Back to GetFilings.com

Table of Contents

SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

(Mark One)

For the fiscal year ended June 30, 2002
OR

[   ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

Commission file number 0-16345

SED INTERNATIONAL HOLDINGS, INC.

Securities registered pursuant to Section 12(b) of the Act:

NONE

Securities registered pursuant to Section 12(g) of the Act:

COMMON STOCK, $.01 PAR VALUE
(Title of Class)

COMMON STOCK PURCHASE RIGHTS
(Title of Class)

Indicate by check mark whether the Company (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 Company was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [   ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Company’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K. [   ]

The aggregate market value of the voting stock held by nonaffiliates of the Company was approximately $2.1 million as of October 9, 2002 based upon the last sale price of the Common Stock as reported on the Nasdaq National Market on that day.
There were 3,911,016 shares of Common Stock, $.01 par value, outstanding at October 9, 2002.

DOCUMENTS INCORPORATED BY REFERENCE:

Part III incorporates information by reference from the portions of the Company’s definitive proxy statement for its 2002 annual meeting of shareholders scheduled to be held on December 11, 2002, which proxy statement will be filed no later than 120 days after the close of the Company’s fiscal year ended June 30, 2002.

- 1 -

Table of Contents

PART I

Item 1. BUSINESS

(a)

General Development of Business

         SED International Holdings, Inc., a Georgia corporation, and its wholly-owned operating subsidiary, SED International, Inc., a Georgia corporation (“SED International”), were incorporated in 1986 to take over the operations of the business of the Company’s predecessor, Southern Electronics Distributors, Inc., which was engaged in the wholesale distribution of consumer electronics products. In fiscal 1999, the Company, formerly a Delaware corporation, reincorporated as a Georgia corporation. As used herein, the term “Company” or the “Registrant” means SED International Holdings, Inc. and its subsidiaries, including SED International, unless the context otherwise indicates.

         The Company is a distributor of microcomputer products, including mass storage products, printers, and other imaging products and wireless products throughout the United States and Latin America. The Company offers to an active base of over 6,500 reseller customers a broad inventory of more than 3,500 products from approximately 170 vendors (direct and indirect), including such market leaders as Hewlett-Packard, Intel, Maxtor, Creative Labs, Acer, 3Com, Toshiba, Envision, and IBM, through a dedicated and highly motivated sales force. The Company distributes products in the United States from its strategically located warehouses in Atlanta, Georgia; Miami, Florida; City of Industry, California; and San Juan, PR. The Company services Latin America through its wholly-owned subsidiaries SED International do Brasil Ltda. in Sao Paulo, Brazil; SED International de Colombia Ltda. in Bogota, Colombia and Intermaco S.R.L. in Buenos Aires, Argentina. The Company’s net sales decreased to $456.4 million in fiscal 2002 from $525.3 million in fiscal 2001, and the Company’s net loss before the cumulative effect of a change in accounting principle was $4.5 million in fiscal 2002 compared to a net loss of $5.3 million in fiscal 2001 before impairment changes.

         The Company also distributes wireless telephone products in the United States and to Latin America. The Company is a direct distributor of wireless telephone products for Audiovox and an indirect distributor for other leading wireless telephone product vendors such as Motorola, Nokia, and LG Infocomm. In fiscal 2002, the Company’s net sales of microcomputer products generated approximately 94.7% of the Company’s total net sales and wireless telephone products represented the remaining 5.3%.

         The shareholders of the Company approved a one-for-two reverse stock split in a special meeting of shareholders held on April 26, 2002. As a result of the reverse split, all holders of the Company’s common stock will return their current share certificates and will receive new certificates which will reduce the number of shares held on a 1 for 2 basis. The new certificates will have the same terms as the old certificates. All applicable amounts reflected herein give retroactive effect to the reverse stock split.

         Subsequent to June 30, 2002, the Company terminated its credit facility with Wachovia Bank, NA, and IBM Global Finance. In October 2002, the Company entered into a new credit facility with Fleet Capital Corporation which provides access by the Company to additional credit capacity and liquidity. Additional information about the agreement with Fleet Capital Corporation may be found in Liquidity and Capital Resources section of this document.

(b)

Financial Information about Industry Segments

         The Company operates in only one business segment.

(c)

Narrative Description of Business

- 2 -

Table of Contents

Products and Vendors

         The Company offers its customers a broad inventory of more than 3,500 products from approximately 170 vendors (direct and indirect), including such market leaders as Hewlett-Packard, Intel, Maxtor, Creative Labs, Acer, 3Com, KDS, Envision, Samsung, and Audiovox. The Company is a direct distributor of wireless telephone products for Audiovox and an indirect distributor for other leading wireless telephone product vendors such as Motorola, Nokia, and LG Infocomm. Microcomputer related products accounted for $432.4 million or 94.7% of the Company’s net sales for fiscal 2002, $491.5 million or 93.6% of net sales in fiscal 2001, and $523.7 million or 85.5% of net sales in fiscal 2000. Approximately $24.0 million or 5.3% of the Company’s net sales for fiscal 2002, $33.8 million or 6.4% of net sales for fiscal 2001, and $88.5 million or 14.5% of net sales for fiscal 2000, consisted of wireless handsets and accessories. The Company continually evaluates its product mix and inventory levels and maintains flexibility by adjusting its product offerings based on demand. The Company’s vendors generally warrant the products distributed by the Company and allow the return of defective products. Generally, the Company’s authorized distributor agreements with its microcomputer and wireless telephone products vendors permit the Company to sell these vendors’ products in the United States and in designated countries in Latin America.

         As a distributor, the Company incurs the risk that the value of its inventory will be affected by industry-wide forces. Rapid technological change is commonplace in the microcomputer and wireless industries and can quickly diminish the marketability of certain items, whose functionality and demand decline with the appearance of new products. These changes, coupled with price reductions by vendors, may cause rapid obsolescence of inventory and corresponding valuation reductions in that inventory. Accordingly, the Company seeks provisions in its vendor agreements common to industry practice which provide price protections or credits for declines in inventory value and the right to return unsold inventory. No assurance can be given, however, that the Company can negotiate such provisions in each of its contracts or that such industry practice will continue.

         The Company purchases goods from approximately 170 vendors (directly and indirectly) and has negotiated favorable terms from certain vendors by purchasing a substantial volume of those vendors’ products. In fiscal 2002, 2001, and 2000, Maxtor accounted for 37.5%, 23.1%, and 9.7%, respectively, and Hewlett Packard accounted for 11.9%, 14.6% and 18.7%, respectively, of the Company’s purchases.

         There can be no assurance that the Company will be able to maintain its existing vendor relationships or secure additional vendors as needed. The Company’s vendor relationships typically are non-exclusive and subject to annual renewal, terminable by either party on short notice, and contain territorial restrictions that limit the countries in which the Company is permitted to distribute the products. The loss of a major vendor, the deterioration of the Company’s relationship with a major vendor, the loss or deterioration of vendor support for certain Company-provided services, the decline in demand for a particular vendor’s product, or the failure of the Company to establish good relationships with major new vendors or other Virtual Vendor Model distributors could have a material adverse effect on the Company’s business, financial condition and results of operations.

