10-Q 1 c55622_10q.htm c55622_10q.htm -- Converted by SEC Publisher, created by BCL Technologies Inc., for SEC Filing

 

 
 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(mark one)    
     
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)  
  OF THE SECURITIES EXCHANGE ACT OF 1934  
     
  For the quarterly period ended September 30, 2008  
     
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)  
  OF THE SECURITIES EXCHANGE ACT OF 1934  
     
  For the transition period from             To  
     
  Commission File Number 0-16345  

SED International Holdings, Inc.
(Exact Name of Registrant as Specified in Its Charter)

GEORGIA 22-2715444
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
 
4916 NORTH ROYAL ATLANTA DRIVE, TUCKER, GEORGIA 30084
  (Zip Code)
 (Address of principal executive offices)  
 
(770) 491-8962
(Registrant’s telephone number, including area code)
 
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since last report)

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

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

Large Accelerated filer o Accelerated filer o
Non-accelerated filer o Smaller reporting company x

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

The number of shares outstanding of the Registrant’s common stock, par value $.01 per share, at November 1, 2008 was 4,823,141 shares.

 
 

SED International Holdings, Inc. and Subsidiaries

INDEX

PART I - FINANCIAL INFORMATION:  
     
           Item 1. Financial Statements Page
     
  Condensed Consolidated Balance Sheets as of  
  September 30, 2008 (Unaudited) and June 30, 2008    3
     
  Condensed Consolidated Statements of Operations for the  
  three months ended September 30, 2008 and 2007 (Unaudited)    4
     
  Condensed Consolidated Statements of Cash Flows for the  
  three months ended September 30, 2008 and 2007 (Unaudited)    5
     
  Notes to Condensed Consolidated Financial Statements (Unaudited)    6
     
           Item 2. Management’s Discussion and Analysis of Financial  
  Condition and Results of Operations    12
     
           Item 3. Quantitative and Qualitative Disclosures about Market Risk    15
     
           Item 4T. Controls and Procedures    15
   
PART II - OTHER INFORMATION:  
     
           Item 1. Legal Proceedings    16
     
           Item 1A. Risk Factors    17
     
           Item 2. Unregistered Sales of Equity Securities and Use of Proceeds    17
     
           Item 3. Defaults Upon Senior Securities    17
     
           Item 4. Submission of Matters to a Vote of Security Holders    17
     
           Item 5. Other Information    17
     
           Item 6. Exhibits    17
     
SIGNATURES      18

FORWARD LOOKING STATEMENT INFORMATION

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

2

SED International Holdings, Inc. and Subsidiaries

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

    September 30, 2008       June 30, 2008  
 
    (Unaudited)       (Note 1)  
 
ASSETS              
Current assets:              
     Cash and cash equivalents $ 3,853     $ 4,086  
     Trade receivables, net   46,747       44,839  
     Inventories, net   40,555       36,116  
     Deferred income taxes, net   254       260  
     Other current assets   5,572       6,482  
                   Total current assets   96,981       91,783  
Property and equipment, net   957       1,044  
                   Total assets $ 97,938     $ 92,827  
 
         LIABILITIES AND SHAREHOLDERS' EQUITY              
Current liabilities:              
     Trade accounts payable $ 47,118     $ 45,986  
     Accrued and other current liabilities   6,214       7,732  
     Revolving credit facility   25,388       18,837  
                   Total liabilities   78,720       72,555  
 
Commitments and contingencies              
 
Shareholders' equity:              
     Preferred stock, $1.00 par value; authorized: 129,500              
           shares, none issued   —       —  
 
     Common stock, $.01 par value; 100,000,000 shares              
             authorized; 6,517,632 issued and 4,823,141              
             shares outstanding at September 30, 2008              
             and 6,278,347 issued and 4,583,856 shares              
             outstanding at June 30, 2008   65       63  
     Additional paid-in capital   68,879       68,681  
     Accumulated deficit   (32,769 )     (32,443 )
     Accumulated other comprehensive loss   (3,870 )     (2,942 )
     Treasury stock, 1,694,491 shares, at cost   (13,087 )     (13,087 )
                   Total shareholders' equity   19,218       20,272  
                   Total liabilities and shareholders' equity $ 97,938     $ 92,827  

See notes to condensed consolidated financial statements.

