SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-16345
SED International Holdings, Inc.
(Exact name of Registrant as specified in its charter)
GEORGIA 22-2715444
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4916 North Royal Atlanta Drive, Tucker, Georgia 30085
(Address of principal executive offices) (Zip code)
(770) 491-8962
(Registrant's telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
At April 30, 1999, there were 6,589,453 shares of Common Stock, $.01 par value,
outstanding.
<PAGE>
SED International Holdings, Inc.
And Subsidiaries
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1 - Financial Statements:
Condensed Consolidated Balance Sheets 2
Condensed Consolidated Statements of Operations 3
Condensed Consolidated Statements of Stockholders' Equity 4
Condensed Consolidated Statements of Cash Flows 5
Notes to Condensed Consolidated Financial Statements 6-7
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 8-12
PART II. OTHER INFORMATION
Item 1 - Legal Proceedings 13
Item 2 - Changes in Securities 13
Item 3 - Default Upon Senior Securities 13
Item 4 - Submission of Matters to a Vote of Security
Holders 13
Item 5 - Other Information 13
Item 6 - Exhibits and Reports on Form 8-K 13
<PAGE>
ITEM 1: FINANCIAL STATEMENTS
<TABLE>
SED International Holdings, Inc.
And Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, June 30,
ASSETS 1999 1998
------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 4,995,000 $ 2,693,000
Trade accounts receivable, net 57,085,000 86,298,000
Inventories 60,773,000 141,196,000
Prepaid income taxes 3,300,000 3,489,000
Deferred income taxes - 1,827,000
Other current assets 2,073,000 1,528,000
------------ ------------
TOTAL CURRENT ASSETS 128,226,000 237,031,000
PROPERTY AND EQUIPMENT, net 7,087,000 9,490,000
INTANGIBLES, net 10,117,000 20,044,000
------------ ------------
$145,430,000 $266,565,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable $ 73,195,000 $122,959,000
Accrued liabilities 8,582,000 6,331,000
------------ ------------
TOTAL CURRENT LIABILITIES 81,777,000 129,290,000
REVOLVING BANK DEBT 10,000,000 31,000,000
STOCKHOLDERS' EQUITY:
Preferred Stock
129,500 shares authorized, none issued
Common stock, $.01 par value; 100,000,000 shares
authorized; 10,881,311 shares (March 31, 1999)
and 10,862,211 shares (June 30, 1998) issued 109,000 108,000
Additional paid-in capital 70,691,000 70,659,000
Retained earnings 50,000 38,840,000
Accumulated other comprehensive loss (699,000) (119,000)
Treasury stock, at cost, 3,734,858 shares
(March 31, 1999) and 345,608 shares
(June 30, 1998) (16,301,000) (2,937,000)
Prepaid compensation - stock awards (197,000) (276,000)
------------ ------------
53,653,000 106,275,000
------------ ------------
$145,430,000 $266,565,000
============ ============
</TABLE>
<PAGE>
<TABLE>
SED International Holdings, Inc.
And Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
March 31, March 31,
----------------------------- -------------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
NET SALES $ 157,674,000 $ 243,281,000 $ 545,922,000 $ 673,085,000
COSTS AND EXPENSES
Cost of sales including buying
and occupancy expenses 159,258,000 229,760,000 525,061,000 634,769,000
Selling, general, and administrative 24,792,000 9,629,000 46,697,000 24,633,000
Impairment Charges 13,573,000 -- 13,573,000 --
Start-up expenses -- -- -- 1,400,000
------------- ------------- ------------- -------------
197,623,000 239,389,000 585,331,000 660,802,000
------------- ------------- ------------- -------------
OPERATING INCOME (LOSS) (39,949,000) 3,892,000 (39,409,000) 12,283,000
INTEREST EXPENSE, Net 154,000 766,000 366,000 2,514,000
------------- ------------- ------------- -------------
EARNINGS (LOSS) BEFORE INCOME TAXES (40,103,000) 3,126,000 (39,775,000) 9,769,000
INCOME TAXES (BENEFIT) (1,244,000) 1,207,000 (985,000) 3,800,000
------------- ------------- ------------- -------------
NET EARNINGS (LOSS) (38,859,000) 1,919,000 (38,790,000) 5,969,000
OTHER COMPREHENSIVE INCOME (LOSS)
Foreign currency translation adjustments (197,000) -- (580,000) --
------------- ------------- ------------- -------------
COMPREHENSIVE INCOME (LOSS) $ (39,056,000) $ 1,919,000 $ (39,370,000) $ 5,969,000
============= ============= ============= =============
NET EARNINGS (LOSS) PER COMMON SHARE:
Basic $ (4.51) $ .18 $ (4.10) $ .64
Diluted (4.51) .18 (4.10) .61
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 8,615,000 10,468,000 9,464,000 9,299,000
Diluted 8,615,000 10,852,000 9,464,000 9,818,000
</TABLE>
<PAGE>
<TABLE>
SED International Holdings, Inc.
And Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS
OF STOCKHOLDERS' EQUITY
(Unaudited)
Accumulated
Common Stock Additional Other Prepaid
Par Paid-In Retained Comprehensive Treasury Stock Compensation
Shares Value Capital Earnings Loss Shares Cost Stock Awards
---------- -------- ----------- ------------ --------- --------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE,
June 30, 1998 10,862,211 $108,000 $70,659,000 $ 38,840,000 $(119,000) 345,608 $(2,937,000) $(276,000)
Amortization of
stock awards 107,000
Stock awards
issued to
employees and
directors 25,000 1,000 71,000 (70,000)
Stock awards
cancelled (6,300) (42,000) 42,000
Stock options
exercised 400 3,000
Treasury stock
purchased 3,389,250 (13,364,000)
Net loss $(38,790,000)
Translation
adjustments (580,000)
---------- -------- ----------- ------------ --------- --------- ------------ ---------
BALANCE,
March 31, 1999 10,881,311 $109,000 $70,691,000 $ 50,000 $(699,000) 3,734,858 $(16,301,000) $(197,000)
========== ======== =========== ============ ========= ========= ============ =========
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE>
<TABLE>
SED International Holdings, Inc.
And Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
March 31,
--------------------------------
1999 1998
------------ -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net earnings (loss) $(38,790,000) $ 5,969,000
------------ -----------
Adjustments to reconcile net earnings (loss)
to net cash provided by
(used in) operating activities:
Impairment charges for long-lived assets 13,573,000 --
Depreciation and amortization 2,515,000 1,990,000
Compensation - stock awards 107,000 86,000
Changes in assets and liabilities,
net of effects of acquired businesses 65,705,000 (18,289,000)
----------- -----------
Net cash provided by (used in)
operating activities 43,110,000 (10,244,000)
----------- -----------
INVESTING ACTIVITIES:
Purchases of equipment (1,479,000) (3,655,000)
Purchase of business, net of cash acquired (4,460,000) (370,000)
Purchase of distribution rights - (1,181,000)
----------- -----------
Net cash used in investing activities (5,939,000) (5,206,000)
----------- -----------
FINANCING ACTIVITIES:
Payments under line of credit, net (21,000,000) (33,500,000)
Proceeds from issuance of common stock, net 75,000 55,733,000
Purchase of treasury stock (13,364,000) (77,000)
----------- -----------
Net cash provided by (used in)
financing activities (34,289,000) 22,156,000
EFFECT OF EXCHANGE RATE CHANGES ON CASH (580,000) -
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 2,302,000 6,706,000
CASH AND CASH EQUIVALENTS, beginning of period 2,693,000 783,000
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 4,995,000 $ 7,489,000
=========== ===========
</TABLE>
<PAGE>
SED International Holdings, Inc.
And Subsidiaries
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Nine Months Ended March 31, 1999 and 1998
A. Interim Financial Statements
The accompanying condensed consolidated financial statements of SED
International Holdings, Inc. and its wholly-owned subsidiaries, SED
International, Inc., SED Magna Distribuidora Ltda., SED Magna (Miami),
Inc., SED International de Colombia Ltda. and Intermaco S.R.L.
(collectively, the "Company") have been prepared without audit. In the
opinion of management, all adjustments (which include only normal
recurring adjustments) considered necessary for a fair presentation have
been included. All intercompany accounts and transactions have been
eliminated. The results of operations for the three months ended March 31,
1999 are not necessarily indicative of the operating results for the full
year.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. It is suggested that
these financial statements be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's Annual
Report on Form 10-K filed with the Securities and Exchange Commission for
the year ended June 30, 1998.
