EUROPEAN MICRO HOLDINGS, INC.
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 December 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 Identification No.)
Incorporation or Organization)
6073 N.W. 167th Street, Unit C-25,
Miami, Florida 33015
- ---------------------------------- -----
(Address of Principal Executive (Zip Code)
Offices)
(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 4,933,900 shares of Common Stock, par value $0.01 per share,
outstanding as of January 31, 1999.
EUROPEAN MICRO HOLDINGS, INC.
PART I
FINANCIAL INFORMATION
- ---------------------
ITEM 1. FINANCIAL STATEMENTS.
---------------------
Index to Consolidated Financial Statements
Consolidated Condensed Balance Sheets as of December 31, 1998 and
June 30, 1998...........................................................3
Consolidated Condensed Statements of Earnings for the three
and six months ended December 31, 1998 and 1997........................4
Consolidated Statement of Changes in Shareholders' Equity
for the six months ended December 31, 1998.............................5
Consolidated Condensed Statements of Cash Flows for the six months
ended December 31, 1998 and 1997.......................................6
Notes to Consolidated Condensed Financial Statements....................7
2
EUROPEAN MICRO HOLDINGS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
($ IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
DEC. 31, JUNE 30,
1998 1998
ASSETS
CURRENT ASSETS:
Cash $5,271 $5,012
Restricted cash 400 -
Trade receivables, net 5,876 7,985
Discounted trade receivables 5,419 -
Due from related parties 557 898
Inventories, net 5,356 1,715
Deferred tax asset 37 26
Prepaid expenses 526 304
Other current assets 871 2,459
------ ------
TOTAL CURRENT ASSETS 24,313 18,399
Property and equipment, net 736 611
Excess of cost over acquired net assets, net 1,524 -
Investments 147 194
TOTAL ASSETS $26,720 $19,204
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Discount creditor $4,606 $ -
Trade payables 2,723 1,638
Other current liabilities 1,768 987
Due to related parties 58 238
Income taxes payable 2,723 2,577
------ -----
TOTAL CURRENT LIABILITIES 11,878 5,440
Long-term borrowings under capital leases 54 84
Other liabilities 283 -
------ -----
TOTAL LIABILITIES 12,215 5,524
------ -----
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 December 31
and June 30, 1998, shares issued
and outstanding,4,933,900 at
December 31 and June 30, 1998 49 49
Additional paid in capital 8,871 8,802
Retained earnings 5,519 4,773
Cumulative foreign currency translation
adjustment 66 56
------ ------
TOTAL SHAREHOLDERS' EQUITY 14,505 13,680
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $26,720 $19,204
3
EUROPEAN MICRO HOLDINGS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
($ IN THOUSANDS, EXCEPT PER SHARE DATA)
(Unaudited) (Unaudited)
Three months ended Six months ended
December 31, December 31,
1998 1997 1998 1997
SALES:
Net sales $27,939 $17,347 $55,720 $32,114
Net sales to related parties 1,072 4,655 2,588 13,995
------- ------- ------- -------
Total net sales 29,011 22,002 58,308 46,109
COST OF GOODS SOLD:
Cost of goods sold (25,685) (14,997) (50,539) (28,019)
Cost of goods sold to related
parties (1,068) ( 4,464) (2,566) (13,710)
-------- -------- ------- --------
Total cost of goods sold (26,753) (19,461) (53,105) (41,729)
GROSS PROFIT 2,258 2,541 5,203 4,380
OPERATING EXPENSES:
Selling, general and administrative
expenses ( 2,150) ( 1,366) ( 3,867) ( 2,423)
Expenses attributable to related
parties ( 0) ( 19) ( 0) ( 44)
-------- ------- -------- --------
Total operating expenses (2,150) ( 1,385) ( 3,867) ( 2,467)
------- -------- -------- --------
OPERATING PROFIT 108 1,156 1,336 1,913
Interest expense, net ( 27) (122) ( 73) (223)
Equity in net income (loss)
of unconsolidated affiliate (19) (14) (47) 21
-------- ------- -------- -------
INCOME BEFORE INCOME TAXES 62 1,020 1,216 1,711
Income taxes ( 38) (351) ( 470) (557)
-------- ------- -------- -------
NET INCOME $24 $669 $746 $1,154
======== ======= ======== =======
NET INCOME PER SHARE - BASIC $.00 $.17 $.15 $.29
======== ======= ======== =======
NET INCOME PER SHARE - DILUTED $.00 $.17 $.15 $.29
======== ======= ======== =======
4
EUROPEAN MICRO HOLDINGS, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
($ IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
ACCUMULATED
ADDITIONAL OTHER TOTAL
PAID IN RETAINED COMPREHENSIVE SHAREHOLDERS'
COMMON STOCK CAPITAL EARNINGS INCOME EQUITY
SHARES AMOUNT
Balance at June 30, 1998 4,933,900 $49 8,802 4,773 56 $13,680
Net income - - - 746 - 746
Additional initial public
offering expenses - - (25) - - (25)
Compensation charge in
relation to share options
issued to non-employees - - 94 - - 94
Other comprehensive
income, net of tax, for
foreign currency
translation adjustment - - - - 10 10
-------- ---- ----- ----- ----- -------
Balance at December 4,933,900 $49 8,871 5,519 66 $14,505
31, 1998 ========= ==== ===== ===== ===== =======
5
EUROPEAN MICRO HOLDINGS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
($ IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED
DECEMBER 31,
1998 1997
OPERATING ACTIVITIES:
Net income $746 $1,154
ADJUSTMENTS TO RECONCILE
NET INCOME TO NET CASH USED IN
OPERATING ACTIVITIES
Depreciation and amortization 143 103
Provision for deferred taxes (11) (63)
Equity in net loss (income) of
unconsolidated affiliate 47 (21)
Compensation charge for non-employee
stock options 94 -
CHANGES IN ASSETS AND LIABILITIES,
NET OF EFFECTS FROM ACQUISITIONS
Trade and discounted receivables 884 (2,518)
Due from related parties 341 115
Inventory (3,525) (3,751)
Other current assets 1,366 (966)
Trade payables (2,059) 768
Due to related parties (180) 2,670
Taxes payable 146 300
Other current liabilities (1,080) 940
Other net (400) -
------- -------
NET CASH USED IN OPERATING ACTIVITIES (3,488) (1,269)
INVESTING ACTIVITIES:
Purchase of fixed assets (166) (88)
Sale of fixed assets - 24
Payment for acquisitions, net
of cash acquired (648) -
-------- -------
NET CASH USED IN INVESTING ACTIVITIES (814) (64)
FINANCING ACTIVITIES:
Dividends paid - (55)
Additional initial public
offering expenses (25) -
Repayment of capital leases, net (30) (64)
Change in bank line of credit - (204)
Change in discount creditor 4,606 1,739
-------- -------
Net cash provided by financing activities 4,551 1,416
-------- -------
Exchange rate changes 10 ( 18)
-------- -------
NET INCREASE IN CASH 259 65
Cash at beginning of period 5,012 288
-------- -------
CASH AT END OF PERIOD $5,271 $353
-------- -------
Non-cash investing and financing activities:
Fair value of assets acquired $4,533 $ -
Goodwill 1,534 -
Fair value of liabilities assumed (4,322) -
6
Notes issued for consideration (964) -
-------- -------
Cash paid for acquisitions $781 -
Less cash acquired (133) -
-------- -------
Net cash paid for acquisitions $648 $ -
======== =======
Interest paid $129 $223
-------- -------
Taxes paid $391 $257
======== =======
7
EUROPEAN MICRO HOLDINGS, INC.
NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1 INTERIM FINANCIAL STATEMENTS
The accompanying unaudited interim financial statements have been prepared
pursuant to the rules and regulations for reporting on Form 10-Q. Accordingly,
certain information and notes required by generally accepted accounting
principles for complete financial statements are not included herein. The
interim statements should be read in conjunction with the Company's financial
statements and notes thereto included in the Company's latest annual report on
Form 10-K.
In the Company's opinion, all adjustments necessary for a fair presentation of
these interim statements have been included and are of a normal and recurring
nature.
2 INVENTORY
Inventories comprise ($ in thousands):
DEC. 31, JUNE 30,
1998 1998
Finished goods and goods for resale $5,388 $1,724
Less: Allowance for inventory obsolescence (32) (9)
------ ------
$5,356 $1,715
====== ------
The Company insures its inventory against theft and other damage up to a maximum
of the higher of $9,900,000 or the carrying value of the inventory. On December
31, 1998, the carrying value was $5,356,000.
Obsolescence comprise ($ in thousands):
SIX MONTHS
ENDED YEAR ENDED
DEC. 31, JUNE 30,
1998 1998
Beginning balance $9 $35
Provision for obsolescence 495 248
Amounts written off ( 472) (274)
------ -----
Ending balance $32 $9
====== =====
8
EUROPEAN MICRO HOLDINGS, INC.
NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
3 OTHER CURRENT ASSETS
Other current assets comprise ($ in thousands):
DEC. 31, JUNE 30,
1998 1998
Amounts paid in advance for inventories $- $2,015
Advanced Corporation Tax recoverable - 145
Value Added Tax receivable 719 -
Other 152 299
----- ------
$871 $2,459
===== ======
4 OTHER CURRENT LIABILITIES
Other current liabilities comprise ($ in thousands):
DEC. 31, JUNE 30,
1998 1998
Accrued expenses $ 455 $710
Value Added Tax payable 305 41
Accrued payroll taxes & national insurance 103 98
Current portion of capital leases 65 70
Deferred payments on Sunbelt acquisition 711 -
Other 129 68
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$ 1,768 $987
======= =====
5 OTHER COMPREHENSIVE INCOME
An adjustment for foreign currency translation has been recorded to
shareholders' equity as other comprehensive income, net of tax. The exchange
rate changes recorded for the six months ended December 31, 1998 and 1997, were
approximately $10,000 and $(18,000), respectively.
9
EUROPEAN MICRO HOLDINGS, INC.
NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
6 EARNINGS PER SHARE
The calculation of earnings per share are detailed in the table below:
Three months ended Six months ended
December 31, December 31,
EARNINGS 1998 1997 1998 1997
Net income ($ in thousands) $24 $669 $746 $1,154
==== ==== ==== ======
WEIGHTED AVERAGE NUMBER OF SHARES
Outstanding common stock during the period 4,933,900 4,000,000 4,933,900 4,000,000
--------- --------- --------- ---------
Effect of dilutive stock options 17,926 - 8,963 -
--------- --------- --------- ---------
DILUTED WEIGHTED AVERAGE NUMBER OF SHARES 4,951,826 4,000,000 4,942,863 4,000,000
========= ========= ========= =========
Basic earnings per share $0.00 $0.17 $0.15 $0.29
========= ========= ========= =========
Diluted earnings per share $0.00 $0.17 $0.15 $0.29
========= ========= ========= =========
During the three-month period ended December 31, 1998, the Company issued
options to purchase 35,000 shares of its common stock at exercise prices ranging
from $9.1875 to $11.00. The above dilutive earnings per share calculations
exclude the effect of options to purchase 20,000 shares of common stock at
$11.00 per share in the three-month period ended December 31, 1998, due to the
fact they were anti-dilutive. The year-to-date period ended December 31, 1998,
reflects only a pro-rata impact of all options as such options were
anti-dilutive in the first quarter of fiscal 1999. Also see Note 8 related to
contingently issuable shares related to an acquisition. The effect of such
contingent shares has been excluded from the above dilutive earnings per share
calculations as the conditions necessary for such contingent shares to be issued
have not been met as of December 31, 1998, and further that no contingent shares
would have been issuable if December 31, 1998, was also the end of the
contingency period. The weighted average number of shares used in the 1997
periods reflect a retroactive adjustment to assume the 4,000,000 shares issued
in January 1998 in exchange for the shares of European Micro Plc that were
outstanding for the complete periods in 1997.
7 RELATED PARTY TRANSACTIONS
European Micro Holdings, Inc. belongs to a group of related companies (the
"GROUP"). The Group is comprised of Technology Express, Inc. located in
Nashville, Tennessee ("TECHNOLOGY EXPRESS"), American Surgical Supply Corp. of
Florida d/b/a American Micro Computer Center in Miami, Florida ("AMERICAN MICRO
COMPUTER CENTER") and, until August 1, 1997, Ameritech Exports Inc. located in
Miami, Florida ("AMERITECH EXPORTS") and Ameritech Argentina S.A. located in
Buenos Aires, Argentina ("AMERITECH ARGENTINA"). All members of the Group were
owned and controlled by either of the two primary shareholders of European Micro
Holdings, Inc., John B. Gallagher and/or Harry D. Shields and their families.
10
EUROPEAN MICRO HOLDINGS, INC.
NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
7 RELATED PARTY TRANSACTIONS (CONTINUED)
The prices charged to members of the Group are lower than they would be in
arms-length transactions. The members of the Group maintain buying arrangements
which enables a Group member to purchase large job-lots at more competitive
prices than would otherwise be possible and then immediately sell part of the
purchase to the other Group members. In practical terms, the sales to related
parties are to the distributors in a similar trade as European Micro Holdings,
Inc. and these parties would not buy at higher prices.
Related party transactions are summarized as follows ($ in thousands):
Three months ended Six months ended
December 31, December 31,
1998 1997 1998 1997
SALES TO:
American Micro Computer Center $389 $4,577 $402 $10,413
Technology Express 683 78 2,186 3,582
----- ------ ----- -------
$1,072 $4,655 $2,588 $13,995
====== ====== ====== =======
PURCHASES FROM:
American Micro Computer Center $130 $325 $130 $325
Technology Express 1,113 392 13,552 2,937
----- ------ ----- -------
$1,243 $717 $13,682 $3,262
====== ====== ====== =======
OPERATING EXPENSES
MANAGEMENT AND CONSULTANCY
FEES PAID TO:
American Micro Computer Center $- $5 $- $18
Technology Express - 14 - 26
----- ------ ----- -------
$- $19 $- $44
====== ====== ====== =======
Due from related parties comprised the following balances ($ in thousands):
DEC. 31, JUNE 30,
1998 1998
American Micro Computer Center $331 $54
Technology Express 226 844
------ -----
$557 898
====== =====
11
EUROPEAN MICRO HOLDINGS, INC.
NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
7 RELATED PARTY TRANSACTIONS (CONTINUED)
Due to related parties comprised of following balances ($ in thousands):
DEC. 30, JUNE 30,
1998 1998
American Micro Computer Center $2 $12
Technology Express 56 226
---- ----
$58 $238
==== ====
There were no related party transactions between, or balances due to or from,
the Company and Ameritech Argentina or Ameritech Exports for the three and six
month periods ended December 31, 1998 and 1997.
The entities listed above are related to the Company in the following manner:
AMERICAN MICRO COMPUTER CENTER
American Micro Computer Center is a distributor of computer hardware based in
Miami, Florida. John B. Gallagher who is Co-Chairman, Co-President, Director and
shareholder (owning 39% of the outstanding shares) of European Micro Holdings,
Inc., is the President of American Micro Computer Center and owns 50% of the
outstanding shares of capital stock in that company.
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,
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.
