-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VSuCr/wcwyS8dIxYcEJWnSVQD/XWk7q1QB1PavLyb0D3N+Mp3ckVey3KmwMXc3SC uSLBRdByJhEWlgRlA5VmRA== 0000907098-99-000020.txt : 19991227 0000907098-99-000020.hdr.sgml : 19991227 ACCESSION NUMBER: 0000907098-99-000020 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990928 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SED INTERNATIONAL HOLDINGS INC CENTRAL INDEX KEY: 0000800286 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-COMPUTER & PERIPHERAL EQUIPMENT & SOFTWARE [5045] IRS NUMBER: 222715444 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-16345 FILM NUMBER: 99719165 BUSINESS ADDRESS: STREET 1: 4916 N ROYAL ATLANTA DR CITY: TUCKER STATE: GA ZIP: 30085 BUSINESS PHONE: 7709418962 MAIL ADDRESS: STREET 1: 4916 NORTH ROYAL ATLANTA DRIVE CITY: TUCKER STATE: GA ZIP: 30085 FORMER COMPANY: FORMER CONFORMED NAME: SOUTHERN ELECTRONICS CORP DATE OF NAME CHANGE: 19920703 10-K 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended June 30, 1999 OR [_] 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 22-271544 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 4916 North Royal Atlanta Drive, Atlanta, Georgia 30085 (Address of principal executive offices) (Zip Code) Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, $.01 PAR VALUE (Title of Class) COMMON STOCK PURCHASE RIGHTS (Title of Class) Indicate by check mark whether the 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 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 Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K. [ ] The aggregate market value of the voting stock held by nonaffiliates of the Registrant was approximately $20.6 million as of September 24, 1999 based upon the last sale price of the Common Stock as reported on the Nasdaq National Market on that day. There were 7,016,453 shares of Common Stock, $.01 par value, outstanding at September 24, 1999. DOCUMENTS INCORPORATED BY REFERENCE: Part III incorporates information by reference from the Registrant's definitive proxy statement for the 1999 annual meeting of shareholders scheduled to be held on November 9, 1999, which proxy statement will be filed no later than 120 days after the close of the Registrant's fiscal year ended June 30, 1999. PART I Item 1. BUSINESS (a) General Development of Business SED International Holdings, Inc., a Georgia corporation, and its wholly owned operating subsidiary, SED International, Inc., a Georgia corporation ("SED International"), were incorporated in 1986 to take over the operations of the business of the Registrant's predecessor, Southern Electronics Distributors, Inc., which was engaged in the wholesale distribution of consumer electronics products. In fiscal 1999, the Registrant, formerly a Delaware corporation, reincorporated as a Georgia corporation. As used herein, the term "Registrant" or the "Company" means SED International Holdings, Inc. and its subsidiaries, including SED International, unless the context otherwise indicates. The Registrant is an international distributor of microcomputer products, including processors, printers and other peripherals and wireless products throughout the United States and Latin America. The Registrant offers to an active base of over 13,000 reseller customers a broad inventory of more than 3,500 products from approximately 100 vendors (direct and indirect), including such market leaders as Hewlett-Packard, Intel, Maxtor, Western Digital, Samsung, Creative Labs, Acer and Epson, through a dedicated and highly motivated sales force. The Registrant distributes products in the United States from its strategically located warehouses in Atlanta, Georgia; Miami, Florida; City of Industry, California and Harrisburg, Pennsylvania. The Registrant services Latin America through its wholly-owned subsidiaries SED International do Brasil Ltda. in Sao Paulo, Brazil; SED International de Colombia Ltda. in Bogota Colombia and Intermaco S.R.L. in Buenos Aires, Argentina. The Registrant's net sales decreased to $707.6 million in fiscal 1999 from $892.6 million in fiscal 1998, and the Registrant had a net loss of $37.9 million in fiscal 1999 compared to a net loss of $0.3 million in fiscal 1998. The Registrant also distributes wireless telephone products in the United States and to Latin America. The Registrant is a direct distributor of wireless telephone products for Audiovox, and an indirect distributor for other leading wireless telephone product vendors such as Motorola, Nokia, and Ericsson. In fiscal 1999, the Registrant's net sales of microcomputer products generated approximately 86.6% of the Registrant's total net sales and wireless telephone products represented the remaining 13.4%. (b) Financial Information about Industry Segments The Registrant operates in only one business segment. (c) Narrative Description of Business Products and Vendors The Registrant offers its customers a broad inventory of more than 3,500 products from approximately 100 vendors (direct and indirect), including such market leaders as Hewlett-Packard, Intel, Maxtor, Western Digital, Samsung, Creative Labs, Acer and Epson. The Registrant is a direct distributor of wireless telephone products for Audiovox, and an indirect distributor for other leading wireless telephone product vendors such as Motorola, Nokia and Ericsson. Microcomputer related products, which include mass storage products, printers and other imaging products, microprocessing and memory chips, monitors, modems, networking products, notebook and personal computers and accessories, accounted for $612.8 million or 86.6% of the Registrant's net sales for fiscal 1999, $785.5 million or 88.0% of net sales in fiscal 1998, and $588.2 million or 91.0% of net sales in fiscal 1997. Approximately $94.7 million or 13.4% of the Registrant's net sales for fiscal 1999, $107.1 million or 12.0% of net sales for fiscal 1998, and $58.2 million or 9.0% of net sales for fiscal 1997 consisted of wireless telephone products such as handheld cellular telephones and accessories. The Registrant continually evaluates its product mix and inventory levels and maintains flexibility by adjusting its product offerings based on demand. The Registrant's vendors generally warrant the products distributed by the Registrant and allow the return of defective products. Generally, the Registrant's authorized distributor agreements with its microcomputer and wireless telephone products vendors permit the Registrant to sell these vendors' products in the United States and in designated countries in Latin America. The Registrant will continue to seek to expand the geographical scope of its distributor arrangements, which may include acquiring or partnering with companies that already have the distribution rights of a particular vendor in a specified country. As a distributor, the Registrant incurs the risk that the value of its inventory will be affected by industry-wide forces. Rapid technological change is commonplace in the microcomputer and wireless industries and can quickly diminish the marketability of certain items, whose functionality and demand decline with the appearance of new products. These changes, coupled with price reductions by vendors, may cause rapid obsolescence of inventory and corresponding valuation reductions in that inventory. Accordingly, the Registrant seeks provisions in its vendor agreements common to industry practice which provide price protections or credits for declines in inventory value and the right to return unsold inventory. No assurance can be given, however, that the Registrant can negotiate such provisions in each of its contracts or that such industry practice will continue. The Registrant purchases goods from approximately 100 vendors (direct and indirect) and has negotiated favorable terms from certain vendors by purchasing a substantial volume of those vendors' products. In fiscal 1999, products purchased from Hewlett-Packard accounted for 21% of the Registrant's total purchases. Hewlett-Packard has not renewed the Registrant's U.S. direct sourcing relationship for Hewlett-Packard products for fiscal 2000. The Registrant has, however, established relationships with other distributors from which it sources Hewlett-Packard products under the Registrant's Virtual Vendor Model program. The Registrant remains an authorized direct distributor of Hewlett-Packard products for export into Latin America and for "in-country" purchases through the Registrant's Latin American subsidiaries. The loss of Hewlett-Packard as a virtual vendor could materially adversely affect the financial condition of the Registrant. The percentage of goods purchased during fiscal 1998 by the Registrant from Hewlett-Packard and Seagate was 19.1% and 11.1%, respectively. During fiscal 1999, the Registrant and Seagate no longer operated under a direct distribution agreement. There can be no assurance that the Registrant will be able to maintain its existing vendor relationships or secure additional vendors as needed. The Registrant's vendor relationships typically are non-exclusive and subject to annual renewal, terminable by either party on short notice, and contain territorial restrictions that limit the countries in which the Registrant is permitted to distribute the products. The loss of a major vendor, the deterioration of the Registrant's relationship with a major vendor, the loss or deterioration of vendor support for certain Registrant-provided services, the decline in demand for a particular vendor's product, or the failure of the Registrant to establish good relationships with major new vendors or other Virtual Vendor Model distributors could have a material adverse effect on the Registrant's business, financial condition and results of operations. Product orders typically are processed and shipped from the Registrant's distribution facilities on the same day an order is received or, in the case of orders received after 6:00 p.m., on the next business day. The Registrant relies almost entirely on arrangements with independent shipping companies for the delivery of its products to United States customers. Products distributed to the Latin American markets are delivered to the foreign purchasers or their agents or representatives at the Registrant's Sao Paulo, Brazil; Bogota, Colombia and Buenos Aires, Argentina facilities. Generally, the Registrant's inventory level of products has been adequate to permit the Registrant to be responsive to its customers' purchase requirements. From time to time, however, the Registrant experiences temporary shortages of certain products as its vendors experience increased demand or manufacturing difficulties with respect to their products, resulting in smaller allocations of such products to the Registrant. Sales and Marketing The Registrant's sales are generated by a telemarketing sales force, which consisted of approximately 162 persons at June 30, 1999 in sales offices located in Atlanta, Georgia; Miami, Florida; Carlsbad, California; City of Industry, California; Sao Paulo, Brazil; Bogota, Colombia and Buenos Aires, Argentina. Of the total number of salespersons at June 30, 1999, 67 persons focused on sales to customers for export to Latin America and on sales in Brazil, Colombia and Argentina, substantially all of whom are fluent in Spanish or Portuguese. The Registrant's Atlanta sales office maintains a separate telemarketing sales force for the sale of wireless telephone products to retailers and wireless telephone carriers and their authorized agents located throughout the United States and Latin America. Members of the sales staff are trained through intensive in-house sales training programs, along with vendor-sponsored product seminars. This training allows sales personnel to provide customers with product information and to use their marketing expertise to answer customers' questions about important new product considerations, such as compatibility and capability, while offering advice on which products meet specific performance and price criteria. The Registrant's salespeople are able to analyze quickly the Registrant's extensive inventory through a sophisticated management information system and recommend the most appropriate cost-effective systems and hardware for each customer--whether a full-line retailer or an industry-specific reseller. The domestic sales force is organized in teams generally consisting of two to four people. The Registrant believes that teams provide superior customer service because customers can contact one of several people. Moreover, the long-term nature of the Registrant's customer relationships is better served by teams that increase the depth of the relationship and improve the consistency of service. It has been the Registrant's experience that the team approach results in superior customer service and better employee morale. Compensation incentives are provided to the Registrant's salespeople, thus encouraging them to increase their product knowledge and to establish long-term relationships with existing and new customers. Customers can telephone their salespersons using a toll-free number provided by the Registrant. Salespeople initiate calls to introduce the Registrant's existing customers to new products and to solicit orders. In addition, salespeople seek to develop new customer relationships by using targeted mailing lists, vendor leads and telephone directories of various cities. The telemarketing salespersons are supported by a variety of marketing programs. For example, the Registrant regularly sponsors shows for its resellers where it demonstrates new product offerings and discusses industry developments. Also, the Registrant's in-house marketing staff prepares catalogs that list available microcomputer and wireless telephone products and routinely produces marketing materials and advertisements. In addition, the in-house marketing staff publishes other direct mail pieces promoting specials and new products, which can be ordered directly through salespeople or through the Registrant's Internet web page providing 24-hour access to on-line order entry. The Registrant's web page provides customers secured access to place orders and review product specifications at times that are convenient to them. Customers also can determine inventory availability and pricing on a real-time basis and in the near future verify the status of previously placed orders through hyperlinks to certain independent shipping companies. The Registrant prides itself on being service oriented and has a number of on-going value-added services intended to benefit both the Registrant's vendors and reseller customers. For example, the Registrant is committed to training its salespeople to be technically knowledgeable about the products they sell. This core competency supplements the sophisticated technical support and configuration services also provided by the Registrant. Salespeople who are knowledgeable about the products they sell often can assist in the configuration of microcomputer systems according to specifications given by the resellers. The Registrant believes that its salesperson's ability to listen to a reseller's needs and recommend a cost-efficient solution strengthens the relationship between the salesperson and his or her reseller and promotes customer loyalty to a vendor's products. In addition, the Registrant provides such other value-added services as new product demonstrations and technical education programs for resellers, order fulfillment and electronic ordering, and informational assistance through the Registrant's web page. Management continually evaluates the Registrant's product mix and the needs of its customers in order to minimize inventory obsolescence and carrying costs. The Registrant's rapid delivery terms are available to all of its customers, and the Registrant seeks to pass through its shipping and handling costs to its customers. The Registrant offers various credit terms including open account, prepay, credit card and COD to qualifying customers. The Registrant closely monitors customers' creditworthiness through its on-line computer system, which contains detailed information on each customer's payment history and other relevant information. In addition, the Registrant participates in national and international credit associations that exchange credit rating information on customers. The Registrant establishes reserves for estimated credit losses in the normal course of business. Customers The Registrant serves an active, nonexclusive customer base of over 13,000 resellers of microcomputer and wireless telephone products. Resellers include value-added resellers, corporate resellers and retailers. The Registrant believes the multi-billion dollar microcomputer and wireless telephone wholesale distribution industries serve customers primarily on a nonexclusive basis, which provides the Registrant with significant growth opportunities. During fiscal 1999, no single customer accounted for more than 3.0% of the net sales of the Registrant. The Registrant believes that most of its customers rely on distributors as their principal source of microcomputer and wireless telephone products. Competition The microcomputer and wireless telephone distribution industries are highly competitive, both in the United States and in Latin America. Competition in these industries is typically characterized by pricing pressures, product availability and potential obsolescence, speed and accuracy of delivery, effectiveness of sales and marketing programs, credit availability, ability to tailor specific solutions to customer needs, quality of product lines and services, and availability of technical support and product information. Additionally, the Registrant's ability to compete favorably is principally dependent upon its ability to control inventory and other operating costs, react timely and appropriately to short-and long-term trends, price its products competitively, increase its net sales and maintain economies of scale. In the early 1990s, the United States microcomputer industry moved toward open sourcing pursuant to which vendors authorized multiple distributors to sell to resellers on equal terms rather than relying on exclusive relationships. As a result, the competitive environment has become more intense, leading to accelerating industry consolidation and declining gross margins. The Registrant's competitors include regional, national and international microcomputer and wireless distributors, many of which have substantially greater technical, financial and other resources than the Registrant, as well as vendors that sell directly to resellers and large resellers that sell to other resellers. Major competitors include Ingram Micro, Inc., Merisel, Inc. and Tech Data Corporation in the United States, and CHS Electronics, Inc. in Latin America. Seasonality The Registrant's sales currently are not subject to material seasonal fluctuations although no assurance can be given that seasonal fluctuations will not develop, especially during the holiday season in the United States and Latin America. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations--Quarterly Data; Seasonality." Employees As of June 30, 1999, the Registrant had 462 full-time employees, 162 of whom were engaged in telemarketing and sales, 173 in administration and 127 in shipping. The Registrant also utilized 18 part-time employees at such date. Management believes the Registrant's relations with its employees are good and the Registrant has never experienced a strike or work stoppage. There is no collective bargaining agreement covering any of the Registrant's employees. Financial Information about Foreign and Domestic Operations and Export Sales For the fiscal year ended June 30, 1997, approximately 45% of the Registrant's net sales were to customers for export principally into Latin America. These customers historically have been serviced through the Registrant's Miami, Florida warehouse facility with sales denominated in U.S. dollars. During the fiscal year ended June 30, 1998, the Registrant began selling directly to customers in Brazil and Colombia through the Registrant's facilities in Sao Paulo, Brazil and Bogota, Colombia. During the fiscal year ended June 30, 1999, the Registrant also began selling directly to customers in Argentina. Sales are denominated in the respective local currencies of these countries. Approximately 41% of the Registrant's net sales in the fiscal year ended June 30, 1998 consisted of sales to customers for export principally into Latin America and direct sales to customers in Brazil and Colombia. Approximately 38% of the Registrant's net sales in fiscal year ended June 30, 1999 consisted of sales to customers for export principally into Latin America and direct sales to customers in Brazil, Colombia and Argentina. See also note 9 to the consolidated financial statements of the Registrant for certain additional information concerning the Registrant's domestic and foreign operations. Item 2. PROPERTIES The Registrant maintains its executive offices at 4916 North Royal Atlanta Drive in Atlanta, Georgia, where 72 of its sales employees are also located. The Registrant leases its executive, administrative and sales office from Diamond Chip Group, L.L.C., a Georgia limited liability company comprised of certain minority shareholders of the Registrant, previously doing business as Royal Park Company, a Georgia general partnership. The lease commenced in April 1999 and expires in September 2006. It supercedes prior leases originally entered into in 1984 between the Registrant's predecessor and Royal Park Company. The facility consists of approximately 30,000 square feet, with an annual rental of approximately $176,000 through September 1999, increasing to approximately $253,000 effective October 1, 1999, with annual increases of three percent through September 30, 2006. The Registrant has a right of first refusal to purchase the facility should it be offered for sale. The Registrant believes that the lease is on terms no less favorable than those available from unaffiliated parties. The Registrant maintains warehouse facilities in Atlanta, Georgia; City of Industry, California; Miami, Florida; Harrisburg, Pennsylvania; Sao Paulo, Brazil; Bogota, Colombia and Buenos Aires, Argentina. The Registrant's distribution facility in Atlanta, Georgia consists of approximately 100,000 square feet subject to a lease expiring January 31, 2000. Rental payments for this facility are approximately $282,000 per annum. The Registrant believes there is sufficient additional warehouse and sales office space available for lease at reasonable prices near its principal facility in the event the Registrant's growth plans so require. The Registrant leases its sales and distribution facility in Miami, Florida under a lease expiring March 31, 2001. This facility consists of approximately 31,200 square feet at a monthly rental of approximately $17,000. On July 24, 1996, the Registrant executed an amendment to this lease which increased the leased space by approximately 30,000 square feet (the "Expansion Space"). The monthly rent for the Expansion Space is approximately $17,000 and the lease term pertaining thereto expires on March 31, 2001. On April 1, 1997, the Registrant began leasing an approximately 50,000 square foot facility in City of Industry, California. The City of Industry facility serves as a distribution center for the Registrant. Payments under the lease will total approximately $18,000 for each of the first 36 months of the lease and will then increase to $20,000 per month thereafter. Pursuant to its terms, the lease will expire on March 31, 2002 unless the Registrant elects to exercise its option to renew the lease for one additional five-year period. On April 1, 1998, the Registrant began leasing an approximately 102,000 square foot distribution facility in Harrisburg, Pennsylvania. Payments for the lease will total approximately $33,000 for each of the 24 months during the period beginning April 1, 1998 and ending March 31, 2000, approximately $34,000 for each of the 12 months during the period beginning April 1, 2000 and ending March 31, 2001, approximately $35,000 for each of the 12 months during the period beginning April 1, 2001 and ending March 31, 2002 and approximately $36,000 for each of the 12 months beginning April 1, 2002 and ending March 31, 2003. The average amount of payments for the lease for each of the 60 months during the period beginning April 1, 1998 and ending March 31, 2003 will be approximately $33,000. Effective December 1, 1998, the Registrant began subleasing approximately 50,000 square feet of this facility for approximately $18,000 per month for each of the 16 months during the period beginning December 1, 1998 and ending March 31, 2000, and approximately $18,500 for each of the 21 months beginning April 1, 2000 and ending December 31, 2001. The sub-lessee has an option to extend its sublease to January 31, 2003. On January 1, 1999 the Registrant began leasing an approximately 35,000 square foot facility in Sao Paulo, Brazil, replacing an approximately 12,900 square foot distribution facility in Tambore, Brazil and an approximately 4,300 square foot administrative center and sales office in Sao Paulo, Brazil, both of which the Registrant had leased since December 1, 1997. The new Sao Paulo facility serves as a sales office, administrative office and distribution center for SED International do Brasil Ltda., a wholly owned subsidiary of the Registrant. Monthly payments for the lease were approximately $8,500 per month in January and February 1999 and increased to approximately $17,000 per month effective March 1, 1999. The lease will expire on January 31, 2003. On December 1, 1997, the Registrant began leasing an approximately 18,000 square foot administrative center and sales office in Bogota, Colombia. The Bogota center serves as a sales office and distribution facility for SED International de Colombia Ltda., a wholly owned subsidiary of the Registrant. Monthly payments for the lease totaled approximately $4,000 for the first month of the lease, after which the rent increased to approximately $6,000 for each of the remaining 34 months of the lease. Pursuant to its terms, the lease will expire on November 30, 2000 unless the Registrant elects to exercise its option to renew the lease for an additional three-year period. On November 1, 1998, the Registrant assumed the lease obligations for several small facilities in Buenos Aires, Argentina. These facilities consist of various spaces in the Galeria business complex and are utilized for sales offices, administrative offices and warehouses by Intermaco S.R.L., a wholly owned subsidiary of the Registrant. Aggregate space is approximately 5,500 square feet. Payments total approximately $71,000 annually. The leases expire at various dates between November 1, 2000 and April 1, 2002. Additionally, the Registrant rents space in a bonded warehouse in Buenos Aires, Argentina on a month-to-month basis at an average cost of $4,500 per month. Item 3. LEGAL PROCEEDINGS The Registrant is involved in litigation relating to claims arising out of its operations in the normal course of business. The Registrant is not currently engaged in any legal proceedings that are expected, individually or in the aggregate, to have a material adverse effect on the Registrant. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not appliable. PART II Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS The following table sets forth the high and low sales prices for Registrant's common stock as reported for each quarter of fiscal 1999 and 1998 as reported by the Nasdaq National Market ("Nasdaq"). The quotations are inter-dealer prices without retail mark-ups, mark-downs or commissions and may not represent actual transactions. Sales Price ------------------- High Low ----- ------ Fiscal year 1999 First $ 9.25 $ 3.75 Second 6.00 3.31 Third 5.50 2.44 Fourth 3.78 2.06 Fiscal year 1998 First $ 20.00 $ 12.88 Second 19.75 8.75 Third 13.94 10.31 Fourth 13.13 8.00 There were 7,016,453 shares of common stock outstanding and approximately 5,000 beneficial owners of common stock of the Company (including individual participants in securities position listings) as of September 24, 1999. The Registrant has never declared or paid cash dividends on its common stock. The Registrant currently intends to retain earnings to finance the growth and development of its business and does not anticipate paying cash dividends in the foreseeable future. Future policy with respect to payment of dividends on the common stock will be determined by the Board of Directors based upon conditions then existing, including the Registrant's earnings and financial condition, capital requirements and other relevant factors. SED International, the earnings of which would be the primary source of any dividend payments, and the Registrant are parties to a revolving credit agreement which contains certain financial covenants that may impact the Registrant's ability to pay dividends should it choose to do so. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources." Item 6. SELECTED FINANCIAL DATA FIVE YEAR FINANCIAL SUMMARY Year ended June 30, --------------------------------------------------------------------------------- 1999 1998 1997 1996 1995 ------------ ------------ ------------ ------------ ------------ Income statement data: Net Sales $707,750,000 $892,629,000 $646,336,000 $468,298,000 $398,753,000 Cost of sales, including buying and occupancy expenses 676,342,000 848,090,000 607,437,000 438,837,000 370,548,000 ------------ ------------ ------------ ------------ ------------ Gross profit 31,228,000 44,539,000 38,899,000 29,461,000 28,205,000 Selling, general and administrative expenses 54,426,000 40,309,000 23,941,000 19,493,000 19,104,000 Impairment charges 15,386,000 Start-up expenses 1,400,000 ------------ ------------ ------------ ------------ ------------ Operating income (loss) (38,584,000) 2,830,000 14,958,000 9,968,000 9,101,000 Interest expense-net 731,000 2,728,000 2,128,000 902,000 688,000 ------------ ------------ ------------ ------------ ------------ Earnings (loss) before income taxes (39,315,000) 102,000 12,830,000 9,066,000 8,413,000 Income taxes (benefit) (1,407,000) 357,000 4,925,000 3,516,000 3,191,000 ------------ ------------ ------------ ------------ ------------ Net earnings (loss) $(37,908,000) $ (255,000) $ 7,905,000 $ 5,550,000 $ 5,222,000 ============ ============ ============= ============ ============ Net earnings (loss) per common share Basic $(4.36) $(.03) $1.10 $.77 $.75 ============ ============ ============= ============ ============ Diluted $(4.36) $(.03) $1.04 $.76 $.74 ============ ============ ============= ============ ============ Weighted average number of shares outstanding Basic 8,698,000 9,602,000 7,138,000 7,190,000 6,964,000 ============ ============ ============= ============ ============ Diluted 8,698,000 9,602,000 7,634,000 7,280,000 7,069,000 ============ ============ ============= ============ ============ At June 30, --------------------------------------------------------------------------------- 1999 1998 1997 1996 1995 ------------ ------------ ------------- ------------ ------------ Balance sheet data: Working capital $ 45,193,000 $107,741,000 $ 79,350,000 $ 40,496,000 $ 41,355,000 Total assets 141,090,000 266,565,000 197,329,000 131,305,000 87,375,000 Long-term obligations less current portion 8,500,000 31,000,000 56,000,000 10,610,000 11,500,000 Shareholders' equity 52,810,000 106,275,000 48,896,000 41,650,000 34,633,000
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the Consolidated Financial Statements of the Company and the Notes thereto and the Selected Consolidated Financial Data included elsewhere herein. Historical operating results are not necessarily indicative of trends in operating results for any future period. Overview The Company is an international distributor of microcomputer products, including personal computers, printers and other peripherals and networking products throughout the United States and Latin America. The Company has recently transformed itself from a regional United States distributor into an international distributor with leading brand name vendor lines, a nationwide presence in the United States and a leadership position in Latin America. In fiscal 1999, the Company's net sales to customers in the United States represented approximately 62.3% of total net sales. Net sales for export principally into Latin America and in-county net sales, in Brazil, Colombia and Argentina represented approximately 37.7% of total net sales for fiscal 1999. Net sales of microcomputer products generated approximately 86.6% of total net sales and wireless telephone products represented the remaining 13.4% for fiscal 1999. For the Company's domestic operations, all purchases and sales are denominated in United States dollars. For the Company's operations in Brazil, Colombia and Argentina, in-country transactions are conducted in the respective local currencies of these three locations while import purchases are denominated in United States dollars. The Company incurred an operating loss of $37.9 million in fiscal 1999. This loss resulted primarily from two negative trends: (1) a decision by one of the Company's largest vendors to reduce the number of distributors, including SED, thereby diminishing sales and gross profit, and (2) the sharp reductions in our Miami business, which cut export activity to approximately half of its prior level of sales primarily due to economic instability in the Latin American region. Other factors contributing to the year's financial results included a devaluation loss in Brazil and excess overhead costs in the U.S. As a result of certain of these trends and events, the loss for fiscal 1999 included impairment charges of $15.4 million for the write-down of certain long-lived assets (see note 3 to the consolidated financial statements.) During fiscal 2000, the Company expects to experience a continuation of its highly competitive and difficult business environment. Evidence of this competitive and difficult business environment includes the following trends: (1) reduction in direct vendor relationships as the number of distributors is reduced, (2) difficulties in receiving vendor incentive support as a result of vendor profitability problems and (3) difficulties in pricing channels as the remaining distributors reduce prices in order to retain market share. This environment could continue to adversely impact the Company's operating performance. Results of Operations The following table sets forth, for the periods presented, the percentage of net sales represented by certain items in the Company's Consolidated Statements of Earnings: Year Ended June 30, ------------------------------------ 1999 1998 1997 ----- ----- ------ Net sales 100.0% 100.0% 100.0% Cost of sales, including buying and occupancy expenses 95.6 95.0 94.0 Gross profit 4.4 5.0 6.0 Selling, general and administrative expenses 7.7 4.5 3.7 Impairment charges 2.2 Start-up expenses 0.2 Operating income (loss) (5.5) 0.3 2.3 Interest expense, net 0.1 0.3 0.3 Earnings (loss) before income taxes (5.6) 2.0 Income taxes (benefit) (.2) 0.8 Net earnings (loss) (5.4)% 0.0% 1.2%