B. Impairment Charges
The Company recorded $13,573,000 of impairment charges during the quarter
ended March 31, 1999 for the following matters:
[bullet] As a result of consecutive sales declines during each of the
past four quarters ended March 31, 1999, the Company
reviewed the intangible assets related to distribution
rights acquired in June 1997 from Globelle for possible
impairment. This evaluation resulted in a $10,792,000
write-down of these rights to their estimated fair value
(based on estimated future associated cash flows).
[bullet] In response to the poor operating performance
realized at SED Magna Distribuidora Ltda. in Brazil since
its December 1997 acquisition and risks inherent in its
future operations, the Company recorded an impairment charge
of $738,000 for the write-off of the remaining goodwill
related to this entity (as this goodwill does not appear to
be recoverable).
[bullet] The Company recorded property and equipment impairment
charges totaling $2,043,000, primarily related to
capitalized software costs for systems which have now been
abandoned.
C. Start-up Expense
As a result of a transaction with Globelle in June 1997, the Company
acquired the distribution rights for certain significant vendor lines in
the United States and subsequently hired 36 experienced sales people
formerly with Globelle. Because the Globelle transaction was not an
acquisition of a going business concern, a transition period followed the
close of that transaction during which the newly-hired sales people became
acclimated to the Company's policies, procedures, and product offerings,
and the inventory of new product lines became stocked at the Company's
warehouses. As a result of this transaction, the Company incurred $1.4
million of start-up expenses during the first fiscal quarter ended
September 30, 1997 reflecting costs associated with
<PAGE>
SED International Holdings, Inc.
And Subsidiaries
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Nine Months Ended March 31, 1999 and 1998
(continued)
the hiring of new sales people, opening new sales offices and other
transition expenses.
D. Share Repurchases
During the nine months ended March 31, 1999, the Company repurchased
3,389,250 shares of its common stock for $13,364,000 in open market and
privately negotiated transactions under a previously announced buy-back
program. In April 1999, the Company repurchased 557,000 shares of its
common stock for $1,463,000, completing its previously announced buy-back
program.
E. Acquisition
Effective November 1, 1998, the Company acquired Intermaco S.R.L.
(Intermaco), a Buenos Aires, Argentina based distributor of
Hewlett-Packard products and other computer peripherals throughout
Argentina, for approximately $4,460,000 in cash. The Company is required
to pay additional amounts to the sellers of Intermaco based on a multiple
of Intermaco's net earnings, as defined, for the two succeeding twelve
month periods commencing November 1, 1998. If paid, such amounts will be
recorded as additional goodwill. This acquisition has been accounted for
using the purchase method of accounting. Goodwill arising from this
acquisition is being amortized using the straight-line method over 30
years. The operating results of the acquired business are included in the
Company's consolidated statements of earnings from the effective date of
acquisition. Pro forma results of operations for the nine months ended
March 31, 1999 and 1998 as if this acquisition had been completed on July
1, 1997 would not differ significantly from actual results achieved.
F. Credit Agreement
The Company has a Credit Agreement, which provides for a secured line of
credit of $75.0 million which was reduced from $100.0 million at the
Company's election in March 1999. The Company may borrow at the prime rate
offered by Wachovia Bank, N.A. (7.75% at March 31, 1999) or the Company
may fix the interest rate for periods of 30 to 180 days under various
interest rate options. The Credit Agreement requires a commitment fee of
.125% of the unused commitment. The Credit Agreement is secured by
accounts receivable and inventory and requires maintenance of certain
minimum working capital and other financial ratios and has certain
dividend restrictions. The Credit Agreement expires in July 2001. At March
31, 1999, the Company had $10,000,000 of borrowings under this Agreement
at an average interest rate of 7.75%.
As of March 31, 1999, the Company was in violation of its fixed charges
coverage, minimum consolidated tangible net worth, restricted payments,
other debt, and priority debt covenants under its Credit Agreement with
its lenders. The lenders have waived the Company's violation of these
covenants through March 31, 1999, provided, the Company and the lenders
have agreed to amend these covenants on or before June 1, 1999. The
Company and its lenders are currently discussing the terms of the amended
fixed charges coverage, minimum consolidated tangible net worth,
restricted payments, other debt, and priority debt covenants and
anticipate amending these covenants or entering into a new agreement on or
before June 1, 1999.
