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 March 31, 2001
|_| 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 5,029,667 shares of Common Stock, par value $0.01 per share,
outstanding as of May 15, 2001.
EUROPEAN MICRO HOLDINGS, INC.
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
INDEX TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Consolidated Condensed Balance Sheets as of March 31, 2001 (unaudited)
and June 30, 2000 .............................................................2
Consolidated Condensed Statements of Operations for the three and nine
months ended March 31, 2001 and 2000 (unaudited)...............................3
Consolidated Condensed Statements of Cash Flows for the nine months
ended March 31, 2001 and 2000 (unaudited)......................................4
Notes to Consolidated Condensed Financial Statements (unaudited)...............6
1
EUROPEAN MICRO HOLDINGS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands, except share data)
MARCH 31, 2001 JUNE 30, 2000
(Unaudited)
-----------------------------------------
ASSETS
CURRENT ASSETS:
Cash $644 $1,222
Restricted cash -- 364
Trade receivables, net 9,246 13,160
Inventories, net 4,251 6,194
Prepaid expenses 270 322
Income taxes receivable 476 909
Other current assets 1,050 765
--------- --------
TOTAL CURRENT ASSETS 15,937 22,936
Property and equipment, net 3,565 3,927
Goodwill, net 4,409 2,808
Investments in and advances to unconsolidated subsidiaries -- 252
Other assets 23 290
--------- --------
TOTAL ASSETS $23,934 $30,213
--------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings $9,651 $11,903
Current portion of long-term borrowings 2,579 678
Trade payables 1,181 2,256
Accrued expenses and other current liabilities 2,313 1,882
Due to related parties -- 11
--------- --------
TOTAL CURRENT LIABILITIES 15,724 16,730
Long-term borrowings -- 2,373
--------- --------
TOTAL LIABILITIES $15,724 $19,103
--------- ---------
COMMITMENTS, CONTINGENCIES AND SUBSEQUENT EVENTS -- --
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 5,029,667 at March 31, 2001 and
4,933,900 at June 30, 2000 50 49
Additional paid-in capital 9,362 9,191
Accumulated other comprehensive loss (883) (550)
Retained earnings (deficit) (319) 2,420
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TOTAL SHAREHOLDERS' EQUITY 8,210 11,110
--------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $23,934 $30,213
========= ========
See accompanying notes to consolidated condensed financial statements.
2
EUROPEAN MICRO HOLDINGS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(UNAUDITED)
THREE MONTHS ENDED MARCH 31, NINE MONTHS ENDED MARCH 31,
--------------------------------------------- ------------------------------------------
2001 2000 2001 2000
---- ---- ---- ----
SALES:
Net sales $20,064 $23,917 $75,735 $89,313
Net sales to related parties 51 437 198 2,350
------- ------- ------- -------
Total net sales 20,115 24,354 75,933 91,663
------- ------- ------- -------
COST OF GOODS SOLD:
Cost of goods sold (19,236) (22,050) (68,994) (80,095)
Cost of goods sold to related parties (46) (449) (189) (2,311)
------- ------- ------- -------
Total cost of goods sold (19,282) (22,499) (69,183) (82,406)
------- ------- ------- -------
GROSS PROFIT 833 1,855 6,750 9,257
OPERATING EXPENSES:
Selling, general and
administrative expenses (2,712) (3,323) (8,191) (9,747)
------- ------- ------- -------
LOSS FROM OPERATIONS (1,879) (1,468) (1,441) (490)
Interest income 6 10 23 70
Interest expense (285) (148) (858) (676)
Equity in net income of unconsolidated
subsidiaries -- (3) -- (3)
------- ------- ------- -------
LOSS BEFORE INCOME TAXES (2,158) (1,609) (2,276) (1,099)
Income tax benefit (expense) (359) 301 (463) 9
------- ------- ------- -------
NET LOSS $(2,517) $(1,308) $(2,739) $(1,090)
======= ======= ======= =======
Net loss per share - basic $(0.50) $(0.26) $(0.55) ($0.22)
======= ======= ======= =======
Net loss per share - diluted $(0.50) $(0.26) $(0.55) ($0.22)
======= ======= ======= =======
See accompanying notes to consolidated condensed financial statements.
3
EUROPEAN MICRO HOLDINGS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
NINE MONTHS ENDED MARCH 31,
----------------------------------------------
2001 2000
---- ----
OPERATING ACTIVITIES:
Net loss $(2,739) $(1,090)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH PROVIDED BY OPERATING ACTIVITIES
Depreciation and amortization 481 435
Amortization of expense related to contingent earn-out provisions -- 47
Deferred income taxes 59 (13)
Provision for note receivable impairment 252 --
Equity in net loss of unconsolidated subsidiaries -- 3
Compensation charge for non-employee stock options 122 42
CHANGES IN ASSETS AND LIABILITIES
Trade receivables 3,914 5,724
Due from related parties -- 1,081
Inventories 1,943 1,329
Prepaid expenses, other current assets and other assets (34) 294
Income tax receivable 433 --
Trade payables (1,075) (2,266)
Due to related parties (11) (629)
Income taxes payable -- (149)
Accrued expenses and other current liabilities (1,408) (809)
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,937 3,999
-------- --------
INVESTING ACTIVITIES:
Purchase of fixed assets (391) (3,069)
Sale of fixed assets 179 42
Payment for acquisition, net of cash acquired -- (1,834)
Advances to unconsolidated affiliate -- 100
-------- --------
NET CASH (USED IN) INVESTING ACTIVITIES (212) (4,761)
-------- --------
FINANCING ACTIVITIES:
Short-term borrowings, net (2,252) (2,568)
Proceeds (repayments) of long-term borrowings (477) 2,957
Issuance of common stock, net 50 --
Repayment of capital leases, net 129 (58)
-------- --------
NET CASH PROVIDED (USED) IN FINANCING ACTIVITIES (2,550) 331
-------- --------
Exchange rate changes 247 (11)
-------- --------
NET DECREASE IN CASH: (578) (442)
Cash at beginning of period 1,222 3,168
-------- --------
CASH AT END OF PERIOD $644 $2,726
======== ========
Non-cash investing and financing activities:
Fair value of assets acquired $ -- $3,314
Goodwill 1,839 1,418
Fair value of liabilities assumed -- (2,817)
Notes issued for consideration (1,839) (0)
-------- --------
4
EUROPEAN MICRO HOLDINGS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
NINE MONTHS ENDED MARCH 31,
---------------------------------------------
2001 2000
---- ----
Cash paid for acquisitions -- 1,915
Less cash acquired -- (81)
-------- --------
Net cash paid for acquisitions $ -- $1,834
======== ========
Interest paid $858 $667
======== ========
Taxes paid $20 $182
======== ========
See accompanying notes to consolidated condensed financial statements.
5
EUROPEAN MICRO HOLDINGS, INC.
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 fiscal year
2001 to date. Ongoing legal costs associated with the litigation related to Big
Blue Europe, the costs associated with the Company's electronic commerce
strategy, increases in general overhead costs, and increased interest expense
due primarily to increased borrowings, coupled with decreasing sales volumes and
gross profit margins, have negatively impacted operating results. These factors
may continue to impact the Company's operations.
The Company was not in compliance with certain loan agreement financial
covenants during fiscal year 2000. While the Company has obtained waivers from
these covenant violations existing at June 30, 2000, in most instances the
waivers only address the covenant-reporting period ending thereon. Management
has initiated certain actions intended to improve liquidity and operating
results. Such actions include, among other things, (i) modifying the terms of
certain financial covenants (ii) canceling the Cap Gemini contract to reduce
costs and internalize the activities related to its electronic commerce strategy
(see Note 8 to the Consolidated Condensed Financial Statements), (iii) obtaining
extensions and subordination of payment of contingent earn-out amounts relating
to calendar year 2000 under the American Micro purchase agreement, (iv)
adjusting staffing levels, and (v) implementing steps to attempt to increase
sales volume and lower inventory levels. As of March 31, 2001, the Company was
not in compliance with two of the financial covenants in its loan agreements.
Given the Company's current and expected operating results, it is likely that
the Company will remain out of compliance with such covenant requirements. Due
to these operating results and the covenant violations, the lender on the
American Micro and Nor'Easter lines of credit and the European Micro Holdings,
Inc. term loan has agreed in principle, subject to documentation, to waive the
covenant violations subject to the Nor'Easter line of credit being repaid before
June 15, 2001 and the American Micro line of credit and the European Micro
Holdings term loan being repaid by August 15, 2001. These loans may be repaid
from the Company's working capital and new borrowings. The Company has had
discussions with a lender about providing new borrowings to the Company. No
assurances can be given that such borrowings will be available on favorable
terms, or at all. The Company's potential inability to obtain new borrowings
gives question to its ability to continue as a going concern.
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. These factors increase the liquidity risk to the
Company.
6
EUROPEAN MICRO HOLDINGS, INC.
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 guaranteed portion of the purchase price of
152,656 pounds sterling ($216,000 at exchange rate on March 31, 2001), and the
portion of the second contingent earn-out payment related to the volume
purchases from the Far-East of 129,758 pounds sterling ($184,000 at exchange
rate on March 31, 2001) has been paid by a cash payment in the amount of 112,966
pounds sterling ($160,000 at exchange rate on March 31, 2001) to the former 40%
Sunbelt shareholder on November 20, 2000 and by the issuance of 37,754 shares of
the Company's common stock to the former 60% Sunbelt shareholder on December 12,
2000. At March 31, 2001, 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.
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
$1,839,000 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 has 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.
4 SHORT-TERM BORROWINGS
Short-term borrowings consists of the following (in thousands):
MARCH 31, 2001 JUNE 30, 2000
-------------- -------------
Bank line of credit
European Micro UK Working Capital facility (a) $2,381 $1,959
Nor'Easter Micro facility (b) 430 975
American Micro facility (b) 993 992
--------- ---------
Total bank lines of credit 3,804 3,926
Receivable financing (c) 5,179 7,303
Other short-term borrowings (d) 668 674
--- ---
Total short-term borrowings $9,651 $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
7
EUROPEAN MICRO HOLDINGS, INC.
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 ($2.8 million at
exchange rate on March 31, 2001). Interest is charged at 1.25% over the
bank-borrowing rate of 5.75% at March 31, 2001 and 6% at June 30, 2000.
Until December 31, 2000, European Micro UK also had a revolving credit agreement
collateralized against general corporate assets. This 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, collateralized 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
8.0% at March 31, 2001. 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
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.
As of March 31, 2001, the Company was not in compliance with two of the
financial covenants in the agreements. Given the Company's current and expected
operating results, it is likely that the Company will remain out of compliance
with such covenant requirements. Due to these operating results and the covenant
violations, the lender on the American Micro and Nor'Easter lines of credit and
the European Micro Holdings, Inc. term loan has agreed to waive the covenant
violations subject to the Nor'Easter line of credit being repaid before June 15,
2001 and the American Micro line of credit and the European Micro Holdings term
loan being repaid by August 15, 2001.
(c) Receivable financing represents borrowings secured by various trade
receivables of European Micro UK totaling $6.1 million at March 31, 2001 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 ($8.8 million at exchange rate on March 31, 2001). Either party giving
three months' notice can terminate this facility. 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 5.75%
at March 31, 2001, 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%.
8
EUROPEAN MICRO HOLDINGS, INC.
5 LONG-TERM BORROWINGS
Long-term borrowings consists of the following (in thousands):
MARCH 31, 2001 JUNE 30, 2000
-------------- -------------
Mortgage loan note (a) $1,651 $1,877
Note payable (b) 750 1,125
Other long-term borrowings 178 49
------ ------
$2,579 $3,051
Less current maturities of long-term borrowings (2,579) (678)
------ ------
Total long-term borrowings $ -- $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 ($2,412,000 at
exchange rate on March 31, 2001). The purchase price was financed in part by a
mortgage loan note in the amount of 1,312,000 pounds sterling ($1,856,000 at
exchange rate on March 31, 2001). 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 ($22,000 at exchange rate on March 31, 2001), 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. Given European Micro UK's current and
expected operating results, it is likely that European Micro UK will be out of
compliance with certain covenant requirements at June 30, 2001. The Company is
evaluating options to address this potential non-compliance at our fiscal year
end. Therefore the total amount outstanding under the mortgage loan note is
reflected in current maturities of long term debt at March 31, 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
March 31, 2001 was 5.1%. 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. Shields has pledged personal assets as additional
collateral and has further agreed to maintain certain personal financial
statement liquidity levels. In the event the Company defaults on this loan, the
lender may foreclose on all or a portion of the pledged securities. Such an
event may cause a change of control in the Company because Messrs. Gallagher and
Shields together own 71% of the Company's outstanding common stock.