Fiscal 1999 Compared to Fiscal 1998 Net sales decreased 20.7%, or $185.0 million, to $707.6 million in fiscal 1999 compared to $892.6 million in fiscal 1998. Information concerning the Company's domestic and foreign sales is summarized below: Year Ended June 30, Change --------------------- ------------------------- 1999 1998 Amount Percent ------ ------ -------- ------- United States: Domestic $440.5 $528.2 $ (87.7) 16.6% Export 191.6 341.9 (150.3) 44.0% Latin America 82.9 24.6 58.3 237.0% Elimination ( 7.4) (2.1) (5.3) N/A ------ ------ ------- ------- Consolidated $707.6 $892.6 $(185.0) 20.7% ====== ====== ======= =======
The overall decline resulted from a decrease in United States domestic net sales, a decline in net sales to customers for export principally to Latin America and a net increase in in-country net sales for Brazil (Magna Distribuidora Ltda. acquired in December 1997 and now operating as SED International do Brasil Ltda.), Colombia (commenced operations in May 1998 and operating as SED International de Colombia Ltda.) and Argentina (Intermaco S.R.L. acquired in November 1998). The decrease in sales in the United States was primarily due to lower sales of mass storage products resulting from the loss of a key vendor. Sales of microcomputer products represented approximately 86.6% of the Company's net sales in fiscal 1999 compared to 88.0% for fiscal 1998. Sales of wireless telephone products accounted for approximately 13.4% of the Company's net sales in fiscal 1999 compared to 12.0% for fiscal 1998. Gross profit decreased $13.3 million to $31.2 million in fiscal 1999, compared to $44.5 million in fiscal 1998. Gross profit for fiscal 1999 was impacted by $7.5 million of inventory markdowns for slow moving inventory. Overall, total gross profit dollars have declined with sales. Gross profit as a percentage of net sales decreased to 4.4% in fiscal 1999 from 5.0% in fiscal 1998. The change in gross profit as a percentage of sales was due principally to a combination of lower sales and the change in the mix of products sold. Overall, the Company continues to experience pricing pressure in selling products. Selling, general and administrative expenses (excluding $15.4 million of impairment charges for fiscal 1999) increased 35.0% to $54.4 million, compared to $40.3 million in fiscal 1998. These expenses as a percentage of net sales increased to 7.7% in 1999 compared to 4.5% in fiscal 1998. The dollar increase in these expenses is primarily due to increased provisions for accounts receivable losses in fiscal 1999 and the inclusion of operations of Latin American affiliates. Net interest expense was $0.7 million in fiscal 1999 compared to interest expense of $2.7 million in fiscal 1998. This net change resulted primarily from a reduction in working capital requirements in fiscal 1999. Income tax benefit was $1.4 million in fiscal 1999 compared to an income tax expense of $0.4 million in fiscal 1998. The effective tax rate (benefit) for fiscal 1999 was significantly reduced as a result of an increase in the valuation allowance. At June 30, 1999, the Company has gross net operating loss carryforwards for U.S. federal and state income tax purposes of approximately $23.7 million expiring at various dates through 2019. At June 30, 1999, the Company has gross net operating loss carryforwards for foreign income tax purposes of approximately $5.2 million and $1.0 million in Brazil and Colombia, respectively. The carryforwards in Brazil do not expire, subject to certain limitations. The carryforwards in Colombia expire at various dates through 2004. At June 30, 1999, the Company has recorded a valuation allowance for principally all deferred tax assets as there is no assurance these assets will be realized. Fiscal 1998 Compared to Fiscal 1997 Net sales increased 38.1%, or $246.3 million, to $892.6 million in fiscal 1998 compared to $646.3 million in fiscal 1997. This growth resulted from an increase in United States net sales, net sales to customers for export principally into Latin America, and net sales in-country for Brazil and Colombia. Net sales in the United States increased approximately 48.5%, or $172.6 million, to $528.2 million in fiscal 1998 compared to $355.6 million in fiscal 1997, primarily due to increased sales of printer and mass storage products. Net sales for export and in-country sales in Brazil and Colombia increased 25.3%, or $73.7 million, to $364.4 million in fiscal 1998 compared to $290.7 million in fiscal 1997, primarily due to the December 1997 acquisition of Magna Distribuidora Ltda. in Brazil. Sales of microcomputer products represented approximately 88.0% of the Company's fiscal 1998 net sales compared to 91.0% for fiscal 1997. Sales of wireless telephone products accounted for approximately 12.0% of the Company's fiscal 1998 net sales compared to 9.0% for fiscal 1997. Gross profit increased 14.4%, or $5.6 million, to $44.5 million in fiscal 1998 compared to $38.9 million in fiscal 1997. Gross profit as a percentage of net sales decreased to 5.0% in fiscal 1998 from 6.0% in fiscal 1997. The dollar increase in gross profit relates directly to the increase in net sales. The decrease in the gross profit percentage was primarily due to lower pricing of hard disc drives, the fourth quarter write-down of certain inventory, including disc drives, and competitive pricing in general. Selling, general and administrative expenses (excluding $1.4 million of start-up expenses) increased 68.6%, or $16.4 million, to $40.3 million in fiscal 1998, compared to $23.9 million in fiscal 1997. These expenses as a percentage of net sales increased to 4.5% in fiscal 1998 compared to 3.7% in fiscal 1997. The dollar increase in these expenses was primarily due to increased salaries and commissions for salespeople, new and expanded sales and distribution facilities, and expenses of operations in Latin America. Additionally, the Company incurred significantly higher expenses for uncollectible customer accounts in the fourth quarter. As a result of a transaction with Globelle, Inc. ("Globelle"), in June 1997, the Company acquired the distribution rights for certain significant vendor lines in the United States and subsequently hired 36 experienced salespeople formerly with Globelle. Because the Globelle transaction was not an acquisition of a going business concern, a transition period followed the close of that transaction during which the newly-hired sales people became acclimated to the Company's policies, procedures and product offerings, and the inventory of new product lines became stocked at the Company's warehouses. As a result of this transaction, the Company incurred $1.4 million of start-up expenses during the fiscal quarter ended September 30, 1997 reflecting costs associated with the hiring of new sales people, opening new sales offices and other transition expenses. Net interest expense increased 28.2%, or $0.6 million, to $2.7 million in fiscal 1998 compared to $2.1 in fiscal 1997. Interest expense as a percentage of net sales was 0.3% both in fiscal 1998 and in fiscal 1997. The increase in interest expense was primarily due to borrowing costs associated with funding increased levels of working capital. Income tax expense was recorded at an effective annual rate of 350.0% in fiscal 1998 compared to 38.4% in fiscal 1997. The increase in the effective rate in fiscal 1998 relates primarily to non-deductible goodwill amortization expense and valuation allowances on foreign losses. Quarterly Data; Seasonality The following table sets forth certain unaudited quarterly historical consolidated financial data for each of the Company's last eight fiscal quarters ended June 30, 1999. This unaudited quarterly information has been prepared on the same basis as the annual information presented elsewhere herein and, in the Company's opinion, includes all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the selected quarterly information. This information should be read in conjunction with the Consolidated Financial Statements and Notes thereto included elsewhere herein. The operating results for any quarter shown are not necessarily indicative of results for any future period. Quarter Ended (in thousands, except per share data Septem- Decem- Septem- Decem- ber 30, ber 31, March 31, June 30, ber 30, ber 31, March 31, June 30, 1997 1997 1998 1998 1998 1998 1999 1999 -------- -------- -------- -------- -------- -------- -------- -------- Net sales $214,032 $215,772 $243,281 $219,544 $217,013 $171,235 $157,674 $161,648 Gross profit 11,607 13,188 13,521 6,233 11,225 11,220 (1,584) 10,367 Operating income (loss) 3,433 4,958 3,892 (9,543) 1,101 (561) (39,949) 825 Net earnings (loss) 1,409 2,641 1,919 (6,244) 342 (273) (38,859) 882 Earnings (loss) per share: Basic .20 .26 .18 (.59) .03 (.03) (4.51) .13 Diluted .18 .25 .18 (.59) .03 (.03) (4.51) .13
Liquidity and Capital Resources The Company's liquidity requirements arise primarily from the funding of working capital needs, including inventories and trade accounts receivable. Historically, the Company has financed its liquidity needs largely through internally generated funds, borrowings under its credit agreement and vendor lines of credit. The Company derives all of its operating income and cash flow from its subsidiaries and relies on payments from its subsidiaries to generate the funds necessary to meet its obligations. As the Company pursues its growth strategy and acquisition opportunities both in the United States and in Latin America, management believes that exchange controls in certain countries may limit the ability of the Company's present and future subsidiaries in those countries to make payments to the Company. Operating activities provided $45.5 million, used $23.3 million and used $29.0 million of cash in fiscal 1999, 1998 and 1997, respectively. The source of cash in fiscal 1999 resulted primarily from decreases of $86.5 million in inventory and $17.6 million in accounts receivable partially offset by a $53.6 million decrease in accounts payable. The use of cash in fiscal 1998 resulted primarily from increases of $33.3 million in accounts receivable and $25.2 million in inventory partially offset by a $29.6 million increase in accounts payable. The use of cash in fiscal 1997 resulted primarily from increases of $12.5 million in accounts receivable and $40.3 million in inventory partially offset by net earnings of $7.9 million and a $12.6 million increase in accounts payable. Investing activities used $6.8 million, $6.3 million and $15.5 million of cash in fiscal 1999, 1998 and 1997, respectively. The significant use of cash in fiscal 1999 was primarily for the purchase of Intermaco S.R.L. for $4.3 million. The remaining use of cash in fiscal 1999 was primarily due to the purchase of computer equipment and software. The Company used $0.7 million in fiscal 1998 to purchase SED International do Brasil Ltda. The significant use of cash in fiscal 1997 was primarily for the purchase of certain distribution rights and equipment from Globelle for $13.0 million. The Company paid $0.9 million in fiscal 1998 for additional distribution rights benefited from the Globelle transaction. The remaining use of cash in fiscal 1998, as well as the use of cash in fiscal 1997, was primarily due to the upgrade of the Company's computer and telephone systems as well as the expansion of warehouse and other facilities in each year. Financing activities used $37.3 million of cash in fiscal 1999 and provided $31.6 million and $44.6 million of cash in fiscal 1998 and 1997, respectively. The net cash used in financing activities in fiscal 1999 primarily related to net borrowings of $22.5 million under the Company's credit agreement and the repurchase of 3,946,250 shares of common stock for approximately $14.8 million in open market and privately negotiated transactions under a stock buy-back program previously authorized by the Board of Directors. In fiscal 1998, the Company received $54.4 million, net of expenses, from a public stock offering of 3,000,000 shares of its common stock. The net proceeds from this stock offering were used to reduce indebtedness under the Company's credit agreement. Additional financing activities in fiscal 1998 relate to the exercise of stock options for $1.6 million and net borrowings of $25.0 million under the Company's credit agreement. In fiscal 1997, the Company repurchased 200,000 shares of common stock for approximately $1.3 million in an open market transaction under a stock buy-back program previously authorized by the Board of Directors. Net borrowings under the Company's credit agreement in fiscal 1997 were $45.4 million. The Company's credit agreement with Wachovia Bank N.A. ("Wachovia"), as amended in August 1999, provides for a line of credit of up to $50.0 million. At June 30, 1999, the Company had borrowings of $8.5 million under this facility. Maximum borrowings under the credit agreement are generally based on eligible accounts receivable and inventory (as defined in the credit agreement) less a $15.0 million reserve. The $15.0 million reserve can be drawn upon, if necessary, to finance obligations to Finova Capital Corporation, which finances the Company's purchases from certain vendors. If this amended agreement had been in place at June 30, 1999, available borrowings under this agreement, based on collateral limitations, would have been $40.0 million at that date ($15.0 million of which would only have been available to finance obligations due to Finova, if necessary). The Wachovia credit agreement is secured by accounts receivable and inventory and requires maintenance of certain minimum working capital and other financial ratios and has certain dividend restrictions. The Company may borrow at the prime rate offered by Wachovia (8.0% at June 30, 1999) or the Company may fix the interest rate for periods of 30 to 180 days under various interest rate options. The credit agreement requires a commitment fee of .25% of the unused commitment and expires in August 2001. Average borrowings, maximum borrowings and the weighted average interest rate for fiscal 1999 were $7.2 million, $32.0 million and 8.12%, respectively. Average borrowings, maximum borrowings and the weighted average interest rate for fiscal 1998 were $33.9 million, $80.0 million and 7.87%, respectively. At June 30, 1999 the Company was not initially in compliance with certain covenants; such covenants were retroactively amended by the bank effective June 30, 1999 to permit the Company to be in compliance. Management believes that the credit agreement together with vendor lines of credit and internally generated funds, will be sufficient to satisfy its working capital needs during fiscal 2000. Inflation and Price Levels Inflation has not had a significant impact on the Company's business because of the typically decreasing costs of products sold by the Company. The Company also receives vendor price protection for a significant portion of its inventory. In the event a vendor reduces its prices for goods purchased by the Company prior to the Company's sale of such goods, the Company generally has been able either to receive a credit from the vendor for the price differential or to return the goods to the vendor for a credit against the purchase price. As the Company pursues its growth strategy to acquire businesses and assets in foreign countries, the Company may operate in certain countries that have experienced high rates of inflation and hyperinflation. At this time, management does not expect that inflation will have a material impact on the Company's business in the immediate future. Year 2000 The Company has evaluated its major computer software and operating systems to determine their respective date sensitivity in light of the possible inability of certain computer programs to handle dates beyond the year 1999 (the "Year 2000 Issue"). The Company's plans for dealing with the Year 2000 Issue have included the following phases: inventorying affected technology and assessing potential impact of the Year 2000 Issue; determining the need for software and operating system upgrades and replacements; implementing and testing newly installed software and operating systems; and developing contingency plans. Many of the Company's hardware, software and operating systems have already been updated to the latest versions available. The Company relies on third-party suppliers for many systems, products and services including