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CONSOLIDATED RESULTS OF OPERATIONS
Three Months Ended March 31, 1999 Compared to Three Months Ended
March 31, 1998
Net sales decreased 35.2% or $85.6 million, to $157.7 million in the third
quarter ended March 31, 1999 compared to $243.3 million in the third quarter
ended March 31, 1998. Information concerning the Company's domestic and foreign
sales is summarized below:
Three Months Ended
March 31, Change
------------------ ----------------
1999 1998 Amount Percent
---- ---- ------ -------
United States:
Domestic $103.8 $143.3 $(39.5) 27.6%
Export 38.3 91.2 (52.9) 58.0%
Latin America 16.9 8.8 8.1 92.0%
Elimination (1.3) - (1.3) N/A
------ ------ ------ ----
Consolidated $157.7 $243.3 $(85.6) 35.2%
====== ====== ====== ====
The overall decline resulted from a decrease in United States domestic net
sales, a decline in net sales to customers for export principally to Latin
America, and a net increase in in-country net sales for Brazil (Magna
Distribuidora Ltda. acquired in December 1997 and operating as SED Magna
Distribuidora Ltda.), Colombia (commenced operations in May 1998 and operating
as SED International de Colombia Ltda.) and Argentina (Intermaco S.R.L. acquired
in November 1998).
The decrease in sales in the United States was primarily due to lower sales of
mass storage products. Sales of microcomputer products represented approximately
83.9% of the Company's third quarter net sales compared to 91.1% for the same
period last year. Sales of wireless telephone products accounted for
approximately 16.1% of the Company's third quarter net sales compared to 8.9%
for the same period last year.
Gross margin decreased $15.1 million, to $(1.6) million in the third quarter
ended March 31, 1999 compared to $13.5 million in the third quarter ended March
31, 1998. Gross margin for the quarter ended March 31, 1999 was impacted by $7.5
million of inventory markdowns for slow moving inventory. Overall, total gross
margin dollars have declined with sales. Gross margin as a percentage of net
sales decreased to (0.1)% in the third quarter ended March 31, 1999 from 5.6% in
the third quarter ended March 31, 1998. The change in gross margin as a
percentage of sales was due to a combination of lower sales and the change in
the mix of products sold. Overall, the Company continues to experience pricing
pressures in selling products.
Selling, general and administrative expenses (excluding $13.6 million of
impairment charges for the third quarter ended March 31, 1999) increased 157.5%,
or $15.2 million, to $23.8 million in the third quarter ended March 31, 1999,
compared to $9.6 million in the third quarter ended March 31, 1998. These
expenses as a percentage of net sales increased to 15.7% in the third quarter
ended March 31, 1999 compared to 4.0% in the third quarter ended March 31, 1998.
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (continued)
The dollar increase in these expenses is primarily due to increased provisions
for accounts receivable losses in the March 1999 quarter and the inclusion of
operations of Latin American affiliates.
Net interest expense was $0.2 million in the third quarter ended March 31, 1999
compared to interest expense of $0.8 million in the third quarter ended March
31, 1998. This net change resulted from a reduction in working capital
requirements in the third quarter ended March 31, 1999.
Income tax benefit was $1.2 million in the third quarter ended March 31, 1999
compared to an income tax expense of $1.2 million in the third quarter ended
March 31, 1998.
Nine Months Ended March 31, 1999 Compared to Nine Months Ended
March 31, 1998
Net sales decreased 18.9% or $127.2 million, to $545.9 million in the nine
months ended March 31, 1999 compared to $673.1 million in the nine months ended
March 31, 1998. Information concerning the Company's domestic and foreign sales
is summarized below:
Nine Months Ended
March 31, Change
1999 1998 Amount Percent
------ ------ ------- -------
United States:
Domestic $345.5 $399.4 $ (53.9) 13.5%
Export 144.0 261.4 (117.4) 44.9%
Latin America 60.1 12.3 47.8 388.6%
Elimination (3.7) - (3.7) N/A
------ ------ ------- ----
Consolidated $545.9 $673.1 $(127.2) 18.9%
====== ====== ======= ====
The overall decline resulted from a decrease in United States domestic net
sales, a decline in net sales to customers for export principally to Latin
America, and a net increase in in-country net sales for Brazil (Magna
Distribuidora Ltda. acquired in December 1997 and operating as SED Magna
Distribuidora Ltda.), Colombia (commenced operations in May 1998 and operating
as SED International de Colombia Ltda.) and Argentina (Intermaco S.R.L. acquired
in November 1998.)
