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 SEPTEMBER 30, 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 October 31, 1999, there were 7,014,453 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 Earnings 3
Condensed Consolidated Statements of
Shareholders' Equity 4
Condensed Consolidated Statements of Cash Flows 5
Notes to Condensed Consolidated Financial Statements 6-8
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-13
PART II. OTHER INFORMATION
Item 1 - Legal Proceedings 14
Item 2 - Changes in Securities 14
Item 3 - Default Upon Senior Securities 14
Item 4 - Submission of Matters to a Vote of Security
Holders 14
Item 5 - Other Information 14
Item 6 - Exhibits and Reports on Form 8-K 15
<PAGE>
<TABLE>
ITEM 1: FINANCIAL STATEMENTS
SED INTERNATIONAL HOLDINGS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, June 30,
ASSETS 1999 1999
------ ------------- -------------
(Unaudited)
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 5,590,000 $ 3,266,000
Trade accounts receivable, net 68,072,000 58,085,000
Inventories 70,627,000 57,092,000
Refundable income taxes 2,985,000 3,801,000
Other current assets 2,486,000 2,729,000
------------- -------------
TOTAL CURRENT ASSETS 149,760,000 124,973,000
PROPERTY AND EQUIPMENT, net 7,294,000 6,994,000
INTANGIBLES, net 9,033,000 9,123,000
------------- -------------
$ 166,087,000 $ 141,090,000
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable $ 97,399,000 $ 72,375,000
Accrued liabilities 6,978,000 7,405,000
------------- -------------
TOTAL CURRENT LIABILITIES 104,377,000 79,780,000
REVOLVING BANK DEBT 8,500,000 8,500,000
SHAREHOLDERS' EQUITY:
Preferred Stock
129,500 shares authorized, none issued Common stock, $.01 par value;
100,000,000 shares authorized; 11,156,311 shares (September 30, 1999)
and 11,158,311 shares (June 30, 1999) issued 112,000 112,000
Additional paid-in capital 71,701,000 71,712,000
Retained earnings 1,532,000 932,000
Accumulated other comprehensive loss (1,393,000) (984,000)
Treasury stock, at cost, 4,151,858 shares
(September 30, 1999) and 4,291,858 shares
(June 30, 1999) (17,323,000) (17,764,000)
Prepaid compensation - stock awards (1,419,000) (1,198,000)
</TABLE>
<PAGE>
<TABLE>
SED INTERNATIONAL HOLDINGS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
Three Months Ended
SEPTEMBER 30,
----------------------------------------
1999 1998
------------ ------------
<S> <C> <C>
NET SALES $186,644,000 $217,013,000
------------ ------------
COST AND EXPENSES
Including buying and occupancy expenses 175,523,000 205,788,000
Selling, general, and administrative 10,182,000 10,124,000
------------ ------------
185,705,000 215,912,000
------------ ------------
OPERATING INCOME 939,000 1,101,000
INTEREST EXPENSE 89,000 319,000
------------ ------------
EARNINGS BEFORE INCOME TAXES 850,000 782,000
INCOME TAXES 250,000 440,000
------------ ------------
NET EARNINGS $ 600,000 $ 342,000
============ ============
NET EARNINGS PER COMMON SHARE:
Basic $ .09 $ .03
Diluted .09 .03
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 6,529,000 10,253,000
Diluted 6,529,000 10,296,000
</TABLE>
<PAGE>
<TABLE>
SED INTERNATIONAL HOLDINGS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS
OF SHAREHOLDERS' EQUITY
(Unaudited)
COMMON STOCK ACCUMULATED
--------------------------------- ADDITIONAL OTHER
PAR PAID-IN RETAINED COMPREHENSIVE
SHARES VALUE CAPITAL EARNINGS LOSS
---------- --------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, June 30, 1999 11,158,311 $ 112,000 $ 71,712,000 $ 932,000 $ (984,000)
Stock awards issued to
employees
Amortization of stock awards
Stock awards cancelled (2,000) (11,000)
Net earnings 600,000
Translation adjustments (409,000)
Comprehensive earnings
---------- --------- ------------ ----------- -------------
BALANCE, September 30, 1999 11,156,311 $ 112,000 $ 71,701,000 $ 1,532,000 $ (1,393,0000)
========== ========= ============ =========== =============
TREASURY STOCK PREPAID TOTAL
-------------------------------- COMPENSATION SHAREHOLDERS'
SHARES COST STOCK AWARDS EQUITY
---------- -------------- ------------ ------------
