10-Q 1 c59322_10-q.htm

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 September 30, 2009

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 of Incorporation or Organization)		(I.R.S. Employer 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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).


	Yes o	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 November 1, 2009 was 5,065,144 shares.

SED International Holdings, Inc. and Subsidiaries

INDEX


PART I - FINANCIAL INFORMATION:

	Item 1.	Financial Statements	Page

		Condensed Consolidated Balance Sheets as of September 30, 2009 (Unaudited) and June 30, 2009	3

		Condensed Consolidated Statements of Operations for the three months ended September 30, 2009 and 2008 (Unaudited)	4

		Condensed Consolidated Statements of Cash Flows for the three months ended September 30, 2009 and 2008 (Unaudited)	5

		Notes to Condensed Consolidated Financial Statements (Unaudited)	6

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	11

	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	15

	Item 4T.	Controls and Procedures	15

PART II - OTHER INFORMATION:

	Item 1.	Legal Proceedings	16

	Item 1A.	Risk Factors	16

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	16

	Item 3.	Defaults Upon Senior Securities	16

	Item 4.	Submission of Matters to a Vote of Security Holders	16

	Item 5.	Other Information	16

	Item 6.	Exhibits	16

SIGNATURES			17

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)


	September 30, 2009			June 30, 2009


	(Unaudited)			(Note 1)

ASSETS
Current assets:
Cash and cash equivalents	$	5,758		$	3,570
Trade receivables, net		49,342			50,128
Inventories, net		41,919			38,532
Deferred tax assets, net		320			286
Other current assets		5,481			5,653

Total current assets		102,820			98,169
Property and equipment, net		723			720

Total assets	$	103,543		$	98,889


LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Trade accounts payable	$	48,383		$	47,417
Accrued and other current liabilities		7,733			7,670
Revolving credit facility		27,323			25,093

Total liabilities		83,439			80,180


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; 6,761,302 shares issued and 5,066,811 shares outstanding at September 30, 2009 and 6,781,302 shares issued and 5,086,811 shares outstanding at June 30, 2009		68			68
Additional paid-in capital		69,660			69,525
Accumulated deficit		(33,079	)		(33,531	)
Accumulated other comprehensive loss		(3,458	)		(4,266	)
Treasury stock, 1,694,491 shares, at cost		(13,087	)		(13,087	)

Total shareholders’ equity		20,104			18,709

Total liabilities and shareholders’ equity	$	103,543		$	98,889

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 September 30,

	2009			2008


Net sales	$	127,938		$	120,718
Cost of sales		121,202			114,168

Gross profit		6,736			6,550
Operating expenses:
Selling, general and administrative expense		6,046			5,734
Depreciation and amortization expense		105			119
Foreign currency transaction (gain) loss		(525	)		882

Total operating expenses		5,626			6,735

Operating income (loss)		1,110			(185	)
Interest (income) expense:
Interest (income)		(18	)		—
Interest expense		442			304

Interest, net		424			304

Income (loss) before income taxes		686			(489	)
Income tax expense (benefit)		234			(163	)

Net income (loss)	$	452		$	(326	)


Basic and diluted income (loss) per common share:
Basic	$	.11		$	(.08	)

Diluted	$	.10		$	(.08	)


Weighted average number of common shares outstanding:
Basic		4,281,000			4,004,000
Diluted		4,578,000			4,004,000

See notes to condensed consolidated financial statements.

SED International Holdings, Inc. and Subsidiaries

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


	Three Months Ended September 30,

	2009			2008

Operating activities:
Net income (loss)	$	452		$	(326	)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation and amortization		105			119
Deferred tax assets		(34	)		6
Stock compensation		134			106
Changes in operating assets and liabilities:
Trade accounts receivable, net of provision		1,854			(2,910	)
Inventories		(2,694	)		(5,473	)
Other assets		547			(1,535	)
Trade accounts payable		(400	)		3,800
Accrued and other current liabilities		(234	)		(261	)

Net cash used in operating activities		(270	)		(6,474	)
Investing activities: Purchase of equipment		(94	)		(46	)
Financing activities: Net borrowings under revolving credit facility		2,230			6,550
Effect of exchange rate changes on cash and cash equivalents		322			(263	)

Net increase (decrease) in cash and cash equivalents		2,188			(233	)
Cash and cash equivalents:
Beginning of period		3,570			4,086

End of period	$	5,758		$	3,853

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 months ended September 30, 2009 are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2010, or any other interim period. The June 30, 2009 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, 2009.

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, 2009.

2. New Accounting Pronouncements

Recently adopted accounting pronouncements

In June 2009, the Financial Accounting Standards Board (“FASB”) issued the Accounting Standards Codification (“ASC”) as the single source of authoritative U.S. GAAP recognized by the FASB to be applied by nongovernmental entities in preparation of financial statements in conformity with U.S. GAAP. The ASC supersedes existing FASB, American Institute of Certified Public Accountants (“AICPA”), Emerging Issues Task Force (“EITF”) and related literature. While the adoption of the ASC as of September 30, 2009 changes how we reference accounting standards, the adoption did not have an impact on our consolidated financial position, results of operations or cash flows.

On July 1, 2009, we adopted the accounting standard for ownership interests in subsidiaries held by parties other than the parent, which establishes accounting for the amount of consolidated net income attributable to the parent and to the non-controlling interest, changes in a parent’s ownership interest and the valuation of retained non-controlling equity investments when a subsidiary is deconsolidated. This accounting standard also establishes reporting requirements that provide enhanced disclosures that clearly identify and distinguish between the interests of the parent and the interests of the non-controlling owners. The impact of adopting this accounting standard on our consolidated financial position, results of operations and cash flows was not significant.

On June 30, 2009, we adopted amendments to the accounting standards addressing subsequent events. The amendments provide guidance to establish general standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. The amendments require entities to disclose the date through which subsequent events were evaluated as well as the rationale for why that date was selected. This disclosure should alert all users of financial statements that an entity has not evaluated subsequent events after that date in the set of financial statements being presented. The amendments required additional disclosures only and, therefore, did not have an impact on our consolidated financial position, results of operations or cash flows. We have evaluated subsequent events through November 12, 2009, the date we have issued this Quarterly Report on Form 10-Q.

Recent accounting pronouncements not yet adopted

In June 2009, the FASB issued amendments to the accounting rules for variable interest entities (“VIEs”) and for transfers of financial assets. The new guidance for VIEs eliminates the quantitative approach previously required for determining the primary beneficiary of a variable interest entity and requires ongoing qualitative reassessments of whether an enterprise is the primary beneficiary. In addition, qualifying special purpose entities (“QSPEs”) are no longer exempt from consolidation under the amended guidance. The amendments also limit the circumstances in which a financial asset, or a portion of a financial asset, should be derecognized when the transferor has not transferred the entire original financial asset to an entity that is not consolidated with the

transferor in the financial statements being presented, and/or when the transferor has continuing involvement with the transferred financial asset. We will adopt these amendments for interim and annual reporting periods beginning on July 1, 2010. We do not expect the adoption of these amendments to have a material impact on our consolidated financial position, results of operations or cash flows.

3. Earnings (Loss) per Common Share

Basic earnings (loss) per share is computed on the basis of the weighted average number of shares of common stock outstanding during the period. Diluted earnings (loss) 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 three months ended September 30, 2009 are the dilutive effects of options to purchase 92,500 shares of common stock. Also, included in diluted earnings for the three months ended September 30, 2009 is the dilutive effect of 805,832 shares of unvested restricted stock.

Diluted earnings per common share for the three months ended September 30, 2009 and 2008 does not reflect the total of any incremental shares related to the assumed conversion or exercise of anti-dilutive stock options (411,159 and 503,659) for the three months ended September 30, 2009 and 2008, respectively. Also excluded from the diluted loss per share calculation for the three months ended September 30, 2008 were 819,285 shares of unvested restricted stock due to their anti-dilutive effect.

