the future.
European Micro UK recognizes that it has currency exposure when
transactions are consummated in currency other than Pound Sterling. For example,
for the quarter ended March 31, 1998, purchases of inventory by European Micro
UK, were in pound sterling (79%), Spanish pesetas (15%), United States dollars
(3%) and other (3%). The most significant currencies in which sales were made,
other than pound sterling (30%), were United States dollars (35%), German Mark
(10%), Dutch guilder (8%), French franc (5%) and others (12%). Additionally,
receivables are also significantly spread out over several currencies. Lastly,
to the extent that bank balances are maintained in different currencies that
would also be subject to fluctuations against the pound sterling.
The policy of the Company 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
16
EUROPEAN MICRO HOLDINGS, INC.
receivable are not totally offset by the accounts payable, there would be a need
to cover the residual credit balance with a forward currency contract. The
Company tends to concentrate its currency management into four currencies --
pound sterling, United States dollars, Dutch guilder and German Mark. It
normally deems the exposure in other minor currencies to be minimal. However,
when the Company buys products in other currencies, the Company may, in
conjunction with current market advice, book a forward contract to cover current
and some anticipated future purchases.
The currency instruments used by the Company are always either forward
contracts with fixed or optional take up dates. Moreover, in as much as the need
is to cover short-term receivables or payables (usually always sub 45 days),
these contracts are usually for periods that do not exceed more than 60 days.
INTER-GROUP SALES
In order to achieve attractive prices from suppliers, a large quantity of
a product must be firmly committed to. European Micro polls the other members of
the group poll each other for informal commitments to help distribute that
product. Thereafter, the purchasing member of the group, would obtain the
product, examine the product for damage and authenticity, and then supervise the
shipping to the other group members. In such capacity, the purchasing member of
the group acts as a "purchasing agent" for the other group members.
In the nine-month period ended March 31,1998, European Micro benefited
from low mark-up purchases from the related parties of $4.5 million. Due to
market conditions such as the strengthening of the United States dollar relative
to the pound sterling and an aggressive sales effort from a leading
manufacturer, European Micro sales to the related parties during the nine-month
period ended March 31, 1998 increased to $25.7 million. While the average margin
on these sales was approximately 1.5% compared to an average margin of 17.8% on
sales to unrelated third parties during the same period, such margin was
sufficient to cover any costs incurred by the Company in purchasing such
products on behalf of the group. Significantly, European Micro was able to enjoy
the marginal benefits from the lower cost of the remaining product for its
sales.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
-----------------------------------------------------------
Not applicable.
17
EUROPEAN MICRO HOLDINGS, INC.
PART II
ITEM 1. LEGAL PROCEEDINGS.
-----------------
The Company is involved in various claims and legal actions arising in
the ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's consolidated financial condition, results of operations or liquidity.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
------------------------------------------
(a) Not applicable.
(b) Not applicable.
(c) On January 31, 1998, the Company issued an aggregate of 4,000,000
shares of common stock, par value $0.01 per share, to John B. Gallagher
(1,900,000 shares), Harry D. Shields (1,602,696 shares), Thomas H. Minkoff, as
Trustee of the Gallagher Family Trust (100,000 shares) and Stuart S. Southard
and Robert H. True, Trustees of the 1997 Henry Daniel Shields Irrevocable
Educational Trust (397,304 shares) in exchange for all of their shares of
ordinary stock of European Micro UK pursuant to an exemption from registration
under Section 4(2) of the Securities Act of 1933, as amended. No commissions or
other remuneration was paid in connection with the above-described issuance of
securities.
(d) The Company's Registration Statement (the "Registration Statement")
on Form S-1 filed by the Company on January 16, 1998 (File No. 333-44393) was
declared effective by the Securities and Exchange Commission on April 6, 1998.
The offering commenced on April 6, 1998 pursuant to a "best efforts"
underwriting by Tarpon Scurry Investments, Inc. The Registration Statement
registered up to 1,100,000 shares of common stock, par value $0.01 per share, of
the Company at an initial offering price of $10.00 per share for an aggregate
offering price of $11,000,000. Of the 1,100,000 shares registered pursuant to
the Registration Statement, 1,000,000 shares are being sold for the account of
the Company, 50,000 shares are being sold for the account of John B. Gallagher
and 50,000 shares are being sold for the account of Harry D. Shields. As of May
8, 1998, the initial public offering had neither terminated nor closed and no
shares of common stock of the Company had been sold by any of the Company, Mr.
Gallagher or Mr. Shields.
The Company has not provided the amount of expenses incurred for its
account in connection with the issuance and distribution of the shares of common
stock registered pursuant to the Registration Statement because the ending date
of the reporting period preceded the effective date of the Registration
Statement. SEE Item 701(f)(4) of Regulation S-K.
As of the date hereof, the Company has not received any proceeds from
the initial public offering because the offering has neither terminated nor
closed. All proceeds received in the offering to date have been paid to an
18
EUROPEAN MICRO HOLDINGS, INC.
escrow agent were such proceeds will remain until the offering is terminated in
accordance with the terms of the Registration Statement.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
-------------------------------
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
---------------------------------------------------
(1) On January 13, 1998 by unanimous written consent in lieu of a
meeting, the shareholders of the Company (i) increased the number of directors
of the Company to six (6) members, (ii) divided the board into three equal size
classes serving staggered three-year terms, (iii) elected as directors Laurence
Gilbert (initial term of office will expire in 1998), Bernadette Spofforth
(initial term of office will expire in 1998), Kyle Saxon (initial term of office
will expire in 1999), John B. Gallagher (initial term of office will expire in
2000) and Harry Shields (initial term of office will expire in 2000), and (iv)
elected as officers John B. Gallagher, Co-Chairman and Co-President, Harry D.