The decrease in sales in the United States was primarily due to lower sales of
mass storage products. Sales of microcomputer products represented approximately
85.3% of the Company's nine month period ended March 31, 1999 net sales compared
to 87.7% for the same period last year. Sales of wireless telephone products
accounted for approximately 14.7% of the Company's nine month period ended March
31, 1999 net sales compared to 12.3% for the same period last year.
Gross margin decreased 45.6%, or $17.5 million, to $20.9 million in the nine
months ended March 31, 1999 compared to $38.3 million in the nine months ended
March 31, 1998. Gross margin for the nine months ended March 31, 1999 was
impacted by $7.5 million of inventory markdowns for slow moving inventory.
Overall, total gross margin dollars have declined with sales. Gross margin as a
percentage of net sales decreased to 3.8% in the nine months ended March 31,
1999 from 5.7% in the nine months ended March 31, 1998. The change in gross
margin as
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (continued)
a percentage of sales was due to a combination of lower sales and the change in
the mix of products sold.
Selling, general and administrative expenses (excluding $1.4 million of start-up
expenses during the quarter ended September 30, 1997 and $13.6 million of
impairment charges for the quarter ended March 31, 1999) increased 89.6%, or
$22.1 million, to $46.7 million in the nine months ended March 31, 1999,
compared to $24.6 million in the nine months ended March 31, 1998. These
expenses as a percentage of net sales increased to 8.6% in the nine months ended
March 31, 1999 compared to 3.7% in the nine months ended March 31, 1998. The
dollar increase in these expenses was primarily due to expenses of operations in
Latin America and higher charges for uncollectible customer accounts.
Net interest expense decreased 85.5%, or $2.1 million, to $.4 million in the
nine months ended March 31, 1999 compared to $2.5 million in the nine months
ended March 31, 1998. The decrease in interest expense was primarily due to
lower average borrowings.
Income tax benefit was $1.0 million in the nine months ended March 31, 1999
compared to an income tax expense of $3.8 million in the nine months ended March
31, 1998.
Liquidity and Capital Resources
The Company's liquidity requirements arise primarily from the funding of working
capital needs, including inventories and trade accounts receivable.
Historically, the Company has financed its liquidity needs largely through
internally generated funds, borrowings under its credit agreement and vendor
lines of credit. The Company derives all of its operating income and cash flow
from its subsidiaries and relies on payments from its subsidiaries to generate
the funds necessary to meet its obligations. As the Company pursues its growth
strategy and acquisition opportunities both in the United States and in Latin
America, management believes that exchange controls in certain countries may
limit the ability of the Company's present and future subsidiaries in those
countries to make payments to the Company.
Operating activities provided $43.1 million in the nine months ended March 31,
1999. The source of cash in the nine months ended March 31, 1999 resulted
primarily from decreases of $32.3 million in accounts receivable and $83.0
million in inventory, offset by a $52.8 million decrease in accounts payable.
Investing activities used $1.5 million in the nine months ended March 31, 1999
to purchase equipment. The Company used $4.5 million, net of acquired cash, to
purchase Intermaco S.R.L. in Argentina.
Financing activities used $34.3 million in the nine months ended March 31, 1999.
The Company used $21.0 million to repay borrowings under its line of credit and
$13.4 million to repurchase shares of its common stock.
The Company has a Credit Agreement, which provides for a secured line of credit
of $75.0 million. The Company may borrow at the prime rate offered by Wachovia
Bank, N.A. (7.75% at March 31, 1999) or the Company may fix the interest rate
for periods of 30 to 180 days under various interest rate options. The Credit
Agreement requires a commitment fee of .125% of the unused commitment. The
Credit Agreement is secured by accounts receivable and inventory and requires
maintenance
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (continued)
of certain minimum working capital and other financial ratios and has certain
dividend restrictions. The Credit Agreement expires in July 2001. At March 31,
1999, the Company had $10,000,000 of borrowings under this Agreement at an
average interest rate of 7.75%.