         Product orders typically are processed and shipped from the Company’s distribution facilities on the same day an order is received or, in the case of orders received after customary cutoff time, on the next business day. The Company relies almost entirely on arrangements with independent shipping companies for the delivery of its products to United States customers. Products sold within the Latin American markets are either picked up by the customer, or delivered to the customers or their agents from the Company’s Sao Paulo, Brazil; Bogota, Colombia and Buenos Aires, Argentina facilities. Generally, the Company’s inventory level of products has been adequate to permit the Company to be responsive to its customers’ purchase requirements. From time to time, however, the Company experiences temporary shortages of certain products as its vendors experience increased demand or manufacturing difficulties with respect to their products, resulting in smaller allocations of such products to the Company.

- 3 -

Table of Contents

Sales and Marketing

         The Company’s sales are generated by a telemarketing sales force, which, on June 30, 2002, consisted of approximately 145 people in sales offices located in Atlanta, Georgia; Miami, Florida; City of Industry, California; San Juan, Puerto Rico, Sao Paulo, Brazil; Bogota, Colombia and Buenos Aires, Argentina. Of the total number of salespersons on June 30, 2002, 69 people focused on sales to customers for export to Latin America and on sales in Brazil, Colombia and Argentina. Substantially all of the export and Latin American based salespeople are fluent in Spanish or Portuguese. The Company’s Atlanta sales office maintains a separate telemarketing sales force for the sale of wireless telephone products to retailers and wireless telephone carriers and their authorized agents located throughout the United States and Latin America.

         Members of the sales staff are trained through intensive in-house sales training programs, along with vendor-sponsored product seminars. This training allows sales personnel to provide customers with product information and to use their marketing expertise to answer customers’ questions about important new product considerations, such as compatibility and capability, while offering advice on which products meet specific performance and price criteria. The Company’s salespeople are able to analyze quickly the Company’s extensive inventory through a sophisticated management information system and recommend the most appropriate cost-effective systems and hardware for each customer, whether that customer is a full-line retailer or an industry-specific reseller.

         The Company’s domestic sales force is organized in teams generally consisting of two to four people. The Company believes that teams provide superior customer service because customers can contact one of several people. Moreover, the long-term nature of the Company’s customer relationships is better served by teams that increase the depth of the relationship and improve the consistency of service. It has been the Company’s experience that the team approach results in superior customer service and better employee morale.

         Compensation incentives are provided to the Company’s salespeople, thus encouraging them to increase their product knowledge and to establish long-term relationships with existing and new customers. Customers can telephone their salespersons using a toll-free number provided by the Company. In addition, salespeople initiate calls to introduce the Company’s existing customers to new products and to solicit orders. Salespeople also seek to develop new customer relationships by using targeted mailing lists, vendor leads and telephone directories of various cities.

         The telemarketing salespersons are supported by a variety of marketing programs. For example, the Company regularly sponsors shows for its resellers where it demonstrates new product offerings and discusses industry developments. Also, the Company’s in-house marketing staff prepares catalogs that list available microcomputer and wireless telephone products and routinely produces marketing materials and advertisements. In addition, the in-house marketing staff promotes products and services through the Company’s Internet web page (www.sedonline.com) providing 24-hour access to on-line order entry. The Company’s web page provides customers secured access to place orders and review product specifications at times that are convenient to them. Customers also can determine on a real-time basis inventory availability, pricing, and verify the status of previously placed orders through hyperlinks to certain independent shipping companies.

         The Company prides itself on being service oriented and has a number of on-going value-added services intended to benefit both the Company’s vendors and reseller customers. For example, the Company is committed to training its salespeople to be technically knowledgeable about the products they sell. This core competency supplements the sophisticated technical support and configuration services also provided by the Company. The Company believes that its salesperson’s ability to listen to a reseller’s needs and recommend a cost-efficient solution strengthens the relationship between the salesperson and his or her reseller and promotes customer loyalty to the Company. In addition, the Company provides such other value-added services as new product demonstrations and technical education programs for resellers, order fulfillment and electronic ordering, and informational assistance through the Company’s web page (www.sedonline.com).

- 4 -

Table of Contents

         Management continually evaluates the Company’s product mix and the needs of its customers in order to minimize inventory obsolescence and carrying costs. The Company’s rapid delivery terms are available to all of its customers, and the Company seeks to pass through its shipping and handling costs to its customers.

         The Company offers various credit terms including open account, prepay, credit card, and COD to qualifying customers. The Company closely monitors customers’ creditworthiness through its on-line computer system, which contains detailed information on each customer’s payment history and other relevant information. In addition, the Company participates in national and international credit associations that exchange credit rating information on customers. The Company establishes reserves for estimated credit losses in the normal course of business.

Customers

         The Company serves an active, nonexclusive customer base of over 6,500 resellers of microcomputer and wireless handset products. Resellers include value-added resellers, corporate resellers and retailers. The Company believes the multi-billion dollar microcomputer and wireless telephone wholesale distribution industries serve customers primarily on a nonexclusive basis, which provides the Company with significant growth opportunities. During fiscal 2002, no single customer accounted for more than 11% of the total company net sales of the Company. The Company believes that most of its customers rely on distributors as their principal source of microcomputer and wireless telephone products.

Competition

         The microcomputer and wireless telephone distribution industries are highly competitive, both in the United States and in Latin America. Competition in these industries is typically characterized by pricing pressures, product availability and potential obsolescence, speed and accuracy of delivery, effectiveness of sales and marketing programs, credit availability, ability to tailor specific solutions to customer needs, quality of product lines and services, and availability of technical support and product information. Additionally, the Company’s ability to compete favorably is principally dependent upon its ability to manage inventory and accounts receivable and to control other operating costs. Successful management of the Company also requires the Company to react quickly and appropriately to short and long-term trends, price its products competitively, increase its net sales and maintain economies of scale.

         The Company’s competitors include regional, national and international microcomputer and wireless distributors, many of which have substantially greater technical, financial and other resources than the Company, as well as vendors that sell directly to resellers and large resellers that sell to other resellers. Major competitors include Ingram Micro, Inc., Tech Data Corporation, D&H, ASI, Brightpoint, Inc., Cellstar Corporation, and Synnex Information Technologies, Inc. in the United States; and Tech Data Corporation, Ingram Mico, Inc., and Intcomex Holdings, L.L.C. in Latin America. From time to time, these competitors may be used as vendors.

Seasonality

         The Company’s sales currently are not subject to material seasonal fluctuations although no assurance can be given that seasonal fluctuations will not develop, especially during the holiday season in the United States and Latin America. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations-Quarterly Data; Seasonality.”

