FORM 10-Q

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 March 31, 2010

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

For the transition period from To

Commission File Number 0-16345

SED International Holdings, Inc.

(Exact Name of Registrant as Specified in Its Charter)


GEORGIA		22-2715444
(State or Other Jurisdiction		(I.R.S. Employer
of Incorporation or Organization)		Identification No.)


4916 North royal ATLANTA DRIVE, Tucker, Georgia		30084-3031
(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 .

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes . No .

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	.	Accelerated filer	.
Non-accelerated filer	.	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 . No X .

The number of shares outstanding of the Registrant’s common stock, par value $.01 per share, at May 3, 2010 was 5,052,415 shares.

SED International Holdings, Inc. and Subsidiaries

INDEX


PART I - FINANCIAL INFORMATION:

Item 1.	Financial Statements	Page

	Condensed Consolidated Balance Sheets as of March 31, 2010 (Unaudited) and June 30, 2009	3

	Condensed Consolidated Statements of Operations for the three months and nine months ended March 31, 2010 and 2009 (Unaudited)	4

	Condensed Consolidated Statements of Cash Flows for the nine months ended March 31, 2010 and 2009 (Unaudited)	5

	Notes to Condensed Consolidated Financial Statements (Unaudited)	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	18

Item 4.	Controls and Procedures	18

PART II - OTHER INFORMATION:

Item 1.	Legal Proceedings	20

Item 1A.	Risk Factors	20

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	20

Item 3.	Defaults Upon Senior Securities	20

Item 4.	[REMOVED AND RESERVED]	20

Item 5.	Other Information	20

Item 6.	Exhibits	20

SIGNATURES		21

FORWARD LOOKING STATEMENT INFORMATION

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

SED International Holdings, Inc. and Subsidiaries

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except share and per share amounts)


		March 31, 2010		June 30, 2009
		(Unaudited)		(Note 1)

ASSETS
Current assets:
Cash and cash equivalents	$	4,179	$	3,570
Trade receivables, net		56,578		50,128
Inventories, net		50,366		38,532
Deferred tax assets, net		294		286
Other current assets		5,686		5,653
Total current assets		117,103		98,169
Property and equipment, net		923		720
Total assets	$	118,026	$	98,889

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable	$	57,563	$	47,417
Accrued and other current liabilities		9,910		7,670
Revolving credit facilities		31,041		25,093
Total liabilities		98,514		80,180

Commitments and contingencies

Shareholders' equity:
Preferred stock, $1.00 par value; authorized: 129,500 shares, none issued		–		–
Common stock, $.01 par value; 100,000,000 shares authorized; 6,746,906 shares issued and 5,052,415 shares outstanding at March 31, 2010 and 6,781,302 shares issued and 5,086,811 shares outstanding at June 30, 2009		67		68
Additional paid-in capital		69,856		69,525
Accumulated deficit		(33,892)		(33,531)
Accumulated other comprehensive loss		(3,432)		(4,266)
Treasury stock, 1,694,491 shares, at cost		(13,087)		(13,087)
Total shareholders' equity		19,512		18,709
Total liabilities and shareholders' equity	$	118,026	$	98,889

See notes to condensed consolidated financial statements.

SED International Holdings, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in thousands, except share and per share amounts)

(Unaudited)


		Three Months Ended				Nine Months Ended
		March 31,				March 31,
		2010		2009		2010		2009

Net sales	$	140,153	$	115,920	$	408,515	$	345,746
Cost of sales		132,746		109,394		387,178		326,103
Gross profit		7,407		6,526		21,337		19,643
Operating expenses:
Selling, general and administrative expense		6,473		5,580		18,735		17,480
Employment contract settlement expense		–		–		1,600		–
Depreciation and amortization expense		87		121		291		360
Foreign currency transaction (gain) loss		(254)		835		(296)		2,106
Total operating expenses		6,306		6,536		20,330		19,946
Operating income (loss)		1,101		(10)		1,007		(303)
Interest (income) expense:
Interest income		(26)		(90)		(73)		(90)
Interest expense		324		303		1,114		880
Interest, net		298		213		1,041		790
Income (loss) before income taxes		803		(223)		(34)		(1,093)
Income tax expense		244		26		327		178
Net income (loss)	$	559	$	(249)	$	(361)	$	(1,271)

Basic income (loss) per common share:	$	.12	$	(.06)	$	(.08)	$	(.32)

Diluted income (loss) per common share:	$	.11	$	(.06)	$	(.08)	$	(.32)
Weighted average number of common shares outstanding:
Basic		4,631,000		4,004,000		4,440,000		4,004,000
Diluted		5,077,000		4,004,000		4,440,000		4,004,000

See notes to condensed consolidated financial statements.

SED International Holdings, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)


	Nine Months Ended March 31,
		2010		2009
Operating activities:
Net loss	$	(361)	$	(1,271)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		291		360
Deferred tax assets		(9)		(26)
Stock compensation		431		260
Changes in operating assets and liabilities:
Trade accounts receivable, net of provision		(5,412)		(4,406)
Inventories		(10,960)		(5,623)
Other assets		401		3,224
Trade accounts payable		8,638		6,379
Accrued and other current liabilities		2,029		(1,882)
Net cash used in operating activities		(4,952)		(2,985)
Investing activities: Purchases of equipment		(480)		(142)
Financing activities:
Net borrowings under revolving credit facility		5,948		5,387
Purchases of common stock		(100)		–
Net cash provided by financing activities		5,848		5,387
Effect of exchange rate changes on cash and cash equivalents		193		(927)
Net increase in cash and cash equivalents		609		1,333
Cash and cash equivalents: Beginning of period		3,570		4,086
End of period	$	4,179	$	5,419

See notes to condensed consolidated financial statements.