<S> <C> <C> <C> <C>
BALANCE, June 30, 1999 4,291,858 $ (17,764,000) $ (1,198,000) $ 52,810,000
Stock awards issued to
employees (150,000) 441,000 (441,000)
Amortization of stock awards 209,000 209,000
Stock awards cancelled 11,000
Net earnings 600,000
Translation adjustments (409,000)
------------
Comprehensive earnings 191,000
----------- ------------- ------------ ------------
BALANCE, September 30, 1999 4,141,858 $ (17,323,000) $ (1,419,000) $ 53,210,000
============ ============= ============ ============
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE>
<TABLE>
SED INTERNATIONAL HOLDINGS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
THREE MONTHS ENDED
SEPTEMBER 30,
---------------------------
1999 1998
---------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net earnings $ 600,000 $ 342,000
Adjustments to reconcile net earnings
to net cash provided by
operating activities:
Depreciation and amortization 590,000 889,000
Compensation - stock awards 209,000 6,000
Changes in assets and liabilities 2,134,000 43,406,000
---------- -----------
Net cash provided by
operating activities 3,533,000 44,643,000
---------- -----------
INVESTING ACTIVITIES:
Purchases of equipment (800,000) (503,000)
---------- -----------
Net cash used in investing activities (800,000) (503,000)
---------- -----------
FINANCING ACTIVITIES:
Payments under line of credit, net (31,000,000)
Proceeds from issuance of common stock, net 3,000
Purchase of treasury stock (4,080,000)
---------- -----------
Net cash used in
financing activities (35,077,000)
EFFECT OF EXCHANGE RATE CHANGES ON CASH (409,000) (433,000)
---------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 2,324,000 8,630,000
CASH AND CASH EQUIVALENTS, beginning of period 3,266,000 2,693,000
---------- ----------
CASH AND CASH EQUIVALENTS, end of period $5,590,000 $11,323,000
========== ===========
</TABLE>
<PAGE>
SED INTERNATIONAL HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(continued)
SED INTERNATIONAL HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED SEPTEMBER 30, 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 International do Brasil 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 September 30, 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, 1999.
B. ACQUISITION
Effective November 1, 1998, the Company acquired Intermaco S.R.L.
("Intermaco"), a Buenos Aires, Argentina base distributor of
Hewlett-Packard products and other computer peripherals through Argentina,
for approximately $4,417,000 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 months
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.
C. CREDIT AGREEMENT
The Company's credit agreement with Wachovia Bank N.A. ("Wachovia"), as
amended in August 1999, provides for a line of credit of up to $50.0
million. At September 30, 1999, the Company had borrowings of $8.5 million
under this facility. Maximum borrowings under the credit agreement are
generally based on eligible accounts receivable and inventory (as defined
in the credit agreement) less a $15.0 million reserve. The $15.0 million
reserve can be drawn upon, if necessary, to finance obligations to Finova
Capital Corporation, which finances the Company's purchases from certain
vendors. Available additional borrowing capacity under this agreement,
based on collateral limitations, at September 30, 1999 were $36.4 million
($15.0 million of which would only have been available to finance
obligations due to Finova, if necessary).
<PAGE>
SED INTERNATIONAL HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(continued)
The Wachovia 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 Company
may borrow at the prime rate offered by Wachovia (8.0% at September 30,
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 .25% of the unused commitment and expires in August 2001.
D. SEGMENT INFORMATION
The Company operates in one business segment as a wholesale distributor of
microcomputer and wireless telephone products. The Company operates and
manages in two geographic regions, the United States and Latin America.