3

SED International Holdings, Inc. and Subsidiaries

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

    Three Months Ended
    September 30,
    2008       2007
 
Net sales $ 120,718     $ 126,696
Cost of sales   114,168       119,807
Gross profit   6,550       6,889
Operating expenses:            
     Selling, general and administrative expense   5,734       5,544
     Depreciation and amortization expense   119       115
     Foreign currency transaction loss   882       182
             Total operating expenses   6,735       5,841
Operating (loss) income   (185 )     1,048
Interest expense   304       508
(Loss) income before income taxes   (489 )     540
Income tax (benefit) expense   (163 )     180
Net (loss) income $ (326 )   $ 360
 
Basic and diluted (loss) income per common share $ (.08 )   $ .09
 
Weighted average number of shares outstanding:            
             Basic   4,004,000       3,879,000
             Diluted   4,004,000       3,932,000

See notes to condensed consolidated financial statements.

4

SED International Holdings, Inc. and Subsidiaries

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

    Three Months Ended  
    September 30,  
    2008       2007  
 
Net cash used in operating activities $ (6,474 )  
$
(1,933 )
Cash flows used in investing activities:              
Purchases of equipment   (46 )     (105 )
     Net cash used in investing activities   (46 )     (105 )
Cash flows provided by financing activities:              
Net borrowings under revolving credit facility   6,550       2,847  
     Net cash provided by financing activities   6,550       2,847  
Effect of exchange rate changes on cash and cash equivalents
 
(263
)
    (68 )
Net (decrease) increase in cash and cash equivalents   (233 )     741  
Cash and cash equivalents at beginning of period   4,086       3,356  
Cash and cash equivalents at end of period $ 3,853    
$
4,097  

See notes to condensed consolidated financial statements.

5

SED International Holdings, Inc. and Subsidiaries

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

1.     

Basis of Presentation

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

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

2.     

Earnings (Loss) per Common Share

               Basic earnings (loss) per share is computed on the basis of the weighted average number of shares of common stock outstanding during the period. Diluted earnings (loss) per share is computed on the basis of the weighted average number of shares of common stock plus the effect of dilutive potential common shares outstanding during the period using the treasury stock method. Included in diluted earnings (loss) are the dilutive effect of options to purchase 92,500 shares of commons stock for the three months ended September 30, 2007.

               Diluted earnings per common share for the three months ended September 30, 2008 and 2007 does not reflect the total of any incremental shares related to the assumed conversion or exercise of anti-dilutive stock options (503,659 and 438,909 for the three months ended September 30, 2008 and 2007, respectively). Also, excluded from the diluted earnings per share calculation for the three months ended September 30, 2008 were 819,285 shares of unvested restricted stock due to their anti-dilutive effect.

3.     

Trade Receivables

    September 30,       June 30,  
    2008       2008  
 
Trade receivables $ 47,510     $ 45,592  
Less: allowance for doubtful accounts   (763 )     (753 )
  $ 46,747     $ 44,839  

4.     

Inventories

    September 30,       June 30,  
    2008       2008  
 
Inventories on hand $ 37,807     $ 32,187  
Inventories in transit   3,611       4,626  
Less: allowances   (863 )     (697 )
  $ 40,555     $ 36,116  

5.     

Comprehensive Loss

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

6

                Comprehensive loss, net of income taxes, for the three months ended September 30, 2008 and 2007, respectively, is as follows:

    Three Months ended
    September 30,
    2008       2007  
Net (loss) income $ (326 )   $ 360  
Changes in foreign translation adjustments   (976 )     (268 )
Changes in fair value of interest rate swap contract   48       (192 )
Comprehensive loss $ (1,254 )   $ (100 )

                There were no income tax effects for the three months ended September 30, 2008 or 2007. The deferred income tax asset related to the cumulative comprehensive losses was fully offset by a valuation allowance as of the beginning and end of the three months periods ended September 30, 2008 and 2007 and, therefore, the comprehensive income or loss for these periods had no income tax effect.

