c56621_10-q.htm -- Converted by SEC Publisher, created by BCL Technologies Inc., for SEC Filing

10-Q 1 c56621_10-q.htm c56621_10-q.htm -- Converted by SEC Publisher, created by BCL Technologies Inc., for SEC Filing

UNITED STATES
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, 2008

o	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		(I.R.S. Employer
of Incorporation or Organization)		Identification No.)

4916 NORTH ROYAL ATLANTA DRIVE, TUCKER, GEORGIA		30084-3031
		(Zip Code)
(Address of principal executive offices)

(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 o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated filer o Accelerated filer o
Non-accelerated filer o Smaller reporting company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes o No x

The number of shares outstanding of the Registrant’s common stock, par value $.01 per share, at February 1, 2009 was 4,823,141 shares.

SED International Holdings, Inc. and Subsidiaries

INDEX


PART I - FINANCIAL INFORMATION:
	Item 1.	Financial Statements	Page

		Condensed Consolidated Balance Sheets as of
		December 31, 2008 (Unaudited) and June 30, 2008	3

		Condensed Consolidated Statements of Operations for the
		three months and six months ended December 31, 2008 and 2007 (Unaudited)	4

		Condensed Consolidated Statements of Cash Flows for the
		six months ended December 31, 2008 and 2007 (Unaudited)	5

		Notes to Condensed Consolidated Financial Statements (Unaudited)	6

	Item 2.	Management’s Discussion and Analysis of Financial
		Condition and Results of Operations	12

	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	17

	Item 4T.	Controls and Procedures	17

PART II - OTHER INFORMATION:


	Item 1.	Legal Proceedings	18

	Item 1A.	Risk Factors	19

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	19

	Item 3.	Defaults Upon Senior Securities	19

	Item 4.	Submission of Matters to a Vote of Security Holders	19

	Item 5.	Other Information	20

	Item 6.	Exhibits	20

SIGNATURES			21

FORWARD LOOKING STATEMENT INFORMATION

Certain statements made in this Quarterly Report on Form 10-Q are “forward-looking statements regarding the plans and objectives of management for future operations. Such statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. The forward-looking statements included herein are based on current expectations that involve numerous risks and uncertainties. Our plans and objectives are based, in part, on assumptions involving judgments with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control. Although we believe that our assumptions underlying the forward-looking statements are reasonable, any of the assumptions could prove inaccurate and, therefore, there can be no assurance that the forward-looking statements included in this report will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein particularly in view of the current state of our operations, the inclusion of such information should not be regarded as a statement by us or any other person that our objectives and plans will be achieved. We undertake no obligation to revise or update publicly any forward-looking statements for any reason. The terms “we”, “our”, “us”, or any derivative thereof, as used herein refer to SED International Holdings, Inc. and Subsidiaries.

SED International Holdings, Inc. and Subsidiaries

CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands except share and per share amounts)


		December 31, 2008		June 30, 2008

	(Unaudited)			(Note 1)

ASSETS
Current assets:
Cash and cash equivalents	$	5,898		$	4,086
Trade receivables, net		37,946			44,839
Inventories, net		36,746			36,116
Deferred income taxes, net		316			260
Other current assets		4,162			6,482
Total current assets		85,068			91,783
Property and equipment, net		908			1,044
Total assets	$	85,976		$	92,827

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable	$	46,146		$	45,986
Accrued and other current liabilities		4,914			7,732
Revolving credit facility		17,099			18,837
Total liabilities		68,159			72,555

Commitments and contingencies

Shareholders' equity:
Preferred stock, $1.00 par value; authorized: 129,500
shares, none issued		—			—

Common stock, $.01 par value; 100,000,000 shares
authorized; 6,517,632 issued and 4,823,141
shares outstanding at December 31, 2008 and
6,278,347 issued and 4,583,856 shares
outstanding at June 30, 2008		65			63
Additional paid-in capital		68,963			68,681
Accumulated deficit		(33,465	)		(32,443	)
Accumulated other comprehensive loss		(4,659	)		(2,942	)
Treasury stock, 1,694,491 shares, at cost		(13,087	)		(13,087	)
Total shareholders' equity		17,817			20,272
Total liabilities and shareholders' equity	$	85,976		$	92,827

See notes to condensed consolidated financial statements.

SED International Holdings, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except share and per share amounts)
(Unaudited)


	Three Months Ended						Six Months Ended
	December 31,						December 31,
	2008			2007			2008				2007

Net sales	$	109,108		$	112,366		$	229,826		$	239,062
Cost of sales		102,541			106,442			216,709			226,249
Gross profit		6,567			5,924			13,117			12,813
Operating expenses:
Selling, general and administrative expense		6,165			5,543			11,899			11,088
Depreciation and amortization expense		120			120			239			235
Foreign currency transaction loss (gain)		390			(13	)		1,272			168
Total operating expenses		6,675			5,650			13,410			11,491
Operating (loss) income		(108	)		274			(293	)		1,322
Interest expense		273			446			577			954
(Loss) income before income taxes		(381	)		(172	)		(870	)		368
Income tax expense (benefit)		315			(58	)		152			122
Net (loss) income	$	(696	)	$	(114	)	$	(1,022	)	$	246

Basic and diluted (loss) income per common share	$	(.18	)	$	(.03	)	$	(.26	)	$	.06

Weighted average number of shares outstanding:
Basic		4,004,000			3,879,000			4,004,000			3,879,000
Diluted		4,004,000			3,879,000			4,004,000			3,946,000

See notes to condensed consolidated financial statements.

SED International Holdings, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)


		Six Months Ended
		December 31,
		2008			2007

Net cash provided by operating activities	$	3,962		$	4,785
Cash flows used in investing activities - purchases of equipment		(128	)		(266	)
Cash flows used in financing activities - net repayments under revolving credit facility		(1,738	)		(4,079	)
Effect of exchange rate changes on cash and cash equivalents		(284	)		(56	)
Net increase in cash and cash equivalents		1,812			384
Cash and cash equivalents at beginning of period		4,086			3,356
Cash and cash equivalents at end of period	$	5,898		$	3,740

See notes to condensed consolidated financial statements.

SED International Holdings, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands except per share data)
(Unaudited)

1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of SED International Holdings, Inc. and its wholly-owned subsidiaries, SED International, Inc. (“SED International”), SED International de Colombia Ltda., and Intermaco S.R.L., (collectively, “SED” or the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three and six months ended December 31, 2008 are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2009, or any other interim period. The June 30, 2008 condensed consolidated balance sheet has been derived from the audited consolidated financial statements included in SED’s Form 10-K for the fiscal year ended June 30, 2008.