The term loan agreement is with SouthTrust Bank, as well as 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. However, the Company was not in
compliance for the March 31, 2001 reporting period. Due to these operating
results and the covenant violations, the lender on the American Micro and
Nor'Easter lines of credit and the European Micro Holdings, Inc. term loan has
agreed in principle, subject to documentation. to waive the covenant violations
subject to the Nor'Easter line of credit being repaid before June 15, 2001 and
the American Micro line of credit and the European Micro Holdings term loan
being repaid by August 15, 2001. Therefore, the total amount outstanding under
the term loan agreement is reflected in current maturities of long term debt at
March 31, 2001. 9
EUROPEAN MICRO HOLDINGS, INC.
6 EARNINGS PER SHARE
The calculation of earnings per share is detailed in the table below:
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
----------------------------------------------------------
2001 2000 2001 2000
---- ---- ---- ----
EARNINGS
Net loss (in thousands) $ (2,517) $(1,308) $(2,739) $(1,090)
--------- --------- --------- ---------
WEIGHTED AVERAGE NUMBER OF SHARES
Outstanding common stock during the period 5,003,639 4,933,900 4,959,882 4,933,900
Contingently issuable shares -- 24,392 -- 74,504
--------- --------- --------- ---------
BASIC WEIGHTED AVERAGE NUMBER OF SHARES 5,003,639 4,958,292 4,959,882 5,008,404
Effect of dilutive stock options and other contingent shares -- -- -- --
--------- --------- --------- ---------
DILUTED WEIGHTED AVERAGE NUMBER OF SHARES 5,003,639 4,958,292 4,959,882 5,008,404
========= ========= ========= =========
Basic earnings per share $(0.50) $(0.26) $(0.55) $(0.22)
========= ========= ========= =========
Diluted earning per share $(0.50) $(0.26) $(0.55) $(0.22)
========= ========= ========= =========
During the nine-month period-ended March 31, 2001, the Company issued 95,767
shares of common stock, which reflected 69,739 and 25,982 weighted average
shares for the three-month and nine-month period ended March 31, 2001,
respectively. During the three-month period-ended March 31, 2001, the Company
issued options to purchase 174,000 shares of its common stock at an exercise
price of $2.00. The above dilutive earnings per share calculations exclude the
effect of warrants and options to purchase 1,624,500 and 1,624,500 shares of
common stock for the three-month and nine-month periods ended March 31, 2001,
respectively, at exercise prices ranging from $2.00 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 329,000 and
329,000 shares of common stock for the three-month and nine-month periods ended
March 31, 2000, respectively, at exercise prices ranging from $10.00 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, as such amount was recognized with the
issuance of the notes payable to the former shareholders.
7 EQUITY LINE OF CREDIT
The Company previously entered into an Equity Line of Credit (the "EQUITY LINE
OF CREDIT") pursuant to which an investor agreed to purchase up to $20 million
of the Company's common stock at a purchase price equal to 88% of the market
price. To date, the Company raised $50,000 by issuing 25.020 shares of common
stock under the Equity Line of Credit. The Company and the investor agreed in
principle subject to documentation to terminate the Equity Line of Credit
effective May 15, 2001. In connection with such termination, all outstanding
warrants held by the investor and the placement agent will be terminated. The
Company agreed to issue the placement agent warrants to purchase 500,000 shares
of common stock at $5.00 per share, which warrants become exercisable only if
the closing bid price of such common stock is $4.00 per share or more for ten
consecutive trading days.
On May 15, 2001, the Company also terminated a consulting agreement that was
entered into in connection with the Equity Line of Credit. Under the consulting
arrangement, the Company previously 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 Line of Credit, and as such, has
offset such amounts against additional paid-in capital in the accompanying
Consolidated Condensed Balance Sheet at March 31, 2001. The remaining $105,000
option value attributed to general consulting services was expensed in the
quarter ended September 30, 2000.
10
EUROPEAN MICRO HOLDINGS, INC.
8 BUSINESS-TO-BUSINESS ELECTRONIC COMMERCE STRATEGY
The Company 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 hired Cap Gemini, a 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 ($1,068,000 at exchange rate on March 31, 2001) related to the
feasibility studies and business process design. The Company has capitalized the
sum of 229,000 pounds sterling ($324,000 at exchange rate on March 31, 2001)
related to the actual software development. This amount is reflected in property
and equipment, net on the accompanying consolidated condensed balance sheets at
March 31, 2001 and June 30, 2000. During May 2000, the Company halted the
ongoing development being performed by Cap Gemini until specific funding is
obtained to complete the project. There can be no assurances that the Company
will be successful in obtaining funding for this project. Since the project was
not continued by November 30, 2000, the Company incurred a termination fee to
Cap Gemini of 150,000 pounds sterling ($212,000 at exchange rate on March 31,
2001). This fee had the option to be credited against future invoices of Cap
Gemini upon the continuation of the project. However, since it is unlikely that
funding for the project will be obtained the termination fee was expensed in the
three-month period ended March 31, 2001. The Company is re-evaluating and
re-defining the current project based on changes in the market. In this
connection, the Company decided to internalize the project and continue the
business- to-business electronic strategy.
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 alleged thirty-three causes of action. Plaintiffs claimed, 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 sought
unspecified compensatory and punitive damages, as well as injunctive relief
restraining defendants from acting in violation of the alleged agreements.
The United States District Court for the Eastern District of New York has
dismissed 31 of the 33 claims brought against the Company on grounds of "forum
non conveniens." The Court decided that it would be more appropriate that these
claims be adjudicated in The Netherlands, under Dutch Law. The Judge had granted
the Plaintiffs in the case (Jeffrey and Marie Alnwick and Big Blue Products) the
option to proceed with the remaining two allegations in United States District
Court; Plaintiffs have requested that these two counts also be dismissed. On
April 19, 2001, the Plaintiffs filed a notice of appeal.
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 nine-month period ended March 31, 2001, the Company has incurred
approximately $217,000 and $572,000 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 a court appointed
liquidator is handling the remaining liquidation. As part of the liquidation the
Company and the Alnwicks have both advanced $85,000 to the liquidator. As of
March 31, 2001, the Company believes the $85,000 that was advanced will not be
recovered and, therefore, a valuation allowance has been established for the
$85,000.
11
EUROPEAN MICRO HOLDINGS, INC.
10 SUBSEQUENT EVENTS
On April 20, 2001, the Company received a Nasdaq Staff Determination Letter
stating that the Company's common stock failed to maintain a minimum market
value of public float of $5.0 million. As a result, the Company's common stock
was delisted from the Nasdaq Stock Market on April 27, 2001. The Company's
common stock is now quoted on the Over-the-Counter Bulletin Board.
During April 2001 the Company consolidated the operations of Nor'Easter with
that of American Micro. All purchasing, warehousing and accounting will be
handled by American Micro. The remaining staff of Nor'Easter will function as a
remote sales office of American Micro.
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
derivatives, have been recorded through earnings. At March 31, 2001, the Company
did not have any open forward foreign exchange contracts. Foreign currency gains
and losses, net were a $294,000 loss and a $226,000 loss for the nine months
ended March 31, 2001 and 2000, respectively. The effect of the adoption of the
new Statements was immaterial.
12
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 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. In April 2001, Nor'Easter's
operations were consolidated with American Micro's operations. 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, and later changed its
name to Engenis, Ltd. on March 5, 2001. Engenis was formed under the laws of the
United Kingdom to serve as a business-to-business electronic commerce trading
company.
13
EUROPEAN MICRO HOLDINGS, INC.
European Micro UK is the parent of European Micro GmbH ("EUROPEAN MICRO
Germany"), Sunbelt and European Micro B.V. ("EUROPEAN MICRO HOLLAND") and has a
50% joint venture interest in Big Blue Europe, B.V. ("BIG BLUE EUROPE").
European Micro Germany was organized under the laws of Germany in 1993 and until
August 2000 operated as a sales office in Dusseldorf, Germany. In August 2000,
we closed the office and consolidated the sales operations of European Micro
Germany. Customers of European Micro Germany 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. As of December 31, 2000, all
operations have ceased and a court appointed liquidator is handling the
remaining liquidation.
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 NINE MONTHS ENDED
MARCH 31, MARCH 31,
-------------------------------------------------------------------------
2001 2000 2001 2000
---- ---- ---- ----
Net sales to third parties 99.7% 98.2% 99.7% 97.4%
Net sales to related parties 0.3% 1.8% 0.3% 2.6%
----- ---- ---- ----
Total net sales 100.0% 100.0% 100.0% 100.0%
----- ---- ---- ----
Cost of goods sold to third parties (95.6%) (90.6%) (90.9%) (87.4%)
Cost of goods sold to related parties (0.3%) (1.8%) (0.2%) (2.5%)
----- ---- ---- ----
Total cost of goods sold (95.9%) (92.4%) (91.1%) (89.9%)
----- ---- ---- ----
Total gross profit 4.1% 7.6% 8.9% 10.1%
Total operating expenses (13.4%) (13.6%) (10.8%) (10.6%)
----- ---- ---- ----
Operating profit (9.3%) (6.0%) (1.9%) (0.5%)
Interest income 0.0% 0.0% 0.0% 0.1%
Interest expense (1.4%) (0.6%) (1.1%) (0.8%)
Equity in income of unconsolidated affiliate 0.0% (0.0%) 0.0% 0.0%
----- ---- ---- ----
Loss before income taxes (10.7%) (6.6%) (3.0%) (1.2%)
Income taxes (1.8%) 1.2% (0.6%) (0.0%)
----- ---- ---- ----
Net loss (12.5%) (5.4%) (3.6%) (1.2%)
===== ==== ==== ====
14
EUROPEAN MICRO HOLDINGS, INC.
THREE-MONTH PERIOD ENDED MARCH 31, 2001 AND 2000
TOTAL NET SALES. Total net sales decreased $4.3 million, or 17.4%, from $24.4
million in the three-month period ended March 31, 2000 to $20.1 million in the
comparable period in 2001. Excluding net sales to related parties, net sales
decreased $3.8 million, or 16.1%, from $23.9 million in the three-month period
ended March 31, 2000 to $20.1 million in the comparable period in 2001. This
decrease was attributable to a decrease in sales of $1.0 million at European
Micro UK due to the a significant decrease in the exchange rate from pounds
sterling to US dollars, a decrease in sales of $2.0 million at Colchester, and a
decrease in sales of $929,000 at American Micro due to a general softening in
the market.
Net sales to related parties decreased $386,000, or 88.1%, from $437,000 in the
three-month period ended March 31, 2000, to $51,000 in the comparable period in
2001. Sales to Technology Express have decreased as product availability
decreased.
GROSS PROFIT. Gross profit decreased $1.0 million, or 55.1%, from $1.9 million
in the three-month period ended March 31, 2000, to $833,000 in the comparable
period in 2001. Gross profit excluding related party transactions decreased $1.0
million, or 55.7%, from $1.9 million in the three-month period ended March 31,
2000 to $827,000 the comparable period in 2001. This decrease was attributable
to a decrease of $600,000 at European Micro UK due to the decrease in sales and
a write-down of inventory causing a decrease in gross margin from 8.01% to
3.74%. This decrease in gross margin was also related to poor market conditions
in February, as well as decreases of $107,000 at Colchester and $343,000 at
Nor'Easter. This decrease was partially offset by an increase of $25,000 at
American Micro. American Micro's gross profit increased despite lower sales
volume with an increase in gross margin from 10.95% to 14.56% by changing the
product mix from low margin components to higher margin complete systems.