telecommunications and data center support. The Company may be adversely impacted if these suppliers have not made the necessary changes to their own systems and products in a timely manner. The cost to the Company of software and hardware remediation was approximately $200,000 during fiscal 1999 and is estimated to be $50,000 during fiscal 2000. The total cost of updating the Company's software and operating systems is currently estimated at approximately $500,000. Potential risk factors for the Company relating to the Year 2000 Issue may include loss of order processing and order shipment capabilities, the potential inability to effectively manage distribution center inventory, and potential complications with telephone or email communications. The Company currently believes that the majority of its mission critical systems pose a low risk to the Company's overall operational abilities, due to the fact that the Company has updated most of its software and operating systems to recent versions. Furthermore, the Company has taken measures to ensure that its systems that pose a potentially higher risk to the Company's overall operational abilities have been updated. The Company believes that it is taking the appropriate measures to develop contingency plans that address the likely worst case scenarios relating to the Year 2000 Issue. Although the Company believes that the measures it is currently undertaking and intends to undertake will adequately address the Year 2000 issue, it has developed alternative plans should potential complications arise. Though essential to the operation of the Company's business, the software and operating systems that the Company currently utilizes may be supplemented by manual processing and shipment of orders. Forward-Looking Statements The matters discussed herein and in the Letter to Shareholders accompanying this Annual Report on Form 10-K contain certain forward-looking statements that represent the Company's expectations or beliefs, including, but not limited to, statements concerning future revenues and future business plans and non-historical Year 2000 information. When used by or on behalf of the Company, the words "may," "could," "should," "would," "believe," "anticipate," "estimate," "intend," "plan" and similar expressions are intended to identify forward-looking statements. These statements by their nature involve substantial risks and uncertainties, certain of which are beyond the Company's control. The Company cautions that various factors, including the factors described under the captions "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained in the Company's Registration Statement on Form S-3 (SEC File No. 333-35069) as well as general economic conditions and industry trends, foreign currency fluctuations, the level of acquisition opportunities available to the Company and the Company's ability to negotiate the terms of such acquisitions on a favorable basis, a dependence upon and/or loss of key vendors or customers, the transition to indirect distribution relationships for some products, the loss of strategic product shipping relationships, customer demand, product availability, competition (including pricing and availability), concentrations of credit risks, distribution efficiencies, capacity constraints and technological difficulties could cause actual results or outcomes to differ materially from those expressed in any forward-looking statements of the Company made by or on behalf of the Company. The Company undertakes no obligation to update any forward-looking statement. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEPENDENT AUDITORS' REPORT 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, 1999 and 1998, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended June 30, 1999. 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 generally accepted auditing standards. 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, such consolidated financial statements present fairly, in all material respects, the financial position of SED International Holdings, Inc. and subsidiaries as of June 30, 1999 and 1998 and the results of their operations and their cash flows for each of the three years in the period ended June 30, 1999 in conformity with generally accepted accounting principles. /s/ DELOITTE & TOUCHE LLP Atlanta, Georgia September 22, 1999 SED INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS June 30, --------------------------------- 1999 1998 ------------ ------------ ASSETS Current assets: Cash and cash equivalents $ 3,266,000 $ 2,693,000 Trade accounts receivable, less allowance for doubtful accounts of $3,253,000 (1999) and $2,362,000 (1998) 58,085,000 86,298,000 Inventories 57,092,000 141,196,000 Refundable income taxes 3,801,000 3,489,000 Deferred income taxes 290,000 1,827,000 Other current assets 2,439,000 1,528,000 ------------ ------------ Total current assets 124,973,000 237,031,000 Property and equipment net 6,994,000 9,490,000 Intangibles-net 9,123,000 20,044,000 ------------ ------------ Total assets $141,090,000 $266,565,000 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Trade accounts payable $ 72,375,000 $122,959,000 Accrued and other current liabilities 7,405,000 6,331,000 Total current liabilities 79,780,000 129,290,000 Revolving bank debt 8,500,000 31,000,000 Commitments (Note 6) Shareholders' equity: Preferred stock, $1.00 par value; 129,500 shares authorized, none issued Common stock, $.01 par value; 100,000,000 shares authorized, 11,158,311 (1999) and 10,862,211 (1998) shares issued, 6,866,453 (1999) and 10,516,603 (1998) shares outstanding 112,000 108,000 Additional paid-in capital 71,712,000 70,659,000 Retained earnings 932,000 38,840,000 Accumulated other comprehensive loss (984,000) (119,000) Treasury stock, 4,291,858 (1999) and 345,608 (1998) shares, at cost (17,764,000) (2,937,000) Prepaid compensation stock awards (1,198,000) (276,000) ------------ ------------ Total shareholders' equity 52,810,000 106,275,000 ------------ ------------ Total liabilities and shareholders' equity $141,090,000 $266,565,000 ============ ============
See notes to consolidated financial statements SED INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Year ended June 30, ----------------------------------------------------- 1999 1998 1997 ------------ ------------ ------------ Net sales $707,570,000 $892,629,000 $646,336,000 Cost of sales, including buying and occupancy expenses 676,342,000 848,090,000 607,437,000 ------------ ------------ ------------ Gross profit 31,228,000 44,539,000 38,899,000 Selling, general and administrative expenses 54,426,000 40,309,000 23,941,000 Impairment charges 15,386,000 Start-up expenses 1,400,000 ------------ ------------ ------------ Operating income (loss) (38,584,000) 2,830,000 14,958,000 Interest expense net 731,000 2,728,000 2,128,000 ------------ ------------ ------------ Earnings (loss) before income taxes (39,315,000) 102,000 12,830,000 Income taxes (benefit) (1,407,000) 357,000 4,925,000 ------------ ------------ ------------ Net earnings (loss) $(37,908,000) $ (255,000) $ 7,905,000 ============ ============ ============ Net earnings (loss) per common share: Basic $(4.36) $(.03) $1.10 Diluted $(4.36) $(.03) $1.04 Weighted average number of shares outstanding: Basic 8,698,000 9,602,000 7,183,000 Diluted 8,698,000 9,602,000 7,634,000
See notes to consolidated financial statements SED INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Accumulated Prepaid Other Compens- Common Stock Additional Compre- ation Total Par Paid-In Retained hensive Treasury Stock Stock holder's Shares Value Capital Earnings Loss Shares Cost Awards Equity ---------- -------- ----------- ----------- --------- ------- ----------- --------- --------- BALANCE, JUNE 30, 1996 7,444,712 $ 74,000 $12,204,000 $31,190,000 $(999,999) 125,590 $(1,390,000) $(428,000) $41,650,000 Amortiz- ation of stock awards 122,000 122,000 Stock awards cancelled (5,000) (28,000) 28,000 Stock options exercised 83,074 1,000 396,000 397,000 Tax benefit of stock awards and options 147,000 147,000 Treasury stock purchased 200,000 (1,325,000) (1,325,000) Net earnings and com- prehensive income 7,905,000 7,905,000 ---------- -------- ----------- ----------- --------- ------- ----------- --------- ----------- BALANCE, JUNE 30, 1997 7,522,786 75,000 12,719,000 39,095,000 325,590 (2,715,000) (278,000) 48,896,000 Stock awards issued to employees 16,600 199,000 (199,000) Amortiz- ation of stock awards 108,000 108,000 Stock awards cancelled (11,900) (93,000) 93,000 Stock options exercised 255,006 2,000 1.576,000 1,578,000 Tax benefit of stock awards and options 818,000 818,000 Sale of common stock, net of offering costs of $955,000 3,000,000 30,000 54,395,000 54,425,000 Treasury stock purchased 20,018 (222,000) (222,000) Issuance of common stock for business acquired 79,719 1,000 1,045,000 1,046,000 Net loss (255,000) (255,000) Transla- tion adjust- ments (119,000) (119,000) Compre- hensive loss (374,000) ---------- -------- ----------- ----------- --------- ------- ----------- --------- ----------- BALANCE, JUNE 30, 1998 10,862,211 108,000 70,659,000 38,840,000 $(119,000) 345,608 (2,937,000) (276,000) 106,275,000 Stock awards issued to employees 305,000 4,000 1,118,000 (1,122,000) Amortiz- ation of stock awards 132,000 132,000 Stock awards cancelled (9,300) (68,000) 68,000 Stock options exercised 400 3,000 3,000 Treasury stock purchased 3,946,250 (14,827,000) (14,827,000) Net loss (37,908,000) (37,908,000) Transla- tion adjust- ments (865,000) (865,000) Compre- hensive loss (38,773,000) ---------- -------- ----------- ----------- --------- ------- ----------- --------- ----------- BALANCE, JUNE 30, 1999 11,158,311 $112,000 $71,712,000 $ 932,000 $(984,000) 4,291,858 $(17,764,000) $(1,198,000) $52,810,000 ========== ======== =========== =========== ========= ========= ============ =========== ===========
See notes to consolidated financial statements SED INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Year ended June 30, --------------------------------------------------- 1999 1998 1997 ------------ ------------ ------------ Operating Activities: Net earnings (loss) $(37,908,000) $ (255,000) $ 7,905,000 Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities: Impairment charges for long-lived assets 15,386,000 Depreciation and amortization 3,206,000 2,847,000 1,731,000 Compensation stock awards 132,000 108,000 122,000 Provision for losses on accounts receivable 13,622,000 6,073,000 1,391,000 Changes in assets and liabilities, net of effects of acquired business in fiscal 1999 and 1998: Trade accounts receivable 17,639,000 (33,254,000) (12,515,000) Inventories 86,489,000 (25,248,000) (40,312,000) Refundable income taxes (312,000) (3,489,000) Deferred income taxes 1,823,000 (604,000) 7,000 Other current assets (865,000) (129,000) (692,000) Trade accounts payable (53,582,000) 29,611,000 12,562,000 Income taxes payable (695,000) Accrued and other current liabilities (92,000) 1,063,000 1,521,000 ------------ ------------ ------------ Net cash provided by (used in) operating activities 45,538,000 (23,277,000) (28,975,000) ------------ ------------ ------------ Investing Activities: Purchase of equipment (2,470,000) (4,767,000) (3,521,000) Purchase of businesses, net of cash acquired (4,306,000) (659,000) Purchase of distribution rights (867,000) (11,992,000) ------------ ------------ ------------ Net cash used in investing activities (6,776,000) (6,293,000) (15,513,000) ------------ ------------ ------------ Financing Activities: Net proceeds from (payments of) revolving bank debt (22,500,000) (25,000,000) 45,390,000 Net proceeds from issuance of common stock 3,000 56,003,000 397,000 Tax benefit from stock awards and options 818,000 147,000 Purchase of treasury stock (14,827,000) (222,000) (1,325,000) ------------ ------------ ------------ Net cash provided by (used in) financing activities (37,324,000) 31,599,000 44,609,000 ------------ ------------ ------------ Effect of exchange rate changes on cash (865,000) (119,000) ------------ ------------ ------------ Increase in cash and cash equivalents 573,000 1,910,000 121,000 Cash and Cash Equivalents Beginning of year 2,693,000 783,000 662,000 ------------ ------------ ------------ End of year $ 3,266,000 $ 2,693,000 $ 783,000 ============ ============ ============ Supplemental Disclosures of Cash Flow Information- Cash paid during the year for: Interest $ 956,000 $ 2,765,000 $ 2,167,000 Income taxes 316,000 3,545,000 5,257,000 Liabilities assumed in acquisitions 4,163,000 6,183,000
See notes to consolidated financial statements SED INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS As of and for the years ended June 30, 1999, 1998 and 1997 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 (formerly SED Magna Distribuidora Ltda.), SED Magna (Miami), Inc., SED International de Colombia Ltda., and Intermaco S.R.L. (collectively the "Company"). All intercompany accounts and transactions have been eliminated. Description of Business--The Company is an international wholesale distributor of microcomputers, computer peripheral products and wireless telephone products, serving value-added resellers and dealers. Use of Estimates--The preparation of financial statements in conformity with generally accepted accounting principles 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. Cash Equivalents--Cash equivalents are short-term investments purchased with a maturity of three months or less. Inventories--Inventories are stated at the lower of cost (first-in, first-out method) or market and include in-transit inventory of $10,313,000 at June 30, 1999 and $26,171,000 at June 30, 1998. Property and Equipment--Property and equipment are recorded at cost. Depreciation is computed principally by the straight-line method over the estimated useful lives, three to seven years, of the related assets or the lease term, whichever is shorter. Intangible Assets--Intangible assets consist primarily of goodwill and distribution rights. Goodwill represents the excess of the cost of acquired businesses over the fair value of net identifiable assets acquired and is amortized using the straight-line method principally over 30 years. Distribution rights have been amortized using the straight-line method over 25 to 30 years. Impairment--The Company periodically reviews property and equipment and intangible assets for impairment based on judgments as to the future undiscounted cash flows from related operations. An impaired asset is written down to its estimated fair market value based on the information available; estimated fair market value is generally measured by discounting estimated future cash flows. 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 earnings. Earnings Per Common Share--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 are additional common shares assumed to be exercised. The Company's diluted EPS differs from basic EPS solely from the effect of dilutive stock options and restricted stock awards. For the years ended June 30, 1999, 1998 and 1997 options for approximately 1,678,000, 1,602,000 and 53,000 common shares, respectively, were excluded from the diluted EPS calculation due to their antidilutive effect. Recently Issued Accounting Pronouncements--In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). This statement requires that all derivative instruments be recorded on the balance sheet at fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if so, the type of the hedge transaction. The ineffective portion of all hedge transactions will be recognized in the current-period earnings. SFAS 133, as now amended, is effective for fiscal years beginning after June 15, 2000. The Company has not yet fully evaluated the impact of this new standard. Effective for the year ended June 30, 1999 (fiscal 1999) the Company adopted SFAS No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 establishes standards for reporting and display of comprehensive income and its components in the Company's consolidated financial statements. Comprehensive income is defined as the change in equity (net assets) of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. The Company's balance of other comprehensive income is comprised exclusively of changes in the net cumulative translation adjustment. Effective for the year ended June 30, 1999, the Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information". The segment information presented herein is in accordance with this new disclosure standard and closely aligns with geographic information presented by the Company in previous years. 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 fair value. 