SED International Holdings, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Tabular amounts in thousands except per share data)

(Unaudited)

1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of SED International Holdings, Inc. and its wholly-owned subsidiaries, SED International, Inc. (“SED International”), SED International de Colombia Ltda., and Intermaco S.R.L., (collectively, “SED”or the "Company") have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the nine months ended March 31, 2010 are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2010, or any other interim period. The June 30, 2009 condensed consolidated balance sheet has been derived from the audited consolidated financial statements included in SED’s Form 10-K for the fiscal year ended June 30, 2009.

For further information, refer to the consolidated financial statements and footnotes thereto included in the SED International Holdings, Inc. Annual Report on Form 10-K for the year fiscal year ended June 30, 2009.

2. New Accounting Pronouncements

Recently adopted accounting pronouncements

In February 2010, the Financial Accounting Standards Board (“FASB”) issued an accounting standards update related to the disclosure requirements for subsequent events. This update provides amendments to the subsequent event guidance within U.S. Generally Accepted Accounting Principles (“U.S. GAAP”) to clarify that an SEC filer is required to evaluate subsequent events through the date the financial statements are issued, but disclosure of this date is no longer required. We adopted this new guidance upon issuance of the accounting standard update.

In January 2010, the FASB issued an accounting standards update for a scope clarification related to accounting and reporting for decreases in ownership of a subsidiary. This update provides amendments to related accounting guidance within U.S. GAAP to clarify that the scope of the decrease in ownership provisions applies to (1) a subsidiary or group of assets that is a business or nonprofit activity, (2) a subsidiary that is a business or nonprofit activity that is transferred to an equity method investee or joint venture, and (3) an exchange of a group of assets that constitutes a business or nonprofit activity for a noncontrolling interest in an entity (including an equity method investee or joint venture). We adopted this new standard effective January 1, 2010 and it had no material impact on our consolidated financial position, results of operations or cash flows.

In January 2010, the FASB issued an accounting standards update related to fair value measurements and disclosures. This update provides amendments to related guidance within U.S. GAAP to require disclosure of the transfers in and out of Levels 1 and 2 and a schedule for Level 3 that separately identifies purchases, sales, issuances and settlements and requires more detailed disclosures regarding valuation techniques and inputs. We adopted this new standard effective January 1, 2010. Refer to Note 10 for disclosures associated with the adoption of this standard.

Recent accounting pronouncements not yet adopted

In June 2009, the FASB issued amendments to the accounting rules for variable interest entities (“VIEs”) and for transfers of financial assets. The new guidance for VIEs eliminates the quantitative approach previously required for determining the primary beneficiary of a variable interest entity and requires ongoing qualitative reassessments of whether an enterprise is the primary beneficiary. In addition, qualifying special purpose entities (“QSPEs”) are no longer exempt from consolidation under the amended guidance. The amendments also limit the circumstances in which a financial asset, or a portion of a financial asset, should be derecognized when the transferor has not transferred the entire original financial asset to an entity that is not consolidated with the transferor in the financial statements being presented, and/or when the transferor has continuing involvement with the transferred financial asset. We will adopt these amendments for interim and annual reporting periods beginning on July 1, 2010. We do not expect the adoption of these amendments to have a material impact on our consolidated financial position, results of operations or cash flows.

3. Earnings (Loss) per Common Share

Basic earnings (loss) per share is computed on the basis of the weighted average number of shares of common stock outstanding during the period. Diluted earnings (loss) per share is computed on the basis of the weighted average number of shares of common stock plus the effect of dilutive potential common shares outstanding during the period using the treasury stock method. Included in diluted earnings per share for the three months ended March 31, 2010 are the dilutive effect of options to purchase 340,500 shares of common stock and the dilutive effect of 423,987 shares of unvested restricted stock.

Diluted earnings (loss) per common share for the three and nine months ended March 31, 2010 and 2009 does not reflect the total of any incremental shares related to the assumed conversion or exercise of anti-dilutive stock options (19,000 and 359,500 for the three and nine months ended March 31, 2010 and 503,659 for both of the three and nine months ended March 31, 2009, respectively.) Also, excluded from diluted loss per share for the nine months ended March 31, 2010 and the three and nine months ended March 31, 2009 were 423,987 and 872,975 shares, respectively, of unvested restricted stock due to their anti-dilutive effect.

Components of basic and diluted earnings per share for the three months ended March 31, 2010 were as follows:


		Three Months Ended March 31, 2010
		Net Income	Shares		Per-Share
		(Numerator)	(Denominator)		Amount
Net income	$	559,000

Basic earnings per share:
Income available to common stockholders	$	559,000	4,631,000	$	0.12

Effect of dilutive securities:
Un-vested restricted stock			339,000
Stock options			107,000
			446,000
Diluted earnings per share:
Income available to common stockholders plus assumed conversions	$	559,000	5,077,000	$	0.11

4. Trade Receivables


		March 31,		June 30,
		2010		2009

Trade receivables	$	57,718	$	50,712
Less: allowance for doubtful accounts		(1,140)		(584)
	$	56,578	$	50,128

5. Inventories


		March 31,		June 30,
		2010		2009

Inventories on hand	$	44,192	$	33,712
Inventories in transit		7,094		5,525
Less: allowances		(920)		(705)
	$	50,366	$	38,532

6. Comprehensive Income (Loss)

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

Comprehensive income (loss) net of income taxes, for the three and nine months ended March 31, 2010 and 2009, respectively, is as follows:


		Three Months ended				Nine Months ended
		March 31,				March 31,
		2010		2009		2010		2009
Net income (loss)	$	559	$	(249)	$	(361)	$	(1,271)
Changes in foreign currency translation adjustments		423		(968)		750		(2,402)
Changes in fair value of interest rate swap contract		(108)		(80)		83		(363)
Comprehensive income (loss)	$	874	$	(1,297)	$	472	$	(4,036)

The deferred income tax asset related to the accumulated other comprehensive income (loss) was fully offset by a valuation allowance as of the beginning and end of the three and nine months ended March 31, 2010 and 2009 and, therefore, the comprehensive income (loss) for these periods had no income tax effect.

