U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(MARK ONE)
|X| Quarterly Report Pursuant to Section 13 or 15(d) of Securities
Exchange Act of 1934
For the quarterly period ended December 31, 2000
|_| Transition report under Section 13 or 15(d) of the Securities Exchange
Act of 1934 (No Fee Required)
For the transition period from _______ to _______.
Commission File No. 333-44393
EUROPEAN MICRO HOLDINGS, INC.
-----------------------------
(Name of Registrant as Specified in Its Charter)
NEVADA 65-0803752
------ ----------
(State or Other Jurisdiction of Incorporation (I.R.S. Employer Identification No.)
or Organization)
6073 N.W. 167TH STREET, UNIT C-25, MIAMI, FLORIDA 33015
------------------------------------------------- -----
(Address of Principal Executive Offices) (Zip Code)
(305) 825-2458
(Issuer's Telephone Number, Including Area Code)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months, and (2) has been
subject to such filing requirements for the past 90 days. Yes |X| No |_|
There were 4,996,674 shares of Common Stock, par value $0.01 per share,
outstanding as of January 31, 2001.
PART I
FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS.
--------------------
INDEX TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Consolidated Condensed Balance Sheets as of December 31, 2000 and
June 30, 2000..................................................................3
Consolidated Condensed Statements of Operations for the three and six
months ended December 31, 2000 and 1999........................................4
Consolidated Statement of Changes in Shareholders' Equity
for the six months ended December 31, 2000.....................................5
Consolidated Condensed Statements of Cash Flows for the six months
ended December 31, 2000 and 1999...............................................6
Notes to Consolidated Condensed Financial Statements...........................8
2
EUROPEAN MICRO HOLDINGS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
DECEMBER 31, 2000 JUNE 30, 2000
-------------------------------------------
ASSETS
CURRENT ASSETS:
Cash $575 $1,222
Restricted cash 359 364
Trade receivables, net 9,956 13,160
Due from related parties 49 --
Inventories, net 7,564 6,194
Prepaid expenses 492 322
Income taxes receivable 847 909
Other current assets 482 765
---------- ----------
TOTAL CURRENT ASSETS 20,324 22,936
Property and equipment, net 3,718 3,927
Goodwill, net 4,360 2,808
Investments in and advances to unconsolidated subsidiaries 85 252
Other assets 348 290
---------- ----------
TOTAL ASSETS $28,835 $30,213
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings $11,167 $11,903
Current portion of long-term borrowings 702 678
Trade payables 877 2,256
Accrued expenses and other current liabilities 3,040 1,882
Due to related parties - 11
---------- ----------
TOTAL CURRENT LIABILITIES 15,786 16,730
Long-term borrowings 2,104 2,373
---------- -----
TOTAL LIABILITIES $17,890 $19,103
---------- ----------
SHAREHOLDERS' EQUITY:
Preferred stock $0.01 par value shares:
1,000,000 authorized, no shares issued - -
and outstanding
Common stock $0.01 par value shares:
20,000,000 authorized, Shares issued and
outstanding 4,996,674 at December 31, 50 49
2000 and 4,933,900 at June 30, 2000
Additional paid-in capital 9,325 9,191
Accumulated other comprehensive loss (628) (550)
Retained earnings 2,198 2,420
---------- ----------
TOTAL SHAREHOLDERS' EQUITY 10,945 11,110
---------- ----------
COMMITMENTS, CONTINGENCIES AND SUBSEQUENT - -
EVENTS
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $28,835 $30,213
=========== ===========
See accompanying notes to consolidated condensed financial statements.
3
EUROPEAN MICRO HOLDINGS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(UNAUDITED) (UNAUDITED)
THREE MONTHS ENDED DECEMBER 31, SIX MONTHS ENDED DECEMBER 31,
-------------------------------------------------------------------
2000 1999 2000 1999
---- ---- ---- ----
C>
SALES:
Net sales $26,657 $33,651 $55,671 $65,396
Net sales to related parties 93 895 147 1,914
-------- -------- -------- --------
Total net sales 26,750 34,546 55,818 67,310
COST OF GOODS SOLD:
Cost of goods sold (23,900) (29,969) (49,758) (58,045)
Cost of goods sold to related (89) (872) (143) (1,863)
parties
-------- -------- -------- --------
Total cost of goods sold (23,989) (30,841) (49,901) (59,908)
-------- -------- -------- --------
GROSS PROFIT 2,761 3,705 5,917 7,402
OPERATING EXPENSES:
Selling, general and (2,596) (3,357) (5,479) (6,423)
administrative expenses
-------- -------- -------- --------
INCOME FROM OPERATIONS 165 348 438 979
Interest income 2 20 17 59
Interest expense (262) (309) (573) (528)
Equity in net income
of unconsolidated subsidiaries -- 2 -- --
-------- -------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES (95) 61 (118) 510
Income tax expense (59) (50) (104) (292)
-------- -------- -------- --------
NET INCOME (LOSS) $(154) $11 $(222) $218
======== ======== ======== ========
Net income (loss) per share $(0.03) $0.00 $(0.04) $0.04
- basic
======== ======== ======== ========
Net income (loss) per share $(0.03) $0.00 $(0.04) $0.04
- diluted
======== ======== ======== ========
See accompanying notes to consolidated condensed financial statements.
4
EUROPEAN MICRO HOLDINGS, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(In thousands, except share data)
(Unaudited)
ACCUMULATED
ADDITIONAL OTHER TOTAL
PAID-IN COMPREHENSIVE RETAINED SHAREHOLDERS'
COMMON STOCK CAPITAL INCOME (loss) EARNINGS EQUITY
--------------------------------------------------------------------------------
SHARES AMOUNT
------ ------
Balance at June 30, 2000 4,933,900 $49 $9,191 $(550) $2,420 $11,110
Comprehensive Income (loss):
Net loss - - - - (222) (222)
Other comprehensive
income, foreign currency
translation adjustment - - - (78) - (78)
---------------------------------------------------
Total comprehensive loss - - - (78) (222) (300)
Issuance of common stock, net of
$184 in offering costs 62,774 1 16 17
Compensation charge in
relation to share options
issued to non-employees - 118 - - 118
-----------------------------------------------------------------------------------------
Balance at December 31, 4,996,674 $50 $9,325 $(628) $2,198 $10,945
=========================================================================================
See accompanying notes to consolidated condensed financial statements.
5
EUROPEAN MICRO HOLDINGS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(UNAUDITED)
SIX MONTHS ENDED DECEMBER 31,
---------------------------------------
2000 1999
---- ----
OPERATING ACTIVITIES:
Net income (loss) $(222) $218
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED
BY (USED IN) OPERATING ACTIVITIES
Depreciation and amortization 333 287
Amortization of expense related to contingent earn-out -- 47
provisions
Deferred income taxes 40 (15)
Provision for note receivable impairment 252 --
Compensation charge for non-employee stock options 118 28
CHANGES IN ASSETS AND LIABILITIES
Trade receivables 3,204 5,512
Due from related parties (49) 1,082
Inventories (1,370) 1,512
Prepaid expenses and other current assets 9 225
Income tax receivable 62 --
Trade payables (1,379) (3,705)
Due to related parties (11) (622)
Income taxes payable -- 369
Accrued expenses and other current liabilities (489) (1,185)
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 498 3,753
--------- ---------
INVESTING ACTIVITIES:
Purchase of fixed assets (279) (2,993)
Sale of fixed assets 190 27
Payment for acquisition, net of cash acquired -- (1,220)
Investments (85) --
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES (174) (4,186)
--------- ---------
FINANCING ACTIVITIES:
Short-term borrowings, net (736) (4,175)
Proceeds (repayments) of long-term borrowings (321) 3,118
Issuance of common stock, net 17 --
Repayment of capital leases, net 102 (33)
--------- ---------
NET CASH USED IN FINANCING ACTIVITIES (938) (1,090)
--------- ---------
Exchange rate changes (33) 174
--------- ---------
NET DECREASE IN CASH: (647) (1,349)
Cash at beginning of period 1,222 3,168
--------- ---------
CASH AT END OF PERIOD $575 $1,819
========= =========
6
Non-cash investing and financing activities:
Fair value of assets acquired $ -- $3,314
Goodwill 1,647 1,408
Fair value of liabilities assumed -- (2,817)
Notes issued for consideration (1,647) (604)
--------- ---------
Cash paid for acquisitions -- 1,301
Less cash acquired -- (81)
--------- ---------
Net cash paid for acquisitions $ -- $1,220
========= =========
Interest paid $573 $517
========= =========
Taxes paid $18 $29
========= =========
See accompanying notes to consolidated condensed financial statements.
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 2000 Annual Report on
Form 10-K.
In the Company's opinion, all adjustments necessary for a fair presentation of
these interim statements have been included and are of a normal and recurring
nature.
2 LIQUIDITY
The Company suffered operating losses during fiscal year 2000 and in the first
and second quarters of 2001. Ongoing legal costs associated with the litigation
related to Big Blue Europe, the costs associated with the Company's electronic
commerce strategy, increases in general overhead costs, and increased interest
expense due primarily to increased borrowings, coupled with decreasing sales
volumes and gross profit margins, have negatively impacted operating results.
These factors may continue to impact the Company's operations.
The Company was not in compliance with certain loan agreement financial
covenants during fiscal year 2000. While the Company has obtained waivers from
these covenant violations existing at June 30, 2000, in most instances the
waivers only address the covenant-reporting period ending thereon. Compliance
with these financial covenants during fiscal 2001 will require improved
operating results compared to fiscal 2000. Management has initiated certain
actions to increase the likelihood of attaining these improved operating
results. Such actions include, among other things, (i) modifying the terms of
certain financial covenants (ii) entering into the Equity Credit Line (See Note
7 to the Consolidated Condensed Financial Statements), (iii) temporarily
suspending activities related to its electronic commerce strategy until specific
funding can be obtained (see Note 8 to the Consolidated Condensed Financial
Statements), (iv) obtaining extensions and subordination of payment of
contingent earn-out amounts relating to calendar year 2000 under the American
Micro purchase agreement, (v) adjusting staffing levels, and (vi) implementing
steps to attempt to increase sales volume and lower inventory levels. No
assurances can be given that management's initiatives will be successful, and
that loan agreement defaults will not occur in the future.
Another factor that could negatively impact the Company's liquidity is the terms
of the borrowing arrangements of European Micro UK. As disclosed in Notes 4 and
5 to the Consolidated Condensed Financial Statements, certain of European Micro
UK's borrowing capacity is subject to termination by the borrower at such
lender's sole discretion. Further, the American Micro and Nor-Easter lines of
credit and the European Micro Holdings, Inc. term loan contain subjective
acceleration clauses. These factors increase the liquidity risk to the Company.