Gross profit attributable to related party sales increased $17,000, or 150.7%,
from a negative $12,000 in the three-month period ended March 31, 2000, to
$5,000 in the comparable period in 2001. This increase is attributable to
Technology Express buying some overstock product in the three-month period ended
March 31, 2000 at a loss, compared to buying in demand product in the comparable
period in 2001.
Gross margins decreased by 3.5% from 7.6% in the three-month period ended March
31, 2000 to 4.1% in the comparable period in 2001. Excluding related party
transactions gross margin decreased 3.7% from 7.8% in the three-month period
ended March 31, 2000 to 4.1% in the comparable period in 2001. This change is
related to the net of a decrease at European Micro UK, Nor'Easter and Colchester
and an increase at American Micro.
Foreign exchange gains and losses, net, decreased $21,000, from a loss of
$145,000 in the three-month period ended March 31, 2000 to a loss of $124,000 in
the comparable period in 2001. This movement was attributable to fewer
transactions during the period even though the Euro weakened 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 13.6% during the three-month period ended March 31, 2000 to 13.4%
in the comparable period in 2001. This decrease was attributable to a decrease
in operating expenses as a percentage of total net sales from 11.9% to 9.9% at
European Micro UK, which is due to a decrease in operating expenses of
approximately $365,000 from $1.6 million in the three-month period ended March
31, 2000 to $1.2 million in the comparable period in 2001. This decrease in
expenses at European Micro UK is due to large expenditures on the
Business-to-Business Electronic Commerce project in the three-month period ended
March 31, 2000 and a 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 3.98% to 5.81% at Nor'Easter, which is due to
an increase in operating expenses of approximately $58,000 from $128,000 in the
three-month period ended March 31, 2000 to $186,000 in the comparable period in
2001. 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 decrease was partially offset also by an increase in
operating expenses as a percentage of total net sales from 2.20% to 32.62% at
Colchester, which is due to a large decrease in sales, while operating expenses
increased. This decrease was also partially offset by an increase in operating
expenses as a percentage of total net sales from 8.99% to 10.81% at American
Micro, which is due to the increase in labor required to configure complete
systems, which is the current focus.
INTEREST EXPENSE. Interest expense increased by $137,000 from $148,000 in
three-month period ended March 31, 2000 to $285,000 in the comparable period in
2001. This was attributable to a increased reliance on short-term borrowings to
finance accounts receivable and inventory balances.
15
EUROPEAN MICRO HOLDINGS, INC.
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 a court appointed liquidator is handling the remaining
liquidation. As part of the liquidation the Company and the Alnwicks have both
advanced $85,000 to the liquidator. As of March 31, 2001, the Company believes
the $85,000 that was advanced will not be recovered and, therefore, a 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.
NINE-MONTH PERIOD ENDED MARCH 31, 2001 AND 2000
TOTAL NET SALES. Total net sales decreased $15.8 million, or 17.2%, from $91.7
million in the nine-month period ended March 31, 2000 to $75.9 million in the
comparable period in 2001. Excluding net sales to related parties, net sales
decreased $13.6 million, or 15.2%, from $89.3 million in the nine-month period
ended March 31, 2000 to $75.7 million in the comparable period in 2001. This
decrease was attributable to a decrease in sales of $14.0 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, a decrease of $776,000 at Colchester, and a decrease of $1.0
million at American Micro. This decrease of net sales was partially offset by an
increase in sales of $2.2 million at Nor'Easter.
Net sales to related parties decreased $2.2 million, or 91.5%, from $2.4 million
in the nine-month period ended March 31, 2000, to $198,000 in the comparable
period in 2001. Sales to Technology Express have decreased as product
availability decreased.
GROSS PROFIT. Gross profit decreased $2.5 million, or 27.1%, from $9.3 million
in the nine-month period ended March 31, 2000, to $6.8 million in the comparable
period in 2001. Gross profit excluding related party transactions decreased $2.5
million, or 26.9%, from $9.2 million in the nine-month period ended March 31,
2000 to $6.7 million in the comparable period in 2001. This decrease was
attributable to a decrease of $3.3 million at European Micro UK. This decrease
in gross profit 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 $178,000 at Nor'Easter. This
decrease was partially offset by an increase of $957,000 at American Micro.
American Micro's gross profit increased despite lower sales volume by increasing
the gross margin from 10.46% to 18.73% by changing the product mix from low
margin components to higher margin complete systems.
Gross profit attributable to related party sales decreased $30,000, or 76.9%,
from $39,000 in the nine-month period ended March 31, 2000, to $9,000 in the
comparable period in 2001. As discussed above, this decrease is attributable to
decreased sales due to a lack of product availability.
Gross margins decreased by 1.2% from 10.1% in the nine-month period ended March
31, 2000 to 8.9% in the comparable period in 2001. Excluding related party
transactions, gross margin decreased from 10.3% in the nine-month period ended
March 31, 2000 to 8.9% in the comparable period in 2001. 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 loss of $226,000 in the
nine-month period ended March 31, 2000, to a loss of $294,000 in the comparable
period in 2001. 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 10.6% for the nine-month period ended March 31, 2000 to 10.8% in
the comparable period in 2001. This was attributable to an increase in operating
expenses as a percentage of total net sales from 8.9% to 10.6% at American
Micro, which is due to a decrease in sales as operating expenses increased
slightly. Operating expenses as a percentage of total net sales increased from
3.7% to 5.2% at Nor'Easter, which is due to an increase in operating expenses of
approximately $274,000 from $415,000 in the nine-month period ended March 31,
2000 to $689,000 in the comparable period in 2001. 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
16
EUROPEAN MICRO HOLDINGS, INC.
improvements. Operating expenses as a percentage of total net sales increased
from 6.6% to 8.6% at Colchester, which is due to a decrease in sales, as
operating expenses increased slightly. These were partially offset by a decrease
in operating expenses as a percentage of total net sales from 9.4% to 8.2% at
European Micro UK, which is due to a decrease in operating expenses of
approximately $1.9 million from $5.5 million in the nine-month period ended
March 31, 2000 to $3.6 million in the comparable period in 2001. This decrease
in expenses is due to large expenditures on the Business-to-Business Electronic
Commerce project in the three-month period ended March 31, 2000 and a reduction
in personnel and the decrease in gross profit reduced commission and bonus
expense, which are a function of gross profit.
INTEREST EXPENSE. Interest expense increased by $182,000 from $676,000 in
nine-month period ended March 31, 2000 to $858,000 in the comparable period in
2001. This was attributable to a increased 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 a court appointed liquidator is handling the remaining
liquidation. As part of the liquidation the Company and the Alnwicks have both
advanced $85,000 to the liquidator. As of March 31, 2001, the Company believes
the $85,000 that was advanced will not be recovered and, therefore, a 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 operating losses during fiscal year 2000 and
fiscal year 2001 to date. 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.
We were not in compliance with certain loan agreement financial covenants during
fiscal year 2000. While we have obtained waivers from these covenant violations
existing at June 30, 2000, in most instances the waivers only address the
covenant-reporting period ending thereon. Management has initiated certain
actions intended to improve liquidity and operating results. Such actions
include, among other things, (i) modifying the terms of certain financial
covenants (ii) canceling the Cap Gemini contract to reduce costs and internalize
the activities related to its electronic commerce strategy until specific
funding can be obtained (see Note 8 to the Consolidated Condensed Financial
Statements), (iii) obtaining extensions and subordination of payment of
contingent earn-out amounts relating to calendar year 2000 under the American
Micro purchase agreement, (iv) adjusting staffing levels, and (v) implementing
steps to attempt to increase sales volume and lower inventory levels. As of
March 31, 2001, we were not in compliance with two of the financial covenants in
the agreements. Given our current and expected operating results, it is likely
that we will remain out of compliance with such covenant requirements. Due to
these operating results and the covenant violations, the lender on the American
Micro and Nor'Easter lines of credit and the European Micro Holdings, Inc. term
loan has agreed in principle, subject to documentation, to waive the covenant
violations subject to the Nor'Easter line of credit being repaid before June 15,
2001 and the American Micro line of credit and the European Micro Holdings term
loan being repaid by August 15, 2001. These loans may be repaid from the
Company's working capital and new borrowings. The Company has had discussions
with a lender about providing new borrowings to the Company. No assurances can
be given that such borrowings will be available on favorable terms, or at all.
The Company's potential inability to obtain new borrowings gives question to its
ability to continue as a going concern.
17
EUROPEAN MICRO HOLDINGS, INC.
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. 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 will also need to obtain cash to repay the lines of credit and the
term loan to SouthTrust Bank. 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 ($2.8 million) at March
31, 2001. The accounts receivable financing provides for a borrowing base of 85%
of accounts receivable, with a limit of 6.2 million pounds sterling ($8.8
million on March 31, 2001). Either party giving three months' notice can
terminate this facility. 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 5.75% at March 31, 2001.
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 8.0% at March 31, 2001.
As partial security for these loans, Messrs. Gallagher and Shields pledged to
the lender a portion of their shares of common stock of our company. In the
event that we defaulted on one or more of these loans, the lender could have
foreclosed on all or a portion of the pledged securities. Such an event could
have caused a change of control in our company because Messrs. Gallagher and
Shields together own 71% of our outstanding common stock. The lines of credit
agreements included certain financial and non-financial covenants and
restrictions. The agreements also contained a provision whereby the lender could
have declared a default based on subjective criteria. As of June 30, 2000, we
were not in compliance with certain of the financial covenants in the
agreements.
On October 5, 2000, we received a waiver of the covenant violations existing at
the June 30, 2000 reporting date for the American Micro and Nor'Easter lines of
credit. Our company and the bank terminated the existing lines of credit and
entered into a new borrowing arrangement whereby each of American Micro and
Nor'Easter have a working capital line of credit equal to the lesser of (i) $1.5
million or (ii) the sum of 85% of eligible accounts receivable, plus the lesser
of 50% of eligible inventory or $750,000. Interest will be paid monthly at a
floating rate of .5% over the bank's base rate. The term of the new arrangements
is for one year from the closing date. The new facilities also require the
companies to maintain depository accounts at the bank, whose daily receipts will
be applied against outstanding borrowings under the lines of credit. The new
facilities also place certain restrictions on our ability to pay dividends and
to make capital expenditures, among other things, and include a provision
whereby the lender can declare a default based on subjective criteria.
Collateral under the new credit line facilities consists of a first priority
lien on all assets of American Micro and Nor'Easter. Messrs. Gallagher and
Shields guaranteed the borrowings under these arrangements. Mr. Shields has
pledged personal assets as additional collateral and has further agreed to
maintain certain personal financial statement liquidity levels. These borrowings
are cross-collateralized and cross-defaulted with borrowings under the $1.5
million term loan to European Micro Holdings, Inc.
As of March 31, 2001, we were not in compliance with two of the financial
covenants in the agreements. Given our current and expected operating results,
it is likely that we will remain out of compliance with such covenant
requirements. Due to these operating results and the covenant violations, the
lender on the American Micro and Nor'Easter lines of credit and the European
Micro Holdings, Inc. term loan has agreed in principle, subject to
documentation, to waive the covenant violations subject to the Nor'Easter line
of credit being repaid before June 15, 2001 and the American Micro line of
credit and the European Micro Holdings term loan being repaid by August 15,
2001. These loans may be repaid from the Company's working capital and new
borrowings. The Company has had discussions with a lender about providing new
borrowings to the Company. No assurances can be given that such borrowings will
be available on favorable terms, or at all.
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.
18
EUROPEAN MICRO HOLDINGS, INC.