2. Acquisitions Business--In November 1998, the Company acquired Intermaco S.R.L. ("Intermaco"), a Buenos Aires based distributor of Hewlett-Packard products and other computer peripherals in Argentina, for approximately $4,417,000 in cash. The Company is required to pay additional amounts (either in cash or in Company common stock at the Company's option) to the sellers of Intermaco based on a multiple of Intermaco's net earnings, as defined, for the two succeeding twelve month periods commencing November 1, 1998. If paid, such amounts will be recorded as additional goodwill. In December 1997, the Company acquired substantially all of the assets and assumed certain liabilities of Magna Distribuidora Ltda., a Brazilian distributor of microcomputers and related products ("Magna"), for approximately $1,802,000, consisting of 79,719 shares of common stock valued at $1,045,000 and cash of $757,000. The Company is required to pay additional amounts to the sellers of Magna based on a multiple of Magna's net earnings, as defined, for the two succeeding twelve month periods commencing December 1997. If paid, such amounts will be recorded as additional goodwill. No additional amount was paid based on results for the initial 12 month period. These acquisitions have been accounted for using the purchase method of accounting. The allocation of purchase price for Intermaco (November 1998) and Magna (December 1997) resulted in $2,495,000 and $758,000 of goodwill, respectively. As discussed in note 3, the Company recorded an impairment charge for the remaining goodwill related to Magna during the third quarter of fiscal 1999. The operating results of the acquired businesses are included in the Company's consolidated statements of earnings from their respective acquisition dates. The pro forma impact of business acquisitions on operations for fiscal 1999, 1998 and 1997 was not material. Distribution Rights--On June 30, 1997, as a result of a transaction with Globelle, a wholesale distributor of microcomputers and related products, the Company acquired certain domestic distribution rights (principally for certain Hewlett-Packard products) and equipment for $12,992,000 in cash. The Company paid Globelle an additional $867,000 in fiscal 1998 for certain other domestic distribution rights. These rights were considered impaired and written down during the year ended June 30, 1999, as discussed in note 3. 3. Long-Term Assets Long-term assets are comprised of the following: June 30, --------------------------- 1999 1998 ----------- ----------- Property and equipment: Furniture and equipment $10,709,000 $13,427,000 Leasehold improvements 1,617,000 1,660,000 Other 207,000 150,000 ----------- ----------- 12,533,000 15,237,000 Less accumulated depreciation 5 ,539,000 5,747,000 ----------- ----------- $ 6,994,000 $ 9,490,000 =========== =========== Intangibles: Distribution rights $ 226,000 $12,859,000 Goodwill 9,853,000 8,003,000 Non-compete agreements 500,000 ----------- ----------- 10,072,000 21,362,000 Less accumulated amortization 955,000 1,318,000 ----------- ----------- $ 9,123,000 $20,044,000 =========== =========== Amortization expense of intangibles was $888,000, $749,000 and $338,000 in the years ended June 30, 1999, 1998 and 1997, respectively. The Company recorded impairment charges aggregating $15,386,000 during the year ended June 30, 1999 for the following: [BULLET] As a result of declining U.S. sales, the Company reviewed the intangible assets related to distribution rights acquired in June 1997 from Globelle for possible impairment. This evaluation resulted in a $11,994,000 writedown of these rights to their estimated fair value (based on estimated future associated cash flows). [BULLET] In response to the poor operating performance realized at SED Magna Distribuidora Ltda. in Brazil since its December 1997 acquisition and risks inherent in its future operations, the Company recorded an impairment charge of $738,000 for the write-off of the goodwill related to this entity (as this goodwill does not appear to be recoverable). [BULLET] Property and equipment was reviewed and written down by $2,654,000 primarily for computer equipment and capitalized software costs. 4. Revolving Bank Debt The Company's credit agreement with Wachovia Bank N.A. ("Wachovia"), as amended in August 1999, provides for a line of credit of up to $50.0 million. At June 30, 1999, the Company had borrowings of $8.5 million under this facility. Maximum borrowings under the credit agreement are generally based on eligible accounts receivable and inventory (as defined in the credit agreement) less a $15.0 million reserve. The $15.0 million reserve can be drawn upon, if necessary, to finance obligations to Finova Capital Corporation, which finances the Company's purchases from certain vendors. If this amended agreement had been in place at June 30, 1999, available borrowings under this agreement, based on collateral limitations, would have been $40.0 million at that date ($15.0 million of which would only have been available to finance obligations due to Finova, if necessary). The Wachovia credit agreement is secured by accounts receivable and inventory and requires maintenance of certain minimum working capital and other financial ratios and has certain dividend restrictions. The Company may borrow at the prime rate offered by Wachovia (8.0% at June 30, 1999) or the Company may fix the interest rate for periods of 30 to 180 days under various interest rate options. The credit agreement requires a commitment fee of .25% of the unused commitment and expires in August 2001. Average borrowings, maximum borrowings and the weighted average interest rate for fiscal 1999 were $7.2 million, $32.0 million and 8.12%, respectively. Average borrowings, maximum borrowings and the weighted average interest rate for fiscal 1998 were $33.9 million, $80.0 million and 7.87%, respectively. At June 30, 1999 the Company was not initially in compliance with certain covenants; such covenants were retroactively amended by the bank effective June 30, 1999 to permit the Company to be in compliance. The carrying value of revolving bank debt at June 30, 1999 approximates its fair value based on interest rates that are believed to be available to the Company for debt with similar provisions. 5. 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 current deferred tax assets are as follows: June 30, ---------------------------- 1999 1998 ----------- ---------- U.S. federal and state operating loss carryforwards $ 9,240,000 Foreign operating loss carryforwards 2,046,000 $ 166,000 Reserves not currently deductible 1,819,000 1,317,000 Inventory valuation 418,000 683,000 Other 170,000 (10,000) Valuation allowance (13,403,000) (329,000) ----------- ----------- $ 290,000 $ 1,827,000 =========== =========== At June 30, 1999, the Company has gross net operating loss carryforwards for U.S. federal and state income tax purposes of approximately $23.7 million expiring at various dates through 2019. At June 30, 1999, the Company has gross net operating loss carryforwards for foreign income tax purposes of approximately $5.2 million and $1.0 million in Brazil and Colombia, respectively. The carryforwards in Brazil do not expire, subject to certain limitations. The carryforwards in Colombia expire at various dates through 2004. At June 30, 1999, the Company has recorded a valuation allowance for principally all deferred tax assets as there is no assurance these assets will be realized. Components of income tax expense (benefit) are as follows: Year Ended June 30, ----------------------------------------------- 1999 1998 1997 ----------- --------- ---------- Current: Federal $(2,795,000) $ 914,000 $4,380,000 State (252,000) 47,000 538,000 Foreign 128,000 ----------- --------- ---------- (2,919,000) 961,000 4,918,000 ----------- --------- ---------- Deferred: Federal 1,203,000 (552,000) 6,000 State 313,000 (52,000) 1,000 Foreign (4,000) ----------- --------- ---------- 1,512,000 (604,000) 7,000 ----------- --------- ---------- $(1,407,000) $ 357,000 $4,925,000 ============ ========= ==========
Income tax benefits relating to the exercise of employee stock awards and options reduce taxes currently payable and are credited to additional paid-in capital. Such amounts approximated $818,000 and $9,700 for fiscal 1998 and 1997, respectively. The Company's effective tax rates differ from statutory rates as follows: Year Ended June 30, ----------------------------------------- 1999 1998 1997 ------ ---- ---- Statutory federal rate (benefit) (34.0)% 34.0% 34.2% State income taxes net of federal income tax benefit 0.1 28.4 3.3 Non-deductible goodwill amortization 1.0 82.4 1.9 Valuation allowance 24.7 163.7 -- Other 4.6 41.5 (1.0) ---- ----- ---- (3.6)% 350.0% 38.4% ==== ===== ====
6. Lease Obligations SED International leases its main office facility under an operating lease with an entity owned by certain minority shareholders of the Company. The lease currently provides for an annual rent of $176,000 through September 1999, increasing to approximately $253,000 effective October 1999, with annual increases of three percent through September 2006. The Company leases additional distribution center and sales office space under operating leases. Rent expense under all operating leases for the years ended June 30, 1999, 1998 and 1997 was $2,573,000, $2,090,000 and $949,000, respectively. As of June 30, 1999, future minimum rental commitments under noncancelable operating leases are: Year Ending June 30, 2000 $1,900,000 2001 1,703,000 2002 1,183,000 2003 555,000 2004 283,000 2005 and thereafter 667,000 ---------- $6,291,000 ========== 7. Shareholders' Equity Common Stock--In October 1997 the Company issued 3,000,000 shares of its common stock for proceeds of $54,395,000, net of offering costs of $955,000. During fiscal years 1999, 1998 and 1997, the Company repurchased 3,946,250, 20,018 and 200,000 shares, respectively, of its common stock in open market and private transactions for $14,827,000, $222,000 and $1,325,000, respectively. Stock Options--The Company maintains stock option plans under which 1,796,146 shares of common stock have been reserved at June 30, 1999 for outstanding and future incentive and nonqualified stock option grants and stock grants to 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 10 years from the date of grant. Options granted under the plans are exercisable in installments ranging from 10% to 50% per year. Upon the occurrence of a "change of control" (as defined), all outstanding options become immediately exercisable. Stock option activity and related information under these plans is as follows: Weighted Average Shares Exercise Price --------- -------------- Shares under options June 30, 1996 1,195,600 $5.24 Granted 401,200 8.21 Exercised (83,074) 8.21 Canceled (85,940) 6.77 --------- Shares under options June 30, 1997 1,427,786 6.02 Granted 318,700 13.94 Exercised (193,506) 5.70 Canceled (32,945) 8.46 --------- Shares under options June 30, 1998 1,520,035 7.66 Granted 225,550 4.10 Exercised (400) 7.50 Canceled (178,350) 4.89 --------- Shares under options June 30, 1999 1,566,835 4.87 ========= Exercisable at June 30: 1997 903,396 5.30 1998 932,039 5.72 1999 848,615 4.96
Additionally, since 1992, the Board of Directors has granted nonqualified options to purchase 183,000 shares of common stock to certain directors of the Company at an exercise price from $5.00 to $15.25 (fair market value of the Company's common stock at date of grant). Options to purchase 10,000 shares of common stock by a director were canceled during fiscal 1997. Options to purchase 61,500 shares of common stock were exercised by certain directors at a weighted average price of $7.73 during fiscal 1998. At June 30, 1999, 111,500 options granted to directors of the Company were outstanding and exercisable at a weighted average exercise price of $5.05; such options expire 10 years from the date of grant. The following table summarizes information pertaining to all options outstanding and exercisable at June 30, 1999: Outstanding Options Exercisable Options -------------------------------------------- ------------------------- Weighted Average Weighted Remaining Average Average Average Range of Number Contractual Exercise Number Exercise Exercise Prices Outstanding Life (Years) Price Exercisable Price - --------------- ----------- ----------- --------- ----------- --------- $3.56-$4.56 175,150 3.89 $3.88 4.89- 5.06 1,503,185 1.99 5.00 848,615 $4.96
In July 1999, the Company's directors approved a broadly-based stock benefit plan under which non-qualified stock options and awards for up to an aggregate of 1,400,000 shares of common stock may be issued. Stock options for the purchase of 988,000 shares of the Company's stock at a price of $2.94 per share and stock awards for 150,000 shares were issued in July 1999. The information described previously in this note does not include the effect of stock options and awards issued subsequent to June 30, 1999 under this plan. Fair Value--The weighted average fair value of options granted in fiscal 1999, 1998 and 1997 was $2.52, $3.61 and $4.45, respectively, using the Black-Scholes option pricing model with the following assumptions: 1999 1998 1997 ---- ---- ---- Dividend yield 0.0% 0.0% 0.0% Expected volatility 58.4% 55.5% 49.2% Risk free interest rate 5.1% 5.9% 6.3% Expected life, in years 6.6 6.8 7.6
Had compensation cost for grants under the Company's stock option plans in fiscal 1999, 1998 and 1997 been determined based on the fair value at the date of grant consistent with the method of SFAS 123, the Company's pro forma net earnings (loss) and net earnings (loss) per share would have been as follows: Year Ended June 30, --------------------------------------------------- 1999 1998 1997 ------------ ----------- ---------- Pro forma net earnings (loss) $(39,027,000) $(1,075,000) $7,446,000 Pro forma net earnings (loss) per common share: Basic (4.49) (.11) 1.04 Diluted (4.49) (.11) .98
Restricted Stock--In 1988, the Company's directors established a restricted stock plan which permits the granting of restricted stock awards to officers, key employees and directors. The individual awards vest generally after three to ten years. At June 30, 1999, 5,000 shares of common stock are reserved for issuance under this plan. Restricted stock activity is as follows: Year Ended June 30, ----------------------------------------------- 1999 1998 1997 ------- ------- ------ Shares of restricted stock beginning of year 67,200 92,500 97,500 Issued 280,000 16,600 Vested (30,000) Canceled (9,300) (11,900) (5,000) ------- ------- ------ Shares of restricted stock end of year 337,900 67,200 92,500 ======= ======= ======
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. 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. 8. Employee Benefit Plan SED International maintains a voluntary retirement benefit program, the Southern Electronics Distributors, Inc. 401(k) Plan. All employees of SED International who have attained the age of 21 are eligible to participate after completing one year of service. SED International matches a portion of employee contributions to the plan. Employees are immediately vested in their own contributions. Vesting in SED International's matching contributions is based on years of continuous service. SED International's matching contribution expense for the years ended June 30, 1999, 1998 and 1997 was $142,000, $114,000 and $90,000, respectively. 9. 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. Financial information by geographic region is as follows: United States Latin America Eliminations Consolidated ------------ ----------- ------------- ------------ Fiscal 1999 Net sales: Unaffiliated customers $624,690,000 $82,880,000 $707,570,000 Foreign subsidiaries 7,362,000 $ (7,362,000) ------------ ----------- ------------- ------------ Total $632,052,000 $82,880,000 $ (7,362,000) $707,570,000 ============ =========== ============= ============ Gross profit $ 23,090,000 $ 8,138,000 $ 31,228,000 Income (loss) from operations (32,058,000) (5,850,000) (37,908,000) Total assets 128,379,000 28,882,000 $ (16,171,000) 141,090,000 Fiscal 1998 Net sales: Unaffiliated customers $867,986,000 $24,643,000 $892,629,000 Foreign subsidiaries 2,129,000 $ (2,129,000) ------------ ----------- ------------- ------------ Total $870,115,000 $24,643,000 $ (2,129,000) $892,629,000 ============ =========== ============= ============ Gross profit $ 41,587,000 $ 2,969,00 $ (17,000) $ 44,539,000 Income (loss) from operations 3,237,000 (390,000) (17,000) 2,830,000 Total assets 254,626,000 15,326,000 (3,387,000) 266,565,000
The Company operated in one geographic region (United States) in fiscal 1997. Sales of products between the Company's geographic regions are made at market prices. All corporate overhead is included in the results of U.S. operations. Net sales by product category is as follows: Microcomputer Wireless Telephone Year Ended June 30, Products Products Total - ------------------- ------------- ------------------ ------------ 1999 $612,847,000 $ 94,723,000 $707,570,000 1998 785,514,000 107,115,000 892,629,000 1997 588,166,000 58,170,000 646,336,000
Approximately 38% of the Company's net sales in the United States in the fiscal year ended June 30, 1999 consisted of sales to customers for export principally into Latin America and direct sales to customers in Brazil, Colombia and Argentina. For the years ended June 30, 1998 and 1997 approximately 41% and 45%, respectively, of the Company's net sales in the United States were to customers for export principally into Latin America. 10. Significant Vendors During the year ended June 30, 1999, the Company purchased approximately 21% of its product from one vendor. During the years ended June 30, 1998 and 1997, the Company purchased approximately 39% and 43%, respectively, of its product from three vendors. 11. Supplemental Disclosures Analysis of Allowances for Doubtful Accounts: Balance at Charged to Charged to Balance at Beginning Costs and to Other End of Period Expenses Deduction(1) Account(2) of Period ---------- ----------- ------------ -------- --------- Year ended June 30, 1999 $2,362,000 $13,622,000 $(13,091,000) $360,000 $3,253,000 1998 1,102,000 5,911,000 (4,813,000) 162,000 2,362,000 1997 1,141,000 1,391,000 (1,430,000) 1,102,000