AMERITECH ARGENTINA
Ameritech Argentina was an authorized distributor of Compaq, Hewlett Packard,
IBM and Acer Computers and accessories in Argentina. Messrs. Shields and
Gallagher were both Directors of Ameritech Argentina and each owned 50% of the
outstanding shares of common stock until its sale on August 1, 1997.
AMERITECH EXPORTS
Ameritech Exports was an authorized distributor of Compaq computers and
accessories into the Caribbean and certain parts of central and South America.
Messrs. Shields and Gallagher were both Directors of Ameritech Exports and each
owned 50% of the outstanding shares of common stock until its sale on August 1,
1997.
12
EUROPEAN MICRO HOLDINGS, INC.
NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
8 ACQUISITION OF SUBSIDIARIES
On October 26, 1998, European Micro Plc, a wholly-owned subsidiary of European
Micro Holdings, Inc. ("EUROPEAN MICRO"), acquired all of the outstanding shares
of capital stock of Sunbelt (UK) Limited ("SUNBELT"), a company registered in
England and Wales, from the shareholders of Sunbelt for the consideration
described below. As a result of the acquisition, Sunbelt is a wholly-owned
subsidiary of European Micro Plc. 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 approximately $1.56 million. Of this guaranteed amount,
approximately $600,000 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 approximately $400,000 to be
repaid in November 2005, subject to early repayment at the option of the
noteholder at any time after June 1, 1999. Such note payable is secured by a
cash account totaling $400,000 at December 31, 1998. The note payable and the
cash balances are reflected on the accompanying consolidated condensed balance
sheet at December 31, 1998, in restricted cash and other current liabilities,
respectively.
The remainder of the unpaid guaranteed consideration of approximately $565,000,
plus accrued interest, is to be paid in equal installments within ninety (90)
days of the end of the first and second contingent earn-out periods as discussed
below. The unpaid balance of the guaranteed purchase price is reflected in other
current liabilities and other liabilities on the accompanying consolidated
condensed balance sheet at December 31, 1998.
The purchase agreement also contains contingent purchase price provisions. The
maximum contingent earn-out payments in the aggregate are two (2) times
Sunbelt's fiscal year 1998 pre-tax earnings of approximately 424,000 pounds
sterling (approximately $1.4 million). The first contingent payment of up to
approximately $700,000 will be made if certain financial parameters are attained
during the first contingent earn-out period which runs from November 1, 1998 to
October 31, 1999, and if certain of the Sunbelt executives are still employed
with the Company at the end of the first earn-out period. The second contingent
payment of up to approximately $700,000 will be made if certain financial
parameters are attained during the second contingent earn-out period which runs
from November 1, 1999 to October 31, 2000. That portion of the first contingent
earn-out payment related to employee retention, approximately $175,000, is being
recognized by the Company over the course of the first contingent earn-out
period as compensation expense. The remaining portion of the first contingent
earn-out payment of approximately $525,000 and the second contingent earn-out
payment have not been recognized in the accompanying consolidated condensed
financial statements as the payment of such amounts are not, in the opinion of
management, determinable beyond a reasonable doubt.
Within ninety (90) days of the end of first and second contingent earn-out
periods, the first and second purchase price installment payments will be made.
Such installment payments will each include one-half of the remaining 40%
guaranteed purchase price amounts, plus any amounts due under the first and
second contingent earn-out payment provisions. The amounts due to the former 40%
shareholder of Sunbelt will be satisfied by the issuance of a convertible loan
note due six years after the date of issue, and subject to early prepayment at
the option of the noteholder on any date after eight months from the date of
issuance. The Company has the option of paying all future amounts due to the
former Sunbelt shareholders in common stock of European Micro Holdings, Inc. The
Company also entered into employment agreements with the two former shareholders
of Sunbelt.
The acquisition of Sunbelt was accounted for as a purchase. The purchase price,
subject to adjustment as described above and inclusive of transaction costs, of
approximately $1.66 million exceeded the estimated fair market value of net
assets acquired by approximately $1.48 million, which is being amortized on a
straight-line basis over 25 years. The allocation of the purchase price and the
determination of the estimated life of goodwill are preliminary. The results of
operations of Sunbelt have been included in the accompanying financial
statements from the date of acquisition.
Sunbelt, formerly privately held, is a distributor of microcomputer products to
dealers, value-added resellers and mass merchants throughout Western Europe.
Sunbelt's trading operations were integrated with and into the operations of
European Micro Plc. Sunbelt's business of distributing its Nova brand products
operates as a separate business entity consistent with past practice. Sunbelt
was established in 1992 and is based in Wimbledon, England. For the fiscal year
ended June 30, 1998, Sunbelt had total sales of approximately $16.5 million and
pre-tax earnings of approximately $742,500.
13
EUROPEAN MICRO HOLDINGS, INC.
NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
8 ACQUISITION OF SUBSIDIARIES (CONTINUED)
On November 12, 1998, European Micro Plc acquired the assets of H&B Trading
International BV ("H&B"). Based in Holland, H&B was a privately held,
independent, focused distributor of microcomputer products to the BENELUX
countries - Belgium, Holland and Luxembourg. H&B had 1997 annual revenues of
approximately $2 million. The acquisition of H&B was accounted for as a
purchase. The base purchase price, subject to adjustment, of approximately
$79,000 exceeded the estimated value of net assets acquired by approximately
$58,000, which is being amortized on a straight-line basis over 25 years. The
allocation of the purchase price and the determination of the estimated life of
goodwill are preliminary. If certain financial performance criteria are met for
the fiscal years ended June 30, 1999 and 2000, additional consideration of
approximately $66,000 will be paid (to be settled in Dutch guilders). Such
contingent consideration has not been reflected in the accompanying consolidated
condensed financial statements. The results of operations of H&B have been
included in the accompanying financial statements from the date of acquisition.
The following summarized unaudited pro forma financial information assumes the
acquisition of Sunbelt occurred on July 1, 1997 ($ in thousands, except per
share data):
Six Months Ended
December 31, 1998 December 31, 1997
----------------- -----------------
Total net sales $64,162 $52,990
======= =======
Net earnings $803 $1,152
==== ======
Earnings per share:
Basic $0.16 $0.29
===== =====
Diluted $0.16 $0.29
===== =====
The amounts are based on certain assumptions and estimates, and do not reflect
any benefits from economies which might be achieved from the combined
operations. The pro forma results do not necessarily represent results which
would have occurred if the acquisition had taken place on the basis assumed
above, nor are they indicative of the results of future operations.
14
EUROPEAN MICRO HOLDINGS, INC.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
INTRODUCTORY STATEMENTS
Forward-Looking Statements and Associated Risks. This Quarterly Report
contains forward-looking statements, including statements regarding, among other
things, (a) European Micro Holdings, Inc.'s ("EUROPEAN MICRO" or the "COMPANY")
projected sales and profitability, (b) the Company's growth strategies, (c)
anticipated trends in the Company's industry, (d) the Company's future financing
plans and (e) the Company's anticipated needs for working capital. In addition,
when used in this Quarterly Report, the words "believes," "anticipates,"
"intends," "in anticipation of," "expects," and similar words are intended to
identify certain forward-looking statements. These forward-looking statements
are based largely on the Company's expectations and are subject to a number of
risks and uncertainties, many of which are beyond the Company's control. Actual
results could differ materially from these forward-looking statements as a
result of changes in trends in the economy and the Company's industry,
reductions in the availability of financing and availability of computer
products on terms as favorable as experienced by the Company in prior periods
and other factors. In light of these risks and uncertainties, there can be no
assurance that the forward-looking statements contained in this Quarterly Report
will in fact occur. The Company does not undertake any obligation to publicly
release the results of any revisions to these forward-looking statements that
may be made to reflect any future events or circumstances.