On October 28, 1999, we obtained a $1.5 million term loan. The term loan
agreement is with the lender of 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 March 31, 2001 was 5.1%. At March 31, 2001, the
outstanding balance on the term loan was $750,000. 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. We were not in compliance for the March 31,
2001 reporting period. Due to these operating results and the covenant
violations, the lender on the American Micro and Nor'Easter lines of credit and
the European Micro Holdings, Inc. term loan has agreed in principle, subject to
documentation, to waive the covenant violations subject to the Nor'Easter line
of credit being repaid before June 15, 2001 and the American Micro line of
credit and the European Micro Holdings term loan being repaid by August 15,
2001. Therefore the total amount outstanding under the term loan agreement is
reflected in current maturities of long term debt at March 31, 2001.
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 of
approximately $1,839,000 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 ($2,412,000 at
March 31, 2001). The purchase price was financed in part by a loan in the amount
of 1,312,000 pounds sterling ($1,856,000 at March 31, 2001). This loan calls for
monthly payments of principal and interest in the amount of 15,588 pounds
sterling ($22,000 at March 31, 2001) and matures in July 2009. The mortgage loan
bears interest at a fixed rate of 7.6%. The mortgage loan includes certain
financial and non-financial covenants and restrictions. The agreement also
contains a provision whereby the lender can declare a default based on
subjective criteria. The financial covenants are measured using the financial
results of European Micro UK as of each fiscal year end. Based upon European
Micro UK's fiscal year end operating results, European Micro UK was out of
compliance with certain of the covenant requirements at June 30, 2000. The
lender waived this non-compliance through July 1, 2001. Given European Micro
UK's current and expected operating results, it is likely that European Micro UK
will be out of compliance with certain covenant requirements at June 30, 2001.
The Company is evaluating options to address this non-compliance.
The Company previously entered into an Equity Line of Credit (the "EQUITY LINE
OF CREDIT") pursuant to which an investor agreed to purchase up to $20 million
of the Company's common stock at a purchase price equal to 88% of the market
price. To date, the Company raised $50,000 by issuing 25.020 shares of common
stock under the Equity Line of Credit. Thee Company and the investor agreed, in
principle, subject to documentation, to terminate the Equity Line of Credit
effective May 15, 2001. In connection with such termination, all outstanding
warrants held by the investor and the placement agent will be terminated. The
Company agreed to issue the placement agent warrants to purchase 500,000 shares
of common stock at $5.00 per share, which warrants become exercisable only if
the closing bid price of such common stock is $4.00 per share or more for ten
consecutive trading days.
On May 15, 2001, the Company also terminated a consulting agreement that was
entered into in connection with the Equity Line of Credit. Under the consulting
arrangement, the Company previously 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 Line of Credit, and as such, has
offset such amounts against additional paid-in capital in the accompanying
Consolidated Condensed Balance Sheet at March 31, 2001. The remaining $105,000
option value attributed to general consulting services was expensed in the
quarter ended September 30, 2000.
19
EUROPEAN MICRO HOLDINGS, INC.
Net cash provided by operating activities during the nine-month period ended
March 31, 2001 amounted to $1.9 million. Significant factors providing cash were
a decrease in trade receivables of $3.9 and a decrease in inventory of $1.9
million. The amount of cash provided by the Company's operations was partially
offset by a decrease in trade payables of $1.1 million and a decrease in accrued
expenses and other current liabilities of $1.4 million.
Cash used in investing activities amounted to $212,000. This primarily consisted
of purchases of fixed assets.
Cash used by financing activities amounted to $2.6 million. This primarily
consisted of $2.3 million paid down on short-term borrowings and payments on
long-term debt of $477,000.
Overall, the Company experienced a net decrease in cash of $578,000 for the
nine-month period ended March 31, 2001.
ASSET MANAGEMENT
INVENTORY. Our goal is to achieve high inventory turns and maintain a low
inventory level and thereby reduce our working capital requirements. Our
strategy to achieve this goal is to effectively manage our inventory and to
achieve high order fill rates. Inventory levels may vary from period to period,
due to factors including increases or decreases in sales levels, our practice of
making large-volume purchases when it deems such purchases to be attractive, new
products and changes in our product mix.
ACCOUNTS RECEIVABLE. We sell products and services to a customer base of more
than 770 value-added resellers, corporate resellers, retailers and direct
marketers. We offer credit terms to qualifying customers and also sell on a
pre-pay and cash-on-delivery basis. With respect to credit sales, we attempt to
control our bad debt exposure by monitoring customers' creditworthiness and,
where practicable, through participation in credit associations that provide
customer credit rating information for certain accounts. Also, substantially all
of European Micro UK's accounts receivables are insured. Nor'Easter, Colchester
and American Micro generally do not insure their accounts receivable.
CURRENCY RISK MANAGEMENT
REPORTING CURRENCY. European Micro Holding's, Nor'Easter's and American Micro's
reporting and functional currency, as defined by Statement of Financial
Accounting Standards No. 52, is the U.S. dollar. The functional currency of
European Micro UK is the U.K. pound sterling and Colchester is the Singapore
dollar. European Micro UK and Colchester translate into the reporting currency
by measuring assets and liabilities using the exchange rates in effect at the
balance sheet date and results of operations using the average exchange rates
prevailing during the period.
HEDGING AND CURRENCY MANAGEMENT ACTIVITIES. We occasionally hedge to guard
against currency fluctuations between the U.K. pound sterling and the U.S.
dollar. Because the functional currency of our company's main operating
subsidiary, European Micro UK, is the U.K. pound sterling, currency fluctuations
of the U.K. pound sterling relative to the U.S. dollar may have a material
adverse effect on our business, financial condition and results of operations.
We may engage in hedging activities in the future, although no assurances can be
given that it will engage in such activities and if we do so that such
activities will be successful.
Generally, our policy is not to hedge specifically against individual daily
transactions. Instead, the exposure to a currency is determined every two to
three days. This is done by comparing the bank account balances and account
receivables with accounts payable, all in the same currency to create a
"natural" hedge. Thereafter, to the extent that a bank balance and the account
receivable are not totally offset by the accounts payable, there would be a need
to cover the residual credit balance with a forward currency contract. We tend
to concentrate our currency management into seven currencies: Euro, U.K. pound
sterling, U.S. dollar, Dutch guilder, Canadian dollar, Singapore dollar and
German Mark. We normally deem the exposure in other currencies to be minimal.
However, when we buy products in other currencies, we may, in conjunction with
current market advice, book a forward contract to cover current and some
anticipated future purchases.
ECONOMIC AND MONETARY UNION. On January 1, 1999, eleven of the fifteen member
countries of the European Union established fixed conversion rates between their
existing sovereign currencies and a new currency called the "Euro." These
countries adopted the Euro as their common legal currency on that date. The Euro
is trading on currency exchanges and is available for non-cash transactions.
Until January 1, 2002, the existing sovereign currencies will remain legal
tender in these countries. On January 1, 2002, the Euro is scheduled to replace
the sovereign legal currencies of these countries. Through the operations of
European Micro UK, we have significant operations within the European Union,
including many of the countries that adopted the Euro. We continue to evaluate
the impact that the Euro will have on our continuing business operations and no
assurances can be given that the Euro will not have a material adverse effect on
our business, financial condition and results of operations. However, we do not
20
EUROPEAN MICRO HOLDINGS, INC.
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.
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 March 31, 2001, the Company did not have any open forward foreign exchange
contracts. Foreign currency gains and losses, net were a $124,000 loss for the
three-months ended March 31, 2001, and a $145,000 loss for the comparable period
in 2000. Foreign currency gains and losses, net were a $294,000 loss for the
nine-months ended March 31, 2001, and a $226,000 loss for the comparable period
in 2000.
RECENT ACCOUNTING PRONOUNCEMENTS
Effective July 1, 2000, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 133, Accounting for Derivative and Hedging Activities, as
amended by SFAS No. 138. The Statement requires the recognition of all
derivatives on the balance sheet at fair value. The Company's derivatives are
primarily forward foreign exchange contracts. The Company's forward foreign
exchange contracts have been designated as economic hedges of anticipated sales
and purchase transactions. In addition, the Company enters utilizes forward
foreign exchange contracts as an economic hedge against foreign currency market
exposures of underlying assets, liabilities and other obligations. Effective in
the first quarter of fiscal 2001, changes in the fair value of these
derivatives, have been recorded through earnings. At March 31, 2001, the Company
did not have any open forward foreign exchange contracts. Foreign currency gains
and losses, net were a $294,000 loss and a $226,000 loss for the nine months
ended March 31, 2001 and 2000, respectively. The effect of the adoption of the
new Statements was immaterial.
21
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.
The United States District Court for the Eastern District of New York has
dismissed 31 of the 33 claims brought against the Company on grounds of "forum
non conveniens." The Court decided that it would be more appropriate that these
claims be adjudicated in The Netherlands, under Dutch Law. The Judge had granted
the Plaintiffs in the case (Jeffrey and Marie Alnwick and Big Blue Products) the
option to proceed with the remaining two allegations in United States District
Court; Plaintiffs have requested that these two counts also be dismissed. On
April 19, 2001, the Plaintiffs filed a notice of appeal.
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.
The Company 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, collateralized 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
8.0% at March 31, 2001. 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
of American Micro and Nor'Easter. Messrs. Gallagher and Shields guaranteed the
obligations under these arrangements. Mr. Shields has pledged personal assets as
22
EUROPEAN MICRO HOLDINGS, INC.
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.
Each of the term loan and the two lines of credit include certain financial and
non-financial covenants and restrictions. The agreements also contain a
provision whereby the lender can declare a default based on subjective criteria.
As of March 31, 2001, the Company was not in compliance with the "Net Worth
Requirements" and "Fixed Charge Coverage Ratio" Covenants. Given the Company's
current and expected operating results, it is likely that the Company will
remain out of compliance with such covenant requirements. Due to these operating
results and the covenant violations, the lender on the American Micro and
Nor'Easter lines of credit and the European Micro Holdings, Inc. term loan has
agreed in principle, subject to documentation, to waive the covenant violations
subject to the Nor'Easter line of credit being repaid before June 15, 2001 and
the American Micro line of credit and the European Micro Holdings term loan
being repaid by August 15, 2001.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
(a), (b), (c) and (d). None.
ITEM 5. OTHER INFORMATION.
On April 12, 2001, Barrett Sutton resigned from the Company's Board of
Directors. The Company's Board of Directors has not filled this vacancy.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
23
EUROPEAN MICRO HOLDINGS, INC.
EXHIBIT
NO. DESCRIPTION LOCATION
--- ----------- --------
2.01 Agreement for the Acquisition of Sunbelt (UK) Incorporated by reference to Exhibit 2.01
Limited by European Micro Plc dated October 26, to Registrant's Form 10-Q for the quarter
1998 ended September 30, 1998.
2.02 Merger Agreement re: AMCC dated June 29, 1999 Incorporated by reference to Exhibit 2.02
to Registrant's From 10-K for the year
ended June 30, 1999.
2.03 Plan of 1999 Merger re: AMCC dated June 29, 1999 Incorporated by reference to Exhibit 2.03
to Registrant's From 10-K for the year
ended June 30, 1999.
2.04 Articles of Merger re: AMCC dated June 29, 1999 Incorporated by reference to Exhibit 2.04
to Registrant's Form 10-K for the year
ended June 30, 1999.
2.05 Amendment to Merger Agreement re: AMCC dated Incorporated by reference to Exhibit 2.05
October 2, 2000 to Registrant's Registration Statement on
Form S-1 filed on October 27, 2000.
3.01 Articles of Incorporation Incorporated by reference to Exhibit No.
3.01 to Registrant's Registration
Statement (the "Registration Statement")
on Form S-1 (Registration Number
333-44393).
3.02 Certificate of Amendment of Articles of Incorporated by reference to Exhibit 3.02
Incorporation to Registrant's Form 10-Q for the quarter
ended March 31, 1998.
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 Employee Stock Purchase Plan Incorporated by reference to Exhibit No.
4.03 to the Registration Statement.
4.04 Form of Lock-up Agreement Incorporated by reference to Exhibit No.
4.04 to the Registration Statement.
10.01 Form of Advice of Borrowing Terms with National Incorporated by reference to Exhibit No.
Westminster Bank Plc 10.01 to the Registration Statement.