8
EUROPEAN MICRO HOLDINGS, INC.
NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
3 GOODWILL
On October 26, 1998, European Micro UK acquired all of the outstanding shares of
capital stock of Sunbelt (UK) Limited ("SUNBELT"). The Sunbelt purchase price
(to be settled in pounds sterling) was comprised of a guaranteed portion and two
contingent earn-out payments. The unpaid balance of the guaranteed purchase
price of 152,656 pounds sterling ($228,000 at exchange rate on December 31,
2000), and the portion of the second contingent earn-out payment related to the
volume purchases from the Far-East of 129,758 pounds sterling ($194,000 at
exchange rate on December 31, 2000) was paid in cash the amount of 112,966
pounds sterling ($169,000 at exchange rate on December 31, 2000) to the former
40% Sunbelt on November 20, 2000 and was paid with the issuance of 37,754 shares
of the Company's common stock to the former 60% Sunbelt shareholder on December
12, 2000. At December 31, 2000, all contingent consideration related to the
Sunbelt acquisition has been paid. Goodwill from this transaction is being
amortized on a straight-line basis over 20 years.
The Company acquired American Surgical Supply Corp. of Florida d/b/a American
Micro Computer Center ("AMCC"), in a merger on July 1, 1999. The transaction was
structured as a merger of AMCC with and into the newly formed, wholly owned
subsidiary of the Company. Upon consummation of the merger, the subsidiary's
name was changed to American Micro Computer Center, Inc. ("AMERICAN MICRO"). The
purchase price for AMCC was equal to $1,131,000, plus an earn-out amount payable
in cash or shares of the Company's common stock (at the Company's discretion)
equal to two times the after-tax earnings of American Micro in calendar year
1999 and two times the after-tax earnings of American Micro in calendar year
2000. The portion of the purchase price paid at closing was funded through the
Company's working capital. In addition, the Company assumed all outstanding
indebtedness of AMCC, including a shareholder loan in the approximate amount of
$289,000. This loan was owed to the father of John B. Gallagher, the Company's
Co-President, Co-Chairman and significant shareholder. This note was repaid in
full in November 1999. If the Company elects to pay any portion of the purchase
price in shares of the Company's common stock, then AMCC's former shareholders
have fifteen days to make arrangements to sell such shares over the next forty
trading days. If the sale of such shares results in net proceeds of less than
the purchase price, then the Company will pay the difference in cash to AMCC's
shareholders.
The acquisition of AMCC was accounted for as a purchase. The base purchase
price, inclusive of transaction costs, of approximately $1,315,000 exceeded the
estimated fair market value of net assets acquired by approximately $817,000,
which constitutes goodwill and which is being amortized on a straight-line basis
over 20 years. The results of operations of American Micro, since acquisition,
have been included in the accompanying consolidated condensed financial
statements. The contingent earn-out payment relating to two times the after tax
earnings for calendar year 1999 of approximately $600,000 was paid in March 2000
and is reflected in goodwill, net. The contingent earn-out payment relating to
two times the after tax earnings for calendar year 2000 of approximately
$1,647,000 is reflected in goodwill, net and accrued expenses and other current
liabilities in the accompanying consolidated condensed financial statements. The
second earn-out payment will be due in monthly principal payments of $50,000,
plus interest at 8% commencing on April 1, 2001 , subject to the rights of
SouthTrust Bank. This loan will be due and payable thirty days after no amounts
are due to SouthTrust Bank. This amount is secured by a pledge of the shares of
common stock of American Micro held by the Company. This security hs been
subordinated to SouthTrust Bank.
The results of operations of the above entities have been included in the
accompanying consolidated condensed financial statements from the dates of
acquisition.
9
EUROPEAN MICRO HOLDINGS, INC.
4 SHORT-TERM BORROWINGS
Short-term borrowings consists of the following (in thousands):
DECEMBER 31, 2000 JUNE 30, 2000
----------------- -------------
Bank line of credit
European Micro UK Working Capital facility (a) $3,217 $1,959
Nor'Easter Micro facility (b) 1,150 975
American Micro facility (b) 750 992
------- -------
Total bank lines of credit 5,117 3,926
Receivable financing (c) 5,381 7,303
Other short-term borrowings (d) 669 674
------- -------
Total short-term borrowings $11,167 $11,903
(a) European Micro UK has a bank line of credit (the "EUROPEAN MICRO UK
WORKING CAPITAL FACILITY") which is collateralized by a mortgage debenture
on all the assets of European Micro UK and is subordinate to the
receivable financing and the capital leases. The facility, which is
subject to review in July each year, has been extended to September 2001
and is due on demand. Maximum borrowing capacity under this facility is
2.0 million pounds sterling ($3.0 million at exchange rate on December 31,
2000). Interest is charged at 1.25% over the bank-borrowing rate of 6% at
December 31, 2000 and 6% at June 30, 2000.
Until December 31, 2000, European Micro UK also had a revolving credit
agreement (the "EUROPEAN MICRO UK INVENTORY FACILITY") collateralized
against general corporate assets. The facility was terminated effective
December 31, 2000.
(b) The Company also obtained two lines of credit on October 28, 1999, to
finance operations based in the United States. American Micro and
Nor'Easter each obtained a line of credit, collaterized by accounts
receivable and inventory. Amounts available under each of the line of
credit agreements are based upon eligible accounts receivable and
inventory, up to a maximum borrowing amount of $1.5 million for each
agreement. Each of these lines of credit was to mature on October 28,
2000. As partial security for these loans, Messrs. Gallagher and Shields
pledged to the lender a portion of their shares of common stock of the
Company. In the event the Company defaults on one or more of these loans,
the lender may foreclose on all or a portion of the pledged securities.
Such an event may cause a change of control in the Company because Messrs.
Gallagher and Shields together own 71% of the Company's outstanding common
stock. The lines of credit agreements include certain financial and
non-financial covenants and restrictions. The agreements also contain a
provision whereby the lender can declare a default based on subjective
criteria.
On October 5, 2000, the Company received a waiver of the covenant
violations existing at the June 30, 2000 reporting date for the American
Micro and Nor'Easter lines of credit. The Company and the bank terminated
the existing lines of credit and entered into a new borrowing arrangement
whereby each of American Micro and Nor'Easter have a working capital line
of credit equal to the lesser of (i) $1.5 million or (ii) the sum of 85%
of eligible accounts receivable, plus the lesser of 50% of eligible
inventory or $750,000. Interest will be paid monthly at a floating rate of
0.5% over the bank's base rate of 9.5% at December 31, 2000. The term of
the new arrangements is for one year from the closing date. The new
facilities also require the companies to maintain depository accounts at
the bank, whose daily receipts will be applied against outstanding
borrowings under the lines of credit. The new facilities also place
certain restrictions on the companies' ability to pay dividends and to
make capital expenditures, among other things, and also include a
provision whereby the lender can declare a default based on subjective
criteria. Collateral under the new credit line facilities consists of a
first priority lien on all assets
10
EUROPEAN MICRO HOLDINGS, INC.
NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
of American Micro and Nor'Easter. Messrs. Gallagher and Shields guaranteed
the obligations under these arrangements. Mr. Shields has pledged personal
assets as additional collateral and has further agreed to maintain certain
personal financial statement liquidity levels. These borrowings are
cross-collateralized and cross-defaulted with borrowings under the $1.5
million term loan to European Micro Holdings, Inc. discussed in Note 5 to
the Consolidated Condensed Financial Statements.
(c) Receivable financing represents borrowings secured by various trade
receivables of European Micro UK totaling $6.3 million at December 31,
2000 and $8.6 million at June 30, 2000. The accounts receivable financing
provides for a borrowing base of 85% of accounts receivable, with a limit
of 6.2 million pounds sterling ($9.3 million at exchange rate on December
31, 2000). This facility can be terminated by either party giving three
months' notice. The finance company which provides the receivable
financing facility has full recourse to European Micro UK with respect to
any doubtful or unrecovered amounts. Interest is charged on the receivable
financing balance at 1.25% above the bank borrowing rate of 6% at December
31, 2000, and 6% at June 30, 2000.
(d) Other short-term borrowings represent various unsecured notes payable of
American Micro. The maturity dates of the notes range from on demand to
June 30, 2001. The interest rates range from 11% to 12%.
5 LONG-TERM BORROWINGS
Long-term borrowings consists of the following (in thousands):
DECEMBER 31, 2000 JUNE 30, 2000
----------------- -------------
Mortgage loan note (a) $1,780 $1,877
Note payable (b) 875 1,125
Other long-term borrowings 151 49
-------- --------
$2,806 $3,051
Less current maturities of long-term borrowings (702) (678)
-------- --------
Total long-term borrowings $2,104 $2,373
======== ========
(a) European Micro UK purchased the office building in which it had previously
leased space for a purchase price of 1,705,000 pounds sterling ($2,547,000
at exchange rate on December 31, 2000). The purchase price was financed in
part by a mortgage loan note in the amount of 1,312,000 pounds sterling
($1,960,000 at exchange rate on December 31, 2000). This mortgage loan
note bears interest at a fixed rate of 7.6%, with monthly payments of
principal and interest of 15,588 pounds sterling ($23,000 at exchange rate
on December 31, 2000), and matures in July 2009. The mortgage loan note
includes certain financial and non-financial covenants and restrictions.
The agreement also contains a provision whereby the lender can declare a
default based on subjective criteria. The financial covenants are measured
using the financial results of European Micro UK as of each fiscal year
end. Based upon European Micro UK's fiscal year end operating results,
European Micro UK was out of compliance with certain of the covenant
requirements at June 30, 2000. The Company has obtained a waiver of this
non-compliance through July 1, 2001.
(b) European Micro Holdings, Inc. obtained a term loan on October 28, 1999, in
the amount of $1,500,000. The term loan is to be repaid with quarterly
payments of $125,000 over three years. The term loan bears interest at the
one-month LIBOR plus two and one-quarter percentage points (2.25%).
One-month LIBOR at December 31, 2000 was 6.6%. The term loan is secured by
substantially all of the assets of the Company. As partial security for
this loan, Messrs. Gallagher and Shields pledged to the lender a portion
of their shares of common stock of the Company. Messrs. Gallagher and
Shields guaranteed the obligations under the term loan. In addition, Mr.