Financial information by geographic region is as follows:
<TABLE>
UNITED STATES LATIN AMERICA ELIMINATIONS CONSOLIDATED
<S> <C> <C> <C> <C>
FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 1999 Net sales:
Unaffiliated customers $155,388,000 $31,256,000 $186,644,000
FOREIGN SUBSIDIARIES 1,254,000 $ (1,254,000)
---------------------------------------------------------------------------------------------
TOTAL $156,642,000 $31,256,000 $ (1,254,000) $186,644,000
---------------------------------------------------------------------------------------------
Gross profit $ 7,382,000 $ 3,761,000 $ (22,000) $ 11,121,000
Income from operations (5,000) 627,000 (22,000) 600,000
Total assets $154,952,000 $31,902,000 $(20,767,000) $166,087,000
FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 1998 Net sales:
Unaffiliated customers $198,773,000 $18,240,000 $217,013,000
FOREIGN SUBSIDIARIES 1,404,000 $ (1,404,000)
---------------------------------------------------------------------------------------------
TOTAL $200,177,000 $18,240,000 $ (1,404,000) $217,013,000
---------------------------------------------------------------------------------------------
Gross profit $ 9,890,000 $ 1,338,000 $ (3,000) $ 11,225,000
Income from operations 634,000 (289,000) (3,000) 342,000
Total assets $171,534,000 $17,570,000 $ (8,762,000) $180,342,000
</TABLE>
Sales of products between the Company's geographic regions are made at
market prices. All corporate overhead is included in the results of U.S.
operations.
Net sales by product category is as follows:
<TABLE>
FOR THE THREE MONTHS MICROCOMPUTER WIRELESS TELEPHONE
ENDED SEPTEMBER 30, PRODUCTS PRODUCTS TOTAL
-----------------------------------------------------------------------------------------
<S> <C> <C> <C>
1999 $156,642,000 $30,002,000 $186,644,000
1998 195,928,000 21,085,000 217,013,000
</TABLE>
Approximately 41% and 36%, respectively, of the Company's net sales in the
United States for the three months ended September 30, 1999 and 1998
consisted of sales to customers for export principally into Latin America
and direct sales to customers in Brazil, Colombia, and Argentina.
<PAGE>
SED INTERNATIONAL HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(continued)
E. SHAREHOLDER'S EQUITY
In July 1999, the Company's directors approved a broadly-based stock
benefit plan under which non-qualified stock options and awards for up to
an aggregate of 1,400,000 shares of common stock may be issued. Stock
options for the purchase of 988,000 shares of the Company's stock at a
price of $2.94 per share and stock awards for 150,000 shares were issued in
July 1999.
Primarily all stock options and awards outstanding were antidilutive to
earnings per common share for the three months ended September 30, 1999.
F. FINANCIAL INSTRUMENT
In July 1999, the Company entered into a 180-day non-deliverable forward
contract covering Brazilian R$3,992,000. This contract is being accounted
for as a speculative forward contract. Gains and losses are computed by
multiplying the foreign currency amount of the forward contract by the
difference between the forward rate available for the remaining maturity of
the contract and the contracted forward rate (R$1.996 to US $1). During the
quarter ended September 30, 1999, the Company recorded a loss of $62,000 in
selling, general, and administrative expenses related to this contract.
This instrument involves elements of market risk. The Company has not
entered into any other forward contracts or other financial instruments as
of September 30, 1999.
G. RECENTLY ISSUED ACCOUNTING PRONOUNEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). This statement requires
that all derivative instruments be recorded on the balance sheet at fair
value. Changes in the fair value of derivatives are recorded each period in
current earnings or other comprehensive income, depending on whether a
derivative is designated as part of a hedge transaction and, if so, the
type of the hedge transaction. The ineffective portion of all hedge
transactions will be recognized in the current-period earnings, SFAS 133,
as now amended, is effective for fiscal years beginning after June 15,
2000. The Company has not yet fully evaluated the impact of this new
standard.