(1) Deductions represent actual write-offs of specific accounts receivable charged against the allowance account, net of amounts recovered. (2) Represents balances of acquired business. Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY Information regarding the Registrant's directors is incorporated herein by reference to the section of the Registrant's Proxy Statement for the Annual Meeting of Shareholders scheduled for November 9, 1999 (the "Proxy Statement") entitled "Proposal 1 - Election of Directors." The executive officers of the Registrant, their ages and their present positions are as follows: Name Age Position Gerald Diamond 61 Chairman of the Board, Chief Executive Officer and Director of the Registrant and SED International Ray D. Risner 54 President, Chief Operating Officer and Director of the Registrant and SED International Larry G. Ayers 53 Vice President-Finance, Chief Financial Officer, Secretary and Treasurer of the Registrant and SED International Mark Diamond 34 Executive Vice President and Director of the Registrant and SED International Jean Diamond 58 Vice President of SED International Ronell Rivera 36 President of SED International do Brazil Ltda and Senior Vice President of SED International Latin America Gerald Diamond. Mr. Diamond has been a director of the Registrant or its predecessor, Southern Electronics Distributors, Inc., since 1980 and currently serves as Chairman of the Board and Chief Executive Officer of the Registrant and SED International. He was elected President and Chairman of the Board of the Registrant and SED International in June 1986 and has served in two or more capacities as Chairman of the Board, Chief Executive Officer and President of the Registrant and SED International from that time up until May 1995. Mr. Diamond founded the predecessor to the Registrant and served as its President and Treasurer from July 1980 through July 1986. Mr. Diamond has been in the electronics-related business for over 35 years. Mr. Diamond is the husband of Jean Diamond and the father of Mark Diamond. Ray D. Risner. Mr. Risner has been a director of the Registrant since November 1994 and has served as President and Chief Operating Officer of the Registrant since May 1995. Mr. Risner served as Executive Vice President-Administration from February 1995 to May 1995. He has served as President and Chief Operating Officer of SED International since May 1995. Mr. Risner served as Vice Chairman of RJM Group, Inc., a private investment advisory firm, from 1989 to 1994. From 1987 to 1989, he served as Vice President, Financial Administration of RJR Nabisco, Inc. Mr. Risner is also a trustee and Vice Chairman of The National Faculty and a member of the Board of American Red Cross Chapter, Atlanta, Georgia. Larry G. Ayers. Mr. Ayers was elected Vice President-Finance, Secretary and Treasurer of the Registrant in August 1986 and Chief Financial Officer in November 1989. He was elected Vice President- Finance and Treasurer of SED International in June 1986, Secretary in August 1986 and Chief Financial Officer in November 1989. Mr. Ayers served as Vice President-Finance of the predecessor to the Registrant from May 1986 through July 1986, and as an independent financial consultant from September 1985 through May 1986. Mr. Ayers served as the Treasurer of Aaron Rents, Inc., a furniture rental and sales company, from 1982 through September 1985 and as an accountant with Touche Ross & Co., a national accounting firm, from 1970 through 1982. Mark Diamond. Mr. Diamond has been a director of the Registrant since October 1996. He has been employed by the Registrant in various capacities since January 1987. In June 1995, Mr. Diamond was elected Executive Vice President of the Registrant and in August 1995 was elected Executive Vice President of SED International. Mark Diamond is the son of Gerald Diamond and Jean Diamond. Jean Diamond. Ms. Diamond was elected Vice President of SED International in August 1994. From 1986 to August 1994, she served as Manager of Credit of SED International. Jean Diamond is the wife of Gerald Diamond and the mother of Mark Diamond. Ronell Rivera. Mr. Rivera has served as President of SED International do Brasil Ltda. since June of 1999 and as Senior Vice President of SED International Latin America since March 1997 and as Vice President-Sales for Latin America from December 1995, when the Company acquired U.S. Computer, to February 1977. From May 1991 to December 1995, Mr. Rivera served in various capacities with U.S. Computer, most recently as Vice President-Sales. Item 11. EXECUTIVE COMPENSATION Information regarding the Registrant's compensation of its executive officers and directors is incorporated herein by reference to the sections of the Proxy Statement entitled "Proposal 1-Election of Directors" and "Executive Compensation." Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information regarding the security ownership of certain beneficial owners and management of the Registrant is incorporated by reference to the section of the Proxy Statement entitled "Ownership of Shares." Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information regarding certain relationships and related transactions is incorporated herein by reference to the section of the Proxy Statement entitled "Compensation Committee Interlocks and Insider Participation." PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this Report: 1. Financial Statements. The following financial statements and the report of the Registrant's independent auditors thereon, are filed herewith. - Independent Auditors' Report - Consolidated Balance Sheets at June 30, 1998 and 1999 - Consolidated Statements of Operations for the years ended June 30, 1997, 1998 and 1999 - Consolidated Statements of Shareholders' Equity for the years ended June 30, 1997, 1998 and 1999 - Consolidated Statements of Cash Flows for the years ended June 30, 1997, 1998 and 1999 - Notes to Consolidated Financial Statements 2. Financial Statement Schedules. - Schedules: Schedule II for Valuation and Qualifying accounts is filed herewith under "Supplemental Disclosures" in Note 11 of the Notes to Consolidated Financial Statements Schedules other than the Schedule presented are omitted because the information required is not applicable or the required information is shown in the consolidated financial statements or notes thereto. 3. Exhibits Incorporated by Reference or Filed with this Report. Exhibit Number Description 3.1 Articles of Incorporation of the Registrant. 3.2 Bylaws of the Registrant. 4.1 See Exhibits 3.1 and 3.2 for provisions of the Articles of Incorporation and Bylaws of the Registrant, respectively, defining rights of holders of common stock of the Registrant. 4.2 Form of Rights Agreement, dated as of October 31, 1996 between the Registrant and National City Bank.(1) 10.1 Form of Lease Agreement dated as of January 1, 1991 between Royal Park, Registrant and SED International, Inc. (Formerly Southern Electronics Distributors, Inc.) ("SED International").(2) 10.2 Lease Agreement dated May 16, 1990 between The Equitable Life Assurance Society of the United States and SED International(3), as amended March 20, 1992.(4) 10.3 Southern Electronics Corporation 1986 Stock Option Plan dated September 3, 1986, together with related forms of Incentive Stock Option Agreement and NonQualified Stock Option Agreement.(5)/*/ 10.4 Form of First Amendment dated September 14, 1989 to Southern Electronics Corporation 1986 Stock Option Plan.(6)/*/ 10.5 Second Amendment dated November 7, 1989 to Southern Electronics Corporation 1996 Stock Option Plan.(7)/*/ 10.6 Third Amendment dated July 17, 1992 to Southern Electronics Corporation 1986 Stock Option Plan.(8)/*/ 10.7 Southern Electronics Corporation 1988 Restricted Stock Plan, together with related form of Restricted Stock Agreement.(9)/*/ 10.8 First Amendment dated November 7, 1989 to Southern Electronics Corporation 1988 Restricted Stock Plan.(10)/*/ 10.9 Second Amendment dated July 17, 1992 to Southern Electronics Corporation 1988 Restricted Stock Plan.(11)/*/ 10.10 Form of Southern Electronics Corporation 1991 Stock Option Plan, together with related forms of Incentive Stock Option Agreement and NonQualified Stock Option Agreement. (12) /*/ 10.11 First Amendment dated July 17, 1992 to Southern Electronics Corporation 1991 Stock Option Plan.(13)/*/ 10.12 Second Amendment dated August 30, 1996 to Southern Electronics Corporation 1991 Stock Option Plan.(14)/*/ 10.13 Form of NonQualified Stock Option Agreement dated as of August 28, 1992 between the Registrant and Cary Rosenthal.(15)/*/ 10.14 Employment Agreements dated November 7, 1989, between the Registrant, SED International and each of Gerald Diamond and Jean Diamond (16)/*/, each as amended by form of Amendment No. 1 dated September 24, 1991.(17)/*/ 10.15 SED International, Inc. Savings Plan effective as of January 1, 1991, together with Savings Plan Trust and Savings Plan Adoption Agreement.(18)/*/ 10.16 Lease Agreement dated November 1992 between H.G. Pattillo and Elizabeth M. Pattillo and SED International.(19) 10.17 Lease Agreement dated August 9, 1993 between New World Partners Joint Venture and SED International and Addendum I thereto ("NWPJV Lease"). (20) 10.18 Second Addendum to NWPJV Lease dated January 10, 1996 among New World Partners Joint Venture, New World Partners Joint Venture Number Two and SED International. (21) 10.19 Third Addendum to NWPJV Lease dated July 24, 1996 between New World Partners Joint Venture Number Two and SED International. (22) 10.20 Amendment to Lease for 4775 N. Royal Atlanta Drive.(23) 10.21 Form of NonQualified Stock Option Agreement dated as of May 21, 1993 between the Registrant and Cary Rosenthal (see Exhibit 10.13)./*/ 10.22 Form of NonQualified Stock Option Agreement, dated as of September 13, 1994 between the Registrant and Cary Rosenthal (see Exhibit 10.13)./*/ 10.23 Form of NonQualified Stock Option Agreement for Directors. (24)./*/ 10.24 1995 Formula Stock Option Plan, together with related form of NonQualified Stock Option Agreement.(25) 10.25 Adoption Agreement for Swerdlin & Registrant Regional Prototype Standardized 401(k) Profit Sharing Plan and Trust, as amended. (26)/*/ 10.26 Third Amendment dated September 12, 1996 to the Southern Electronics Corporation Stock Option Plan.(27)/*/ 10.27 Industrial Real Estate Lease (Multi-Tenant Facility) dated as of March 6, 1997, between Majestic Realty Co. and Patrician Associates, Inc., as landlord (the "Landlord"), and SED International, as Tenant, together with Option to Extend Term dated as of March 26, 1997, between the Landlord and SED International, as Tenant. (28) 10.28 Lease Agreement made August 11, 1997, between Gwinnett Industries, Inc. and SED International. (29) 10.29 Lease Agreement made February 3, 1998, between First Industrial Harrisburg, L.P. and SED International. (30) 10.30 Second Amendment to Employment Agreement effective July 1, 1998 between SED International and Gerald Diamond. (31)/*/ 10.31 Second Amendment to Employment Agreement effective July 1, 1998 between SED International and Jean Diamond. (32)/*/ 10.32 1999 Stock Option Plan dated July 20, 1999, together with related forms of Stock Option Agreement and Restriction Agreement./*/ 10.33 Third Amendment to Employment Agreement effective December 16, 1998 between SED International and Jean Diamond. (33)/*/ 10.34 Third Amendment to Employment Agreement effective July 1, 1999 between SED International and Gerald Diamond./*/ 10.35 Fourth Amendment to Employment Agreement effective July 1, 1999 between SED International and Jean Diamond./*/ 10.36 Employment Agreement effective June 1, 1999, between SED International and Ronell Rivera./*/ 10.37 Form of Second Amended and Restated Credit Agreement dated as of August 31, 1999, among the Registrant and SED International as Borrowers and Wachovia Bank, N.A. as Agent./*/ 10.38 Form of Indemnification Agreement entered into with each of the directors of the Registrant and the Registrant./*/ 10.39 Form of Indemnification Agreement entered into with each of the officers of the Registrant and the Registrant./*/ 21 Subsidiaries of the Registrant. 23 Independent Auditors' Consent. 24 Power of Attorney (see signature page to this Registration Statement). 27 Financial Data Schedule. - -------------------- /*/Management contract or compensatory plan or arrangement with one or more directors or executive officers. (1) Incorporated herein by reference to Exhibit 7 to the Registrant's Current Report on Form 8-K dated October 30, 1996. (2) Incorporated herein by reference to exhibit of same number to Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1991 (SEC File No. 0-16345) ("1991 Form 10-K"). (3) Incorporated herein by reference to Exhibit 10.8 to Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1990 (SEC File No. 0-16345) ("1990 Form 10-K"). (4) Incorporated herein by reference to Exhibit 10.5 to Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1992 (SEC File No. 0-16345) ("1992 Form 10-K"). (5) Incorporated herein by reference to Exhibit 10.12 to Registrant's ("Registration Statement") on Form S1, filed September 5, 1986 (Reg. No. 338494). (6) Incorporated herein by reference to Exhibit 10.22 to Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1988 (SEC File No. 0-16345). (7) Incorporated herein by reference to Exhibit 10.25 to Registrant's 1990 Form 10-K. (8) Incorporated herein by reference to Exhibit 10.12 to Registrant's 1992 Form 10-K. (9) Incorporated herein by reference to Exhibit 10.21 to Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1988 (SEC File No. 0-16345). (10) Incorporated herein by reference to Exhibit 10.26 to Registrant's 1990 Form 10-K. (11) Incorporated herein by reference to Exhibit 10.15 to Registrant's 1992 Form 10-K. (12) Incorporated herein by reference to Annex A to Registrant's definitive Supplemental Proxy Statement dated October 18, 1991 (SEC File No. 0-16345). (13) Incorporated herein by reference to Exhibit 10.17 to Registrant's 1992 Form 10-K. (14) Incorporated herein by reference to Appendix A to Registrant's Proxy Statement pertaining to Registrant's 1995 Annual Meeting of Stockholders dated October 1, 1995 (SEC File No. 0-16345). (15) Incorporated herein by reference to Exhibit 10.18 to Registrant's 1992 Form 10-K. (16) Incorporated herein by reference to Exhibit 6(a) to Registrant's Quarterly Report on Form 10-Q for the quarterly period ended December 31, 1989 (SEC File No. 0-16345). (17) Incorporated herein by reference to Exhibit 10.13 to Registrant's 1991 Form 10-K. (18) Incorporated herein by reference to Exhibit 10.15 to Registrant's 1991 Form 10-K. (19) Incorporated herein by reference to Exhibit 10.24 to Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1993 (SEC File No. 0-16345) ("1993 Form 10-K"). (20) Incorporated herein by reference to Exhibit 10.25 to Registrant's 1993 Form 10-K. (21) Incorporated herein by reference to Exhibit 10.32 to Registrant's Annual Report on Form l0-K for the fiscal year ended June 30, 1996 (SEC File No. 0-16345) ("1996 Form 10-K"). (22) Incorporated herein by reference to Exhibit 10.33 to Registrant's 1996 Form 10-K. (23) Incorporated herein by reference to Exhibit 10.26 to Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1995 (SEC File No. 0-16345) ("1995 Form 10-K"). (24) Incorporated herein by reference to Exhibit 10.29 to Registrant's 1995 Form 10-K. (25) Incorporated herein by reference to Appendix B to Registrant's Proxy Statement pertaining to Registrant's 1995 Annual Meeting of Stockholders dated October 1, 1995 (SEC File No. 0-16345). (26) Incorporated herein by reference to Exhibit 10.41 to Registrant's 1996 Form 10-K. (27) Incorporated herein by reference to Appendix A to Registrant's Proxy Statement pertaining to Registrant's 1996 Annual Meeting of Stockholders dated October 1, 1996 (SEC File No. 0-16345). (28) Incorporated herein by reference to Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1997 (SEC File No. 0-16345). (29) Incorporated herein by reference to Exhibit 10.40 to Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1997 (SEC File No. 0-16345). (30) Incorporated herein by reference to Exhibit 10.45 to Registrants Annual Report on Form 10-K for the fiscal year ended June 30, 1998 (SEC File No. 01-6345) ("1998 Form 10-K"). (31) Incorporated herein by reference to Exhibit 10.48 to Registrant's 1998 Form 10-K. (32) Incorporated herein by reference to Exhibit 10.49 to Registrant's 1998 Form 10-K. (33) Incorporated herein by reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended December 31, 1998 (SEC File No. 0-16345). (b) Reports on Form 8-K. No reports on Form 8-K were filed by the Registrant during the quarter ended June 30, 1999. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. Date: September 28, 1999 By: /s/ Larry G. Ayers Larry G. Ayers Vice President - Finance, Chief Financial Officer, Secretary and Treasurer POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS that each person whose signature appears below constitutes and appoints Gerald Diamond, Ray D. Risner, and Larry G. Ayers, and any of them, as his true and lawful attorneys-in-fact, each acting alone, with full powers of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to the Annual Report on Form 10-K of SED International Holdings, Inc., and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission and other appropriate agencies, granting unto said attorneys-in-fact, and any of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact, or any of them, or their substitutes, each acting alone, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated this 28th day of September, 1999. /s/ Gerald Diamond Gerald Diamond Chairman of the Board, Chief Executive Officer and Director (principal executive officer) [Signatures continued on following page] /s/ Larry G. Ayers Larry G. Ayers Vice President - Finance, Chief Financial Officer, Secretary and Treasurer (principal financial and accounting officer) /s/ Stewart I. Aaron Stewart I. Aaron Director /s/ Joel Cohen Joel Cohen Director /s/ Mark Diamond Mark Diamond Director /s/ Ray D. Risner Ray D. Risner Director /s/ Cary Rosenthal Cary Rosenthal Director EX-3.1 2 ARTICLES OF INCORPORATION OF SED INTERNATIONAL HOLDINGS, INC. I. CORPORATE NAME The name of the corporation is: SED INTERNATIONAL HOLDINGS, INC. II. AUTHORIZED SHARES The corporation is authorized to issue two classes of shares to be designated respectively "Common Stock" and "Preferred Stock." The total number of shares which the corporation is authorized to issue is one hundred million one hundred twenty-nine thousand five hundred (100,129,500) shares. The number of shares of Common Stock authorized is one hundred million (100,000,000) shares, and the par value of each share is $.01. The number of shares of Preferred Stock authorized is one hundred twenty-nine thousand five hundred shares (129,500), and the par value of each share is $1.00. Authority is hereby expressly granted to the board of directors from time to time to issue the Preferred Stock as Preferred Stock of one or more series and in connection with the creation of any such series to fix by the resolution or resolutions providing for the issue of shares thereof the designation, powers, preferences and relative, participating, optional or other special rights of such series, and the qualifications, limitations or restrictions thereof. Such authority of the board of directors with respect to each such series shall include, but not be limited to, the determination of the following: (a) the distinctive designation of, and the number of shares comprising, such series, which number may be increased (except where otherwise provided by the board of directors in creating such series) or decreased (but not below the number of shares thereof then outstanding) from time to time by like action of the board of directors; (b) the dividend rate or amount for such series, the conditions and dates upon which such dividends shall be payable, the relation which such dividends shall bear to the dividends payable on any other class or classes or any other series of any class or classes of stock, and whether such dividends shall be cumulative, and if so, from which date or dates for such series; (c) whether or not the shares of such series shall be subject to redemption by the corporation and the times, prices, and other terms and conditions of such redemption; (d) whether or not the shares of such series shall be subject to the operation of a sinking fund or purchase fund to be applied to the redemption or purchase of such shares and if such a fund be established, the amount thereof and the terms and provisions relative to the application thereof; (e) whether or not the shares of such series shall be convertible into or exchangeable for shares of any other class or classes of stock of the corporation and if provision be made for conversion or exchange, the times, prices, rates, adjustments,and other terms and conditions of such conversion or exchange; (f) whether or not the shares of such series shall have voting rights, in addition to the voting rights provided by law, and if they are to have such additional voting rights, the extent thereof; (g) the rights of the shares of such series in the event of any liquidation, dissolution or winding up of the corporation or upon any distribution of its assets; and (h) any other powers, preferences, and relative, participating, optional, or other special rights of the shares of such series, and the qualifications, limitations, or restrictions thereof, to the full extent now or hereinafter permitted by law and not inconsistent with the provisions hereof. All shares of any one series of Preferred Stock shall be identical in all respects except as to the dates from which dividends thereon may be cumulative. All series of the Preferred Stock shall rank equally and be identical in all respects except as otherwise provided in the resolution or resolutions providing for the issue of any series of Preferred Stock. Whenever dividends upon the Preferred Stock at the time outstanding, to the extent of the preference to which such stock is entitled, shall have been paid in full or declared and set apart for payment for all past dividend periods, and after the provisions for any sinking or purchase fund or funds for any series of Preferred Stock shall have been complied with, the board of directors may declare and pay dividends on the Common Stock, payable in cash, stock, or otherwise, and the holders of shares of Preferred Stock shall not be entitled to share therein, subject to the provisions of the resolution or resolutions creating any series of Preferred Stock. In the event of any liquidation, dissolution, or winding up of the corporation or upon the distribution of the assets of the corporation remaining, after the payment to the holders of the Preferred Stock of the full preferential amounts to which they shall be entitled as provided in the resolution or resolutions creating any series thereof, shall be divided and distributed among the holders of the Common Stock ratably, except as may otherwise be provided in any such resolution or resolutions. Neither the merger or consolidation of the corporation with another corporation nor the sale or lease of all or substantially all the assets of the corporation shall be deemed to be a liquidation, dissolution, or winding up of the corporation or a distribution of its assets. II. INITIAL REGISTERED OFFICE AND AGENT The street address and county of the initial registered office of the corporation is 4916 North Royal Atlanta Drive, Tucker, Georgia 30085. The initial registered agent at such office shall be Harvey R. Linder. IV. INCORPORATOR The name and address of the incorporator are as follows: Harvey R. Linder, Esq. c/o SED International Holdings, Inc. 4916 North Royal Atlanta Drive Tucker, Georgia 30085 V. INITIAL PRINCIPAL OFFICE The mailing address of the initial principal office of the corporation is 4916 North Royal Atlanta Drive, Tucker, Georgia 30085. VI. INITIAL DIRECTORS The board of directors shall be divided into three classes, designated as Class I, Class II and Class III. Each class shall consist, as nearly as may be possible, of one-third of the total number of directors constituting the entire board of directors. The term of office of one class of directors shall expire each year. At each annual meeting of shareholders, the directors of one class shall be elected to hold office for a term expiring at the third annual meeting following the election and until a successor shall have been duly elected and qualified. During the intervals between annual meetings of shareholders, any vacancy occurring in the board of directors caused by resignation, removal, death or other incapacity, and any newly created directorships resulting from an increase in the number of directors may be filled by a majority vote of the directors then in office, whether or not a quorum. Each director chosen to fill a vacancy shall hold office for the unexpired term in respect of which such vacancy occurred. When the number of directors is changed, any newly created directorships or any decrease in directorships shall be so apportioned among the classes as to make all classes as nearly equal in number as possible. The shareholders may, at any meeting called for the purpose or by unanimous written consent of the shareholders in lieu of a meeting, remove any director from office, but only for cause, and may elect his successor. The initial board of directors of the corporation shall consist of six members, and the name, address and initial term of office of each member is set forth below: Class I directors to hold office until the 2001 Annual Meeting of Shareholders: Stewart I. Aaron 7585-D Ponce de Leon Circle Doraville, Georgia 30340-3162 Mark Diamond 4916 North Royal Atlanta Drive Tucker, Georgia 30085 Class II directors to hold office until the 1999 Annual Meeting of Shareholders: Ray D. Risner 4916 North Royal Atlanta Drive Tucker, Georgia 30085 Cary Rosenthal 5664 New Peachtree Road Atlanta, Georgia 30341 Class III directors to hold office until the 2000 Annual Meeting of Shareholders: Gerald Diamond 4916 North Royal Atlanta Drive Tucker, Georgia 30085 Joel Cohen P.O. Box 1527 Dalton, Georgia 30720 Notwithstanding any other provisions of the Articles of Incorporation or the Bylaws (and notwithstanding the fact that a lesser percentage for separate class votes for certain actions may be permitted by law, by the Articles of Incorporation or by the Bylaws), the affirmative vote of the holders of not less than 80% of the votes entitled to be cast by the holders of all then outstanding shares of voting stock, voting together as a single class, will be required to amend or repeal any provision of the Articles of Incorporation or the Bylaws to the extent that such action is inconsistent with the purpose of this Article VI; provided, however, that the provisions of this paragraph shall not apply to amendments to the Bylaws or Articles of Incorporation that are recommended by not less than 75% of the members of the board of directors. VII. LIMITATIONS ON DIRECTOR LIABILITY No director of the corporation shall be personally liable to the corporation or its shareholders for monetary damages for any action taken, or any failure to take any action, as a director, except for liability (i) for any appropriation, in violation of his duties, of any business opportunity of the corporation; (ii) for acts or omissions which involve intentional misconduct or a knowing violation of the law; (iii) for the types of liability set forth in Section 14-2-832 of the Georgia Business Corporation Code; or (iv) for any transaction from which the director received an improper personal benefit. If the Georgia Business Corporation Code is amended after the effective date of this Article to authorize corporate action further limiting the personal liability of directors, then the liability of a director of the corporation shall be limited to the fullest extent permitted by the Georgia Business Corporation Code, as so amended. Any repeal or modification of the foregoing paragraph by the shareholders of the corporation shall not adversely affect any right or protection of a director of the corporation existing at the time of such repeal or modification. VIII. ACTION WITHOUT MEETING Any action required or permitted to be taken at a shareholders meeting may be taken without a meeting of the shareholders only if the action is evidenced by one or more written consents describing the action taken, signed by the holders of not less than 100% of the shares that would be entitled to vote at a meeting of shareholders. No written consent signed under this provision shall be valid unless the consenting shareholder has been furnished the same material that, under the Georgia Business Corporation Code, would have been required to be sent to shareholders in a notice of a meeting at which the proposed action would have been submitted to the shareholders for action, or it contains an express waiver of the rights to receive such material. Notwithstanding any other provisions of the Articles of Incorporation or the Bylaws (and notwithstanding the fact that a lesser percentage for separate class votes for certain actions may be permitted by law, by the Articles of Incorporation or by the Bylaws), the affirmative vote of the holders of not less than 80% of the votes entitled to be cast by the holders of all then outstanding shares of voting stock, voting together as a single class, will be required to amend or repeal any provision of the Articles of Incorporation or the Bylaws to the extent that such action is inconsistent with the purpose of this Article VIII; provided, however, that the provisions of this paragraph shall not apply to amendments to the Bylaws or Articles of Incorporation that are recommended by not less than 75% of the members of the board of directors. IX. ADVANCE NOTIFICATION OF SHAREHOLDER PROPOSALS The annual meeting of the shareholders of the corporation shall be held each year for the purposes of electing directors and of transacting such other business as properly may be brought before the meeting. To be properly brought before the meeting, business must be brought (i) by or at the direction of the board of directors or (ii) by any shareholder of the corporation entitled to vote at the meeting who complies with the procedures set forth in this Article IX; provided, in each case, that such business proposed to be conducted is, under the law, an appropriate subject for shareholder action. For business to be properly brought before an annual meeting by a shareholder, the shareholder must give timely notice thereof in writing to the Secretary of the corporation. To be timely, a shareholder's notice must be received by the Secretary at the principal executive offices of the corporation not fewer than 120 calendar days prior to the first anniversary of the date that the corporation's proxy statement (or, in the event the stockholders of SED International Holdings, Inc., a Delaware corporation (the "Predecessor Corporation") approve the merger of the Predecessor Corporation with and into the corporation at the 1998 Annual Meeting of Stockholders of the Predecessor Corporation, then the Predecessor Corporation's proxy statement) was released to shareholders in connection with the preceding year's annual meeting of shareholders. However, if no annual meeting of shareholders of either the corporation or the Predecessor Corporation, as the case may be, were held in the previous year or if the date of the annual meeting of shareholders of such corporation has been changed by more than 30 calendar days from the date contemplated at the time of the previous year's proxy statement of such corporation, the notice shall be received by the Secretary at the principal executive offices of the corporation no later than the later of (i) 150 days prior to the date of the contemplated annual meeting or (ii) the date which is 10 calendar days after the date of the first public announcement or other notification to the shareholders of the date of the contemplated annual meeting. Such shareholder's notice to the Secretary shall set forth as to each matter such shareholder proposes to bring before the annual meeting (i) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting; (ii) the name and address, as they appear on the corporation's books, of the shareholder proposing such business; (iii) the class and number of shares of the corporation which are beneficially owned by such shareholder; (iv) the dates upon which the shareholder acquired such shares; (v) documentary support for any claim of beneficial ownership; (vi) any material interest of such shareholder in such business; (vii) a statement in support of the matter and any other information required by Securities and Exchange Commission Rule 14a-8, as may be amended; and (viii) as to each person whom the shareholder proposes to nominate for election or reelection as director all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors in an election contest, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (including such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected, and evidence satisfactory to the corporation that such nominee has no interests that would limit his or her ability to fulfill his or her duties of office). In addition, if the shareholder intends to solicit proxies from the shareholders of the corporation, such shareholder shall notify the corporation of this intent in accordance with Securities and Exchange Commission Rules 14a-8 and 14a-4(c)(2)(i), as such rules may be amended. Notwithstanding any other provisions of the Articles of Incorporation or the Bylaws (and notwithstanding the fact that a lesser percentage for separate class votes for certain actions may be permitted by law, by the Articles of Incorporation or by the Bylaws), the affirmative vote of the holders of not