                Accumulated other comprehensive loss included in shareholders’ equity totaled $3.9 million and $2.9 million at September 30, 2008 and June 30, 2008, respectively, and consisted of foreign currency translation adjustments of $3.6 million and $2.6 million and changes in the fair value of interest rate swap contract of $.3 million and $.3 million.

6.     

Segment Reporting

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

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

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

      United States     Latin America     Eliminations       Consolidation
For the three months ended September 30, 2007                          
Net sales to unaffiliated customers   $ 102,809   $ 25,071   $ (1,184 )   $ 126,696
Gross profit   $ 4,839   $ 2,050     —     $ 6,889
Foreign currency transaction loss     —   $ 182     —     $ 182
Operating income   $ 531   $ 517     —     $ 1,048
Interest expense   $ 508     —     —     $ 508
Income tax expense   $ 13   $ 167     —     $ 180
Net income   $ 10   $ 350     —     $ 360
Total assets at September 30, 2007   $ 90,478   $ 24,243   $ (12,938 )   $ 101,783

7

Net sales by product category is as follows:

      Consumer   Wireless            
For the three months Micro-Computer   Electronics   Telephone   Handling      
ended September 30, Products   Products   Products   Revenue   Total
2008  $ 109,044   $ 8,938   $ 2,474   $ 262   $ 120,718
2007  $ 118,693   $ 5,703   $ 2,066   $ 234   $ 126,696

                Approximately 46.7% and 36.3% of SED's net sales for the three months ended September 30, 2008 and 2007, respectively, consisted of sales to customers for export principally into Latin America and direct sales to customers in Colombia and Argentina.

7.     

Restricted Stock

               The Company’s stock option plan established in 1999 (the “1999 Plan”) also permits the grant of restricted stock awards. No restricted stock awards were granted or forfeited under the 1999 Plan during fiscal 2008 or the three months ended September 30, 2008. Also, no restricted stock awards were outstanding under the 1999 Plan at September 30, 2008. SED established the 2007 Restrictive Stock Plan (the “2007 Plan) during fiscal 2008. A total of 750,000 shares of the Company’s authorized and unissued shares of common stock were reserved for grants under the 2007 Plan. Generally, the awards are subject to forfeiture prior to vesting and begin vesting in equal amounts on the second, third and fourth anniversaries of the grant date; provided, however, that at the time of vesting the holder is an employee of the Company. The value of the 2007 Restricted Stock Plan awards issued in fiscal 2008 was determined using the market price of the Company’s common stock on the grant date. The total compensation cost of the restricted stock awards over the four year vesting period is expected to be $940,000, net of $62,000 estimated forfeitures. The compensation cost of the restricted stock issued in fiscal 2008 is being amortized and expensed over a vesting period of four years. During the three months ended September 30, 2008, there were no restricted shares forfeited and none were granted. At September 30, 2008, 705,000 shares of restricted stock were outstanding under the 2007 Plan and the related unrecognized compensation cost was $724,000 which SED expects to be recognized ratably over the next 37 months.

               On July 1, 2008, the Company issued 22,857 shares of restricted common stock to each of its five non-employee directors in accordance with the Company’s board compensation plan. Each of the non-employee directors entered into a restricted stock agreement with respect to his respective shares of restricted common stock (the “Restricted Stock Agreement”). The value of the director’s restricted stock awards was determined using the market price of the Company’s common stock on the grant date of $1.75. Generally, the shares issued to the non-employee directors will be subject to forfeiture prior to vesting and vest in equal amounts on the first and second anniversary dates of the issuance date. At September 30, 2008, 114,285 shares were outstanding and un-vested under the non-employee director’s Restrictive Stock Agreement. The total compensation cost of the restricted common stock over the two year vesting period is expected to be $200,000 with zero estimated forfeitures. The unrecognized compensation cost was $175,000 at September 30, 2008 which SED expects to be recognized ratably over the next 21 months.

