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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-K/A

Amendment No. 2
(Amending Part II  Items 6, and 8)

(Mark One)þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended June 30, 2003oro
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from    to


Commission file number 0-16345

SED International Holdings, Inc.

(Exact name of Company as
specified in its charter)


GEORGIA
    
    22-2715444(State or other jurisdiction
    
    (I.R.S. Employerof incorporation or organization)
    
    Identification No.)4916 North Royal Atlanta Drive, Tucker, Georgia
    
    30085(Address of principal executive offices)
    
    (Zip Code)


Companys telephone number, including area code:
770-491-8962
Securities registered pursuant to Section 12(b) of the Act:
None

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

(Title of Class)
    
    (Title of Class)Common Stock, $.01 par value
    
    Common Stock Purchase Rights


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

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

Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes o No þ

The aggregate market value of the voting stock held by non-affiliates of
the Company was approximately $2.8 million as of September 11, 2003 based upon
the last sale price of the Common Stock as reported on the Over the Counter
Bulletin Board on that day. There were 3,875,155shares of Common Stock, $.01
par value, outstanding at September 11, 2003.

EXPLANATORY NOTE

This Amendment No. 2 on Form 10-K/A is being filed to amend Part II, Item 6 and
Item 8 of the Registrants Annual report on Form 10-K for the fiscal year ended
June 30, 2003, filed on October 7, 2003 (the Original 10-K). This Amendment
No. 2 does not otherwise alter the disclosures set forth in the Original 10-K
and does not reflect events occurring after the filing of the Original 10-K.
This Amendment No. 2 is effective for all purposes as of the date of the filing
of the Original 10-K.

Subsequent to the issuance of the Companys consolidated financial statements
included in its Annual report on Form 10-K for the fiscal year ended June 30,
2003, management determined that amounts outstanding under the revolving credit
facility with Fleet Capital Corporation (Fleet) as described in Note 8 of the
Companys consolidated financial statements should have been classified as a
current liability rather than long term in accordance with Financial Accounting
Standards Board Emerging Issues Task Force Issue No. 95-22. Accordingly, the
accompanying balance sheets in Item 8 and working capital in Item 6, Selected
Financial Data have been restated to reflect the reclassification of the
amounts outstanding under the revolving credit facility with Fleet as a
current liability. This restatement has no impact on the Companys results of
operations, cash flows or compliance covenants under the Fleet Agreement for
the years ended June 30, 2003 and 2002.

Part II Item 6 of the original 10-K is herby amended and restated in its
entirety as follows:

_______________________________________



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TABLE OF CONTENTS



|                                             |  |  |  |  |  |  |  | 
|-------------------------------------------- |  |  |  |  |  |  |  | 
|PART II                                     
|REPORT OF INDEPENDENT AUDITORS              
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  
|PART IV                                     
|EX-31.1 SECTION 302 CERTIFICATION OF THE CEO
|EX-31.2 SECTION 302 CERTIFICATION OF THE CFO
|EX-32.1 SECTION 906 CERTIFICATION OF THE CEO
|EX-32.2 SECTION 906 CERTIFICATION OF THE CFO



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PART II

Item 6.Selected Financial Data Five Year Financial Summary

Year ended June 30,2003
    
    2002
    
    2001
    
    2000
    
    1999Statement of operations data:Net sales
    
    $
    413,148,000
    
    
    $
    423,881,000
    
    
    $
    445,580,000
    
    
    $
    530,789,000
    
    
    $
    662,047,000Cost of sales
    
    
    393,724,000
    
    
    
    403,792,000
    
    
    
    420,441,000
    
    
    
    500,856,000
    
    
    
    638,097,000Gross profit
    
    
    19,424,000
    
    
    
    20,089,000
    
    
    
    25,139,000
    
    
    
    29,933,000
    
    
    
    23,950,000Selling, general and admin expenses
    
    
    24,961,000
    
    
    
    20,628,000
    
    
    
    24,153,000
    
    
    
    23,617,000
    
    
    
    39,424,000Depreciation & amortization expense
    
    
    1,614,000
    
    
    
    2,081,000
    
    
    
    2,687,000
    
    
    
    2,395,000
    
    
    
    3,077,000Foreign currency transactions loss (gain)
    
    
    581,000
    
    
    
    (9,000
    )
    
    
    220,000
    
    
    
    96,000
    
    
    
    214,000(Gain) loss disposal of assets
    
    
    (3,000
    )
    
    
    13,000
    
    
    
    224,000
    
    
    
    (3,000
    )Impairment charges
    
    
    39,000
    
    
    
    
    
    
    
    6,147,000
    
    
    
    
    
    
    
    15,386,000Operating (loss) income
    
    
    (7,768,000
    )
    
    
    (2,624,000
    )
    
    
    (8,292,000
    )
    
    
    3,828,000
    
    
    
    (34,151,000
    )Interest expense  net
    
    
    470,000
    
    
    
    265,000
    
    
    
    60,000
    
    
    
    147,000
    
    
    
    253,000Other income  net
    
    
    10,513,000Income (loss) before income taxes and before cumulative effect
of a change in accounting principle and discontinued operations
    
    
    2,275,000
    
    
    
    (2,889,000
    )
    
    
    (8,352,000
    )
    
    
    3,681,000
    
    
    
    (34,404,000
    )Income tax (benefit) expense
    
    
    613,000
    
    
    
    (1,390,000
    )
    
    
    344,000
    
    
    
    578,000
    
    
    
    (1,407,000
    )Income (loss) from continuing operations
    
    
    1,662,000
    
    
    
    (1,499,000
    )
    
    
    (8,696,000
    )
    
    
    3,103,000
    
    
    
    (32,997,000
    )Loss from discontinued operations
    
    
    (4,742,000
    )
    
    
    (3,009,000
    )
    
    
    (3,149,000
    )
    
    
    (1,414,000
    )
    
    
    (4,911,000
    )(Loss) income before cumulative effect of a change in accounting
principle
    
    
    (3,080,000
    )
    
    
    (4,508,000
    )
    
    
    (11,845,000
    )
    
    
    1,689,000
    
    
    
    (37,908,000
    )Cumulative effect of a change in accounting principle, net of
income tax benefit of $75,000
    
    
    
    
    
    
    6,297,000Net (loss) income
    
    $
    (3,080,000
    )
    
    $
    (10,805,000
    )
    
    $
    (11,845,000
    )
    
    $
    1,689,000
    
    
    $
    (37,908,000
    )Basic and diluted (loss) income per share:From continuing operations
    
    $
    0.43
    
    
    $
    (0.39
    )
    
    $
    (2.40
    )
    
    $
    0.92
    
    
    $
    (7.59
    )From discontinued operations
    
    
    (1.24
    )
    
    
    (0.78
    )
    
    
    (0.87
    )
    
    
    (0.42
    )
    
    
    (1.13
    )Before cumulative effect of a change in accounting principle
    
    
    (0.81
    )
    
    
    (1.17
    )
    
    
    (3.27
    )
    
    
    0.50
    
    
    
    (8.72
    )Cumulative effect of a change in accounting principle, net of tax
    
    
    
    
    
    
    (1.63
    )Basic and diluted (loss) income per share
    
    $
    (0.81
    )
    
    $
    (2.80
    )
    
    $
    (3.27
    )
    
    $
    0.50
    
    
    $
    (8.72
    )Weighted average number of shares outstandingBasic
    
    
    3,816,000
    
    
    
    3,862,000
    
    
    
    3,618,000
    
    
    
    3,364,000
    
    
    
    4,349,000Diluted
    
    
    3,816,000
    
    
    
    3,862,000
    
    
    
    3,618,000
    
    
    
    3,386,000
    
    
    
    4,349,000


At June
30,2003
    
    2002
    
    2001
    
    2000
    
    1999Balance sheet data:Working capital
    
    $
    25,514,000
    
    
    $
    24,063,000
    
    
    $
    30,539,000
    
    
    $
    36,506,000
    
    
    $
    45,193,000Total assets
    
    
    86,170,000
    
    
    
    80,562,000
    
    
    
    107,466,000
    
    
    
    121,319,000
    
    
    
    141,090,000Long-term obligations less current portion
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,500,000Shareholders equity
    
    
    27,716,000
    
    
    
    27,852,000
    
    
    
    42,615,000
    
    
    
    55,349,000
    
    
    
    52,810,000


All periods presented have been restated in connection with the February
2003 discontinuance of operations of SED International do Brasil Distribuidora,
Ltda. If the non-amortization provisions of SFAS No. 142 had been applied to
all periods presented, the 2001, 2000 and 1999 net income would have increased
or net loss would have decreased by $433,000, $373,000, and $888,000. 2000 and
1999 have been reclassified in connection with the fiscal 2001 adoption of a
new accounting pronouncement.