4. Trade Receivables


	September 30, 2009			June 30, 2009


Trade receivables	$	50,175		$	50,712
Less: allowance for doubtful accounts		(833	)		(584	)

	$	49,342		$	50,128

5. Inventories


	September 30, 2009			June 30, 2009


Inventories on hand	$	39,767		$	33,712
Inventories in transit		3,050			5,525
Less: allowances		(898	)		(705	)

	$	41,919		$	38,532

6. Comprehensive Income (Loss)

Comprehensive income (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 income (loss) and other comprehensive income (loss). SED’s other comprehensive income (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 income (loss), net of income taxes, for the three months ended September 30, 2009 and 2008, respectively, is as follows:


	Three Months ended September 30,

	2009		2008

Net income (loss)	$	452	$	(326	)
Changes in foreign currency translation adjustments		795		(976	)
Changes in fair value of interest rate swap contract		13		48

Comprehensive income (loss)	$	1,260	$	(1,254	)

The deferred income tax asset related to the accumulated other comprehensive loss was fully offset by a valuation allowance as of the beginning and end of the three month periods ended September 30, 2009 and 2008 and, therefore, the comprehensive income or loss for these periods had no income tax effect.

Accumulated other comprehensive loss included in shareholders’ equity totaled $3.5 million and $4.3 million at September 30, 2009 and June 30, 2009, respectively, and consisted of foreign currency translation adjustments of $3.3 million and $4.0 million, respectively, and changes in the fair value of interest rate swap contract of $0.2 million and $0.3 million, respectively.

7. 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 September 30, 2009
Net sales to unaffiliated customers	$	101,339	$	26,592		$	7		$	127,938
Gross profit	$	4,997	$	1,739			—		$	6,736
Foreign currency transaction gain		—	$	(525	)		—		$	(525	)
Operating income	$	574	$	536			—		$	1,110
Interest income		—	$	(18	)		—		$	(18	)
Interest expense	$	425	$	17			—		$	442
Income tax expense	$	18	$	216			—		$	234
Net income	$	131	$	321			—		$	452
Total assets at September 30, 2009	$	89,077	$	26,963		$	(12,497	)	$	103,543


	United States		Latin America			Eliminations			Consolidation

For the three months ended September 30, 2008
Net sales to unaffiliated customers	$	93,518	$	28,112		$	(912	)	$	120,718
Gross profit	$	4,506	$	2,044			—		$	6,550
Foreign currency transaction loss		—	$	882			—		$	882
Operating income (loss)	$	336	$	(521	)		—		$	(185	)
Interest expense	$	304	$				—		$	304
Income tax expense (benefit)	$	7	$	(170	)		—		$	(163	)
Net income (loss)	$	25	$	(351	)		—		$	(326	)
Total assets at September 30, 2008	$	85,777	$	25,434		$	(13,273	)	$	97,938

Net sales by product category is as follows:


For the three months ended September 30,	Micro-Computer Products			Consumer Electronics Products			Wireless Telephone Products			Handling Revenue			Total

2009		$	109,265		$	17,410		$	999		$	264	$	127,938
2008		$	109,044		$	8,938		$	2,474		$	262	$	120,718

Approximately 38.7% and 46.7% of SED’s net sales for the three months ended September 30, 2009 and 2008, respectively, consisted of sales to customers for export principally into Latin America and direct sales to customers in Colombia and Argentina.

8. Restricted Stock

Restricted Stock — 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.

On July 1, 2008, the Company issued 22,857 shares of restricted common stock to each of its then five non-employee directors in accordance with the Company’s Board compensation plan. On January 1, 2009, the Company issued 26,845 shares of restricted common stock to each of its two newly elected non-employee directors in accordance with the Company’s Board compensation plan. 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.

Effective January 2009, non-employee Board of Director’s base compensation was set at a per annum rate of $60,000 of which 50% shall be paid by an annual award of restricted shares of common stock. The independent directors shall only be entitled to the stock portion of their compensation after serving on the Board for the full calendar year. The number of shares to be issued to the directors will be determined on January 1, 2010 based upon the market price of the Company’s common stock as of that date.

On July 1, 2008, the Company issued 125,000 shares of restricted common stock at a value of $117,000 to a vendor, an accredited investor, for services which vested immediately.

Restricted stock activity is as follows:


	Three Months Ended September 30,

	2009			2008


Shares of restricted stock-beginning of period		882,975			705,000
Issued		—			239,285
Vested		(57,143	)		(125,000	)
Forfeited		(20,000	)		—

Shares of restricted stock-end of period		805,832			819,285

Share-based compensation expense recognized during the three months ended September 30, 2009 and 2008 totaled approximately $134,000 and $84,000, respectively. At September 30, 2009, there was $657,000 of unrecognized compensation cost related to unvested stock awards compensation arrangements which SED expects to be recognized over the next 25 months. At September 30, 2008, there was $899,000 of unrecognized compensation cost related to unvested stock awards compensation arrangements to be recognized over 40 months.

9. 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 became a Wells Fargo company effective December 31, 2008.

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 per annum interest rates available are LIBOR, plus a margin ranging from 1.25% to 2.00%, and the prime rate. SED is required to pay a commitment fee of 0.25% on the unused portion of the facility and 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.

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 Wachovia 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 10% of the formula borrowing base ($3.9 million at September 30, 2009) 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 September 30, 2009, SED determined that it was in compliance with the Wachovia Agreement.

During February 2009, SED Colombia signed a one-year $2.5 million unsecured line of credit with Banco de Credito that bears interest at a fixed rate of 13.7% per annum.

Available borrowings under these credit facilities at September 30, 2009 were $13.0 million under the Wachovia Agreement, after deducting $1.8 million in reserves for outstanding letters of credit, and $2.5 million under the Banco de Credito line of credit. Average borrowings, maximum borrowings and weighted average interest rate for the three months ended September 30, 2009 were

$27.0 million, $36.6 million and 5.8%, respectively. The weighted average interest rate on outstanding borrowings under the credit facilities was 6.1% at September 30, 2009. Average borrowings, maximum borrowings and weighted average interest rate for the three months ended September 30, 2008 were $22.4 million, $26.2 million and 5.7%, respectively.

The carrying value of all bank debt at September 30, 2009 approximates its fair value based on the variable market rates of interest on such bank debt.

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 under the Wachovia Agreement. 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%. On March 26, 2009, the swap agreement was further amended to provide for an extension to January 26, 2013 and an interest rate modification to 2.95%. The fixed rates cited do not include Wachovia’s markup of 1.5% as of September 30, 2009.

The Company utilizes derivative financial instruments to reduce interest rate risk. 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 agreement 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 (loss) 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 $499,000 at September 30, 2009 and $272,000 at September 30, 2008 and is included in accrued expenses. The Company does not hold or issue derivative financial instruments for trading purposes.

As of September 30, 2009, approximately $223,000 in pre-tax losses related to cash flow hedges that are currently deferred in Accumulated Other Comprehensive Loss are expected to be reclassified to expense through January 26, 2010. Approximately $174,000 was reclassified to expense during the three months ended September 30, 2009.

10. Legal Proceedings

None

11. Fair Value of Financial Instruments

Effective July 1, 2008, the Company adopted FASB accounting guidance pertaining to financial assets and liabilities that are being measured and reported on a fair value basis and the related disclosure requirements about fair value measurements. The guidance 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 implementation of the guidance 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 also adopted the guidance related to fair value measurements for non-financial assets and liabilities, such as our property and equipment, which is measured at fair value for impairment assessment, beginning July 1, 2009.

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. We reduce 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. 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 as it is valued using a valuation model that has inputs other than quoted market prices that are both observable and unobservable. The fair value, not in the Company’s favor, of the interest rate swap was $499,000 at September 30, 2009.


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 condensed consolidated 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 condensed 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 September 30,

	2009			2008


Net sales		100.00	%		100.00	%
Cost of sales, including buying and occupancy expense		94.74	%		94.57	%

Gross profit		5.26	%		5.43	%
Operating expenses:
Selling, general and administrative expense		4.73	%		4.75	%
Depreciation and amortization expense		.08	%		.10	%
Foreign currency transaction (gain) loss		(.41	)%		.73	%

Total operating expenses		4.40	%		5.58	%

Operating income (loss)		.86	%		(.15	)%
Interest (income) expense:
Interest income		(.01	)%
Interest expense		.34	%		.25	%

Interest, net		.33	%		.25	%

Income (loss) before income taxes		.53	%		(.40	)%
Income tax expense (benefit)		.18	%		(.13	)%

Net income (loss)		.35	%		(.27	)%

Three Months Ended September 30, 2009 and 2008

Revenues. Total net sales for the three months ended September 30, 2009 increased 6.0%, or $7.2 million, to $127.9 million as compared to $120.7 million for the three months ended September 30, 2008. Microcomputer product sales, excluding handling revenue, for the three months ended September 30, 2009 increased .2% to $109.3 million compared to $109.0 million for the three months ended September 30, 2008. This was primarily due to a slight increase in laptop computers, consumables, hard drives and

other computer product sales. Consumer electronics sales for the three months ended September 30, 2009 increased 94.8% to $17.4 million compared to $8.9 million for the three months ended September 30, 2008. This was primarily due to an increase in television sales and electronics sales from e-commerce. Wireless revenues for the three months ended September 30, 2009 decreased 59.6% to $1.0 million compared to $2.5 million for the three months ended September 30, 2008.