Shields, Co-Chairman and Co-President, and Jay Nash, Chief Financial Officer,
Controller, Secretary and Treasurer.
(2) On February 13, 1998 by unanimous written consent in lieu of a
meeting, the shareholders of the Company adopted the European Micro Holdings,
Inc. 1998 Stock Incentive Plan (the "Incentive Plan") and the European Micro
Holdings, Inc. Employee Stock Purchase Plan (the "Purchase Plan"). A summary of
each of the Incentive Plan and the Purchase Plan is contained in the Company's
Registration Statement.
(3) On February 13, 1998 by unanimous written consent in lieu of a
meeting, the shareholders of the Company elected Barrett Sutton as a director of
the Company. Mr. Sutton's initial term of office will expire in the year 1999.
(4) On March 18, 1998 by unanimous written consent in lieu of a
meeting, the shareholders of the Company amended its articles of incorporation
to revise the year in which each director's initial term of office will expire.
The dates set forth in Items 4(1) and 4(3) above reflect this amendment to the
articles of incorporation.
ITEM 5. OTHER INFORMATION.
-----------------
Not applicable.
19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
---------------------------------
(a) EXHIBITS.
EXHIBIT
NO. DESCRIPTION LOCATION
- ------- ----------- --------
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 Provided herewith
Articles of Incorporation
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 Incorporated by reference to
Purchase Plan 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 Incorporated by reference to
with National Westminister Bank Exhibit No. 10.01 to the
Plc Registration Statement.
10.02 Invoice Discounting Agreement Incorporated by reference to
with Lombard Natwest Discounting Exhibit No. 10.02 to the
Limited, dated November 21, 1996 Registration Statement.
10.03 Commercial Credit Insurance, Incorporated by reference to
policy number 60322, with Hermes Exhibit No. 10.03 to the
Kreditversicherungs-AG Registration Statement.
dated August 1, 1995
10.04 Commercial Credit Insurance, Incorporated by reference to
policy number 82692, with Hermes Exhibit No. 10.04 to the
Kreditversicherungs-AG Registration Statement.
dated August 1, 1995
10.05 Consignment Agreement with Incorporated by reference to
European Micro Computer B.V., Exhibit No. 10.05 to the
dated January 1996 Registration Statement.
10.06 Distributor Agreement with Incorporated by reference to
WatchGuard Technologies, Inc., Exhibit No. 10.06 to the
dated November 5, 1997 Registration Statement.
10.07 Shareholders' Cross-Purchase Incorporated by reference to
Agreement by and between Jeffrey Exhibit No. 10.07 to the
Gerard Alnwick, Marie Alnwick, Registration Statement.
European Micro Plc and Big Blue
Europe, B.V. dated August 21, 1997
20
10.08 Trusteed Shareholders Incorporated by reference to
Cross-Purchase Agreement by and Exhibit No. 10.08 to the
between John B. Gallagher, Harry Registration Statement.
D. Shields, 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
10.09 Executive Employment Agreement Incorporated by reference to
between John B. Gallagher and Exhibit No. 10.09 to the
European Micro Holdings, Inc. Registration Statement.
effective as of January 1, 1998
10.10 Executive Employment Agreement Incorporated by reference to
between Harry D. Shields and Exhibit No. 10.10 to the
European Micro Holdings, Inc. Registration Statement.
effective as of January 1, 1998
10.11 Contract of Employment Agreement Incorporated by reference to
between Laurence Gilbert and Exhibit No. 10.11 to the
European Micro UK dated March 14, Registration Statement.
1998
10.12 Contract of Employment between Incorporated by reference to
Bernadette Spofforth and European Exhibit No. 10.12 to the
Micro UK dated April 30, 1996 Registration Statement.
10.13 Subscription Agreement by and Incorporated by reference to
between John B. Gallagher, Harry Exhibit No. 10.13 to the
D. Shields, Thomas H. Minkoff, 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
10.14 Administrative Services Contract Incorporated by reference to
by and between European Micro Exhibit No. 10.14 to the
Holdings, Inc. and European Micro Registration Statement.
Plc effective as of January 1,
1998
10.15 Escrow Agreement between European Incorporated by reference to
Micro Holdings, Inc., Tarpon Exhibit No. 10.15 to the
Scurry Investments, Inc. and The Registration Statement.
Chase Manhattan dated as of March
24, 1998
10.16 Form of Indemnification Incorporated by reference to
Agreements with officers and Exhibit No. 10.16 to the
directors Registration Statement.
10.17 Form of Transfer Agent Agreement Incorporated by reference to
with Chase Mellon Shareholder Exhibit No. 10.17 to the
Services, L.L.C. Registration Statement.
11.01 Statement re: computation of Not applicable
earnings
18.01 Letter on change in accounting Not applicable
principles
19.01 Reports furnished to Security Not applicable
holders
22.01 Published report regarding Not applicable
matters submitted to vote
23.01 Consents of experts and counsel Not applicable
24.01 Power of Attorney Not applicable
27.01 Financial Data Schedule Provided herewith
(b) REPORTS ON FORM 8-K.
None.
21
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.
Date: May 13, 1998 EUROPEAN MICRO HOLDINGS, INC.
By: /s/ John B. Gallagher
------------------------------
John B. Gallagher
Co-President
22