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The Company has restated its Consolidated Balance Sheet as of June 30,
2003 and 2002 to properly classify the revolving credit facility with Fleet
Capital Corporation (the Fleet Agreement) as a current liability in
accordance with Financial Accounting Standards Board Emerging Issues Task Force
Issue No. 95-22, Balance Sheet Classification of Borrowings Outstanding under
Revolving Credit Agreements That Include Both a Subjective Acceleration Clause
and a Lock-Box Arrangement(EITF 95-22). This restatement has no impact on
the Companys results of operations, cash flows or compliance covenants under
the Fleet Agreement for the years ended June 30, 2003 and 2002. The revolving
credit facility is classified as a current liability in accordance with EITF
95-22 since the Fleet Agreement contains a subjective acceleration clause and
contractual provisions under a lock box arrangement that require the cash
receipts of the Company be used to repay amounts outstanding under the
revolving credit facility. As a result of the reclassification of the
revolving credit facility to a current liability, working capital decreased
$12,823,000 and $4,900,000 for the fiscal years ended June 30, 2003 and 2002
respectively.

Part II Item 8 of the original 10-K is hereby amended and restated in its
entirety as follows:

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Item 8.Financial Statements and Supplementary Data




REPORT OF INDEPENDENT AUDITORS

Board of Directors
SED International Holdings, Inc.

We have audited the accompanying consolidated balance sheets of SED
International Holdings, Inc. and subsidiaries as of June 30, 2003 and 2002, and
the related consolidated statements of operations, shareholders equity and
cash flows for each of the three years in the period ended June 30, 2003. These
financial statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of SED
International Holdings, Inc. and subsidiaries as of June 30, 2003 and 2002, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended June 30, 2003, in conformity with
accounting principles generally accepted in the United States of America.

As
discussed in Note 8, the consolidated balance sheets for the
years ended June 30, 2003 and 2002 have been restated to
reclassify borrowings under a revolving credit facility form
non-current liabilities to current liabilities.

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



| | /s/ ERNST & YOUNG LLP
| | ---------------------

Atlanta, Georgia
October 3, 2003, except for Note 8,  
as to which the date is  
February 12, 2004

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SED INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE
SHEETS(Restated see Note 8)

June 30,2003
    
    2002ASSETSCurrent assets:Cash and cash equivalents
    
    $
    4,849,000
    
    
    $
    4,371,000Restricted cash
    
    
    
    
    
    
    800,000Trade accounts receivable, less allowance for doubtful accounts of
$2,749,000 (2003) and $1,455,000 (2002)
    
    
    34,261,000
    
    
    
    33,393,000Other receivables
    
    
    10,029,000Inventories
    
    
    33,098,000
    
    
    
    36,732,000Deferred income taxes
    
    
    153,000
    
    
    
    113,000Other current assets
    
    
    1,578,000
    
    
    
    1,364,000Total current assets
    
    
    83,968,000
    
    
    
    76,773,000Property and equipment  net
    
    
    2,202,000
    
    
    
    3,789,000Total assets
    
    $
    86,170,000
    
    
    $
    80,562,000LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Trade accounts payable
    
    $
    37,470,000
    
    
    $
    41,024,000Accrued and other current liabilities (including $3,400,000 to a
related party in 2003)
    
    
    8,146,000
    
    
    
    4,390,000Revolving credit facility
    
    
    12,823,000
    
    
    
    4,900,000Short term subsidiary bank debt
    
    
    15,000
    
    
    
    2,396,000Total current liabilities
    
    
    58,454,000
    
    
    
    52,710,000Total liabilities
    
    
    58,454,000
    
    
    
    52,710,000Shareholders equity:Preferred stock, $1.00 par value; 129,500 shares authorized, none issuedCommon stock, $.01 par value; 100,000,000 shares authorized, 5,563,206
(2003) and 5,563,206 (2002) shares issued, 3,875,861 (2003) and
3,929,510 (2002) shares outstanding
    
    
    56,000
    
    
    
    56,000Additional paid-in capital
    
    
    68,442,000
    
    
    
    68,407,000Accumulated deficit
    
    
    (23,109,000
    )
    
    
    (20,029,000
    )Accumulated other comprehensive loss
    
    
    (4,531,000
    )
    
    
    (7,499,000
    )Treasury stock, 1,687,345 (2003) and 1,633,696 (2002) shares, at cost
    
    
    (13,052,000
    )
    
    
    (12,861,000
    )Unearned compensation  stock awards
    
    
    (90,000
    )
    
    
    (222,000
    )Total shareholders equity
    
    
    27,716,000
    
    
    
    27,852,000Total liabilities and shareholders equity
    
    $
    86,170,000
    
    
    $
    80,562,000


See notes to consolidated financial statements.

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SED INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

For the Year Ended June 30,2003
    
    2002
    
    2001Net sales
    
    $
    413,148,000
    
    
    $
    423,881,000
    
    
    $
    445,580,000Cost of sales
    
    
    393,724,000
    
    
    
    403,792,000
    
    
    
    420,441,000Gross profit
    
    
    19,424,000
    
    
    
    20,089,000
    
    
    
    25,139,000Selling, general and administrative expenses
    
    
    24,961,000
    
    
    
    20,628,000
    
    
    
    24,153,000Depreciation and amortization expense
    
    
    1,614,000
    
    
    
    2,081,000
    
    
    
    2,687,000Foreign currency transactions loss (gain)
    
    
    581,000
    
    
    
    (9,000
    )
    
    
    220,000(Gain) loss disposal of assets
    
    
    (3,000
    )
    
    
    13,000
    
    
    
    224,000Impairment charges
    
    
    39,000
    
    
    
    
    
    
    
    6,147,000Operating loss
    
    
    (7,768,000
    )
    
    
    (2,624,000
    )
    
    
    (8,292,000
    )Interest expense  net
    
    
    470,000
    
    
    
    265,000
    
    
    
    60,000Other income, net
    
    
    10,513,000(Loss) income before income taxes and before
cumulative effect of a change in accounting
principle
    
    
    2,275,000
    
    
    
    (2,889,000
    )
    
    
    (8,352,000
    )Income tax expense (benefit)
    
    
    613,000
    
    
    
    (1,390,000
    )
    
    
    344,000(Loss) income from continuing operations
    
    
    1,662,000
    
    
    
    (1,499,000
    )
    
    
    (8,696,000
    )Loss from discontinued operations
    
    
    (4,742,000
    )
    
    
    (3,009,000
    )
    
    
    (3,149,000
    )Loss before cumulative effect of a change in
accounting principle
    
    
    (3,080,000
    )
    
    
    (4,508,000
    )
    
    
    (11,845,000
    )Cumulative effect of a change in accounting
principle, net of income tax benefit of
$75,000
    
    
    
    
    
    
    6,297,000Net loss
    
    $
    (3,080,000
    )
    
    $
    (10,805,000
    )
    
    $
    (11,845,000
    )Basic and diluted (loss) income per share:From continuing operations
    
    $
    0.43
    
    
    $
    (0.39
    )
    
    $
    (2.40
    )From discontinued operations
    
    
    (1.24
    )
    
    
    (0.78
    )
    
    
    (0.87
    )Before cumulative effect of a change in
accounting principle
    
    
    (0.81
    )
    
    
    (1.17
    )
    
    
    (3.27
    )Cumulative effect of a change in accounting
principle, net of tax
    
    
    
    
    
    
    (1.63
    )Basic and diluted loss per share
    
    $
    (0.81
    )
    
    $
    (2.80
    )
    
    $
    (3.27
    )Weighted average number of shares outstanding:Basic
    
    
    3,816,000
    
    
    
    3,862,000
    
    
    
    3,618,000Diluted
    
    
    3,816,000
    
    
    
    3,862,000
    
    
    
    3,618,000


See notes to consolidated financial statements.