               Compensation expense for share-based awards recognized in net (loss) income for the three months ended September 30, 2008 and 2007 was $84,000 and zero, respectively.

               On July 1, 2008, the Company issued 125,000 shares of restricted common stock to a vendor, an accredited investor, for services. At September 30, 2008, these shares were outstanding and fully vested.

8.     

Credit Facility and Bank Debt

               On March 1, 2007, SED signed a three-year extension of a credit facility with Wachovia Bank, National Association (the “Wachovia Agreement”) which extended the maturity to September 21, 2011. The Wachovia Agreement was originally entered into on September 21, 2005 with a term of three years. On January 10, 2008, SED elected to increase the Wachovia line of credit to $50.0 million. The Wachovia Agreement provides for revolving borrowings based on SED’s eligible accounts receivable and inventories as defined therein.

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

8

               The Wachovia Agreement contains certain covenants which, among other things, require that SED maintain unused availability of $5.0 million or more during the term of the agreement to make advances to SED’s Latin American subsidiaries. SED’s advances to its Latin American subsidiaries are restricted. The Wachovia Agreement also contains a covenant which requires that if SED’s unused availability is less than $3.5 million ($5.0 million prior to amendment) at any time during the term of the agreement, then maintenance of a minimum fixed charge coverage ratio is required, as defined. The Wachovia Agreement also restricts SED’s ability to distribute dividends.

               Available borrowings under this agreement, based on collateral limitations at September 30, 2008 were $13.3 million. Average borrowings, maximum borrowings and weighted average interest rate for the three months ended September 30, 2008 were $22.4 million, $26.2 million and 5.7%, respectively. The weighted average interest rate on outstanding borrowings under credit facilities was 5.7% at September 30, 2008.

               The carrying value of all bank debt at September 30, 2008 approximates its fair value based on the variable market rates of interest on such bank debt. Outstanding Letters of Credit under the Wachovia Agreement totaled $1.5 million at September 30, 2008.

               On January 26, 2007, the Company entered into a three-year interest rate swap contract to reduce the impact of the fluctuations in the interest rates on $5.0 million notional amount of the revolving credit facility. The contract effectively converted the variable rate to a fixed rate of 5.20% . On March 5, 2008, the three-year swap agreement was amended to a notional amount of $15.0 million with a fixed rate of 4.54% . The fixed rates cited above do not include Wachovia's rate mark-up, currently 1.5% . The Company utilizes derivative financial instruments to reduce interest rate risk. The Company does not hold or issue derivative financial instruments for trading purposes. Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”), establishes accounting and reporting standards for derivative instruments and hedging activities. As required by SFAS 133, the Company recognizes all derivatives as either assets or liabilities in the balance sheet and measures those instruments at fair value. The Company has designated its interest rate swap as a cash flow hedge. Accordingly, the gains and losses associated with changes in the fair value of the interest rate swap are reported in other comprehensive income as the hedge is highly effective in achieving offsetting changes in the fair value of cash flows of the asset or liability hedged. The fair value, not in the Company’s favor, of the interest rate swap was $272,000 at September 30, 2008 and is included in accrued expenses.

9.     

Legal Proceedings

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

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

               On June 19, 2006, the Company through its subsidiary, SED International, instituted an action in the Superior Court of Fulton County, State of Georgia captioned SED International, Inc. vs. Michael Levine, Civil Action file no. 2006-CV-118591. In the action, the Company asserts that Mr. Levine breached the terms of the Termination Agreement with SED International and requests that the court grant such equitable relief and damages as provided by law. In response, Mr. Levine has denied the Company’s assertions, filed a third party complaint against the Company and asserted counterclaims against SED International, alleging breach and infliction of emotional distress. In connection with the third party complaint and the counterclaims, Mr. Levine has asked that the court award him costs, fees and punitive damages. In October 2006, the Company filed an Answer to his third party complaint and discovery commenced. Since that time, Mr. Levine has withdrawn, without prejudice, all counterclaims filed by him against SED International and discovery has essentially been completed. The Company is vigorously prosecuting this action and has filed a motion for summary judgment to his third party complaint. Mr. Levine has filed a motion for summary judgment directed to the claims of SED International. A hearing was held on the summary judgment motions on September 9, 2008. The judge has denied the various summary judgment motions and the parties now anticipate going to trial before December 31, 2008.