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CONSOLIDATED RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1998
Net sales decreased 14.0% or $30.4 million, to $186.6 million in the first
quarter ended September 30, 1999 compared to $217.0 million in the first quarter
ended September 30, 1998. Information concerning the Company's domestic and
foreign sales is summarized below:
THREE MONTHS ENDED
SEPTEMBER 30, CHANGE
------------------ -----------------
1999 1998 AMOUNT PERCENT
------ ----- ------- -------
United States:
Domestic $109.8 $139.3 $(29.5) 21.2
Export 46.8 60.9 (14.1) 23.2
Latin America 31.3 18.2 13.1 72.0
Elimination (1.3) (1.4) .1 N/A
------ ------ ------
Consolidated $186.6 $217.0 $(30.4) 14.0
====== ====== ======
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 International
do Brasil 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, printers, computer processors and monitors. Sales of
microcomputer products represented approximately 83.9% of the Company's first
quarter net sales compared to 90.3% for the same period last year. Sales of
wireless telephone products accounted for approximately 16.1% of the Company's
first quarter net sales compared to 9.7% for the same period last year.
Gross margin decreased $0.1 million, to $11.1 million in the first quarter ended
September 30, 1999 compared to $11.2 million in the first quarter ended
September 30, 1998. Gross margin as a percentage of net sales increased to 6.0%
in the first quarter ended September 30, 1999 from 5.2% in the first quarter
ended September 30, 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.
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - (continued)
Selling, general and administrative expenses increased $0.1 million to $10.2
million in the first quarter ended September 30, 1999, compared to
$10.1 million in the first quarter ended September 30, 1998. These expenses as a
percentage of net sales increased to 5.5% in the first quarter ended September
30, 1999 compared to 4.7% in the first quarter ended September 30, 1998.
The dollar increase in these expenses is primarily due to the inclusion of
operations of Latin American subsidiaries.
Net interest expense was $0.1 million in the first quarter ended September 30,
1999 compared to interest expense of $0.3 million in the first quarter ended
September 30, 1998. This net change resulted from a reduction in working capital
requirements in the first quarter ended September 30, 1999.
Income tax was $0.3 million in the first quarter ended September 30, 1999
compared to an income tax expense of $0.4 million in the first quarter ended
September 30, 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 $3.5 million in the three months ended September
30, 1999. The source of cash in the three months ended September 30, 1999
resulted primarily from a $25.0 million increase in accounts payable, partially
offset by increases of $10.0 million in accounts receivable and $13.5 million
in inventory.
Investing activities used $0.8 million in the three months ended September 30,
1999 to purchase equipment.
The Company's credit agreement with Wachovia Bank N.A. ("Wachovia"), as amended
in August 1999, provides for a line of credit of up to $50.0 million. At
September 30, 1999, the Company had borrowings of $8.5 million under this
facility. Maximum borrowings under the credit agreement are generally based on
eligible accounts receivable and inventory (as defined in the credit agreement)
less a $15.0 million
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - (continued)
reserve. The $15.0 million reserve can be drawn upon, if necessary, to
finance obligations to Finova Capital Corporation, which finances
the Company's purchases from certain vendors. Available additional borrowing
capacity under this agreement, based on collateral limitations, at
September 30, 1999 were $36.4 million ($15.0 million of which would only
have been available to finance obligations due to Finova, if necessary).
The Wachovia 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 company may borrow at the
prime rate offered by Wachovia (8.0% at September 30, 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 .25% of the unused
commitment and expires in August 2001. Management believes that the Credit
Agreement together with vendor lines of credit and internally generated funds
will be sufficient to satisfy its working capital needs during fiscal 2000.
FINANCIAL INSTRUMENTS
The functional currency for the Company's international subsidiaries is the
local currency for the country in which the subsidiaries own their primary
assets. The translation of the applicable currencies into U.S. dollars is
performed for balance sheet accounts using current exchange rates in effect at
the balance sheet date and for revenue and expense accounts using a weighted
average exchange rate during the period. Any related translation adjustments are
recorded directly to shareholders' equity.
In July 1999, the Company entered into a 180-day non-deliverable forward
contract covering Brazilian R$3,992,000. This contract is being accounted for as
a speculative forward contract. Gains and losses are computed by multiplying the
foreign currency amount of the forward contract by the difference between the
forward rate available for the remaining maturity of the contract and the
contracted forward rate (R$1.996 to US $1). During the quarter ended September
30, 1999, the Company recorded a loss of $62,000 in selling, general, and
administrative expenses related to this contract. This instrument involves
elements of market risk. The Company has not entered into any other forward
contracts or other financial instruments as of September 30, 1999.
