SED International Holdings, Inc.

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SED International Holdings, Inc.

4916 North Royal Atlanta Drive
Tucker, Georgia 30085
U.S.A.
Telephone: (770) 491-8962

Toll Free: (800) 444-8962
Fax: (800) 329-2733
Web site:http://www.sedonline.com

Public Company
Incorporated: 1980 as Southern Electronics Corporation
Employees: 451
Sales: $609.4 million (2000)
Stock Exchanges: NASDAQ
Ticker Symbol: SECX
NAIC: 421420 Office Equipment Wholesalers; 421430 Computer and Computer Peripheral Equipment and Software Wholesalers

SED International Holdings, Inc., through its wholly owned operating subsidiary SED International, Inc., is a mid-size distributor of computer equipment, cellular phones, and related accessories. It serves more than 30,000 value-added resellers, system builders, e-commerce resellers, dealer-agents, and retailers with a selection of more than 5,000 products, fulfillment services, finance options, and e-commerce solutions. SED serves customers throughout the United States. It began supplying the Latin American market in 1994 through a warehouse in Miami and presently has sales and distribution offices in Brazil, Colombia, Argentina, and Puerto Rico.

A Regional Distributor of Consumer Electronics in the 1980s

Southern Electronics Corp., the predecessor to SED International Holdings, Inc., was formed in the Atlanta, Georgia, metropolitan area in 1980. It distributed consumer electronics products to dealers in the Southeast. One of the founders, Gerald Diamond, was the company’s president and treasurer.

Southern Electronics remained privately owned until 1986, when an investor group that included Gerald Diamond bought the company’s assets for $14.5 million. In October 1986 Southern Electronics completed its initial public offering (IPO), raising $4.5 million that was used to reduce the company’s debt. Investment firm Drexel Burnham Lambert underwrote the stock offering and took a 30 percent interest in the company. The company was organized as a holding company, called Southern Electronics Corp., and a wholly owned operating subsidiary, Southern Electronics Distributors, Inc.

Prior to its IPO, Southern Electronics had been facing stiff competition from retailers in the consumer electronics business. With Gerald Diamond as its CEO, the company decided in 1987 to begin distributing computer hardware and peripheral products, such as printers, modems, monitors, and keyboards. It also began distributing cellular phones. For 1987 Southern Electronics reported a net loss of $770,000.

By the end of the decade Southern Electronics had returned to profitability. It was distributing products to approximately 4,500 small dealers and value-added resellers (VARs) in the Southeast. The company stocked some 2,000 products from about 50 original equipment manufacturers (OEMs), typically smaller companies such as Seagate Technology Inc. and Panasonic Consumer Electronics Co., rather than larger OEMs like IBM and Compaq Computer Corp. About 72 percent of Southern Electronics’ revenue came from the sale of computer hardware and peripheral products, with cellular phone sales accounting for 18 percent. For 1990 the company’s net income rose 35 percent to $3.6 million, and revenue increased 25 percent to $114 million, compared to 1989. Most of the company’s profits were used to reduce its long-term debt.

National and International Expansion, 1990s

For fiscal 1991 ending June 30, Southern Electronics had net income of $4.2 million on revenue of $139 million. It had about 150 employees. Later in calendar 1991 the company had a secondary stock offering of 1.6 million shares to raise more than $17 million. Included in the offering was Drexel Burnham Lambert’s 30 percent interest in Southern Electronics. At the time Southern Electronics’ stock was traded on a “bid/ask” basis rather than on the NASDAQ National Market System. The secondary offering was priced at $11 a share. For 1992-93 the company’s stock traded in the $7 to $17 range.

It was reported in 1994 that Southern Electronics was for sale. It held negotiations with several suitors and by mid-1995 was in merger talks with networking products distributor GBC Technologies Inc. Computer Reseller News characterized GBC as a low-volume, value-added supplier of networking products that typically required technical support. Southern Electronics, on the other hand, favored a high-volume, low-cost strategy and typically did not sell the types of computer products that required technical support. After the heads of the two companies failed to agree on a business plan, merger talks between GBC and Southern Electronics were called off in June 1995.

Southern Electronics began looking to supply the Latin American market in 1994, when it opened a warehouse in Miami. In its first year of selling to the region, Southern Electronics had $14.3 million in sales to Latin America. In 1995 the company acquired Miami-based U.S. Computer of North America Inc. for $13.9 million. U.S. Computer had a sales staff that spoke fluent Spanish and Portuguese, and Latin American sales boomed to $171.5 million in fiscal 1996 ending June 30, which represented 37 percent of Southern Electronics’ fiscal 1996 revenue of $468.3 million.

During 1997 Southern Electronics Corp., the parent holding company of Southern Electronics Distributors, Inc., changed its name to SED International Holdings, Inc., and Southern Electronics Distributors, Inc., became SED International, Inc. The name changes reflected the growth of SED’s international operations. The acquisition of U.S. Computer gave SED the right to distribute Hewlett-Packard Co. products in much of Latin America. In November 1997 SED extended its Hewlett-Packard distribution into Brazil with the acquisition of Magna Distribuidora Ltda., a Sao Paulo-based distributor, for $1.4 million. SED also opened a sales office and distribution center in Bogota, Colombia, in 1997. For fiscal 1997 SED’s sales to Latin America reached $290.7 million, or 45 percent of the company’s overall revenue of $646.3 million.