As of March 31, 1999, the Company was in violation of its fixed charges
coverage, minimum consolidated tangible net worth, restricted payments, other
debt, and priority debt covenants under its Credit Agreement with its lenders.
The lenders have waived the Company's violation of these covenants through March
31, 1999, provided, the Company and the lenders have agreed to amend these
covenants on or before June 1, 1999. The Company and its lenders are currently
discussing the terms of the amended fixed charges coverage, minimum consolidated
tangible net worth, restricted payments, other debt, and priority debt covenants
and anticipate amending these covenants or entering into a new agreement on or
before June 1, 1999.
Management believes that the Credit Agreement (when amended) together with
vendor lines of credit and internally generated funds will be sufficient to
satisfy its working capital needs during fiscal 1999. The Credit Agreement
permits up to $30.0 million to be borrowed for the purpose of financing
acquisitions, subject to a limitation of $15.0 million for any one acquisition,
and further subject to compliance with the other terms of the Credit Agreement.
Inflation and Price Levels
Inflation has not had a significant impact on the Company's business because of
the typically decreasing costs of products sold by the Company. The Company also
receives vendor price protection for a significant portion of its inventory. In
the event a vendor reduces its prices for goods purchased by the Company prior
to the Company's sale of such goods, the Company generally has been able either
to receive a credit from the vendor for the price differential or to return the
goods to the vendor for a credit against the purchase price. As the Company
pursues its growth strategy to acquire businesses and assets in foreign
countries, the Company may operate in certain countries that have experienced
high rates of inflation and hyperinflation. At this time, management does not
expect that inflation will have a material impact on the Company's business in
the immediate future.
Our Brazilian subsidiary maintains certain US Dollar denominated liabilities.
During January 1999, the Brazilian Real devalued from 1.21 to 1.72 per US Dollar
when the Brazilian government changed its foreign exchange policy. As a result,
our Brazilian subsidiary incurred significant transaction losses during the
Quarter ended March 31, 1999. As the Brazilian economy may not have yet
stabilized, future devaluations are possible.
Year 2000
The Company is currently evaluating its major computer software and operating
systems to determine their respective date sensitivity in light of the possible
inability of certain computer programs to handle dates beyond the year 1999 (the
"Year 2000 Issue"). The Company's plans for dealing with the Year 2000 Issue
include the following phases: inventorying affected technology and assessing
potential impact of the Year 2000 Issue; determining the need for software and
operating system upgrades and replacements; implementing and testing newly
installed software and operating systems; and developing contingency plans. Many
of the Company's software and operating systems have already been updated to the
latest versions available.
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (continued)
The Company relies on third-party suppliers for many systems, products and
services including telecommunications and data center support. The Company may
be adversely impacted if these suppliers do not make necessary changes to their
own systems and products successfully in a timely manner.
The cost to the Company of software and hardware remediation was approximately
$250,000 during fiscal 1998 and is estimated to be $200,000 during fiscal 1999,
and $50,000 during fiscal 2000. The total cost of updating the Company's
software and operating systems is currently estimated at approximately $500,000.
Potential risk factors for the Company relating to the Year 2000 Issue may
include loss of order processing and order shipment capabilities, the potential
inability to effectively manage distribution center inventory, potential
complications with telephone or e-mail communications, and potential liability
for litigation due to distribution of products that were not Year 2000
compliant. The Company currently believes that the majority of its mission
critical systems pose a low risk to the Company's overall operational abilities,
because the Company has updated most of its software and operating systems to
recent versions. Furthermore, the Company is currently taking measures to ensure
that its systems that pose a potentially higher risk to the Company's overall
operational abilities will be updated within a reasonable time frame.
The Company believes that it is taking the appropriate measures to develop
contingency plans that address the likely worst case scenarios relating to the
Year 2000 Issue. Although the Company believes that the measures it is currently
undertaking and intends to undertake will adequately address the Year 2000
Issue, it has still developed alternative plans should potential complications
arise. For example, though essential to the operation of the Company's business,
the software and operating systems that the Company currently utilizes may be
supplemented by manual processing and shipment of orders.