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SED INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY

Common Stock
    
    
    
    
    
    Retained
    
    AccumulatedAdditional
    
    Earnings
    
    Other
    
    Treasury Stock
    
    Unearned
    
    TotalPar
    
    Paid-In
    
    (Accumulated
    
    Comprehensive
    
    
    
    Compensation
    
    Stockholders'Shares
    
    Value
    
    Capital
    
    Deficit)
    
    Loss
    
    Shares
    
    Cost
    
    Stock Awards
    
    EquityBALANCE JUNE 30,
2000
    
    
    5,563,456
    
    
    $
    56,000
    
    
    $
    70,600,000
    
    
    $
    2,621,000
    
    
    $
    (1,583,000
    )
    
    
    1,876,012
    
    
    $
    (15,515,000
    )
    
    $
    (830,000
    )
    
    $
    55,349,000Stock awards issued
    
    
    
    
    
    
    
    
    
    
    (1,241,000
    )
    
    
    
    
    
    
    
    
    
    
    (203,978
    )
    
    
    1,687,000
    
    
    
    (446,000
    )Amortization of
stock awards
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    814,000
    
    
    
    814,000Stock awards
cancelled
    
    
    (250
    )
    
    
    
    
    
    
    (2,000
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,000Treasury shares
purchased
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    770
    
    
    
    (2,000
    )
    
    
    
    
    
    
    (22,000
    )Issuance of common
stock for business
acquired
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,924
    
    
    
    (22,000
    )(940,000
    )
    
    
    
    
    
    
    
    
    
    
    (150,000
    )
    
    
    1,240,000
    
    
    
    
    
    
    
    300,000Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11,845,000
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11,845,000
    )Translation
adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,981,000
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,981,000
    )Comprehensive
earnings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (13,826,000
    )BALANCE JUNE 30,
2001
    
    
    5,563,206
    
    
    
    56,000
    
    
    
    68,417,000
    
    
    
    (9,224,000
    )
    
    
    (3,564,000
    )
    
    
    1,532,728
    
    
    
    (12,612,000
    )
    
    
    (458,000
    )
    
    
    42,615,000Stock awards issued
    
    
    
    
    
    
    
    
    
    
    (99,000
    )
    
    
    
    
    
    
    
    
    
    
    (16,000
    )
    
    
    126,000
    
    
    
    (27,000
    )Amortization of
stock awards
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    158,000
    
    
    
    158,000Stock awards
cancelled
    
    
    
    
    
    
    
    
    
    
    89,000
    
    
    
    
    
    
    
    
    
    
    
    23,938
    
    
    
    (194,000
    )
    
    
    105,000Treasury shares
purchased
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    93,030
    
    
    
    (181,000
    )
    
    
    
    
    
    
    (181,000
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,805,000
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,805,000
    )Translation
adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,935,000
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,935,000
    )Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (14,740,000
    )BALANCE JUNE 30,
2002
    
    
    5,563,206
    
    
    
    56,000
    
    
    
    68,407,000
    
    
    
    (20,029,000
    )
    
    
    (7,499,000
    )
    
    
    1,633,696
    
    
    
    (12,861,000
    )
    
    
    (222,000
    )
    
    
    27,852,000Stock awards
cancelled
    
    
    
    
    
    
    
    
    
    
    31,000
    
    
    
    
    
    
    
    
    
    
    
    15,185
    
    
    
    (163,000
    )
    
    
    132,000Stock based
compensation
    
    
    
    
    
    
    
    
    
    
    4,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,000Treasury shares
purchased
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    38,464
    
    
    
    (28,000
    )
    
    
    
    
    
    
    (28,000
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,080,000
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,080,000
    )Reclassification of
cumulative
translation
adjustment
reclassified to the
statement of
operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,756,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,756,000Translation
adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    212,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    212,000Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (112,000
    )BALANCE JUNE 30,
2003
    
    
    5,563,206
    
    
    $
    56,000
    
    
    $
    68,442,000
    
    
    $
    (23,109,000
    )
    
    $
    (4,531,000
    )
    
    
    1,687,345
    
    
    $
    (13,052,000
    )
    
    $
    (90,000
    )
    
    $
    27,716,000


See notes to consolidated financial statements.

7



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##### Table of Contents



SED INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Year Ended June 30,2003
    
    2002
    
    2001Operating activities:Net loss
    
    $
    (3,080.000
    )
    
    $
    (10,805,000
    )
    
    $
    (11,845,000
    )Adjustments to reconcile net loss to net cash provided by
operating activities:Impairment charges for long-lived assets, including
cumulative effect of a change in accounting principle in
2002
    
    
    100,000
    
    
    
    6,365,000
    
    
    
    6,547,000Depreciation and amortization
    
    
    1,666,000
    
    
    
    2,146,000
    
    
    
    2,824,000Compensation stock awards
    
    
    4,000
    
    
    
    158,000
    
    
    
    814,000Provision for losses on accounts receivable
    
    
    2,302,000
    
    
    
    1,638,000
    
    
    
    4,476,000Reclassification of cumulative translation adjustment
    
    
    2,756,000Changes in assets and liabilitiesRestricted cash
    
    
    800,000
    
    
    
    (100,000
    )Trade accounts receivable
    
    
    1,158,000
    
    
    
    2,661,000
    
    
    
    4,471,000Other receivable
    
    
    (10,029,000
    )Inventories
    
    
    3,096,000
    
    
    
    707,000
    
    
    
    (4,774,000
    )Deferred income taxes
    
    
    
    
    
    
    242,000
    
    
    
    5,000Other assets
    
    
    (118,000
    )
    
    
    1,661,000
    
    
    
    537,000Trade accounts payable
    
    
    (2,636,000
    )
    
    
    (1,562,000
    )
    
    
    373,000Accrued and other current liabilities
    
    
    3,336,000
    
    
    
    (2,106,000
    )
    
    
    (1,136,000
    )Net cash (used in) provided by operating activities
    
    
    (645,000
    )
    
    
    1,005,000
    
    
    
    2,292,000Investing activities:Purchase of equipment
    
    
    (217,000
    )
    
    
    (349,000
    )
    
    
    (842,000
    )Purchase of businesses, net of cash acquired
    
    
    
    
    
    
    
    
    
    
    (1,462,000
    )Net cash used in investing activities
    
    
    (217,000
    )
    
    
    (349,000
    )
    
    
    (2,304,000
    )Financing activities:Net proceeds of revolving credit facility
    
    
    7,923,000
    
    
    
    4,900,000
    
    
    
    (2,304,000
    )Net repayments of short term bank debt of foreign
subsidiaries
    
    
    (2,040,000
    )
    
    
    (174,000
    )
    
    
    (356,000
    )Purchase of treasury stock
    
    
    (28,000
    )
    
    
    (181,000
    )
    
    
    (22,000
    )Net cash provided by (used in) financing activities
    
    
    5,855,000
    
    
    
    4,545,000
    
    
    
    (378,000
    )Effect of exchange rate changes on cash
    
    
    (4,515,000
    )
    
    
    (5,073,000
    )
    
    
    (1,981,000
    )Increase (decrease) in cash and cash equivalents
    
    
    478,000
    
    
    
    128,000
    
    
    
    (2,371,000
    )Cash and cash equivalentsBeginning of year
    
    
    4,371,000
    
    
    
    4,243,000
    
    
    
    6,614,000End of year
    
    $
    4,849,000
    
    
    $
    4,371,000
    
    
    $
    4,243,000Supplemental
Disclosures of Cash Flow Information Cash paid (received) during the year for Interest paid
    
    $
    758,000
    
    
    $
    1,133,000
    
    
    $
    514,000Income tax (refunds) payments
    
    $
    613,000
    
    
    $
    (777,000
    )
    
    $
    414,000


See notes to consolidated financial statements.

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##### Table of Contents



SED INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended June 30, 2003, 2002, 2001

1. Summary Of Significant Accounting Policies

Principles of Consolidation- The consolidated financial statements
include the accounts of SED International Holdings, Inc. and its wholly-owned
subsidiaries, SED International, Inc. (formerly Southern Electronics
Distributors, Inc.), SED International do Brasil, Ltda. (formerly SED Magna
Distribuidora Ltda.), SED Magna (Miami), Inc., SED International de Colombia
Ltda., Intermaco S.R.L., (collectively the Company). All intercompany
accounts and transactions have been eliminated. The operations of SED
International do Brasil, Ltda. were discontinued in the third quarter of fiscal
2003. See Note 19.

Description of Business- The Company is a wholesale distributor of
microcomputers, computer peripheral products and wireless telephone products,
serving value-added resellers and dealers in the United States and Latin
America. The Company does not require collateral from its customers.

Risks and Uncertainties- The Company has at various times incurred a
decline in net sales in the United States since fiscal 1998 and has incurred
operating losses in either its domestic or certain of its foreign operations at
various times during the past five fiscal years. Company management is
continuing to focus on increasing profit margins and reducing administrative
and overhead costs. There is no assurance the Company will be successful in
connection with these efforts. Failure to effectively implement the plan could
adversely affect the Companys profitability and financial condition.