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


	Three Months Ended September 30,					Change

	2009		2008			Amount			Percent

	(Amounts in millions except percentage amounts)
United States
Domestic	$	78.4	$	64.3		$	14.1			21.9	%
Export		22.9		29.2			(6.3	)		(21.6	)%
Latin America		26.6		28.1			(1.5	)		(5.3	)%
Elimination				(.9	)		.9			—

Consolidated	$	127.9	$	120.7		$	7.2			6.0	%

Domestic revenues were $78.4 million and $64.3 million for the three months ended September 30, 2009 and 2008, respectively. The increase was due to an increase in computer and consumer electronics sales. Export revenues, net of eliminations, were $22.9 million and $28.3 million for the three months ended September 30, 2009 and 2008, respectively. The decrease was due to a decline in sales of computer products, printers and consumable printer products due to declining economic conditions. Latin America sales as measured in local currencies increased 4.2% due to an increase in sales of computer products, printers and consumable printer products as compared to a decrease of 5.3% as measured in U.S. dollars. After translation into U.S. dollars, Latin America sales were $26.6 million and $28.1 million for the three months ended September 30, 2009 and 2008, respectively.

Sales of microcomputer products, including handling revenue, represented approximately 85.6% of SED’s first quarter net sales compared to 90.5% for the same period last year. Sales of consumer electronics products accounted for approximately 13.6% of SED’s first quarter net sales compared to 7.4% for the same period last year. Sales of wireless telephone products accounted for approximately .8% of SED’s first quarter net sales compared to 2.0% for the same period last year.

Gross Profit Margins. Gross profit margin increased $186,000 to $6.7 million for the three months ended September 30, 2009, compared to $6.6 million for the same period last year. Gross profit as a percentage of net sales was 5.3% for the three months ended September 30, 2009 compared to 5.4% for the same period last year. The decrease in gross profit margin was primarily due to lower margins on sales in Latin America due to the lowering of selling prices caused by offset U.S. Dollar devaluation. Overall, SED continues to experience pricing pressure in selling products.

Selling, General and Administrative Expense. Selling, general and administrative expenses, excluding depreciation and amortization expense and foreign currency transaction losses, for the three months ended September 30, 2009 increased 5.4% to $6.0 million, compared to $5.7 million for the same period last year. The increase was primarily due from several factors including: (i) an increase of approximately $170,000 in credit and collection cost mostly a result of increased bad debt expense; (ii) an increase of approximately $100,000 in Board of Director cost related to an expanded board and increased compensation; (iii) an increase of approximately $50,000 in Latin America employee expenses mostly related to mandated government salary increases.

Depreciation and Amortization. Depreciation and amortization was $105,000 for the three months ended September 30, 2009 compared with $119,000 for the same period last year.

Foreign Currency Transaction. SED has significant U.S. Dollar denominated liabilities recorded in its Latin American subsidiaries to meet certain vendor payment requirements. The devaluation of the U.S. Dollar currency versus the Latin American currencies resulted in a foreign currency transaction gain totaling $525,000 for the three months ended September 30, 2009 as compared to a loss of $882,000 for the three months ended September 30, 2008 due from Latin American currency devaluation versus the U.S. Dollar.

Interest Income. Interest income was $18,000 for the three months ended September 30, 2009.

Interest Expense. Interest expense was $442,000 and $304,000 for the three months ended September 30, 2009 and 2008, respectively. This change resulted primarily from higher average loan balances.

Provision for Income Taxes (Benefit). Income tax expense was $234,000 for the three months ended September 30, 2009 as compared to an income tax benefit of $163,000 for the three months ended September 30, 2008. The provision is primarily related to 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 the benefit of the net operating loss carry forward.