Shield has pledged personal assets as additional collateral and has
further agreed to maintain certain personal financial statement liquidity
levels. In the event the Company defaults on this loan, the lender may
foreclose on all or a portion of the pledged securities. Such an event may
cause a change of control in the Company because Messrs. Gallagher and
Shields together own 71% of the Company's outstanding common stock.
11
EUROPEAN MICRO HOLDINGS, INC.
NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
The term loan agreement is with SouthTrust Bank as is the Nor'Easter Micro and
American Micro line of credit facilities discussed in Note 4 to the Consolidated
Condensed Financial Statements. The agreement also contains a provision whereby
the lender can declare a default based on subjective criteria. Further, the term
loan credit agreement contains similar loan covenant requirements and is
cross-collateralized and cross-defaulted with the line of credit facilities. As
such, the Company was not in compliance for the June 30, 2000 reporting period.
On October 5, 2000, the Company received a waiver of the non-compliance with the
financial covenants as of June 30, 2000, and also entered into an amendment to
the term loan agreement that, among other things, established revised financial
covenants.
6 EARNINGS PER SHARE
The calculation of earnings per share is detailed in the table below:
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
---------------------------------------------------
2000 1999 2000 1999
---- ---- ---- ----
EARNINGS
Net income (loss) (in thousands) $(154) $11 $(222) $218
--------- --------- --------- ---------
WEIGHTED AVERAGE NUMBER OF SHARES
Outstanding common stock during 4,943,057 4,933,900 4,938,478 4,933,900
the period
Contingently issuable shares -- 114,011 -- 99,559
--------- --------- --------- ---------
BASIC WEIGHTED AVERAGE NUMBER OF SHARES 4,943,057 5,047,911 4,938,478 5,033,459
Effect of dilutive stock options and -- -- -- 497
other contingent shares
--------- --------- --------- ---------
DILUTED WEIGHTED AVERAGE NUMBER OF 4,943,057 5,047,911 4,938,478 5,033,956
SHARES
========= ========= ========= =========
Basic earnings per share $(0.03) $0.00 $(0.04) $0.04
========= ========= ========= =========
Diluted earning per share $(0.03) $0.00 $(0.04) $0.04
========= ========= ========= =========
During the three-month period-ended December 31, 2000, the Company issued 62,774
shares of common stock, which reflected 9,157 and 4,579 weighted average shares
for the three-month and six-month period ended December 31, 2000, respectively.
During the three-month period-ended December 31, 2000, the Company issued
warrants and options to purchase 50,000 shares of its common stock at an
exercise price of $4.00. The above dilutive earnings per share calculations
exclude the effect of warrants and options to purchase 1,480,500 and 1,480,500
shares of common stock for the three-month and six-month periods ended December
31, 2000 respectively, at exercise prices ranging from $4.00 to $12.00
respectively, because they were anti-dilutive. The above dilutive earnings per
share calculations exclude the effect of warrants and options to purchase
349,000 and 341,500 shares of common stock for the three-month and six-month
periods ended December 31, 1999 respectively, at exercise prices ranging from
$7.50 to $12.00 respectively, because they were anti-dilutive. Also, see Note 3
to the Consolidated Condensed Financial Statements related to contingently
issuable shares related to an acquisition. The effect of contingent shares
related to the first earn-out of American Micro is not included, as such payment
was paid in cash in March 2000. The effect of contingent shares related to
second earn-out of American Micro is not included.
12
EUROPEAN MICRO HOLDINGS, INC.
NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
7 EQUITY LINE OF CREDIT
On August 24, 2000, European Micro Holdings, Inc. entered into an Equity Line of
Credit (the "EQUITY CREDIT LINE"). Pursuant to the Equity Credit Line, an
institutional investor agreed to acquire up to $20 million of the Company's
common stock at a purchase price equal to 88% of the market price of such stock,
as defined in the agreement. The timing of each sale and the number of shares to
be sold is at the discretion of the Company, subject to various conditions,
including an effective registration of the shares. Dollar amounts that the
Company can request under any individual sale is subject to the average trading
volume of the Company's common stock for the preceding 25-day trading period.
The maximum term of the Equity Credit Line is 30 months from the date of the
agreement. The agreement contains various representations, warranties and
covenants by the Company, including limitations on the Company's ability to sell
common stock or common stock equivalents, sell assets, merge, etc. In connection
with entering into the Equity Credit Line, the Company also entered into a
Placement Agent Agreement. Under the Placement Agent Agreement, the agent will
receive a commission equal to 7% of the gross proceeds from each advance under
the Equity Credit Line.
The Company has issued to the placement agent two warrants to purchase a total
of 1,000,000 shares of the Company's common stock. The Class A Warrant allows
the holder to purchase 500,000 shares of common stock at an exercise price of
$7.00 (subject to certain anti-dilution adjustments) commencing with the first
advance under the Equity Credit Line. If the warrant shares are not covered by
an effective registration statement for the resale of the warrant shares, the
holder can elect a cash-less exercise. The warrant shares expire five years from
the issuance date. The Company can force conversion of the warrant shares if the
closing price of its common stock is $10.00 or higher for ten consecutive
trading days. The Class B Warrant allows the holder to purchase 500,000 shares
of common stock at an exercise price of $10.00 (subject to similar anti-dilution
adjustments). The other terms of the Class B Warrant are similar to the Class A
Warrant, except that the Class B Warrant is exercisable pro-rata to the ratio of
the advances drawn under the Equity Credit Line, and except that the Company can
force conversion of the warrant shares if the closing price of its common stock
is $15.00 or higher for ten consecutive trading days.
The Company granted the Equity Credit Line investor and the placement agent
certain registration rights. Pursuant to the registration rights agreements, the
Company was obligated to, among other things, register the sale of the investors
shares sold to such investor under the Equity Credit Line and the sale of shares
of common stock underlying the warrant shares. On October 27, 2000, the Company
filed a registration statement with the Securities and Exchange Commission to
register all such shares. The Securities and Exchange Commission issued approval
and the registration statement became effective on December 1, 2000.
On August 8, 2000, in connection with the Equity Credit Line, the Company
entered into a consulting arrangement with a third party whereby such party
would provide certain financing and capital market consultation. In connection
with the arrangement, the Company paid to the consultant $10,000 in cash
compensation. The Company also issued to the consultant options to purchase
100,000 shares of its common stock at an exercise price of $4.55. Management has
attributed $208,000 of the value of these options as incremental costs directly
attributable to the signing of the Equity Credit Line, and as such, has offset
such amounts against additional paid in capital in the accompanying Consolidated
Condensed Balance Sheet at December 31, 2000. The remaining $105,000 option
value attributed to general consulting services was expensed in the quarter
ended September 30, 2000. In addition, the Company will pay to the consultant
cash payments and warrants to purchase common shares of the Company. Each cash
and warrant payment will equal 1% of the dollar amount drawn by the Company
under the Equity Credit Line.
On December 4, 2000, in connection with the Equity Credit Line, the Company
requested an advance from the investor in the amount of $50,000. In accordance
with the advance request, on December 26, 2000, the Company issued 25,020 shares
of its common stock to the investor and received cash in the amount of $45,750
($50,000 less fees of $4,250), accordingly the Company has reclassed $45,750
from prepaid offering costs to additional paid in capital. As a result of this
initial advance all 500,000 of the Class A warrant shares and a pro-rata portion
of the Class B warrant shares became exercisable. These amounts have been netted
against additional paid-in capital.
13
EUROPEAN MICRO HOLDINGS, INC.
NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
8 BUSINESS-TO-BUSINESS ELECTRONIC COMMERCE STRATEGY
The Company has initiated a business-to-business electronic commerce strategy,
which is focused on creating a global, value-added, information technology
equipment and service trading community. The Company has hired Cap Gemini, a
leading European management consultancy and information technology services
firm, to assist in the implementation of this plan. The Company has incurred the
sum of 755,000 pounds sterling ($1,128,000 at exchange rate on December 31,
2000) related to the feasibility studies and business process design. This
amount was reflected in selling, general and administrative expenses on the
accompanying consolidated statements of operations for the year ended June 30,
2000. The Company has capitalized the sum of 229,000 pounds sterling ($338,000
at exchange rate on December 31, 2000) related to the actual software
development. This amount is reflected in property and equipment, net on the
accompanying consolidated condensed balance sheets at December 31, 2000 and June
30, 2000. During May 2000, the Company temporarily halted the ongoing
development being performed by Cap Gemini until specific funding is obtained to
complete the project. No further expenses have been incurred in the six months
ended December 31, 2000. There can be no assurances that the Company will be
successful in obtaining funding for this project. Since the project was not
continued by November 30, 2000, the Company incurred a fee to Cap Gemini of
150,000 pounds sterling ($224,000 at exchange rate on December 31, 2000). This
fee will be credited against future invoices of Cap Gemini upon the continuation
of the project. The Company is re-evaluating and re-defining the current project
based on changes in the market. This planning includes detailing the project
based on the Company's ability to fund the project from current working capital,
if other funding is still not available.
9 COMMITMENTS AND CONTINGENCIES
On November 12, 1999, Jeffrey and Marie Alnwick (the "ALNWICKS") and a New York
corporation, Big Blue Products, commenced an action individually and
derivatively for the Dutch company, Big Blue Europe, against our company and our
founders and officers, John B. Gallagher and Harry D. Shields, in the United
States District Court, Eastern District of New York, Jeffrey Alnwick and Marie
Alnwick v. European Micro Holdings, Inc., Eastern District of New York, Docket
No. 99 CV 7380 (the "ALNWICK LITIGATION").
The complaint alleges thirty-three causes of action. Plaintiffs claim, in
substance, that defendants breached oral and written agreements relating to the
management, operation and funding of Big Blue Europe. Specifically, plaintiffs
alleged that defendants breached the joint venture agreement by which Big Blue
Europe was formed, a licensing agreement for use of the "Big Blue" service mark
in Europe, a non-competition agreement allegedly preventing Big Blue Europe from
operating in the United States and several capital contribution agreements.
Plaintiffs also claimed that defendants breached their fiduciary duties to the
Alnwicks, engaged in fraudulent acts, aided and abetted breaches of fiduciary
duties by others, misappropriated trade secrets and interfered with the
employment contract of Big Blue Europe's managing director. The complaint seeks
unspecified compensatory and punitive damages, as well as injunctive relief
restraining defendants from acting in violation of the alleged agreements.
Defendants have moved to dismiss the complaint principally on the basis of forum
non-conveniens in favor of existing proceedings in the Netherlands (commenced by
European Micro UK). Defendants argue that any dispute between the stockholders
and directors of Big Blue Europe, which operates pursuant to Dutch law, should
be resolved by a Dutch court.