Numerous factors and conditions impact the Companys ability to achieve
its profit goals, including, but not limited to, the following:



| |  |  | Continuation of distribution agreements- The Company operates
under formal but cancelable distribution agreements with certain of
its suppliers. If these agreements were cancelled, the Company would
be forced to obtain its products through wholesalers. This would
reduce the Companys profit margin on the affected products.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Availability of certain products- From time to time, due to
production limitations or heavy demand, the Company may only be able
to purchase a limited amount of popular products from its suppliers.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Product margins- The Company operates in a very competitive
business environment. Accordingly, product margins are continually
under pricing pressure.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Vendor credit- The Company significantly relies on its suppliers
for trade credit. Changes by the suppliers in their credit terms could
force the Company to obtain less favorable financing for its
purchases.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Product obsolescence- The Company offers a broad line of
products that are subject to fast technological obsolescence, which
increases the risk of inventory markdown. Through its vendor
agreements, the Company has certain stock return privileges, which
vary from supplier to supplier.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Credit decisions and losses- The Company maintains an
experienced customer credit staff and relies on customer payment
history and third party data to make customer credit decisions.
Nevertheless, the Company may experience customer credit losses in
excess of its expectations. The Company also maintains credit
insurance for customers located in the United States and most Latin
American countries (subject to certain terms and conditions).
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

9



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##### Table of Contents





| |  |  | Proportionate control of general and administrative costs- The
Company attempts to control its overhead costs to keep such costs in
line with its sales volume. As sales volumes fluctuate, the Company
must continually monitor its overhead costs and make adjustments
timely and appropriately.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Uncertain and possibly volatile economic and political
environment in Latin America- The general economic and political
environment in all of the countries in which the Company operates in
Latin America is uncertain and, at times, volatile. As a result of
these conditions, the Company could experience unexpected costs from
its operations in these countries.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Availability of credit facilities- The Company operated under a
formal credit facility with a bank for many years that was subject to
certain collateral limitations and contained certain covenants. During
October 2002 a new credit facility was obtained. The new credit
facility provides more flexibility compared to the prior agreement but
also includes covenants and other provisions. The Company consistently
violated the financial covenants associated with the previous credit
agreement, but was successful in negotiating waivers of such
violations. No assurance can be given that the Company will be able to
maintain compliance with financial covenants, or obtain waivers in the
event of non-compliance, in the future. Failure to maintain compliance
with the financial covenants could adversely affect the Companys
ability to obtain vendor credit and the overall business operations.
The credit facilities are further described in Note 8.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Cash flows- While not presently expected, the Companys
continued operation in Latin America may require additional capital
infusion (in the form of advance notes from the parent company or
other debt borrowings by the subsidiary). The October 2002 credit
facility restricts the future funding by the parent company of Latin
American operations. Operating needs and regulatory matters restrict
the Companys ability to repatriate cash flows to the United States.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Revenue Recognition- Sales are recorded upon shipment. The Company allows
its customers to return product for exchange or credit subject to certain
limitations. Returns have historically not been significant. Provision for
estimated losses on such returns are recorded at the time of sale. Funds
received from vendors for product rebates are accounted for as a reduction of
product cost. Shipping and handling revenues are included in net sales and
shipping and handling costs are included in cost of sales.

Concentrations of Credit Risk- Financial instruments that potentially
subject the Company to significant concentrations of credit risk consist
principally of cash and trade accounts receivable. The Company generally does
not require collateral from its customers.

Use of Estimates- The preparation of financial statements in conformity
with accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from
those estimates, and those difference could be significant.

Cash Equivalents- Cash equivalents are short-term investments purchased
with a maturity of three months or less.

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

10



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##### Table of Contents



Allowance for Doubtful Accounts- An allowance for uncollectible accounts
has been established based on our collection experience and an assessment of
the collectibility of specific accounts. The Company evaluates the
collectibility of accounts receivable based on a combination of factors.
Initially, the Company estimates an allowance for doubtful accounts as a
percentage of accounts receivable based on historical collections experience.
This initial estimate is periodically adjusted when the Company becomes aware
of a specific customers inability to meet its financial obligations (e.g.,
bankruptcy filing) or as a result of changes in the overall aging of accounts
receivable. Management does not believe the estimate of the allowance for
doubtful accounts is likely to be adversely affected by any individual customer, since the Company is
protected by credit insurance on its significant customers, subject to certain
deductible limitations. Uncollectible accounts are written-off against the
allowance for doubtful accounts.

Inventories- Inventories are stated at the lower of cost (first-in,
first-out method) or market and include in-transit inventory of $11,136,000 at
June 30, 2003 and $3,383,000 at June 30, 2002. Most of the Companys vendors
allow for either return of goods within a specified period (usually 90 days) or
for credits related to price protection. However, for other vendor
relationships and inventories, the Company is not protected from the risk of
inventory loss. Therefore, in determining the net realizable value of
inventories, the Company identifies slow moving or obsolete inventories that
(1) are not protected by our vendor agreements from risk of loss, and (2) are
not eligible for return under various vendor return programs. Based upon these
factors, the Company estimates the net realizable value of inventories and
records any necessary adjustments as a charge to cost of sales. If inventory
return privileges or price protection programs were discontinued in the future,
or if vendors were unable to honor the provisions of certain contracts which
protect the Company from inventory losses, the risk of loss associated with
obsolete and slow moving inventories would increase.

Property and Equipment- Property and equipment are recorded at cost less
accumulated depreciation and amortization. Depreciation is computed principally
by the straight-line method over the estimated useful lives of the related
asset, which generally range from three to seven years. Leasehold improvements
are amortized ratably over the lesser of the useful lives of the improvements
or the related lease terms.

Long-Lived Assets and Impairment- The Company periodically reviews
long-lived assets, for impairment based on judgments as to the fair value of
such assets primarily based upon future undiscounted cash flows from related
operations. Based on the information available, an impaired asset is written
down to its estimated fair market value generally measured by discounting
estimated future cash flows. See Note 3 and Note 7.

Foreign Currency Translation- The assets and liabilities of foreign
operations are translated at the exchange rates in effect at the balance sheet
date, with related translation gains or losses reported as a separate component
of shareholders equity. The results of foreign operations are translated at
the weighted average exchange rates for the year. Gains or losses resulting
from foreign currency transactions are included in the statement of operations.
See Note 17.

Earnings Per Common Share (EPS)- Basic EPS is computed by dividing income
available to common stockholders by the weighted average number of common
shares outstanding for the period. Diluted EPS is computed using the
weighted-average number of common shares and dilutive potential common shares
outstanding. Dilutive potential common shares represent additional common
shares assumed to be issued. For the years ended June 30, 2003, 2002, and 2001
(fiscal 2003, 2002, and 2001, respectively) options for approximately 801,000,
969,000, and 321,000 common shares, respectively, were excluded from the
diluted EPS calculation due to their antidilutive effect.

Fair Value of Financial Instruments- Financial instruments that are
subject to fair value disclosure requirements are carried in the consolidated
financial statements at amounts that approximate their fair value.

Reclassifications- Certain prior year balances have been reclassified to
conform with the current year presentation.

11



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##### Table of Contents



2. Acquisitions

On November 1, 1998, the Company acquired Intermaco S.R.L. (Intermaco),
a Buenos Aires, Argentina, distributor of Hewlett-Packard products and other
computer peripherals. Consideration for the acquisition consisted of an initial
cash payment at closing of $4,417,000, and two subsequent payments based on a
multiple of Intermacos net earnings for each of the succeeding twelve-month
periods. For the first twelve-month period ended October 31, 1999, the Company
paid an additional $2,030,000, consisting of $1,230,000 in cash and 200,000
shares of the Companys common stock valued at $800,000 in February 2000. For
the second twelve-month period ended October 31, 2000, the Company paid in
April 2001 an additional $1,400,000 in cash and issued 150,000 shares of the
Companys common stock valued at $300,000. This acquisition was recorded under
the purchase method of accounting. The operating results of the acquired
business is included in the Companys consolidated statements of operations
from the acquisition date.

3. Recently Issued Accounting Pronouncements

In November 2002, the FASB issued FASB Interpretation Number 45,
Guarantors Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others(FIN 45). FIN 45 requires an
entity to disclose in its interim and annual financial statements information
with respect to its obligations under certain guarantees that it has issued. It
also requires an entity to recognize, at the inception of a guarantee, a
liability for the fair value of the obligation undertaken in issuing the
guarantee. The disclosure requirements of FIN 45 are effective for interim and
annual periods after December 15, 2002. The initial recognition and initial
measurement requirements of FIN 45 are effective prospectively for guarantees
issued or modified after December 31, 2002. The adoption of FIN 45 had no
significant effect on the Company.

In January 2003, the Emerging Issues Task Force (EITF) of the Financial
Accounting Standards Board (FASB) issued EITF Issue No. 02-16, Accounting by
a Customer (Including a Reseller) for Certain Consideration Received from a
Vendor(the Issue). The Issue addresses accounting and reporting issues
related to how a reseller should account for cash consideration received from
vendors. Generally, cash consideration received from vendors is presumed to be
a reduction of the prices of the vendors products or services and should,
therefore, be characterized as a reduction of cost of sales when recognized in
the customers income statement. However, under certain circumstances this
presumption may be overcome and recognition as revenue or as a reduction of
other costs in the income statement may be appropriate. The Issue is effective
for fiscal periods beginning after December 15, 2002. While the Company does
receive cash consideration from vendors subject to the provisions of the Issue,
the adoption of EITF Issue No. 02-16 had no significant impact on the Company.

