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Previous: ALMOST FAMILY INC, 10-Q, EX-27, 2000-11-08 |
Next: SED INTERNATIONAL HOLDINGS INC, 10-Q, EX-10, 2000-11-08 |
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, 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
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, 2000, there were 7,374,888 shares of Common Stock, $.01 par value, outstanding.
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 Income 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 9-11
PART II OTHER INFORMATION
Item 1 - Legal Proceedings 12
Item 2 - Changes in Securities and Use of Proceeds 12
Item 3 - Default Upon Senior Securities 12
Item 4 - Submission of Matters to a Vote of Security
Holders 12
Item 5 - Other Information 12
Item 6 - Exhibits and Reports on Form 8-K 12
PART I - FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
SED International Holdings, Inc.
And Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, June 30,
ASSETS 2000 2000
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 5,539,000 $ 7,314,000
Trade accounts receivable, net 52,551,000 49,183,000
Inventories 46,504,000 42,733,000
Deferred income taxes 360,000 360,000
Other current assets 3,728,000 2,886,000
TOTAL CURRENT ASSETS 108,682,000 102,476,000
PROPERTY AND EQUIPMENT, net 7,518,000 7,827,000
INTANGIBLES, net 10,921,000 11,016,000
___________ ____________
$127,121,000 $121,319,000
September 30, June 30,
LIABILITIES AND SHAREHOLDERS
' EQUITY 2000 2000(Unaudited)
CURRENT LIABILITIES:
Trade accounts payable $ 60,969,000 $ 55,076,000
Accrued liabilities 6,671,000 6,994,000
Short term subsidiary bank debt 4,192,000 3,900,000
TOTAL CURRENT LIABILITIES: 71,832,000 65,970,000
REVOLVING BANK DEBT
SHAREHOLDERS' EQUITY:
Preferred Stock
129,500 shares authorized, none issued
Common stock, $.01 par value; 100,000,000
shares authorized; 11,126,911 shares
issued; and 7,374,888 shares
outstanding 112,000 112,000
Additional paid-in capital 71,579,000 71,579,000
Retained earnings 2,696,000 2,621,000
Accumulated other comprehensive loss (1,802,000) (1,583,000)
Treasury stock, at cost 3,752,023 shares (16,550,000) (16,550,000)
Prepaid compensation - stock awards (746,000) (830,000)
55,289,000 55,349,000
$127,121,000 $121,319,000
SED International Holdings, Inc.
And Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
September 30,
2000 1999
NET SALES $133,014,000 $186,644,000
COST AND EXPENSES
Cost of sales including buying
and occupancy expenses 124,402,000 175,523,000
Selling, general, and administrative expenses 8,331,000 10,182,000
132,733,000 185,705,000
OPERATING INCOME 281,000 939,000
INTEREST EXPENSE, net 107,000 89,000
EARNINGS BEFORE INCOME TAXES 174,000 850,000
INCOME TAXES 99,000 250,000
NET EARNINGS $ 75,000 $ 600,000
NET EARNINGS PER COMMON SHARE:
Basic $.01 $.09
Diluted .01 .09
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 6,966,000 6,529,000
Diluted 7,374,000 6,529,000
See notes to condensed consolidated financial statements.
SED International Holdings, Inc.
And Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS
OF SHAREHOLDERS' EQUITY
(Unaudited)
Accumulated
Common Stock Additional Other Prepaid Total
Par Paid-In Retained Comprehensive Treasury Stock Compensation Shareholders
'Shares Value Capital Earnings Loss Shares Cost Stock Awards Equity
BALANCE, June 30, 2000 11,126,911 $112,000 $ 71,579,000 $2,621,000 $(1,583,000) 3,752,023 $(16,550,000) $ (830,000) $55,349,000
Amortization of
stock awards 84,000 84,000
Net earnings 75,000 75,000
Translation
adjustments (219,000) (219,000)
Comprehensive
earnings (loss) (1) (144,000)
BALANCE, September 30, 2000 11,126,911
$112,000 $ 71,579,000 $ 2,696,000 $(1,802,000) 3,752,023 $(16,550,000) $ (746,000) $55,289,000
(1) Comprehensive earnings for the quarter ended September 30, 1999 were $191,000.
See notes to condensed consolidated financial statements.
SED International Holdings, Inc.
And Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
September 30,
2000 1999
OPERATING ACTIVITIES:
Net earnings $ 75,000 $ 600,000
Adjustments to reconcile net earnings
to net cash provided by
operating activities:
Depreciation and amortization 689,000 590,000
Compensation - stock awards 84,000 209,000
Changes in assets and liabilities (2,424,000) 2,134,000
Net cash (used in) provided by
operating activities (1,576,000) 3,533,000
INVESTING ACTIVITIES:
Purchases of equipment (272,000) (800,000)
Net cash used in investing activities (272,000) (800,000)
FINANCING ACTIVITIES:
Proceeds from short-term bank debt of
foreign subsidiaries, net 292,000 -
Net cash provided by financing activities 292,000 _______ -_
EFFECT OF EXCHANGE RATE CHANGES ON CASH (219,000) (409,000)
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS (1,775,000) 2,324,000
CASH AND CASH EQUIVALENTS, beginning of period 7,314,000 3,266,000
CASH AND CASH EQUIVALENTS, end of period $5,539,000 $5,590,000
See notes to condensed consolidated financial statements.
SED International Holdings, Inc.
And Subsidiaries
NOTES TO CONDENSED UNAUDITED CONSOLDIATED FINANCIAL STATEMENTS
Three Months Ended September 30, 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. (formerly SED Magna Distribuidora Ltda., SED Magna (Miami), Inc., SED International de Colombia Ltda., Intermaco S.R.L., and E-Store.com, Inc. (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, 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, including the Strategic Plan, Risks and Uncertainties section contained in Note 1, included in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission for the year ended June 30, 2000.
Certain June 30, 2000 balance sheet amounts have been reclassified for comparative purposes.
B. Bank Debt
During the quarter ended September 30, 2000, the Company was not in compliance with certain covenants under the Wachovia Bank N.A. credit agreement; however, the credit agreement was amended and restated, and accordingly, the event of non-compliance was waived and cured. The Company had no outstanding borrowings under this agreement at September 30, 2000 and June 30, 2000.
Following is a summary of the Company
September 30, June 30,
2000 2000____
SED International do
Brazil Ltda. $4,087,000 $3,465,000
SED International de
Colombia Ltda. 105,000 435,000
$4,192,000 $3,900,000
The weighted average monthly rates for the quarter ended September 30, 2000 were 1.63% in Brazil and 1.55% in Colombia.
SED International Holdings, Inc.
And Subsidiaries
NOTES TO CONDENSED UNAUDITED CONSOLDIATED FINANCIAL STATEMENTS
Three Months Ended September 30, 2000 and 1999
(continued)
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:
For the three months ended
United States Latin America Eliminations ConsolidatedSeptember 30, 2000
Net sales:
Unaffiliated customers $ 95,828,000 $37,186,000 $133,014,000
Foreign subsidiaries 769,000 $ (769,000)
Total $ 96,597,000 $37,186,000 $ (769,000) $133,014,000
Gross profit $ 5,127,000 $ 3,485,000 $ 8,612,000
Net (loss) income (4,000) 79,000 75,000
Total assets $103,173,000 $35,504,000 $(11,556,000) $127,121,000
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
Net (loss) income (5,000) 627,000 (22,000) 600,000
Total assets $154,952,000 $31,902,000 $(20,767,000) $166,087,000
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:
For the three months Microcomputer Wireless Telephone
ended September 30, Products Products Total
2000 $120,937,000 $12,077,000 $133,014,000
1999 156,642,000 30,002,000 186,644,000
Approximately 48.8% and 41.2% of the Company
SED International Holdings, Inc.
And Subsidiaries
NOTES TO CONDENSED UNAUDITED CONSOLDIATED FINANCIAL STATEMENTS
Three Months Ended September 30, 2000 and 1999
(continued)
D. Recently Issued Accounting Pronouncements
The Emerging Issues Task Force (the "Task Force") of the Financial Accounting Standards Board reached a consensus on Issue 00-10, Accounting for Shipping and Handling Fees and Costs. The issue addresses the income statement classification for shipping and handling fees and costs by companies that record revenue based on the gross amount billed to customers under EITF Issue No. 99-19 Reporting Revenue Gross as Principal versus Net as an Agent. Upon application of the consensus, which is required for the Company in the fourth quarter of fiscal 2001, prior period financial statements should be reclassified to conform to the consensus. To date, the Company has not completed its analysis of the impact that Issue 00-10 may have on the classifications in the statements of income, if any.