10.02 Invoice Discounting Agreement with Lombard NatWest Incorporated by reference to Exhibit No.
Discounting Limited, dated November 21, 1996 10.02 to the Registration Statement.
10.03 Commercial Credit Insurance, policy number 60322, Incorporated by reference to Exhibit No.
with Hermes Kreditversicherungs-AG dated August 1, 10.03 to the Registration Statement.
1995
10.04 Commercial Credit Insurance, policy number 82692, Incorporated by reference to Exhibit No.
with Hermes Kreditversicherungs-AG dated August 1, 10.04 to the Registration Statement.
1995
10.05 Consignment Agreement with European Micro Computer Incorporated by reference to Exhibit No.
B.V., dated January 1996 10.05 to the Registration Statement.
24
EUROPEAN MICRO HOLDINGS, INC.
EXHIBIT
NO. DESCRIPTION LOCATION
--- ----------- --------
10.06 Stockholders' Cross-Purchase Agreement by and Incorporated by reference to Exhibit No.
between Jeffrey Gerard Alnwick, Marie Alnwick, 10.07 to the Registration Statement.
European Micro Plc and Big Blue Europe, B.V. dated
August 21, 1997
10.07 Trusteed Stockholders Cross-Purchase Agreement by Incorporated by reference to Exhibit No.
and between John B. Gallagher, Harry D. Shields, 10.08 to the Registration Statement.
Thomas H. Minkoff, Trustee of the Gallagher Family
Trust, Robert H. True and Stuart S. Southard,
Trustees of the Henry Daniel Shields 1997
Irrevocable Educational Trust, European Micro
Holdings, Inc. and SunTrust Bank, Nashville, N.A.,
as Trustee dated January 31, 1998
10.08 Executive Employment Agreement between John B. Incorporated by reference to Exhibit No.
Gallagher and European Micro Holdings, Inc. 10.09 to the Registration Statement.
effective as of January 1, 1998
10.09 Executive Employment Agreement between Harry D. Incorporated by reference to Exhibit No.
Shields and European Micro Holdings, Inc. 10.10 to the Registration Statement.
effective as of January 1, 1998
10.10 Contract of Employment Agreement between Laurence Incorporated by reference to Exhibit No.
Gilbert and European Micro UK dated March 14, 1998 10.11 to the Registration Statement.
10.11 Subscription Agreement by and between John B. Incorporated by reference to Exhibit No.
Gallagher, Harry D. Shields, Thomas H. Minkoff, 10.13 to the Registration Statement.
Trustee of the Gallagher Family Trust, Robert H.
True and Stuart S. Southard, Trustees of the Henry
Daniel Shields 1997 Irrevocable Educational Trust,
European Micro Holdings, Inc. effective as of
January 31, 1998
10.12 Administrative Services Contract by and between Incorporated by reference to Exhibit No.
European Micro Holdings, Inc. and European Micro 10.14 to the Registration Statement.
Plc effective as of January 1, 1998
10.13 Escrow Agreement between European Micro Holdings, Incorporated by reference to Exhibit No.
Inc., Tarpon Scurry Investments, Inc. and The 10.15 to the Registration Statement.
Chase Manhattan dated as of March 24, 1998
10.14 Form of Indemnification Agreements with officers Incorporated by reference to Exhibit No.
and directors 10.16 to the Registration Statement.
10.15 Form of Transfer Agent Agreement with Chase Mellon Incorporated by reference to Exhibit No.
Stockholder Services, L.L.C. 10.17 to the Registration Statement.
10.16 Form of Credit Agreement by and between European Incorporated by reference to Exhibit No.
Micro UK and National Westminster Bank Plc 10.17 to the Annual Report on Form 10-K
for the fiscal year ended June 30, 1998
filed with the Commission on September 28,
1998.
10.17 Consulting Contract dated September 10, 1998 by Incorporated by reference to Exhibit 10.19
and between European Micro Holdings, Inc. and The to Registrant's Form 10-Q for the quarter
Equity Group ended September 30, 1998.
10.18 Employment Agreement dated July 1, 1999 between Incorporated by reference to Exhibit 10.21
John B. Gallagher and American Micro to Registrant's Form 10-K for the year
ended June 30, 1999.
25
EUROPEAN MICRO HOLDINGS, INC.
EXHIBIT
NO. DESCRIPTION LOCATION
--- ----------- --------
10.19 Revolving Loan Agreement dated October 5, 2000 Incorporated by reference to Exhibit 10.19
between American Micro and SouthTrust Bank re: to Registrant's Form 10-K for the year
Line of Credit to American Micro ended June 30, 2000.
10.20 First Amendment to Loan Agreement dated October 5, Incorporated by reference to Exhibit 10.20
2000 among the Company, American Micro, Nor'Easter to Registrant's Form 10-K for the year
and SouthTrust Bank, N.A. re: Term Loan to the ended June 30, 2000.
Company
10.21 Revolving Loan Agreement dated October 5, 2000 Incorporated by reference to Exhibit 10.21
between Nor'Easter and SouthTrust Bank re: Line of to Registrant's Form 10-K for the year
Credit to Nor'Easter ended June 30, 2000.
10.22 Loan Agreement dated October 28, 1999 among the Incorporated by reference to Exhibit 10.23
Company, American Micro, Nor'Easter and SouthTrust to Registrant's Form 10-Q for the quarter
Bank, N.A. re: Term Loan to the Company ended September 30, 1999.
10.23 Security Agreement dated October 5, 2000 between Incorporated by reference to Exhibit 10.23
Nor'Easter and SouthTrust Bank to Registrant's Form 10-K for the year
ended June 30, 2000.
10.24 Security Agreement dated October 5, 2000 between Incorporated by reference to Exhibit 10.24
American Micro and SouthTrust Bank to Registrant's Form 10-K for the year
ended June 30, 2000.
10.25 Line of Credit Note given by Nor'Easter to Incorporated by reference to Exhibit 10.25
SouthTrust Bank to Registrant's Form 10-K for the year
ended June 30, 2000.
10.26 Line of Credit Note given by American Micro to Incorporated by reference to Exhibit 10.26
SouthTrust Bank to Registrant's Form 10-K for the year
ended June 30, 2000.
10.27 Unconditional Guaranty given by Harry Shields to Incorporated by reference to Exhibit 10.27
SouthTrust Bank Re: American Micro to Registrant's Form 10-K for the year
ended June 30, 2000.
10.28 Unconditional Guaranty given by John Gallagher to Incorporated by reference to Exhibit 10.28
SouthTrust Bank Re: American Micro to Registrant's Form 10-K for the year
ended June 30, 2000.
10.29 Amended and Restated Unlimited Guaranty Agreement Incorporated by reference to Exhibit 10.29
dated October 5, 2000 between Harry Shields and to Registrant's Form 10-K for the year
SouthTrust Bank ended June 30, 2000.
10.30 Amended and Restated Unlimited Guaranty Agreement Incorporated by reference to Exhibit 10.30
dated October 5, 2000 between John Gallagher and to Registrant's Form 10-K for the year
SouthTrust Bank ended June 30, 2000.
10.31 Unconditional Guaranty given by John Gallagher to Incorporated by reference to Exhibit 10.31
SouthTrust Bank Re: Nor'Easter to Registrant's Form 10-K for the year
ended June 30, 2000.
10.32 Unconditional Guaranty given by Harry Shields to Incorporated by reference to Exhibit 10.32
SouthTrust Bank Re: Nor'Easter to Registrant's Form 10-K for the year
ended June 30, 2000.
10.33 Specific Agreement for the Provision of Incorporated by reference to Exhibit 10.25
Professional Services dated as of March 17, 2000 to Registrant's Form 10-Q for the quarter
between the Company and Cap Gemini UK Plc ended March 31, 2000.
26
EUROPEAN MICRO HOLDINGS, INC.
EXHIBIT
NO. DESCRIPTION LOCATION
--- ----------- --------
10.34 Secured Promissory Note dated as of February 19, Incorporated by reference to Exhibit 10.40
2001, given by the Company in favor of John B. to Registrant's Form 10-Q for the quarter
Gallagher ended December 31, 2000.
10.35 Secured Promissory Note dated as of February 19, Incorporated by reference to Exhibit 10.40
2001, given by the Company in favor of John P. to Registrant's Form 10-Q for the quarter
Gallagher ended December 31, 2000.
10.36 Pledge and Security Agreement dated as of February Incorporated by reference to Exhibit 10.40
19, 2001, among the Company, John B. Gallagher and to Registrant's Form 10-Q for the quarter
John P. Gallagher ended December 31, 2000.
10.37 Termination Agreement dated as of May 15, 2001, Provided herewith.
between the Company and the May Davis Group, Inc.
10.38 Termination Agreement dated as of May 15, 2001, Provided herewith.
between the Company and Spinneret Financial
System, Ltd.
10.39 Termination Agreement dated as of May 15, 2001, Provided herewith.
between the Company and Persia Consulting Group,
Inc.
10.40 Warrant dated as of May 15, 2001, given by the Provided herewith.
Company to the May Davis Group, Inc.
11.01 Statement re: Computation of Earnings Provided herewith.
15.01 Letter re: Unaudited Financial Information Not applicable.
18.01 Letter re Change in Accounting Principles Not applicable.
19.01 Report Furnished to Security Holders Not applicable.
21.01 Subsidiaries of the Registrant Not applicable.
22.01 Published Report Regarding Matters Submitted to Not applicable.
Vote of Security Holders
23.01 Consent of Experts Not applicable.
24.01 Power of Attorney Not applicable.
(b) Reports on Form 8-K.
None.
27
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: May 21, 2001 EUROPEAN MICRO HOLDINGS, INC.
By: /s/ Harry D. Shields
-----------------------------
Harry D. Shields, Co-President
28
EXHIBIT 10.37
-------------
TERMINATION AGREEMENT
---------------------
THIS TERMINATION AGREEMENT (the "Agreement") is entered into on May 15,
2001, by and between European Micro Holdings, Inc., a Nevada corporation
("EMCC") and the May Davis Group, Inc. ("May Davis").
WHEREAS, on August 24, 2000, the parties entered into a Placement Agent
Agreement (the "Placement Agent Agreement") pursuant to which May Davis would
act as EMCC's exclusive placement agent in connection with an Equity Line of
Credit Agreement; and
WHEREAS, in connection with the Placement Agent Agreement, on August
24, 2000, EMCC granted to May Davis a Class A Warrant and a Class B Warrant and
the parties entered into a Registration Rights Agreement and Escrow Agreement
(the Placement Agent Agreement, the Class A Warrant, the Class B Warrant, the
Registration Rights Agreement and the Escrow Agreement are collectively referred
to as the "Transaction Documents"); and
WHEREAS, subsequent to August 24, 2000, the Class A Warrant and the
Class B Warrant were transferred to the persons and in the quantities identified
in Schedule A hereto; and
WHEREAS, the parties hereto desire to terminate the Transaction
Documents in their entirety on the terms set forth herein.
NOW THEREFORE, in consideration of the mutual promises, covenants and
conditions contained herein and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
1. TERMINATION. Each of EMCC and May Davis hereby terminate each
Transaction Document in its entirety, including, without limitation, all of May
Davis' right to any and all warrants to purchase shares of capital stock of
EMCC. As a result of this provision, neither EMCC nor May Davis shall have any
rights or obligations under or with respect to any Transaction Document. Each of
EMCC and May Davis will sign and deliver to First Union National Bank (the
"ESCROW AGENT"), as escrow agent under the Escrow Agreement, the notice attached
as Schedule B hereto notifying the Escrow Agent that the Escrow Agreement has
been terminated.
2. RETURN OF ORIGINAL CLASS A WARRANT AND CLASS B WARRANT. On the date
hereof, May Davis shall deliver to EMCC originally executed copies of the Class
A Warrant and the Class B Warrant, which shall be marked "cancelled." By their
signature below, each of Mark Angelo, Hunter Singer, Joseph Donahue, Robert
Farrell and Persia Consulting acknowledge and consent to the termination of the
Class A Warrant and the Class B Warrant previously assigned to them by May Davis
and that none of them shall have rights whatsoever under either the Class A
Warrant or the Class B Warrant.