In August 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets(SFAS 144), which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets
and supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of,and the accounting and reporting
provisions of APB Opinion No. 30, Reporting the Results of Operations for a
disposal of a segment of a business. SFAS 144 is effective for fiscal years
beginning after December 15, 2001, with earlier application encouraged. The
Company adopted SFAS 144 as of July 1, 2002 and the adoption of SFAS 144 has
not had a significant impact on the Companys financial position and results of
operations.

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

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##### Table of Contents



Effective July 1, 2002, the Company adopted the fair value method defined
in SFAS No. 123, Accounting for Stock-Based Compensation. (SFAS No. 123). In
December 2002, the FASB issued SFAS 148, Accounting for Stock-Based
Compensation  Transition and Disclosure an amendment of FASB Statement No.
123. For information regarding the adoption of the fair value method defined in
SFAS No. 123, refer to Note 11. The adoption of SFAS No. 123 had no significant
effect on the Companys financial statements.

In July 2001, the FASB issued Statement No. 141 (SFAS 141) Business
Combinations,and Statement No. 142 (SFAS 142), Goodwill and Other Intangible
Assets. SFAS 141 prospectively prohibits the pooling of interests method of
accounting for business combinations initiated after June 30, 2001. SFAS 142
requires companies to cease amortizing goodwill that existed at June 30, 2001
and establishes a new method for testing goodwill for impairment on an annual
basis (or an interim basis if an event occurs that might reduce the fair value
of a reporting unit below its carrying value.) Any goodwill resulting from
acquisitions completed after June 30, 2001 is not amortized. SFAS 142 also
requires that an identifiable intangible asset that is determined to have an
indefinite useful economic life not be amortized, but separately tested for
impairment using a fair value based approach. The Company adopted SFAS 142 as
of July 1, 2001. However, the Company did not complete the required
transitional
impairment tests until the second quarter ended December 31, 2001. During the
three month period ended December 31, 2001, the Company tested goodwill arising
from the Intermaco acquisition described in Note 2 as of July 1, 2001 primarily
utilizing a valuation technique relying on the expected present value of future
cash flows. As a result of this valuation process as well as the application of
the remaining provisions of SFAS 142, the Company recorded a pre-tax
transitional impairment loss of $6,372,000, representing the write-off of all
of the Companys existing goodwill. This write-off was reported as a cumulative
effect of a change in accounting principle, on a net of tax basis, as of July
1, 2001 in the Companys consolidated statement of operations. Prior to the
adoption of SFAS 142 on July 1, 2001, the Company amortized this goodwill over
an estimated useful life of 30 years.

If the Company accounted for goodwill consistent with the provisions of
SFAS 142 in prior periods, the Companys net (loss) earnings as reported would
have been as follows after giving effect to the non-amortization provisions of
SFAS 142, net of income taxes:

Year Ended June 30,2002
    
    2001Reported (loss) earnings before the
cumulative effect of a change in
accounting principle
    
    $
    (4,508,000
    )
    
    $
    (11,845,000
    )Add: amortization expense
    
    
    
    
    
    
    433,000Adjusted (loss) earnings before the
cumulative effect of a change in
accounting principle, net of taxes
    
    $
    (4,508,000
    )
    
    $
    11,412,000
    )Adjusted net (loss) earnings
    
    $
    (10,805,000
    )
    
    $
    (11,412,000
    )Basic and dilutive (loss) earnings per
share: Reported net (loss) earnings
before the cumulative effect of a
change in accounting principle
    
    $
    (1.17
    )
    
    $
    (3.27
    )Add: amortization expense
    
    
    
    
    
    
    0.12Adjusted (loss) earnings before the
cumulative effect of a change in
accounting principle, net of taxes
    
    $
    (1.17
    )
    
    $
    (3.15
    )Adjusted net (loss) earnings
    
    $
    (2.80
    )
    
    $
    (3.15
    )


4. Restricted Cash

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

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##### Table of Contents



5. Other Receivables and Income

In June 2003, the Company recorded income of $10.0 million, plus accrued
interest of $29,000 related to proceeds due under two key man life insurance
policies held on the life of Gerald Diamond, the Companys founder and former
Chairman and Chief Executive Officer. The insurance proceeds were received in
July and August of 2003. In December 2002, the Company entered into a
confidential settlement agreement for claims arising out of a disagreement with
a former insurance broker. The net proceeds of $512,932 were recorded net of
attorneys fees of
$96,420.

6. Property and Equipment

Property and equipment are comprised of the following:

June 30,2003
    
    2002Property and equipment:Furniture and equipment
    
    $
    9,864,000
    
    
    $
    12,515,000Leasehold improvements
    
    
    1,525,000
    
    
    
    1,789,000Other
    
    
    175,000
    
    
    
    598,00011,564,000
    
    
    
    14,902,000Less accumulated depreciation
    
    
    9,362,000
    
    
    
    11,113,000$
    2,202,000
    
    
    $
    3,789,000


Depreciation expense for property and equipment totalled $1,666,000,
$2,006,000, and $2,391,000 for the years ended June 30, 2003, 2002 and 2001,
respectively.

7. Exit Costs and Impairment Charges

In January 2002, the Company decided to discontinue the computer asset
recovery operation of E-Store.com started in fiscal year 2001. In connection
with this decision, the Company recorded expenses totalling $362,000 related to
lease termination of $249,000, severance costs of $60,000, and loss on fixed
asset disposal of $53,000. Loss on fixed asset disposal, severance expenses,
and the lease and utility termination expenses have been classified as facility
closure. All inventory-related exit costs have been classified as cost of goods
sold in the accompanying consolidated statement of operations. The net loss for
the years ended June 30, 2002 and 2001 for the E-Store.com division was
approximately $1,282,000 and $362,000, respectively.

In the fourth quarter of the year ended June 30, 2001, the Company
recorded non-cash facility closure and impairment charges totaling $6,547,000.
The non-cash accounting charge was determined based on a detailed analysis of
the Companys long-lived assets and their estimated future cash flows. The
analysis resulted in the identification and measurement of an impairment loss
of $5,947,000 in goodwill and approximately $200,000 in property and equipment.
Substantially all of the goodwill impairment relates to the Companys acquired
export distribution rights in connection with the fiscal 1996 acquisition of
substantially all of the net assets of U.S. Computer of North America, Inc.
This impairment resulted from a gradual, but significant, decline in sales
volumes and adverse changes in the competitive environment for the distribution
of the corresponding product lines. The goodwill was not considered recoverable
through other means. Management estimated the undiscounted cash flows to be
generated by the assets for the respective operations and compared them to
their carrying values. Since the estimated undiscounted future cash flows were
less than the carrying values, the carrying values were adjusted to estimated
fair values.

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8. Credit Facilities

The Company has restated its Consolidated Balance Sheet as of June 30,
2003 and 2002 to properly classify the revolving credit facility with Fleet
Capital Corporation (hereafter Fleet and the Fleet Agreement) as a current
liability in accordance with Financial Accounting Standards Board Emerging
Issues Task Force Issue No. 95-22, Balance Sheet Classification of Borrowings
Outstanding under Revolving Credit Agreements That Include Both a Subjective
Acceleration Clause and a Lock-Box Arrangement(EITF 95-22). This restatement
has no impact on the Companys results of operations, cash flows or compliance
covenants under the Fleet Agreement for the years ended June 30, 2003 and 2002.
The revolving credit facility is classified as a current liability in
accordance with EITF 95-22 since the Fleet Agreement contains a subjective
acceleration clause and contractual provisions under a lock box arrangement
that require the cash receipts of the Company be used to repay amounts
outstanding under the revolving credit facility

On October 7, 2002, the Company entered into a three year, $35 million
credit facility with Fleet. The Fleet Agreement provides for revolving
borrowings up to $35 million based upon the Companys eligible domestic
accounts receivable and inventory as defined therein. Borrowings under the
Fleet Agreement accrue interest based upon a variety of interest rate options
depending upon the computation of availability as defined therein. The interest
rates range from the prime rate to the prime rate plus a margin of .5%, or the
Federal funds rate plus a margin of .5%, or LIBOR plus a margin ranging from 2%
to 2.75%. The Company is also subject to a commitment fee ranging from .25% to
..5% on the unused portion of the facility. Interest is payable monthly.
Borrowings under the Fleet Agreement are secured by substantially all domestic
assets of the Company and 65% of each of the Companys shares in its foreign
subsidiaries, respectively. The Fleet Agreement matures on October 7, 2005.