Financial Condition and Liquidity

Overview. At September 30, 2009, SED had cash and cash equivalents totaling $5.8 million and working capital of approximately $19.4 million. At September 30, 2009, SED’s availability under the credit facilities was approximately $15.5 million, after deducting $1.8 million in reserves for outstanding Letters of Credit. 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 and Banco de Credito. SED’s accounts receivable and inventories collateralize SED’s U.S. borrowings. The Wachovia credit facility provides SED with a $50.0 million line of credit through September 2011. During February 2009, SED Colombia signed a $2.5 million unsecured, one-year line of credit with Banco de Credito. 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 September 30, 2009, 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.

While SED had historically derived a material portion of its operating income and cash flows from its foreign subsidiaries, management believes if the deteriorating economic conditions in Latin America and the devaluation of certain Latin American currencies continue, there may be a negative effect on net income and the foreign subsidiaries’ ability to generate cash flows from operations. Domestic banking agreements and international monetary restrictions may also limit SED’s ability to transfer cash between its foreign and domestic subsidiaries.

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

Operating Activities. Cash used in operating activities was approximately $.3 million for the three months ended September 30, 2009 as compared to approximately $6.5 million used by operating activities for the three months ended September 30, 2008. Changes in operating assets and liabilities during the 3 months ended September 30, 2009 are as follows.

Net trade receivables were $49.3 million at September 30, 2009 and $50.1 million at June 30, 2009. Average days sales outstanding were approximately 36.0 days at both September 30, 2009 and June 30, 2009.

Net inventories increased $3.4 million to $41.9 million at September 30, 2009 from $38.5 million at June 30, 2009. SED continues to monitor and adjust inventory levels according to current and projected sales volumes.

Other current assets decreased to $5.5 million at September 30, 2009 from $5.7 million at June 30, 2009.

Trade accounts payable increased by approximately $1.0 million to $48.4 million at September 30, 2009 compared to $47.4 million at June 30, 2009.

Accrued and other current liabilities were $7.7 million at both September 30, 2009 and June 30, 2009.

Financing Activities. Net borrowings under the credit facilities increased by approximately $2.2 million to $27.3 million at September 30, 2009 compared to $25.1 million at June 30, 2009. The increase was due from the financing of the sales growth.

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 September 30, 2009, 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.

The current global economic downturn creates several risks relating to our financial results, operations and prospects. We may experience a rapid decline in demand for the products we sell resulting in a more competitive environment and pressure to reduce the cost of operations. The benefits from cost reductions may take longer to fully realize and may not fully mitigate the impact of the reduced demand. The current global economic downturn may also result in changes in vendor terms and conditions, such as rebates, cash discounts and cooperative marketing efforts, which may result in further downward pressure on our gross margins. Deterioration in the financial and credit markets heightens the risk of customer bankruptcies and delay in payment. Deterioration in the credit

markets in Latin America and the United States have resulted in reduced availability of credit insurance to cover customer accounts. This may result in our reducing the credit lines we provide to customers, thereby having a negative impact on our net sales. Also, volatile foreign currency exchange rates increase our risk related to products purchased in a currency other than the currency in which those products are sold. The realization of any or all of these risks could have a significant adverse effect on our future financial results. 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

As a smaller reporting company, SED 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 September 30, 2009 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

None.

ITEM 1A. Risk Factors

As a smaller reporting company, SED is not required to provide the information required by this item.

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

In August 2009, SED’s Board of Directors approved a stock repurchase plan, pursuant to Rule 10b-18 of the Exchange Act, in which SED may buy back up to $50,000 worth of its outstanding shares of common stock in the open market over a six month period beginning on the effective date. As of September 30, 2009, no shares have been repurchased under such plan.

ITEM 3. Defaults Upon Senior Securities

None.

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

None.

ITEM 5. Other Information

None.

ITEM 6. Exhibits


Exhibits			Description

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.

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: November 12, 2009	/s/ Jean Diamond
	Jean Diamond
	Chief Executive Officer
	(Principal Executive Officer)

Date: November 12, 2009	/s/ Lyle Dickler
	Lyle Dickler
	Chief Financial Officer
	(Principal Financial and Accounting Officer)