Unless the context otherwise requires and except as otherwise specified,
references herein to "European Micro" or the "Company" include European Micro
Holdings, Inc. and its two wholly-owned subsidiaries, European Micro Plc, a
company organized under the laws of the United Kingdom ("EUROPEAN MICRO UK"),
and Nor'easter Micro, Inc., a Nevada corporation ("NOR'EASTER") (collectively,
the two wholly-owned subsidiaries are referred to as the "SUBSIDIARIES").
OVERVIEW
The Company is an independent distributor of microcomputer products,
including personal computers, memory modules, disc drives and networking
products, to customers mainly in Western Europe and to customers and related
parties in the United States. The Company's customers consist of more than 375
value-added resellers, corporate resellers, retailers, direct marketers and
distributors. The Company does not sell to end-users. Substantially all of the
products sold by the Company are manufactured by well-recognized manufacturers
such as IBM, Compaq and Hewlett-Packard, although the Company generally does not
obtain its inventory directly from such manufacturers. The Company monitors the
geographic pricing strategies related to such products, currency fluctuations
and product availability in order to obtain inventory at favorable prices from
other distributors, resellers and wholesalers.
The Company considers itself to be a focused distributor, as opposed to a
broadline distributor, dealing with a limited and select group of products from
a limited and select group of leading manufacturers. The Company believes that
being a focused distributor enables it to respond more quickly to customer
requests and gives it greater availability of products, access to products and
improved pricing. The Company believes that as a focused distributor it has been
able to develop greater expertise in the products which it sells. The Company
places significant emphasis on market awareness and planning and actively shares
this knowledge with its customers in order to further enhance trading relations.
The Company strives to monitor and react quickly to market trends in order to
enable its multilingual sales team to maintain the highest levels of customer
service.
European Micro Holdings, Inc. was organized under the laws of the State of
Nevada and is the parent of European Micro UK and Nor'easter. 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.
European Micro UK was organized under the laws of the United Kingdom in 1991 to
serve as an independent distributor to customers mainly in Western Europe and to
related parties in the United States. On January 31, 1998, European Micro
Holdings, Inc. acquired one hundred percent (100%) of the issued and outstanding
shares of ordinary stock of European Micro UK in consideration for the issuance
of 4,000,000 newly issued shares of common stock, par value $0.01 per share (the
"COMMON STOCK"), of European Micro Holdings, Inc. The 4,000,000 shares of Common
Stock of European Micro Holdings, Inc. was issued to the shareholders of
European Micro UK on a pro rata basis in accordance with such shareholders'
respective ownership interest in European Micro UK. As a result of the exchange,
the shareholders of European Micro UK together received all of the issued and
outstanding shares of Common Stock of European Micro Holdings, Inc. prior to the
consummation of its initial public offering. These shareholders were John B.
Gallagher, Harry D. Shields, Thomas H. Minkoff, as trustee of the Gallagher
15
Family Trust, and Stuart S. Southard and Robert H. True, as Trustees of the 1997
Henry Daniel Shields Irrevocable Educational Trust. In addition, European Micro
UK became a wholly-owned subsidiary of European Micro Holdings, Inc.
European Micro UK is the parent of European Micro GmbH (formerly known as
European Micro Computer Center GmbH) ("EUROPEAN MICRO GERMANY"), Sunbelt (UK)
Limited ("SUNBELT") and European Micro B.V. ("EUROPEAN MICRO HOLLAND") and has a
50% joint venture interest in Big Blue Europe, B.V. ("BIG BLUE EUROPE").
European Micro Germany was organized under the laws of Germany in 1993 and
operates as a sales office in Dusseldorf, Germany. All products sold by European
Micro Germany are procured and shipped from the facilities of European Micro UK.
On October 26, 1998, European Micro UK completed its acquisition of all of the
outstanding shares of capital stock of Sunbelt. Sunbelt is a company registered
in England and Wales which was established in 1992 and is based in Wimbledon,
England. Sunbelt operates as a distributor of microcomputer products to dealers,
value-added resellers and mass merchants throughout Western Europe. Except for
the distribution of its Nova brand products, Sunbelt's distribution operations
were integrated with and into the operations of European Micro UK, since the
date of acquisition. Sunbelt continues to distribute its Nova line of products
in accordance with past practice. European Micro Holland was formed in 1995 and
recently acquired the assets of H&B Trading International B.V. ("H&B") from
European Micro UK. European Micro UK acquired these assets on November 12, 1998.
Big Blue Europe was organized under the laws of Holland in January 1997 and is a
computer parts distributor with offices located near Amsterdam, Holland. Selling
primarily to computer maintenance companies, Big Blue Europe has experienced
growth in sales and the Company believes that Big Blue Europe is positioned to
participate in the relatively high margin parts after-market industry. Big Blue
Europe has no affiliation with International Business Machines Corporation.
European Micro Holdings, Inc. was formed in December 1997 to serve as a
holding company of the Subsidiaries. Its headquarters are located at 6073 N.W.
167th Street, Unit C-25, Miami, Florida 33015, and its telephone number is (305)
825-2458.
The following organizational chart summarizes the relationships among
European Micro Holdings, Inc., Nor'easter, European Micro UK, European Micro
Germany, Big Blue Europe, Sunbelt and European Micro Holland.
[ORGANIZATIONAL CHART OMITTED]
16
EUROPEAN MICRO HOLDINGS, INC.
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 Earnings:
PERCENTAGE OF NET SALES
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------ ------------
1998 1997 1998 1997
---- ---- ---- ----
Net sales to third parties 96.3% 78.8% 95.6% 69.6%
Net sales to related parties 3.7% 21.2% 4.4% 30.4%
------- ------- ------- -------
Total net sales 100.0% 100.0% 100.0% 100.0%
------- ------- ------- -------
Cost of goods sold to third
parties (88.5%) (68.2%) (86.7%) (60.8%)
Cost of goods sold to related
parties (3.7%) (20.3%) (4.4%) (29.7%)
------- ------- ------- -------
Total cost of goods sold (92.2%) (88.5%) (91.1%) (90.5%)
------- ------- ------- -------
Total gross profit 7.8% 11.5% 8.9% 9.5%
Total operating expenses (7.4%) (6.3%) (6.6%) (5.4%)
------- ------- ------- -------
Operating profit 0.4% 5.2% 2.3% 4.1%
Interest expense, net (0.1%) (0.6%) (0.1%) (0.4%)
Equity in income (loss) of
unconsolidated affiliate (0.1%) (0.1%) (0.1%) 0.0%
------- ------- ------- -------
Income before income taxes 0.2% 4.5% 2.1% 3.7%
Income taxes (0.1%) (1.6%) (0.8%) (1.2%)
------- ------- -------- -------
Net income 0.1% 2.9% 1.3% 2.5%
======= ======= ======== =======
THREE-MONTH PERIOD ENDED DECEMBER 31, 1998 AND 1997
TOTAL NET SALES. Total net sales increased $7 million, or 31.9%, from $22
million in the three-month period ended December 31, 1997 to $29 million in the
comparable period in 1998. Excluding net sales to related parties, net sales
increased $10.6 million, or 61.1%, from $17.3 million in the three-month period
ended December 31, 1997 to $27.9 million in the comparable period in 1998. This
increase was attributable to the addition of Sunbelt's trading sales (accounting
for approximately $1.3 million), the additional sales from Sunbelt's Nova line
of products (accounting for approximately $650,000), the start-up growth of
Nor'easter which started its operations in February 1998 (accounting for
approximately $7 million) and the growth of the Premier Dealers Club (accounting
for approximately $1.6 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 of seasonal variations in the demand for the products and services
offered by the Company, the introduction of new hardware and software
technologies and products offering improved features and functionality, the
introduction of new products and services by the Company and its competitors,
the loss or consolidation of a significant supplier or customer, changes in the
level of operating expenses, inventory adjustments, product supply constraints
and competitive conditions, including pricing, interest rate fluctuations, the
impact of acquisitions, currency fluctuations and general economic conditions.