The Fleet Agreement also contains certain covenants which, among other
things, require that if the Companys availability is less than $5 million at
any time during the agreement, the Company must restrict or limit capital
expenditures and advances to the Companys Latin American subsidiaries. Also,
if the $5 million threshhold is breached, the Fleet Agreement requires the
maintenance of certain levels of earnings before interest, taxes, depreciation,
and amortization, requires maintenance of minimum fixed charge coverage ratio
beginning in the second quarter of fiscal 2004, and requires the maintenance of
minimum tangible net worth, as defined, of negative $5 million. Based upon the
Companys experience in fiscal 2002 and through the date of entering into the
Fleet Agreement, the Company has continuously maintained at least $5 million in
availability under the Fleet Agreement. The Companys availability under the
Fleet Agreement net of reserves of $2.1 million for outstanding Letters of
Credit was $9.6 million on October 3, 2003.

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Until October 2002, the Company had a credit agreement with Wachovia Bank
N.A. (Wachovia), which provided for borrowings under a line of credit of up
to $25 million and $35 million at June 30, 2002 and 2001, respectively. At June
30, 2002, the Company had $4.9 million outstanding under this facility. Maximum
borrowings under the credit agreement were generally based on eligible accounts
receivable and inventory. Available borrowings under this agreement, based on
collateral limitations at June 30, 2002 were $9.9 million ($9.5 million of
which would only be available to finance obligations due to IBM Global
Financing, if necessary).

The Wachovia credit agreement required maintenance of certain minimum
working capital and other financial ratios and has certain dividend
restrictions. The credit agreement required a commitment fee of .50% of the
unused commitment. Average borrowings, maximum borrowings and the weighted
average interest rate for fiscal 2002 were $4,961,000, $19,100,000, and 5.67%
respectively. At June 30, 2002 the Company was not in compliance with certain
financial covenants under the Wachovia agreement. However, the Company
subsequently obtained a new revolving credit agreement as previously discussed.
Since the June 30, 2002 borrowings outstanding under the Wachovia agreement
were subsequently refinanced on a long-term basis under the Fleet Agreement,
all such borrowings have been classified as non-current in the June 30, 2002
balance sheet.

Subsidiary Bank Debt The Companys subsidiary, SED International do
Brasil Distribuidora Ltda. (operations of which have been discontinued),
operated under line of credit agreements with several Brazilian banks. Interest
rates on borrowings were negotiated at the time of borrowing. The credit
agreements were secured by an $800,000 certificate of deposit and the
subsidiarys accounts receivable and required the maintenance of certain
financial ratios. At June 30, 2003 and 2002, there were $15,000, and $2,396,000
respectively, of outstanding borrowings under these lines of credit. Average
borrowings, maximum borrowings and the weighted average monthly interest rate
under these loan agreements for fiscal 2003 were $948,000, $2,520,000, and 26%,
respectively. Average borrowings, maximum borrowings and the weighted average
monthly interest rate under these loan agreements for fiscal 2002 were
$2,749,000, $3,685,000, and 1.94%, respectively.

The carrying value of all bank debt at June 30, 2003 approximates its fair
value based on the variable market rates of interest on such bank debt.

9. Income Taxes

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The tax effects of
significant items comprising the Companys deferred tax assets are as follows:

June 30,2003
    
    2002U.S. federal and state operating loss carryforwards
    
    $
    11,836,000
    
    
    $
    10,998,000Foreign operating loss carryforwards
    
    
    4,087,000
    
    
    
    3,474,000Reserves not currently deductible
    
    
    3,436,000
    
    
    
    1,520,000Valuation allowance
    
    
    (19,206,000
    )
    
    
    (15,879,000
    )$
    153,000
    
    
    $
    113,000


At June 30, 2003, the Company has gross net operating loss carryforwards
for federal and state income tax purposes in the United States of approximately
$28.7 million and $34.3 million, respectively, expiring at various dates
through 2023 and gross net operating loss carryforwards for income tax purposes
in Brazil of approximately $12.0 million which generally do not expire. At June
30, 2003 and 2002, the Company has recorded a valuation allowance for
principally all deferred tax assets, except for those relating to Intermaco
S.R.L., as there is no assurance that these assets will be realized.

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Components of income tax expense (benefit) are as follows:

Year Ended June 30,2003
    
    2002
    
    2001Current:Federal
    
    
    
    
    
    $
    (1,882,000
    )StateForeign
    
    $
    634,000
    
    
    
    175,000
    
    
    $
    339,000634,000
    
    
    
    (1,707,000
    )
    
    
    339,000Deferred:FederalStateForeign
    
    
    (21,000
    )
    
    
    242,000
    
    
    
    5,000(21,000
    )
    
    
    242,000
    
    
    
    5,000$
    613,000
    
    
    $
    (1,465,000
    )
    
    $
    344,000


The Companys effective tax rates for income (loss) from continuing
operations differ from statutory rates as follows:

Year Ended June 30,2003
    
    2002
    
    2001Statutory federal rate (benefit)
    
    
    34.0
    %
    
    
    (34.0
    )%
    
    
    (34.0
    )%State income taxes net of federal income tax benefits
    
    
    .9
    
    
    
    (15.4
    )
    
    
    (4.4
    )Non-deductible goodwill amortization
    
    
    
    
    
    
    
    
    
    
    20.8Life insurance proceeds
    
    
    (166.4
    )Net operating loss carryback
    
    
    
    
    
    
    (26.9
    )Valuation allowance
    
    
    156.1
    
    
    
    27.0
    
    
    
    21.2Other
    
    
    2.3
    
    
    
    1.2
    
    
    
    .526.9
    %
    
    
    (48.1
    )%
    
    
    4.1
    %


The valuation allowance increased during fiscal 2003, 2002, and 2001 by
$3,327,000, $1,804,000, and $1,844,000, respectively.

10. Lease Obligations

SED International leases its main office facility under an operating lease
with an entity owned by certain minority shareholders and officers of the
Company. Rent expense for this facility for the years ended June 30, 2003,
2002, and 2001 was $275,000, $267,000, and $259,000 respectively. This lease,
as of October 2003, provides for an annual rent of $277,000 with annual
increases of 3% through September 2006. The Company leases additional
distribution center and sales office space under other operating leases. Rent
expense, net of sublease rental income, under all operating leases for the
years ended June 30, 2003, 2002, and 2001 was $1,741,000, $1,505,000, and
$1,622,000, respectively.

The Company was obligated under lease agreements for its closed Harrisburg
distribution center through March of 2003 and portions of other distribution
centers which were not being utilized by the Company. Most of such distribution
space has been sublet to third parties. Sublease rental income was $377,000,
$494,000, and $738,000 for the years ended June 30, 2003, 2002, 2001,
respectively.

As of June 30, 2003, future minimum rental commitments under noncancelable
operating leases are:

FutureYear Ending June 30
    
    Rent2004
    
    $
    1,286,0002005
    
    
    617,0002006
    
    
    396,0002007
    
    
    76,000$
    2,375,000


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11. Shareholders Equity

Common Stock During fiscal years 2003, 2002, and 2001, the Company
repurchased 38,464, 93,030, and 9,924 shares, respectively, of its common stock
in open market and private transactions for $28,000, $181,000, and $22,000,
respectively.

Stock Options Effective July, 1, 2002, the Company adopted the fair
value method of recording stock-based compensation in accordance with the
provisions of SFAS No. 123, Accounting for Stock-Based Compensation,which is
considered the preferable accounting method for stock-based employee
compensation. Historically, the Company had elected to follow the Accounting
Principles Board Opinion No. 25, Accounting for Stock Based Compensation issued
to Employees(APB 25) and related Interpretations in accounting for its
employee stock-based compensation. Accordingly, no compensation expense has
been recognized for stock option plans in the past. The Company has elected to
follow the prospective method and all employee awards granted, modified or
settled after July 1, 2002 will be expensed over the vesting period based on
the fair value at the date the stock-based compensation is granted. Stock
compensation expense recognized in the year ended June 30, 2003 in connection
with the prospective adoption of SFAS No. 123 totaled approximately $4,000. The
following table illustrates the effect on net income and earnings per share as
if the fair value based method had been applied to all outstanding and unvested
awards in each period.