3. WARRANTS. In consideration for May Davis' agreement to terminate the
Transaction Documents, EMCC shall grant to May Davis or its designees warrants
1
to purchase up to 500,000 shares of common stock of EMCC at $5.00 per share,
provided that such warrants become exercisable only if the closing bid price of
EMCC's common stock is $4.00 per share or more for ten (10) consecutive trading
days. The terms of the warrants granted hereby shall be set forth in a Warrant
Agreement of even date herewith.
IN WITNESS WHEREOF, the undersigned parties have executed this
Agreement as of the date first above written.
MAY DAVIS GROUP, INC.
By:
----------------------------------------------------
Name:
--------------------------------------------------
Title:
-------------------------------------------------
EUROPEAN MICRO HOLDINGS, INC.
By:
--------------------------------------------------
Name:
------------------------------------------------
Title:
-----------------------------------------------
ACKNOWLEDGEMENT AND CONSENT
---------------------------
Each of the undersigned persons hereby acknowledges and consents to the
terms of the foregoing Termination Agreement on the date first set forth above.
-----------------------------------------------------
Mark Angelo
-----------------------------------------------------
Hunter Singer
-----------------------------------------------------
Joseph Donahue
-----------------------------------------------------
Robert Farrell
PERSIA CONSULTING GROUP, INC.
By:
--------------------------------------------------
Name:
------------------------------------------------
Title:
-----------------------------------------------
2
SCHEDULE A
TRANSFEREES OF WARRANTS
Class A Warrant
Name: No. of Warrants:
---- ---------------
Mark Angelo 113,000
Hunter Singer 113,000
Joseph Donahue 113,000
Robert Farrell 113,000
Persia Consulting Group, Inc. 48,000
Class B Warrant
Name: No. of Warrants:
---- ---------------
Mark Angelo 113,000
Hunter Singer 113,000
Joseph Donahue 113,000
Robert Farrell 113,000
Persia Consulting Group, Inc. 48,000
SCHEDULE B
----------
Notice to First Union National Bank
First Union National Bank
407 Main Street
Metuchen, New Jersey 08840
Attention: Robert Mercado
Carmela Agugliaro
RE: ESCROW AGREEMENT (THE "ESCROW AGREEMENT") DATED AUGUST 24, 2000, AMONG
EUROPEAN MICRO HOLDINGS, INC., THE MAY DAVIS GROUP, INC. AND FIRST UNION
NATIONAL BANK, AS ESCROW AGENT
Ladies and Gentlemen:
Please be advised that the undersigned parties terminated the Escrow Agreement
effective as of May ___, 2001. As a result, in accordance with Section 1(c) of
the Escrow Agreement, the Escrow Period terminated effective May ___, 2001.
Sincerely,
EUROPEAN MICRO HOLDINGS, INC.
By:
--------------------------------------------------
Name:
------------------------------------------------
Title:
-----------------------------------------------
MAY DAVIS GROUP, INC.
By:
--------------------------------------------------
Name:
------------------------------------------------
Title:
-----------------------------------------------
EXHIBIT 10.38
-------------
TERMINATION AGREEMENT
---------------------
THIS TERMINATION AGREEMENT (the "AGREEMENT") is entered into on May 15,
2001, by and between European Micro Holdings, Inc., a Nevada corporation
("EMCC") and Spinneret Financial System, Ltd. (the "INVESTOR").
WHEREAS, on August 24, 2000, the parties entered into an Equity Line of
Credit Agreement (the "Equity Line of Credit Agreement") pursuant to which EMCC
would issue and sell to the Investor, from time to time, up to $20.0 million of
EMCC's common stock; and
WHEREAS, in connection with the Equity Line of Credit Agreement, on
August 24, 2000, EMCC granted to the Investor certain registration rights
described in a Registration Rights Agreement (the Equity Line of Credit
Agreement and the Registration Rights Agreements are collectively referred to as
the "Transaction Documents"); and
WHEREAS, the parties hereto desire to terminate the Transaction
Documents in their entirety on the terms set forth herein.
NOW THEREFORE, in consideration of the mutual promises, covenants and
conditions contained herein and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
Termination. Each of EMCC and the Investor hereby terminate each
Transaction Document in its entirety, including, without limitation, all of the
Investor's right to purchase shares of capital stock of EMCC. As a result of
this provision, neither EMCC nor the Investor shall have any rights or
obligations under or with respect to any Transaction Document.
IN WITNESS WHEREOF, the undersigned parties have executed this
Agreement as of the date first above written.
SPINNERET FINANCIAL SYSTEM, LTD.
By:
--------------------------------------------------
Name:
------------------------------------------------
Title:
-----------------------------------------------
EUROPEAN MICRO HOLDINGS, INC.
By:
--------------------------------------------------
Name:
------------------------------------------------
Title:
-----------------------------------------------
EXHIBIT 10.39
-------------
TERMINATION AGREEMENT
---------------------
THIS TERMINATION AGREEMENT (the "Agreement") is entered into on May 15,
2001, by and between European Micro Holdings, Inc., a Nevada corporation
("EMCC") and Persian Consulting Group, Inc. (the "Consultant").
WHEREAS, on August 24, 2000, the parties entered into an Amended and
Restated Consulting Agreement (the "Consulting Agreement") pursuant to which the
Consultant would provide certain consulting services to EMCC; and
WHEREAS, the parties hereto desire to terminate the Consulting
Agreement in its entirety on the terms set forth herein.
NOW THEREFORE, in consideration of the mutual promises, covenants and
conditions contained herein and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
Termination. Each of EMCC and the Consultant hereby terminate each
Consulting Agreement in its entirety. As a result of this provision, neither
EMCC nor the Consultant shall have any rights or obligations under or with
respect to the Consulting Agreement.
IN WITNESS WHEREOF, the undersigned parties have executed this
Agreement as of the date first above written.
PERSIA CONSULTING GROUP, INC.
By:
--------------------------------------------------
Name:
------------------------------------------------
Title:
-----------------------------------------------
EUROPEAN MICRO HOLDINGS, INC.
By:
--------------------------------------------------
Name:
------------------------------------------------
Title:
-----------------------------------------------
EXHIBIT 10.40
THE SECURITIES REPRESENTED BY THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE
SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE OFFERED FOR SALE,
SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR
APPLICABLE STATE SECURITIES LAWS, OR AN OPINION OF COUNSEL IN A FORM REASONABLY
SATISFACTORY TO THE ISSUER THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR
APPLICABLE STATE SECURITIES LAWS OR UNLESS SOLD PURSUANT TO RULE 144 UNDER SAID
ACT. NOTWITHSTANDING THE FOREGOING, THIS WARRANT MAY BE PLEDGED IN CONNECTION
WITH A BONA FIDE MARGIN ACCOUNT.
EUROPEAN MICRO HOLDINGS, INC.
WARRANT TO PURCHASE COMMON STOCK
Warrant No.: R-001 Number of Shares: 500,000
Date of Issuance: May 15, 2001
European Micro Holdings, Inc., a Nevada corporation (the "Company"), hereby
certifies that, for Ten United States Dollars ($10.00) and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, May Davis Group, Inc., the registered holder hereof or its
permitted assigns, is entitled, subject to the terms set forth below, to
purchase from the Company upon surrender of this Warrant, at any time or times
on or after the date hereof, but not after 11:59 P.M. Eastern Time on the
Expiration Date (as defined herein) Five Hundred Thousand (500,000) fully paid
and nonassessable shares of Common Stock (as defined herein) of the Company (the
"WARRANT SHARES") at the Warrant Exercise Price provided in Section 1(b) below;
PROVIDED, HOWEVER, that (a) this Warrant shall become exercisable only if the
Closing Bid Price of the Company's Common Stock is $4.00 per share or more for
ten (10) consecutive trading days and (b) in no event shall the holder be
entitled to exercise this Warrant for a number of Warrant Shares in excess of
that number of Warrant Shares which, upon giving effect to such exercise, would
cause the aggregate number of shares of Common Stock beneficially owned by the
holder and its affiliates to exceed 4.99% of the outstanding shares of the
Common Stock following such exercise, except within 60 days of the Expiration
Date. For purposes of the foregoing proviso, the aggregate number of shares of
Common Stock beneficially owned by the holder and its affiliates shall include
the number of shares of Common Stock issuable upon exercise of this Warrant with
respect to which the determination of such proviso is being made, but shall
exclude shares of Common Stock which would be issuable upon (i) exercise of the
remaining, unexercised Warrants beneficially owned by the holder and its
affiliates and (ii) exercise or conversion of the unexercised or unconverted
portion of any other securities of the Company beneficially owned by the holder
and its affiliates (including, without limitation, any convertible notes or
preferred stock) subject to a limitation on conversion or exercise analogous to
the limitation contained herein. Except as set forth in the preceding sentence,
for purposes of this paragraph, beneficial ownership shall be calculated in
accordance with Section 13(d) of the Securities Exchange Act of 1934, as
amended. For purposes of this Warrant, in determining the number of outstanding
shares of Common Stock a holder may rely on the number of outstanding shares of
Common Stock as reflected in (1) the Company's most recent Form 10-Q or Form
10-K, as the case may be, (2) a more recent public announcement by the Company
or (3) any other notice by the Company or its transfer agent setting forth the
number of shares of Common Stock outstanding. Upon the written request of any
holder, the Company shall promptly, but in no event later than one (1) Business
Day following the receipt of such notice, confirm in writing to any such holder
the number of shares of Common Stock then outstanding. In any case, the number
of outstanding shares of Common Stock shall be determined after giving effect to
the exercise of Warrants (as defined below) by such holder and its affiliates
since the date as of which such number of outstanding shares of Common Stock was
reported.
Section 1.
(a) TERMINATION AGREEMENT. This Warrant (the "WARRANT") issued
pursuant to the Termination Agreement of even date herewith between the Company
and the May Davis Group, Inc.
(b) DEFINITIONS. The following words and terms as used in this
Warrant shall have the following meanings:
(i) "BUSINESS DAY" means any day other than Saturday,
Sunday or other day on which commercial banks in the City of New York are
authorized or required by law to remain closed.
(ii) "CLOSING BID PRICE" means the closing bid price
of Common Stock as quoted on the Principal Market (as reported by Bloomberg
Financial Markets ("BLOOMBERG") through its "Volume at Price" function).
(iii) "COMMON STOCK" means (i) the Company's common
stock, par value $0.01 per share, and (ii) any capital stock into which such
Common Stock shall have been changed or any capital stock resulting from a
reclassification of such Common Stock.
(iv) "EXPIRATION DATE" means August 23, 2005 or, if
such date falls on a Saturday, Sunday or other day on which banks are required
or authorized to be closed in the City of New York or the State of New York or
on which trading does not take place on the Principal Exchange or automated
quotation system on which the Common Stock is traded (a "HOLIDAY"), the next
date that is not a Holiday.
(v) "OPTIONS" means any rights, warrants or options
to subscribe for or purchase Common Stock or Convertible Securities.
2
(vi) "PERSON" means an individual, a limited
liability company, a partnership, a joint venture, a corporation, a trust, an
unincorporated organization and a government or any department or agency
thereof.
(vii) "PRINCIPAL MARKET" means the New York Stock
Exchange, the American Stock Exchange, the Nasdaq National Market, the Nasdaq
SmallCap Market, whichever is at the time the principal trading exchange or
market for such security, or the over-the-counter market on the electronic
bulletin board for such security as reported by BLOOMBERG or, if no bid or sale
information is reported for such security by BLOOMBERG, then the average of the
bid prices of each of the market makers for such security as reported in the
"pink sheets" by the National Quotation Bureau, Inc.
(viii) "SECURITIES ACT" means the Securities Act of
1933, as amended.
(ix) "WARRANT" means this Warrant and all Warrants
issued in exchange, transfer or replacement thereof.
(x) "WARRANT EXERCISE PRICE" shall be $5.00.
(xi) "WARRANT SHARES" means the shares of Common
Stock issuable at any time upon exercise of this Warrant.