The Emerging Issues Task Force (the "Task Force") of the Financial Accounting Standards Board reached a consensus on Issue 00-14, Accounting for Certain Sales Incentives. The issue addresses the accounting for sales incentives offered voluntarily by a vendor without charge to customers that can be used in, or that are exercisable by a customer as a result of a single exchange transaction. For sales incentives resulting in the right to a rebate, the Task Force concluded that recognition should occur at the date of sale, measured based upon the estimated amount of refunds expected to be claimed by customers. Indicators pointing to the ability to make a reasonable and reliable estimate of the amount of future rebates or refunds were developed. If the amount cannot be reliably estimated, it should be assumed that all customers will request a refund. When recognized, a cash incentive should be classified as a reduction of revenue. Upon application of the consensus, which is required for the Company in the fourth quarter of fiscal 2001, prior period financial statements should be reclassified to conform to the consensus. To date, the Company has not completed its analysis of the impact that Issue 00-14 may have on the classifications in the statements and income, if any.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CONSOLIDATED RESULTS OF OPERATIONS
Three Months Ended September 30, 2000 Compared to Three Months Ended
September 30, 1999
Net sales decreased 28.7%, or $53.6 million, to $133.0 million in the first quarter ended September 30, 2000 compared to $186.6 million in the first quarter ended September 30, 1999. Information concerning the Company
=s domestic and foreign sales is summarized below:Three Months Ended
September 30, Change
2000 1999 Amount Percent
United States:
Domestic $ 68.1 $109.8 $(41.7) (38.0)
Export 28.4 46.8 (18.4) (39.3)
Latin America 37.2 31.3 5.9 18.8
Elimination (.7) (1.3) .6 N/A
Consolidated $133.0 $186.6 $(53.6) (28.7)
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, offset by a net increase in in-country net sales for Brazil (Magna Distribuidora Ltda., acquired in December 1997 and now 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 wireless products. The increase in sales in Latin America was generally across all product categories. Sales of microcomputer products represented approximately 90.9% of the Company
=s first quarter net sales compared to 83.9% for the same period last year. Sales of wireless telephone products accounted for approximately 9.1% of the Company =s first quarter net sales compared to 16.1% for the same period last year.Gross profit decreased to $8.6 million in the first quarter ended September 30, 2000 compared to $11.1 million in the first quarter ended September 30, 1999. Gross profit as a percentage of net sales increased to 6.5% in the first quarter ended September 30, 2000 from 6.0% in the first quarter ended September 30, 1999. The change in gross profit 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.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
Selling, general and administrative expenses decreased $1.9 million to $8.3 million in the first quarter ended September 30, 2000, compared to $10.2 million in the first quarter ended September 30, 1999. These expenses as a percentage of net sales increased to 6.3% in the first quarter ended September 30, 2000 compared to 5.5% in the first quarter ended September 30, 1999. The dollar decrease in selling, general and administrative expenses is principally due to lower provisions for accounts receivable losses and lower employee expenses in the September 2000 quarter.
Net interest expense was $0.1 million in the first quarter ended September 30, 2000 compared to interest expense of $0.1 million in the first quarter ended September 30, 1999.
Income tax expense was $0.1 million in the first quarter ended September 30, 2000 compared to an income tax of $0.3 million in the first quarter ended September 30, 1999. The higher effective income tax rate primarily relates to tax on income generated by certain of the Company's Latin America subsidiaries, while the remaining operations contributed losses with no corresponding tax benefits.
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 Wachovia Bank N.A. credit agreement, subsidiary bank credit agreements, 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 used $1.6 million in the three months ended September 30, 2000. The use of cash in the three months ended September 30, 2000 resulted primarily from increases of $3.4 million in accounts receivable and $3.8 million in inventory, offset by a $5.9 million increase in accounts payable.
Investing activities used $.3 million in the three months ended September 30, 2000 to purchase equipment and software.
Financing activities provided $.3 million in the three months ended September 30, 2000 resulting from net bank borrowings by its foreign subsidiaries.
Management believes that the Wachovia Bank N.A. credit agreement, subsidiary bank credit agreements together with vendor lines of credit, and internally generated funds will be sufficient to satisfy its working capital needs.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
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.
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 fluctuations, 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.
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. The Latin American countries in which the Company operates have experienced high rates of inflation and hyperinflation from time to time in the past. At this time, management does not expect that inflation will have a material impact on the Company's business in the immediate future.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Default Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
Shareholders who desire the Company to include notice of a matter in the Company's Proxy Statement for its 2001 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, 2001 and must otherwise comply 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
10.2 First Amendment to Employment Agreement between Mark Diamond and SED International, Inc. dated March 8, 2000
27.1 Financial Data Schedule
b) Reports on Form 8-K
The Company filed a current report on Form 8-K on September 19, 2000 disclosing under Item 4 that its independent accounting firm, Deloitte Touche, LLP had declined to stand for reelection as the Company's independent accountant for the Company's 2001 fiscal year.
The Company filed a current report on Form 8-K on October 18, 2000 disclosing under Item 4 that it had engaged Ernst & Young, LLP as its new independent accountant as of October 18, 2000.
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 8, 2000 /s/Gerald Diamond
Gerald Diamond
Chief Executive Officer and
Chairman of the Board
(Principal Executive Officer)
November 8, 2000 /s/Larry G. Ayers
Larry G. Ayers
Vice President-Finance and
Treasurer
(Principal Accounting Officer)
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