Year Ended June 30,(in thousands, except per share amounts)
    
    2003
    
    2002
    
    2001Net loss, as reported
    
    $
    (3,080
    )
    
    $
    (10,805
    )
    
    $
    (11,845
    )Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
less $4,000 recognized in 2003
    
    
    (361
    )
    
    
    (775
    )
    
    
    (762
    )Pro forma net loss
    
    $
    (3,441
    )
    
    $
    (11,580
    )
    
    $
    (12,607
    )Loss per share:As reported
    
    $
    (0.81
    )
    
    $
    (2.80
    )
    
    $
    (3.27
    )Pro forma
    
    $
    (0.90
    )
    
    $
    (3.00
    )
    
    $
    (3.48
    )


Fair
Value The weighted average fair value of options granted in fiscal
2003, 2002, and 2001 was $.62, $1.43, $4.70, respectively, using the
Black-Scholes option pricing model with the following assumptions:

Year Ended June 30,2003
    
    2002
    
    2001Dividend yield
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %Expected volatility
    
    
    63.1
    %
    
    
    61.5
    %
    
    
    84.5
    %Risk free interest rate
    
    
    3.94
    %
    
    
    4.9
    %
    
    
    5.3
    %Expected life, in years
    
    
    8.0
    
    
    
    10.0
    
    
    
    10.0


The Company maintains stock option plans under which 919,098 shares of
common stock have been reserved at June 30, 2003 for outstanding and future
incentive and nonqualified stock option grants as well as stock awards to
directors, officers, and key employees. Incentive stock options must be granted
at not less than the fair market value of the common stock at the date of grant
and expire 10 years from the date of grant. Nonqualified stock options may be
granted at a price of not less than 85% of the fair market value of the common
stock at the date of grant and expire 20 years from the date of grant. Options
granted under the plans are exercisable in installments ranging from 20% to 50%
per year. Upon the occurrence of a change of control (as defined in the
Companys stock option plans), all outstanding options become immediately
exercisable.

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##### Table of Contents



Stock option activity, including options issued to non-employee directors,
and related information under these plans is as follows:

WeightedAverageShares
    
    Exercise PriceShares under options at June 30, 2000
    
    
    1,326,393
    
    
    $
    10.18Granted
    
    
    83,550
    
    
    
    5.45Cancelled
    
    
    (1,088,549
    )
    
    
    8.58Shares under options at June 30, 2001
    
    
    321,394
    
    
    
    14.14Granted
    
    
    746,500
    
    
    
    1.91Cancelled
    
    
    (99,300
    )
    
    
    4.00Shares under options at June 30, 2002
    
    
    968,594
    
    
    
    3.17Granted
    
    
    37,500
    
    
    
    .90Cancelled
    
    
    (205,210
    )
    
    
    3.91Shares under options at June 30, 2003
    
    
    800,884
    
    
    
    2.87Options exercisable at June 30:2001
    
    
    103,868
    
    
    $
    6.862002
    
    
    802,738
    
    
    
    2.962003
    
    
    740,918
    
    
    
    2.96


The following table summarizes information pertaining to all options
outstanding and exercisable at June 30, 2003:

Outstanding OptionsWeighted
    
    
    
    
    
    Exercisable OptionsAverage
    
    WeightedRemaining
    
    Average
    
    
    
    
    
    AverageRange of
    
    Number
    
    Contractual
    
    Exercise
    
    Number
    
    ExerciseExercise Prices
    
    Outstanding
    
    Life (Years)
    
    Price
    
    Exercisable
    
    Price$0.0000 - $1.0130
    
    
    32,500
    
    
    
    9.0
    
    
    $
    0.9000
    
    
    
    
    
    
    
    $1.0131 - $2.0260
    
    
    561,500
    
    
    
    8.1
    
    
    $
    1.9377
    
    
    
    546,636
    
    
    $
    1.9531$2.0261 - $3.0390
    
    
    30,500
    
    
    
    7.6
    
    
    $
    2.3439
    
    
    
    22,533
    
    
    $
    2.2853$5.0651 - $6.0780
    
    
    143,709
    
    
    
    5.8
    
    
    $
    5.8800
    
    
    
    143,709
    
    
    $
    5.8800$6.0781 - $7.0910
    
    
    5,250
    
    
    
    6.4
    
    
    $
    6.8200
    
    
    
    5,250
    
    
    $
    6.8200$7.0911 - $8.1040
    
    
    21,800
    
    
    
    6.4
    
    
    $
    7.8856
    
    
    
    17,250
    
    
    $
    7.8713$9.1171 - $10.1300
    
    
    5,625
    
    
    
    3.4
    
    
    $
    10.1061
    
    
    
    5,540
    
    
    $
    10.1087


Restricted Stock- The Companys stock option plan established in 1999
also permits the grant of restricted stock awards. Awards which have been
granted under this 1999 plan vest ratably over two to ten years. Restricted
stock activity is as follows:

Year Ended June 30,2003
    
    2002
    
    2001Shares of restricted stock beginning of year
    
    
    96,988
    
    
    
    158,358
    
    
    
    204,500Issued
    
    
    0
    
    
    
    16,000
    
    
    
    203,978Vested
    
    
    (32,866
    )
    
    
    (53,432
    )
    
    
    (249,100
    )Canceled
    
    
    (15,185
    )
    
    
    (23,938
    )
    
    
    (1,020
    )Shares of restricted stock end of year
    
    
    48,937
    
    
    
    96,988
    
    
    
    158,358


The value of restricted stock awards is determined using the market price
of the Companys common stock on the grant date and is amortized over the
vesting period. The unamortized portion of such awards is deducted from
stockholders equity.

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##### Table of Contents



Stockholder Rights Agreement- In October 1996, the Company adopted a
stockholder rights agreement under which one common stock purchase right is
presently attached to and trades with each outstanding share of the Companys
common stock. The rights become exercisable and transferable apart from the
common stock ten days after a person or group, without the Companys consent,
acquires beneficial ownership of 12% or more of the Companys common stock or
announces or commences a tender or exchange offer that could result in 12%
ownership (the Change Date). Once exercisable, each right entitles the holder
to purchase shares of common stock in number equal to eight multiplied by the
product of the number of shares outstanding on the Change Date divided by the
number of rights outstanding on the Change Date not owned by the person or
group and at a price of 20% of the per share market value as of the Change
Date. The rights have no voting power and, until exercisable, no dilutive
effect on net earnings per common share. The rights expire in October 2006 and
are redeemable at the discretion of the Companys Board of Directors at $.01
per right.

Exchange Plan- In February 2001, the Company made an offer to employees
of the Company to exchange stock options they previously received in exchange
for awards of restricted stock under the Companys 1997 and 1999 Stock Option
Plan. Under the exchange, an employee received one share of restricted common
stock for each option to purchase five shares of common stock surrendered. A
similar option exchange offer was made to non-employee Directors. Based on the
5 for 1 exchange ratio, 1,019,889 options were exchanged for awards of 203,978
shares of restricted common stock. The exchanged options had an exercise price
from $5.25 to $10.13 and the average exercise price for the exchanged options
was $8.78. The total valuation placed on the awards issued was approximately
$446,000, based on the closing price of the common stock of $2.19 on February
28, 2001. The exchange increased the number of shares of the Companys common
stock outstanding by 5.5%, but reduced potential dilutive impact on the
Companys common stock associated with the 1,019,889 options exchanged and
cancelled. Options returned became available for re-issuance.

The exchange valuation of $446,000 resulted in non-cash deferred
compensation in the amount of $413,000 for the employees portion of the
exchange, and expense of $33,000 for the immediate vesting of the outside
Directors restricted stock.

Subsequent to the exchange settlement, stock awards issued to certain
officers of the Company and its subsidiary, SED International, Inc., were
accelerated and immediately vested. The accelerated vesting resulted in the
recognition of non-cash awards compensation expense of $462,000 in 2001.

12. Employee Benefit Plan

SED International, Inc. maintains the SED International, Inc. 401(k) Plan,
a voluntary retirement benefit program. All employees of SED International,
Inc. who have attained the age of 21 are eligible to participate after
completing one year of service. Employees are immediately vested in their own
contributions. Prior to July 1, 2002, SED International, Inc. matched a portion
of employee contributions to the plan. Effective July 1, 2002, SED
International revised the plan to provide 401K matching for its employees at
the discretion of the Board of Directors and is no longer required to match
401K funds. Vesting in SED International, Inc.s matching contributions, if
any, is based on years of continuous service. There were no matching
contributions to the 401(k) plan in fiscal 2003. SED International, Inc.s
matching contribution expense for the years ended June 30, 2002 and 2001 was
$93,000 and $125,000, respectively.

13. Segment Information

The Company operates in one business segment as a wholesale distributor of
microcomputer and wireless telephone products. The Company operates and manages
in two geographic regions, the United States and Latin America.