For further information, refer to the consolidated financial statements and footnotes thereto included in the SED International Holdings, Inc. Annual Report on Form 10-K for the year fiscal year ended June 30, 2008.

2. (Loss) Earnings per Common Share

Basic (loss) earnings per share is computed on the basis of the weighted average number of shares of common stock outstanding during the period. Diluted (loss) earnings per share is computed on the basis of the weighted average number of shares of common stock plus the effect of dilutive potential common shares outstanding during the period using the treasury stock method. Included in diluted earnings per common share for the six months ended December 31, 2007 are the dilutive effect of options to purchase 92,500 shares of commons stock. Also, included in diluted earnings for the six months ended December 31, 2007 is the dilutive effect of 730,000 shares of unvested restricted stock.

Diluted earnings per common share for the three and six months ended December 31, 2008 and 2007 does not reflect the total of any incremental shares related to the assumed conversion or exercise of anti-dilutive stock options (503,659 and 508,909 for the three months and 503,659 and 416,409 for the six months ended December 31, 2008 and 2007, respectively). Also, excluded from the diluted earnings per share calculation for the three and six months ended December 31, 2008 were 819,285 shares of unvested restricted stock due to their anti-dilutive effect. Excluded from the diluted earnings per share calculation for the three months ended December 31, 2007 were 730,000 shares of unvested restricted stock due to their anti-dilutive effect.


3. Trade Receivables

		December 31,			June 30,
		2008			2008

Trade receivables	$	38,869		$	45,592
Less: allowance for doubtful accounts		(923	)		(753	)
	$	37,946		$	44,839

4. Inventories

		December 31,			June 30,
		2008			2008

Inventories on hand	$	35,422		$	32,187
Inventories in transit		2,517			4,626
Less: allowances		(1,193	)		(697	)
	$	36,746		$	36,116

5. Comprehensive Loss

Comprehensive loss is defined as the change in equity (net assets) of a business enterprise during a period from transactions or other events and circumstances from non-owner sources, and is comprised of net (loss) income and other comprehensive (loss) income. SED’s other comprehensive loss is comprised of changes in SED’s foreign currency translation adjustments and changes in fair value of an interest rate swap contract, including income taxes attributable to those changes.

Comprehensive loss, net of income taxes, for the three and six months ended December 31, 2008 and 2007, respectively, is as follows:


		Three Months ended						Six Months ended
		December 31,						December 31,
		2008			2007			2008			2007
Net (loss) income	$	(696	)	$	(114	)	$	(1,022	)	$	246
Changes in foreign translation adjustments		(458	)		39			(1,434	)		(229	)
Changes in fair value of interest rate swap contract		(331	)		(147	)		(283	)		(339	)
Comprehensive loss	$	(1,485	)	$	(222	)	$	(2,739	)	$	(322	)

The deferred income tax asset related to the cumulative comprehensive losses was fully offset by a valuation allowance as of the beginning and end of the six month periods ended December 31, 2008 and 2007 and, therefore, the comprehensive income or loss for these periods had no income tax effect.

Accumulated other comprehensive loss included in shareholders’ equity totaled $4.7 million and $2.9 million at December 31, 2008 and June 30, 2008, respectively, and consisted of foreign currency translation adjustments of $4.1 million and $2.6 million and changes in the fair value of interest rate swap contract of $.6 million and $.3 million.

6. Segment Reporting

SED operates in one business segment as a wholesale distributor of microcomputer, consumer electronics and wireless telephone products. SED operates and manages in two geographic regions, the United States and Latin America. Sales of products between SED's geographic regions are made at market prices and eliminated in consolidation. All corporate overhead is included in the results of U.S. operations.

Financial information for continuing operations by geographic region is as follows:


		United States			Latin America			Eliminations			Consolidation
For the three months ended December 31, 2008
Net sales to unaffiliated customers	$	82,868		$	26,815		$	(575	)	$	109,108
Gross profit		3,782			2,785			—			6,567
Foreign currency transaction loss		—			390			—			390
Operating (loss) income		(853	)		745			—			(108	)
Interest expense		273			—			—			273
Income tax expense		3			312			—			315
Net (loss) income		(1,129	)		433			—			(696	)
Total assets at December 31, 2008		73,460			25,480			(12,964	)		85,976

		United States			Latin America			Eliminations			Consolidation
For the three months ended December 31, 2007
Net sales to unaffiliated customers	$	88,383		$	25,280		$	(1,297	)	$	112,366
Gross profit		4,289			1,635			—			5,924
Foreign currency transaction gain		—			(13	)		—			(13	)
Operating (loss) income		(182	)		456			—			274
Interest expense		446			—			—			446
Income tax expense (benefit)		2			(60	)		—			(58	)
Net (loss) income		(630	)		516			—			(114	)
Total assets at December 31, 2007		74,025			23,921			(12,479	)		85,467

Net sales by product category is as follows:


				Consumer		Wireless
For the three months		Micro-Computer		Electronics		Telephone		Handling
ended December 31,		Products		Products		Products		Revenue		Total
2008	$	98,119	$	9,345	$	1,404	$	240	$	109,108
2007		102,798		7,686		1,676		206		112,366

Approximately 36.9% and 41.8% of SED's net sales for the three months ended December 31, 2008 and 2007, respectively, consisted of sales to customers for export principally into Latin America and direct sales to customers in Colombia and Argentina.


				United States			Latin America		Eliminations			Consolidation
For the six months ended December 31, 2008
Net sales to unaffiliated customers			$	176,386		$	54,927	$	(1,487	)	$	229,826
Gross profit				8,287			4,830		—			13,117
Foreign currency transaction loss				—			1,272		—			1,272
Operating (loss) income				(516	)		223		—			(293	)
Interest expense				577			—		—			577
Income tax expense				10			142		—			152
Net (loss) income				(1,103	)		81		—			(1,022	)
Total assets at December 31, 2008				73,460			25,480		(12,964	)		85,976

For the six months ended December 31, 2007
Net sales to unaffiliated customers			$	191,192		$	50,351	$	(2,481	)	$	239,062
Gross profit				9,128			3,685		—			12,813
Foreign currency transaction loss				—			168		—			168
Operating income				349			973		—			1,322
Interest expense				954			—		—			954
Income tax expense				15			107		—			122
Net (loss) income				(620	)		866		—			246
Total assets at December 31, 2007				74,025			23,921		(12,479	)		85,467

Net sales by product category is as follows:

				Consumer			Wireless
For the six months	Micro-Computer			Electronics			Telephone		Handling
ended December 31,	Products			Products			Products		Revenue			Total
2008	$	207,163	$	18,283		$	3,878	$	502		$	229,826
2007		221,491		13,389			3,742		440			239,062

Approximately 42.0% and 38.9% of SED's net sales for the six months ended December 31, 2008 and 2007, respectively, consisted of sales to customers for export principally into Latin America and direct sales to customers in Colombia and Argentina.

