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, 2000
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
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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, 2000, there were 7,378,463 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 Shareholders'
Equity 4
Condensed Consolidated Statements of Cash Flows 5
Notes to Condensed Consolidated Financial
Statements 6-9
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-15
PART II. OTHER INFORMATION
Item 1 - Legal Proceedings 16
Item 2 - Changes in Securities and Use of Proceeds 16
Item 3 - Default Upon Senior Securities 16
Item 4 - Submission of Matters to a Vote of Security
Holders 16
Item 5 - Other Information 16
Item 6 - Exhibits and Reports on Form 8-K 16
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
<TABLE>
SED International Holdings, Inc.
And Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
<PAGE>
March 31, June 30,
ASSETS 2000 1999
------ ------------- -------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 5,086,000 $ 3,266,000
Trade accounts receivable, net 50,725,000 58,085,000
Inventories 46,004,000 57,092,000
Refundable income taxes 2,929,000 3,801,000
Other current assets 2,876,000 2,729,000
------------- -------------
TOTAL CURRENT ASSETS 107,620,000 124,973,000
PROPERTY AND EQUIPMENT, net 7,821,000 6,994,000
INTANGIBLES, net 10,889,000 9,123,000
------------- -------------
$ 126,330,000 $ 141,090,000
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable $ 65,245,000 $ 72,375,000
Accrued liabilities 5,761,000 7,405,000
------------- -------------
TOTAL CURRENT LIABILITIES 71,006,000 79,780,000
REVOLVING BANK DEBT 8,500,000
SHAREHOLDERS' EQUITY:
Preferred Stock
129,500 shares authorized, none issued
Common stock, $.01 par value; 100,000,000 shares
authorized; 11,127,411 shares (March 31, 2000)
and 11,158,311 shares (June 30, 1999) issued 112,000 112,000
Additional paid-in capital 71,582,000 71,712,000
Retained earnings 2,545,000 932,000
Accumulated other comprehensive loss (1,397,000) (984,000)
Treasury stock, at cost, 3,748,948 shares
(March 31, 2000) and 4,291,858 shares
(June 30, 1999) (16,541,000) (17,764,000)
Prepaid compensation - stock awards (977,000) (1,198,000)
------------- -------------
55,324,000 52,810,000
$ 126,330,000 $ 141,090,000
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE>
<TABLE>
SED International Holdings, Inc.
And Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
March 31, March 31,
------------------------------ ------------------------------
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
NET SALES $140,984,000 $ 157,674,000 $ 477,080,000 $ 545,922,000
------------- ------------- ------------- -------------
COST AND EXPENSES
Cost of sales including buying
and occupancy expenses 131,671,000 159,258,000 446,425,000 525,061,000
Selling, general, and administrative 8,343,000 24,792,000 28,063,000 46,697,000
Impairment charges -- 13,573,000 -- 13,573,000
------------- ------------- ------------- -------------
140,014,000 197,623,000 474,488,000 585,331,000
------------- ------------- ------------- -------------
OPERATING INCOME (LOSS) 970,000 (39,949,000) 2,592,000 (39,409,000)
INTEREST EXPENSE, net 34,000 154,000 413,000 366,000
------------- ------------- ------------- -------------
EARNINGS (LOSS) BEFORE INCOME TAXES 936,000 (40,103,000) 2,179,000 (39,775,000)
INCOME TAXES (BENEIFT) 198,000 (1,244,000) 566,000 (985,000)
------------- ------------- ------------- -------------
NET EARNINGS (LOSS) $ 738,000 $ (38,859,000) $ 1,613,000 $ (38,790,000)
============= ============= ============= =============
NET EARNINGS (LOSS) PER COMMON SHARE:
Basic $ .11 $ (4.51) $ .24 $ (4.10)
Diluted .11 (4.51) .24 (4.10)
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 6,880,000 8,615,000 6,650,000 9,464,000
Diluted 6,900,000 8,615,000 6,657,000 9,464,000
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE>
<TABLE>
SED International Holdings, Inc.
And Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS
OF SHAREHOLDERS' EQUITY
(Unaudited)
Accumulated
Common Stock 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 (30,900) (130,000)
Treasury shares purchased
Issuance of common stock
for business acquisition
Comprehensive earnings:
Net earnings 1,613,000
Translation adjustments (413,000)
Comprehensive earnings
---------- ----------- ------------ ---------- -----------
BALANCE, March 31, 2000 11,127,411 $ 112,000 $ 71,582,000 $2,545,000 $(1,397,000)
========== =========== ============ ========== ===========
Prepaid Total
Treasury Stock 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 532,000 532,000
Stock awards cancelled 130,000
Treasury shares purchased 7,090 (18,000) (18,000)
Issuance of common stock
for business acquisition (400,000) 800,000 800,000
Comprehensive earnings:
Net earnings 1,613,000
Translation adjustments (413,000)
Comprehensive earnings 1,200,000
--------- ------------ ------------ ------------
BALANCE, March 31, 2000 3,748,948 $(16,541,000) $ (977,000) $55,324,000
========= ============ ============ ============
</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,
--------------------------
2000 1999
----------- ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net earnings (loss) $1,613,000 $(38,790,000)
Adjustments to reconcile net earnings (loss)
to net cash provided by
operating activities:
Impairment charges for long-lived assets 13,573,000
Depreciation and amortization 1,831,000 2,515,000
Compensation - stock awards 532,000 107,000
Changes in assets and liabilities 9,175,000 65,705,000
---------- -----------
Net cash provided by
operating activities 13,151,000 43,110,000
---------- -----------
INVESTING ACTIVITIES:
Purchase of business, net of cash acquired (4,460,000)
Purchases of equipment (2,400,000) (1,479,000)
----------- -----------
Net cash used in investing activities (2,400,000) (5,939,000)
----------- -----------
FINANCING ACTIVITIES:
Payments under line of credit, net (8,500,000) (21,000,000)
Proceeds from issuance of common stock, net 75,000
Purchase of treasury stock (18,000) (13,364,000)
----------- -----------
Net cash used in
financing activities (8,518,000) (34,289,000)
----------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (413,000) (580,000)
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,820,000 2,302,000
CASH AND CASH EQUIVALENTS, beginning of period 3,266,000 2,693,000
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 5,086,000 $ 4,995,000
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE>
SED International Holdings, Inc.
And Subsidiaries
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Nine Months Ended March 31, 2000 and 1999
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 nine months ended March 31, 2000 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 based distributor of
Hewlett-Packard products and other computer peripherals through Argentina,
for approximately $4,417,000 in cash. This acquisition has been accounted
for using the purchase method of accounting. The Company is required to pay
additional amounts to the sellers of Intermaco based on a multiple of
Intermaco's net earnings, as defined in the Quotas' Purchase Agreement, for
the two succeeding twelve-month periods commencing November 1, 1998;
additional amounts paid are recorded as additional goodwill. During the
three months ended December 31, 1999 the Company accrued $2,030,000 due to
the sellers of Intermaco based on Intermaco's results for the twelve-month
period ended October 31, 1999. Payment of this liability was made in
February 2000, consisting of 400,000 shares of the Company's common stock
valued at $800,000 and $1,230,000 in cash.
C. Borrowings
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 March 31, 2000, the Company had no borrowings 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 $17.0 million reserve. The reserve was increased from
$15.0 million to $17.0 million through a letter agreement, which was
effective on March 20, 2000. The $17.0 million reserve can be drawn upon,
if necessary, to finance obligations to Finova Capital Corporation, which
finances the Company's purchases from certain vendors. The Finova reserve
was increased to $20.0 million for the period of March 30, 2000 through
April 14, 2000. After April 14, 2000 the Finova reserve was changed to
$17.0 million. Available additional borrowing
<PAGE>
capacity under this agreement, based on collateral limitations, at March
31, 2000 was $25.5 million ($20.0 million of which is only available to
finance obligations due to Finova, if necessary).
Under the agreement the Company may borrow at the prime rate offered by
Wachovia (9.0% at March 31, 2000) 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. 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
and other restrictions. At March 31, 2000 the Company was in compliance
with the agreement covenants.
In November 1999 the Company's Brazilian subsidiary entered into a $4.8
million line of credit agreement with a Brazilian bank. Borrowings under
this line of credit bear interest at 2.5% monthly. The credit agreement is
secured by the subsidiary's accounts receivable and requires the
maintenance of certain financial ratios. At March 31, 2000, there were no
outstanding borrowings under this line of credit. This line of credit
agreement remains effective until terminated by either party.