(c) OTHER DEFINITIONAL PROVISIONS.
(i) Except as otherwise specified herein, all
references herein (A) to the Company shall be deemed to include the Company's
successors and (B) to any applicable law defined or referred to herein shall be
deemed references to such applicable law as the same may have been or may be
amended or supplemented from time to time.
(ii) When used in this Warrant, the words "HEREIN",
"HEREOF", and "HEREUNDER" and words of similar import, shall refer to this
Warrant as a whole and not to any provision of this Warrant, and the words
"SECTION", "SCHEDULE", and "EXHIBIT" shall refer to Sections of, and Schedules
and Exhibits to, this Warrant unless otherwise specified.
(iii) Whenever the context so requires, the neuter
gender includes the masculine or feminine, and the singular number includes the
plural, and vice versa.
Section 2. EXERCISE OF WARRANT.
(a) Subject to the terms and conditions hereof, this Warrant
may be exercised by the holder hereof then registered on the books of the
Company, pro rata as hereinafter provided, at any time after the date hereof and
prior to 11:59 P.M. Eastern Time on the Expiration Date, by (i) delivery of a
written notice, in the form of the subscription notice attached as EXHIBIT A
hereto (the "EXERCISE NOTICE"), of such holder's election to exercise this
Warrant, which notice shall specify the number of Warrant Shares to be
purchased, (ii) payment to the Company of an amount equal to the Warrant
Exercise Price(s) applicable to the Warrant Shares being purchased, multiplied
3
by the number of Warrant Shares (at the applicable Warrant Exercise Price) as to
which this Warrant is being exercised (plus any applicable issue or transfer
taxes) (the "AGGREGATE EXERCISE Price") in cash or wire transfer of immediately
available funds. In the event of any exercise of the rights represented by this
Warrant in compliance with this Section 2(a), the Company shall on the second
Business Day following the date of receipt of the Exercise Notice, the Aggregate
Exercise Price and this Warrant (or an indemnification undertaking with respect
to this Warrant in the case of its loss, theft or destruction) and the receipt
of the representations of the holder specified in Section 6 hereof, if requested
by the Company (the "EXERCISE DELIVERY DOCUMENTS"), credit such aggregate number
of shares of Common Stock to which the holder shall be entitled to the holder's
or its designee's balance account with The Depository Trust Company; provided,
however, if the holder who submitted the Exercise Notice requested physical
delivery of any or all of the Warrant Shares, then the Company shall, on or
before the second Business Day following receipt of the Exercise Delivery
Documents, issue and surrender to a common carrier for overnight delivery to the
address specified in the Exercise Notice, a certificate, registered in the name
of the holder, for the number of shares of Common Stock to which the holder
shall be entitled pursuant to such request. Upon delivery of the Exercise Notice
and Aggregate Exercise Price referred to above, the holder of this Warrant shall
be deemed for all corporate purposes to have become the holder of record of the
Warrant Shares with respect to which this Warrant has been exercised. In the
case of a dispute as to the determination of the Warrant Exercise Price, the
Closing Bid Price or the arithmetic calculation of the Warrant Shares, the
Company shall promptly issue to the holder the number of Warrant Shares that is
not disputed and shall submit the disputed determinations or arithmetic
calculations to the holder via facsimile within one (1) Business Day of receipt
of the holder's Exercise Notice. If the holder and the Company are unable to
agree upon the determination of the Warrant Exercise Price or arithmetic
calculation of the Warrant Shares within one (1) day of such disputed
determination or arithmetic calculation being submitted to the holder, then the
Company shall immediately submit via facsimile (i) the disputed determination of
the Warrant Exercise Price or the Closing Bid Price to an independent, reputable
investment banking firm or (ii) the disputed arithmetic calculation of the
Warrant Shares to its independent, outside accountant The Company shall cause
the investment banking firm or the accountant, as the case may be, to perform
the determinations or calculations and notify the Company and the holder of the
results no later than forty-eight (48) hours from the time it receives the
disputed determinations or calculations. Such investment banking firm's or
accountant's determination or calculation, as the case may be, shall be deemed
conclusive absent manifest error.
(b) Unless the rights represented by this Warrant shall have
expired or shall have been fully exercised, the Company shall, as soon as
practicable and in no event later than five (5) Business Days after any exercise
and at its own expense, issue a new Warrant identical in all respects to this
Warrant exercised except it shall represent rights to purchase the number of
Warrant Shares purchasable immediately prior to such exercise under this Warrant
exercised, less the number of Warrant Shares with respect to which such Warrant
is exercised.
(c) No fractional Warrant Shares are to be issued upon any pro
rata exercise of this Warrant, but rather the number of Warrant Shares issued
upon such exercise of this Warrant shall be rounded up or down to the nearest
whole number.
4
(d) If the Company or its Transfer Agent shall fail for any
reason or for no reason to issue to the holder within ten (10) Business Days of
receipt of the Exercise Delivery Documents, a certificate for the number of
Warrant Shares to which the holder is entitled or to credit the holder's balance
account with The Depository Trust Company for such number of Warrant Shares to
which the holder is entitled upon the holder's exercise of this Warrant, the
Company shall, in addition to any other remedies under this Warrant or the
Placement Agent Agreement or otherwise available to such holder, pay as
additional damages in cash to such holder on each day the issuance of such
certificate for Warrant Shares is not timely effected an amount equal to 0.5% of
the product of (A) the sum of the number of Warrant Shares not issued to the
holder on a timely basis and to which the holder is entitled, and (B) the
Closing Bid Price of the Common Stock for the trading day immediately preceding
the last possible date which the Company could have issued such Common Stock to
the holder without violating this Section 2.
(e) If within ten (10) Business Days after the Company's
receipt of the Exercise Delivery Documents, the Company fails to deliver a new
Warrant to the holder for the number of Warrant Shares to which such holder is
entitled pursuant to Section 2(b) hereof, then, in addition to any other
available remedies under this Warrant or the Placement Agent Agreement, or
otherwise available to such holder, the Company shall pay as additional damages
in cash to such holder on each day after such tenth (10th) Business Day that
such delivery of such new Warrant is not timely effected in an amount equal to
0.25% of the product of (A) the number of Warrant Shares represented by the
portion of this Warrant which is not being exercised and (B) the Closing Bid
Price of the Common Stock for the trading day immediately preceding the last
possible date which the Company could have issued such Warrant to the holder
without violating this Section 2.
Section 3. COVENANTS AS TO COMMON STOCK. The Company hereby covenants
and agrees as follows:
(a) This Warrant is, and any Warrants issued in substitution
for or replacement of this Warrant will upon issuance be, duly authorized and
validly issued.
(b) All Warrant Shares which may be issued upon the exercise
of the rights represented by this Warrant will, upon issuance, be validly
issued, fully paid and nonassessable and free from all taxes, liens and charges
with respect to the issue thereof.
(c) During the period within which the rights represented by
this Warrant may be exercised, the Company will at all times have authorized and
reserved at least 100% of the number of shares of Common Stock needed to provide
for the exercise of the rights then represented by this Warrant and the par
value of said shares will at all times be less than or equal to the applicable
Warrant Exercise Price.
(d) The Company will not, by amendment of its Certificate of
Incorporation or through any reorganization, transfer of assets, consolidation,
merger, dissolution, issue or sale of securities, or any other voluntary action,
avoid or seek to avoid the observance or performance of any of the terms to be
observed or performed by it hereunder, but will at all times in good faith
assist in the carrying out of all the provisions of this Warrant and in the
taking of all such action as may reasonably be requested by the holder of this
5
Warrant in order to protect the exercise privilege of the holder of this Warrant
against dilution or other impairment, consistent with the tenor and purpose of
this Warrant. The Company will not increase the par value of any shares of
Common Stock receivable upon the exercise of this Warrant above the Warrant
Exercise Price then in effect, and (ii) will take all such actions as may be
necessary or appropriate in order that the Company may validly and legally issue
fully paid and nonassessable shares of Common Stock upon the exercise of this
Warrant.
(e) This Warrant will be binding upon any entity succeeding to
the Company by merger, consolidation or acquisition of all or substantially all
of the Company's assets.
Section 4. TAXES. The Company shall pay any and all taxes, except any
applicable withholding, which may be payable with respect to the issuance and
delivery of Warrant Shares upon exercise of this Warrant.
Section 5. WARRANT HOLDER NOT DEEMED A Stockholder. Except as otherwise
specifically provided herein, no holder, as such, of this Warrant shall be
entitled to vote or receive dividends or be deemed the holder of shares of the
Company for any purpose, nor shall anything contained in this Warrant be
construed to confer upon the holder hereof, as such, any of the rights of a
stockholder of the Company or any right to vote, give or withhold consent to any
corporate action (whether any reorganization, issue of stock, reclassification
of stock, consolidation, merger, conveyance or otherwise), receive notice of
meetings, receive dividends or subscription rights, or otherwise, prior to the
issuance to the holder of this Warrant of the Warrant Shares which he or she is
then entitled to receive upon the due exercise of this Warrant. In addition,
nothing contained in this Warrant shall be construed as imposing any liabilities
on such holder to purchase any securities (upon exercise of this Warrant or
otherwise) or as a stockholder of the Company, whether such liabilities are
asserted by the Company or by creditors of the Company. Notwithstanding this
Section 5, the Company will provide the holder of this Warrant with copies of
the same notices and other information given to the stockholders of the Company
generally, contemporaneously with the giving thereof to the stockholders.
Section 6. REPRESENTATIONS OF HOLDER. The holder of this Warrant, by
the acceptance hereof, represents that it is acquiring this Warrant and the
Warrant Shares for its own account for investment only and not with a view
towards, or for resale in connection with, the public sale or distribution of
this Warrant or the Warrant Shares, except pursuant to sales registered or
exempted under the Securities Act; provided, however, that by making the
representations herein, the holder does not agree to hold this Warrant or any of
the Warrant Shares for any minimum or other specific term and reserves the right
to dispose of this Warrant and the Warrant Shares at any time in accordance with
or pursuant to a registration statement or an exemption under the Securities
Act. The holder of this Warrant further represents, by acceptance hereof, that,
as of this date, such holder is an "accredited investor" as such term is defined
in Rule 501(a)(1) of Regulation D promulgated by the Securities and Exchange
Commission under the Securities Act (an "ACCREDITED INVESTOR"). Upon exercise of
this Warrant, the holder shall, if requested by the Company, confirm in writing,
in a form satisfactory to the Company, that the Warrant Shares so purchased are
being acquired solely for the holder's own account and not as a nominee for any
other party, for investment, and not with a view toward distribution or resale
and that such holder is an Accredited Investor. If such holder cannot make such
6
representations because they would be factually incorrect, it shall be a
condition to such holder's exercise of this Warrant, that the Company receive
such other representations as the Company considers reasonably necessary to
assure the Company that the issuance of its securities upon exercise of this
Warrant shall not violate any United States or state securities laws.
Section 7. OWNERSHIP AND TRANSFER. The Company shall maintain at its
principal executive offices (or such other office or agency of the Company as it
may designate by notice to the holder hereof), a register for this Warrant, in
which the Company shall record the name and address of the person in whose name
this Warrant has been issued, as well as the name and address of each
transferee. The Company may treat the person in whose name any Warrant is
registered on the register as the owner and holder thereof for all purposes,
notwithstanding any notice to the contrary, but in all events recognizing any
transfers made in accordance with the terms of this Warrant.
Section 8. ADJUSTMENT OF WARRANT EXERCISE PRICE AND NUMBER OF SHARES.
The Warrant Exercise Price and the number of shares of Common Stock issuable
upon exercise of this Warrant shall be adjusted from time to time as follows:
(a) ADJUSTMENT OF WARRANT EXERCISE PRICE UPON SUBDIVISION OR
COMBINATION OF COMMON STOCK. If the Company at any time after the date of
issuance of this Warrant subdivides (by any stock split, stock dividend,
recapitalization or otherwise) one or more classes of its outstanding shares of
Common Stock into a greater number of shares, any Warrant Exercise Price in
effect immediately prior to such subdivision will be proportionately reduced and
the number of shares of Common Stock obtainable upon exercise of this Warrant
will be proportionately increased. If the Company at any time after the date of
issuance of this Warrant combines (by combination, reverse stock split or
otherwise) one or more classes of its outstanding shares of Common Stock into a
smaller number of shares, any Warrant Exercise Price in effect immediately prior
to such combination will be proportionately increased and the number of Warrant
Shares issuable upon exercise of this Warrant will be proportionately decreased.