Employees

         As of June 30, 2002, the Company had 372 full-time employees, 145 of whom were engaged in telemarketing and sales, 167 in administration and 60 in warehouse management and shipping. Management believes the Company’s relations with its employees are good and the Company has never experienced a strike or work stoppage. With the exception of the Brazilian operations, there is no collective bargaining agreement covering any of the Company’s employees.

- 5 -

Table of Contents

Financial Information about Foreign and Domestic Operations and Export Sales

         During the fiscal year ended June 30, 1998, the Company began selling directly to customers in Brazil and Colombia through the Company’s facilities in Sao Paulo, Brazil and Bogota, Colombia. During the fiscal year ended June 30, 1999, the Company also began selling directly to customers in Argentina through the Company’s facilities in Buenos Aires. Sales are denominated in the respective local currencies of these countries. For the fiscal year ended June 30, 2002, 2001 and 2000, approximately 31.8%, 43.7% and 44.2%, respectively, of the Company’s net sales were to customers for export principally into Latin America and direct sales to customers in Brazil, Colombia and Argentina. See Notes 11 and 15 to the consolidated financial statements of the Company for additional information concerning the Company’s domestic and foreign operations.

Item 2. PROPERTIES

         The Company maintains its executive offices at 4916 North Royal Atlanta Drive in Atlanta, Georgia, where 53 of its sales employees are also located. The Company leases its executive, administrative and sales office from Diamond Chip Group, L.L.C., a Georgia limited liability company comprised of certain minority shareholders and officers of the Company, previously doing business as Royal Park Company, a Georgia general partnership. The lease commenced in April 1999 and expires in September 2006. The facility consists of approximately 30,000 square feet, with an annual rental of approximately $277,000 effective October 1, 2002, with annual increases of three percent through September 30, 2006. The Company has a right of first refusal to purchase the facility should it be offered for sale. The Company believes that the lease of its executive offices is on terms no less favorable than those available from unaffiliated parties.

         The Company maintains warehouse facilities in Atlanta, Georgia; City of Industry, California; Miami, Florida, San Juan Puerto Rico; Sao Paulo, Brazil (via an agency relationship with Coimex Logistica Integrada S.A.); Bogota, Colombia and Buenos Aires, Argentina. The Company’s distribution facility in Atlanta, Georgia consists of approximately 100,000 square feet subject to a lease expiring January 31, 2004. Rental payments for this facility are approximately $290,000 per annum. The Company believes there is sufficient additional warehouse and sales office space available for lease at reasonable prices near its principal facility in the event the Company’s growth plans so require.

         The Company leases its sales and distribution facility in Miami, Florida under a lease expiring March 31, 2004. This facility consists of approximately 61,000 square feet at an annual rental of approximately $462,000 effective April 1, 2002 and increasing to $478,800 effective April 1, 2003.

         The Company also leases an approximately 50,000 square foot facility in City of Industry, California. The City of Industry facility serves as a distribution center and sales center for the Company. Annual rental under the lease is approximately $237,000. Pursuant to its terms, the lease will expire on March 31, 2005.

         On April 1, 1998, the Company began leasing an approximately 102,000 square foot distribution facility in Harrisburg, Pennsylvania. The Company is obligated for lease payments of approximately $408,000 per year through March 31, 2003. From June 1, 2000 through December 31, 2000 the Company sublet approximately 51,000 square feet of the facility for approximately $222,000 per year. The Company entered into a sublease for the entire building beginning on October 1, 2001 to cover the entire cost of this facility through the end of the lease on March 31, 2003.

         On May 1, 2002 the Company began leasing approximately 4,100 square feet in Sao Paulo, Brazil under two separate leases, one on each floor. This facility serves as a sales and administrative office for SED International do Brasil Distribuidora Ltda., a wholly owned subsidiary of the Company. Total annual lease expenses are approximately $90,000 per year. These leases will expire on April 30, 2005.

         On June 1, 2002 the Company began leasing space in a multi-customer warehouse, distribution, and logistics oriented facility in Barueri SP, Brazil. Coimex Logistica Integrada S/A provides the Company with logistic and distribution services for our entire product mix in Brazil. The base rate for use of this facility is approximately $600 per month plus a variable charge which fluctuates in relation to the amount of business processed through the facility.

- 6 -

Table of Contents

         On December 1, 1997, the Company began leasing an approximately 33,000 square foot administrative center and sales office in Bogota, Colombia. The Bogota center serves as a sales office and distribution facility for SED International de Colombia Ltda., a wholly owned subsidiary of the Company. Annual payments total approximately $60,000 per year. The lease will expire on November 30, 2003.

         On November 1, 1998, the Company assumed the lease obligations for several small facilities in Buenos Aires, Argentina. These facilities consist of various spaces in the Galeria business complex and are utilized for sales offices, administrative offices and warehouses by Intermaco S.R.L., a wholly owned subsidiary of the Company. Aggregate space is approximately 5,500 square feet. Payments total approximately $36,000 annually. The leases expire at various dates until May 2004.

Item 3. LEGAL PROCEEDINGS

         The Company is involved in litigation relating to claims arising out of its operations in the normal course of business. The Company is not currently engaged in any legal proceedings that are expected, individually or in the aggregate, to have a material adverse effect on the Company.

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

         The shareholders of the Company approved a one-for-two stock split in a special meeting of shareholders held on April 26, 2002. As a result of the reverse stock split, all holders of the Company’s common stock will return their current share certificates and will receive new certificates which will reduce the number of shares held on a 1 for 2 basis. The new certificates will have the same terms as the old certificates, and the holders of the new certificates will the same rights under the new certificates. All applicable amounts reflected herein give retroactive effect to the reverse stock split.

         The shareholders are expected to vote on an amendment to the 1999 stock option plan to provide for the availability of 400,000 options for key employees.

PART II

Item 5. MARKET FOR THE COMPANY’S COMMON STOCK AND RELATED SHAREHOLDER MATTERS

         Until October 4, 2002 the Company’s common stock was traded over the counter and quoted on the NASDAQ National Market System under the symbol “SECX”. The Company received notification on September 27, 2002 from NASDAQ that the Company’s common stock will be delisted from the Nasdaq National Market due to noncompliance with the value of public float requirement of $5,000,000.00 for continued listing on Nasdaq National Market. The Company’s stock price also has fallen below the $1.00 minimum necessary for continued listing on the Nasdaq National Market and Nasdaq SmallCap. The Company does not presently intend to take actions to regain compliance with the Nasdaq National Market or SmallCap listing standards. The Company is now trading its common stock on the OTC Bulletin Board (OTCBB) and is currently followed by three market makers. The OTCBB is a regulated quotation service that displays real-time quotes, last-sale prices and volume information in over-the-counter (OTC) equity securities. OTCBB securities are traded by a community of market makers that enter quotes and trade reports. The Company expects that SED’s ticker symbol (SECX) will remain the same.