Forward-Looking Information
The matters discussed herein contain certain forward-looking statements that
represent the Company's expectations or beliefs, including, but not limited to,
statements concerning future revenues and future business plans and
non-historical Year 2000 information. When used by or on behalf of the Company,
the words "may," "could," "should," "would," "believe," "anticipate,"
"estimate," "intend," "plan," and similar expressions are intended to identify
forward-looking statements. These statements by their nature involve substantial
risks and uncertainties, certain of which are beyond the Company's control. The
Company cautions that various factors, including the factors described under the
captions "Risk Factors" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" contained in the Company's Registration
Statement on Form S-3 (SEC File No. 333-35069) as well as general economic
conditions and industry trends, foreign currency fluctuation, the level of
acquisition opportunities available to the Company and the Company's ability to
negotiate the terms of such acquisition on a favorable basis, a dependence upon
and/or loss of key vendors or customers, the loss of strategic product shipping
relationships, customer demand, product availability, competition (including
pricing and availability), concentrations of credit risks, distribution
efficiencies, capacity constraints and technological difficulties could cause
actual results or outcomes to differ materially from those expressed in any
forward-looking statements of the Company made by or on behalf of the Company.
The Company undertakes no obligation to update any forward-looking statement.
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable
Item 2. Changes in Securities
Not applicable
Item 3. Default Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits.
Exhibit
Number Description
10.1 Amendment dated March 30, 1999 to Amended and
Restated Credit Agreement among SED International
Holdings, Inc., SED International, Inc., and
Wachovia Bank, N.A. dated as of August 13, 1997
27.1 Financial Data Schedule
b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SED International Holdings, Inc.
(Registrant)
May 17, 1999 /s/Gerald Diamond
Gerald Diamond
Chief Executive Officer
Chairman of the Board
(Principal Executive Officer)
May 17, 1999 /s/Larry G. Ayers
Larry G. Ayers
Vice President-Finance and
Treasurer
(Principal Accounting Officer)
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
10.1 Amendment Dated March 30, 1999 to Amended and Restated
Credit Agreement among SED International Holdings, Inc.
SED International, Inc., and Wachovia Bank, N.A.
dated as of August 13, 1997
27.1 Financial Data Schedule
<PAGE>
EXHIBIT 10.1
March 30, 1999
Mr. Kevin Harrison
Vice President
Wachovia Bank
191 Peachtree St. NE
30th Floor
Atlanta, GA 30303-1757
Dear Kevin:
Pursuant to Section 2.07 of the Amended and Restated Credit Agreement,
please reduce our commitment from $100 million effective March 30, 1999.
With this reduction, I understand that we are permitted to make treasury
stock repurchases.
I understand that we are continuing our efforts to amend the Credit
Agreement to resolve any dfaults which may exist. Thank you for your
cooperation and participation in our borrowing needs.
Sincerely,
/s/ Larry G. Ayers
Larry G. Ayers
Vice President - Finance
LGA/dv
<PAGE>
EXHIBIT 27.1
FINANCIAL DATA SCHEDULE
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SED
INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS AS OF AND FOR THE PERIOD ENDED MARCH 31, 1999 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
PERIOD-TYPE 9-MOS
FISCAL-YEAR-END JUN-30-1999
PERIOD-END MAR-31-1999
CASH 4,995,000
SECURITIES 0
RECEIVABLES 74,338,000
ALLOWANCES 17,253,000
INVENTORY 60,773,000
CURRENT-ASSETS 128,226,000
PP&E 12,343,000
ACCUMULATED DEPRECIATION 5,256,000
TOTAL-ASSETS 145,430,000
CURRENT-LIABILITIES 81,777,000
BONDS 0
PREFERRED 0
PREFERRED-MANDATORY 0
COMMON 109,000
OTHER-SE 53,544,000
TOTAL-LIABILITY-AND-EQUITY 145,430,000
SALES 545,922,000
TOTAL-REVENUES 545,922,000
CGS 525,061,000
TOTAL-COSTS 525,061,000
OTHER-EXPENSES 60,270,000
LOSS-PROVISION 0
INTEREST-EXPENSE 366,000
LOSS-PRETAX (39,775,000)
INCOME-TAX BENEFIT (985,000)
LOSS-CONTINUING (38,790,000)
DISCONTINUED 0
EXTRAORDINARY 0
CHANGES 0
NET-LOSS (37,790,000)
EPS-BASIC (4.10)
EPS-DILUTED (4.10)