Any adjustment under this Section 8(a) shall become effective at the close of
business on the date the subdivision or combination becomes effective.
(b) DISTRIBUTION OF ASSETS. If the Company shall declare or
make any dividend or other distribution of its assets (or rights to acquire its
assets) to holders of Common Stock, by way of return of capital or otherwise
(including, without limitation, any distribution of cash, stock or other
securities, property or options by way of a dividend, spin off,
reclassification, corporate rearrangement or other similar transaction) (a
"DISTRIBUTION"), at any time after the issuance of this Warrant, then, in each
such case:
(i) any Warrant Exercise Price in effect immediately
prior to the close of business on the record date fixed for the determination of
holders of Common Stock entitled to receive the Distribution shall be reduced,
effective as of the close of business on such record date, to a price determined
by multiplying such Warrant Exercise Price by a fraction of which (A) the
numerator shall be the Closing Sale Price of the Common Stock on the trading day
immediately preceding such record date minus the value of the Distribution (as
determined in good faith by the Company's Board of Directors) applicable to one
7
share of Common Stock, and (B) the denominator shall be the Closing Sale Price
of the Common Stock on the trading day immediately preceding such record date;
and
(ii) either (A) the number of Warrant Shares
obtainable upon exercise of this Warrant shall be increased to a number of
shares equal to the number of shares of Common Stock obtainable immediately
prior to the close of business on the record date fixed for the determination of
holders of Common Stock entitled to receive the Distribution multiplied by the
reciprocal of the fraction set forth in the immediately preceding clause (i), or
(B) in the event that the Distribution is of common stock of a company whose
common stock is traded on a national securities exchange or a national automated
quotation system, then the holder of this Warrant shall receive an additional
warrant to purchase Common Stock, the terms of which shall be identical to those
of this Warrant, except that such warrant shall be exercisable into the amount
of the assets that would have been payable to the holder of this Warrant
pursuant to the Distribution had the holder exercised this Warrant immediately
prior to such record date and with an exercise price equal to the amount by
which the exercise price of this Warrant was decreased with respect to the
Distribution pursuant to the terms of the immediately preceding clause (i).
(c) NOTICES.
(i) Immediately upon any adjustment of the Warrant
Exercise Price, the Company will give written notice thereof to the holder of
this Warrant, setting forth in reasonable detail, and certifying, the
calculation of such adjustment.
(ii) The Company will give written notice to the
holder of this Warrant at least ten (10) days prior to the date on which the
Company closes its books or takes a record (A) with respect to any dividend or
distribution upon the Common Stock, (B) with respect to any pro rata
subscription offer to holders of Common Stock or (C) for determining rights to
vote with respect to any Organic Change (as defined below), dissolution or
liquidation, provided that such information shall be made known to the public
prior to or in conjunction with such notice being provided to such holder.
(iii) The Company will also give written notice to
the holder of this Warrant at least ten (10) days prior to the date on which any
Organic Change, dissolution or liquidation will take place, provided that such
information shall be made known to the public prior to or in conjunction with
such notice being provided to such holder.
Section 9. PURCHASE RIGHTS; REORGANIZATION, RECLASSIFICATION,
CONSOLIDATION, MERGER OR SALE.
(a) In addition to any adjustments pursuant to Section 8
above, if at any time the Company grants, issues or sells any Options,
Convertible Securities or rights to purchase stock, warrants, securities or
other property pro rata to the record holders of any class of Common Stock (the
"PURCHASE Rights"), then the holder of this Warrant will be entitled to acquire,
upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights
which such holder could have acquired if such holder had held the number of
shares of Common Stock acquirable upon complete exercise of this Warrant
8
immediately before the date on which a record is taken for the grant, issuance
or sale of such Purchase Rights, or, if no such record is taken, the date as of
which the record holders of Common Stock are to be determined for the grant,
issue or sale of such Purchase Rights.
(b) Any recapitalization, reorganization, reclassification,
consolidation, merger, sale of all or substantially all of the Company's assets
to another Person or other transaction in each case which is effected in such a
way that holders of Common Stock are entitled to receive (either directly or
upon subsequent liquidation) stock, securities or assets with respect to or in
exchange for Common Stock is referred to herein as an "ORGANIC CHANGE". Prior to
the consummation of any (i) sale of all or substantially all of the Company's
assets to an acquiring Person or (ii) other Organic Change following which the
Company is not a surviving entity, the Company will secure from the Person
purchasing such assets or the successor resulting from such Organic Change (in
each case, the "ACQUIRING ENTITY") a written agreement (in form and substance
satisfactory to the holders of Warrants representing at least two-thirds of the
Warrant Shares issuable upon exercise of the Warrants then outstanding) to
deliver to each holder of Warrants in exchange for such Warrants, a security of
the Acquiring Entity evidenced by a written instrument substantially similar in
form and substance to this Warrant and satisfactory to the holders of the
Warrants (including an adjusted warrant exercise price equal to the value for
the Common Stock reflected by the terms of such consolidation, merger or sale,
and exercisable for a corresponding number of shares of Common Stock acquirable
and receivable upon exercise of the Warrants without regard to any limitations
on exercise, if the value so reflected is less than any Applicable Warrant
Exercise Price immediately prior to such consolidation, merger or sale). Prior
to the consummation of any other Organic Change, the Company shall make
appropriate provision (in form and substance satisfactory to the holders of
Warrants representing a majority of the Warrant Shares issuable upon exercise of
the Warrants then outstanding) to insure that each of the holders of the
Warrants will thereafter have the right to acquire and receive in lieu of or in
addition to (as the case may be) the Warrant Shares immediately theretofore
issuable and receivable upon the exercise of such holder's Warrants (without
regard to any limitations on exercise), such shares of stock, securities or
assets that would have been issued or payable in such Organic Change with
respect to or in exchange for the number of Warrant Shares which would have been
issuable and receivable upon the exercise of such holder's Warrant as of the
date of such Organic Change (without taking into account any limitations or
restrictions on the exercisability of this Warrant).
Section 11. LOST, STOLEN, MUTILATED OR DESTROYED WARRANT. If this
Warrant is lost, stolen, mutilated or destroyed, the Company shall promptly, on
receipt of an indemnification undertaking (or, in the case of a mutilated
Warrant, the Warrant), issue a new Warrant of like denomination and tenor as
this Warrant so lost, stolen, mutilated or destroyed.
Section 12. NOTICE. Any notices, consents, waivers or other
communications required or permitted to be given under the terms of this Warrant
must be in writing and will be deemed to have been delivered: (i) upon receipt,
when delivered personally; (ii) upon receipt, when sent by facsimile (provided
confirmation of receipt is received by the sending party transmission is
mechanically or electronically generated and kept on file by the sending party);
or (iii) one Business Day after deposit with a nationally recognized overnight
9
delivery service, in each case properly addressed to the party to receive the
same. The addresses and facsimile numbers for such communications shall be:
If to the Holder:
May Davis Group, Inc.
1 World Trade Center, Suite 8735
New York, NY 10048
Telephone: (212) 775-7400
Facsimile: (212) 775-8166
Attention: Michael Jacobs
With Copy to:
Butler Gonzalez LLP
1000 Stuyvesant Avenue
Suite # 6
Union, NJ 07083
Telephone: (908) 810-8588
Facsimile: (908) 810-0873
Attention: David Gonzalez, Esq.
If to the Company:
European Micro Holdings, Inc.
6073 N.W. 167th Street
Unit C-25
Miami, Fl 33015
Telephone: (305) 825-2458
Facsimile: (305) 362-4854
Attention: John B. Gallagher, Co-President
With a copy to:
Kirkpatrick & Lockhart
201 Biscayne Blvd.
Suite 2000
Miami, Fl 33131
Attention: Clayton Parker, Esq.
Telephone: (305) 539-3306
Facsimile: (305) 358-7095
Each party shall provide five days' prior written notice to the other party of
any change in address or facsimile number. Written confirmation of receipt (A)
given by the recipient of such notice, consent, facsimile, waiver or other
communication, (or (B) provided by a nationally recognized overnight delivery
service shall be rebuttable evidence of personal service, receipt by facsimile
or receipt from a nationally recognized overnight delivery service in accordance
with clause (i), (ii) or (iii) above, respectively.
10
Section 13. DATE. The date of this Warrant is May ___, 2001. This
Warrant, in all events, shall be wholly void and of no effect after the close of
business on the Expiration Date.
Section 14. AMENDMENT AND WAIVER. Except as otherwise provided herein,
the provisions of the Warrants may be amended and the Company may take any
action herein prohibited, or omit to perform any act herein required to be
performed by it, only if the Company has obtained the written consent of the
holders of Warrants representing at least two-thirds of the Warrant Shares
issuable upon exercise of the Warrants then outstanding; provided that no such
action may increase the Warrant Exercise Price or decrease the number of shares
or class of stock obtainable upon exercise of any Warrant without the written
consent of the holder of such Warrant.
Section 15. DESCRIPTIVE HEADINGS; GOVERNING LAW. The descriptive
headings of the several sections and paragraphs of this Warrant are inserted for
convenience only and do not constitute a part of this Warrant. The corporate
laws of the State of Nevada shall govern all issues concerning the relative
rights of the Company and its stockholders. All other questions concerning the
construction, validity, enforcement and interpretation of this Warrant shall be
governed by the internal laws of the State of New York, without giving effect to
any choice of law or conflict of law provision or rule (whether of the State of
New York, or any other jurisdiction) that would cause the application of the
laws of any jurisdiction other than the State of New York.
[SIGNATURE PAGE FOLLOWS]
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IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by
John B. Gallagher, its Co-President, as of May ___, 2001.
EUROPEAN MICRO HOLDINGS, INC.
By:
------------------------------
Name: John B. Gallagher
Title: Co-President
EXHIBIT A TO WARRANT
SUBSCRIPTION FORM
TO BE EXECUTED BY THE REGISTERED HOLDER TO EXERCISE THIS
WARRANT EUROPEAN MICRO HOLDINGS, INC.
The undersigned holder hereby exercises the right to purchase
_________________ of the shares of Common Stock ("WARRANT SHARES") of European
Micro Holdings, Inc., a Nevada corporation (the "COMPANY"), evidenced by the
attached Warrant (the "Warrant"). Capitalized terms used herein and not
otherwise defined shall have the respective meanings set forth in the Warrant.
1. Form of Warrant Exercise Price. The Holder intends that payment of
the Warrant Exercise Price shall be made as:
____________ a "CASH EXERCISE" with respect to ________________
Warrant Shares.
2. Payment of Warrant Exercise Price. In the event that the holder has
elected a Cash Exercise with respect to some or all of the Warrant Shares to be
issued pursuant hereto, the holder shall pay the sum of $___________________ to
the Company in accordance with the terms of the Warrant.
3. Delivery of Warrant Shares. The Company shall deliver to the holder
__________ Warrant Shares in accordance with the terms of the Warrant.
Date: _______________ __, ______
Name of Registered Holder
By:
-----------------------------------
Name:
Title:
EXHIBIT B TO WARRANT
FORM OF WARRANT POWER
FOR VALUE RECEIVED, the undersigned does hereby assign and transfer to
________________, Federal Identification No. __________, a warrant to purchase
____________ shares of the capital stock of European Micro Holdings, Inc., a
Nevada corporation, represented by warrant certificate no. _____, standing in
the name of the undersigned on the books of said corporation. The undersigned
does hereby irrevocably constitute and appoint ______________, attorney to
transfer the warrants of said corporation, with full power of substitution in
the premises.
Dated: _________, ____
------------------------------------
By:
--------------------------------
Its:
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