- 7 -

Table of Contents

The following table sets forth the high and low sales prices for Company’s common stock as reported for each quarter of fiscal 2002 and 2001 as adjusted for 1 for 2 recapitalization on April 26, 2002. The quotations are inter-dealer prices without retail mark-ups, mark-downs or commissions and may not represent actual transactions.

         There were 3,911,016 shares of common stock outstanding and approximately 3,000 beneficial owners of the common stock of the Company (including individual participants in securities position listings) as of October 9, 2002.

         The Company has never declared or paid cash dividends on its common stock. The Company currently intends to retain earnings to finance its ongoing operations and it does not anticipate paying cash dividends in the foreseeable future. Future policy with respect to payment of dividends on the common stock will be determined by the Board of Directors based upon conditions then existing, including the Company’s earnings and financial condition, capital requirements and other relevant factors. SED International, the earnings of which would be the primary source of any dividend payments, and the Company are parties to a revolving credit agreement which contains certain financial covenants that may impact the Company’s ability to pay dividends in the event the Company should change its policy and choose to issue dividends. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources.”

         In November 1998 the Company acquired Intermaco, S.R.L., a Buenos Aires based distributor of Hewlett Packard products and other computer peripherals. Pursuant to the terms of an earn-out agreement entered into by the Company in connection with the acquisition, in February 2000 and April 2001 the Company issued 200,000 shares and 150,000 shares of its common stock, respectively, to Eduardo Kerner and Manfredo Kerner. Messrs. Kerner were the sole owners of Intermaco. Messrs. Kerner are not residents of the United States and the shares were issued to Messrs. Kerner in a private placement that was not subject to the United States Securities laws.

- 8 -

Table of Contents

Item 6. SELECTED FINANCIAL DATA FIVE YEAR FINANCIAL SUMMARY

*

2000, 1999, and 1998 have been reclassified in connection with the fiscal 2001 adoption of a new accounting pronouncement.

- 9 -

Table of Contents

Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

         The following discussion should be read in conjunction with the consolidated financial statements of the Company and the notes thereto and the Selected Consolidated Financial Data included elsewhere herein. Historical operating results are not necessarily indicative of trends in operating results for any future period.

Overview

         The Company is an international distributor of microcomputer products, including personal computers, printers and other peripherals, supplies, and networking products throughout the United States and Latin America. In fiscal 2002, the Company’s net sales to customers in the United States represented approximately 68.2% of total net sales. Net sales for export principally into Latin America and in-country net sales in Brazil, Colombia and Argentina represented approximately 31.8% of total net sales for fiscal 2002. Net sales of microcomputer products generated approximately 94.7% of total net sales and wireless telephone products represented the remaining 5.3% for fiscal 2002.

         The Company incurred a net loss before the cumulative effect of a change in accounting principle of $4.5 million on net sales of $456.4 million in fiscal 2002. Net sales during fiscal 2001 and 2000 were $525.3 million and $612.1 million, respectively. The gross profit as a percentage of net sales decreased to 5.0% in fiscal 2002 compared to 5.9% in fiscal 2001 and 6.3% in fiscal 2000. Selling, general and administrative expenses (excluding impairment charges) as a percentage of net sales were 6.1% in fiscal 2002, 6.7% in fiscal 2001, and 5.8% in fiscal 2000.

         The Company has incurred a decline in net sales in the United States from fiscal 1998 to 2001. Although net sales in the United States in 2002 compared to 2001 increased by $15.4 million, the net sale improvement in the United States was offset by an $84.3 million decrease in net sales in export and Latin America. The Company has incurred operating losses in either its domestic or certain of its foreign operations at various times during the past five fiscal years. Company management is continuing to focus on increasing profit margins and reducing administrative and overhead costs. There is no assurance the Company will be successful in its efforts. Failure to improve margins and reduce overhead could adversely affect the Company’s profitability and financial condition.

         Numerous factors and conditions impact the Company’s ability to adequately effect this plan, including, but not limited to, the following:

	•		Continuation of distribution agreements - The Company operates under formal but cancelable distribution agreements with certain of its suppliers. If these agreements were cancelled, the Company would be forced to obtain its products through wholesalers. This would reduce the Company’s profit margin on the affected products.
	•		Availability of certain products - From time to time, due to production limitations or heavy demand, the Company may only be able to purchase a limited amount of popular products from its suppliers.
	•		Product margins - The Company operates in a very competitive business environment. Accordingly, product margins are continually under pricing pressure.
	•		Vendor credit - The Company significantly relies on its suppliers for trade credit. Changes by the suppliers in their credit terms could force the Company to obtain less favorable financing for its purchases.
	•		Product obsolescence - The Company offers a broad line of products that are subject to fast technological obsolescence, which increases the risk of inventory markdown. Through its vendor agreements, the Company has certain stock return privileges, which vary from supplier to supplier.

- 10 -

Table of Contents

	•		Credit decisions and losses - The Company maintains an experienced customer credit staff and relies on customer payment history and third party data to make customer credit decisions. Nevertheless, the Company may experience customer credit losses in excess of its expectations. The Company also maintains credit insurance for customers located in the United States (subject to certain terms and conditions).
	•		Proportionate control of general and administrative costs - The Company attempts to control its overhead costs to keep such costs in line with its sales volume. As sales volumes fluctuate, the Company must continually monitor its overhead costs and make adjustments timely and appropriately.
	•		Uncertain and possibly volatile economic and political environment in Latin America - The general economic and political environment in all of the countries in which the Company operates in Latin America is uncertain and, at times, volatile. As a result of these conditions, the Company could experience unexpected costs from its operations in these countries.
	•		Availability of credit facilities - The Company operated under a formal credit facility with a bank for many years that was subject to certain collateral limitations and contained certain covenants. During October 2002 a new credit facility was obtained. The new credit facility provides more flexibility compared to the prior agreement but also includes covenants and other provisions. The Company consistently violated the financial covenants associated with the previous credit agreement, but was successful in negotiating waivers of such violations. No assurance can be given that the Company will be able to maintain compliance with financial covenants, or obtain waivers in the event of non-compliance, in the future. Failure to maintain compliance with the financial covenants could adversely affect the Company’s ability to obtain vendor credit and the overall business operations. The credit facilities are further described in Note 6.
	•		Cash flows - The Company’s continued operation in Latin America may require additional capital infusion in the form of loans from the parent company or other debt borrowings by the subsidiary. The October 2002 credit facility places certain restrictions on the future funding of Latin American operations (See Note 6 to the audited consolidated financial statements).

         For the Company’s domestic operations, all purchases and sales are denominated in United States dollars. For the Company’s operations in Brazil, Colombia and Argentina, in-country transactions are conducted in the respective local currencies of these three locations while import purchases are generally denominated in United States dollars.