17
EUROPEAN MICRO HOLDINGS, INC.
Net sales to related parties decreased $3.6 million in the three-month
period ended December 31, 1998 from the comparable period in 1997. This decrease
is primarily attributable to large purchases of computer peripherals made on
behalf of related parties in the three-month period ended December 31, 1997
compared to the same period in 1998. In addition, the Company's purchases from
related parties increased by $0.5 million in the three-month period ended
December 31, 1998 from the comparable period in 1997. 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. See "Note 7 to the Consolidated Condensed Financial Statements." 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 the 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. Likewise, the Company's
business and results of operations will be materially adversely affected if the
Company is unable to purchase product from the other members of the group
(including Technology Express) when such product could be purchased from these
group members at prices lower than available from other sources.
GROSS PROFIT. Gross profit decreased $280,000 or 11.1 %, from $2.54
million in the three-month period ended December 31, 1997 to $2.26 million in
the comparable period in 1998. Gross profit excluding related party transactions
decreased $96,000, or 4.1%, from $2.35 million in the three-month period ended
December 31, 1997 to $2.25 million in the comparable period in 1998. This
decrease is primarily due to unusually aggressive pricing discounts given by
manufacturers during this period which resulted in the Company incurring
approximately $495,000 in inventory obsolescence provisions. In addition, this
decrease is partially the result of a shift in market conditions which produced
a downward pressure on margins due to currency fluctuations, product
availability and changes in geographic pricing strategies of manufacturers and
suppliers of the Company's products.
Gross profit attributable to related party sales was $4,000 in the
three-month period ended December 31, 1998. As discussed above, the mark-up on
sales to related parties is typically one percent over cost. Therefore, the
gross profit on sales to third parties is typically higher than the gross profit
earned on sales to related parties. This represents a gross margin of
approximately 0.5%. This is lower than the normal one percent due to the
currency changes between the pound sterling and the U.S. dollar.
Gross margin decreased by 370 basis points from 11.5% in the three-month
period ended December 31, 1997 to 7.8% in the comparable period in 1998.
Excluding related party transactions, gross margin decreased from 13.5% in the
three-month period ended December 31, 1997 to 8.1% in the comparable period in
1998. The addition of Sunbelt's Nova line of products generally have a higher
margin than other products which helped offset the decrease in gross margin for
the Company's other products. During the period, the Nova line produced a gross
margin of 26%. The decline in gross margin is related to the shift in market
conditions and the inventory write-downs discussed above.
Foreign exchange gains and losses moved from a loss of $255,000 in the
three-month period ended December 31, 1997 to a loss of $52,000 in the
comparable period in 1998. This favorable movement was attributable to the
weakening of the pound sterling relative to other European currencies and the
strengthening of the pound sterling against the U.S. dollar.
OPERATING EXPENSES. Operating expenses as a percentage of total net sales
increased from 6.3% in the three-month period ended December 31, 1997 to 7.4% in
the comparable period in 1998. Operating expenses increased primarily due to the
increase in administrative expenses incurred by European Micro Holdings, Inc.
which began operations in January 1998. Such expenses included legal,
accounting, public relations and other expenses typically incurred by a public
company.
INTEREST EXPENSE. Interest expense, net, decreased by $95,000 from
$122,000 in the three-month period ended December 31, 1997 to $27,000 in the
comparable period in 1998. This was attributable to decreased borrowing during
the period because of the availability of the net proceeds from the Company's
initial public offering.
INCOME TAXES. Income taxes as a percentage of earnings before income taxes
increased from 34.4% in the three-month period ended December 31, 1997 to 61.3%
in the comparable period in 1998. During the period, European Micro UK had
earned taxable income and accrued income taxes at its effective rate of 37.46%.
European Micro Holdings, Inc. and Nor'easter had a taxable loss during the
18
EUROPEAN MICRO HOLDINGS, INC.
period, resulting in a tax credit. On a consolidated basis, the effect of the
taxes paid by European Micro UK and the tax credit by European Micro Holdings,
Inc. and Nor'easter resulted in an increase in income taxes as a percentage of
earnings before income taxes. The Company's effective income tax rate may
increase or decrease in the future as a result of the Company's product mix and
variations in the countries to which the Company sells its products.
INTEREST IN JOINT VENTURE. The Company's share of loss from Big Blue
Europe increased from $14,000 in the three-month period ended December 31, 1997
to $19,000 in the comparable period in 1998. While Big Blue Europe's net sales
increased $65,000 during the quarter, the reduction in earnings was attributed
to an increased provision for inventory obsolescence.
SIX-MONTH PERIOD ENDED DECEMBER 31, 1998 AND 1997
TOTAL NET SALES. Total net sales increased $12.2 million, or 26.5%, from
$46.1 million in the six-month period ended December 31, 1997 to $58.3 million
in the comparable period in 1998. Excluding net sales to related parties, net
sales increased $23.6 million, or 73.5%, from $32.1 million in the six-month
period ended December 31, 1997 to $55.7 million in the comparable period in
1998. This increase was attributable to general sales growth (accounting for
approximately $4.6 million), the addition of Sunbelt's trading sales of
(accounting for approximately $1.3 million), the additional sales from Sunbelt's
Nova line of products (accounting for approximately $650,000), the start-up
growth of Nor'easter which started its operations in February 1998 (accounting
for approximately $14 million), and the growth of the Premier Dealers Club
(accounting for approximately $3.1 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 of seasonal variations in the demand for the products and
services offered by the Company, the introduction of new hardware and software
technologies and products offering improved features and functionality, the
introduction of new products and services by the Company and its competitors,
the loss or consolidation of a significant supplier or customer, changes in the
level of operating expenses, inventory adjustments, product supply constraints
and competitive conditions, including pricing, interest rate fluctuations, the
impact of acquisitions, currency fluctuations and general economic conditions.
Net sales to related parties decreased $11.4 million in the six-month
period ended December 31, 1998 from the comparable period in 1997. This decrease
is primarily attributable to large purchases of computer peripherals made on
behalf of related parties in the six-month period ended December 31, 1997
compared to the same period in 1998. In addition, the Company's purchases from
related parties increased by $10.4 million in the six-month period ended
December 31, 1998 from the comparable period in 1997. 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. See "Note 7 to the Consolidated Condensed Financial Statements." 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 the 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. Likewise, the Company's
business and results of operations will be materially adversely affected if the
Company is unable to purchase product from the other members of the group
(including Technology Express) when such product could be purchased from these
group members at prices lower than available from other sources.
GROSS PROFIT. Gross profit increased $820,000, or 18.8 %, from $4.4
million in the six-month period ended December 31, 1997 to $5.2 million in the
comparable period in 1998. Gross profit excluding related party transactions
increased $1.1 million, or 26.5%, from $4.1 million in the six-month period
ended December 31, 1997 to $5.2 million in the comparable period in 1998. This
increase is primarily due to the general increase in sales volume which was
partially offset by the inventory write-downs discussed in the results for the
three-months ended December 31, 1998.
Gross profit attributable to related party sales was $22,000 in the
six-month period ended December 31, 1998. As discussed above, the mark-up on
sales to related parties is typically one percent over cost. Therefore, the
gross profit on sales to third parties is typically higher than the gross profit
earned on sales to related parties. This represents a margin of approximately
0.86%. This is lower than the normal one percent due to the currency changes
between the pound sterling and the U.S. dollar.