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 Sates 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
March 31, 2000
Net sales:
Unaffiliated customers $110,246,000 $30,738,000 $140,984,000
Foreign subsidiaries 622,000 $ (622,000)
---------------------------------------------------------------------------------------------
Total $110,868,000 $30,738,000 $ (622,000) $140,984,000
---------------------------------------------------------------------------------------------
Gross profit $ 6,170,000 $ 3,433,000 $ (290,000) $ 9,313,000
Income from operations 560,000 543,000 (365,000) 738,000
Total assets $106,795,000 $34,544,000 $(15,009,000) $126,330,000
For the three months ended
March 31, 1999
Net sales:
Unaffiliated customers $140,801,000 $16,873,000 $157,674,000
Foreign subsidiaries 1,311,000 $ (1,311,000)
---------------------------------------------------------------------------------------------
Total $142,112,000 $16,873,000 $ (1,311,000) $157,674,000
---------------------------------------------------------------------------------------------
Gross profit $ (1,856,000) $ 211,000 $ 60,000 $ (1,585,000)
Income from operations (33,438,000) (4,482,000) (939,000) (38,859,000)
Total assets $124,467,000 $23,668,000 $ (2,705,000) $145,430,000
</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 March 31, Products Products Total
-----------------------------------------------------------------------------------------
<S> <C> <C> <C>
2000 $125,418,000 $15,566,000 $140,984,000
1999 134,776,000 22,898,000 157,674,000
</TABLE>
Approximately 34.3% and 27.0% of the Company's net sales in the United
States for the three months ended March 31, 2000 and 1999, respectively,
consisted of sales to customers for export principally into Latin America
and direct sales to customers in Brazil, Colombia, and Argentina.
<PAGE>
<TABLE>
United States Latin America Eliminations Consolidated
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
For the nine months ended
March 31, 2000
Net sales:
Unaffiliated customers $386,094,000 $90,986,000 $477,080,000
Foreign subsidiaries 3,345,000 $ (3,345,000)
---------------------------------------------------------------------------------------------
Total $389,439,000 $90,986,000 $ (3,345,000) $477,080,000
---------------------------------------------------------------------------------------------
Gross profit $ 20,432,000 $10,534,000 $ (311,000) $ 30,655,000
Income from operations 618,000 1,456,000 (461,000) 1,613,000
Total assets $106,795,000 $34,544,000 $(15,009,000) $126,330,000
For the nine months ended
March 31, 1999
Net sales:
Unaffiliated customers $485,792,000 $60,130,000 $545,922,000
Foreign subsidiaries 3,678,000 $ (3,678,000)
---------------------------------------------------------------------------------------------
Total $489,470,000 $60,130,000 $ (3,678,000) $545,922,000
---------------------------------------------------------------------------------------------
Gross profit $ 15,836,000 $ 5,070,000 $ (45,000) $ 20,861,000
Income from operations (33,309,000) (4,437,000) (1,044,000) (38,790,000)
Total assets $124,467,000 $23,668,000 $ (2,705,000) $145,430,000
</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 nine months Microcomputer Wireless Telephone
ended March 31, Products Products Total
--------------------------------------------------------------------------------------
<S> <C> <C> <C>
2000 $402,968,000 $74,112,000 $477,080,000
1999 475,586,000 70,336,000 545,922,000
</TABLE>
Approximately 29.7% and 29.4% of the Company's net sales in the United
States for the nine months ended March 31, 2000 and 1999, respectively,
consisted of sales to customers for export principally into Latin America
and direct sales to customers in Brazil, Colombia and Argentina.
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.
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 was accounted for as
a speculative forward contract. Gains and losses were 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). The
settlement loss in January 2000 was $194,000. The Company has not entered
into any other forward contracts or other financial instruments as of March
31, 2000.
G. Recently Issued Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. ("SFAS") 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.
<PAGE>
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 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 March 31, 2000 Compared to Three Months Ended
March 31, 1999
Net sales decreased 10.6% or $16.7 million, to $141.0 million in the third
quarter ended March 31, 2000 compared to $157.7 million in the third quarter
ended March 31, 1999. Information concerning the Company's domestic and foreign
sales is summarized below:
Three Months Ended
March 31, Change
------------------ ----------------
2000 1999 Amount Percent
------ ------ ------ -------
United States:
Domestic $ 72.9 $103.8 $(30.9) (29.8)
Export 38.0 38.3 (.3) (.8)
Latin America 30.7 16.9 13.8 81.6
Elimination (.6) (1.3) .7 N/A
------ ------ ------
Consolidated $141.0 $157.7 $(16.7) 10.6
====== ====== ======
The overall decline resulted from a decrease in United States domestic net
sales, a slight 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
printers, computer processors and monitors. The increase in sales in Latin
America was generally across all product categories. Sales of microcomputer
products represented approximately 89.0% of the Company's third quarter net
sales compared to 85.5% for the same period last year. Sales of wireless
telephone products accounted for approximately 11.0% of the Company's third
quarter net sales compared to 14.5% for the same period last year.