9

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

10.     

Fair Value of Financial Instruments

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

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

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

               We endeavor to utilize the best available information in measuring the fair value of the interest rate swap. The interest rate swap is classified in its entirety based on the lowest level of input that is significant to the fair value measurement. We have determined that our interest rate swap is a Level 2 liability in the fair value hierarchy. The fair value, not in the Company’s favor, of the interest rate swap was $272,000 at September 30, 2008.

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

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11.     

New Accounting Pronouncements

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

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

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

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

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

Overview

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

Critical Accounting Policies and Estimates

               General. Management’s discussion and analysis of SED’s financial condition and results of operations are based upon SED’s 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 ongoing basis, management evaluates its estimates, including those related to vendor programs and incentives, bad debts, inventories, investments and income taxes. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Management believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its consolidated financial statements.

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

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

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

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

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

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

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

Results of Continuing Operations

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

    Three Months Ended
    September 30,
    2008     2007  
 
Net sales   100.00 %   100.00 %
Cost of sales, including buying and occupancy expense   94.57 %   94.56 %
Gross profit   5.43 %   5.44 %
Operating expenses:            
Selling, general and administrative expense   4.75 %   4.38 %
Depreciation and amortization expense   .10 %   .09 %
Foreign currency transaction loss   .73 %   .14 %
          Total operating expenses   5.58 %   4.61 %
Operating (loss) income   (.15 )%   .83 %
Interest expense   .25 %   .40 %
(Loss) income before income taxes   (.40 )%   .43 %
Income tax (benefit) expense   (.13 )%   .14 %
(Loss) income   (.27 )%   .29 %

Three Months Ended September 30, 2008 and 2007

               Revenues. Total net sales for the three months ended September 30, 2008 decreased 4.7%, or $6.0 million, to $120.7 million as compared to $126.7 million for the three months ended September 30, 2007. Microcomputer product sales, excluding handling revenue, for the three months ended September 30, 2008 decreased 8.1% to $109.0 million compared to $118.7 million for the three months ended September 30, 2007. This was primarily due to a decrease in laptop computers, consumables, hard drives and other computer product sales. Consumer electronics sales for the three months ended September 30, 2008 increased 56.7% to $8.9 million compared to $5.7 million for the three months ended September 30, 2007. Wireless revenues for the three months ended September 30, 2008 increased 19.7% to $2.5 million compared to $2.1 million for the three months ended September 30, 2007.

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

      Three Months Ended      
      September 30,     Change
      2008       2007       Amount     Percent  
    (Amounts in millions except percentage amounts)
United States                              
      Domestic   $ 64.3     $ 80.7     $ (16.4 )   (20.3 )%
      Export     29.2       22.1       7.1     32.1 %
Latin America     28.1       25.1       3.0     12.0 %
Elimination     (.9 )     (1.2 )     .3     25.0 %
Consolidated   $ 120.7     $ 126.7     $ (6.0 )   (4.7 )%

               Domestic revenues were $64.3 million and $80.7 million for the three months ended September 30, 2008 and 2007, respectively. The decrease was due to a decline in computer and consumer electronics sales. The aggregate of revenues from Export and Latin America was $56.4 million and $46.0 million for the three months ended September 30, 2008 and 2007, respectively. The increase was due to an increase in sales of computer products, printers and consumable printer products.

               Sales of microcomputer products, including handling revenue, represented approximately 90.5% of SED’s first quarter net sales compared to 93.9% for the same period last year. Sales of consumer electronics products accounted for approximately 7.4% of SED’s first quarter net sales compared to 4.5% for the same period last year. Sales of wireless telephone products accounted for approximately 2.0% of SED’s third quarter net sales compared to 1.6% for the same period last year.