Establishing a presence in Latin America allowed SED to bypass the middlemen that previously had carried its products to the region from Miami. Acquiring local distributors in Latin America also gave SED the ability to take advantage of their local market knowledge and customer relationships. SED established a bonus system to encourage local managers to stay and increase sales after their companies were acquired by SED.

Also in 1997 SED acquired the U.S. assets of failing distributor Globelle Corp. for $13 million. Globelle had acquired distributor GBC Technologies in 1996, but then ran into difficulty integrating its operations. Although Globelle had lost its authorization to distribute products made by IBM Corp. and Seagate Technology, the acquisition gave SED authorization to distribute products made by Hewlett-Packard Co. and 3Com Corp. in the United States. SED also gained Globelle’s Memphis warehouse that was electronically integrated with Federal Express Corp., as well as the company’s sales office at its Minneapolis headquarters.

The acquisition of Globelle helped boost SED’s fiscal 1998 revenue to $892.6 million, although a number of factors resulted in a net loss of $255,000. The loss, which included a $6.2 million fourth quarter loss, was the company’s first since 1987. Contributing to the loss were slumping demand in the mass-storage market, which was SED’s largest product category, and uncollectible receivables. By 1998 SED had grown to 366 employees. The company had recently increased the number of its warehouses from two to four by opening one in Harrisburg, Pennsylvania, and another in the Los Angeles area. In early 1998 SED unveiled a web site where resellers could order more than 10,000 products. In its first six months SED Online Order Express received orders from about 4,200 resellers.

The year 1999 (fiscal year ending June 30) was difficult financially for SED. A slump in the PC market resulted in pricing pressures in certain product segments, notably lower hard drive prices. In an effort to return to profitability, SED laid off 40 employees—about ten percent of its work force—and consolidated some of its warehouse facilities. It closed a 40,000-square-foot warehouse annex in Atlanta, and it sublet half of a 100,000-square-foot warehouse located in City of Industry, California. To achieve profitability the company also focused on reducing overhead, improving gross margins, and providing better service to its vendors. Also contributing to SED’s problems was a weakening Latin American market, including economic turmoil in Brazil where inflation had reached 42 percent. SED continued to expand in Latin America, however, having in December 1998 acquired Intermaco S.R.L., an Argentine-based distributor of Hewlett-Packard products.

Although SED had been assembling nonbranded computers known as “white boxes” on a build-to-order basis for several years, it contracted with Solectron Corporation to build the nonbranded systems at Solectron’s Atlanta facility. The computers would start at $599 and utilize Intel processors and Microsoft Corp. operating systems.

In spite of its cost-cutting efforts, SED posted a $38.9 million loss for the quarter ending March 31, 1999. Contributing to the loss were the devaluation of Brazil’s currency, higher than expected credit losses, and slow-moving product. Other problems included losing authorization to distribute disk drives made by Seagate Technology. Seagate was one of several manufacturers who were reducing the number of their channel partners, a practice that strengthened the larger distributors but hurt mid-size distributors like SED. Latin American sales for the quarter fell by 58 percent, and the company also took a $13.6 million charge related to the value of long-term assets.

Company Perspectives:

SED International, Inc., founded in 1980, is a leading provider of computer hardware, wireless communications and e-business solutions to channel partners throughout the United States and Latin America. SED International delivers world-class service offerings including flexible financing, end-user fulfillment, web hosting and expert technical support.

For fiscal 1999 ending June 30 SED’s revenue declined to $707.6 million, and the company reported a net loss of $37.9 million. The company managed to report a profit for the fourth quarter, as it closed more warehouses and laid off almost 40 percent of its U.S. work force. The company expected to be profitable for fiscal 2000, and in fact earned $1.7 million on revenue of $609.4 million. During the year the company restructured its executive management. Gerald Diamond remained as chairman and CEO. His son, Mark Diamond, was promoted from executive vice-president to president and chief operating officer (COO).

SED’s return to profitability in 2000 was attributed to a new domestic strategy and improved sales and profits in Latin America, which was served by SED offices in Brazil, Argentina, Colombia, and Puerto Rico. The new domestic strategy involved focusing on increasing gross profit margins, reducing inventory, increasing inventory turnover, lowering bank borrowings, and reducing credit losses. SED remained optimistic it would also be profitable in 2001, and for the first two quarters of fiscal 2001 the company reported a modest profit. Chairman and CEO Gerald Diamond noted that SED was in the process of changing its product mix, re-evaluating its lines of business, and concentrating on areas of higher potential profit.

Principal Subsidiaries

Magna Distribuidora Ltda. (Brazil); Intermaco S.R.L. (Argentina); SED International de Colombia; SED International do Brasil (Brazil).

Principal Divisions

United States; Latin America.

Principal Competitors

CHS Electronics, Inc.; MCSi, Inc.; Ingram Micro Inc.; Tech Data Corp.; Merisel Inc.; Brightpoint Inc.; Cellstar Corp.

Key Dates:

1980:: Company is founded as Southern Electronics Corp.
1986:: Southern Electronics becomes a public company and has its initial public offering (IPO).
1994:: Company opens a warehouse in Miami to serve the Latin American market.
1997:: Parent company changes name to SED International Holdings, Inc., and its operating subsidiary becomes SED International, Inc.