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
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - (continued)
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.
YEAR 2000
The Company has evaluated 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 have
included 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 hardware, software and operating systems have already been
updated to the latest versions available.
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 have not made the necessary changes to
their own systems and products in a timely manner.
The cost to the Company of software and hardware remediation was approximately
$200,000 during fiscal 1999 and is estimated to be $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, and potential
complications with telephone or email communications. The Company currently
believes that the majority of its mission critical systems pose a low risk to
the Company's overall operational abilities, due to the fact that the Company
has updated most of its software and operating systems to recent versions.
Furthermore, the Company has taken measures to ensure that its systems that pose
a potentially higher risk to the Company's overall operational abilities have
been updated.
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 developed alternative plans should potential complications arise.
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.
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - (continued)
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 transition to indirect distribution
relationships for some products, 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 AND USE OF PROCEEDS
On November 9, 1999 at the Annual Meeting of the Board of Directors,
the Board approved two amendments to the Company's Rights Agreement
dated as of October 31, 1996 between the Company and National City
Bank. The first amendment reduces the price to exercise a right from
20% of the then current market price per share of common stock
multiplied by the number of shares of common stock to be received
upon exercise to 10% of the then current market price per share of
common stock multiplied by the number of shares of common stock to be
received upon exercise. The second amendment clarifies that the
holders of any rights certificate may exercise the rights evidenced
thereby, subject to certain restrictions, in whole or in part at any
time after the date on which the Company's right to redeem the rights
has expired.
Item 3. DEFAULT UPON SENIOR SECURITIES
None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's 1999 Annual Meeting of Shareholders was held on
November 9, 1999 for the following purposes: (i)to elect three Class
II directors for terms to expire at the 2002 Annual Meeting of
Shareholders. The voting results on the foregoing matters, which were
all approved, were as follows:
Proposal 1 - To elect three Class II directors for terms to expire at
the 2002 Annual Meeting of Shareholders
NOMINEE FOR AUTHORITY WITHHELD AGAINST
-------------- --------- ------------------ -------
Larry G. Ayers 5,309,374 1,400 -0-
Melvyn I. Cohen 5,291,274 18,900 -0-
Cary Rosenthal 5,309,374 1,400 -0-
Item 5. OTHER INFORMATION
Shareholders who desire the Company to include notice of matter in
the Company's Proxy Statement for its 2000 Annual Shareholders'
Meeting under Rule 14a-4 of the Securities Exchange Act of 1934 and
the bylaws of the Company must submit notice to the Company's
Secretary no later than June 6, 2000 and must otherwise comply
<PAGE>
with the rules and regulations of the Securities and Exchange
Commission applicable to Shareholder Proposals.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
a) EXHIBITS.
Exhibit
NUMBER DESCRIPTION
4.1 First Amendment to the SED International Holdings,
Inc. Rights Agreement
27.1 Financial Data Schedule
a) REPORTS ON FORM 8-K
None
<PAGE>
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)
NOVEMBER 15, 1999 /S/GERALD DIAMOND
Gerald Diamond
Chief Executive Officer
Chairman of the Board
(Principal Executive Officer)
NOVEMBER 15, 1999 /S/LARRY G. AYERS
Larry G. Ayers
Vice President-Finance and
Treasurer
(Principal Accounting Officer)
<PAGE>
EXHIBIT INDEX
Exhibit
NUMBER DESCRIPTION
4.1 First Amendment to the SED International Holdings, Inc.
Rights Agreement
27.1 Financial Data Schedule
<PAGE>
Exhibit 4.1
FIRST AMENDMENT TO THE
SED INTERNATIONAL HOLDINGS, INC.
RIGHTS AGREEMENT
This First Amendment to the Rights Agreement (the "First Amendment") amends
the Rights Agreement dated as of October 31, 1996 (the "Rights Agreement"),
between SED International Holdings, Inc., a Georgia corporation (formerly known
as Southern Electronics Corporation, a Delaware corporation ) (the "Company"),
and National City Bank, a national banking association (the "Rights Agent"), and
is made and entered into this 15th day of November, 1999, effective as of
November 9, 1999, by and between the Company and the Rights Agent.