7. Restricted Stock

The Company’s stock option plan established in 1999 (the “1999 Plan”) also permits the grant of restricted stock awards. No restricted stock awards were granted or forfeited under the 1999 Plan during fiscal 2008 or the six months ended December 31, 2008. Also, no restricted stock awards were outstanding under the 1999 Plan at December 31, 2008. SED established the 2007 Restricted Stock Plan (the “2007 Plan”) during fiscal 2008. A total of 750,000 shares of the Company’s authorized and unissued shares of common stock were reserved for grants under the 2007 Plan. Generally, the awards are subject to forfeiture prior to vesting and begin vesting in equal amounts on the second, third and fourth anniversaries of the grant date; provided, however, that at the time of vesting the holder is an employee of the Company. The value of the 2007 Restricted Stock Plan awards issued in fiscal 2008 was determined using the market price of the Company’s common stock on the grant date. The total compensation cost of the restricted stock awards over the four year vesting period is expected to be $940,000, net of $62,000 estimated forfeitures. The compensation cost of the restricted stock issued in fiscal 2008 is being amortized and expensed over a vesting period of four years. During the three and six months ended December 31, 2008, there were no restricted shares forfeited by employees and none were granted to employees. At

December 31, 2008, 705,000 shares of restricted stock were outstanding under the 2007 Plan and the related unrecognized compensation cost was $666,000 which SED expects to be recognized ratably over the next 34 months.

On July 1, 2008, the Company issued 22,857 shares of restricted common stock to each of its five non-employee directors in accordance with the Company’s board compensation plan. Each of the non-employee directors entered into a restricted stock agreement with respect to his respective shares of restricted common stock (the “Restricted Stock Agreement”). The value of the director’s restricted stock awards was determined using the market price of the Company’s common stock on the grant date of $1.75. The shares issued to the non-employee directors will be subject to forfeiture prior to vesting and vest in equal amounts on the first and second anniversary dates of the issuance date. At December 31, 2008, 114,285 shares were outstanding and un-vested under the non-employee director’s Restrictive Stock Agreement. The total compensation cost of the restricted common stock over the two year vesting period is expected to be $200,000 with zero estimated forfeitures. The unrecognized compensation cost was $150,000 at December 31, 2008 which SED expects to be recognized ratably over the next 18 months.

Compensation expense for share-based awards recognized in net (loss) income for the three and six months ended December 31, 2008 was $84,000 and $167,000 and for the three months and six months ended December 31, 2007 was $38,000 and $38,000, respectively.

On July 1, 2008, the Company issued 125,000 shares of restricted common stock to a vendor, an accredited investor, for services. At December 31, 2008, these shares were outstanding and fully vested.

8. Credit Facility and Bank Debt

On March 1, 2007, SED signed a three-year extension of a credit facility with Wachovia Bank, National Association (the “Wachovia Agreement”) which extended the maturity to September 21, 2011. The Wachovia Agreement was originally entered into on September 21, 2005 with a term of three years. On January 10, 2008, SED elected to increase the Wachovia line of credit to $50.0 million. The Wachovia Agreement provides for revolving borrowings based on SED’s eligible accounts receivable and inventories as defined therein. Wachovia Bank was recently acquired by Wells Fargo Bank but the Company does not anticipate any negative effects due to the acquisition.

Borrowings under the Wachovia Agreement accrue interest based upon a variety of interest rate options depending upon the computation of availability as defined therein. The interest rates range from LIBOR, plus a margin ranging from 1.25% to 2.00%, to the prime rate. SED is required to pay a commitment fee of .25% on the unused portion of the facility. Interest is payable monthly. Borrowings under the Wachovia Agreement are collateralized by substantially all domestic assets of SED and 65% of SED’s shares in its foreign subsidiaries, respectively.

The Wachovia Agreement contains certain covenants which, among other things, require that SED maintain unused availability of $5.0 million or more during the term of the Agreement before SED is permitted to make advances to SED’s Latin American subsidiaries. SED’s advances to its Latin American subsidiaries are restricted. The Wachovia Agreement also contains a covenant which requires that if SED’s unused availability is less than $3.5 million at any time during the extension term of the Agreement, then maintenance of a minimum fixed charge coverage ratio is required. The Wachovia Agreement also restricts SED’s ability to distribute cash dividends. As of December 31, 2008, the SED determined that it was in compliance with the Wachovia Agreement.

Available borrowings under this Agreement, based on collateral limitations at December 31, 2008 were $15.8 million. Average borrowings, maximum borrowings and weighted average interest rate for the three months ended December 31, 2008 were $19.6 million, $27.7 million and 4.9%, respectively. The weighted average interest rate on outstanding borrowings under this credit facility was 5.6% at December 31, 2008. Average borrowings, maximum borrowings and weighted average interest rate for the six months ended December 31, 2008 were $21.0 million, $27.7 million and 5.2%, respectively.

The carrying value of all bank debt at December 31, 2008 approximates its fair value based on the variable market rates of interest on such bank debt. Outstanding Letters of Credit under the Wachovia Agreement totaled $1.2 million at December 31, 2008.

On January 26, 2007, the Company entered into a three-year interest rate swap contract to reduce the impact of the fluctuations in the interest rates on $5.0 million notional amount of the revolving credit facility. The contract effectively converted the variable rate to a fixed rate of 5.20%. On March 5, 2008, the three-year swap agreement was amended to a notional amount of $15.0 million with a fixed rate of 4.54%. The fixed rates cited above do not include Wachovia's rate mark-up, currently 1.5%. The Company utilizes derivative financial instruments to reduce interest rate risk. The Company does not hold or issue derivative financial instruments for trading purposes. Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”), establishes accounting and reporting standards for derivative instruments and hedging activities. As required by SFAS 133, the Company recognizes all derivatives as either assets or liabilities in the balance sheet and measures those

instruments at fair value. The Company has designated its interest rate swap as a cash flow hedge. Accordingly, the gains and losses associated with changes in the fair value of the interest rate swap are reported in other comprehensive income as the hedge is highly effective in achieving offsetting changes in the fair value of cash flows of the asset or liability hedged. The fair value, not in the Company’s favor, of the interest rate swap was $603,000 at December 31, 2008 and is included in accrued expenses.