Accumulated other comprehensive loss included in shareholders’ equity totaled $3.4 million and $4.3 million at March 31, 2010 and June 30, 2009, respectively, and consisted of foreign currency translation adjustments of $3.2 million and $4.0 million, respectively, and $0.2 million and $0.3 million, respectively related to the interest rate swap contract.

7. Segment Reporting

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

Financial information by geographic region is as follows:


		United States		Latin America		Eliminations		Consolidation
For the three months ended March 31, 2010
Net sales to unaffiliated customers	$	108,645	$	31,530	$	(22)	$	140,153
Gross profit		5,332		2,075		–		7,407
Foreign currency transaction gain		–		(254)		–		(254)
Operating income		518		583		–		1,101
Interest income		–		(26)		–		(26)
Interest expense		279		45		–		324
Income tax expense		4		240		–		244
Net income		235		324		–		559
Total assets at March 31, 2010		94,913		35,742		(12,629)		118,026


		United States		Latin America		Eliminations		Consolidation
For the three months ended March 31, 2009
Net sales to unaffiliated customers	$	94,003	$	22,769	$	(852)	$	115,920
Gross profit		4,483		2,043		–		6,526
Foreign currency transaction loss		–		835		–		835
Operating (loss) income		(16)		6		–		(10)
Interest income		–		(90)		–		(90)
Interest expense		267		36		–		303
Income tax expense		9		17		–		26
Net (loss) income		(292)		43		–		(249)
Total assets at March 31, 2009		84,451		26,218		(12,843)		97,826

Net sales by product category is as follows:


For the three months ended March 31,		Micro- Computer Products		Consumer Electronics Products		Wireless Telephone Products		Handling Revenue		Total
2010	$	122,045	$	17,126	$	740	$	242	$	140,153
2009	$	103,232	$	11,371	$	1,086	$	231	$	115,920

Approximately 38.7% ($22.7 million United States export and $31.5 million Latin America) and 35.9% ($18.8 million United States export, net of ($.9) million elimination, and $22.8 million Latin America) of SED's net sales for the three months ended March 31, 2010 and 2009, respectively, consisted of sales to customers for export principally into Latin America and direct sales to customers in Colombia and Argentina.

Financial information by geographic region is as follows:


		United States		Latin America		Eliminations		Consolidation
For the nine months ended March 31, 2010
Net sales to unaffiliated customers	$	323,354	$	85,176	$	(15)	$	408,515
Gross profit		15,779		5,558		–		21,337
Foreign currency transaction gain		–		(296)		–		(296)
Operating income		231		776		–		1,007
Interest income		–		(73)		–		(73)
Interest expense		1,052		62		–		1,114
Income tax expense		27		300		–		327
Net (loss) income		(848)		487		–		(361)
Total assets at March 31, 2010		94,913		35,742		(12,629)		118,026

		United States		Latin America		Eliminations		Consolidation
For the nine months ended March 31, 2009
Net sales to unaffiliated customers	$	270,389	$	77,696	$	(2,339)	$	345,746
Gross profit		12,770		6,873		–		19,643
Foreign currency transaction loss		–		2,106		–		2,106
Operating (loss) income		(532)		229		–		(303)
Interest income		–		(90)		–		(90)
Interest expense		844		36		–		880
Income tax expense		19		159		–		178
Net (loss) income		(1,395)		124		–		(1,271)
Total assets at March 31, 2009		84,451		23,542		(12,843)		95,150

Net sales by product category is as follows:


For the nine months ended March 31,		Micro- Computer Products		Consumer Electronics Products		Wireless Telephone Products		Handling Revenue		Total
2010	$	346,730	$	58,421	$	2,604	$	761	$	408,516
2009	$	310,395	$	29,654	$	4,964	$	733	$	345,746

Approximately 36.3% ($63.1 million United States export and $ 85.2 million Latin America) and 40.0% ($60.5 million United States export, net of ($2.4) million elimination, and $77.7 million Latin America) of SED's net sales for the nine months ended March 31, 2010 and 2009, respectively, consisted of sales to customers for export principally into Latin America and direct sales to customers in Colombia and Argentina

8. Shareholders’ Equity

Stock Repurchase Plan — In August 2009, SED’s Board of Directors approved a stock repurchase plan, pursuant to Rule 10b-18 of the Exchange Act, in which SED may buy back up to $50,000 worth of its outstanding shares of common stock in the open market over a six month period beginning on the effective date. In February 2010, SED’s Board of Directors extended the stock repurchase program for an additional six months and reserved an additional $50,000 for repurchases under the program. As of March 31, 2010, SED had met the authorized repurchase limit of $100,000 by purchasing 43,733 shares at an average price per share of $2.29 under this plan. Upon repurchase, the Company has retired these shares rather than reserving these shares for reissuance in treasury stock.

Restricted Stock — SED established the 2007 Restricted Stock Plan (the “2007 Plan”) during fiscal 2008. A total of 750,000 shares of the Company’s authorized and unissued shares of common stock were reserved for grants under the 2007 Plan. Generally, the awards are subject to forfeiture prior to vesting and begin vesting in equal amounts on the second, third and fourth anniversaries of the grant date; provided, however, that at the time of vesting the holder is an employee of the Company.

On July 1, 2008, the Company issued 22,857 shares of restricted common stock to each of its then five non-employee directors in accordance with the Company’s Board compensation plan. On January 1, 2009, the Company issued 26,845 shares of restricted common stock to each of its two newly elected non-employee directors in accordance with the Company’s Board compensation plan. The shares issued to the non-employee directors will be subject to forfeiture prior to vesting and vest in equal amounts on the first and second anniversary dates of the issuance date.

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

Effective January 2009, non-employee Board of Director’s base compensation was set at a per annum rate of $60,000 of which 50% shall be paid by an annual award of restricted shares of common stock. The independent directors shall only be entitled to the stock portion of their compensation after serving on the Board for the full calendar year. On January 4, 2010, 104,337 shares of restricted common stock were issued under the Board of Directors compensation plan for 2009 calendar year services. The number of shares to be issued to the directors for the 2010 calendar year will be determined on January 1, 2011 based upon the market price of the Company’s common stock as of that date.

On January 1, 2010, 10,000 restricted shares were granted to a newly hired employee under the 2007 Plan. These shares vest in equal amounts on the first and second anniversary of the grant.

Unvested restricted stock activity is as follows:


	Nine Months Ended March 31,
	2010	2009

Shares of unvested restricted stock-beginning of period	882,975	705,000
Issued	114,337	292,975
Vested	(468,325)	(125,000)
Forfeited and retired	(105,000)	–
Shares of unvested restricted stock-end of period	423,987	872,975

Share-based compensation expense recognized during the three months ended March 31, 2010 and 2009 totaled approximately $186,000 and $94,000, respectively. Share-based compensation expense recognized during the nine months ended March 31, 2010 and 2009 totaled approximately $431,000 and $260,000, respectively. At March 31, 2010, there was $159,000 of unrecognized compensation cost related to unvested stock awards compensation arrangements which SED expects to be recognized over the next 19 months. At March 31, 2009, there was $196,000 of unrecognized compensation cost related to unvested stock awards compensation arrangements to be recognized over 31 months.

Stock Options — At March 31, 2010 359,000 stock options were outstanding and were all exercisable with an aggregate intrinsic value of $224,000.

9. Credit Facility and Bank Debt

On March 1, 2007, SED signed a three-year extension of a credit facility with Wachovia Bank, National Association (the “Wachovia Agreement”) which extended the maturity to September 21, 2011. The Wachovia Agreement was originally entered into on September 21, 2005 with a term of three years. On January 10, 2008, SED elected to increase the Wachovia line of credit to $50.0 million. The Wachovia Agreement provides for revolving borrowings based on SED’s eligible accounts receivable and inventories as defined therein. Wachovia Bank became a Wells Fargo company effective December 31, 2008.

Borrowings under the Wachovia Agreement accrue interest based upon a variety of interest rate options depending upon the computation of availability as defined therein. The per annum interest rates available are LIBOR, plus a margin ranging from 1.25% to 2.00%, and the prime rate. SED is required to pay a commitment fee of 0.25% on the unused portion of the facility and interest is payable monthly. Borrowings under the Wachovia Agreement are collateralized by substantially all domestic assets of SED and 65% of SED’s shares in its foreign subsidiaries.

The Wachovia Agreement contains certain covenants which, among other things, require that SED maintain unused availability of $5.0 million or more during the term of the Wachovia Agreement before SED is permitted to make advances to SED’s Latin American subsidiaries. SED’s advances to its Latin American subsidiaries are restricted. The Wachovia Agreement also contains a covenant which requires that if SED’s unused availability is less than 10% of the formula borrowing base ($4.6 million at March 31, 2010) at any time during the extension term of the Agreement, then maintenance of a minimum fixed charge coverage ratio is required. The Wachovia Agreement also restricts SED’s ability to distribute cash dividends. As of March 31, 2010, SED determined that it was in compliance with the Wachovia Agreement.

During February 2009, SED Colombia signed a one-year $3.0 million unsecured line of credit with Banco de Credito that bears interest at a fixed rate of 9.2% per annum. SED extended the line until February 2011 during the March 31, 2010 quarter.

Available borrowings under these credit facilities at March 31, 2010 were $14.9 million under the Wachovia Agreement, after deducting $1.8 million in reserves for outstanding letters of credit, and $2.4 million under the Banco de Credito line of credit. Average borrowings, maximum borrowings and weighted average interest rate for the three months ended March 31, 2010 were $29.8 million, $35.5 million and 4.3%, respectively. The weighted average interest rate on outstanding borrowings under the credit facilities was 4.1% at March 31, 2010. Average borrowings, maximum borrowings and weighted average interest rate for the nine months ended March 31, 2010 were $27.8 million, $35.5 million and 5.9%, respectively.

The carrying value of all bank debt at March 31, 2010 approximates its fair value based on the variable market rates of interest on such bank debt.

On January 26, 2007, the Company entered into a three-year interest rate swap contract to reduce the impact of the fluctuations in the interest rates on $5.0 million notional amount of the revolving credit facility under the Wachovia Agreement. The contract effectively converted the variable rate to a fixed rate of 5.20%. On March 5, 2008, the three-year swap agreement was amended to a notional amount of $15.0 million with a fixed rate of 4.54%. On March 26, 2009, the swap agreement was further amended to provide for an extension to January 26, 2013 and an interest rate modification to 2.95%. The fixed rates cited do not include Wachovia's markup of 1.5% as of March 31, 2010.

The Company utilizes derivative financial instruments to reduce interest rate risk. The Company recognizes all derivatives as either assets or liabilities in the balance sheet and measures those instruments at fair value. The Company has designated its interest rate swap agreement as a cash flow hedge. Accordingly, the gains and losses associated with changes in the fair value of the interest rate swap are reported in other comprehensive income (loss) as the hedge is highly effective in achieving offsetting changes in the fair value of cash flows of the asset or liability hedged. The fair value, not in the Company’s favor, of the interest rate swap was $581,000 at March 31, 2010 and $345,000 at June 30, 2009 and is included in accrued and other current liabilities. The Company does not hold or issue derivative financial instruments for trading purposes.

As of March 31, 2010, all pre-tax losses that were related to the March 26, 2009 amendment to the interest rate swap agreement which were deferred and included in Accumulated Other Comprehensive Loss have been reclassified to expense. During the three and nine months ended March 31, 2010, approximately $49,000 and $396,000 were reclassified to expense respectively.

10. Fair Value of Financial Instruments

Effective July 1, 2008, the Company adopted FASB accounting guidance pertaining to financial assets and liabilities that are being measured and reported on a fair value basis and the related disclosure requirements about fair value measurements. The guidance establishes a fair value hierarchy that prioritized the inputs to valuation techniques used to measure fair value. The three levels of the fair-value hierarchy include: Level 1 – quoted market prices in active markets for identical assets and liabilities; Level 2 – inputs other than quoted market prices included in Level 1 above that are observable for the asset or liability, either directly or indirectly; and, Level 3 – unobservable inputs for the asset or liability. The implementation of the guidance for financial assets and financial liabilities, effective July 1, 2008, did not have a material impact on our consolidated financial position and results of operations. We also adopted the guidance related to fair value measurements for non-financial assets and liabilities, such as our property and equipment, which is measured at fair value for impairment assessment, beginning July 1, 2009.

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

We are exposed to market risks from changes in interest rates, which may affect our operating results and financial position. We reduce our risks from interest rate fluctuations through the use of an interest rate swap. This derivative financial instrument is used to manage risk and is not used for trading or speculative purposes. We endeavor to utilize the best available information in measuring the fair value of the interest rate swap. The fair value of our interest rate swap contract is determined by third parties by means of a mathematical model that calculates the present value of the anticipated cash flows from the transaction using mid-market prices and other economic data and assumptions, with the forward three-month LIBOR yield curve as the primary input. The interest rate swap is classified in its entirety based on the lowest level of input that is significant to the fair value measurement. We have determined that our interest rate swap is a Level 2 liability in the fair value hierarchy as it is valued using a valuation model that has inputs other than quoted market prices that are both observable and unobservable. The fair value, not in the Company’s favor, of the interest rate swap was $581,000 at March 31, 2010.

11.

Employment Contract Settlement Expense

In December 2009, Jean Diamond, SED's former CEO, retired from her position as CEO. Ms. Diamond had approximately 4.5 years remaining on her employment contract. SED signed a contract settlement agreement with Ms. Diamond and recorded a one-time charge of $1.6 million for the settlement amount. Terms of the contract settlement agreement requires payment of the contract settlement amount to Ms. Diamond in June 2010. Accordingly, the $1.6 million obligation is included in accrued and other current liabilities at March 31, 2010.

12.

Subsequent Event

In May 2010, SED’s Board of Directors approved a stock repurchase plan, pursuant to Rule 10b-18 of the Exchange Act, in which SED may buy back up to $100,000 worth of its outstanding shares of common stock in the open market over a six month period.

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

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

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

Overview

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

Critical Accounting Policies and Estimates

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

Revenue Recognition. Revenue is recognized once four criteria are met: (1) SED must have persuasive evidence that an arrangement exists; (2) delivery must occur, which generally happens at the point of shipment (this includes the transfer of both title and risk of loss, provided that no significant obligations remain); (3) the price must be fixed or determinable; and (4) collectability must be reasonably assured. Shipping revenue is included in net sales while the related costs, including shipping and handling costs, are included in the cost of sales. 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.

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

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

Results of Operations

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


	Three Months Ended March 31,		Nine Months Ended March 31,
	Three Months Ended March 31,		Nine Months Ended March 31,
	2010	2009	2010	2009

Net sales	100.00%	100.00%	100.00%	100.00%
Cost of sales, including buying and occupancy expense	94.72%	94.37%	94.78%	94.32%
Gross profit	5.28%	5.63%	5.22%	5.68%
Operating expenses:
Selling, general and administrative expense	4.62%	4.82%	4.59%	5.06%
Employment contract settlement expense	–	–	.39%	–
Depreciation and amortization expense	.06%	.10%	.07%	.10%
Foreign currency transaction (gain) loss	(.18)%	.72%	(.07)%	.61%
Total operating expenses	4.50%	5.64%	4.98%	5.77%
Operating income (loss)	.78%	(.01)%	.24%	(.09)%
Interest (income) expense:
Interest income	(.02)%	(.08)%	(.02)%	(.02)%
Interest expense	.23%	.26%	.27%	.25%
Interest, net	.21%	.18%	.25%	.23%
Income (loss) before income taxes	.57%	(.19)%	(.01)%	(.32)%
Income tax expense	.17%	.02%	.08%	.05%
Net income (loss)	.40%	(.21)%	(.09)%	(.37)%

Three Months Ended March 31, 2010 and 2009

Revenues. Total net sales for the three months ended March 31, 2010 increased 20.9%, or $24.2 million, to $140.2 million as compared to $115.9 million for the three months ended March 31, 2009. Microcomputer product sales, excluding handling revenue, for the three months ended March 31, 2010 increased 18.2% to $122.0 million compared to $103.2 million for the three months ended March 31, 2009. This was primarily due to an increase in laptop computers, consumables, hard drives and other computer product sales. Consumer electronics sales for the three months ended March 31, 2010 increased 50.6% to $17.1 million compared to $11.4 million for the three months ended March 31, 2009. This was primarily due to an increase in television sales and electronics sales. Wireless revenues for the three months ended March 31, 2010 decreased 31.9% to $.7 million compared to $1.1 million for the three months ended March 31, 2009.

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


		Three Months Ended March 31,				Change
		Three Months Ended March 31,				Change
		2010		2009		Amount	Percent
		(Amounts in millions except percentage amounts)
United States
Domestic	$	86.0	$	74.3	$	11.7	15.7%
Export		22.7		19.7		3.0	15.2%
Latin America		31.5		22.8		8.7	38.2%
Elimination		–		(0.9)		0.9	–
Consolidated	$	140.2	$	115.9	$	24.3	21.0%

Domestic revenues were $86.0 million and $74.3 million for the three months ended March 31, 2010 and 2009, respectively. The increase was due to an increase in computer and consumer electronics sales. Export revenues, net of eliminations, were $22.7 million and $18.8 million for the three months ended March 31, 2010 and 2009, respectively. The increase was due to increases in sales of computer products, printers and consumable printer products. Latin America sales as measured in local currencies increased 18.6% due to increases in sales of computer products, printers and consumable printer products as compared to an increase of 38.2 % as measured in U.S. dollars. After translation into U.S. dollars, Latin America sales were $31.5 million and $22.8 million for the three months ended March 31, 2010 and 2009, respectively.

Sales of microcomputer products, including handling revenue, represented approximately 87.3% of SED’s third quarter net sales compared to 89.3% for the same period last year. Sales of consumer electronics products accounted for approximately 12.2% of SED’s third quarter net sales compared to 9.8% for the same period last year. Sales of wireless telephone products accounted for approximately 0.5% of SED’s third quarter net sales compared to 0.9% for the same period last year.

Gross Profit Margins. Gross profit increased $0.9 million to $7.4 million for the three months ended March 31, 2010, compared to $6.5 million for the same period last year. Gross profit as a percentage of net sales was 5.3% for the three months ended March 31, 2010 compared to 5.6% for the same period last year. The decrease in gross profit margin was primarily due to lower margins on sales in Latin America. The decrease in gross margin as a percentage of sales in Latin America was primarily due to lower competitive prices caused by an increase in the number of distributors in the marketplace, particularly in Colombia. 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 gains, for the three months ended March 31, 2010 increased 16.0% to $6.5 million, compared to $5.6 million for the same period last year. The increase was primarily due from several factors including: (i) an increase of approximately $500,000 in employee salaries and commissions mostly attributed to the increase in sales and increased distribution labor cost; (ii) a one-time separation charge of approximately $150,000 related to the departure of an executive; (iii) approximately $150,000 in other miscellaneous expenses; (iv) approximately $50,000 in increased city taxes in Latin America; (v) and an increase of approximately $45,000 in credit and collection cost mostly a result of increased bad debt expense.

In September 2009, SED engaged a consulting firm to evaluate and make recommendations for improving certain operational areas of SED. These areas include the order entry process, warehousing and logistics, activity based costing, and implementation of certain reporting metrics. SED incurred costs of approximately $150,000 for these services during the three months ended March 31, 2010.

Depreciation and Amortization. Depreciation and amortization was $87,000 for the three months ended March 31, 2010 compared with $121,000 for the same period last year.

Foreign Currency Transaction. SED has significant U.S. Dollar denominated liabilities recorded in its Latin American subsidiaries to meet certain vendor payment requirements. The revaluation of the Latin American currency versus the U.S. Dollar currencies resulted in a foreign currency transaction gain totaling $254,000 for the three months ended March 31, 2010 as compared to a loss of $835,000 for the three months ended March 31, 2009 due from Latin American currency devaluation versus the U.S. Dollar.

Interest Income. Interest income was $26,000 and $90,000 for the three months ended March 31, 2010 and 2009, respectively.

Interest Expense. Interest expense was $324,000 and $303,000 for the three months ended March 31, 2010 and 2009, respectively. This change resulted primarily from higher average loan balances.

Provision for Income Taxes. Income tax expense was $244,000 for the three months ended March 31, 2010 as compared to $26,000 for the three months ended March 31, 2009. The provision is primarily related to operating losses and income generated by SED’s Latin American subsidiaries. The provision for income taxes differs from the amount which would result from applying the statutory Federal income tax rate due to the taxes imposed on the foreign subsidiaries as well as the fact that SED provides a full valuation allowance against all deferred tax assets generated from its U.S. operations as there is no assurance that these assets will be realized.

Nine Months Ended March 31, 2010 and 2009

Revenues. Total net sales for the nine months ended March 31, 2010 increased 18.2%, or $62.8 million, to $408.5 million as compared to $345.7 million for the nine months ended March 31, 2010. Microcomputer product sales, excluding handling revenue, for the nine months ended March 31, 2010 increased 11.7% to $346.7 million compared to $310.4 million for the nine months ended March 31, 2009. This was primarily due to an increase in laptop computers, consumables, hard drives and other computer product sales. Consumer electronics sales for the nine months ended March 31, 2010 increased 97.0% to $58.4 million compared to $29.7 million for the nine months ended March 31, 2009. This was primarily due to an increase in television sales, small appliance sales and electronics sales from e-commerce. Wireless revenues for the nine months ended March 31, 2010 decreased 47.5% to $2.6 million compared to $5.0 million for the nine months ended March 31, 2009.

