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 December 31, 1998
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 January 29, 1999, there were 8,735,353 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 8-13
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 14
<PAGE>
ITEM 1: FINANCIAL STATEMENTS
<TABLE>
SED International Holdings, Inc.
And Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, June 30,
ASSETS 1998 1998
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 5,368,000 $ 2,693,000
Trade accounts receivable, net 64,834,000 86,298,000
Inventories 100,127,000 141,196,000
Prepaid income taxes -- 3,489,000
Deferred income taxes 1,827,000 1,827,000
Other current assets 2,054,000 1,528,000
------------ ------------
TOTAL CURRENT ASSETS 174,210,000 237,031,000
PROPERTY AND EQUIPMENT, net 8,890,000 9,490,000
INTANGIBLES, net 21,952,000 20,044,000
------------ ------------
$205,052,000 $266,565,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable $ 99,346,000 $122,959,000
Accrued liabilities 7,451,000 6,331,000
Income taxes payable 166,000 --
------------ ------------
TOTAL CURRENT LIABILITIES 106,963,000 129,290,000
REVOLVING BANK DEBT -- 31,000,000
STOCKHOLDERS' EQUITY:
Preferred Stock
129,500 shares authorized, none issued
Common stock, $.01 par value; 100,000,000 shares
authorized; 10,857,711 shares (December 31, 1998)
and 10,862,211 shares (June 30, 1998) issued 108,000 108,000
Additional paid-in capital 70,631,000 70,659,000
Retained earnings 38,909,000 38,840,000
Cumulative translation cost (502,000) (119,000)
Treasury stock, at cost, 2,122,358 shares
(December 31, 1998) and 345,608 shares
(June 30, 1998) (10,836,000) (2,937,000)
Prepaid compensation - stock awards (221,000) (276,000)
------------ ------------
98,089,000 106,275,000
------------ ------------
$205,052,000 $266,565,000
============ ============
</TABLE>
<PAGE>
<TABLE>
SED International Holdings, Inc.
And Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Six Months Ended
December 31, December 31,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
NET SALES $171,235,000 $215,772,000 $388,248,000 $429,804,000
------------ ------------ ------------ ------------
COSTS AND EXPENSES
Cost of sales including buying
and occupancy expenses 160,015,000 202,584,000 365,803,000 405,009,000
Selling, general, and administrative 11,781,000 8,230,000 21,905,000 15,004,000
Start-up expenses -- -- -- 1,400,000
------------ ------------ ------------ ------------
171,796,000 210,814,000 387,708,000 421,413,000
------------ ------------ ------------ ------------
OPERATING INCOME (LOSS) (561,000) 4,958,000 540,000 8,391,000
INTEREST EXPENSE (INCOME), Net (107,000) 624,000 212,000 1,748,000
------------ ------------ ------------ ------------
EARNINGS (LOSS) BEFORE INCOME TAXES (454,000) 4,334,000 328,000 6,643,000
INCOME TAXES (BENEFIT) (181,000) 1,693,000 259,000 2,593,000
------------ ------------ ------------ ------------
NET EARNINGS (LOSS) $ (273,000) $ 2,641,000 $ 69,000 $ 4,050,000
============ ============ ============ ============
OTHER COMPREHENSIVE INCOME (LOSS)
Foreign currency translation adjustments 50,000 -- (383,000) --
------------ ------------ ------------ ------------
COMPREHENSIVE INCOME (LOSS) $ (223,000) $ 2,641,000 $ (314,000) $ 4,050,000
============ ============ =========== ============
NET EARNINGS (LOSS) PER COMMON SHARE:
Basic $(.03) $.26 $.01 $.46
Diluted (.03) .25 .01 .43
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 9,399,000 10,190,000 9,889,000 8,714,000
Diluted 9,507,000 10,683,000 9,902,000 9,312,000
</TABLE>
<PAGE>
<TABLE>
SED International Holdings, Inc.
And Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS
OF STOCKHOLDERS' EQUITY
(Unaudited)
Accumulated
Com- Com-
Common Stock Additional prehen- pensa-
Par Paid-In Retained sive Treasury Stock tion
Shares Value Capital Earnings (Loss) Shares Cost 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 24,000
Stock awards cancelled (4,900) (31,000) 31,000
Stock options exercised 400 3,000
Treasury stock purchased 1,776,750 (7,899,000)
Net earnings 69,000
Translation adjustments (383,000)
---------- -------- ----------- ----------- --------- --------- ----------- ---------
BALANCE, December 31, 1998 10,857,711 $108,000 $70,631,000 $38,909,000 $(502,000) 2,122,358 $(10,836,000) $(221,000)
========== ======== =========== =========== ========= ========= ============ =========
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE>
<TABLE>
SED International Holdings, Inc.
And Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
December 31,
1998 1997
<S> <C> <C>
OPERATING ACTIVITIES:
Net earnings $ 69,000 $ 4,050,000
Adjustments to reconcile net earnings
to net cash provided by
(used in) operating activities
Depreciation and amortization 1,758,000 1,245,000
Compensation - stock awards 24,000 57,000
Changes in assets and liabilities,
net of effects of acquired businesses 43,162,000 (32,496,000)
----------- -----------
Net cash provided by (used in)
operating activities 45,013,000 (27,144,000)
----------- -----------
INVESTING ACTIVITIES:
Purchases of equipment, net (673,000) (2,253,000)
Purchase of business, net of cash acquired (2,386,000) (370,000)
Purchase of distribution rights -- (963,000)
----------- -----------
Net cash used in investing activities (3,059,000) (3,586,000)
----------- -----------
FINANCING ACTIVITIES:
Payments under line of credit, net (31,000,000) (23,000,000)
Proceeds from issuance of common stock, net 3,000 55,333,000
Purchase of treasury stock (7,899,000) (77,000)
----------- -----------
Net cash provided by (used in)
financing activities (38,896,000) 32,256,000
EFFECT OF EXCHANGE RATE CHANGES ON CASH (383,000) --
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 2,675,000 1,526,000
CASH AND CASH EQUIVALENTS, beginning of period 2,693,000 783,000
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 5,368,000 $ 2,309,000
=========== ===========
</TABLE>
<PAGE>
SED International Holdings, Inc.
And Subsidiaries
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Six Months Ended December 31, 1998 and 1997
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
December 31, 1998 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. Start-up Expense
As a result of a transaction with Globelle, Inc. ("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 the hiring of new sales people, opening new sales
offices and other transition expenses.
C. Share Repurchase
During the six months ended December 31, 1998, the Company repurchased
1,776,750 shares of its common stock for $7,899,000 in open market
transactions under a previously announced buy-back program.
D. 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.
<PAGE>
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 six months ended December 31, 1998
and 1997 as if this acquisition had been completed on July 1, 1997 would
not differ significantly from actual results achieved.
E. Credit Agreement
The Company has a Credit Agreement, which provides for a secured line of
credit of $100.0 million. The Company may borrow at the prime rate
offered by Wachovia Bank, N.A. (7.75% at December 31, 1998) 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 August
2000. At December 31, 1998, the Company had no borrowings under this
Agreement.
As of December 31, 1998, the Company was in violation of its fixed
charges coverage and minimum consolidated tangible net worth covenants
under its Credit Agreement with its lenders. The Company also expects
that it will be in violation of these financial covenants as of March
31, 1999 based on current economic conditions. The lenders have waived
the Company's violation of these covenants through February 28, 1999,
provided, the Company and the lenders have agreed to amend these
covenants on or before March 1, 1999. The Company and its lenders are
currently discussing the terms of the amended fixed charges coverage and
minimum consolidated tangible net worth covenants and anticipate
amending these covenants on or before March 1, 1999.
F. Subsequent Event
The January 1999 devaluation in the Brazilian currency, the Real, should
have a significant negative effect on the Company's operating results
for the quarter ending March 31, 1999. The ultimate amount of the
Company's devaluation loss will only be known when the currency
stabilizes. However, based solely on January 1999 information, the
currency loss would be in excess of $3.0 million. Furthermore, this
devaluation and unfavorable business conditions in Latin America may
negatively impact the Company's Latin American customers' abilities to
meet their U.S. dollar obligations, including those due the Company.
While the Company continues to believe that its export sales to and
investments in Brazil and other Latin American countries can be
beneficial in the long-term, it continues to evaluate the impact of
current business conditions on its investments in inventories, accounts
receivable, and long-term assets. The ultimate resolution of these
matters (including the pending Amendment of the Company's Credit
Agreement - Note E)could have a material adverse effect on the
Company'sfinancial condition and operating results for the third quarter
of fiscal 1999 and possibly for future quarters.