19
EUROPEAN MICRO HOLDINGS, INC.
Gross margin decreased by 60 basis points from 9.5% in the six-month
period ended December 31, 1997 to 8.9% in the comparable period in 1998.
Excluding related party transactions, gross margin decreased from 12.8% in the
six-month period ended December 31, 1997 to 9.3% in the comparable period in
1998. This change is related to the shift in market conditions and the inventory
write-downs discussed above.
Foreign exchange gains and losses moved from a loss of $232,000 in the
six-month period ended December 31, 1997 to a loss of $184,000 in the comparable
period in 1998. This favorable movement was attributable to the weakening of the
pound sterling relative to other European currencies and the strengthening of
the pound sterling against the U.S. dollar.
OPERATING EXPENSES. Operating expenses as a percentage of total net sales
increased from 5.4% in the six-month period ended December 31, 1997 to 6.6% in
the comparable period in 1998. Operating expenses increased primarily due to the
increase in administrative expenses related to European Micro Holdings, Inc.,
which began operations in January 1998. Such expenses included legal,
accounting, public relations and other expenses typically incurred by a public
company.
INTEREST EXPENSE. Interest expense, net, decreased by $150,000 from
$223,000 in the six-month period ended December 31, 1997 to $73,000 in the
comparable period in 1998. This was attributable to decreased borrowing during
the period because of the availability of the net proceeds from the Company's
initial public offering.
INCOME TAXES. Income taxes as a percentage of earnings before income taxes
increased from 32.5% in the six-month period ended December 31, 1997 to 38.7% in
the comparable period in 1998. During the period, European Micro UK had earned
taxable income and accrued income taxes. European Micro Holdings, Inc. and
Nor'easter had a taxable loss during the period, resulting in a tax credit. On a
consolidated basis, the effect of the taxes paid by European Micro UK and the
tax credit by European Micro Holdings, Inc. and Nor'easter resulted in an
increase in income taxes as a percentage of earnings before income taxes. The
Company's effective income tax rate may increase or decrease in the future as a
result of the Company's product mix and variations in the countries to which the
Company sells its products.
INTEREST IN JOINT VENTURE. The Company's share of income or loss from Big
Blue Europe decreased from income of $21,000 in the six-month period ended
December 31, 1997 to a loss of $47,000 in the comparable period in 1998. This
reduction in earnings is attributed to an increased provision for inventory
obsolescence and a reduction in total sales.
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
and 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
short-term revolving lines of credit provided by National Westminster Bank Plc
together with accounts receivable financing provided by Lombard NatWest.
Short-term obligations must be repaid within one year. One line of credit and
the accounts receivable facilities are set and reviewed annually. The interest
rate on these facilities is based on a mark-up over the bank borrowing rate in
the United Kingdom. This line of credit facility was $830,000 in fiscal 1997 and
was increased to $2.0 million during fiscal 1998. The accounts receivable
financing provides financing for up to 85% of trade receivables. In June 1998,
the Company obtained a second short-term line of credit which is secured by the
Company's inventory. This facility allows the Company to borrow up to $5.8
million to assist in the purchase of inventory.
Long-term funding is supplied to the Company in the form of automobile
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 36 months from the date of purchase and are typically
20
EUROPEAN MICRO HOLDINGS, INC.
for 80% of the purchase value of the vehicle. As of December 31, 1998, the
borrowings were $119,000, of which $54,000 was due after more than one year.
European Micro's typical principal need for additional working capital in
fiscal 1999 is expected to be for the purchase of additional inventory to
support growth and to take advantage of cash discounts offered by certain of
European Micro's suppliers for early payment. Working capital will also be
needed for expansion purposes, including acquisitions. European Micro expects to
obtain cash for these purposes through its internal cash flow 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's business, financial condition and
results of operations.
Net cash used in operating activities during the six-month period to
December 31, 1998 amounted to $3.5 million. Significant factors in the use of
cash were a decrease in trade payables, net of effects from acquisitions, of
$2.1 million and an increase in inventory, net of effects from acquisitions, of
$3.6 million. The decrease in payables was largely attributable to paying down
the large payables balance that was acquired in the Sunbelt acquisition. The
increase in inventory was largely attributable to large quantity purchases of
computer products at prices which the Company considered to be favorable. The
amount of cash used in the Company's operations was partially offset by net
income in the period of $746,000, cash generated from a decrease in trade and
discounted receivables, net of effects from acquisitions of $900,000, and a
reduction in other current assets primarily related to the prepayment of
inventory at June 30, 1998 of $1.4 million.
Cash used in investing activities amounted to $800,000, consisting of
expenditures on fixed assets of $166,000 and the acquisition of Sunbelt of
$570,000 ($700,000 less cash acquired of $130,000) and H&B of $79,000. See "Note
8 to the Consolidated Condensed Financial Statements."
Cash provided by financing activities was $4.55 million, of which $4.61
million was provided by an increase in the Lombard NatWest accounts receivable
financing facility. Cash was used for repayments of capital leases of $30,000
and additional expenses associated with the initial public offering of $25,000.
Overall, the Company experienced a net increase in cash of $259,000 for
the six-month period ended December 31, 1998, which is after the impact of
exchange rates of $10,000.
ASSET MANAGEMENT
INVENTORY. European Micro's goal is to achieve high inventory turns and to
maintain a low level of inventory on hand and thereby reduce 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 many 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 375 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 UK's
accounts receivables are insured and its positive credit results have allowed
European Micro UK 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's
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.
21
EUROPEAN MICRO HOLDINGS, INC.
HEDGING AND CURRENCY MANAGEMENT ACTIVITIES. European Micro Holdings, Inc.
does not engage in hedging activities to guard against currency fluctuations
between the United Kingdom pound sterling and the United States dollar. Because
the functional currency of European Micro Holdings, Inc.'s main operating
subsidiary, European Micro UK, is the United Kingdom pound sterling, currency
fluctuations of the pound sterling relative to the U.S. dollar may have a
material adverse effect on the Company's business, financial condition and
results of operations. European Micro Holdings, Inc. may engage in hedging
activities in the future, although no assurances can be given that it will
engage in such activities and if it does so that such activities will be
successful.
European Micro UK recognizes that it has currency exposure when
transactions are consummated in currency other than the pound sterling. For
example, for the quarter ended December 31, 1998, purchases of inventory by
European Micro UK were in the United Kingdom pound sterling (28%), German Mark
(9%), United States dollar (53%), Canadian dollar (7%) and other (3%). The most
significant currencies in which sales were made, other than the pound sterling
(50%), were the German Mark (17%), Dutch guilder (10%), French franc (10%) and
others (13%). 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
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:
United Kingdom pound sterling, United States dollar, Dutch guilder and German
Mark. It normally deems the exposure in other currencies to be minimal. However,
when the Company buys products in other currencies, the Company may, in
conjunction with current market advice, book a forward contract to cover current
and some anticipated future purchases.
ECONOMIC AND MONETARY UNION
On January 1, 1999, eleven of the fifteen member countries of the European
Union established fixed conversion rates between their existing sovereign
currencies and a new currency called the "euro." These countries adopted the
euro as their common legal currency on that date. The euro is trading on
currency exchanges and is available for non-cash transactions. Until January 1,
2002, the existing sovereign currencies will remain legal tender in these
countries. On January 1, 2002, the euro is scheduled to replace the sovereign
legal currencies of these countries. Through the operations of European Micro
UK, the Company has significant operations within the European Union, including
many of the countries which adopted the euro. The Company is evaluating the
impact the euro will have on its continuing business operations and no
assurances can be given that the euro will not have a material adverse effect on
the Company's business, financial condition and results of operations. However,
the Company does not expect the euro to have a material effect on its
competitive position as a result of price transparency within the European Union
because the Company does not rely on currency imbalances in purchasing inventory
from within the European Union. Moreover, the Company has updated its
information technology to accommodate the adoption of the euro. The costs
incurred in evaluating and updating this information technology was not
material. In addition, the Company cannot accurately predict the impact the euro
will have on currency exchange rates or the Company's currency exchange rate
risk. The Internal Revenue Service ("IRS") has requested comments on various tax
issues raised by the euro conversion. The IRS is expected to publish guidelines
on this issue soon and, until such time, the Company cannot predict whether the
IRS guidelines will have any tax consequences on the Company.