- 11 -

Table of Contents

Results of Operations

         The following table sets forth, for the years presented, the percentage of net sales represented by certain items in the Company’s consolidated statements of operations:

Fiscal 2002 Compared to Fiscal 2001

         Net sales decreased 13.1%, or $68.9 million, to $456.4 million in fiscal 2002 compared to $525.3 million in fiscal 2001. Information concerning the Company’s domestic and foreign sales is summarized below:

         Domestic sales were $311.3 million and $295.9 million in fiscal 2002 and fiscal 2001, respectively. The increase in domestic sales was due primarily to an increase in sales to large system integrators and the addition of over 1,700 new customers in fiscal 2002. The overall sales decline resulted from a decrease in net sales to customers for export principally to Latin America and a decrease in in-country net sales for Brazil (Magna Distribuidora Ltda. acquired in December 1997 and now operating as SED International do Brasil Distribuidora Ltda.), Colombia (commenced operations in May 1998 and operating as SED International de Colombia Ltda.) and Argentina (Intermaco S.R.L. acquired in November 1998). The decrease in Latin American in-country sales was partially attributable to changes in product mix towards higher margin product offerings as well as more stringent credit standards in Brazil. In addition, the 74.2% decrease in the value of the Argentine peso, 19.0% decrease in the Brazilian real, and the 4.2% decline in the Colombian peso contributed significantly to the decline in Latin American sales. The

- 12 -

Table of Contents

decrease in U.S. export sales was primarily due to the economic downturn in the Latin American countries the Company does business in.

         Sales of microcomputer products represented approximately 94.7% of the Company’s net sales in fiscal 2002 compared to 93.6% for fiscal 2001. Sales of wireless telephone products accounted for approximately 5.3% of the Company’s net sales in fiscal 2002 compared to 6.4% for fiscal 2001.

         Gross profit decreased $7.9 million to $23.0 million in fiscal 2002, compared to $31.0 million in fiscal 2001. Gross profit as a percentage of net sales decreased to 5.0% in fiscal 2002 from 5.9% in fiscal 2001. The change in gross profit as a percentage of sales was primarily due to lower sales in Latin America and the change in the mix of products sold. Overall, the Company continues to experience pricing pressure in selling products.

         Selling, general and administrative expenses (excluding impairment charges and intangible write offs) for fiscal 2002 decreased 21.1% to $27.8 million, compared to $35.2 million in fiscal 2001. These expenses as a percentage of net sales decreased to 6.1% in 2002 compared to 6.7% in fiscal 2001. These reduced expenses were primarily the result of a reduction in the number of employees in all of the Company’s operations as well as lower bad debts. The 2002 cumulative effect adjustment and the 2001 non-cash impairment charges were determined based on an analysis of the Company’s goodwill and long-lived assets and the estimated future cash flows of operations associated with such impairment. See Notes 3 and 5 to the Company’s 2002 consolidated financial statements.

         The results of operations of the Company were adversely affected by the continuing inflationary conditions in Latin America and the devaluation of the Brazilian, Argentinian, and Colombian currencies. In fiscal 2002, the approximate devaluation of the Brazilian currency as compared to the U.S. dollar was 19%. The approximate devaluation of the Argentinian peso in 2002 as compared to the U.S. dollar was 74.2%. The approximate devaluation of the Colombian peso in 2002 as compared to the U.S. dollar was approximately 4.2%. Since the Company has significant U.S. dollar denominated liabilities in Latin American subsidiaries, the devaluation resulted in foreign currency transaction losses totaling approximately $11,000 in Argentina and $410,000 in Brazil in fiscal 2002. The rate of annual interest on the Brazilian lines of credit was 25.4% and 21.0% at June 30, 2002 and 2001, respectively. See Item 7A.

         Net interest expense was $1.1 million in fiscal 2002 compared to interest expense of $0.7 million in fiscal 2001. This net change resulted primarily from a increase in working capital requirements in fiscal 2002.

         In 2002, the Company realized an income tax benefit of $1.9 million resulting from the adjustment of certain income tax liabilities and refunds received in the fourth quarter of 2002 related to recent United States tax legislation which provided for an extension of the period in which net operating losses could be carried back, offset in part by income taxes in Colombia and Argentina. At June 30, 2002, the Company has gross net operating loss carryforwards for U.S. federal tax purposes of approximately $25 million and $42 million, respectively, expiring at various dates through 2022 and gross net operating loss carryforwards for foreign income tax purposes of approximately $10 million in Brazil, which generally do not expire. At June 30, 2002 and 2001, the Company has recorded valuation allowances for principally all deferred tax assets, except for those relating to Intermaco S.R.L., as there is no assurance that these assets will be realized.

Fiscal 2001 Compared to Fiscal 2000

         Net sales decreased 14.2%, or $86.8 million, to $525.3 million in fiscal 2001 compared to $612.1 million in fiscal 2000.

- 13 -

Table of Contents

Information concerning the Company’s domestic and foreign sales is summarized below:

         The overall sales decline resulted from a decrease in United States domestic net sales and a decline in net sales to customers for export principally to Latin America offset by a net increase in in-country net sales for Brazil (Magna Distribuidora Ltda. acquired in December 1997 and now operating as SED International do Brasil Distribuidora Ltda.), Colombia (commenced operations in May 1998 and operating as SED International de Colombia Ltda.) and Argentina (Intermaco S.R.L. acquired in November 1998).

         The decrease in sales in the United States was primarily due to lower sales of printers, printer consumables, computer processors and wireless products which was offset by an increase in sales of mass storage products. The decrease in U.S. export sales was due primarily to lower sales of printers and printer consumables. Sales of microcomputer products represented approximately 93.5% of the Company’s net sales in fiscal 2001 compared to 85.5% for fiscal 2000. Sales of wireless telephone products accounted for approximately 6.5% of the Company’s net sales in fiscal 2001 compared to 14.5% for fiscal 2000.

         Gross profit decreased $7.3 million to $31.0 million in fiscal 2001, compared to $38.3 million in fiscal 2000. Gross profit as a percentage of net sales decreased to 5.9% in fiscal 2001 from 6.3% in fiscal 2000. The change in gross profit as a percentage of sales was primarily due to lower margins on sales in Latin America and the change in the mix of products sold. Overall, the Company continues to experience pricing pressure in selling products.

         Selling, general and administrative expenses (excluding $6.5 million of impairment charges for fiscal 2001) decreased 1.0% to $35.3 million, compared to $35.6 million in fiscal 2000. These expenses as a percentage of net sales increased to 6.7% in 2001 compared to 5.8% in fiscal 2000. The non-cash accounting charge was determined based on a detailed analysis of the Company’s long-lived assets and their estimated future cash flows. The analysis resulted in the identification and measurement of an impairment loss of $5,947,000 in goodwill and approximately $600,000 in property and equipment. Substantially all of the goodwill impairment relates to the company’s acquired export distribution rights in connection with the fiscal 1996 acquisition of substantially all of the net assets of U.S. Computer of North America, Inc. This impairment results from a gradual, but, significant, decline in sales volumes and adverse changes in the competitive environment for the distribution of the corresponding product lines. The goodwill is not considered recoverable through other means. The impairment loss of approximately $600,000 related to the Company’s property and equipment in Brazil ($400,000) as well as certain domestic assets ($200,000). Management estimated the undiscounted cash flows to be generated by the assets for the respective operations and compared them to their carrying values. Since the estimated undiscounted future cash flows were less than the carrying value of the assets, the carrying values were adjusted to estimated fair values.