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CONSOLIDATED RESULTS OF OPERATIONS
Three Months Ended December 31, 1998 Compared to Three Months Ended
December 31, 1997
Net sales decreased 20.7% or $44.6 million, to $171.2 million in the second
quarter ended December 31, 1998 compared to $215.8 million in the second
quarter ended December 31, 1997. Information concerning the Company's
domestic and foreign sales is summarized below:
Three Months Ended
December 31, Change
1998 1997 Amount Percent
United States:
Domestic $102.4 $134.8 $(32.4) 24.0%
Export 44.8 77.5 (32.7) 42.2%
Latin America 25.0 3.5 21.5 614.3%
Elimination (1.0) - (1.0) N/A
Consolidated $171.2 $215.8 $(44.6) 20.7%
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 84.6% of the Company's second quarter net sales compared to
86.6% for the same period last year. Sales of wireless telephone products
accounted for approximately 15.4% of the Company's first quarter net sales
compared to 13.4% for the same period last year.
Gross profit decreased 15.2%, or $2.0 million, to $11.2 million in the second
quarter ended December 31, 1998 compared to $13.2 million in the second
quarter ended December 31, 1997. Overall, total gross profit dollars have
declined with sales. Gross profit as a percentage of net sales increased to
6.6% in the second quarter ended December 31, 1998 from 6.1% in the second
quarter ended December 31, 1997. The change in gross profit 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 increased 43.9%, or $3.6
million, to $11.8 million in the second quarter ended December 31, 1998,
compared to $8.2 million in the second quarter ended December 31, 1997.
These expenses as a percentage of net sales increased to 6.9% in the second
quarter ended December 31, 1998 compared to 3.8% in the second quarter ended
December 31, 1997. The dollar increase in these expenses is primarily due
to an increment of $2 million in
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - (continued)
accounts receivable reserves and the inclusion of operations of Latin
American affiliates.
Net interest income was $.1 million in the second quarter ended December 31,
1998 compared to interest expense of $.6 million in the second quarter ended
December 31, 1997. This net change resulted from a reduction in working
capital requirements in the second quarter ended December 31, 1998.
Income tax benefit was recorded at an effective annual rate of 39.9% in the
second quarter ended December 31, 1998 compared to an income tax expense of
39.1% in the second quarter ended December 31, 1997.
Six Months Ended December 31, 1998 Compared to Six Months Ended
December 31, 1997
Net sales decreased 9.7% or $41.6 million, to $388.2 million in the six
months ended December 31, 1998 compared to $429.8 million in the six months
ended December 31, 1997. Information concerning the Company's domestic and
foreign sales is summarized below:
Six Months Ended
December 31, Change
1998 1997 Amount Percent
United States:
Domestic $241.7 $256.1 $(14.4) 5.6%
Export 105.7 170.2 (64.5) 37.9%
Latin America 43.2 3.5 39.7 1,134.3%
Elimination (2.4) - (2.4) N/A
Consolidated $388.2 $429.8 $(41.6) 9.7%
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 87.8% of the Company's six month period ended December 31, 1998
net sales compared to 85.6% for the same period last year. Sales of wireless
telephone products accounted for approximately 12.2% of the Company's six
month period ended December 31, 1998 net sales compared to 14.4% for the same
period last year.
Gross profit decreased 9.7%, or $2.4 million, to $22.4 million in the six
months ended December 31, 1998 compared to $24.8 million in the six months
ended December 31, 1997. Overall, total gross profit dollars have declined
with sales. Gross profit as a percentage of net sales increased to 6.1% in
the six months ended December 31, 1998 from 5.8% in the six months ended
December 31, 1997. The change
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - (continued)
in gross profit as 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) increased
46.0%, or $6.9 million, to $21.9 million in the six months ended December 31,
1998, compared to $15.0 million in the six months ended December 31, 1997.
These expenses as a percentage of net sales increased to 5.6% in the six
months ended December 31, 1998 compared to 3.5% in the six months ended
December 31, 1997. 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 87.9%, or $1.5 million, to $.2 million in the
six months ended December 31, 1998 compared to $1.7 million in the six months
ended December 31, 1997. The decrease in interest expense was primarily due
to lower average borrowings.
Income tax expense was recorded at an effective annual rate of 79.0% in the
six months ended December 31, 1998 compared to 39.0% in the six months ended
December 31, 1997. The increase in the effective rate relates primarily to
non-deductible goodwill amortization expense and valuation allowances on
foreign losses.
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 $45.0 million in the six months ended December
31, 1998. The source of cash in the six months ended December 31, 1998
resulted primarily from decreases of $21.5 million in accounts receivable and
$44.1 million in inventory, offset by a $26.6 million decrease in accounts
payable.
Investing activities used $.7 million in the six months ended December 31,
1998 to purchase equipment. The Company used $2.4 million, net of acquired
cash, to purchase Intermaco S.R.L. in Argentina.
Financing activities used $38.9 million in the six months ended December 31,
1998. The Company used $31.0 million to repay borrowings under its line of
credit and $7.9 million to repurchase shares of its common stock.
The Company has a Credit Agreement, which provides for a secured line of
credit of $100.0 million. The Company may borrow at the prime rate offered
by Wachovia Bank, N.A. (7.75% at December 31, 1998) 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 August 2000. At
December 31, 1998, the Company had no borrowings under this Agreement.
As of December 31, 1998, the Company was in violation of its fixed charges
coverage and minimum consolidated tangible net worth covenants under its
Credit Agreement with its lenders. The Company also expects that it will be
in violation of these financial covenants as of March 31, 1999 based on
current economic conditions. The lenders have waived the Company's violation
of these covenants through February 28, 1999, provided, the Company and the
lenders have agreed to amend these covenants on or before March 1, 1999. The
Company and its lenders are currently discussing the terms of the amended
fixed charges coverage and minimum consolidated tangible net worth covenants
and anticipate amending these covenants on or before March 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.
Business Conditions
The January 1999 devaluation in the Brazilian currency, the Real, should have
a significant negative effect on the Company's operating results for the
quarter ending March 31, 1999. The ultimate amount of the Company's
devaluation loss will only be known when the currency stabilizes. However,
based solely on January 1999 information, the currency loss would be in
excess of $3.0 million. Furthermore, this devaluation and unfavorable
business conditions in Latin America may negatively impact the Company's
Latin American customers' abilities to meet their U.S. dollar obligations,
including those due the Company. While the Company continues to believe that
its export sales to and investments in Brazil and other Latin American
countries can be beneficial in the long-term, it continues to evaluate the
impact of current business conditions on its investments in inventories,
accounts receivable, and long-term assets. The ultimate resolution of these
matters (including the pending Amendment of the Company's Credit Agreement as
noted above)could have a material adverse effect on the Company's financial
condition and operating results for the third quarter of fiscal 1999 and
possibly for future quarters.
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.
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - (continued)
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.
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
pproximately $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.
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
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - (continued)
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 Third Amendment to Employment Agreement dated December
16, 1998, effective as of December 1, 1998, between SED
International, Inc. and Jean Diamond.
10.2 Sixth Amendment to Amended and Restated Credit
Agreement dated as of November 30, 1998 among SED
International Holdings, Inc. and SED International,
Inc., Borrowers, Wachovia Bank, N.A. and National City
Bank of Columbus, and Wachovia Bank, N.A. as Agent, as
Banks.
27.1 Financial Data Schedule
b) 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)
February 16, 1999 /s/Gerald Diamond
Gerald Diamond
Chief Executive Officer
Chairman of the Board
(Principal Executive Officer)
February 16, 1999 /s/Larry G. Ayers
Larry G. Ayers
Vice President-Finance and
Treasurer
(Principal Accounting Officer)
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
10.1 Third Amendment to Employment Agreement dated December 16,
1998, effective as of December 1, 1998, between SED
International, Inc. and Jean Diamond.
10.2 Sixth Amendment to Amended and Restated Credit Agreement dated
as of November 30, 1998 among SED International Holdings, Inc.
and SED International, Inc., Borrowers, Wachovia Bank, N.A.
and National City Bank of Columbus, and Wachovia Bank, N.A. as
Agent, as Banks.
27.1 Financial Data Schedule
<PAGE>
Exhibit 10.1
THIRD AMENDMENT TO EMPLOYMENT AGREEMENT
THIS THIRD AMENDMENT TO EMPLOYMENT AGREEMENT is made this 16th day of
December, 1998, effective as of December 1, 1998, between SED
INTERNATIONAL, INC., a Georgia corporation (the "Subsidiary") and a
wholly-owned subsidiary of SED INTERNATIONAL HOLDINGS, INC., a Georgia
corporation, and Jean Diamond, an individual resident of the State of Georgia
(the "Employee").
W I T N E S S E T H:
WHEREAS, on November 7, 1989, Employee and the Subsidiary entered into
an Employment Agreement (the "Agreement") setting forth the terms and
conditions of Employee's employment with the Subsidiary; and
WHEREAS, effective July 1, 1991, Employee and the Subsidiary entered
into the First Amendment to the Employment Agreement, modifying certain terms
and conditions of Employee's employment with the Subsidiary; and
WHEREAS, effective July 1, 1998, Employee and the Subsidiary entered
into the Second Amendment to the Employment Agreement, modifying certain
terms and conditions of Employee's employment with the Subsidiary; and
WHEREAS, the Subsidiary and Employee agree that it is in the best
interest of both parties to make certain further modifications to the terms
and conditions of Employee's employment the Subsidiary.
NOW, THEREFORE, in consideration of the foregoing, the continued
employment of the Employee, and for other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, the parties
hereto agree as follows:
1. Amendment to Section 3(c) of the Agreement. Pursuant to Section
15(d) of the Agreement, Section 3(c) is hereby modified so as to permit
Employee the use of an automobile comparable to that provided to Mr. Gerald
<PAGE>
Diamond under the terms of his current Employment Agreement, as amended,
with the Subsidiary. The following language shall be inserted immediately
after the end of the first complete sentence of Section 3(c), (at line 10):
The Employee shall also be entitled during the term of this Agreement to
the use of an automobile comparable to that provided to Mr. Gerald
Diamond under the terms of his current Employment Agreement, as amended,
with the Subsidiary, with the premiums for the automobile insurance
coverage thereon, together with the reasonable cost of maintenance and
other expenses (including gasoline) being payable by the Subsidiary or
its designee. The Employee shall have the option to have the use of a
new (replacement) automobile every three (3) years, commencing first on
December 1, 2001. The amount of insurance coverage shall be determined
by the Subsidiary or its designee in accordance with the policies of the
Subsidiary, from time to time in effect. As a condition to the use of
such automobile, Employee shall cooperate fully with the Subsidiary or
its designee in connection with obtaining and maintaining in effect any
such policy of insurance.
2. Other Provisions of the Agreement. Except as otherwise provided
herein, all other provisions of the Agreement shall remain in full force and
effect and Employee's employment thereunder shall continue on the terms
described therein throughout the term of the Agreement, as amended hereby.
IN WITNESS WHEREOF, the parties have duly executed and delivered this
Third Amendment to Employment Agreement as of the day and year first
indicated above.
SED INTERNATIONAL, INC.
By: _______________________________________
Name: _________________________________
Title: _________________________________
____________________________________(SEAL)
Jean Diamond (Employee)
<PAGE>
Exhibit No. 10.2
SIXTH AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT
THIS SIXTH AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT (this
"Amendment") is entered into as of November 30, 1998, among SED INTERNATIONAL
HOLDINGS, INC., a Delaware corporation ("Old SEDIH") and SED INTERNATIONAL,
INC., a Delaware corporation ("Old SEDI"), jointly and severally; SED MERGER
CORP., a Georgia corporation 100% owned by Old SEDIH, soon to be known as SED
INTERNATIONAL HOLDINGS, INC. ("SEDIH") and SED INTERNATIONAL MERGER CORP., a
Georgia corporation 100% owned by Old SEDI, soon to be known as SED
INTERNATIONAL, INC. ("SEDI"), jointly and severally (Old SEDI, Old SEDIH,
SEDI, and SEDIH are collectively referred to herein as the "Borrowers");
WACHOVIA BANK, N.A., as Agent (the "Agent"); and WACHOVIA BANK, N.A. and
NATIONAL CITY BANK, as Banks (collectively, the "Banks");
W I T N E S S E T H:
WHEREAS, Old SEDI, Old SEDIH, the Agent and the Banks executed and
delivered that certain $100,000,000 Amended and Restated Credit Agreement,
dated as of the 13th day of August, 1997, as amended by that certain First
Amendment to Amended and Restated Credit Agreement, dated as of September 22,
1997, that certain Second Amendment to Amended and Restated Credit Agreement,
dated as of October 15, 1997, that certain Third Amendment to Amended and
Restated Credit Agreement, dated as of January 8, 1998, that certain Fourth
Amendment to Amended and Restated Credit Agreement, dated as of June 30,
1998, and that certain Fifth Amendment to Amended and Restated Credit
Agreement, dated as of June 30, 1998 (as so amended, the "Credit
Agreement");
WHEREAS, the Borrowers have requested and the Agent and the Banks have
agreed to grant certain consents and waivers, and to make certain amendments
with respect to the Credit Agreement, subject to the terms and conditions
hereof;
NOW, THEREFORE, for and in consideration of the above premises and other
good and valuable consideration, the receipt and sufficiency of which hereby
is acknowledged by the parties hereto, the Borrowers, the Agent and the Banks
hereby covenant and agree as follows:
1. Consent to Mergers; Waiver. Without the execution and delivery of
this Amendment, the execution, delivery and effect of the Merger Agreements
(defined in paragraph 12 of this Amendment) would constitute an Event of
Default under the Credit Agreement. Subject to the terms and conditions set
forth in paragraph 12 of this Amendment, the Agent and each of the Banks
hereby (i) consent to the execution and delivery of the Merger Agreements,
and (ii) agree that the execution, delivery and effect of the Merger
Agreements shall not constitute an Event of Default under the Credit
Agreement. Provided, however, such consent and waiver with respect to the
Merger Agreements granted by the Agent and the Banks under this Amendment
shall not extend to any other existing Default or Event of Default or other
provision of the Credit Agreement or any of the other Loan Documents, whether
now existing or hereafter arising.
<PAGE>
2. Definitions. (a) Unless otherwise specifically defined herein, each
term used herein which is defined in the Credit Agreement has the meaning
assigned to such term in the Credit Agreement. Each reference to "hereof",
"hereunder", "herein" and "hereby" and each other similar reference and each
reference to "this Agreement" and each other similar reference contained in
the Credit Agreement from and after the date hereof refer to the Credit
Agreement as amended hereby.
(b) Effective as of the Effective Time (defined in each of the Merger
Agreements), each reference in the Credit Agreement, the Notes and the other
Loan Documents to "SED International Holdings, Inc.," a Delaware corporation,
shall refer to "SED International Holdings, Inc.," a Georgia corporation.
(c) Effective as of the Effective Time (defined in each of the Merger
Agreements), each reference in the Credit Agreement, the Notes and the other
Loan Documents to "SED International, Inc.," a Delaware corporation, shall
refer to "SED International, Inc.," a Georgia corporation.
3. Assumption by SEDI and SEDIH. By its execution and delivery hereof,
(i) SEDI hereby assumes and agrees to be bound by and perform, observe,
discharge, and otherwise comply with the agreements, duties, obligations,
covenants and undertakings of Old SEDI under the Credit Agreement, the Notes
to which Old SEDI is a party, and each of the other Loan Documents to which
Old SEDI is a party, and (ii) SEDIH hereby assumes and agrees to be bound by
and perform, observe, discharge, and otherwise comply with the agreements,
duties, obligations, covenants and undertakings of Old SEDIH under the Credit
Agreement, the Notes to which Old SEDIH is a party, and each of the other
Loan Documents to which Old SEDIH is a party.
4. Restatement of Representations and Warranties. As of the Effective
Time, the Borrowers hereby restate and renew each and every representation
and warranty heretofore made by Old SEDI and Old SEDIH in the Credit
Agreement and the other Loan Documents as fully as if made on the date hereof
and with specific reference to this Amendment and all other loan documents
executed and/or delivered in connection herewith.
5. Effect of Amendment. Except as set forth expressly hereinabove, all
terms of the Credit Agreement and the other Loan Documents remain in full
force and effect, and constitute the legal, valid, binding and enforceable
obligations of the Borrowers. The
<PAGE>
agreements contained herein will be deemed to have prospective application
only, unless otherwise specifically stated herein.
6. Ratification. Each of the Borrowers hereby restates, ratifies and
reaffirms each and every term, covenant and condition set forth in the Credit
Agreement and the other Loan Documents effective as of the date hereof.
7. Counterparts. This Amendment may be executed in any number of
counterparts and by different parties hereto in separate counterparts, each
of which when so executed and delivered will be deemed to be an original and
all of which counterparts, taken together, will constitute but one and the
same instrument.
8. Section References. Section titles and references used in this
Amendment have substantive meaning or content of any kind whatsoever and are
not a part of the agreements among the parties hereto evidenced hereby.
9. No Default; Release. To induce the Agent and the Banks to enter into
this Amendment and to continue to make advances pursuant to the Credit
Agreement, each of the Borrowers hereby acknowledges and agrees that, as of
the date hereof, and after giving effect to the terms hereof, (i) there
exists no Default or Event of Default, (ii) there exists no right of offset,
defense, counterclaim, claim or objection in favor of the Borrowers arising
out of or with respect to any of the Loans or other obligations of the
Borrowers owed to the Banks under the Credit Agreement, and (iii) the Agent
and each of the Banks has acted in good faith and has conducted its
relationships with each of the Borrowers in a commercially reasonable manner
in connection with the negotiations, execution and delivery of this Amendment
and in all respects in connection with the Credit Agreement, each of the
Borrowers hereby waiving and releasing any such claims to the contrary that
may exist as of the date of this Amendment. A default or breach of
representation or warranty by the Borrowers under this Amendment shall
constitute an Event of Default under the Credit Agreement.
10. Further Assurances. Each of the Borrowers agrees to take such
further actions as the Agent reasonably requests in connection herewith to
evidence the agreements herein contained.
11. Governing Law. This Amendment is governed by, and construed and
interpreted in accordance with, the laws of the State of Georgia.
<PAGE>
12. Conditions Precedent. This Amendment becomes effective upon (a)
execution and delivery of this Amendment by each of the parties hereto, (b)
the simultaneous execution and delivery by each of the Borrowers of the
following documents each dated as of the date hereof in the form delivered to
counsel to the Agent as of November 3, 1998 (collectively, the "Merger
Agreements"): (i) that certain Agreement and Plan of Merger of SED
International Holdings, Inc. with and into SED Merger Corp., and (ii) that
certain Agreement and Plan of Merger of SED International, Inc. with and into
SED International Merger Corp.; and (c) delivery to counsel to the Agent of
officer certified resolutions authorizing the transactions described in this
Amendment for each of the Borrowers. Provided, however, in the event that the
Effective Time does not occur on or before November 30, 1998, then, in such
event, this Amendment shall become null and void, and of no force and effect.
[signatures contained on the next page]
<PAGE>
IN WITNESS WHEREOF, the Borrowers, the Agent and each of the Banks has
caused this Amendment to be duly executed, under seal, by its duly authorized
officer as of the day and year first above written.
SED INTERNATIONAL HOLDINGS, INC.,
a Delaware corporation
By:_________________________(SEAL)
Title:
SED INTERNATIONAL, INC.,
a Delaware corporation
By:_________________________(SEAL)
Title:
SED INTERNATIONAL HOLDINGS, INC.,
a Georgia corporation
By:_________________________(SEAL)
Title:
SED INTERNATIONAL, INC.,
a Georgia corporation
By:_________________________(SEAL)
Title:
WACHOVIA BANK, N.A.,
as Agent and as a Bank
By:_________________________(SEAL)
Title:
NATIONAL CITY BANK
By:_________________________(SEAL)
Title:
<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 DECEMBER 31, 1998 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
PERIOD-TYPE 6-MOS
FISCAL-YEAR-END JUN-30-1999
PERIOD-END DEC-31-1998
CASH 5,368,000
SECURITIES 0
RECEIVABLES 64,834,000
ALLOWANCES 5,636,000
INVENTORY 100,127,000
CURRENT-ASSETS 174,810,000
PP&E 8,890,000
ACCUMULATED DEPRECIATION 6,968,000
TOTAL-ASSETS 205,052,000
CURRENT-LIABILITIES 106,963,000
BONDS 0
PREFERRED 0
PREFERRED-MANDATORY 0
COMMON 108,000
OTHER-SE 97,981,000
TOTAL-LIABILITY-AND-EQUITY 205,052,000
SALES 388,248,000
TOTAL-REVENUES 388,248,000
CGS 365,803,000
TOTAL-COSTS 365,803,000
OTHER-EXPENSES 21,905,000
LOSS-PROVISION 0
INTEREST-EXPENSE 212,000
INCOME-PRETAX 328,000
INCOME-TAX 259,000
INCOME-CONTINUING 69,000
DISCONTINUED 0
EXTRAORDINARY 0
CHANGES 0
NET-INCOME 69,000
EPS-BASIC 0.01
EPS-DILUTED 0.01