Defendants intend to contest the claims in the Alnwicks Litigation vigorously,
whether asserted in the United States or in the Netherlands courts. For the
three-month and six-month period ended December 31, 2000, the Company has
incurred approximately $236,000 and $355,000 in costs related to such lawsuit.
Management does not believe that the ultimate outcome of this litigation will
result in a material liability to the Company.
Due to the continued uncertainty of the outcome of the pending lawsuit and the
difficulties of managing operations of Big Blue Europe during the dispute, the
Company recorded during the three-month period ended September 30, 2000 an
additional $252,000 provision for doubtful accounts related to the notes
receivable owed to the Company. During the three-month period ended December 31,
2000, the Company and the Alnwicks entered into a liquidation agreement in which
Big Blue Europe would cease operations and liquidate all assets and liabilities.
As of December 31, 2000 all operations have ceased and the remaining liquidation
is being handled by a court appointed liquidator. As part of the liquidation the
Company and the Alnwicks have both advanced $85,000 to the liquidator. As of
December 31, 2000 the Company believes the $85,000 that was advanced will be
recovered and therefore, no valuation allowance has been established for the
$85,000.
14
10 SUBSEQUENT EVENTS
On January 2, 2001, the Company issued options to purchase 144,000 shares of its
common stock at an exercise price of $2.00 to various key employees.
On January 19, 2001, the Company received a letter from The Nasdaq Stock Market,
Inc. stating that the Company failed to maintain a minimum market value of
public float of $5.0 million over a 30 day trading period. According to the
letter, the Company has until April 19, 2001 to regain the minimum public float.
If the Company is unable to demonstrate that the minimum public float has been
met, then the Company's common stock will be delisted. In such an event the
Company intends to apply for listing on The Nasdaq Small Cap Market if it
satisfies the requirements for continued listing on that market. Any delisting
of the Company's common stock may negatively impact the price of the Company's
common stock and impair the development of a trading market in the Company's
common stock.
11 OTHER ACCOUNTING MATTERS
Effective July 1, 2000, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 133, Accounting for Derivative and Hedging Activities, as
amended by SFAS No. 138. The Statement requires the recognition of all
derivatives on the balance sheet at fair value. The Company's derivatives are
primarily forward foreign exchange contracts. The Company's forward foreign
exchange contracts have been designated as economic hedges of anticipated sales
and purchase transactions. In addition, the Company enters utilizes forward
foreign exchange contracts as an economic hedge against foreign currency market
exposures of underlying assets, liabilities and other obligations. Effective in
the first quarter of fiscal 2001, changes in the fair value of these derivtives,
have been recorded through earnings. At December 31, 2000, the Company did not
have any open forward foreign exchange contracts. Foreign currency gains and
losses, net were a $20,000 loss and a $160,000 gain for the six months ended
December 31, 2000 and 1999, respectively. The effect of the adoption of the new
Statements was immaterial.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin 101, "Revenue Recognition in Financial Statements." The effective date
has been deferred with respect to the Company to the fourth fiscal quarter of
2001 pending additionsl interpretive guidance. The Company is not able to
quantify the impact of SAB 101 at this time. However, there is at least one
issue that could have a material impact on the Company's consolidated condensed
financial statements. For European Micro UK the standard practice is to
recognize revenue on shipment. However, title to the goods is retained until
full payment is received from the customer to perfect the Company's interest in
the goods. Under possible interpretations, European Micro UK would not be able
to recognize revenue until full payment is received. In the transisiton year,
revenues would be lower as all sales on the net terms not collected by year-end
would not be recognized.
15
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 AND ITS
ABILITY TO COMPLY WITH THE FINANCIAL COVENANTS IN THE COMPANY'S LOAN AGREEMENTS.
IN ADDITION, WHEN USED IN THIS QUARTERLY REPORT, THE WORDS "BELIEVES,"
"ANTICIPATES," "INTENDS," "IN ANTICIPATION OF," "EXPECTS," AND SIMILAR WORDS ARE
INTENDED TO IDENTIFY CERTAIN FORWARD-LOOKING STATEMENTS. THESE FORWARD-LOOKING
STATEMENTS ARE BASED LARGELY ON THE COMPANY'S EXPECTATIONS AND ARE SUBJECT TO A
NUMBER OF RISKS AND UNCERTAINTIES, MANY OF WHICH ARE BEYOND THE COMPANY'S
CONTROL. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THESE FORWARD-LOOKING
STATEMENTS AS A RESULT OF CHANGES IN TRENDS IN THE ECONOMY AND THE COMPANY'S
INDUSTRY, REDUCTIONS IN THE AVAILABILITY OF FINANCING AND AVAILABILITY OF
COMPUTER PRODUCTS ON TERMS AS FAVORABLE AS EXPERIENCED BY THE COMPANY IN PRIOR
PERIODS AND OTHER FACTORS. IN LIGHT OF THESE RISKS AND UNCERTAINTIES, THERE CAN
BE NO ASSURANCE THAT THE FORWARD-LOOKING STATEMENTS CONTAINED IN THIS QUARTERLY
REPORT WILL IN FACT OCCUR. THE COMPANY DOES NOT UNDERTAKE ANY OBLIGATION TO
PUBLICLY RELEASE THE RESULTS OF ANY REVISIONS TO THESE FORWARD-LOOKING
STATEMENTS TO REFLECT ANY FUTURE EVENTS OR CIRCUMSTANCES.
UNLESS THE CONTEXT OTHERWISE REQUIRES AND EXCEPT AS OTHERWISE SPECIFIED,
REFERENCES HEREIN TO "EUROPEAN MICRO" OR THE "COMPANY" INCLUDE EUROPEAN MICRO
HOLDINGS, INC. AND ITS FIVE WHOLLY-OWNED SUBSIDIARIES, EUROPEAN MICRO PLC, A
COMPANY ORGANIZED UNDER THE LAWS OF THE UNITED KINGDOM ("EUROPEAN MICRO UK"),
NOR'EASTER MICRO, INC., A NEVADA CORPORATION ("NOR'EASTER"), COLCHESTER
ENTERPRISE PTE. LTD. A COMPANY ORGANIZED UNDER THE LAWS OF SINGAPORE
("COLCHESTER"), AMERICAN MICRO COMPUTER CENTER, INC. A FLORIDA CORPORATION
("AMERICAN MICRO"), AND ENGENIS.COM LTD., A COMPANY ORGANIZED UNDER THE LAWS OF
THE UNITED KINGDOM ("ENGENIS"), (COLLECTIVELY, THE FIVE WHOLLY-OWNED
SUBSIDIARIES ARE REFERRED TO AS THE "SUBSIDIARIES").
OVERVIEW
We are an independent distributor of microcomputer products, including personal
computers, memory modules, disc drives and networking products, to customers
mainly in Western Europe and the United States. Our customers consist of more
than 770 value-added resellers, corporate resellers, retailers, direct marketers
and distributors. We generally do not sell to end-users. Substantially all of
the products sold by us are manufactured by well-recognized manufacturers, such
as IBM, Compaq and Hewlett-Packard, although we generally do not obtain our
inventory directly from such manufacturers. We monitor the geographic pricing
strategies related to such products, currency fluctuations and product
availability in an attempt to obtain inventory at favorable prices from other
distributors, resellers and wholesalers.
We consider ourselves to be a focused distributor, as opposed to a broadline
distributor, dealing with a limited and select group of products from a limited
and select group of leading manufacturers. We believe that being a focused
distributor enables us to respond more quickly to customer requests and gives us
greater availability of products, access to products and improved pricing. We
believe that as a focused distributor we have been able to develop greater
expertise in the products that we sell. Our company places significant emphasis
on market awareness and planning and shares this knowledge with our customers to
enhance business relations. We strive to monitor and react quickly to market
trends in order to enable our multilingual sales team to maintain the highest
levels of customer service.
European Micro Holdings, Inc. was organized under the laws of the State of
Nevada in December 1997 and is the parent of European Micro UK, Nor'Easter,
Colchester, American Micro and Engenis. European Micro UK was organized under
the laws of the United Kingdom in 1991 to serve as an independent distributor of
microcomputer products to customers mainly in Western Europe and to related
parties in the United States. Nor'Easter was organized under the laws of the
State of Nevada on December 26, 1997 to serve as an independent distributor of
microcomputer products in the United States. Colchester was organized under the
laws of Singapore in November 1998 to serve as an independent distributor of
microcomputer products in Asia. American Micro was organized under the laws of
the State of Florida on June 24, 1999 to acquire AMCC and now serves as an
independent distributor of microcomputer products in the United States. Premier
Pages, Ltd. was formed on January 28, 2000 and later changed its name to
Engenis.com, Ltd. on June 23, 2000. Engenis was formed under the laws of the
United Kingdom to serve as a business-to-business electronic commerce trading
company.
European Micro UK is the parent of European Micro GmbH ("EUROPEAN MICRO
GERMANY"), Sunbelt and European Micro B.V. ("EUROPEAN MICRO HOLLAND") and has a
50% joint venture interest in Big Blue Europe, B.V. ("BIG BLUE EUROPE").
16
EUROPEAN MICRO HOLDINGS, INC.
European Micro Germany was organized under the laws of Germany in 1993 and until
August 2000 operated as a sales office in Dusseldorf, Germany. In August 2000,
we closed the office and consolidated the sales operations of European Micro
Germany. Customers of European Micro Germany are being handled through European
Micro UK. All products sold by European Micro Germany were procured and shipped
from the facilities of European Micro UK. Sunbelt is a company registered in
England and Wales, which was established in 1992 and is based in Wimbledon,
England. Sunbelt operated as a distributor of microcomputer products to dealers,
value-added resellers and mass merchants throughout Western Europe. Except for
the distribution of our Nova brand products (which was discontinued in January
2000), Sunbelt's distribution operations were integrated with and into the
operations of European Micro UK. European Micro Holland was organized under the
laws of Holland in 1995, and operates as a sales office near Amsterdam, Holland.
Big Blue Europe was organized under the laws of Holland in January 1997 and is a
computer parts distributor with offices located near Amsterdam, Holland, selling
primarily to computer maintenance companies. We are currently in the process of
liquidating Big Blue Europe.
European Micro Holding's headquarters are located at 6073 N.W. 167th Street,
Unit C-25, Miami, Florida 33015, and our telephone number is (305) 825-2458.