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


		Nine months Ended March 31,				Change
		Nine months Ended March 31,				Change
		2010		2009		Amount	Percent
		(Amounts in millions except percentage amounts)
United States
Domestic	$	260.2	$	207.5	$	52.7	25.4%
Export		63.1		62.9		.2	.3%
Latin America		85.2		77.7		7.5	9.7%
Elimination		–		(2.4)		2.4	–
Consolidated	$	408.5	$	345.7	$	62.8	18.2%

Domestic revenues were $260.2 million and $207.5 million for the nine months ended March 31, 2010 and 2009, respectively. The increase was due to an increase in computer and consumer electronics sales. Export revenues, net of eliminations, were $63.1 million and $60.5 million for the nine months ended March 31, 2010 and 2009, respectively. The increase was due to higher sales of computer products, printers and consumable printer products. Latin America sales as measured in local currencies increased 4.6% due to increases in sales of computer products, printers and consumable printer products as compared to an increase of 9.7% as measured in U.S. dollars. After translation into U.S. dollars, Latin America sales were $85.2 million and $77.7 million for the nine months ended March 31, 2010 and 2009, respectively.

Sales of microcomputer products, including handling revenue, represented approximately 85.1% of net sales for the nine months ended March 31, 2010 compared to 90.0% for the same period last year. Sales of consumer electronics products accounted for approximately 14.3% of net sales for the nine months ended March 31, 2010 compared to 8.6% for the same period last year. Sales of wireless telephone products accounted for approximately 0.6% of net sales for the nine months ended March 31, 2010 compared to 1.4% for the same period last year.

Gross Profit Margins. Gross profit increased $1.7 million to $21.3 million for the nine months ended March 31, 2010, compared to $19.6 million for the same period last year. Gross profit as a percentage of net sales was 5.2% for the nine months ended March 31, 2010 compared to 5.7% for the same period last year. The decrease in gross profit margin was primarily due to lower margins on sales in Latin America. The decrease in gross margin as a percentage of sales in Latin America was primarily due to lower competitive prices caused by an increase in the number of distributors in the marketplace, particularly in Colombia. 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, one time contract settlement expense and foreign currency transaction gains, for the nine months ended March 31, 2010 increased 7.2% to $18.7 million, compared to $17.5 million for the same period last year. The increase was primarily due from several factors including: (i) an increase of approximately $700,000 in salaries and commissions mostly attributed to the increase in sales and increased headcounts; (ii) an increase of approximately $350,000 in credit and collection cost mostly a result of increased bad debt expense; (iii) a one time separation expense of approximately $150,000 related to the departure of an executive; (iv) approximately $100,000 in increased wages from government mandated salary increases in Latin America (v) and a decrease of approximately $90,000 in bank charges due from a decrease in loan origination, credit card and floor-plan expenses.

In September 2009, SED engaged a consulting firm to evaluate and make recommendations for improving certain operational areas of the SED. These areas include the order entry process, warehousing and logistics, activity based costing, and implementation of certain reporting metrics. SED incurred costs of approximately $450,000 for these services during the nine months ended March 31, 2010.

Employment Contract Settlement Expense. In December 2009, Jean Diamond, SED's former CEO, retired from her position as CEO. Ms. Diamond had approximately 4.5 years remaining on her employment contract. SED signed a contract settlement agreement with Ms. Diamond and recorded a one time charge of $1.6 million for the settlement amount. Terms of the contract settlement agreement requires payment of the contract settlement amount to Ms. Diamond in June 2010.

Depreciation and Amortization. Depreciation and amortization was $291,000 for the nine months ended March 31, 2010 compared with $360,000 for the same period last year.

Foreign Currency Transaction. SED has significant U.S. Dollar denominated liabilities recorded in its Latin American subsidiaries to meet certain vendor payment requirements. The revaluation of the Latin American currency versus the U.S. Dollar currencies resulted in a foreign currency transaction gain totaling $0.3 million for the nine months ended March 31, 2010 as compared to a loss of $2.1 million for the nine months ended March 31, 2009 due from Latin American currency devaluation versus the U.S. Dollar.

Interest Income. Interest income was $73,000 and $90,000 for the nine months ended March 31, 2010 and 2009, respectively.

Interest Expense. Interest expense was $1.1 million and $0.9 million for the nine months ended March 31, 2010 and 2009, respectively. This change resulted primarily from higher average loan balances.

Provision for Income Taxes. Income tax expense was $327,000 for the nine months ended March 31, 2010 as compared to an income tax expense of $178,000 for the nine months ended March 31, 2010. The provision is primarily related to operating income generated by SED’s Latin American subsidiaries. The provision for income taxes differs from the amount which would result from applying the statutory Federal income tax rate due to the taxes imposed on the foreign subsidiaries as well as the fact that SED is not fully valuing a tax asset and the benefit of the net operating loss carry forward.

Financial Condition and Liquidity

Overview. At March 31, 2010, SED had cash and cash equivalents totaling $4.2 million and working capital of approximately $18.6 million. At March 31, 2010 available borrowings were $17.3 million, which includes $14.9 million under the Wachovia Agreement, after deducting $1.8 million in reserves for outstanding letters of credit, and $2.4 million under the Banco de Credito line of credit. SED’s principal source of liquidity is its cash and cash equivalents, trade receivables, inventories and amounts available for use under its revolving credit facility with Wachovia Bank, National Association and Banco de Credito. SED’s accounts receivable and inventories collateralize SED’s U.S. borrowings. The Wachovia credit facility provides SED with a $50.0 million line of credit through September 2011. During February 2009, SED Colombia signed a $3.0 million unsecured, one-year line of credit with Banco de Credito. SED extended the line until February 2011 during the quarter. Historically, SED has financed its liquidity needs largely through internally generated funds, borrowings under the Wachovia credit facility, subsidiary bank credit agreements, and vendor lines of credit. As of March 31, 2010, SED was in compliance with the requirements of the Wachovia credit facility agreement and has no reason to believe that it will not remain in compliance.

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

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

Operating Activities. Cash used in operating activities was approximately $5.0 million for the nine months ended March 31, 2010 as compared to approximately $3.0 million used in operating activities for the nine months ended March 31, 2009. Changes in operating assets and liabilities during the nine months ended March 31, 2010 are as follows.