W I T N E S S E T H:
WHEREAS, the Company has determined that it would be in the best interest
of the Company and its shareholders to amend the Rights Agreement to decrease
the price to exercise a right and to clarify the events that allow rights to be
exercised;
WHEREAS, Section 27 of the Rights Agreement permits the Company to amend
the Rights Agreement and the Company has complied with the provisions of such
Section 27; and
WHEREAS, the Board of Directors of the Company has approved and adopted
this First Amendment by resolutions approved on November 9, 1999 at a meeting
duly called and held;
NOW, THEREFORE, BE IT HEREBY RESOLVED, that the Rights Agreement is amended
as follows:
1.
Subsection 7(a) of the Rights Agreement is hereby amended by deleting that
subsection in its entirety and substituting in lieu thereof the following
subsection:
"(a) Subject to Section 7(e) hereof and unless earlier
redeemed as provided in Section 23, the registered holder of any Rights
Certificate may exercise the Rights evidenced thereby (except as otherwise
provided herein including, without limitation, the restrictions on
exercisability set forth in Section 9(c), Section 11(b) and Section 23(a)
hereof) in whole or in part at any time after the date on which the
Company's right to redeem the Rights has expired upon surrender of the
Rights Certificate, with the form of election to purchase and the
certificate on the reverse side thereof duly executed, to the Rights Agent
at the principal office or offices of the Rights Agent designated for such
purpose, together with payment of the aggregate Purchase Price with respect
to the total number of shares (or other securities, cash or other assets,
<PAGE>
as the case may be) as to which such surrendered Rights are then
exercisable, at or prior to the Expiration Date."
2.
The last sentence of Subsection 11(a)(ii) of the Rights Agreement is hereby
amended by deleting that sentence in its entirety and substituting in lieu
thereof the following sentence:
"The price (which following such first occurrence, shall
thereafter be referred to as the "Purchase Price") for the exercise of each
Right shall be equal to the product of (x) 10% of the then Current Market
Price per share of the Common Stock (determined pursuant to Section 1(j) on
the Stock Acquisition Date), multiplied by (y) the number of shares of
Common Stock to be received upon exercise, as set out in this
subparagraph."
3.
Except as specifically set forth herein, the terms of the Rights Agreement
shall remain in full force and effect.
Capitalized terms used and not otherwise defined herein shall have those
meanings ascribed to them in the Rights Agreement.
IN WITNESS WHEREOF, the Company and the Rights Agent have caused this First
Amendment to the Rights Agreement to be executed by their duly authorized
officers as of November 15, 1999.
SED INTERNATIONAL HOLDINGS, INC.
/S/ LARRY G. AYERS
Larry G. Ayers
Vice President -Finance, Treasurer
and Secretary
NATIONAL CITY BANK
/S/ MARLAYNA JEANCLARC
Marlayna Jeanclarc
Vice President
<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 SEPTEMBER 30, 1999 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
PERIOD-TYPE
3-MOS
FISCAL-YEAR-END JUN-30-2000
PERIOD-END SEP-30-1999
CASH 5,590,000
SECURITIES 0
RECEIVABLES 68,072,000
ALLOWANCES 5,868,000
INVENTORY 70,627,000
CURRENT-ASSETS 149,760,000
PP&E 7,294,000
ACCUMULATED DEPRECIATION 6,069,000
TOTAL-ASSETS 166,087,000
CURRENT-LIABILITIES 104,377,000
BONDS 0
PREFERRED 0
PREFERRED-MANDATORY 0
COMMON 112,000
OTHER-SE 53,098,000
TOTAL-LIABILITY-AND-EQUITY 166,087,000
SALES 186,644,000
TOTAL-REVENUES 186,644,000
CGS 175,523,000
TOTAL-COSTS 175,523,000
OTHER-EXPENSES 10,182,000
EARNINGS-PROVISION 0
INTEREST-EXPENSE 89,000
EARNINGS-PRETAX 850,000
INCOME-TAX BENEFIT 250,000
EARNINGS-CONTINUING 600,000
DISCONTINUED 0
EXTRAORDINARY 0
CHANGES 0
NET-EARNINGS 600,000
EPS-BASIC .09
EPS-DILUTED .09