RESULTS OF OPERATIONS
The following table sets forth, for the periods presented, the percentage of net
sales represented by certain items in the Company's Consolidated Condensed
Statements of Operations:
PERCENTAGE OF NET SALES
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
----------------------------------------------------
2000 1999 2000 1999
---- ---- ---- ----
Net sales to third parties 99.7% 97.4% 99.7% 97.2%
Net sales to related parties 0.3% 2.6% 0.3% 2.8%
------- ------- ------- -------
Total net sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold to third
parties (89.4%) (86.8%) (89.1%) (86.2%)
------- ------- ------- -------
Cost of goods sold to related
parties (0.3%) (2.5%) (0.3%) (2.8%)
------- ------- ------- -------
Total cost of goods sold (89.7%) (89.3%) (89.4%) (89.0%)
------- ------- ------- -------
Total gross profit 10.3% 10.7% 10.6% 11.0%
------- ------- ------- -------
Total operating expenses (9.7%) (9.7%) (9.8%) (9.6%)
------- ------- ------- -------
Operating profit 0.6% 1.0% 0.8% 1.4%
Interest income 0.0% 0.1% 0.0% 0.1%
Interest expense (1.0%) (0.9%) (1.0%) (0.8%)
Equity in income of
unconsolidated affiliate 0.0% 0.0% 0.0% 0.0%
------- ------- ------- -------
Income (loss) before income (0.4%) 0.2% (0.2%) 0.7%
taxes
Income taxes (0.2%) (0.1%) (0.2%) (0.4%)
------- ------- ------- -------
Net income (loss) (0.6%) 0.1% (0.4%) 0.3%
======= ======= ======= =======
17
EUROPEAN MICRO HOLDINGS, INC.
THREE-MONTH PERIOD ENDED DECEMBER 31, 2000 AND 1999
TOTAL NET SALES. Total net sales decreased $7.8 million, or 22.6%, from $34.5
million in the three-month period ended December 31, 1999 to $26.7 million in
the comparable period in 2000. Excluding net sales to related parties, net sales
decreased $7.0 million, or 20.8%, from $33.7 million in the three-month period
ended December 31, 1999 to $26.7 million in the comparable period in 2000. This
decrease was attributable to a decrease in sales of $7.6 million at European
Micro UK due to the comparison to the sales run up caused by the impending
millennium and a significant decrease in the exchange rate from pounds sterling
to US dollars, and a decrease in sales of $1.5 million at Colchester due to
shifting sales from third parties to intercompany sales. This decrease of net
sales was partially offset by an increase in sales of $706,000 at American Micro
due to a shift from selling server options and other computer parts and
concentrating on configuring and selling complete systems, an increase in sales
of $1.4 million at Nor'Easter due to the increased availability of product from
Colchester.
Net sales to related parties decreased $803,000 or 89.7%, from $895,000 in the
three-month period ended December 31, 1999, to $92,000 in the comparable period
in 2000. Sales to Technology Express have decreased as product availability
decreased.
GROSS PROFIT. Gross profit decreased $945,000, or 25.5%, from $3.7 million in
the three-month period ended December 31, 1999, to $2.8 million in the
comparable period in 2000. Gross profit excluding related party transactions
decreased $924,000, or 25.1%, from $3.7 million in the three-month period ended
December 31, 1999 to $2.8 million the comparable period in 2000. This decrease
was attributable to a decrease of $1.34 million at European Micro UK due to the
decrease in sales in addition to a decrease in gross margin from 11.63% to
8.82%. This decrease in gross margin mainly resulted from the excellent margins
gained from the sale of memory modules during October 1999 due to the Taiwan
earthquake. This decrease was also attributable to a decrease of $11,000 at
Nor'Easter, and a decrease of $110,000 at Colchester. This decrease was
partially offset, by an increase of $543,000 at American Micro. Nor'Easter's
gross profit decreased even with a higher sales volume because of a decrease in
gross margin from 8.28% to 5.81%. Colchester's gross profit decreased with a
decrease in sales volume. American Micro's gross profit increased due to higher
sales volume and an increase in gross margin from 10.26% to 19.82% by changing
the product mix from low margin components to higher margin complete systems.
Gross profit attributable to related party sales decreased $21,000, or 85.6%,
from $24,000 in the three-month period ended December 31, 1999, to $3,000 in the
comparable period in 2000. As discussed above, this decrease is attributable to
decreased sales due to a lack of product availability.
Gross margins decreased by 0.4% from 10.7% in the three-month period ended
December 31, 1999 to 10.3% in the comparable period in 2000. Excluding related
party transactions, gross margin decreased from 10.9% in the three-month period
ended December 31, 1999 to 10.3% in the comparable period in 2000. This change
is related to the net of a decrease at European Micro UK and Nor'Easter and an
increase at American Micro.
Foreign exchange gains and losses, net, changed from a gain of $160,000 in the
three-month period ended December 31, 1999, to a loss of $20,000 in the
comparable period in 2000. This adverse movement was attributable to the
weakening of the Euro relative to the British pound sterling, causing a
devaluation of sales made in European currencies, and the strengthening of the
U.S. dollar relative to the Euro and the British pound sterling, making
purchases denominated in U.S. dollars more expensive.
OPERATING EXPENSES. Operating expenses as a percentage of total net sales
decreased from 9.72% during the three-month period ended December 31, 1999 to
9.70% in the comparable period in 2000. This decrease was attributable to a
decrease in operating expenses as a percentage of total net sales from 8.57% to
7.36% at European Micro UK, which is due to a decrease in operating expenses of
approximately $882,000 from $2.0 million in the three-month period ended
December 31, 1999 to $1.1 million in the comparable period in 2000. This
decrease in expenses at European Micro UK is due to the reduction in personnel
and the decrease in gross profit reduced commission and bonus expense, which are
a function of gross profit. This decrease was partially offset by an increase in
operating expenses as a percentage of total net sales from 4.13% to 4.93% at
Nor'Easter, which is due to an increase in operating expenses of approximately
$103,000 from $162,000 in the three-month period ended December 31, 1999 to
$265,000 in the comparable period in 2000. This increase in expenses is due to
moving their operations to a new building, which has higher monthly rent, an
increase in depreciation expense related to new equipment and leasehold
improvements and an increase in gross profit therefore increasing commission and
18
EUROPEAN MICRO HOLDINGS, INC.
bonus expense, which are a function of gross profit. This decrease was partially
offset also by an increase in operating expenses as a percentage of total net
sales from 4.38% to 7.62% at Colchester, which is due to a large decrease in
sales, while operating expenses only decreased slightly. This decrease was also
partially offset by an increase in operating expenses as a percentage of total
net sales from 8.94% to 10.31% at American Micro, which is due to an increase in
operating expenses attributable to selling efforts related a new product mix.
INTEREST EXPENSE. Interest expense decreased by $48,000 from $309,000 in
three-month period ended December 31, 1999 to $261,000 in the comparable period
in 2000. This was attributable to a decreased reliance on short-term borrowings
to finance accounts receivable and inventory balances.
INTEREST IN JOINT VENTURE. Due to the continued uncertainty of the outcome of
the pending lawsuit and the difficulties of managing operations of Big Blue
Europe during the dispute, the Company recorded during the three-month period
ended September 30, 2000 an additional $252,000 provision for doubtful accounts
related to the notes receivable owed to the Company. During the three-month
period ended December 31, 2000, the Company and the Alnwicks entered into a
liquidation agreement in which Big Blue Europe would cease operations and
liquidate all assets and liabilities. As of December 31, 2000 all operations
have ceased and the remaining liquidation is being handled by a court appointed
liquidator. As part of the liquidation the Company and the Alnwicks have both
advanced $85,000 to the liquidator. As of December 31, 2000 the Company believes
the $85,000 that was advanced will be recovered and therefore, no valuation
allowance has been established for the $85,000.
INCOME TAXES. Income tax expense results from taxes on income earned by European
Micro UK. The Company has not accrued a tax expense or benefit for the U.S.
operations.
SIX-MONTH PERIOD ENDED DECEMBER 31, 2000 AND 1999
TOTAL NET SALES. Total net sales decreased $11.5 million, or 17.1%, from $67.3
million in the six-month period ended December 31, 1999 to $55.8 million in the
comparable period in 2000. Excluding net sales to related parties, net sales
decreased $9.7 million, or 14.9%, from $65.4 million in the six-month period
ended December 31, 1999 to $55.7 million in the comparable period in 2000. This
decrease was attributable to a decrease in sales of $13.0 million at European
Micro UK due to the comparison to the sales run up caused by the impending
millennium, and a significant decrease in the exchange rate from pounds sterling
to US dollars, and a decrease of $74,000 at American Micro. This decrease of net
sales was partially offset by an increase in sales of $2.1 million at
Nor'Easter, and an increase of $1.3 million at Colchester. This increase at
Colchester is due to Colchester selling within the Asian region as compared to
being mainly a supplier for other Subsidiaries in 1999, especially during the
three month period of July through September 2000.
Net sales to related parties decreased $1.8 million, or 92.3%, from $1.9 million
in the six-month period ended December 31, 1999, to $147,000 in the comparable
period in 2000. Sales to Technology Express have decreased as product
availability decreased.
GROSS PROFIT. Gross profit decreased $1.5 million, or 20.1%, from $7.4 million
in the six-month period ended December 31, 1999, to $5.9 million in the
comparable period in 2000. Gross profit excluding related party transactions
decreased $1.4 million, or 19.6%, from $7.4 million in the six-month period
ended December 31, 1999 to $5.9 million in the comparable period in 2000. This
decrease was attributable to a decrease of $2.6 million at European Micro UK.
This decrease in gross margin mainly resulted from the excellent margins gained
from the sale of memory modules during October 1999 due to the Taiwan
earthquake. This decrease was partially offset by an increase of $149,000 at
Nor'Easter, and an increase of $931,000 at American Micro, and an increase of
$104,000 at Colchester. Nor'Easter's gross profit increased due to higher sales
volume and an increase in gross margin from 6.6% to 6.7%. Colchester's gross
profit increased due to higher sales volume and an increase in gross margin from
5.9% to 6.5%. American Micro's gross profit increased even with lower sales
volume by increasing the gross margin from 10.2% to 20.6% by changing the
product mix from low margin components to higher margin complete systems.
Gross profit attributable to related party sales decreased $47,000, or 92.2%,
from $51,000 in the six-month period ended December 31, 1999, to $4,000 in the
comparable period in 2000. As discussed above, this decrease is attributable to
decreased sales due to a lack of product availability.