         The results of operations of the Company were adversely affected by the continuing inflationary conditions in Latin America and the devaluation of the Brazilian currency. In fiscal 2001, the approximate devaluation of the Brazilian currency as compared to the U.S. dollar was approximately 25%. Since the Company has significant U.S. dollar denominated liabilities in Brazil, the devaluation resulted in translation losses totaling approximately $570,000 in fiscal 2001.

- 14 -

Table of Contents

         Net interest expense was $0.7 million in fiscal 2001 compared to interest expense of $0.5 million in fiscal 2000. This net change resulted primarily from a reduction in working capital requirements in fiscal 2001.

         Income tax expense was $0.3 million in fiscal 2001 compared to an income tax expense of $0.6 million in fiscal 2000. The income tax expense resulted from in-country income taxes on certain Latin America operations. At June 30, 2001, the Company has gross net operating loss carryforwards for U.S. federal tax purposes of approximately $23 million expiring at various dates through 2016 and gross net operating loss carryforwards for foreign income tax purposes of approximately $7.9 million in Brazil, which generally do not expire. At June 30, 2001 and 2000, the Company has recorded valuation allowances for principally all deferred tax assets, except those relating to Intermaco S.R.L., as there is no assurance these assets will be realized.

Quarterly Data

         The following table sets forth certain unaudited quarterly historical consolidated financial data for each of the Company’s last eight fiscal quarters ended June 30, 2002. This unaudited quarterly information has been prepared on the same basis as the annual information presented elsewhere herein and, in the Company’s opinion, includes all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the selected quarterly information. The Company’s interim financial statements for the quarter ended September 30, 2001 have been restated in connection with the Company’s adoption of Statement of Financial Accounting Standard No. 142, Goodwill and Other Intangible Assets, subsequent to the issuance of the September 30, 2001 interim financial statements. The net loss as reported was $3,137,000 as compared to a net loss of $9,434,000 as restated. In addition, all per share amounts in the following table give retroactive effect to the one-for-two reverse stock split on April 26, 2002. The quarterly financial statements have been reclassified in connection with the Company’s fourth quarter 2001 adoption of the new accounting pronouncement related to income statement classification of shipping and handling revenues and costs. These reclassifications had no effect on net earnings (loss). This information should be read in conjunction with the consolidated financial statements and Notes thereto included elsewhere herein. The operating results for any quarter shown are not necessarily indicative of results for any future period.

Fourth Quarter Adjustments

         In the fourth quarter of fiscal 2002, the Company recorded certain non-recurring adjustments related to changes in estimates associated with unclaimed property liabilities ($1.2 million), and the adjustment of income tax liabilities and the accrual of refunds receivable under recently enacted tax legislation ($1.9 million). These fourth quarter adjustments resulted in a reduction of the net loss of approximately $777,000 or $.20 per share for fiscal year 2002.

- 15 -

Table of Contents

         In the fourth quarter of fiscal 2001, the Company recorded certain non-recurring adjustments related to changes in estimates associated with the impairment of long-lived assets ($6.5 million) and allowance for doubtful accounts ($3.3 million). These fourth quarter adjustments totalled approximately $9.8 million or $1.35 per share increase in the net loss for fiscal 2001.

Liquidity and Capital Resources

         The Company’s liquidity requirements arise primarily from the funding of working capital needs, including inventories and trade accounts receivable. Historically, the Company has financed its liquidity needs largely through internally generated funds, borrowings under its credit agreement and vendor lines of credit. The Company derives all of its operating income and cash flow from its subsidiaries and relies on payments from its subsidiaries to generate the funds necessary to meet its obligations. As the Company continues operations in Latin America, management believes that capital requirements in Latin America may limit the ability of the Company’s subsidiaries in those countries to make payments to the Company.

         Operating activities provided $1.4 million, $2.3 million and $16.5 million of cash in fiscal 2002, 2001 and 2000, respectively. The cash provided in fiscal 2002 resulted primarily from decreases in trade acounts receivable of $2.7 million, inventories of $.7 million, and other assets of $1.7 million, which was partially offset by decreases in accounts payable and accrued liabilities of $3.7 million. In fiscal year 2001, the Company had net cash flows from operating activities in spite of the $11.8 million loss which was the result of significant non cash charges affecting fiscal 2001, while the net effect of changes in operating accounts had no significant effect.

         Investing activities used $.3 million, $2.3 million and $4.5 million of cash in fiscal 2002, 2001 and 2000, respectively. The primary use of cash in fiscal 2002 was for the purchase of equipment for $.3 million. The use of cash in fiscal 2001 was primarily for the purchase of computer equipment for $.8 million and for additional payments related to the purchase of Intermaco S.R.L. amounting to $1.5 million. The significant use of cash in fiscal 2000 was primarily for the purchase of Intermaco S.R.L. for $1.5 million and $3.0 million for the purchase of computer equipment and software.

         Financing activities provided $4.5 million of cash in fiscal 2002, used $.4 million of cash in fiscal 2001 and used $8.1 million of cash in fiscal 2000. The net cash provided in fiscal 2002 primarily related to bank borrowings on the revolving line of credit. The net cash used in financing activities in fiscal 2001 primarily related to repayment of short-term borrowings by subsidiaries. The net cash used in financing activities in fiscal 2000 primarily related to repayments of borrowings of $8.5 million under the Company’s credit agreement offset by other net bank borrowings of $435,000.

         The Company’s cash flows were adversely affected by the unfavorable changes in exchange rates in the Latin American countries in which the Company does business. The exchange rate changes had the effect of using approximately $5.4 million in cash for the year ended June 30, 2002 as compared to using $2.0 million in fiscal 2001 and $.6 million in fiscal 2000.

         Subsequent to June 30, 2002, the Company terminated its credit agreement with Wachovia Bank N.A. (“Wachovia”), as amended, from time to time, which provided for borrowing under a line of credit of up to $25 million ($35 million at June 30, 2001). At June 30, 2002 and 2001, the Company had borrowings of $4.9 million and no borrowings, respectively, outstanding under this facility. Maximum borrowings under the Wachovia credit agreement were generally based on eligible accounts receivable and inventory (as defined in the credit agreement) less a $9.5 million reserve. This reserve could be drawn upon, if necessary, to finance obligations to IBM Credit Corporation, which financed the Company’s purchases from certain vendors. Available borrowings under this agreement, based on collateral limitations at June 30, 2002 and 2001 were $9.9 million and $23.5 million, respectively ($9.5 million of which would only be available to finance obligations due to IBM for both years, if necessary).