9. Legal Proceedings

On September 5, 2008, pursuant to a Settlement Agreement and General Release (the “Agreement”) the Company settled the lawsuits brought by Mark Diamond against the Company, its domestic subsidiaries and certain of its directors and entitled, “Mark Diamond v. SED International Holdings, Inc., SED International, Inc. and SED Magna (Miami), CA No. 2007CV131027, in the Superior Court of Fulton County, Georgia; Mark Diamond v. SED International, Inc., Case No. 2006-SOX-00044, ARB No. 08-033, U.S. Department of Labor (the “Sox Case”); and Mark Diamond v. Jean Diamond, Melvyn Cohen and Stewart Aaron, CA No. 2007CV144583, in the Superior Court of Fulton County, Georgia.” The Agreement covers and fully resolves all claims that have been or could have been brought in the preceding litigations and also covers all appeals and proceedings related thereto.

Under the Agreement, the Company paid Mark Diamond the sum of $2.1 million, of which $325,000 was recovered from its insurance carriers during the three months ended September 30, 2008. The Company has agreed to issue 200,000 shares of restricted common stock (valued at approximately $300,000) to an irrevocable trust for the benefit of the children of Mark Diamond. The Company has not yet issued the shares. The issuance of these shares will be exempt from registration pursuant to Sections 4(2) of the Securities Act of 1933, as amended (the “Act”) and the stock certificates representing these shares will be imprinted with a legend restricting transfer unless pursuant to an effective registration statement or an exemption from registration under the Act. Mark Diamond is the son of Jean Diamond, the Chairman and CEO of the Company. As part of the settlement, none of the parties to the Agreement acknowledged or denied any liability in the matters covered by settlement. The settlement was negotiated on behalf of the Company by three independent directors who were not the subject of any of these litigations.

As of December 30, 2008, pursuant to the Agreement, the plaintiff has withdrawn, with prejudice, each of the aforementioned litigation matters.

On February 2, 2009, the Company settled the lawsuit it filed on June 19, 2006, in the Superior Court of Fulton County, State of Georgia captioned SED International, Inc. vs. Michael Levine, Civil Action file no. 2006-CV-118591 (the “Levine Suit”). In the action, the Company asserted that Mr. Levine breached the terms of both his Confidentiality Agreement and Termination Agreement with SED International and requests that the court grant such equitable relief and damages as provided by law. In response, Mr. Levine denied the Company’s assertions, filed a third party complaint against the Company alleging a contractual right of indemnification based upon the bylaws of the Company. Mr. Levine had asked that the court award him costs, and attorney’s fees. On February 2, 2009, this case was settled amicably at a mediation hearing with no material impact to the Company.

On March 18, 2008, Archbrook Laguna, LLC (“Archbrook”) filed a complaint in the United States District Court, District of New Jersey, Civil Action No. 08-1421 (the “New Jersey Suit”), captioned Archbrook Laguna, LLC v. New Age Electronics, Inc., SED International, Inc., Adam Carroll, Charles Marsh, Marshall Mizell and Lee Perlman (each a “Defendant” and, collectively, the “Defendants”). The complaint in the New Jersey Suit includes counts for Civil Conspiracy (Count I), Violation of the Robinson-Patman Act (Count II), Trade Libel (Count III), Commercial Disparagement (Count IV), Injurious Falsehood (Count V), Tortious Interference with Economic and Prospective Relations (Count VI), Violation of N.J. STAT. ANN. § 2C:41-2c and 2d (New Jersey RICO Statute – Counts VII and VIII), Misappropriation, Computer Misuse, Fraud and Abuse (Count IX), Breach of Contract / Tortious Interference (Count X against Defendant Mizell), Breach of Fiduciary Duty (Count XI against Defendant Marsh). Archbrook alleges that it is the victim of a concerted conspiracy by the Defendants to eliminate one of Archbrook’s business relationships with a large technology company and damage Archbrook’s business generally. The complaint in the New Jersey Suit alleges that Archbrook should be entitled to, among other things, compensatory damages, punitive damages, attorney fees and expenses. The complaint also seeks an injunction precluding Defendants from acting in concert to continue the alleged acts. The Company has conducted an investigation into the allegations of the complaint and believes that the allegations against SED International are without merit. On June 3, 2008, the Company entered into a settlement agreement with Archbrook. As part of the agreement, Archbrook filed a motion to dismiss SED International from the lawsuit. However, on August 20, 2008, Archbrook asked the Court to terminate said motion to dismiss, based on allegations that SED International has intentionally destroyed information relevant to the case. The Court has treated this request as a withdrawal of Archbrook’s motion to dismiss. The Company has investigated these allegations and concluded that they lack merit. During December 2008, the Company participated in binding arbitration with Archbrook for the alleged breach of the settlement agreement in order to compel Archbrook to reinstate its motion to dismiss SED from the New Jersey lawsuit, and to recover all costs and attorney’s fees and any other damages incurred as a result of Archbrook’s withdrawal of the motion to dismiss. On February 5, 2009, the arbitrator rendered a decision in favor of the Company ordering Archbrook to re-file its motion to dismiss SED International from the New Jersey Suit with prejudice.

10. Fair Value of Financial Instruments

Effective July 1, 2008, the Company adopted the provisions of SFAS No. 157 “Fair Value Measurements” (“SFAS No. 157”) which applies to financial assets and liabilities that are being measured and reported on a fair value basis and expands disclosures about fair value measurements. SFAS No. 157 establishes a fair value hierarchy that prioritized the inputs to valuation techniques used to measure fair value. The three levels of the fair-value hierarchy include: Level 1 – quoted market prices in active markets for identical assets and liabilities; Level 2 – inputs other than quoted market prices included in level 1 above that are observable for the asset or liability, either directly or indirectly; and, Level 3 – unobservable inputs for the asset or liability.

The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximate fair value because of the short maturity of these items. The carrying amount of debt outstanding pursuant to revolving debt and similar bank credit agreements approximates fair value as interest rates on these instruments approximate current market rates.

We are exposed to market risks from changes in interest rates, which may affect our operating results and financial position. When deemed appropriate, we minimize our risks from interest rate fluctuations through the use of an interest rate swap. This derivative financial instrument is used to manage risk and is not used for trading or speculative purposes. The swap is valued using a valuation model that has inputs other than quoted market prices that are both observable and unobservable.