               Gross Profit Margins. Gross profit margin decreased $.3 million to $6.6 million in the first quarter of fiscal 2008, compared to $6.9 million in the same quarter last year. Gross profit as a percentage of net sales was 5.4% for the first quarter of fiscal 2009 and 2008. Overall, SED continues to experience pricing pressure in selling products.

               Selling, General and Administrative Expenses. Selling, general and administrative expenses, excluding depreciation and amortization expense and foreign currency transaction losses, for the first quarter of fiscal 2009 increased 3.4% to $5.7 million, compared to $5.5 million for the first quarter of fiscal 2008. The increase in selling, general and administrative expenses was primarily due from several factors including: (i.) an increase of approximately $270,000 in employee expense related to government mandated salary increases in Latin America and additional personnel in the consumer electronics sales force in the United States; (ii.) a decrease of approximately $220,000 in credit and collection expenses; (iii.) an increase of approximately $150,000 in professional fees and (iv) an net decrease of $10,000 of other expenses.

               Depreciation. Depreciation and amortization was $.1 million for each of the three months ended September 30, 2008 and 2007.

               Foreign Currency Transaction. SED has significant U.S. Dollar denominated liabilities recorded in its Latin American subsidiaries. The devaluation of the Latin American currencies vs. the U.S. Dollar resulted in a foreign currency transaction loss totaling approximately $.9 million for the three months ended September 30, 2008 as compared to a loss of approximately $.2 million for the three months ended September 30, 2007.

               Interest Expense. Interest expense was approximately $.3 million and $.5 million for the three months ended September 30, 2008 and 2007, respectively. This change resulted primarily from declining interest rates.

               Provision for Income Taxes. Income tax benefit was $.2 million for the three months ended September 30, 2008 as compared to an income tax expense of $.2 million for the three months ended September 30, 2007. The provision is primarily related to losses or income generated by SED’s Latin American subsidiaries. The (benefit) provision for income taxes differs from the amount which would result from applying the statutory Federal income tax rate due to the taxes imposed on the foreign subsidiaries as well as the fact that SED is not fully valuing a tax asset and benefit of the net operating loss carry forward.

Financial Condition and Liquidity

               Overview. At September 30, 2008, SED had cash and cash equivalents totaling $ 3.9 million. At September 30, 2008, SED’s principal source of liquidity is its cash, cash equivalents, trade receivables, inventories and amounts available for use under its revolving credit facility. SED’s accounts receivable and inventory collateralize SED’s borrowings. SED’s availability under the Wachovia Agreement was $13.3 million on September 30, 2008, net of $1.5 million in reserves for outstanding Letters of Credit.

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Historically, SED 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 September 2005, SED entered into a three year, $35.0 million credit facility with Wachovia Bank, National Association. The agreement was amended in March 2007 to extend the maturity date to September 2011. On January 10, 2008, SED elected to permanently increase the Wachovia line of credit to $50.0 million. SED derives a substantial portion of its operating income and reported cash flows from its foreign subsidiaries and, due to certain bank and regulatory regulations, relies on such cash flows to satisfy its foreign obligations. While SED continues operations in Latin America, management believes that domestic banking agreements and international monetary restrictions may limit SED’s ability to transfer cash between its domestic and international subsidiaries. SED has no off-balance sheet arrangements or transactions involving special purpose entities.

               Operating Activities. Cash used in operating activities was $6.5 million for the three months ended September 30, 2008 as compared to $1.9 million used in operating activities for the three months ended September 30, 2007.

               Net trade receivables were $46.7 million at September 30, 2008 and $44.8 million at June 30, 2008. The increase in trade receivables is a result of higher sales in September 2008 as compared to June 2008. Average days sales outstanding at September 30, 2008 were approximately 35.6 days as compared to 35.4 days at June 30, 2008.

               Net inventories increased $4.4 million to $40.6 million at September 30, 2008 from $36.1 million at June 30, 2008. SED continues to monitor inventory levels and adjusts according to current and projected sales volumes.

               Other current assets decreased to $5.6 million at September 30, 2008 from $6.5 million at June 30, 2008.