         The Wachovia agreement was secured by accounts receivable and inventory of SED International, Inc. and required maintenance of certain minimum working capital and other financial ratios and had certain dividend

- 16 -

Table of Contents

restrictions. The Company was able to borrow at Wachovia’s prime rate (4.75% as of June 30, 2002) plus .50% or the Company was able to fix the interest rate for periods of 30 to 180 days under various interest rate options. The credit agreement required a commitment fee of .50% of the unused commitment and would have expired on November 1, 2002. Average borrowings, maximum borrowings, and the weighted average interest rate for fiscal 2002 were $5.0 million, $19.1 million, and 5.67%, respectively. Average borrowings, maximum borrowings, and the weighted average interest rate for fiscal 2001 were $1.2 million, $10.0 million, and 6.75%, respectively. At June 30, 2002, the Company was not in compliance with certain agreement covenants; however, the Company was not negatively affected because the Company was successful in negotiating a new $35 million credit facility with Fleet Capital Corporation and replaced the credit agreement with Wachovia.

         On October 7, 2002, the Company entered into a three year, $35 million credit facility with Fleet Capital Corporation (the “Fleet Agreement”). The Fleet Agreement provides for revolving borrowings up to $35 million based upon the Company’s eligible domestic accounts receivable and inventory as defined therein. Borrowings under the Fleet 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 the prime rate to the prime rate plus a margin of .5% or LIBOR plus a margin ranging from 2% to 2.75%. The Company is also subject to a commitment fee ranging from .25% to .5% on the unused portion of the facility. Interest is payable monthly. Borrowings under the Fleet Agreement are secured by substantially all domestic assets of the Company and 65% of each of the Company’s shares in its foreign subsidiaries, respectively.

         The Fleet Agreement also contains certain covenants which, among other things requires that if the Company’s availability is less than $5 million at anytime during the agreement, the Company must restrict or limit capital expenditures and advances to the Company’s Latin American subsidiaries. Also, if the $5 million threshold is breached the Agreement requires the maintenance of certain levels of earnings before interest, taxes, depreciation, and amortization, requires maintenance of minimum fixed charge coverage ratio beginning in the second quarter of fiscal 2004, and requires the maintenance of minimum tangible net worth, as defined, of negative $5 million. Based upon the Company’s experience in fiscal 2002 and through the date of entering into the Fleet Agreement, the Company would have had at least $5 million in availability under the Fleet Agreement. The Company’s availability under the Fleet Agreement was $11.3 million on October 7, 2002.

         The Company’s subsidiary, SED International do Brasil Distribuidora Ltda. operates under line of credit agreements with several Brazilian banks. Interest rates on borrowings are negotiated at the time of borrowing. The credit agreements are secured by the subsidiary’s accounts receivable and require the maintenance of certain financial ratios. At June 30, 2002, the Company had $2.4 million of borrowings outstanding under these facilities. For the year ended June 30, 2002, average borrowings, maximum borrowings and the weighted average monthly interest rate under these loan agreements for fiscal 2002 were $2.8 million, $3.7 million, and 1.94%, respectively.

         At June 30, 2002, the Company’s subsidiary, SED International de Colombia Ltda. had no bank borrowings. In addition, the Colombian subsidiary had no significant borrowings during fiscal 2002.

         The carrying value of all bank debt at June 30, 2002 and 2001 approximates its fair value based on interest rates that are believed to be available to the Company for debt with similar provisions.

         Management believes that its credit agreements together with vendor lines of credit and internally generated funds, will be sufficient to satisfy its working capital needs during fiscal 2003. However, no assurance can be given that the Company will be able to remain in compliance with the financial covenants associated with the Fleet Agreement, or that the Company will be able to continue to obtain credit from its vendors in the future. Failure to maintain compliance under the Fleet Agreement or obtain vendor lines of credit could significantly and adversely affect the Company’s business operations.

- 17 -

Table of Contents

Critical Accounting Policies

Allowance for Doubtful Accounts — Methodology

         An allowance for uncollectible accounts has been established based on collection experience and an assessment of the collectibility of specific accounts. Management evaluates the collectibility of accounts receivable based on a combination of factors. Initially, management estimates an allowance for doubtful accounts as a percentage of accounts receivable based on historical collections experience. This initial estimate is periodically adjusted when management 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. Management does not believe the estimate of the allowance for doubtful accounts is likely to be adversely affected by any individual customer, since the Company is protected by credit insurance on its significant customers, subject to certain limitations.

Inventories — Slow Moving and Obsolescence

         Most of the Company’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, the Company is not protected by vendors from the risk of inventory loss. Therefore, in determining the net realizable value of inventories, management identifies slow moving or obsolete inventories that (1) are not protected by vendor agreements from risk of loss, and (2) are not eligible for return under various vendor return programs. Based upon these factors, management estimates the net realizable value of inventories and records any necessary adjustments as a charge to cost of sales. If inventory return privileges were discontinued in the future, or if vendors were unable to honor the provisions of certain contracts which protect the Company from inventory losses, including price protections, the risk of loss associated with obsolete or slowing moving inventories would increase. The Company’s reserve for obsolete and slowing moving inventories was approximately $991,000 at June 30, 2002, or 2.65% of gross inventories.

Financial Instruments

         The functional currency for the Company’s international subsidiaries is the local currency for the country in which the subsidiaries own their primary assets. The translation of the applicable currencies into U.S. dollars is performed for balance sheet accounts using current exchange rates in effect at the balance sheet date and for revenue and expense accounts using a weighted average exchange rate during the period. Any related translation adjustments are recorded directly to shareholders’ equity as a component of comprehensive income.

         In January 2001, the Company entered into non-deliverable forward contracts covering Brazilian R$2,047,000, or US $1,000,000. These contracts were accounted for as speculative forward contracts. These contracts were settled in March 2001 at a gain of $33,000. The Company has no future plans to enter into foreign exchange forward or option contracts to hedge foreign currency transactions. These were isolated transactions. Generally, it is the Company’s policy not to enter into derivative contracts for speculative trading purposes.

Inflation and Price Levels

         Inflation has not had a significant impact on the Company’s business because of the typically decreasing costs of products sold by the Company. The Company also receives vendor price protection for a significant portion of its inventory. In the event a vendor reduces its prices for goods purchased by the Company prior to the Company’s sale of such goods, the Company generally has been able either to receive a credit from the vendor for the price differential or to return the goods to the vendor for a credit against the purchase price.

         The Latin American countries in which the Company operates have experienced high rates of inflation and hyperinflation from time to time in the past. At this time, management estimates that inflation may have a material impact on the Company’s Latin American business operations in the immediate future (See Item 7A).