YEAR 2000 ISSUES
Many existing computer programs use only two digits to identify a year in
the date field. These programs were designed and developed without considering
the impact of the upcoming change in the Year 2000. If not corrected in the
computer applications of the Company or its suppliers and customers, this
problem may cause computer applications to fail or to create erroneous results
by or at the Year 2000. In 1998, the Company initiated a plan ("Plan") to
identify, assess and remediate Year 2000 issues within each of its significant
computer programs and certain equipment which contain micro-processors. The
Company has divided the Plan into five major phases - assessment, planning,
conversion, implementation and testing. After completing the assessment and
planning phases in the prior year, the Company is currently in the conversion,
implementation and testing phases. The Plan addresses each subsidiary
differently. All computer equipment, software and other non-information
technology equipment owned by Nor'easter was Year 2000 compliant when purchased
and therefore the costs of conversion and remediation are expected to be
22
EUROPEAN MICRO HOLDINGS, INC.
minimal. European Micro UK is in the process of obtaining assurances from
manufacturers of all of its computer equipment, software and other
non-information technology equipment as to whether they are Year 2000 compliant.
Any non-compliant software or hardware will be upgraded or replaced. The Company
expects to complete the conversion, implementation and testing phases by
September 1999. The Company has budgeted an aggregate of $60,000 to cover these
costs. The Company does not generally sell software products and therefore the
Company does not expect its products to be affected by the Year 2000 problem.
The Company is evaluating the impact the Year 2000 problem will have on
its suppliers, customers, financial institutions, freight carriers and general
economic infrastructure. The Company is not highly dependent upon any single
supplier or customer and therefore does not expect the failure of the Company's
suppliers and customers to correct the Year 2000 problem to have a material
adverse effect on the Company's business, financial condition and results of
operations. The Company is dependent upon financial institutions, freight
carriers and general economic infrastructure. The Company has received varying
information from these outside parties regarding their state of readiness for
the Year 2000 problem. The Company is formulating contingency plans to implement
in the event these parties fail to address the Year 2000 problem. The Company
expects such plans to be completed in September 1999.
The Company's failure to correct a material Year 2000 problem could result
in an interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the Company's
operations, liquidity and financial condition. The Company's ability to insulate
itself from the Year 2000 problem is limited due to the Company's inability to
accurately gauge the readiness of its suppliers, customers, financial
institutions, freight carriers and general economic infrastructure. Accordingly,
the Company cannot accurately anticipate or quantify the impact of the Year 2000
problem or determine whether the failure to correct the Year 2000 problem will
have a material adverse effect on the Company's operations, liquidity or
financial condition.
RELATED PARTY 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 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 three- and six-month periods ended December 31, 1998, European
Micro UK benefited from low mark-up purchases from the other members of the
group by $1.0 million and $10.0 million, respectively, and Nor'easter by $0.2
million and $3.6 million, respectively. European Micro's sales to the related
parties during the three-month period ended December 31, 1998 decreased $3.6
million from $4.7 million to $1.1 million and for the six-month period ended
December 31, 1998 decreased $11.4 million from $14.0 million to $2.6 million.
The primary reasons for this reduction in related party sales is due to the
availability of product at prices in the United States more favorable than other
sources of supply. While the average margin on these sales was approximately 1%
compared to an average margin of approximately 8.5% on sales to unrelated third
parties during the same period, such margin was sufficient to cover the 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. See "Note 7 to the
Consolidated Condensed Financial Statements."
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company utilizes derivative financial instruments in the form of
forward exchange contracts for the purpose of economic hedges of anticipated
sale and purchase transactions. In addition, the Company enters into economic
hedges for the purpose of hedging foreign currency market exposures of
underlying assets, liabilities and other obligations which exist as part of its
ongoing business operations.
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.
23
EUROPEAN MICRO HOLDINGS, INC.
The Company places all foreign exchange forward contracts with Global
Financial Markets, a division of the National Westminster Bank Plc, a leading
European bank.
24
EUROPEAN MICRO HOLDINGS, INC.
EXCHANGE RATE SENSITIVITY
On December 31, 1998, the Company did not have any open forward exchange
contracts. Losses in respect of the foreign exchange transactions were as
follows ($ in thousands):
Three Months Six Months
Ended December 31, Ended December 31,
1998 1997 1998 1997
----------------------------------------------------
Loss on foreign exchange
transactions ($52) ($255) ($184) ($232)
========= ========= ========= =========
25
EUROPEAN MICRO HOLDINGS, INC.
PART II
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
(a), (b), (c) and (d). None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
(a) The Company held its 1998 Annual Meeting of Stockholders on November
16, 1998.
(b) At the annual meeting, the stockholders re-elected the Class 1
directors named in the following table by the vote set forth in such table for a
three-year term to expire in 2001. The names of the directors whose terms of
office as directors continued after the meeting were: John B. Gallagher, Jr.,
Harry D. Shields, Barrett Sutton and Kyle Saxon.
NAME: FOR: AGAINST: WITHHELD:
----- ---- -------- ---------
Bernadette Spofforth 4,535,574 0 1,000
Laurence Gilbert 4,535,574 0 1,000
(c) The only matter voted upon at the Annual Meeting of Stockholders was
the election of the directors mentioned in the above table. Such table also sets
forth the number of votes for, against or withheld for such directors.
(d) None.
The foregoing matters are described in detail in the Company's Proxy
Statement dated October 30, 1998 for the 1998 Annual Meeting of Stockholders.
ITEM 5. OTHER INFORMATION.
On October 26, 1998, European Micro UK acquired all of the outstanding
shares of capital stock of Sunbelt from the shareholders of Sunbelt for the
consideration described below. As a result of the acquisition, Sunbelt is a
wholly-owned subsidiary of European Micro UK. 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 approximately $1.56 million. Of this
guaranteed amount, approximately $600,000 was paid in cash at closing.
The unpaid balance of the guaranteed consideration includes a note payable
to the former Sunbelt shareholder in the amount of approximately $400,000 to be
repaid in November 2005, subject to early repayment at the option of the
noteholder at any time after June 1, 1999. Such note payable is secured by a
cash account totaling $400,000 at December 31, 1998. The note payable and the
cash balances are reflected on the accompanying consolidated condensed balance
sheet at December 31, 1998, in restricted cash and other current liabilities,
respectively.
The remainder of the unpaid guaranteed consideration of approximately
$565,000, plus accrued interest, is to be paid in equal installments within
ninety (90) days of the end of the first and second contingent earn-out periods
as discussed below. The unpaid balance of the guaranteed purchase price is
reflected in other current liabilities and other liabilities on the accompanying
consolidated condensed balance sheet at December 31, 1998.
The purchase agreement also contains contingent purchase price provisions.
The maximum contingent earn-out payments in the aggregate are two (2) times
Sunbelt's fiscal year 1998 pre-tax earnings of approximately 424,000 pounds
sterling (approximately $1.4 million). The first contingent payment of up to
approximately $700,000 will be made if certain financial parameters are attained
during the first contingent earn-out period which runs from November 1, 1998 to
26
EUROPEAN MICRO HOLDINGS, INC.