Gross margins decreased by 0.4% from 11.0% in the six-month period ended
December 31, 1999 to 10.6% in the comparable period in 2000. Excluding related
party transactions, gross margin decreased from 11.2% in the six-month period
ended December 31, 1999 to 10.6% in the comparable period in 2000. This change
is related to the net of a decrease at European Micro (UK) and an increase at
American Micro, Colchester and Nor'Easter.
19
EUROPEAN MICRO HOLDINGS, INC.
Foreign exchange gains and losses, net, changed from a loss of $82,000 in the
six-month period ended December 31, 1999, to a loss of $170,000 in the
comparable period in 2000. This adverse movement was attributable to the
weakening of the Euro relative to the British pound sterling, causing a
devaluation of sales made in European currencies, and the strengthening of the
U.S. dollar relative to the Euro and the British pound sterling, making
purchases denominated in U.S. dollars more expensive.
OPERATING EXPENSES. Operating expenses as a percentage of total net sales
increased from 9.54% in the six-month period ended December 31, 1999 to 9.82% in
the comparable period in 2000. This increase was partially attributable to
expensing $105,000 related to the value of stock options attributed to general
consulting services. This increase was also attributable to an increase in
operating expenses as a percentage of total net sales from 8.8% to 10.5% at
American Micro, which is due to a decrease in sales as operating expenses remain
constant. Operating expenses as a percentage of total net sales increased from
3.6% to 5.0% at Nor'Easter, which is due to an increase in operating expenses of
approximately $216,000 from $286,000 in the six-month period ended December 31,
1999 to $502,000 in the comparable period in 2000. This increase in expenses is
due to moving their operations to a new building, which has higher monthly rent,
an increase in depreciation expense related to new equipment and leasehold
improvements and an increase in gross profit therefore increasing commission and
bonus expense, which are a function of gross profit. This increase was partially
offset by a decrease in operating expenses as a percentage of total net sales
from 8.6% to 7.6% at European Micro UK, which is due to a decrease in operating
expenses of approximately $1.5 million from $3.9 million in the six-month period
ended December 31, 1999 to $2.4 million in the comparable period in 2000. This
decrease in expenses is due to the reduction in personnel and the decrease in
gross profit reduced commission and bonus expense, which are a function of gross
profit. Also, this decrease was attributable to a decrease in operating expenses
as a percentage of total net sales from 7.5% to 5.2% at Colchester, which is due
to a large increase in sales, as operating expenses increased slightly.
INTEREST EXPENSE. Interest expense increased by $45,000 from $528,000 in
six-month period ended December 31, 1999 to $573,000 in the comparable period in
2000. This was attributable to having the lines of credit at Nor'Easter and
American Micro and the term loan for six months, July through December, during
2000, while only three months, October through December, during 1999.
INTEREST IN JOINT VENTURE. Due to the continued uncertainty of the outcome of
the pending lawsuit and the difficulties of managing operations of Big Blue
Europe during the dispute, the Company recorded during the three-month period
ended September 30, 2000 an additional $252,000 provision for doubtful accounts
related to the notes receivable owed to the Company. During the three-month
period ended December 31, 2000, the Company and the Alnwicks entered into a
liquidation agreement in which Big Blue Europe would cease operations and
liquidate all assets and liabilities. As of December 31, 2000 all operations
have ceased and the remaining liquidation is being handled by a court appointed
liquidator. As part of the liquidation the Company and the Alnwicks have both
advanced $85,000 to the liquidator. As of December 31, 2000 the Company believes
the $85,000 that was advanced will be recovered and therefore, no valuation
allowance has been established for the $85,000.
INCOME TAXES. Income tax expense results from taxes on income earned by European
Micro UK. The Company has not accrued a tax expense or benefit for the U.S.
operations.
SEASONALITY
We typically experience variations in our total net sales and net income on a
quarterly basis as a result of many factors. These include seasonal variations
in demand for our products and services, the introduction of new hardware and
software technologies and products offering improved features and functionality,
the introduction of new products and services by us and our competitors, the
loss or consolidation of a significant supplier or customer, changes in the
level of operating expenses, inventory adjustments, product supply constraints,
pricing, interest rate fluctuations, the impact of acquisitions, currency
fluctuations and general economic conditions. Historical operating results have
included a reduction in demand in Europe during the summer months.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL. Our company suffered an operating loss in fiscal 2000 and the first and
second quarters of fiscal 2001. Our operating results have been adversely
impacted by ongoing legal costs related to Big Blue Europe, the costs associated
with our electronic commerce strategy, increases in general overhead costs and
interest expense and a decrease in sales. These factors may continue to impact
our operations in fiscal 2001.
20
EUROPEAN MICRO HOLDINGS, INC.
We were not in compliance with certain financial covenants contained in our loan
documents during fiscal 2000. The lenders waived any noncompliance with these
financial covenants that existed on June 30, 2000. In most cases, however, these
waivers do not relate to any future reporting period. Compliance with these
financial covenants during Fiscal 2001 will require improved operating results
compared to Fiscal 2000. Management has initiated certain actions to increase
the likelihood of attaining these improved operating results. Such actions
include, among other things, (i) modifying the terms of certain financial
covenants, (ii) entering into the equity line of credit, (iii) temporarily
suspending activities related to our electronic commerce strategy until specific
funding can be obtained, (iv) obtaining extensions of the due date for payment
of contingent earn-out amounts relating to calendar year 2000 under the American
Micro purchase agreement, (v) adjusting staffing levels, and (vi) implementing
steps to attempt to increase sales and lower inventory levels. No assurances can
be given that management's initiatives will be successful or that loan agreement
defaults will not occur in the future.
Another factor that could negatively impact on our liquidity position is the
terms of the borrowing arrangements of European Micro UK. Certain of European
Micro UK's borrowing capacity are subject to termination by the lender at its
sole discretion. Further, the American Micro and Nor-Easter line of credit
facilities and the European Micro Holdings, Inc. term loan contain subjective
acceleration clauses. These factors increase the liquidity risk to our company.
CASH REQUIREMENTS. Our primary cash requirements are for operating expenses,
funding accounts receivable, purchasing inventory, acquisitions and debt
service. We have historically funded these cash requirements through a
combination of loans, internally generated cash flow and the net proceeds of our
initial public offering.
WORKING CAPITAL. Working capital requirements of European Micro UK are funded by
a combination of line of credit facilities, together with accounts receivable
financing. In both cases, the amounts drawn down accrue the same rate of
interest based on a markup over the bank-borrowing rate in the United Kingdom.
The bank line of credit was 2.0 million pounds sterling ($3.0 million) at
December 31, 2000. The accounts receivable financing provides for a borrowing
base of 85% of accounts receivable, with a limit of 6.2 million pounds sterling
($9.2 million on December 31, 2000). This facility can be terminated by either
party giving three months' notice. The finance company that provides the
receivable financing facility has full recourse to European Micro UK with
respect to any doubtful or unrecovered amounts. Interest is charged on the
receivable financing balance at 1.25% above the bank-borrowing rate of 6% at
December 31, 2000.
Working capital requirements of our U.S. operations are funded by two lines of
credit. On October 28, 1999, American Micro and Nor'Easter each obtained a line
of credit secured by accounts receivable and inventory. Amounts available under
each of the line of credit agreements were based upon eligible accounts
receivable and inventory, up to a maximum borrowing amount of $1.5 million for
each agreement. Each of these lines of credit was to mature on October 28, 2000.
Interest accrued at 0.5% over the bank-borrowing rate of 9.5% at December 31,
2000. As partial security for these loans, Messrs. Gallagher and Shields pledged
to the lender a portion of their shares of common stock of our company. In the
event that we defaulted on one or more of these loans, the lender could have
foreclosed on all or a portion of the pledged securities. Such an event could
have caused a change of control in our company because Messrs. Gallagher and
Shields together own 71% of our outstanding common stock. The lines of credit
21
EUROPEAN MICRO HOLDINGS, INC.
agreements included certain financial and non-financial covenants and
restrictions. The agreements also contained a provision whereby the lender could
have declared a default based on subjective criteria. As of June 30, 2000, we
were not in compliance with certain of the financial covenants in the
agreements.
On October 5, 2000, we received a waiver of the covenant violations existing at
the June 30, 2000 reporting date for the American Micro and Nor'Easter lines of
credit. Our company and the bank terminated the existing lines of credit and
entered into a new borrowing arrangement whereby each of American Micro and
Nor'Easter have a working capital line of credit equal to the lesser of (i) $1.5
million or (ii) the sum of 85% of eligible accounts receivable, plus the lesser
of 50% of eligible inventory or $750,000. Interest will be paid monthly at a
floating rate of .5% over the bank's base rate. The term of the new arrangements
is for one year from the closing date. The new facilities also require the
companies to maintain depository accounts at the bank, whose daily receipts will
be applied against outstanding borrowings under the lines of credit. The new
facilities also place certain restrictions on our ability to pay dividends and
to make capital expenditures, among other things, and includes a provision
whereby the lender can declare a default based on subjective criteria.
Collateral under the new credit line facilities consists of a first priority
lien on all assets of American Micro and Nor'Easter. Messrs. Gallagher and
Shields guaranteed the borrowings under these arrangements. Mr. Shields has
pledged personal assets as additional collateral and has further agreed to
maintain certain personal financial statement liquidity levels. These borrowings
are cross-collateralized and cross-defaulted with borrowings under the $1.5
million term loan to European Micro Holdings, Inc.
LONG-TERM CAPITAL. Our long-term capital needs have historically been met from
the sales of securities and long-term borrowings. In June 1998, we received $9.3
million in gross proceeds from our initial public offering of 933,900 shares of
common stock. Our company incurred total expenses in connection with the
offering of $2.2 million. These proceeds have been used to acquire Sunbelt and
American Micro and to fund operations.
On October 28, 1999, we obtained a $1.5 million term loan. The term loan
agreement is with the lender the Nor'easter Micro and American Micro line of
credit facilities discussed above. Further, the term loan contains similar loan
covenants. The term loan is to be repaid with quarterly payments of $125,000
over three years. The term loan bears interest at the one-month LIBOR, plus
2.25%. One-month LIBOR at December 31, 2000 was 6.6%. At December 31, 2000, the
outstanding balance on the term loan was $875,000. The term loan is secured by
substantially all of the assets of our company. As partial security for this
loan, Messrs. Gallagher and Shields pledged to the lender a portion of their
shares of common stock of our company. In addition, Mr. Shields has pledged
personal assets as additional collateral and has further agreed to maintain
certain personal financial statement liquidity levels. In the event we default
on this loan, the lender may foreclose on all or a portion of the pledged
securities. Such an event may cause a change of control in our company because
Messrs. Gallagher and Shields together own 71% of our outstanding common stock.