Net trade receivables were $56.6 million at March 31, 2010 and $ 50.1 million at June 30, 2009. Average days sales outstanding for the quarter were approximately 36 days at both March 31, 2010 and June 30, 2009.

Net inventories increased $11.8 million to $50.4 million at March 31, 2010 from $38.5 million at June 30, 2009. SED continues to monitor and adjust inventory levels according to current and projected sales volumes.

Other current assets, which includes tax receivables, prepaids and other receivables, was $5.7 million at March 31, 2010 and June 30, 2009.

Trade accounts payable increased by approximately $10.2 million to $57.6 million at March 31, 2010 compared to $47.4 million at June 30, 2009. This is a result of increased sales in the current quarter, larger related inventory purchases and the timing of payments.

Accrued and other current liabilities, which includes non-trade vendor payables, accrued wages, tax payables and other miscellaneous expense accruals, were $9.9 million at March 31, 2010 compared to $7.7 million at June 30, 2009. The increase included the $1.6 million contract settlement expense as described previously.

Financing Activities. Net borrowings under the credit facilities increased by approximately $5.9 million to $31.0 million at March 31, 2010 compared to $25.1 million at June 30, 2009.

There have been no material changes to obligations and/or commitments since the end of the last fiscal year. Purchase orders or contracts for the purchase of inventories and other goods and services are not included in our estimates because SED is not able to determine the aggregate amount of such purchase orders or contracts that are binding obligations. SED’s purchase orders are based on its current distribution needs and are fulfilled by its vendors within short time horizons. As of March 31, 2010, SED did not have any significant agreements for the purchase of inventories or other goods specifying minimum quantities or set prices that exceeded its expected requirements.

The current global economic downturn creates several risks relating to our financial results, operations and prospects. We may experience a rapid decline in demand for the products we sell resulting in a more competitive environment and pressure to reduce the cost of operations. The benefits from cost reductions may take longer to fully realize and may not fully mitigate the impact of the reduced demand. The current state of the global economy may also result in changes in vendor terms and conditions, such as rebates, cash discounts and cooperative marketing efforts, which may result in further downward pressure on our gross margins. Deterioration in the financial and credit markets heightens the risk of customer bankruptcies and delay in payment. Deterioration in the credit markets in Latin America and the United States have resulted in reduced availability of credit insurance to cover customer accounts. This may result in our reducing the credit lines we provide to customers, thereby having a negative impact on our net sales. Also, volatile foreign currency exchange rates increase our risk related to products purchased in a currency other than the currency in which those products are sold. The realization of any or all of these risks could have a significant adverse effect on our future financial results. Historically, SED has financed its liquidity needs largely through internally generated funds, borrowings under the Wachovia credit facility, subsidiary bank credit agreements, and vendor lines of credit. There can be no assurance that all of the aforementioned sources of capital will be available to SED when needed. For example, SED’s creditors may tighten their lending standards and SED may find it necessary to tighten credit availability standards to its customers due to the general weakening of the economic environment. However, SED believes that funds generated from operations, together with its Wachovia credit facility, subsidiary bank credit agreements, vendor credit lines, and current cash and cash equivalents will be sufficient to support its working capital and liquidity requirements for at least the next 12 months.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

ITEM 4. 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 March 31, 2010 that have materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

ITEM 1. Legal Proceedings

None.

ITEM 1A. Risk Factors

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

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

On January 4, 2010 SED issued an aggregate of 104,337 shares of restricted common stock, with a market value of approximately $212,000, to the eight non-management members of its Board of Directors under its director compensation plan for 2009 calendar year services.

During January 2010 SED issued 10,000 shares of restricted common stock, with a market value of approximately $20,000, as a hiring bonus to the new General Manager of its SED Colombia subsidiary.

The aforementioned shares of restricted common stock were issued in reliance upon the exemption from the registration requirements of the Securities act of 1933, as amended (“Act”) pursuant to Section 4(2) of the Act and/or Rule 701 promulgated thereunder.

In February 2010, SED’s Board of Directors extended its stock repurchase program pursuant to Rule 10b -18 of the Exchange Act for an additional six months and reserved an additional $50,000 for repurchases under the program originally adopted by its Board in August, 2009. As of December 31, 2009, $28,083 was available for repurchases under the program and, including the additional $50,000 reserved by the Board in February 2010, an aggregate of $78,083 was available as of February 2010. As set forth in the table below, during the quarter ended March 31, 2010, SED used all the available funds under the program for repurchases.

ISSUER PURCHASES OF EQUITY SECURITIES


Period	Total Number of Shares Purchased	Average Price Paid per Share	Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs
January 2010	0	-	-	$28,083
February 2010	8,140	$2.53	8,140	$57,508
March 2010	23,160	$2.49	23,160	0
Total	31,300	$2.50	31,300	0

Subsequent to quarter end, on May 6, 2010, the Board extended the stock repurchase program by reserving an additional $100,000 for repurchases under the program.

ITEM 3. Defaults Upon Senior Securities

None.

ITEM 4. [REMOVED AND RESERVED]

ITEM 5. Other Information

None.

ITEM 6. Exhibits


Exhibits		Description
31.1		Rule 13a-14(a)/15d-14(a) Certification by Principal Executive Officer.*
31.2		Rule 13a-14(a)/15d-14(a) Certification by Principal Financial Officer.*
32.1		Section 1350 Certification by Principal Executive Officer.*
32.2		Section 1350 Certification by Principal Financial Officer.*
*		Filed Herewith

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: May 13, 2010	/s/ Jonathan Elster

Jonathan Elster

Chief Executive Officer

(Principal Executive Officer)


Date: May 13, 2010	/s/ Lyle Dickler

Lyle Dickler

Chief Financial Officer

(Principal Financial and Accounting Officer)