               Trade accounts payable increased $1.1 million to $47.1 million at September 30, 2008 compared to $46.0 million at June 30, 2008. The increase in trade accounts payable is primarily attributed to timing of vendor payments.

               Financing Activities. Net borrowings under the revolving credit facility increased $6.6 million to $25.4 million at September 30, 2008 compared to $18.8 million at June 30, 2008.

               There have been no material changes to obligations and/or commitments since last fiscal year-end. Purchase orders or contracts for the purchase of inventories and other goods and services are not included in our estimates. We are not able to determine the aggregate amount of such purchase orders that represent contractual obligations, as purchase orders may represent authorizations to purchase rather than binding agreements. Our purchase orders are based on our current distribution needs and are fulfilled by our vendors within short time horizons. SED does not have significant agreements for the purchase of inventories or other goods specifying minimum quantities or set prices that exceed our expected requirements as of September 30, 2008.

               Summary. SED 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 working capital and liquidity requirements for at least the next 12 months.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

ITEM 4T. CONTROLS AND PROCEDURES

  (a)

Evaluation of Disclosure Controls and Procedures

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

  (b) Changes in Internal Control over Financial Reporting

                There were no changes in our internal controls over financial reporting that occurred during the quarter ended September 30, 2008 that have materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II – OTHER INFORMATION

ITEM 1. Legal Proceedings

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

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

               On June 19, 2006, the Company through its subsidiary, SED International, instituted an action in the Superior Court of Fulton County, State of Georgia captioned SED International, Inc. vs. Michael Levine, Civil Action file no. 2006-CV-118591. In the action, the Company asserts that Mr. Levine breached the terms of the Termination Agreement with SED International and requests that the court grant such equitable relief and damages as provided by law. In response, Mr. Levine has denied the Company’s assertions, filed a third party complaint against the Company and asserted counterclaims against SED International, alleging breach and infliction of emotional distress. In connection with the third party complaint and the counterclaims, Mr. Levine has asked that the court award him costs, fees and punitive damages. In October 2006, the Company filed an Answer to his third party complaint and discovery commenced. Since that time, Mr. Levine has withdrawn, without prejudice, all counterclaims filed by him against SED International and discovery has essentially been completed. The Company is vigorously prosecuting this action and has filed a motion for summary judgment to his third party complaint. Mr. Levine has filed a motion for summary judgment directed to the claims of SED International. A hearing was held on the summary judgment motions on September 9, 2008. The judge has denied the various summary judgment motions and the parties now anticipate going to trial before December 31, 2008.

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

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which the Company denies and expects to vigorously defend against. At the same time, the Company is now vigorously defending its interests in the New Jersey Suit, and now has additional defenses to recovery based upon the existence of the settlement agreement.

ITEM 1A.     Risk Factors

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

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

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

                The disclosure of the information required by this Item previously has been included in our Current Report on Form 8-K filed on July 7, 2008.

ITEM 3.    Defaults Upon Senior Securities

               None.

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

               None.

ITEM 5.    Other Information

               Not applicable.

ITEM 6.    Exhibits

Exhibits   Description
 
 10.1      Final Form of Restricted Stock Agreement, dated as of July 1, 2008, between the
       Company and each of the non-employee directors.(1)
 31.1      Rule 13a-14(a)/15d-14(a) Certification by Principal Executive Officer.
 31.2      Rule 13a-14(a)/15d-14(a) Certification by Principal Financial Officer.
 32.1      Section 1350 Certification by Principal Executive Officer.
 32.2      Section 1350 Certification by Principal Financial Officer.

______________

(1)     

Incorporated herein by reference to Exhibit 10.1 from the Company’s Current Report on Form 8-K filed on July 7, 2008

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SIGNATURES

                Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

    SED International Holdings, Inc.  
              (Registrant)
Date: November 12, 2008    
    /s/ Jean Diamond
    Jean Diamond
    Chief Executive Officer
    (Principal Executive Officer)
 
Date: November 12, 2008   /s/ Lyle Dickler
    Lyle Dickler
    Chief Financial Officer
    (Principal Financial and Accounting Officer)

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