The term loan agreement includes certain financial and non-financial covenants
and restrictions. The agreement also contains a provision whereby the lender can
declare a default based on subjective criteria. As described above, we were not
in compliance with the loan covenants on June 30, 2000. The lender waived this
non-compliance in October 2000 and amended the term loan agreement, including
revising the financial covenants.
On July 1, 1999, we acquired American Micro for a purchase price of $1,131,000,
plus an earn-out. The portion of the purchase price paid at closing was funded
through our working capital. The contingent earn-out payment relating to two
times the after tax earnings for calendar year 1999 of approximately $600,000
was paid in March 2000. The remaining earn-out portion of the purchase price
relating to two times the after tax earnings for calendar year 2000 was funded
through a note payable to the former stockholders of American Micro. Pursuant to
the original merger agreement, the remaining earn-out portion was to be due no
later than May 1, 2001. The former stockholders of American Micro have agreed
that, for so long as the repayment of the earn-out is limited by the loan
covenants with SouthTrust Bank, we will pay the stockholders $50,000 per month,
plus 8% interest, commencing April 1, 2001, subject to the rights of SouthTrust
Bank. The loan will be due and payable thirty days after no amounts are due to
SouthTrust Bank. This amount is secured by a pledge of the shares of common
stock of American Micro held by the Company. This security has been subordinated
to SouthTrust Bank.
On July 16, 1999, European Micro UK purchased the office building in which it
had previously been leasing space for 1,705,000 pounds sterling ($2,547,000 at
December 31, 2000). The purchase price was financed in part by a loan in the
amount of 1,312,000 pounds sterling ($1,960,000 at December 31, 2000). This loan
calls for monthly payments of principal and interest in the amount of 15,588
pounds sterling ($23,284 at December 31, 2000) and matures in July 2009. The
mortgage loan bears interest at a fixed rate of 7.6%. The mortgage loan includes
certain financial and non-financial covenants and restrictions. The agreement
also contains a provision whereby the lender can declare a default based on
subjective criteria. The financial covenants are measured using the financial
22
EUROPEAN MICRO HOLDINGS, INC.
results of European Micro UK as of each fiscal year end. Based upon European
Micro UK's fiscal year end operating results, European Micro UK was out of
compliance with certain of the covenant requirements at June 30, 2000. The
lender waived this non-compliance through July 1, 2001.
On August 24, 2000, European Micro Holdings, Inc. entered into an equity line of
credit with Spinneret Financial System, Ltd. Pursuant to the equity line of
credit, Spinneret Financial agreed to acquire up to $20 million of our common
stock at a purchase price equal to 88% of the market price of such stock. The
timing of each sale and the number of shares to be sold is at our discretion,
subject to various conditions, including an effective registration of the
shares. The dollar amount that our company can request under any individual sale
is subject to the average trading volume of our common stock for the preceding
25-day trading period. The maximum term of the equity line of credit is 30
months from the date of the agreement. The agreement contains various
representations, warranties and covenants by us, including limitations on our
ability to sell common stock or common stock equivalents, sell assets, merge, or
enter into certain other transactions.
On December 4, 2000, in connection with the Equity Credit Line, the Company
requested an advance from the investor in the amount of $50,000. In accordance
with the advance request, on December 26, 2000, the Company issued 25,020 shares
of its common stock to the investor and received cash in the amount of $45,750
($50,000 less fees of $4,250), accordingly the Company has reclassed $45,750
from prepaid offering costs to additional paid in capital. As a result of this
initial advance all 500,000 of the Class A warrant shares and a pro-rata portion
of the Class B warrant shares became exercisable.
Net cash provided by operating activities during the six-month period ended
December 31, 2000 amounted to $498,000. Significant factors providing cash were
a decrease in trade receivables of $3.2 million and a net income before non-cash
expenses in the period of $441,000. The amount of cash provided by the Company's
operations was partially offset by an increase in inventory of $1.4 million, a
decrease in trade payables of $1.4 million.
Cash used in investing activities amounted to $174,000. This primarily consisted
of purchases of fixed assets.
Cash used by financing activities amounted to $938,000. This primarily consisted
of $736,000 paid down on short-term borrowings and payments on long-term debt of
$321,000. The amount of cash used by financing activities was partially offset
by $17,000 in issuance of common stock, net.
Overall, the Company experienced a net decrease in cash of $647,000 for the
six-month period ended December 31, 2000.
ASSET MANAGEMENT
INVENTORY. Our goal is to achieve high inventory turns and maintain a low
inventory level and thereby reduce our working capital requirements. Our
strategy to achieve this goal is to effectively manage our inventory and to
achieve high order fill rates. Inventory levels may vary from period to period,
due to factors including increases or decreases in sales levels, our practice of
making large-volume purchases when it deems such purchases to be attractive, new
products and changes in our product mix.
ACCOUNTS RECEIVABLE. We sell products and services to a customer base of more
than 770 value-added resellers, corporate resellers, retailers and direct
marketers. We offer credit terms to qualifying customers and also sell on a
pre-pay and cash-on-delivery basis. With respect to credit sales, we attempt to
control our bad debt exposure by monitoring customers' creditworthiness and,
where practicable, through participation in credit associations that provide
customer credit rating information for certain accounts. Also, substantially all
of European Micro UK's accounts receivables are insured. Nor'Easter, Colchester
and American Micro generally do not insure their accounts receivable.
CURRENCY RISK MANAGEMENT
REPORTING CURRENCY. European Micro Holding's, Nor'Easter's and American Micro's
reporting and functional currency, as defined by Statement of Financial
Accounting Standards No. 52, is the U.S. dollar. The functional currency of
European Micro UK is the U.K. pound sterling and Colchester is the Singapore
dollar. European Micro UK and Colchester translate into the reporting currency
23
EUROPEAN MICRO HOLDINGS, INC.
by measuring assets and liabilities using the exchange rates in effect at the
balance sheet date and results of operations using the average exchange rates
prevailing during the period.
HEDGING AND CURRENCY MANAGEMENT ACTIVITIES. We occasionally hedge to guard
against currency fluctuations between the U.K. pound sterling and the U.S.
dollar. Because the functional currency of our company's main operating
subsidiary, European Micro UK, is the U.K. pound sterling, currency fluctuations
of the U.K. pound sterling relative to the U.S. dollar may have a material
adverse effect on our business, financial condition and results of operations.
We may engage in hedging activities in the future, although no assurances can be
given that it will engage in such activities and if we do so that such
activities will be successful.
Generally, our policy is not to hedge specifically against individual daily
transactions. Instead, the exposure to a currency is determined every two to
three days. This is done by comparing the bank account balances and account
receivables with accounts payable, all in the same currency to create a
"natural" hedge. Thereafter, to the extent that a bank balance and the account
receivable are not totally offset by the accounts payable, there would be a need
to cover the residual credit balance with a forward currency contract. We tend
to concentrate our currency management into seven currencies: Euro, U.K. pound
sterling, U.S. dollar, Dutch guilder, Canadian dollar, Singapore dollar and
German Mark. We normally deem the exposure in other currencies to be minimal.
However, when we buy products in other currencies, we may, in conjunction with
current market advice, book a forward contract to cover current and some
anticipated future purchases.
ECONOMIC AND MONETARY UNION. On January 1, 1999, eleven of the fifteen member
countries of the European Union established fixed conversion rates between their
existing sovereign currencies and a new currency called the "Euro." These
countries adopted the Euro as their common legal currency on that date. The Euro
is trading on currency exchanges and is available for non-cash transactions.
Until January 1, 2002, the existing sovereign currencies will remain legal
tender in these countries. On January 1, 2002, the Euro is scheduled to replace
the sovereign legal currencies of these countries. Through the operations of
European Micro UK, we have significant operations within the European Union,
including many of the countries that adopted the Euro. We continue to evaluate
the impact that the Euro will have on our continuing business operations and no
assurances can be given that the Euro will not have a material adverse effect on
our business, financial condition and results of operations. However, we do not
expect the Euro to have a material effect on our competitive position as a
result of price transparency within the European Union because we do not rely on
currency imbalances in purchasing inventory from within the European Union. In
the first eight quarters of trading, the Euro devalued against sterling by
12.4%, adversely affecting the value of our trade receivables denominated in
Euros. Going forward, we cannot accurately predict the impact the Euro will have
on currency exchange rates or our currency exchange rate risk. The Internal
Revenue Service ("IRS") has requested comments on various tax issues raised by
the Euro conversion. The IRS is expected to publish guidelines on this issue
and, until such time, we cannot predict whether the IRS guidelines will have any
tax consequences on us.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
-----------------------------------------------------------
We utilize derivative financial instruments in the form of forward foreign
exchange contracts for the purpose of economic hedges of anticipated sale and
purchase transactions. In addition, we enter into economic hedges for the
purposes of hedging foreign currency market exposures of underlying assets,
liabilities and other obligations that exist as part of its ongoing business
operations.
Where the foreign currency exposure is covered by a forward foreign exchange
contract the asset, liability or other obligation is recorded at the contracted
rate each month end and the resultant mark-to-market gains and losses are
recognized as cost of sales in the current period, generally consistent with the
period in which the gain or loss of the underlying transaction is recognized.
Cash flows associated with derivative transactions are classified in the
statement of cash flows in a manner consistent with those of the exposure being
hedged.
EXCHANGE RATE SENSITIVITY
On December 31, 2000, the Company did not have any open forward foreign exchange
contracts. Foreign currency gains and losses, net were a $20,000 loss for the
three-months ended December 31, 2000, and a $160,000 gain for the comparable
period in 1999. Foreign currency gains and losses, net were a $170,000 loss for
the six-months ended December 31, 2000, and an $82,000 loss for the comparable
period in 1999.
24
EUROPEAN MICRO HOLDINGS, INC.
PART II
ITEM 1. LEGAL PROCEEDINGS.
-----------------
On November 12, 1999, Jeffrey and Marie Alnwick (the "ALNWICKS") and a New York
corporation, Big Blue Products, commenced an action individually and
derivatively for the Dutch company, Big Blue Europe, against our company and our
founders and officers, John B. Gallagher and Harry D. Shields in the United
States District Court, Eastern District of New York, Jeffrey Alnwick and Marie
Alnwick v. European Micro Holdings, Inc., Eastern District of New York, Docket
No. 99 CV 7380 (the "ALNWICK LITIGATION").
The complaint alleges thirty-three causes of action. Plaintiffs claim, in
substance, that defendants breached oral and written agreements relating to the
management, operation and funding of Big Blue Europe. Specifically, plaintiffs
alleged that defendants breached the joint venture agreement by which Big Blue
Europe was formed, a licensing agreement for use of the "Big Blue" service mark
in Europe, a non-competition agreement allegedly preventing Big Blue Europe from
operating in the United States and several capital contribution agreements.
Plaintiffs also claimed that defendants breached their fiduciary duties to the
Alnwicks, engaged in fraudulent acts, aided and abetted breaches of fiduciary
duties by others, misappropriated trade secrets and interfered with the
employment contract of Big Blue Europe's managing director. The complaint seeks
unspecified compensatory and punitive damages, as well as injunctive relief
restraining defendants from acting in violation of the alleged agreements.
Defendants have moved to dismiss the complaint principally on the basis of forum
non-conveniens in favor of existing proceedings in the Netherlands (commenced by
European Micro UK), where a Dutch court has appointed an independent director to
oversee the operations of the company. Defendants argue that any dispute between
the stockholders and directors of the Dutch company, Big Blue Europe, which
operates pursuant to Dutch law, should be resolved by a Dutch court.
Our company and our affiliated defendants intend to contest the claims in the
Alnwick Litigation vigorously, whether asserted in the United States or in the
Netherlands courts.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
-----------------------------------------
(a), (b), (c) and (d). None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
-------------------------------
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
---------------------------------------------------
(a), (b), (c) and (d). None.
(c) On December 12, 2000, the Company issued 37,754 shares of common stock in
connection with the purchase of the shares of common stock of Sunbelt. See Note
3 to the Consolidated Condensed Financial Statements. The closing price of the
Company's common stock on December 12, 2000 was $3.00 per share. This
transaction was exempt from registration pursuant to section 4(2) of the
Securities Act of 1933 as the recipient of the shares was an accredited
investor.
ITEM 5. OTHER INFORMATION.
-----------------
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
--------------------------------
(a) Exhibits.
25
EUROPEAN MICRO HOLDINGS, INC.
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.
2.02 Merger Agreement re: AMCC dated Incorporated by reference to
June 29, 1999 Exhibit 2.02 to Registrant's
From 10-K for the year ended
June 30, 1999.
2.03 Plan of 1999 Merger re: AMCC dated Incorporated by reference to
June 29, 1999 Exhibit 2.03 to Registrant's
From 10-K for the year ended
June 30, 1999.
2.04 Articles of Merger re: AMCC dated Incorporated by reference to
June 29, 1999 Exhibit 2.04 to Registrant's
Form 10-K for the year ended
June 30, 1999.
2.05 Amendment to Merger Agreement re: Incorporated by reference to
AMCC dated October 2, 2000 Exhibit 2.05 to Registrant's
Registration Statement on Form
S-1 filed on October 27, 2000.
3.01 Articles of Incorporation Incorporated by reference to
Exhibit No. 3.01 to
Registrant's Registration
Statement (the "Registration
Statement") on Form S-1
(Registration Number
333-44393).
3.02 Certificate of Amendment of 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 Purchase Incorporated by reference to
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.
10.02 Invoice Discounting Agreement with Incorporated by reference to
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
26
EUROPEAN MICRO HOLDINGS, INC.
EXHIBIT
NO. DESCRIPTION LOCATION
--- ----------- --------
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 Stockholders' 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
10.07 Trusteed Stockholders 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
10.08 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
10.09 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
10.10 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
10.11 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
10.12 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
10.13 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
10.14 Form of Indemnification Agreements Incorporated by reference to
with officers and directors Exhibit No. 10.16 to the
Registration Statement.
10.15 Form of Transfer Agent Agreement Incorporated by reference to
with Chase Mellon Stockholder Exhibit No. 10.17 to the
Services, L.L.C. Registration Statement.
10.16 Form of Credit Agreement by and Incorporated by reference to
between European Micro UK and Exhibit No. 10.17 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.
10.17 Consulting Contract dated Incorporated by reference to
September 10, 1998 by and between Exhibit 10.19 to
European Micro Holdings, Inc. and Registrant's Form 10-Q for
The Equity Group the quarter ended
September 30, 1998.
27
EUROPEAN MICRO HOLDINGS, INC.
EXHIBIT
NO. DESCRIPTION LOCATION
--- ----------- --------
10.18 Employment Agreement dated July 1, Incorporated by reference to
1999 between John B. Gallagher and Exhibit 10.21 to
American Micro Registrant's Form 10-K for
the year ended June 30, 1999.
10.19 Revolving Loan Agreement dated Incorporated by reference to
October 5, 2000 between American Exhibit 10.19 to Registrant's Form
Micro and SouthTrust Bank re: Line 10-K for the year ended June 30,
of Credit to American Micro 2000.
10.20 First Amendment to Loan Agreement Incorporated by reference to
dated October 5, 2000 among the Exhibit 10.20 to Registrant's
Company, American Micro, Form 10-K for the year ended
Nor'Easter and SouthTrust Bank, June 30, 2000.
N.A. re: Term Loan to the Company
10.21 Revolving Loan Agreement dated Incorporated by reference to
October 5, 2000 between Nor'Easter Exhibit 10.21 to Registrant's Form
and SouthTrust Bank re: Line of 10-K for the year ended June
Credit to Nor'Easter 30, 2000.
10.22 Loan Agreement dated October 28, Incorporated by reference to
1999 among the Company, American Exhibit 10.23 to Registrant's Form
Micro, Nor'Easter and SouthTrust 10-Q for the quarter ended
Bank, N.A. re: Term Loan to the September 30, 1999.
Company
10.23 Security Agreement dated October Incorporated by reference to
5, 2000 between Nor'Easter and Exhibit 10.23 to Registrant's Form
SouthTrust Bank 10-K for the year ended June 30,
2000.
10.24 Security Agreement dated October Incorporated by reference to
5, 2000 between American Micro and Exhibit 10.24 to Registrant's
SouthTrust Bank Form 10-K for the year ended
June 30, 2000.
10.25 Line of Credit Note given by Incorporated by reference to
Nor'Easter to SouthTrust Bank Exhibit 10.25 to Registrant's
Form 10-K for the year ended
June 30, 2000.
10.26 Line of Credit Note given by Incorporated by reference to
American Micro to SouthTrust Bank Exhibit 10.26 to Registrant's
Form 10-K for the year ended
June 30, 2000.
10.27 Unconditional Guaranty given by Incorporated by reference to
Harry Shields to SouthTrust Bank Exhibit 10.27 to Registrant's
Re: American Micro Form 10-K for the year ended
June 30, 2000.
10.28 Unconditional Guaranty given by Incorporated by reference to
John Gallagher to SouthTrust Bank Exhibit 10.28 to Registrant's
Re: American Micro Form 10-K for the year ended
June 30, 2000.
10.29 Amended and Restated Unlimited Incorporated by reference to
Guaranty Agreement dated October Exhibit 10.29 to Registrant's Form
5, 2000 between Harry Shields and 10-K for the year ended June 30,
SouthTrust Bank 2000.
10.30 Amended and Restated Unlimited Incorporated by reference to
Guaranty Agreement dated October Exhibit 10.30 to Registrant's
5, 2000 between John Gallagher and Form 10-K for the year ended
SouthTrust Bank June 30, 2000.
10.31 Unconditional Guaranty given by Incorporated by reference to
John Gallagher to SouthTrust Bank Exhibit 10.31 to Registrant's
Re: Nor'Easter Form 10-K for the year ended
June 30, 2000.
10.32 Unconditional Guaranty given by Incorporated by reference to
Harry Shields to SouthTrust Bank Exhibit 10.32 to Registrant's
Re: Nor'Easter Form 10-K for the year ended
June 30, 2000.
28
EUROPEAN MICRO HOLDINGS, INC.
EXHIBIT
NO. DESCRIPTION LOCATION
--- ----------- --------
10.33 Specific Agreement for the Incorporated by reference to
Provision of Professional Services Exhibit 10.25 to Registrant's
dated as of March 17, 2000 between Form 10-Q for the the quarter
the Company and Cap Gemini UK Plc ended March 31, 2000.
10.34 Equity Line of Credit Agreement Incorporated by reference to
dated as of August 24, 2000, Exhibit 10.34 to Registrant's Form
between the Company and Spinneret 10-K for the year ended June
Financial System, Ltd. 30, 2000.
10.35 Registration Rights Agreement Incorporated by reference to
dated as of August 24, 2000, Exhibit 10.35 to Registrant's
between the Company and Spinneret Form 10-K for the year ended
Financial System, Ltd. June 30, 2000.
10.36 Warrant to Purchase Common Stock Incorporated by reference to
dated as of August 24, 2000, given Exhibit 10.36 to Registrant's
by the Company to Spinneret Form 10-K for the year ended June
Financial System, Ltd. 30, 2000.
10.37 Warrant to Purchase Common Stock Incorporated by reference to
dated as of August 24, 2000, given Exhibit 10.37 to Registrant's
by the Company to the May Davis Form 10-K for the year ended
Group, Inc. June 30, 2000.
10.38 Registration Rights Agreement Incorporated by reference to
dated as of August 24, 2000, Exhibit 10.38 to Registrant's
between the Company and the May Form 10-K for the year ended
Davis Group, Inc. June 30, 2000.
10.39 Placement Agent Agreement dated as Incorporated by reference to
of August 24, 2000, between the Exhibit 10.39 to Registrant's
Company and the May Davis Group, Form 10-K for the year ended
Inc. June 30, 2000.
10.40 Secured Promissory Note dated as Provided herewith.
of February 19, 2001 given by the
Company to John B. Gallagher
10.41 Secured Promissory Note dated as Provided herewith.
of February 19, 2001 given by
the Company to John P. Gallagher.
10.42 Pledge and Security Agreement Provided herewith.
dated as of February 19, 2001
among the Company, John B.
Gallagher and John P. Gallagher.
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
21.01 Subsidiaries of the Registrant Not applicable.
22.01 Published Report Regarding Not applicable.
Matters Submitted to Vote of
Security Holders
23.01 Consent of Experts Not applicable.
24.01 Power of Attorney Not applicable.
(b) Reports on Form 8-K.
On January 5, 2001, the Company filed a Form 8-K, which disclosed that the
Company dismissed KPMG LLP as its independent certified public accountant
effective December 28, 2000.
29
EUROPEAN MICRO HOLDINGS, INC.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Dated: February 20, 2001 EUROPEAN MICRO HOLDINGS, INC.
By: /s/ John B. Gallagher
-------------------------------
John B. Gallagher, Co-President