We endeavor to utilize the best available information in measuring the fair value of the interest rate swap. The interest rate swap is classified in its entirety based on the lowest level of input that is significant to the fair value measurement. We have determined that our interest rate swap is a Level 2 liability in the fair value hierarchy. The fair value, not in the Company’s favor, of the interest rate swap was $603,000 at December 31, 2008.

The implementation of SFAS No. 157 for financial assets and financial liabilities, effective July 1, 2008, did not have a material impact on our consolidated financial position and results of operations. We have not applied the provisions of SFAS No. 157 to non-financial assets and liabilities, such as our property and equipment, which is measured at fair value for impairment assessment. We will apply the provisions of SFAS No. 157 to these assets and liabilities, beginning July 1, 2009, in accordance with FASB Staff Position No. 157-2, “Effective Date of FASB Statement No. 157”.

11. New Accounting Pronouncements

In December 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 141 (Revised), “Business Combinations” (“SFAS No. 141R”) and SFAS No. 160, “Non-controlling Interests in Consolidated Financial Statements” (SFAS No. 160”). SFAS No. 141(R) and SFAS No. 160 revise the method of accounting for a number of aspects of business combinations and non-controlling interests, including acquisition costs, contingencies (including contingent assets, contingent liabilities and contingent purchase price), the impacts of partial and step-acquisitions (including the valuation of net assets attributable to none-acquired minority interests), and post acquisition exit activities of acquired businesses. SFAS No. 141(R) and SFAS No. 160 will be effective for the Company during our fiscal year beginning July 1, 2009.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities - an amendment of FASB Statement No. 133” (“SFAS No. 161”). FAS 161 requires enhanced disclosures about an entity’s derivative and hedging activities and thereby seeks to improve the transparency of financial reporting. Under SFAS No. 161, entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. SFAS No. 161 will be effective for the Company beginning July 1, 2009. Early application is encouraged. SFAS No. 161 also encourages, but does not require, comparative disclosures for earlier periods at initial adoption. The adoption of SFAS No. 161 will not have a material impact on the disclosures in the Company’s consolidated financial statements.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Throughout this Quarterly Report on Form 10-Q, the terms “Company,” “we,” “us,” “our” and “SED” refers to SED International Holdings, Inc. and its subsidiaries.

The following discussion should be read in conjunction with the condensed consolidated financial statements of SED and the notes thereto included in this quarterly report. Historical operating results are not necessarily indicative of trends in operating results for any future period.

Overview

SED is an international distributor of microcomputer products, including personal computers, printers and other peripherals, supplies, networking products, consumer electronics and wireless telephone products, serving value-added resellers and dealers throughout the United States and certain countries in Latin America.

Critical Accounting Policies and Estimates

General. Management’s discussion and analysis of SED’s financial condition and results of operations are based upon SED’s condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, management evaluates its estimates, including those related to vendor programs and incentives, bad debts, inventories, investments and income taxes. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Management believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its consolidated financial statements.

Revenue Recognition. Revenue is recognized once four criteria are met: (1) SED must have persuasive evidence that an arrangement exists; (2) delivery must occur, which generally happens at the point of shipment (this includes the transfer of both title and risk of loss, provided that no significant obligations remain); (3) the price must be fixed or determinable; and (4) collectability must be reasonably assured. Shipping revenue is included in net sales while the related costs, including shipping and handling costs, are included in the cost of products sold. SED allows its customers to return product for exchange or credit subject to certain limitations. A provision for such returns is recorded based upon historical experience.

Commitments and Contingencies. During the ordinary course of business, contingencies arise resulting from an existing condition, situation, or set of circumstances involving uncertainty as to possible gain, a gain contingency, or loss contingency, that will ultimately be resolved when one or more future events occur or fail to occur. Resolution of the uncertainty may confirm the acquisition of an asset or the reduction of a liability or the loss or impairment of an asset or the incurrence of a liability. When loss contingencies exist, such as, but not limited to, pending or threatened litigation, actual or possible claims and assessments, collectability of receivables or obligations related to product warranties and product defects or statutory obligations, the likelihood of the future event or events occurring generally will confirm the loss or impairment of an asset or the incurrence of a liability.

Accounts Receivable. Accounts receivable are carried at the amount owed by customers less an allowance for doubtful accounts.

Credit decisions and losses. SED maintains an experienced customer credit staff and relies on customer payment history and third party data to make customer credit decisions. Nevertheless, SED may experience customer credit losses in excess of its expectations. SED maintains credit insurance policies for certain customers located in the United States and select Latin American countries (subject to certain terms and conditions). However, the terms of the credit insurance agreement require SED to maintain certain minimum standards and policies with respect to extending credit to customers. If SED does not adhere to such policies, the insurance companies may not pay claims submitted by SED.

Allowance for Doubtful Accounts. An allowance for uncollectible accounts has been established based on our collection experience and an assessment of the collectability of specific accounts. SED evaluates the collectability of accounts receivable based on a combination of factors. Initially, SED estimates an allowance for doubtful accounts as a percentage of accounts receivable based on historical collections experience. This initial estimate is periodically adjusted when SED becomes aware of a specific customer’s inability to meet its financial obligations (e.g., bankruptcy filing) or as a result of changes in the overall aging of accounts receivable. SED maintains a policy of writing off the accounts deemed to be uncollectible against the Allowance for Doubtful Accounts in its fourth quarter.

Inventories. Inventories are stated at the lower of cost (first-in, first-out method) or market. Most of SED’s vendors allow for either return of goods within a specified period (usually 90 days) or for credits related to price protection. However, for other vendor relationships and inventories, SED is not protected from the risk of inventory losses. Therefore, in determining the net realizable value of inventories, SED identifies slow moving or obsolete inventories that (1) are not protected by our vendor agreements from risk of loss, and (2) are not eligible for return under various vendor return programs. Based upon these factors, SED estimates the net realizable value of inventories and records any necessary adjustments as a charge to cost of sales. If inventory return privileges or price protection programs were discontinued in the future, or if vendors were unable to honor the provisions of certain contracts which protect SED from inventory losses, the risk of losses associated with obsolete and slow moving inventories would increase.

Foreign Currency Translation. The assets and liabilities of foreign operations are translated at the exchange rates in effect at the balance sheet date, with related translation gains or losses reported as a separate component of shareholders’ equity, net of tax. The results of foreign operations are translated at the weighted average exchange rates for the year. Gains or losses resulting from foreign currency transactions are included in the statement of operations.