October 31, 1999, and if certain of the Sunbelt executives are still employed
with the Company at the end of the first earn-out period. The second contingent
payment of up to approximately $700,000 will be made if certain financial
parameters are attained during the second contingent earn-out period which runs
from November 1, 1999 to October 31, 2000. That portion of the first contingent
earn-out payment related to employee retention, approximately $175,000, is being
recognized by the Company over the course of the first contingent earn-out
period as compensation expense. The remaining portion of the first contingent
earn-out payment of approximately $525,000 and the second contingent earn-out
payment have not been recognized in the accompanying consolidated condensed
financial statements as the payment of such amounts are not, in the opinion of
management, determinable beyond a reasonable doubt.
Within ninety (90) days of the end of first and second contingent earn-out
periods, the first and second purchase price installment payments will be made.
Such installment payments will each include one-half of the remaining 40%
guaranteed purchase price amounts, plus any amounts due under the first and
second contingent earn-out payment provisions. The amounts due to the former 40%
shareholder of Sunbelt will be satisfied by the issuance of a convertible loan
note due six years after the date of issue, and subject to early prepayment at
the option of the noteholder on any date after eight months from the date of
issuance. The Company has the option of paying all future amounts due to the
former Sunbelt shareholders in common stock of European Micro Holdings, Inc. The
Company also entered into employment agreements with the two former shareholders
of Sunbelt.
The acquisition of Sunbelt was accounted for as a purchase. The purchase
price, subject to adjustment as described above and inclusive of transaction
costs, of approximately $1.66 million exceeded the estimated fair market value
of net assets acquired by approximately $1.48 million, which is being amortized
on a straight-line basis over 25 years. The allocation of the purchase price and
the determination of the estimated life of goodwill are preliminary. The results
of operations of Sunbelt have been included in the accompanying financial
statements from the date of acquisition.
Sunbelt, formerly privately held, is a distributor of microcomputer
products to dealers, value-added resellers and mass merchants throughout Western
Europe. Sunbelt's trading operations were integrated with and into the
operations of European Micro UK. Sunbelt's business of distributing its Nova
brand products operates as a separate business entity consistent with past
practice. Sunbelt was established in 1992 and is based in Wimbledon, England.
For the fiscal year ended June 30, 1998, Sunbelt had total sales of
approximately $16.5 million and pre-tax earnings of approximately $742,500.
On November 12, 1998, European Micro UK acquired the assets of H&B. Based
in Holland, H&B was a privately held, independent, focused distributor of
microcomputer products to the BENELUX countries - Belgium, Holland and
Luxembourg. H&B had 1997 annual revenues of approximately U.S. $2 million. The
acquisition of H&B was accounted for as a purchase. The base purchase price,
subject to adjustment, of approximately $79,000 exceeded the estimated value of
net assets acquired by approximately $58,000, which is being amortized on a
straight-line basis over 25 years. The allocation of the purchase price and the
determination of the estimated life of goodwill are preliminary. If certain
financial performance criteria are met for the fiscal years ended June 30, 1999
and 2000, additional consideration of approximately $66,000 will be paid (to be
settled in Dutch guilders). Such contingent consideration has not been reflected
in the accompanying consolidated condensed financial statements. The results of
operations of H&B have been included in the accompanying financial statements
from the date of acquisition.
27
EUROPEAN MICRO HOLDINGS, INC.
The following summarized unaudited pro forma financial information assumes
the acquisition of Sunbelt occurred on July 1, 1997 ($ in thousands, except per
share data):
SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1998 1997
---- ----
Total net sales $64,162 $52,990
Net earnings $803 $1,152
Earnings per share:
Basic $0.16 $0.29
Diluted $0.16 $0.29
The amounts are based on certain assumptions and estimates, and do not
reflect any benefits from economies which might be achieved from the combined
operations. The pro forma results do not necessarily represent results which
would have occurred if the acquisition had taken place on the basis assumed
above, nor are they indicative of the results of future operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS.
EXHIBIT
NO. DESCRIPTION LOCATION
- ------- ----------- --------
2.01 Agreement for the Acquisition of Incorporated by reference to
Sunbelt (UK) Limited by European Exhibit 2.01 to Registrant's
Micro Plc dated October 26, 1998 Form 10-Q for the quarter
ended September 30, 1998.
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 Incorporated by reference to
Articles of Incorporation Exhibit 3.02 to Registrant's
Form 10-Q for the quarter
ended March 31, 1998.
3.03 Bylaws Incorporated by reference to
Exhibit No. 3.02 to the
Registration Statement.
4.01 Form of Stock Certificate Incorporated by reference to
Exhibit No. 4.01 to the
Registration Statement.
4.02 1998 Stock Incentive Plan Incorporated by reference to
Exhibit No. 4.02 to the
Registration Statement.
4.03 1998 Stock Employee Stock 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 Westminster Bank Plc Exhibit No. 10.01 to the
Registration Statement.
28
EUROPEAN MICRO HOLDINGS, INC.
EXHIBIT
NO. DESCRIPTION LOCATION
- ------- ----------- --------
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 dated Registration Statement.
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 dated Registration Statement.
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
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 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
29
EUROPEAN MICRO HOLDINGS, INC.
EXHIBIT
NO. DESCRIPTION LOCATION
- ------- ----------- --------
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.
10.18 Form of Credit Agreement by and Incorporated by reference to
between European Micro UK and Exhibit No. 10.18 to the
National Westminster Bank Plc Annual Report on Form 10-K
for the fiscal year ended June 30,
1998 filed with the Commission on
September 28, 1998.
10.19 Consulting Contract dated Incorporated by reference to
September 10, 1998 by and between Exhibit 10.19 to Registrant's Form
European Micro Holdings, Inc. and 10-Q for the quarter ended
The Equity Group September 30, 1998.
10.20 Service Agreement dated October Incorporated by reference to
28, 1998 by and between European Exhibit 10.20 to Registrant's Form
Micro Holdings, Inc. and Michael 10-Q for the quarter ended
Gesner September 30, 1998.
10.21 Service Agreement dated October Incorporated by reference to
28, 1998 by and between European Exhibit 10.21 to Registrant's Form
Micro Plc and Gerard O'Rourke 10-Q for the quarter ended
September 30, 1998.
11.01 Statement re: Computation of Provided herewith.
Earnings
15.01 Letter re: Unaudited Financial Not applicable.
Information
18.01 Letter re Change in Accounting Not applicable.
Principles
19.01 Report Furnished to Security Not applicable.
Holders
22.01 Published Report Regarding Not applicable.
Matters Submitted to Vote of
Security Holders
23.01 Consents of experts and counsel Not applicable.
24.01 Power of Attorney Not applicable.
27.01 Financial Data Schedule Provided herewith.
(b) REPORTS ON FORM 8-K.
Registrant filed a Current Report on Form 8-K dated November 10, 1998 to
disclose the acquisition of Sunbelt (UK) Ltd. This Form 8-K was amended on
January 8, 1999 to delete any reference that the Company intends to provide any
financial information required by Item 7 of Form 8-K because it determined that
Sunbelt is not a "significant" business under Rule 11-01(b) of Regulation S-X.
Subsequent to the amended filing, the Company's independent accountants
determined that Sunbelt would be deemed to be a "significant" business under
Rule 11-01(b) of Regulation SX. The Company intends to report such financial
information in an amended Form 8-K.
30
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.
Date: February 16, 1999 EUROPEAN MICRO HOLDINGS, INC.
By: /s/ Harry D. Shields
--------------------
Harry D. Shields, Co-President
31