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##### Table of Contents



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

United States
    
    Latin America
    
    Eliminations
    
    ConsolidatedFiscal 2003Net sales:Unaffiliated customers
    
    $
    375,485,000
    
    
    $
    37,663,000
    
    
    
    
    
    
    $
    413,148,000Foreign subsidiaries
    
    
    19,000
    
    
    
    
    
    
    $
    (19,000
    )Total
    
    $
    375,504,000
    
    
    $
    37,663,000
    
    
    $
    (19,000
    )
    
    $
    413,148,000Gross profit
    
    $
    14,878,000
    
    
    $
    4,476,000
    
    
    $
    70,000
    
    
    $
    19,424,000(Loss) income from
continuing operations
    
    
    (9,446,000
    )
    
    
    1,608,000
    
    
    
    70,000
    
    
    
    (7,768,000
    )Total assets at year-end
    
    
    107,724,000
    
    
    
    9,382,000
    
    
    
    (30,987,000
    )
    
    
    86,119,000Fiscal 2002Net sales:Unaffiliated customers
    
    $
    385,911,000
    
    
    $
    37,970,000
    
    
    
    
    
    
    $
    423,881,000Foreign subsidiaries
    
    
    913,000
    
    
    
    
    
    
    $
    (913,000
    )Total
    
    $
    386,824,000
    
    
    $
    37,970,000
    
    
    $
    (913,000
    )
    
    $
    423,881,000Gross profit
    
    $
    14,719,000
    
    
    $
    5,193,000
    
    
    $
    177,000
    
    
    $
    20,089,000(Loss) income from
continuing operations
    
    
    (4,799,000
    )
    
    
    1,998,000
    
    
    
    177,000
    
    
    
    (2,624,000
    )Total assets at year-end
    
    
    145,998,000
    
    
    
    8,286,000
    
    
    
    (77,832,000
    )
    
    
    76,452,000Fiscal 2001Net sales:Unaffiliated customers
    
    $
    399,733,000
    
    
    $
    45,847,000
    
    
    
    
    
    
    $
    445,580,000Foreign subsidiaries
    
    
    1,585,000
    
    
    
    
    
    
    $
    (1,585,000
    )Total
    
    $
    401,318,000
    
    
    $
    45,847,000
    
    
    $
    (1,585,000
    )
    
    $
    445,580,000Gross profit
    
    $
    19,703,000
    
    
    $
    5,436,000
    
    
    
    
    
    
    $
    25,139,000(Loss) income from
continuing operations
    
    
    (9,188,000
    )
    
    
    896,000
    
    
    
    
    
    
    
    (8,292,000
    )Total assets at year-end
    
    
    98,017,000
    
    
    
    17,119,000
    
    
    $
    (20,572,000
    )
    
    
    94,564,000


Sales of products between the Companys geographic regions are made at
market prices and are eliminated in consolidation. All corporate overhead is
included in the results of U.S. operations.

Net sales by product category for continuing operations is as follows:

Microcomputer
    
    Wireless Telephone
    
    HandlingYear Ended June 30,
    
    Products
    
    Products
    
    Revenue
    
    Total2003
    
    $
    363,343,000
    
    
    $
    48,543,000
    
    
    $
    1,262,000
    
    
    $
    413,148,0002002
    
    
    398,536,000
    
    
    
    24,014,000
    
    
    
    1,331,000
    
    
    
    423,881,0002001
    
    
    409,851,000
    
    
    
    33,827,000
    
    
    
    1,902,000
    
    
    
    445,580,000


Approximately 9.1%, 9.0% and 10.3% in the fiscal years ended June 30,
2003, 2002, and 2001, respectively, consisted of sales to customers for export
principally into Latin America and direct sales to customers in Colombia and
Argentina.

14. Significant Vendors and Customers

During the years ended June 30, 2003, 2002 and 2001 the Company purchased
approximately 52.9%, 50.1% and 39% of its product from two vendors. During the
year ended June 30, 2002, the Company sold approximately 11% of its product to
one customer.

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15. Supplemental Disclosures

An analysis of allowances for doubtful accounts is as follows:

Balance at
    
    Charged toBeginning
    
    Costs and
    
    
    
    
    
    Balance atYear Ended June 30,
    
    of Year
    
    Expenses
    
    Deductions (1)
    
    End of Year2003
    
    $
    1,455,000
    
    
    $
    2,302,000
    
    
    $
    (1,008,000
    )
    
    $
    2,749,0002002
    
    
    5,631,000
    
    
    
    1,638,000
    
    
    
    (5,814,000
    )
    
    
    1,455,0002001
    
    
    3,761,000
    
    
    
    4,476,000
    
    
    
    (2,606,000
    )
    
    
    5,631,000




---

|(1) |  | Deductions represent actual write-offs of specific accounts receivable
charged against the allowance account, net of amounts recovered.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------

16. Reverse Stock Split

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

17. Latin America Economic Situation and Devaluation

As a result of an ongoing economic crisis, the Argentine government has
implemented a number of monetary and exchange control measures including
restrictions on the withdrawal of funds deposited with Argentine banks and the
practical impossibility of making transfers abroad. On January 6, 2002, the
Argentine Congress also approved Law No. 25,561 on Public Emergency and
Exchange System Reform that eliminated the pegging of the ARS (Argentine peso)
to the US dollar on a one to one basis. In place of the pegged exchange rate
the Central Bank of Argentina established an official and a freely floating
exchange market for transactions originating in Argentina. The official
exchange rate was fixed at ARS (Argentine peso) 1.4 to USD (US Dollar) 1. The
freely floating exchange for the ARS as compared to the USD decreased from
1.7 pesos to 1 dollar at January 11, 2002 (first day after exchange market was
reopened) to 2.8 pesos to 1 dollar at June 30, 2003.

In connection with the de-dollarization of the Argentine peso and other
changes enacted by the Argentine government, unfavorable consequences have
resulted including, but not limited to, (a) the default on public debt
payments, (b) the implementation of restrictions on the withdrawal of funds
deposited with financial institutions, (c) the practical impossibility of
making fund transfers outside Argentina to serve financial obligations without
the approval of the Central Bank of Argentina, (d) raising prices and
inflation, (e) limited availability of credit, (f) and declining domestic
market demand within Argentina.

Since January 1, 2002, Argentina has experienced annual inflation rate of
approximately 10.0%. While Argentinas government together with the
International Monetary Fund are seeking remedies, no assurance can be given
that the economic situation in Argentina will stabilize. The devaluation, which
commenced in January 2002, could make it more difficult for Argentine companies
to service their commercial and financial obligations due in or tied to the
USD. Any of the foregoing events and a continuation of the Argentine recession
may have a material adverse effect on the Companys business, results of
operations, financial condition, and ability to make payments on the Companys
indebtedness and on the Companys common stock market price. The information
included in the Companys financial statements, and other documentation, does
not contain the potential impact that might arise from the situation described
above and, accordingly, should be analyzed considering that circumstance.

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18. Liabilities Under Employment Agreement and Contingent Liabilities

The Company carried two key man life insurance policies payable to the
benefit of the Company on Gerald Diamond, the Companys founder and Former
Chairman and Chief Executive Officer who passed away in June of 2003. At June
30, 2003, the Company recorded a liability of approximately $3.4 million, which
represents the Companys present estimate of the amounts due as benefits to Mr.
Diamonds surviving spouse under Mr. Diamonds employment contract. However,
the Company may be contingently liable for additional benefit payments
depending on the resolution of issues concerning additional death benefits
potentially due to Mr. Diamonds surviving spouse.

19. Discontinued Operations

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

Following is a summary of the results of discontinued operations in
(000s):

Year Ended June 30,2003
    
    2002
    
    2001Net sales
    
    $
    8,196
    
    
    $
    32,507
    
    
    $
    79,758Loss from operations before income taxes
    
    
    (1,448
    )
    
    
    (3,009
    )
    
    
    (3,149
    )Loss on disposal
    
    
    (3,294
    )Loss from discontinued operations
    
    $
    (4,742
    )
    
    $
    (3,009
    )
    
    $
    (3,149
    )


The net loss from discontinued operations consists of operating losses
incurred in the Brazil Operation and estimated loss on disposal of the business
which includes charges for the following: (i) the write-off of foreign currency
translation losses of $2.6 million previously recorded as a component of
stockholders equity, (ii) equipment, (iii) customer accounts receivable, (iv)
employee termination costs, (v) inventory, and (vi) facility exit and lease
termination costs. As of June 30, 2003, SED International do Brasil
Distribuidora, Ltda. had assets of $51,000 and third party liabilities of
$848,000. The assets include cash of $22,000 and prepaid taxes of $9,000.
Liabilities include accounts payable related to inventory purchases of
$751,000, bank obligations of $15,000 and other miscellaneous accrued
liabilities of $82,000.

Interest expense for the Brazil operation for the fiscal years 2003, 2002,
and 2001 totaled $288,000, $868,000 and $600,000, and was based on the actual
borrowings from banks by the Brazil operation.

SED International do Brasil Distribuidora, Ltda. has been transitioned
from a commercial operating company into dormancy. During the dormancy period,
the Company will incur ongoing operating expenses for attorney fees, statutory
bookkeeping and reporting services, document storage and inventory storage cost
until liquidation of the inventory. These ongoing expenses during the dormancy
period are not expected to be significant.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

SED INTERNATIONAL HOLDINGS, INCBy:

    /s/ PHILIP FLYNTPhilip FlyntVice President  Finance, Chief FinancialOfficer, Secretary and Treasurer (principalfinancial and accounting officer)


Date: February 12, 2004

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