- 18 -

Table of Contents

Forward-Looking Statements

         The matters discussed herein and in the Letter to Shareholders accompanying this Annual Report on Form 10-K contain certain forward-looking statements that represent the Company’s expectations or beliefs, including, but not limited to, statements concerning future revenues and future business plans. When used by or on behalf of the Company, the words “may,” “could,” “should,” “would,” “believe,” “anticipate,” “estimate,” “intend,” “plan” and similar expressions are intended to identify forward-looking statements. These statements by their nature involve substantial risks and uncertainties, certain of which are beyond the Company’s control. The Company cautions that various factors, including the factors described under the captions “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in the Company’s Registration Statement on Form S-3 (SEC File No. 333-35069) as well as general economic conditions and industry trends, foreign currency fluctuations, the level of acquisition opportunities available to the Company and the Company’s ability to negotiate the terms of such acquisitions on a favorable basis, a dependence upon and/or loss of key vendors or customers, the transition to indirect distribution relationships for some products, the loss of strategic product shipping relationships, customer demand, product availability, competition (including pricing and availability), concentrations of credit risks, distribution efficiencies, capacity constraints and technological difficulties could cause actual results or outcomes to differ materially from those expressed in any forward-looking statements of the Company made by or on behalf of the Company. The Company undertakes no obligation to update any forward-looking statement.

Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         The Company is exposed to market risk from changes in foreign currency and interest rates. The Company distributes many of its products in foreign countries, primarily in Latin America. Approximately 31.8% of the Company’s total net sales were generated from sales made to resellers located in Latin American countries during fiscal 2002. The Company manages its risk to foreign currency rate changes by maintaining foreign currency bank accounts in currencies in which it regularly transacts business. In January 2001, the Company entered into non-deliverable forward contracts covering Brazilian R$2,047,000, or US $1,000,000. These contracts were accounted for as speculative forward contracts. These contracts were settled in March 2001 at a gain of $33,000. The Company has no future plans to enter into foreign exchange forward or option contracts to hedge foreign currency transactions. These were isolated transactions. Generally, it is the Company’s policy not to enter into derivative contracts for speculative trading purposes.

Latin America Economic Situation and Devaluation

         Argentine authorities have implemented a number of monetary and exchange control measures that primarily included restrictions on the free disposition of funds deposited with banks and the practical impossibility of making transfers abroad. On January 6, 2002, the Argentine Congress approved Law No. 25,561 on Public Emergency and Exchange System Reform that introduced dramatic changes to the economic model implemented until that date and that amended the Convertibility Law approved in March 1991.

         The Central Bank of Argentina established an “official” and a “freely floating” exchange market for transactions originating in Argentina. The “official” exchange rate was fixed at ARS (Argentine peso) 1.4 to USD (US Dollar) 1, and the “freely floating” exchange rate as of the close of the first day after the exchange market reopened (January 11, 2002), which had been suspended since December 23, 2001, ranged from ARS 1.6 to ARS 1.7 to USD 1 (selling rate).

         The exchange rate for the ARS as compared to the USD decreased from 1.7 pesos to 1 dollar at January 11, 2002 to 3.9 pesos to 1 dollar at June 30, 2002.

         As a result of the change in currency, the Company recorded foreign currency translation losses as a component of comprehensive loss of approximately $3.3 million during the year ended June 30, 2002 in connection with its Argentina-based subsidiary, Intermaco S.R.L. (“Intermaco”). The exchange rate at October 4, 2002 was approximately ARS 3.8 to USD 1.

- 19 -

Table of Contents

         In connection with procuring inventories for resale in Argentina, Intermaco has USD denominated liabilities from time to time. The Company recorded transaction losses totaling $11,000 for the year ended June 30, 2002 in connection with these USD liabilities.

         In 2002, Argentina has experienced inflation of nearly 60% and interest rates are presently 36% annually. While the Argentine government together with the International Monetary Fund is seeking remedies, no assurance can be given that the economic situation in Argentina will stabilize. The devaluation, which commenced in January 2002, could make it more difficult for Argentine companies to service their commercial and financial obligations due in or tied to the USD. Any of the foregoing events and a continuation of the Argentine recession may have a material adverse effect on the Company’s business, results of operations, financial condition, and ability to make payments on the Company’s indebtedness and on the Company’s common stock market price. The information included in the Company’s financial statements, and other documentation, does not contain the potential impact that might arise from the situation described above and, accordingly, should be analyzed considering that circumstance.

         In addition, the Brazilian real, or $R, has declined from $R 2.31 to USD 1 at June 30, 2001 to $R 2.85 to USD 1 at June 30, 2002. Based on this decline, the Company’s Brazilian subsidiary, SED Brasil Distribuidora Ltda. (“SED Brazil”), realized foreign currency translation losses as a component of comprehensive loss in the year ended June 30, 2002 totaling approximately USD $552,000. In connection with procuring inventories for resale in Brazil, SED Brazil has USD denominated liabilities from time to time. SED Brazil recorded transaction losses totaling $166,000 for the year ended June 30, 2002 in connection with these USD liabilities. On October 4, 2002, the real had further declined to $R 3.7 to USD 1. Had the October 4, 2002 exchange rate been in effect at June 30, 2002, SED Brazil would have recognized additional translation losses totaling approximately $115,000 and additional transaction losses on USD denominated liabilities of approximately $729,000. The information included in the Company’s financial statements, and other documentation, does not contain the potential impact that might arise from declines in the Brazilian real after June 30, 2002, or those declines which may occur in the future and, accordingly, should be analyzed considering that circumstance.

         The Company’s cash equivalents and short-term investments and its outstanding debt bear variable interest rates. The rates adjust to market conditions. Changes in the market rate affects interest earned and paid by the Company. The Company does not use derivative instruments to offset the exposure to changes in interest rates. Changes in the interest rates are not expected to have a material impact on the Company’s results of operations.

- 20 -

Table of Contents

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEPENDENT AUDITORS’ REPORT

Board of Directors
SED International Holdings, Inc.

         We have audited the accompanying consolidated balance sheet of SED International Holdings, Inc. and subsidiaries as of June 30, 2002 and 2001, and the related consolidated statements of operations, shareholders’ equity and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

         We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

         In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of SED International Holdings, Inc. and subsidiaries as of June 30, 2002 and 2001, and the consolidated results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

         As discussed in Note 3, effective July 1, 2001, the Company adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets.

- 21 -

Table of Contents

INDEPENDENT AUDITORS’ REPORT

Board of Directors of SED International Holdings, Inc.

We have audited the accompanying consolidated statements of operations, stockholders’ equity, and cash flows of SED International Holdings, Inc. and subsidiaries for the year ended June 30, 2000. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the results of operations and cash flows of SED International Holdings, Inc. and subsidiaries for the year ended June 30, 2000 in conformity with accounting principles generally accepted in the United States of America.

DELOITTE & TOUCHE LLP

Atlanta, Georgia
September 26, 2000

- 22 -

Table of Contents

SED INTERNATIONAL HOLDINGS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

See notes to consolidated financial statements.

- 23 -

Table of Contents

SED INTERNATIONAL HOLDINGS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS

See notes to consolidated financial statements.

- 24 -

Table of Contents

SED INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY