SED INTERNATIONAL HOLDINGS INC - 10-Q Quarterly Report

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


x		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the quarterly period ended		March 31, 2003


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		30085

(Address of principal executive offices)		(Zip Code)

(770) 491-8962

(Registrant’s telephone number, including area code)

NOT APPLICABLE

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the Registrant is an accelerated filer (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 May 7, 2003 was 3,891,060 shares.

TABLE OF CONTENTS


		CONDENSED CONSOLIDATED BALANCE SHEETS
		CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
		CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
		CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
		CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
		NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
	ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
	ITEM 4. CONTROLS AND PROCEDURES
PART II — OTHER INFORMATION
	ITEM 6. Exhibits and Reports on Form 8-K
SIGNATURES
EX-99.1 SECTION 906 CERTIFICATION OF CEO
EX-99.2 SECTION 906 CERTIFICATION OF CFO

SED International Holdings, Inc. and Subsidiaries

INDEX


Part I — Financial Information:
	Item 1. Financial Statements		Page
		Condensed Consolidated Balance Sheets as of March 31, 2003 (Unaudited) and June 30, 2002		3
		Condensed Consolidated Statements of Operations for the three months ended March 31, 2003 and 2002 (Unaudited)		4
		Condensed Consolidated Statements of Operations for the nine months ended March 31, 2003 and 2002 (Unaudited)		5
		Condensed Consolidated Statement of Stockholders’ Equity for the nine months ended March 31, 2003 (Unaudited)		6
		Condensed Consolidated Statements of Cash Flows for the nine months ended March 31, 2003 and 2002 (Unaudited)		7
		Notes to Condensed Consolidated Financial Statements (Unaudited)		8
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			16
	Item 3. Quantitative and Qualitative Disclosures about Market Risk			25
	Item 4. Controls and Procedures			25
Part II — Other Information:
	Item 6. Exhibits and Reports on Forms 8-K			26

SED International Holdings, Inc. and Subsidiaries

CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)


		March 31, 2003			June 30, 2002

		(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents		$	5,555		$	4,371
Restricted cash			0			800
Accounts receivable, net			33,380			33,393
Inventories, net			35,571			36,732
Deferred income taxes			143			113
Prepaid expenses and other current assets			1,801			1,364

	Total Current Assets		76,450			76,773
Property, plant and equipment, net			2,576			3,789

TOTAL ASSETS		$	79,026		$	80,562

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable		$	35,956		$	41,024
Accrued liabilities			3,786			4,390
Short term subsidiary bank debt			13			2,396

	Total Current Liabilities		39,755			47,810
Revolving credit facility			14,850			4,900

TOTAL LIABILITIES			54,605			52,710
Stockholders’ Equity:
Preferred stock, $1.00 par value; authorized: 129,000 shares, No shares issued and outstanding			—			—
Common stock, $.01 par value; authorized: 100,000,000 shares outstanding: March 31, 2003 - 3,891,060 shares; June 30, 2002 - 3,929,510 shares			56			56
Contributed capital			68,440			68,407
Accumulated deficit			(26,076	)		(20,029	)
Accumulated other comprehensive loss			(4,845	)		(7,499	)
Treasury stock, 1,672,160 at March 31, 2003 and 1,633,696 shares at June 30, 2002 at cost			(13,052	)		(12,861	)
Unearned compensation — stock awards			(102	)		(222	)

	Total Stockholders’ Equity		24,421			27,852

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	79,026		$	80,562

See notes to condensed consolidated financial statements.

SED International Holdings, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)


			Three Months Ended
			March 31,

			2003			2002

REVENUES			$	94,444		$	110,932
COST of REVENUES				90,667			106,163

GROSS PROFIT				3,777			4,769
OPERATING EXPENSES:
	Selling, general and administrative expense			4,797			4,827
	Depreciation and amortization expense			375			469
	Foreign currency transaction loss			138			17

		Total Operating Expenses		5,310			5,313

OPERATING LOSS				(1,533	)		(544	)

OTHER INCOME (EXPENSES):
	Interest expense, net			(96	)		(79	)
	Gain (loss) on disposal of assets, net			3			—

		Total Other Income (Expense)		(93	)		(79	)

LOSS BEFORE INCOME TAXES				(1,626	)		(623	)
INCOME TAX EXPENSE				79			137

LOSS FROM CONTINUING OPERATIONS				(1,705	)		(760	)
LOSS FROM DISCONTINUED OPERATIONS				(3,585	)		(385	)

NET LOSS			$	(5,290	)	$	(1,145	)

BASIC AND DILUTED LOSS PER COMMON SHARE
Loss from continuing operations			$	(0.44	)	$	(0.20	)
Loss from discontinued operations				(0.94	)		(0.10	)

Net loss per common share			$	(1.38	)	$	(0.30	)

WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic & Diluted				3,837,000			3,873,000

See notes to condensed consolidated financial statements.

SED International Holdings, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)


		Nine Months Ended
		March 31,

		2003			2002

REVENUES		$	318,456		$	324,514
COST of REVENUES			303,899			308,860

GROSS PROFIT			14,557			15,654
OPERATING EXPENSES:
	Selling, general and administrative expense		13,667			15,715
	Depreciation and amortization expense		1,234			1,579
	Foreign currency transactions (gain) loss		621			(214	)

	Total Operating Expenses		15,522			17,080

OPERATING LOSS			(965	)		(1,426	)

OTHER INCOME (EXPENSES):
	Interest expense, net		(419	)		(106	)
	Gain (loss) on disposal of assets, net		3			(19	)
	Other, net		513			—

	Total Other Income (Expense)		97			(125	)
LOSS BEFORE INCOME TAXES AND BEFORE CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE			(868	)		(1,551	)
INCOME TAX EXPENSE			519			407

LOSS FROM CONTINUING OPERATIONS			(1,387	)		(1,958	)
LOSS FROM DISCONTINUED OPERATIONS			(4,660	)		(2,455	)

LOSS BEFORE CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE			(6,047	)		(4,413	)
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE, NET OF INCOME TAX BENEFIT OF $75,000						(6,297	)

NET LOSS		$	(6,047	)	$	(10,710	)

BASIC AND DILUTED LOSS PER COMMON SHARE Loss from continuing operations		$	(0.36	)	$	(0.51	)
Loss from discontinued operations			(1.22	)		(0.63	)

Loss before the cumulative effect of a change in accounting principle			(1.58	)		(1.14	)
Cumulative effect of a change in accounting principle						(1.62	)

Net loss per weighted average common share		$	(1.58	)	$	(2.76	)

WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic & Diluted			3,821,000			3,874,000

See notes to condensed consolidated financial statements.

SED International Holdings, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(Dollars and shares in thousands)
(Unaudited)


										Accumulated
	Common Stock				Additional					Other			Treasury Stock					Unearned			Total
			Par		Paid-In		Accumulated			Comprehensive								Compensation			Shareholders'
	Shares		Value		Capital		Deficit			Loss			Shares		Cost			Stock Awards			Equity

Balances, June 30, 2002		5,563	$	56	$	68,407	$	(20,029	)	$	(7,499	)		1,634	$	(12,861	)	$	(222	)	$	27,852
Amortization of stock awards																			(12	)		(12	)
Stock Awards Cancelled						31										(163	)		132
Stock Based Compensation						2																2
Treasury shares Purchased														18		(28	)					(28	)
Net loss								(6,047	)													(6,047	)
Reclassification of Cumulative Translation Adj to Earnings											2,756											2,756
Translation Adjustments											(102	)										(102	)

Comprehensive loss																						(3,393	)

Balance, March 31, 2003		5,563	$	56	$	68,440	$	(26,076	)	$	(4,845	)		1,652	$	(13,052	)	$	(102	)	$	24,421

See notes to condensed consolidated financial statements.

SED International Holdings, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
(Unaudited)


		Nine Months Ended
		March 31,

		2003			2002

NET CASH USED BY OPERATING ACTIVITIES		$	(9,398	)	$	(10,060	)
CASH FLOWS USED IN INVESTING ACTIVITIES:
	Purchases of property, plant and equipment		(176	)		(250	)

	Net cash used in investing activities		(176	)		(250	)

CASH FLOWS FROM FINANCING ACTIVITIES:
	Net borrowings under revolving bank debt		9,950			13,600
	Repayment of foreign bank debt borrowings		(1,945	)		(1,062	)
	Repurchase of common stock		(28	)		(160	)

	Net cash provided by financing activities		7,977			12,378

EFFECT OF EXCHANGE RATE CHANGES ON CASH			2,781			(3,529	)

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS			1,184			(1,461	)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD			4,371			4,243

CASH AND CASH EQUIVALENTS AT END OF PERIOD		$	5,555		$	2,782

See notes to condensed consolidated financial statements.

SED International Holdings, Inc. and Subsidiaries

NOTES TO 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 do Brasil Distribuidora Ltda. (formerly SED Magna Distribuidora Ltda.), SED Magna (Miami), Inc., SED International de Colombia Ltda., Intermaco S.R.L., and E-Store.com, Inc. (E.Store.com, Inc. operations were discontinued during fiscal year 2002) (collectively, the “Company”) have been prepared in accordance with generally accepted accounting principles 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 accruals) considered necessary for a fair presentation have been included. Certain reclassifications have been made to the prior period’s financial information to conform with the presentation used in fiscal year 2003. Operating results for the nine months ended March 31, 2003 are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2003, or any other interim period.

For further information, refer to the consolidated financial statements and footnotes thereto included in the SED Holdings, Inc. Annual Report on Form 10-K for the year fiscal year ended June 30, 2002.

2. Discontinued Operations

In February 2003, the Company approved a plan to discontinue commercial operations of its Brazilian subsidiary, SED International do Brasil Distribuidora, Ltda.. As a result, SED International do Brasil Distribuidora, Ltda. was reported as a disposal of a segment of business in the third quarter 2003. Accordingly, the operating results of SED International do Brasil Distribuidora, Ltda. have been classified as a discontinued operation for all periods presented in the Company’s consolidated statements of operations. Additionally, the Company has reported all of SED International do Brasil Distribuidora, Ltda. assets at their estimated net realizable values in the Company’s condensed consolidated balance sheet as of March 31, 2003 in accordance with Accounting Principles Board Opinion No. 30.

Results of discontinued operations consist of the following in (000’s):


	Three Months			Three Months			Nine Months			Nine Months
	Ended			Ended			Ended			Ended
	March 31,			March 31,			March 31,			March 31,
	2003			2002			2003			2002

Net sales	$	256		$	6,467		$	8,195		$	26,947
Loss from operations before income taxes		(291	)		(385	)		(1,366	)		(2,455	)
Provision for income taxes		—			—			—			—

Loss from operations		(291	)		(385	)		(1,366	)		(2,455	)
Loss on disposal before income taxes		(3,294	)		—			(3,294	)
Provision (benefit) for income taxes		—			—			—			—

Loss on disposal of discontinued operations		(3,294	)		—			(3,294	)		(2,455	)

Loss from discontinued operations	$	(3,585	)	$	(385	)	$	(4,660	)	$	(2,455	)

SED International Holdings, Inc. and Subsidiaries

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

2. Discontinued Operations (continued)

The net loss from discontinued operations consists of operating losses incurred in the segment and estimated loss on disposal of the segment which includes charges for the following: (i) the write-off of foreign currency translation losses of $2.6 million previously recorded as a component of Stockholders Equity, (ii) equipment (iii) customer accounts receivable (iv) employee termination costs, (v) inventory, and (vi) facility exit and lease termination costs.

At March 31, 2003, SED International do Brasil Distribuidora, Ltda. had assets of $49,000 and third party liabilities of $938,000. The assets include cash of $32,000 and rental deposits of $17,000. Liabilities include accounts payable related to inventory of $785,000, accrued salaries and taxes of $47,000, retirement contributions of $48,000 and other miscellaneous accrued liabilities of $58,000.

3. Restricted Cash

Restricted cash at June 30, 2002 consisted of term deposits pledged as collateral to secure letters of credit, which expired during the first and second quarters of fiscal year 2003.

4. Accounts Receivable

March 31, June 30,

2003 2002

Trade receivables
$ 34,988 $ 34,848

Less: allowance for doubtful accounts
(1,608 ) (1,455 )

$ 33,380 $ 33,393

5. Inventory

March 31, June 30,

2003 2002

Inventory
$ 28,299 $ 34,340

Inventory in transit
8,286 3,383

Less: reserves
(1,014 ) (991 )

$ 35,571 $ 36,732

SED International Holdings, Inc. and Subsidiaries

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

6. Comprehensive Income (Loss)

Comprehensive income (loss) was $(2.7) million and $(2.4) million, respectively, for the three months ended March 31, 2003 and 2002 and $(3.4) and $(14.4) million respectively, for the nine months ended March 31, 2003 and 2002.

7. Other Income

In December of 2002, the Company entered into a confidential settlement agreement for claims arising out of a disagreement with a former insurance broker. The net proceeds of $512,932 were recorded net of attorneys’ fees of $96,420.

SED International Holdings, Inc. and Subsidiaries

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

8. Segment Reporting

The Company operates in one business segment as a wholesale distributor of microcomputer and wireless telephone products. The Company operates and manages in two geographic regions, the United Sates and Latin America. Sales of products between the Company’s geographic regions are made at market prices and eliminated in consolidation.

Financial information by geographic region is as follows:


For the three months
ended March 31, 2003		United States			Latin America		Eliminations			Consolidation

Net Sales:
Unaffiliated customers		$	84,908		$	9,536				$	94,444
Foreign Subsidiaries

	Total	$	84,908		$	9,536				$	94,444

Gross profit		$	2,676		$	1,101				$	3,777
(Loss) Income from continuing operations			(1,873	)		340					(1,533	)
Total assets			101,140			10,562	$	(32,676	)		79,026
For the three months ended March 31, 2002
Net Sales:
Unaffiliated customers		$	102,994		$	7,933	$	5		$	110,932
Foreign Subsidiaries

	Total	$	102,994		$	7,933	$	5		$	110,932

Gross profit		$	3,548		$	1,221				$	4,769
(Loss) Income from continuing operations			(1,109	)		565					(544	)
Total assets		$	96,309		$	17,165	$	(11,854	)	$	101,620

Net sales by product category is as follows:


			Wireless		Shipping and
For the three months	Microcomputer		Telephone		Handling
Ended March 31,	Products		Products		Revenue		Total

2003	$	85,683	$	8,450	$	311	$	94,444
2002		104,974		5,599		359		110,932

Approximately 23.1% and 25.5% of the Company’s net sales for the three months ended March 31, 2003 and 2002, respectively, consisted of sales to customers for export principally into Latin America and direct sales to customers in Colombia and Argentina.

SED International Holdings, Inc. and Subsidiaries

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

8. Segment Reporting (continued)


For the nine months
ended March 31, 2003		United States			Latin America		Eliminations			Consolidation

Net Sales:
Unaffiliated customers		$	290,203		$	28,253				$	318,456
Foreign Subsidiaries			19				$	(19	)

	Total	$	290,222		$	28,253	$	(19	)	$	318,456

Gross profit		$	10,924		$	3,563	$	70		$	14,557
(Loss) Income from continuing operations			(2,337	)		1,302		70			(965	)
Total assets		$	101,140		$	10,562	$	(32,676	)	$	79,026
For the nine months ended March 31, 2002
Net Sales:
Unaffiliated customers		$	294,512		$	30,002				$	324,514
Foreign Subsidiaries			435				$	(435	)

	Total	$	294,947		$	30,002	$	(435	)	$	324,514

Gross profit		$	11,737		$	3,900		17		$	15,654
(Loss) Income from continuing operations			(2,821	)		1,378		17			(1,426	)
Total assets		$	91,383		$	19,406	$	(26,757	)	$	84,032

Net sales by product category is as follows:


			Wireless		Shipping and
For the nine months	Microcomputer		Telephone		Handling
Ended March 31,	Products		Products		Revenue		Total

2003	$	284,708	$	32,804	$	944	$	318,456
2002		307,399		16,004		1,111	$	324,514

Approximately 22.2% and 26.4% of the Company’s net sales for the nine months ended March 31, 2003 and 2002, respectively, consisted of sales to customers for export principally into Latin America and direct sales to customers in Colombia and Argentina.

SED International Holdings, Inc. and Subsidiaries

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

9. Restricted Stock, Stock Options and Other Stock Plans

Effective July, 1, 2002, the Company adopted the fair value method of recording stock-based compensation in accordance with the provisions of SFAS No. 123, Accounting for Stock-Based Compensation, which is considered the preferable accounting method for stock-based employee compensation. Historically, the Company had elected to follow the Accounting Principles Board Opinion No. 25, Accounting for Stock Based Compensation issued to Employees (“APB 25”) and related Interpretations in accounting for its employee stock-based compensation. Accordingly, no compensation expense has been recognized for stock option plans in the past. The Company has elected to follow the prospective method and all employee awards granted, modified or settled after July 1, 2002 will be expensed over the vesting period based on the fair value at the date the stock-based compensation is granted. The following table illustrates the effect on net income and earnings per share as if the fair value based method had been applied to all outstanding and unvested awards in each period.


		Three Months Ended						Nine Months Ended
		March 31						March 31

		2003			2002			2003			2002

Net loss, as reported		$	(5,290	)	$	(1,145	)	$	(6,047	)	$	(10,708	)
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects			1			—			2			—
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects			(1	)		(194	)		(2	)		(581	)

Pro forma net loss		$	(5,290	)	$	(1,339	)	$	(6,047	)	$	(11,289	)

Loss per share:
	As reported	$	(1.38	)	$	(0.30	)	$	(1.58	)	$	(2.76	)

	Pro forma	$	(1.38	)	$	(0.35	)	$	(1.58	)	$	(2.91	)

10. Credit Facility and Bank Debt

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 the Federal funds 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 matures on October 7, 2005.

SED International Holdings, Inc. and Subsidiaries

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

Credit Facility and Bank Debt (Continued)

The Fleet Agreement also contains certain covenants which, among other things, requires that if the Company’s availability is less than $5 million at any time 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 Fleet 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. As of May 7, 2003, the Company’s availability under the Fleet Agreement was $10.3 million. Average borrowings, maximum borrowings and the weighted average interest rate for the quarter ended March 31, 2003 were $14.7 million, $19.1 million and 3.74%, respectively. Average borrowings, maximum borrowings and the weighted average interest rate from October 7, 2002 through March 31, 2003 were $15.7 million, $23.7 million and 3.96%, respectively.

At March 31, 2003, the Company would not have been in compliance with certain financial covenants under the Fleet Agreement had it breached the $5 million availability threshold. In the future, if the Company were to breach the $5 million threshold and fail to comply with the required financial covenants, Fleet may declare an event of default and could demand repayment of all outstanding borrowings and discontinue the agreement. If Fleet were to declare an event of default, the Company’s liquidity and business operations could be adversely affected. Full details of the Fleet Agreement are reported on Form 10-K for the year ended June 30, 2002.

Until October 2002, the Company had a credit agreement with Wachovia Bank N.A. (“Wachovia”), which provided for borrowings under a line of credit of up to $25 million and $35 million at June 30, 2002 and 2001, respectively. The Wachovia credit 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 restrictions. The Company was able to borrow at Wachovia’s prime rate (5.25% at September 30, 2002) plus .50% or the Company could 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 expired November 1, 2002. Average borrowings, maximum borrowings and the weighted average interest rate for the quarter ended September 30, 2002 were $6.2 million, $13.6 million and 5.25%, respectively. Average borrowings, maximum borrowings and the weighted average interest rate for the six months ended December 31, 2002 were $3.2 million, $13.6 million and 5.25%, respectively. At September 30, 2002 the Company was in technical default with certain covenants under the Wachovia credit agreement; however, Wachovia and the Company subsequently waived the covenant violations and amended the agreement to achieve compliance.

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 March 31, 2003, the Company had $13,000 as compared to $2.4 million at June 30, 2002 of borrowings outstanding under these facilities. The weighted average monthly interest rate under these loan agreements for the nine month period ended March 31, 2003 was approximately 2.13%.

SED International Holdings, Inc. and Subsidiaries

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

11. Recently Issued Accounting Standards

In July 2001, the Financial Accounting Standards Board (“FASB”) issued Statement No. 142 (“SFAS 142”), Goodwill and Other Intangible Assets. SFAS 142 requires companies to cease amortizing goodwill that existed at June 30, 2001 and established a new method for testing goodwill for impairment on an annual basis (or an interim basis if an event occurs that might reduce the fair value of a reporting unit below its carrying value.) Any goodwill resulting from acquisitions completed after June 30, 2001 will not be amortized. SFAS 142 also requires that an identifiable intangible asset that is determined to have an indefinite useful economic life not be amortized, but separately tested for impairment using a fair value based approach. The Company adopted SFAS 142 as of July 1, 2001. However, the Company did not complete the required transitional impairment tests until the second quarter ended December 31, 2001. During the three-month period ended December 31, 2001, the Company tested goodwill arising from a prior business combination of an enterprise based in Argentina as of July 1, 2001 primarily utilizing a valuation technique relying on the expected present value of future cash flows. As a result of this valuation process as well as the application of the remaining provisions of SFAS 142, the Company recorded a pre-tax transitional impairment loss of $6,372,000, representing the write-off of all of the Company’s existing goodwill. This write-off was reported as a cumulative effect of a change in accounting principle, on a net of tax basis, as of July 1, 2001 in the Company’s Consolidated Statement of Operations for the six-month period ended December 31, 2001. The quarter ended September 30, 2001 was restated to reflect the implementation of SFAS 142 effective July 1, 2001. Prior to the adoption of SFAS 142 on July 2001, the Company amortized this goodwill over an estimated useful life of 30 years.

In July 2002, the FASB issued Statement No. 146, Accounting for Costs Associated with Exit or Disposal Activities (SFAS 146). SFAS 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies the Emerging Issues Task Force Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity including Certain Costs Incurred in a Restructuring. SFAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred, whereas EITF 94-3 had required recognition of the liability at the commitment date to an exit plan. The Company is required to adopt the provisions of SFAS 146 effective for exit or disposal activities initiated after December 31, 2002. The adoption of SFAS 146 had no material impact on the Company’s financial statements.

Effective July 1, 2002, the Company adopted the fair value method defined in SFAS No. 123, Accounting for Stock-Based Compensation. (“SFAS No. 123”). In December 2002, the FASB issued SFAS 148, Accounting for Stock-Based Compensation- Transition and Disclosure - an amendment of FASB Statement No. 123. For information regarding the adoption of the fair value method defined in SFAS No. 123, refer to Note 9.

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

The Company, from time to time, makes “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements reflect the expectations of management of the Company at the time such statements are made. The reader can identify such forward-looking statements by the use of words such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “intend(s),” “potential,” “continue,” or the negative of such terms, or other comparable terminology. Forward-looking statements also include the assumptions underlying or relating to any of the foregoing statements.

Actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors including, but not limited to, those set forth under “Risk Factors That May Affect Future Results” below. All forward-looking statements included in this Report on Form 10-Q are based on information available to the Company on the date hereof. The Company assumes no obligation to update any forward-looking statements.

Overview

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

Critical Accounting Policies and Estimates

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

Revenue Recognition. The Company recognizes revenues in accordance with the guidance of Staff Accounting Bulletin (“SAB”) No. 101, “Revenue Recognition in Financial Statements.” The Company recognizes revenue for products sold at the time shipment occurs and collection of the resulting receivable is deemed probable by the Company. The Company allows its customers to return product for exchange or credit subject to certain limitations. Provision for estimated losses on such returns are recorded at the time of sale. Funds received from vendors for product rebates are accounted for as a reduction of product cost. Shipping and handling revenues are included in net sales and shipping costs are included in cost of sales.

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, collect ability 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. The Company accounts for such contingencies in accordance with the provisions of Statement of Financial Accounting Standards No. 5.

Bad Debts. The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. On a monthly basis the Company applies a reserve calculation based on the aging of its receivables and either increases or decreases its estimate of doubtful accounts accordingly. If the financial condition of the Company’s customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. The Company maintains credit insurance for its significant customers.

Inventory. Inventories are stated at the lower of cost (first-in, first-out method) or market. 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 from the risk of inventory loss. Therefore, in determining the net realizable value of inventories, the Company 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, the Company 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 the Company from inventory losses, the risk of loss 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. 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 Discontinued Operations

At March 31, 2003, SED International do Brasil Distribuidora, Ltda. had assets of $49,000 and third party liabilities of $938,000. The assets include cash of $32,000 and rental deposits of $17,000. Liabilities include accounts payable related to inventory purchases of $785,000, accrued salaries and taxes of $47,000, retirement contributions of $48,000 and other miscellaneous accrued liabilities of $58,000.

SED International do Brasil Distribuidora, Ltda. has been transitioned from a commercial operating company into dormancy. During the dormancy period, the Company will incur ongoing operating expenses for attorney fees, statutory bookkeeping and reporting services, document storage and inventory storage cost until liquidation of the inventory. Please refer to Note 2 of the consolidated financial statements for further information regarding the results of operations for the reporting periods.

Results of Continuing Operations

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


			Three Months Ended						Nine Months Ended
			March 31,						March 31,

			2003			2002			2003			2002

REVENUES				100	%		100	%		100	%		100	%
COST OF REVENUES				96.0			95.7			95.4			95.2

GROSS MARGIN				4.0			4.3			4.6			5.1
OPERATING EXPENSES:
Selling, general and administrative expense				5.1			4.4			4.3			4.8
Depreciation and amortization expense				0.4			0.4			0.4			0.5
Foreign currency transaction loss				0.1			*			.2			*

	Total Operating Expenses			5.6			4.8			4.9			5.3

OPERATING LOSS				(1.6	)		(.5	)		(.3	)		(.2	)

OTHER INCOME (EXPENSES):
Interest expense, net				(0.1	)		*			(0.1	)		*
Gain (loss) on disposal of assets, net				*			*			*
Other, net										0.1			*

		Total Other Income		(0.1	)		(0.1	)		*			*
LOSS BEFORE INCOME
TAXES AND BEFORE CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE				(1 .7	)		(.6	)		(.3	)		(.2	)
INCOME TAX EXPENSE				.1			.1			.2			.1

LOSS BEFORE CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE				(1.8	)		(.7	)		(.5	)		(.5	)
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE NET OF INCOME TAX BENEFIT OF $75,000													(1.9	)

LOSS FROM CONTINUING OPERATIONS				(1.8	)%		(.7	)%		(.5	)%		(2.4	)%

less than 0.5%

Three Months Ended March 31, 2003 and 2002

Revenues. Total revenues for the three months ended March 31, 2003 decreased 14.8% to $94.4 million as compared to $110.9 million for the three months ended March 31, 2002. Microcomputer product sales for the three months ended March 31, 2003 decreased 18.3% to $85.7 million as compared to $105.0 million for the three months ended March 31, 2002. The decline in microcomputer product sales for the three months ended March 31, 2003 was primarily due to the overall general decline in the economy coupled with continued pricing pressures in the market. Wireless telephone revenues for the three months ended March 31, 2003 increased 50.9% to $8.5 million as compared to $5.6 million for the three months ended March 31, 2002. The increase in wireless revenues over the prior year quarter is primarily due to expanded product lines and distribution rights.

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


		Three Months Ended
		March 31,				Change

		2003		2002		Amount			Percent

United States:
	Domestic	$	72.6	$	82.6		($10.0	)		(12.1	%)
	Export		12.3		20.4		(8.1	)		(39.7	)
	Latin America		9.5		7.9		1.6			20.7

Consolidated		$	94.4	$	110.9		($16.5	)		(14.8	%)

Domestic revenues decreased $10.0 million to $72.6 million or 12.1% for the three months ended March 31, 2003 as compared to $82.6 million for the three months ended March 31, 2002. The decrease is attributed to a decline in hard drive and CPU sales offset by the increase in the Company’s wireless product lines.

The decline in the U.S. export sales was due primarily to lower sales of printers and printer consumables. Sales of microcomputer products represented approximately 90.7% of the Company’s third quarter net sales compared to 94.6% for the same period last year. Sales of wireless telephone products accounted for approximately 8.9% of the Company’s third quarter net sales compared to 5.0% for the same period last year.

The increase in sales in Latin America was principally due to the improving economies in both Argentina and Colombia.

During the three months ended March 31, 2003, one single customer accounted for approximately 10% of the Company’s total revenue. For the three months ended March 31, 2002, one customer accounted for 14.1% of the Company’s total revenue. There can be no assurance that significant customers will continue to purchase products from the Company at current levels in the future, and the loss of one or more of these significant customers could have a material adverse affect on the Company’s business, financial condition or results of operations.

Gross Profit Margins. Gross profit margin was $3.8 million or 4.0% for the three months ended March 31, 2003 compared to $4.8 million or 4.3% for the three months ended March 31, 2002. The decrease in the gross profit margin is primarily a result of lower margin sales and overall pricing pressures in the market. The Company’s margins may be affected by several factors including (i) the mix of products sold, (ii) the price of products sold and provided and (iii) increased competition.

Selling, General and Administrative Expense. Selling, general and administrative expenses were $4.8 million for the three months ended March 31, 2003 and 2002. Selling, general and administrative expenses as a percentage of revenues were 5.1% for the three months ended March 31, 2003 as compared to 4.4% for the three months ended March 31, 2002. During the quarter ended March 2003, the Company recorded termination charges related to a reduction in force of approximately $258,000 and facility reserves of $250,000 for excess space in it’s Miami warehouse. These expenses were partially offset by a reduction in the company’s medical insurance and other reserves of $203,000 and the reduction of the Company’s amortization expense associated with the cancellation of previously granted stock awards of $90,000.

Depreciation. Depreciation expense was $375,000 and $469,000 for the three months ended March 31, 2003 and 2002, respectively.

Foreign Currency Transaction. Foreign currency transaction losses for the three months ended March 31, 2003 were $138,000 as compared to $17,000 for the three months ended March 31, 2002.

Interest Expense, Net. Interest expense, net was $96,000 and $79,000 for the three months ended March 31, 2003 and 2002, respectively. The increase in interest expense is related to increased borrowings under the Company’s credit facility.

Provision for Income Taxes. Income tax expense was approximately $79,000 for the three months ended March 31, 2003 as compared to $137,000 for the three months ended March 31, 2002. The provision is primarily related to income generated by the Company’s Latin American subsidiaries.

Nine Months Ended March 31, 2003 and 2002

Revenues. Total revenues for the nine months ended March 31, 2003 decreased approximately 1.8% to $318.5 million as compared to $324.5 million for the nine months ended March 31, 2002. Microcomputer product sales for the nine months ended March 31, 2003 decreased 7.5% to $284.7 million as compared to $307.4 million for the nine months ended March 31, 2002. The decrease in microcomputer product sales for the nine months ended March 31, 2003 was due primarily to increased competition, pricing pressures and the overall decline in the economy. Wireless telephone revenues for the nine months ended March 31, 2003 increased 105% to $32.8 million as compared to $16.0 million for the nine months ended March 31, 2002. The increase in wireless revenues is primarily due to expanded product lines and distribution channels.

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


		Nine Months Ended
		March 31,					Change

		2003		2002			Amount			Percent

United States:
	Domestic	$	248.3	$	238.7		$	9.6			4.0	%
	Export		42.0		56.3			(14.3	)		(25.5	)
	Latin America		28.2		29.9			(1.7	)		(5.5	)
	Elimination		0.0		(0.4	)		0.4			100.0

Consolidated		$	318.5	$	324.5		$	(6.0	)		(1.8	%)

Although total revenues for the nine-month period ended March 31, 2003 declined $6.0 million or 1.8%, the Company has experienced a shift in its domestic and international revenues from the same period last year. Domestic revenues accounted for approximately 78.0% of overall sales for the nine months ended March 31, 2003 compared to 73.6% for the nine months ended March 31, 2002 while international revenues accounted for 22.1% and 26.4% for the periods ending March 31, 2003 and 2002 respectively.

Domestic revenues increased $9.6 million to $248.3 million or 4.0% for the nine months ended March 31, 2003 as compared to $238.7 million for the nine months ended March 31, 2002. The increase is attributed to the development of additional distribution channels for the Company’s wireless product lines offset by slower demand of microcomputer products.

The decline in the U.S. export sales was due primarily to lower sales of printers and printer consumables. Sales of microcomputer products represented approximately 89.4% of the Company’s sales for the nine month period ending March 31, 2003 as compared to 94.7% for the same period last year. Sales of wireless telephone products accounted for approximately 10.3% of the Company’s sales for the nine month period ending March 31, 2003 as compared to 4.9% for the same period last year.

The decrease in revenues in Latin America was principally due to lower sales to customers in Argentina and Colombia associated with more stringent credit standards, a change in sales pricing policies and the decline in the Argentine economy as a whole.

During the nine months ended March 31, 2003, no one single customer accounted for more than 10% of the Company’s total revenue. For the nine months ended March 31, 2002, one customer accounted for 13.7% of the Company’s total revenue. There can be no assurance that significant customers will continue to purchase products from the Company at current levels in the future, and the loss of one or more of these significant customers could have a material adverse affect on the Company’s business, financial condition or results of operations.

Gross Profit Margins. Gross profit margin was $14.6 million or 4.6% for the nine months ended March 31, 2003 compared to $15.7 million or 4.8% for the nine months ended March 31, 2002. The decrease in the gross profit margin is primarily a result of lower margin sales and overall pricing pressures in the market. The Company’s margins may be affected by several factors including (i) the mix of products sold, (ii) the price of products sold and provided and (iii) increased competition.

Selling, General and Administrative Expense. Selling, general and administrative expenses were $13.7 million and $15.7 million for the nine months ended March 31, 2003 and 2002, respectively. Selling, general and administrative expenses as a percentage of revenues were 4.3% for the nine months ended March 31, 2003 as compared to 4.8% for the nine months ended March 31, 2002. The decrease is primarily due to the Company’s ongoing efforts to reduced employee costs and general overhead expenses

Depreciation. Depreciation expense was $1.2 million and $1.6 million for the nine months ended March 31, 2003 and 2002, respectively.

Foreign Currency Transaction. Foreign currency transaction loss was $621,000 as compared to a gain of ($214,000) for the nine months ended March 31, 2003 and 2002, respectively.

Interest Expense, Net. Interest expense, net was $419,000 and $106,000 for the nine months ended March 31, 2003 and 2002, respectively. This is directly related to the increase in borrowings under the Fleet Agreement.

Other Income. Other income for the nine months ended March 31, 2003 was $512,932. In December, 2002, the Company entered into a confidential settlement agreement for claims arising out of a disagreement with a former insurance broker. The favorable proceeds were recorded net of attorneys’ fees of $96,420.

Provision for Income Taxes. Income tax expense was approximately $519,000 for the nine months ended March 31, 2003 as compared to $407,000 for the nine months ended March 31, 2002. The provision is primarily related to income generated by the Company’s Latin American subsidiaries.

Financial Condition and Liquidity

Overview. At March 31, 2003 the Company had cash and cash equivalents totaling $5.6 million. At March 31, 2003, the Company’s principal source of liquidity is its $5.6 million of cash and borrowings available under its revolving credit facility. The Company’s availability under the Fleet Agreement was $10.3 million on May 7, 2003. Historically, the Company has financed its liquidity needs largely through internally generated funds, borrowings under a revolving credit agreement, subsidiary bank credit agreements, and vendor lines of credit. In October 2002, the Company entered into a three year, $35 million credit facility with Fleet Capital Corporation, which was used in part to pay off the Wachovia Bank borrowings. The Company derives all of its operating income and cash flow from its subsidiaries and relies on such cash flows to satisfy its obligations on a consolidated basis. As the Company continues operations in Latin America, management believes that domestic banking agreements and international monetary restrictions may limit the Company’s ability to transfer cash between its domestic and international subsidiaries. The Company has no off-balance sheet arrangements including special purpose entities.

Operating Activities. Cash used by operating activities was $9.4 million and $10.1 million for the nine months ended March 31, 2003 and 2002, respectively.

Restricted cash decreased $800,000 to $0 at March 31, 2003 from $800,000 at June 30, 2002. This decrease was due to the expiration of time deposits pledged as collateral to secure letters of credit.

Net trade receivables were $33.4 million at March 31, 2003 and June 30, 2002. Average days sales outstanding at March 31, 2003 were approximately 32 days as compared to 33 days at June 30, 2002.

Inventories decreased $1.1 million to $35.6 million at March 31, 2003 from $36.7 million at June 30, 2002.

Prepaid and other current assets increased $400,000 to $1.8 million at March 31, 2003 from $1.4 million at June 30, 2002 primarily as a result of prepaid insurance policies.

Accounts payable decreased $5.1 million to $35.9 million at March 31, 2003 compared to $41.0 million at June 30, 2002 as a result of the discontinuance of third party financing and accelerated vendor payments that allowed the Company to take advantage of early payment discounts. Accrued liabilities at March 31, 2003 decreased $600,000 compared to June 30, 2002 primarily due to a reduction in employee and tax related accruals.

Investing Activities. During the first nine months of 2003, the Company made approximately $234,000 in capital expenditures primarily related to equipment purchases. The Company also generated cash of approximately $58,000 through the sale of assets associated with the discontinuance of its Brazilian subsidiary.

Financing Activities. Financing activities generated $7.7 million and $12.4 million for the nine months ended March 31, 2003 and 2002, respectively. This increase was primarily due to additional borrowings under the Company’s revolving credit facility.

Borrowings under the revolving credit facility increased $10.0 million to $14.9 million at March 31, 2003 compared to $4.9 million at June 30, 2002. The increase is primarily due to inventory purchases, discontinuance of a third party financing arrangement and the decrease in accounts payables.

Summary. The Company believes that funds generated from operations, together with its revolving credit agreement, subsidiary bank credit agreements, vendor credit lines and current cash, will be sufficient to support the short-term and long-term working capital and liquidity requirements.

Risk Factors That May Affect Future Results

The Company’s prospects are subject to certain risks and uncertainties as follows:

• 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 most likely 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.

• 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 and Latin America (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 10 of the consolidated financial statements.

• 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.

International Business Risks

Approximately 22.1% for the first nine months of fiscal 2003 and 26.4% for the nine months ended fiscal 2002 revenues were generated in markets outside of the United States. International sales are subject to the customary risks associated with international transactions, including political risks, local laws and taxes, the potential imposition of trade or currency exchange restrictions, tariff increases, transportation delays, difficulties or delays in collecting accounts receivable, exchange rate fluctuations and the effects of prolonged currency destabilization in major international markets. The Company may seek to mitigate its currency exchange fluctuation risk by entering into currency hedging transactions. The Company also acts to mitigate certain risks associated with international transactions through the purchase of political risk and credit insurance. However, there can be no assurance that these efforts will successfully limit the Company’s currency exchange fluctuation risk.

Ability to Attract and Retain Key Personnel

The Company’s continued growth and success depends to a significant extent on the continued service of senior management and other key employees, the development of additional management personnel and the hiring of new qualified employees. There can be no assurance that the Company will be successful in continuously recruiting new personnel or in retaining existing personnel. The loss of one or more key or other employees or the Company’s inability to attract additional qualified employees or retain other employees could have a material adverse effect on the Company’s business, results of operations or financial condition.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company is subject to market risk arising from adverse changes in interest rates and foreign exchange. The Company does not enter into financial investments for speculation or trading purposes and is not a party to any financial or commodity derivatives.

Interest Rate Risk

The Company’s cash equivalents and short-term investments and its outstanding debt bear variable interest rates which 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.

Foreign Currency Exchange

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. As a result of the change in currency, the company recorded foreign currency translation loss as a component of comprehensive income of approximately ($3.4) million for the nine months ended March 31, 2003.

The Company distributes many of its products in foreign countries, primarily in Latin America. Approximately 22.1% of the Company’s total net sales were generated from sales made to resellers located in Latin American countries during the nine month period ended March 31, 2003. The Company manages its risk to foreign currency rate changes by maintaining foreign currency bank accounts in currencies in which it regularly transacts business. Additionally, the Company’s foreign subsidiaries procure inventory payable in U.S dollars for resale in their respective countries. Upon settlement of the payables, the Company may be required to record transaction gains or losses resulting form currency fluctuations from the time the subsidiary entered into the agreement to settlement date of the liability. During the nine months ended March 31, 2003, the company recorded transaction losses of approximately $621,000. At March 31, 2003, the Company’s foreign subsidiaries had approximately $4.4 million in U.S dollar denominated liabilities. In the aggregate, if the value of the dollar against the foreign denominated currency strengthens by 10%, the Company would record a transaction loss of approximately ($440,000). Conversely, if the value of the dollar declines by 10%, the Company would record a transaction gain of approximately $440,000. The Company was not a party to any hedge transactions as of March 31, 2003.

The information included in the Company’s financial statements, and other documentation, does not include the potential impact that might arise from any decline in foreign currency in Latin American after March 31, 2003 or those declines which may occur in the future and, accordingly, should be analyzed considering that circumstance.

ITEM 4. CONTROLS AND PROCEDURES

The Company maintains disclosure controls and procedures designed to ensure that information required to be disclosed in its filings under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. The Company’s principal executive and financial officers have evaluated these disclosure controls and procedures within 90 days prior to the filing of this Report on Form 10-Q and have concluded that such disclosure controls and procedures are effective.

Subsequent to their evaluation, there have been no significant changes in internal controls or other factors known to management of the Company that could significantly affect internal controls nor any corrective actions with regard to significant deficiencies and material weaknesses

PART II — OTHER INFORMATION

ITEM 6. Exhibits and Reports on Form 8-K

(a) Exhibits


		Exhibit 99.1 Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

		Exhibit 99.2 Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(b) Reports on Form 8-K


		On April 1, 2003, the Company filed a report on Form 8-K reporting under Item 5 that Mr. Philip D. Flynt has been promoted from Corporate Controller to the positions of Chief Financial Officer, Vice President — Finance, Secretary and Treasurer

Items 1, 2, 3, 4 and 5 of Part II are not applicable and have been omitted.

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)

/s/ Philip Flynt

Philip Flynt
Vice President and
Chief Financial Officer,
Secretary and Treasurer
(Principal Financial and
Accounting Officer)

Date: May 14, 2003

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

I, Gerald Diamond, certify that:

1. I have reviewed this quarterly report on Form 10-Q of SED International Holdings, Inc.;

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors:

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: May 14, 2003

/s/ Gerald Diamond

Gerald Diamond
Chief Executive Officer
(Principal Executive Officer)

CERTIFICATION OF CHIEF FINANCIAL OFFICER

I, Philip Flynt, certify that:

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors:

6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: May 14, 2003

/s/ Philip Flynt

Philip Flynt
Chief Financial Officer
(Principal Financial Officer)

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	March 31,			June 30,
	2003			2002

Trade receivables	$	34,988		$	34,848
Less: allowance for doubtful accounts		(1,608	)		(1,455	)

	$	33,380		$	33,393

	•		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 most likely 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.

	•		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 and Latin America (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 10 of the consolidated financial statements.

1.		I have reviewed this quarterly report on Form 10-Q of SED International Holdings, Inc.;

2.		Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.		Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4.		The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

	a)		designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

	b)		evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

	c)		presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

	a)		all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

	b)		any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6.		The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

		Date: May 14, 2003

		/s/ Gerald Diamond

		Gerald Diamond Chief Executive Officer (Principal Executive Officer)

6.		The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

		Date: May 14, 2003

		/s/ Philip Flynt

		Philip Flynt Chief Financial Officer (Principal Financial Officer)