Gross margin increased to $9.3 million in the third quarter ended March 31, 2000
compared to $(1.6) million in the third quarter ended March 31, 1999. Gross
margin as a percentage of net sales increased to 6.6% in the third quarter ended
March 31, 2000 from (1.0)% in the third quarter ended March 31, 1999. The change
in gross margin as a percentage of sales was due to a decrease in lower margin
sales in the United States, an increase in higher margin sales in Latin America
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 decreased $16.5 million to $8.3
million in the third quarter ended March 31, 2000, compared to $24.8 million
(excluding $13.6 million of impairment charges) in the third quarter ended March
31, 1999. These expenses as a percentage of net sales decreased to 5.9% in the
third quarter ended March 31, 2000 compared to 15.7% in the third quarter ended
March 31, 1999. The dollar decrease in selling, general and administrative
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (continued)
expenses is principally due to lower provisions for accounts receivable losses,
lower employee expenses and occupancy costs in the March 2000 quarter.
Net interest expense was negligible in the third quarter ended March 31, 2000
compared to interest expense of $.2 million in the third quarter ended March 31,
1999, principally due to lower borrowings in the March 2000 quarter.
Income tax expense was $.2 million in the third quarter ended March 31, 2000
compared to an income tax benefit of $1.2 million in the third quarter ended
March 31, 1999. Income tax expense relates primarily to tax on income generated
by the Company's Latin American subsidiaries.
Nine Months Ended March 31, 2000 Compared to Nine Months Ended
March 31, 1999
Net sales decreased 12.6% or $68.8 million, to $477.1 million in the nine months
ended March 31, 2000 compared to $545.9 million in the nine months ended March
31, 1999. Information concerning the Company's domestic and foreign sales is
summarized below:
Nine Months Ended
March 31, Change
------------------ ----------------
2000 1999 Amount Percent
------ ------ ------ -------
United States:
Domestic $273.8 $345.5 $(71.7) (20.8)
Export 115.6 144.0 (28.4) (19.7)
Latin America 91.0 60.1 30.9 51.4
Elimination (3.3) (3.7) .4 N/A
------ ------ ------
Consolidated $477.1 $545.9 $(68.8) 12.6
====== ====== ======
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. The increase
in sales in Latin America was generally across all product categories. Sales of
microcomputer products represented approximately 84.5% of the Company's nine
months net sales compared to 87.1% for the same period last year. Sales of
wireless telephone products accounted for approximately 15.5% of the Company's
nine months net sales compared to 12.9% for the same period last year.
Gross margin increased $9.8 million, to $30.7 million in the nine months ended
March 31, 2000 compared to $20.9 million in the nine months ended March 31,
1999. Gross margin as a percentage of net sales increased to 6.4% in the nine
months ended March 31, 2000 from 3.8% in the nine months ended March 31, 1999.
The change in gross margin as a percentage of sales was due to a decrease in
lower margin sales in the United States, an increase in higher margin sales in
Latin America
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (continued)
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 decreased $18.6 million to $28.1
million in the nine months ended March 31, 2000, compared to $46.7 million
(excluding $13.6 million of impairment charges) in the nine months ended March
31, 1999. These expenses as a percentage of net sales decreased to 5.9% in the
nine months ended March 31, 2000 compared to 8.6% the nine months ended March
31, 1999. The dollar decrease in selling, general and administrative expenses is
principally due to lower provisions for accounts receivable losses, lower
employee expenses and occupancy costs in the March 2000 quarter. The Company
closed the Harrisburg, Pennsylvania distribution facility during the quarter
ended December 31, 1999. In conjunction with this facility closure, the company
incurred severance and closing costs totaling $175,000. Such closure costs
included future facility lease payments net of estimated sublease income. It is
expected that this facility closure will result in annual cost savings of
$750,000 commencing January 2000.
Net interest expense was $.4 million in the nine months ended March 31, 2000 and
March 31, 1999.
Income tax expense was $.6 million in the nine months ended March 31, 2000
compared to an income tax benefit of $1.0 million in the nine months ended March
31, 1999. Income tax expense relates primarily to tax on income generated by the
Company's Latin American subsidiaries.
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 outside the
United States to make payments to the Company.
Operating activities provided $13.2 million in the nine months ended March 31,
2000. The source of cash in the nine months ended March 31, 2000 resulted
primarily from decreases of $7.4 million in accounts receivable and $11.1
million in inventory, partially offset by a $7.1 million decrease in accounts
payable.
Investing activities used $2.4 million in the nine months ended March 31, 2000
to purchase equipment.
Financing activities used $8.5 million in the nine months ended March 31, 2000
resulting from repayment of borrowings under its line of credit.
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 through Argentina, for approximately $4,417,000 in
cash. This acquisition has been accounted for using the purchase method of
accounting. The Company is required to pay additional amounts to the sellers of
Intermaco based
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (continued)
on a multiple of Intermaco's net earnings, as defined in the Quotas' Purchase
Agreement, for the two succeeding twelve-month periods commencing November 1,
1998; additional amounts paid are recorded as additional goodwill. During the
three months ended December 31, 1999 the Company accrued $2,030,000 due to the
sellers of Intermaco based on Intermaco's results for the twelve-month period
ended October 31, 1999. Payment of this liability was made in February 2000,
consisting of 400,000 shares of the Company's common stock valued at $800,000
and $1,230,000 in cash.
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 March
31, 2000, the Company had no borrowings 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 $17.0 million reserve.
The reserve was increased from $15.0 million to $17.0 million through a letter
agreement, which was effective on March 20, 2000. The $17.0 million reserve can
be drawn upon, if necessary, to finance obligations to Finova Capital
Corporation, which finances the Company's purchases from certain vendors. The
Finova reserve was increased to $20.0 million for the period of March 30, 2000
through April 14, 2000. After April 14, 2000 the Finova reserve was changed to
$17.0 million. Available additional borrowing capacity under this agreement,
based on collateral limitations, at March 31, 2000 was $25.5 million ($20.0
million of which is only available to finance obligations due to Finova, if
necessary).
Under the agreement the Company may borrow at the prime rate offered by Wachovia
(9.0% at March 31, 2000) 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. 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 and other restrictions. At March 31,
2000 the Company was in compliance with the agreement covenants.
In November 1999 the Company's Brazilian subsidiary entered into a $4.8 million
line of credit agreement with a Brazilian bank. Borrowings under this line of
credit bear interest at 2.5% monthly. The credit agreement is secured by the
subsidiary's accounts receivable and requires the maintenance of certain
financial ratios. At March 31, 2000, there were no outstanding borrowings under
this line of credit. This line of credit agreement remains effective until
terminated by either party.
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 was accounted for as a
speculative forward contract. Gains and losses were computed by multiplying the
foreign currency amount of the forward contract by the difference between the
forward rate
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (continued)
available for the remaining maturity of the contract and the contracted forward
rate (R$1.996 to US $1). The settlement loss in January 2000 was $194,000. The
Company has not entered into any other forward contracts or other financial
instruments as of March 31, 2000.
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 to
either receive a credit from the vendor for the price differential or 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.
Year 2000
The Company did not experience any significant malfunctions or errors in its
operating or business systems when the date changed from 1999 to 2000. Based on
operations since January 1, 2000, the Company does not expect any significant
impact to its ongoing business as a result of the "Year 2000 issue." However, it
is possible that the full impact of the date change, which was of concern due to
computer programs that use two digits instead of four digits to define years,
has not been fully recognized. For example, it is possible that Year 2000 or
similar issues such as leap year-related problems may occur with billing,
payroll, or financial closings at month, quarterly, or year end. The Company
believes that any such problems are likely to be minor and correctable. In
addition, the Company could still be negatively affected if its customers or
suppliers are adversely affected by the Year 2000 or similar issues. The Company
currently is not aware of any significant Year 2000 or similar problems that
have arisen for its customers or suppliers.
The Company expended approximately $500,000 on Year 2000 readiness efforts from
1997 to 1999. These efforts included replacing outdated, noncompliant hardware
and software, as well as identifying and correcting Year 2000 problems.
<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 (SED 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
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 Finova Capital Corp. Letter dated March 10, 2000
10.2 Wachovia Bank, N.A. Letter dated March 30, 2000
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)
May 12, 2000 /s/Gerald Diamond
Gerald Diamond
Chief Executive Officer and
Chairman of the Board
(Principal Executive Officer)
May 12, 2000 /s/Larry G. Ayers
Larry G. Ayers
Vice President-Finance and
Treasurer
(Principal Accounting Officer)
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
10.1 Finova Capital Corp. Letter dated March 10, 2000
10.2 Wachovia Bank, N.A. Letter dated March 30, 2000
27.1 Financial Data Schedule
<PAGE>
Exhibit 10.1
FINOVA
Financial Innovators
FINOVA Capital Corp.
1060 First Avenue
King of Prussia, PA 19406
March 10, 2000
Kevin B. Harrison
Senior Vice President
Wachovia Bank, N.A.
191 Peachtree Street, 30th Fl.
Atlanta, GA 30303
Dear Kevin:
This letter is in accordance with the terms and conditions of the Intercreditor
Agreement ("Agreement") dated August 31, 1999, by and among Wachovia Bank, N.A.
("Wachovia"), FINOVA Capital Corporation ("FINOVA"); and SED International, Inc.
("SED").
As you are aware, FINOVA currently provides a $15,000,000 Inventory Credit
Facility to SED ("FINOVA Indebtedness"). FINOVA is interested in increasing the
SED credit facility to $17,000,000. In accordance with the requirements under
the Agreement, please be advised that FINOVA is hereby providing five (5)
business days written notice that as of March 20, 2000 the FINOVA Indebtedness
will be increased to a maximum of $17,000,000.
Please acknowledge the above change to the FINOVA Indebtedness by signing below
and returning to my attention at the above address. Should you have any
questions concerning this matter, please contact me at (610)491-8269.
All terms and conditions will remain in full force and effect as stated in the
Intercreditor Agreement dated August 31, 1999.
Sincerely, Acknowledged and Accepted
Timothy J. Kochanasz By: /s/ Kevin B. Harrison
Senior Account Executive Print Name: Kevin B. Harrison
FINOVA Capital Corporation Title: SVP
<PAGE>
Exhibit 10.2
Wachovia Bank, N.A.
191 Peachtree Street, N.E.
Atlanta, GA 30303
March 30, 2000
Mr. Michael Pettinger
FINOVA Capital Corp.
1060 First Avenue
King of Prussia, PA 19406
Dear Mike:
In reference to the Intercreditor Agreement dated August 31, 1999, Wachovia
agrees to allow the level of FINOVA Indebtedness to be increased to $20,000,000
for a period through April 14, 2000. On that date the limit will be reduced to
$17,000,000 as per the Intercreditor Agreement and the letter dated March 10,
2000.
All other terms and conditions will remain in full force and effect as written
in the Intercreditor Agreement dated August 31, 1999.
Sincerely,
/s/ Kevin B. Harrison
Kevin B. Harrison
Senior Vice President
(404)332-5269
Acknowledged:
By: /s/ Raymond Crouse By: /s/ Larry G. Ayers
Name: Raymond Crouse Name: Larry G. Ayers
Title: VP National Portfolio Mgr. Title: CFO
FINOVA Capital Corp. SED International, Inc.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
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, 2000 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-END> MAR-31-2000
<CASH> 5,086,000
<SECURITIES> 0
<RECEIVABLES> 50,725,000
<ALLOWANCES> 4,320,000
<INVENTORY> 46,004,000
<CURRENT-ASSETS> 107,620,000
<PP&E> 7,821,000
<DEPRECIATION> 7,122,000
<TOTAL-ASSETS> 126,330,000
<CURRENT-LIABILITIES> 71,006,000
<BONDS> 0
0
0
<COMMON> 112,000
<OTHER-SE> 55,212,000
<TOTAL-LIABILITY-AND-EQUITY> 126,330,000
<SALES> 477,080,000
<TOTAL-REVENUES> 477,080,000
<CGS> 446,425,000
<TOTAL-COSTS> 446,425,000
<OTHER-EXPENSES> 28,063,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 413,000
<INCOME-PRETAX> 2,179,000
<INCOME-TAX> 566,000
<INCOME-CONTINUING> 1,613,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,613,000
<EPS-BASIC> .24
<EPS-DILUTED> .24
</TABLE>