Results of Continuing Operations

The following table sets forth for the periods indicated the percentage of net sales represented by certain line items from SED’s condensed consolidated statements of operations:


	Three Months Ended				Six Months Ended
	December 31,				December 31,
	2008		2007		2008		2007

Net sales	100.00	%	100.00	%	100.00	%	100.00	%
Cost of sales, including buying and occupancy expense	93.98	%	94.73	%	94.29	%	94.64	%
Gross profit	6.02	%	5.27	%	5.71	%	5.36	%
Operating expenses:
Selling, general and administrative expense	5.65	%	4.93	%	5.18	%	4.64	%
Depreciation and amortization expense	.11	%	.11	%	.10	%	.10	%
Foreign currency transaction loss (gain)	.36	%	(.01	)%	.56	%	.07	%
Total operating expenses	6.12	%	5.03	%	5.84	%	4.81	%
Operating (loss) income	(.10	)%	.24	%	(.13	)%	.55	%
Interest expense	.25	%	.40	%	.25	%	.40	%
(Loss) income before income taxes	(.35	)%	(.16	)%	(.38	)%	.15	%
Income tax expense (benefit)	.29	%	(.05	)%	.07	%	.05	%
(Loss) income	(.64	)%	(.11	)%	(.45	)%	.10	%

Three Months Ended December 31, 2008 and 2007

Revenues. Total net sales for the three months ended December 31, 2008 decreased 2.9%, or $3.3 million, to $109.1 million as compared to $112.4 million for the three months ended December 31, 2007. Microcomputer product sales, excluding handling revenue, for the three months ended December 31, 2008 decreased 4.6% to $98.1 million compared to $102.8 million for the three months ended December 31, 2007. This was primarily due to a decrease in laptop computers, consumables, hard drives and other computer product sales. Consumer electronics sales for the three months ended December 31, 2008 increased 21.6% to $9.3 million compared to $7.7 million for the three months ended December 31, 2007. This was primarily due to an increase in television sales and

electronics sales from e-commerce. Wireless revenues for the three months ended December 31, 2008 decreased 16.2% to $1.4 million compared to $1.7 million for the three months ended December 31, 2007.

Information concerning SED’s domestic and international revenues is summarized below:


	Three Months Ended
	December 31,						Change
		2008			2007			Amount		Percent
	(Amounts in millions except percentage amounts)
United States
Domestic	$	68.8		$	65.4		$	3.4		5.2	%
Export		14.1			23.0			(8.9	)	(38.7	)%
Latin America		26.8			25.3			1.5		5.9	%
Elimination		(.6	)		(1.3	)		.7		53.8	%
Consolidated	$	109.1		$	112.4		$	(3.3	)	(2.9	)%

Domestic revenues were $68.8 million and $65.4 million for the three months ended December 31, 2008 and 2007, respectively. The increase was due to an increase in computer and consumer electronics sales. The aggregate of revenues from Export and Latin America was $40.3 million and $47.0 million for the three months ended December 31, 2008 and 2007, respectively. The decrease was due to a decline in sales of computer products, printers and consumable printer products.

Sales of microcomputer products, including handling revenue, represented approximately 90.1% of SED’s second quarter net sales compared to 91.7% for the same period last year. Sales of consumer electronics products accounted for approximately 8.6% of SED’s second quarter net sales compared to 6.8% for the same period last year. Sales of wireless telephone products accounted for approximately 1.3% of SED’s second quarter net sales compared to 1.5% for the same period last year.

Gross Profit Margins. Gross profit margin increased $643,000 to $6.6 million for the three months ended December 31, 2008, compared to $5.9 million for the same period last year. Gross profit as a percentage of net sales was 6.0% for the three months ended December 31, 2008 compared to 5.3% for the same period last year. The increase in gross profit margin was primarily due to (i) sales of higher margin products in the U.S. and (ii) higher margins on sales in Latin America due to the raising of selling prices to partially offset U.S. Dollar devaluation. Overall, SED continues to experience pricing pressure in selling products.

Selling, General and Administrative Expenses. Selling, general and administrative expenses, excluding depreciation and amortization expense and foreign currency transaction losses, for the three months ended December 31, 2008 increased 11.2% to $6.2 million, compared to $5.5 million for the same period last year. The increase in selling, general and administrative expenses was primarily due from several factors including: (i) an increase of an aggregate of approximately $370,000 for professional fees and settlement costs related to negotiations with a group of shareholders and the Levine Suit, and for professional fees related to the New Jersey Suit ; (ii) an increase of approximately $45,000 in bank charges related to credit card, floor plan fees, and bank fees in Latin America; (iii) an increase of approximately $35,000 in credit and collection cost; (iv) an increase of approximately $40,000 in employee expenses related to mandated government salary increases in Latin America and additional headcounts in the consumer electronics sales force in the United States; and (v) a net increase of approximately $50,000 in shipping supply cost related to fulfillment orders.

Depreciation and Amortization. Depreciation and amortization was $120,000 for each of the three months ended December 31, 2008 and 2007.

Foreign Currency Transaction. SED has significant U.S. Dollar denominated liabilities recorded in its Latin American subsidiaries. The devaluation of the Latin American currencies versus the U.S. Dollar resulted in a foreign currency transaction loss totaling $390,000 for the three months ended December 31, 2008 as compared to a gain of $13,000 for the three months ended December 31, 2007.

Interest Expense. Interest expense was $273,000 and $446,000 for the three months ended December 31, 2008 and 2007, respectively. This change resulted primarily from declining interest rates and lower average loan balances. The average loan balance decreased from $23.0 million to $19.6 million and the average interest rate dropped from 6.7% to 4.9% for the three months ended December 31, 2008 and 2007, respectively.

Provision (Benefit) for Income Taxes. Income tax expense was $315,000 for the three months ended December 31, 2008 as compared to an income tax benefit of $58,000 for the three months ended December 31, 2007. The provision is primarily related to $745,000 of operating income generated by SED’s Latin American subsidiaries. The provision (benefit) for income taxes differs from

the amount which would result from applying the statutory Federal income tax rate due to the taxes imposed on the foreign subsidiaries as well as the fact that SED is not fully valuing a tax asset and the benefit of the net operating loss carry forward.

Six Months Ended December 31, 2008 and 2007

Revenues. Total net sales for the six months ended December 31, 2008 decreased 3.9%, or $9.2 million, to $229.8 million as compared to $239.1 million for the six months ended December 31, 2007. Microcomputer product sales, excluding handling revenue, for the six months ended December 31, 2008 decreased 6.5% to $207.2 million compared to $221.5 million for the six months ended December 31, 2007. This was primarily due to a decrease in laptop computers, consumables, hard drives and other computer product sales. Consumer electronics sales for the six months ended December 31, 2008 increased 36.6% to $18.3 million compared to $13.4 million for the six months ended December 31, 2007. This was primarily due to an increase in television sales and electronics sales from e-commerce. Wireless revenues for the six months ended December 31, 2008 increased 3.6% to $3.9 million compared to $3.7 million for the six months ended December 31, 2007.

Information concerning SED’s domestic and international revenues is summarized below:


	Six Months Ended
	December 31,							Change
		2008			2007			Amount		Percent
	(Amounts in millions except percentage amounts)
United States
Domestic	$	133.2		$	146.1		$	(12.9	)	(8.8	)%
Export		43.2			45.1			(1.9	)	(4.2	)%
Latin America		54.9			50.4			4.5		8.9	%
Elimination		(1.5	)		(2.5	)		1.0		40.0	%
Consolidated	$	229.8		$	239.1		$	(9.3	)	(3.9	)%

Domestic revenues were $133.2 million and $146.1 million for the six months ended December 31, 2008 and 2007, respectively. The decrease was due to a decline in computer and consumer electronics sales. The aggregate of revenues from Export and Latin America was $96.6 million and $93.0 million for the six months ended December 31, 2008 and 2007, respectively. The increase was due to an increase in sales of computer products, printers and consumable printer products.

Sales of microcomputer products, including handling revenue, represented approximately 90.4% of net sales for the six months ended December 31, 2008 compared to 92.8% for the same period last year. Sales of consumer electronics products accounted for approximately 8.0% of net sales for the six months ended December 31, 2008 compared to 5.6% for the same period last year. Sales of wireless telephone products accounted for approximately 1.7% of net sales for the six months ended December 31, 2008 compared to 1.6% for the same period last year.

Gross Profit Margins. Gross profit margin increased $304,000 to $13.1 million for the six months ended December 31, 2008, compared to $12.8 million in the same period last year. Gross profit as a percentage of net sales was 5.7% for the six months ended December 31, 2008 compared with 5.4% for the same period last year. The increase in gross profit margin was primarily due to (i) sales of higher margin products in the U.S. and (ii) higher margins on sales in Latin America due to the raising of selling prices to partially offset U.S. dollar devaluation. Overall, SED continues to experience pricing pressure in selling products.

Selling, General and Administrative Expenses. Selling, general and administrative expenses, excluding depreciation and amortization expense and foreign currency transaction losses, for the six months ended December 31, 2008 increased 7.3% to $11.9 million, compared to $11.1 million for the same period last year. The increase in selling, general and administrative expenses was primarily due from several factors including: (i) an increase of an aggregate of approximately $460,000 for professional fees and settlement cost related to negotiations with a group of shareholders and the Levine Suit, for professional fees related to the New Jersey Suit; (ii) an increase of approximately $42,000 in Sarbanes-Oxley compliance cost; (iii) an increase of approximately $67,000 in bank charges; (iv) a decrease of approximately $187,000 in credit and collection cost; (v) an increase of approximately $300,000 in employee expenses related to mandated government salary increases in Latin America and additional headcounts in the consumer electronics sales force in the United States; and (vi) a net increase of approximately $50,000 in shipping supply cost related to fulfillment orders.

Depreciation and Amortization. Depreciation and amortization was $239,000 and $235,000 for each of the six months ended December 31, 2008 and 2007, respectively.

Foreign Currency Transaction. SED has significant U.S. Dollar denominated liabilities recorded in its Latin American subsidiaries. The devaluation of the Latin American currencies vs. the U.S. Dollar resulted in a foreign currency transaction loss totaling $1,272,000 for the six months ended December 31, 2008 as compared to a loss of $168,000 for the six months ended December 31, 2007.

Interest Expense. Interest expense was $577,000 and $954,000 for the six months ended December 31, 2008 and 2007, respectively. This change resulted primarily from declining interest rates and lower average loan balances. The average loan balance decreased from $24.9 million to $21.0 million and the average interest rate decreased from 6.9% to 5.2% for the six months ended December 31, 2008 and 2007, respectively.

Provision for Income Taxes. Income tax expense was $152,000 for the six months ended December 31, 2008 as compared to an income tax expense of $122,000 for the six months ended December 31, 2007. The provision is primarily related to $223,000 operating income generated by SED’s Latin American subsidiaries. The provision for income taxes differs from the amount which would result from applying the statutory Federal income tax rate due to the taxes imposed on the foreign subsidiaries as well as the fact that SED is not fully valuing a tax asset and benefit of the net operating loss carry forward.

Financial Condition and Liquidity

Overview. At December 31, 2008, SED had cash and cash equivalents totaling $5.9 million and working capital of approximately $17.0 million. SED’s principal source of liquidity is its cash, cash equivalents, trade receivables, inventories and amounts available for use under its revolving credit facility with Wachovia Bank, National Association. SED’s accounts receivable and inventories collateralize SED’s borrowings. The Wachovia credit facility provides SED with a $50.0 million line of credit through September 2011. SED’s availability under this credit facility was approximately $15.8 million, after deducting $1.2 million in reserves for outstanding Letters of Credit. Historically, SED has financed its liquidity needs largely through internally generated funds, borrowings under the Wachovia credit facility, subsidiary bank credit agreements, and vendor lines of credit. As of December 31, 2008, SED was in compliance with the requirements of the Wachovia credit facility agreement and has no reason to believe that it will not remain in compliance.

SED derives a substantial portion of its operating income and cash flows from its foreign subsidiaries and, due to certain bank and other regulations in the countries where they operate, relies on such cash flows to satisfy its foreign obligations. While SED continues operations in Latin America, management believes that domestic banking agreements and international monetary restrictions may limit SED’s ability to transfer cash between its domestic and international subsidiaries.

SED has no off-balance sheet arrangements or transactions involving special purpose entities.

Operating Activities. Cash provided by operating activities was approximately $4.0 million for the six months ended December 31, 2008 as compared to approximately $4.8 million provided by operating activities for the six months ended December 31, 2007.

Net trade receivables were $37.9 million at December 31, 2008 and $44.8 million at June 30, 2008. The decrease in trade receivables is a result of lower sales in December 2008 as compared to June 2008. Average days sales outstanding at December 31, 2008 were approximately 32.0 days as compared to 35.4 days at June 30, 2008.

Net inventories increased $600,000 to $36.7 million at December 31, 2008 from $36.1 million at June 30, 2008. SED continues to monitor and adjust inventory levels according to current and projected sales volumes.

Other current assets decreased to $4.2 million at December 31, 2008 from $6.5 million at June 30, 2008. This was due to conversion of tax receivables in Latin America to Savings Bonds.

Trade accounts payable increased by approximately $200,000 to $46.2 million at December 31, 2008 compared to $46.0 million at June 30, 2008.

Financing Activities. Net borrowings under the Wachovia credit facility decreased by approximately $1.7 million to $17.1 million at December 31, 2008 compared to $18.8 million at June 30, 2008.

There have been no material changes to obligations and/or commitments since the end of the last fiscal year. Purchase orders or contracts for the purchase of inventories and other goods and services are not included in our estimates because SED is not able to determine the aggregate amount of such purchase orders or contracts that are binding obligations. SED’s purchase orders are based on its current distribution needs and are fulfilled by its vendors within short time horizons. As of December 31, 2008, SED did not have any significant agreements for the purchase of inventories or other goods specifying minimum quantities or set prices that exceeded its expected requirements.

Historically, SED has financed its liquidity needs largely through internally generated funds, borrowings under the Wachovia credit facility, subsidiary bank credit agreements, and vendor lines of credit. There can be no assurance that all of the aforementioned sources of capital will be available to SED when needed. For example, SED’s creditors may tighten their lending standards and SED may find it necessary to tighten credit availability standards to its customers due to the general weakening of the economic environment. However, SED believes that funds generated from operations, together with its Wachovia credit facility, subsidiary bank credit agreements, vendor credit lines, and current cash and cash equivalents will be sufficient to support its working capital and liquidity requirements for at least the next 12 months.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

A smaller reporting company is not required to provide the information required by this item.

ITEM 4T. CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our chief executive officer and chief financial officer, carried out an evaluation of the effectiveness of our “disclosure controls and procedures” (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this report (the “Evaluation Date”). Based upon that evaluation, our chief executive officer and chief financial officer concluded that as of the Evaluation Date, our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act (i) is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and (ii) is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.

(b) Changes in Internal Control over Financial Reporting

There were no changes in our internal controls over financial reporting that occurred during the quarter ended December 31, 2008 that have materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

ITEM 1. Legal Proceedings

As of December 30, 2008, pursuant to the Agreement, the plaintiff has withdrawn, with prejudice, each of the aforementioned litigation matters.

On February 2, 2009, the Company settled the lawsuit it filed on June 19, 2006, in the Superior Court of Fulton County, State of Georgia captioned SED International, Inc. vs. Michael Levine, Civil Action file no. 2006-CV-118591 (the “Levine Suit”). In the action, the Company asserted that Mr. Levine breached the terms of both the Confidentiality Agreement and Termination Agreement with SED International and requests that the court grant such equitable relief and damages as provided by law. In response, Mr. Levine denied the Company’s assertions, filed a third party complaint against the Company alleging a contractual right of indemnification based upon the bylaws of the Company. Mr. Levine had asked that the court award him costs, and attorney’s fees. On February 2, 2009, this case was settled amicably at a mediation hearing with no material impact to the Company.

ITEM 1A. Risk Factors

In addition to other information set forth in this report, you should carefully consider the factors discussed in Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended June 30, 2008, as amended, which could materially affect our business, financial position and results of operations. The risks described in our Annual Report on Form 10-K, as amended, are not the only risks facing SED. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial position and results of operations.

The risk factors in our Annual Report on Form 10-K for the year ended June 30, 2008, as amended, should be considered in connection with evaluation the forward-looking statements contained in this Quarterly Report on Form 10-Q because these factors could cause the actual results and conditions to differ materially form those projected in the forward-looking statements. If any of the risks actually occur, our business, financial condition or results of operations could be negatively affected. In that case, the trading price of SED’s could decline, and you may lose all or part of your investment.


ITEM 2.		Unregistered Sales of Equity Securities and Use of Proceeds

		None.

ITEM 3.		Defaults Upon Senior Securities

		None.

ITEM 4.		Submission of Matters to a Vote of Security Holders

The 2008 Annual Meeting of the Shareholders of SED was held on January 20, 2009 at its principal executive offices in Tucker, Georgia. On the December 10, 2008 record date for the annual meeting 4,823,141 shares of Common Stock were outstanding and eligible to vote.

The shareholders of SED were asked to vote on the following proposals: (i) the election of four director nominees to the Board (the “Election of Directors”); (ii) an amendment to SED’s Articles of Incorporation (the “Charter”) to declassify the Board subsequent to the annual meeting (the “Declassification Amendment”); (iii) an amendment to the Charter and SED’s Bylaws (the “Bylaws”) to allow shareholders holding not less than 66 2/3% of the outstanding shares of Common Stock to take action by written consent (the “Shareholder Consent Amendment”); and (iv) the appointment of J.H. Cohn LLP as SED’s independent auditors for the fiscal year ending June 30, 2009 (the “Approval of Auditors”). The shareholders adopted all of the proposals. The vote tabulation with respect to each proposal is as follows:

1. The Election of Directors:


		*VOTES*
NAME	*FOR*	*WITHHELD*
Melvyn I. Cohen	2,696,180	44,762
Jean Diamond	2,236,228	504,714
Samuel A. Kidston	2,732,067	8,875
J.K. Hage III	2,732,067	8,875

2. The Declassification Amendment:

VOTES

FOR AGAINST ABSTAIN

2,734,117 6,825 0

3. The Shareholder Consent Amendment:


	*VOTES*
*FOR*	*AGAINST*	*ABSTAIN*
2,716,934	23,558	450

4. Approval of Auditors:


	*VOTES*
*FOR*	*AGAINST*	*ABSTAIN*
2,528,175	43,142	169,625

ITEM 5. Other Information

Not applicable.

ITEM 6. Exhibits


Exhibits		Description
10.1		Employment Agreement between SED International Holdings, Inc. and Barry
		Diamond. (1)
10.2		Amended and Restated Employment Agreement between SED International
		Holdings, Inc. and Jonathan Elster dated November 20, 2008 (1)
31.1		Rule 13a-14(a)/15d-14(a) Certification by Principal Executive Officer.
31.2		Rule 13a-14(a)/15d-14(a) Certification by Principal Financial Officer.
32.1		Section 1350 Certification by Principal Executive Officer.
32.2		Section 1350 Certification by Principal Financial Officer.
(1)	Incorporated herein by reference to Exhibits 10.1 and 10.2 from the Company’s Current Report on Form 8-K filed on November 24, 2008.

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)

Date: February 13, 2009

/s/ Jean Diamond
Jean Diamond
Chief Executive Officer
(Principal Executive Officer)

Date: February 13, 2009

/s/ Lyle Dickler
Lyle Dickler
Chief Financial Officer
(Principal Financial and Accounting Officer)