less than 80% of the votes entitled to be cast by the holders of all then outstanding shares of voting stock, voting together as a single class, will be required to amend or repeal any provision of the Articles of Incorporation or the Bylaws to the extent that such action is inconsistent with the purpose of this Article IX; provided, however, that the provisions of this paragraph shall not apply to amendments to the Bylaws or Articles of Incorporation that are recommended by not less than 75% of the members of the board of directors. X. INDEMNIFICATION OF DIRECTORS AND OFFICERS Each person who was or is made a party or is threatened to be made a party to or is otherwise involved in any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative including any proceeding brought by or in the right of the corporation (hereinafter a "proceeding"), by reason of the fact he or she, or a person of whom he or she is a legal representative, is or was a director or officer of the corporation or a designated officer of an operating division or subsidiary of the corporation, or who, while a director or officer of the corporation, is or was serving at the request of the corporation as a director or officer of another foreign or domestic corporation, partnership, joint venture, trust, employee benefit plan, or other enterprise, shall be indemnified and held harmless by the corporation to the fullest extent authorized by the Georgia Business Corporation Code, as the same exists or may hereafter be amended (but in the case of any such amendment, only to the extent that such amendment permits the corporation to provide broader indemnification rights than the Georgia Business Corporation Code permitted the corporation to provide prior to such amendment), against all expense, liability and loss (including attorneys' fees, judgments, fines, ERISA excise taxes or penalties, and amounts paid or to be paid in settlement) actually and reasonably incurred or suffered by such director or officer in connection with any such proceeding. Such indemnification shall continue as to a director or officer who has ceased to be a director or officer, as applicable, and shall inure to the benefit of the heirs, executors and administrators of the director or officer. Except with respect to proceedings to enforce rights to indemnification by a director or officer, the corporation shall indemnify any such director or officer in connection with a proceeding (or part thereof) initiated by such director or officer only if such proceeding (or part thereof) was authorized by the board of directors of the corporation. The right to indemnification conferred in this Article shall be a contract right. The corporation shall pay for or reimburse the actual and reasonable expenses incurred by a director or officer who is a party to a proceeding in advance of final disposition of the proceeding if the director or officer furnishes the corporation: (i) a written affirmation of his or her good faith belief that he or she has met the standard of conduct set forth in Georgia Business Corporation Code Section 14-2-851(a); and (ii) a written undertaking, executed personally or on his or her behalf, to repay any advances if it is ultimately determined that he or she is not entitled to indemnification for such expenses under this Article or otherwise. The undertaking must be an unlimited general obligation of the director or officer but need not be secured and may be accepted without reference to director's financial ability to make repayment. IN WITNESS WHEREOF, the undersigned incorporator has executed these Articles of Incorporation as of the 29th day of September, 1998. /s/ Harvey R. Linder Harvey R. Linder, Incorporator EX-3.2 3 BYLAWS OF SED INTERNATIONAL HOLDINGS, INC. ARTICLE I SHAREHOLDERS SECTION 1.1. Annual Meetings. The annual meeting of the shareholders of the corporation shall be held each year for the purposes of electing directors and of transacting such other business as properly may be brought before the meeting. To be properly brought before the meeting, business must be brought (i) by or at the direction of the board of directors or (ii) by any shareholder of the corporation entitled to vote at the meeting who complies with the procedures set forth in this Section 1.1; provided, in each case, that such business proposed to be conducted is, under the law, an appropriate subject for shareholder action. For business to be properly brought before an annual meeting by a shareholder, the shareholder must give timely notice thereof in writing to the Secretary of the corporation. To be timely, a shareholder's notice must be received by the Secretary at the principal executive offices of the corporation not fewer than 120 calendar days prior to the first anniversary of the date that the corporation's proxy statement (or, in the event the stockholders of SED International Holdings, Inc., a Delaware corporation (the "Predecessor Corporation") approve the merger of the Predecessor Corporation with and into the corporation at the 1998 Annual Meeting of Stockholders of the Predecessor Corporation, then the Predecessor Corporation's proxy statement) was released to shareholders in connection with the preceding year's annual meeting of shareholders. However, if no annual meeting of shareholders of either the corporation or the Predecessor Corporation, as the case may be, were held in the previous year or if the date of the annual meeting of shareholders of such corporation has been changed by more than 30 calendar days from the date contemplated at the time of the previous year's proxy statement of such corporation, the notice shall be received by the Secretary at the principal executive offices of the corporation no later than the later of (i) 150 days prior to the date of the contemplated annual meeting or (ii) the date which is 10 calendar days after the date of the first public announcement or other notification to the shareholders of the date of the contemplated annual meeting. Such shareholder's notice to the Secretary shall set forth as to each matter such shareholder proposes to bring before the annual meeting (i) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting; (ii) the name and address, as they appear on the corporation's books, of the shareholder proposing such business; (iii) the class and number of shares of the corporation which are beneficially owned by such shareholder; (iv) the dates upon which the shareholder acquired such shares; (v) documentary support for any claim of beneficial ownership; (vi) any material interest of such shareholder in such business; (vii) a statement in support of the matter and any other information required by Securities and Exchange Commission Rule 14a-8, as may be amended; and (viii) as to each person whom the shareholder proposes to nominate for election or reelection as director all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors in an election contest, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (including such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected, and evidence satisfactory to the corporation that such nominee has no interests that would limit his or her ability to fulfill his or her duties of office). In addition, if the shareholder intends to solicit proxies from the shareholders of the corporation, such shareholder shall notify the corporation of this intent in accordance with Securities and Exchange Commission Rules 14a-8 and 14a-4(c)(2)(i), as such rules may be amended. SECTION 1.2. Special Meetings. The corporation shall hold a special meeting of shareholders on call of the board of directors or, upon delivery to the corporation's chief executive officer of a signed and dated written request setting out the purpose or purposes for the meeting, on call of the holders of 100% of the votes entitled to be cast on any issue proposed to be considered at the proposed special meeting. Only business within the purpose or purposes described in the notice of special meeting required by Section 1.4 below may be conducted at a special meeting of the shareholders. Meetings of the shareholders may be held at any time without notice when all the shareholders entitled to vote thereat are present in person or by proxy. SECTION 1.3. Date, Time and Place of Meetings. All meetings of shareholders shall be held on such date and at such time and place, within or without the State of Georgia, as may be fixed from time to time by the board of directors. The date, time and place of all meetings shall be stated in the notice of the meeting or in a duly executed waiver of notice thereof. If no designation is made, the place of the meeting shall be the principal business office of the corporation. SECTION 1.4. Notice of Meetings. The chief executive officer or his designee shall deliver, either personally or by first-class mail, a written notice of the place, day, and time of all meetings of the shareholders not less than ten (10) nor more than sixty (60) days before the meeting date to each shareholder of record entitled to vote at such meeting. Written notice is effective when mailed, if mailed with first-class postage prepaid and correctly addressed to the shareholder's address shown in the corporation's current record of shareholders. In the case of a special meeting, the purpose or purposes for which the meeting is called shall be included in the notice of the special meeting. SECTION 1.5. Record Date. The board of directors, in order to determine the shareholders entitled to notice of or to vote at any meeting of the shareholders or any adjournment thereof, or to express consent to corporate action in writing without a meeting, or to receive payment of any dividend or other distribution or allotment of any rights, or to exercise any rights in respect of any change, conversion or exchange of stock, or for the purpose of any other lawful action, shall fix in advance a record date that may not be more than seventy (70) days before the meeting or action requiring a determination of shareholders. Only such shareholders as shall be shareholders of record on the date fixed shall be entitled to such notice of or to vote at such meeting or any adjournment thereof, or to receive payment of any such dividend or other distribution or allotment of any rights, or to exercise any such rights in respect of stock, or to take any such other lawful action, as the case may be, notwithstanding any transfer of any stock on the books of the corporation after any such record date fixed as aforesaid. The record date shall apply to any adjournment of the meeting except that the board of directors shall fix a new record date for the adjourned meeting if the meeting is adjourned to a date more than 120 days after the date fixed for the original meeting. SECTION 1.6. Shareholders' List for Meeting. After fixing a record date for a meeting, the corporation shall prepare an alphabetical list of the names of all shareholders of record who are entitled to notice of the shareholders' meeting. The list shall be arranged by voting group (and within each voting group by class or series of shares) and show the address of and number of shares held by each shareholder. The corporation shall make the shareholders' list available for inspection by any shareholder, his agent, or his attorney at the time and place of the meeting. SECTION 1.7. Quorum. Subject to any express provision of law or the articles of incorporation, a majority of the votes entitled to be cast by all shares voting together as a group shall constitute a quorum for the transaction of business at all meetings of the shareholders. Whenever a class of shares or series of shares is entitled to vote as a separate voting group on a matter, a majority of the votes entitled to be cast by each voting group so entitled shall constitute a quorum for purposes of action on any matter requiring such separate voting. Once a share is represented, either in person or by proxy, for any purpose at a meeting other than solely to object to holding a meeting or transacting business at the meeting, it is deemed present for quorum purposes for the remainder of the meeting and for any adjournment of that meeting unless a new record date is set for the adjourned meeting. SECTION 1.8. Adjournment of Meetings. The holders of a majority of the voting shares represented at a meeting, or the chairman of the board or the president, whether or not a quorum is present, shall have the power to adjourn the meeting from time to time, without notice other than announcement at the meeting. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally notified. If after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each shareholder of record entitled to vote at the adjourned meeting. SECTION 1.9. Vote Required. When a quorum exists, action on a matter (other than the election of directors) by a voting group is approved if the votes cast within the voting group favoring the action exceed the votes cast opposing the action, unless the articles of incorporation, a bylaw authorized by the articles of incorporation or express provision of law requires a greater number of affirmative votes. Unless otherwise provided in the articles of incorporation, directors are elected by a plurality of the votes cast by the shares entitled to vote in the election at a meeting at which a quorum is present. Shareholders do not have the right to cumulate their votes unless the articles of incorporation so provide. SECTION 1.10. Voting Entitlement of Shares. Unless otherwise provided in the articles of incorporation, each shareholder, at every meeting of the shareholders, shall be entitled to cast one vote, either in person or by written proxy, for each share standing in his or her name on the books of the corporation as of the record date. A shareholder may vote his shares in person or by proxy. An appointment of proxy is effective when received by the President of the corporation or other officer or agent authorized to tabulate votes and is valid for eleven (11) months unless a longer period is expressly provided in the appointment of proxy form. An appointment of proxy is revocable by the shareholder unless the appointment form conspicuously states that it is irrevocable and the appointment is coupled with an interest. SECTION 1.11. Action by Shareholders Without a Meeting. Any action required or permitted to be taken at a shareholders' meeting may be taken without a meeting if the action is taken by all the shareholders who otherwise would be entitled to notice of and to vote at a meeting of shareholders on the action. The action must be evidenced by one or more written consents describing the action taken, signed by shareholders entitled to take action without a meeting and delivered to the corporation for inclusion in the minutes or for filing with the corporate records. No written consent shall be valid unless the consenting shareholder has been furnished the same material that would have been required to be sent to the shareholders in a notice of a meeting at which the proposed action would have been submitted to the shareholders for action, including notice of any applicable dissenters' right, or the written consent contains an express waiver of the right to receive the material otherwise required to be furnished. Written notice, together with the materials that would have been required to be sent in a notice of meeting, shall be given within ten (10) days after the proper taking of the corporate action without a meeting to all persons who otherwise would have been entitled to notice of and to vote at a meeting of shareholders on the action. ARTICLE II. BOARD OF DIRECTORS SECTION 2.1. General Powers. Subject to the articles of incorporation, bylaws approved by the shareholders and any lawful agreement between the shareholders, all corporate powers shall be exercised by or under the authority of, and the business and affairs of the corporation managed under the direction of, the board of directors. SECTION 2.2. Number and Tenure. The initial board of directors shall be such as may be determined by the incorporator(s) unless the initial directors are named in the articles of incorporation, and thereafter the number of directors shall be such as may be determined from time to time by the shareholders or by the board of directors, but in no event shall the number be less than the minimum authorized under the laws of the State of Georgia. No decrease in the number or minimum number of directors, through amendment of the articles of incorporation or of the bylaws or otherwise, shall have the effect of shortening the term of any incumbent director. Directors shall be elected at the annual meeting of shareholders to serve terms as provided in the articles of incorporation; provided, however, that despite the expiration of a director's term he or she shall continue to serve until a successor is elected and qualified or until there is a decrease in the number of directors. SECTION 2.3. Qualifications of Directors. Directors shall be natural persons who have attained the age of 18 years but need not be residents of the State of Georgia or shareholders of the corporation. SECTION 2.4. Vacancy on the Board. Unless the articles of incorporation provide otherwise, if a vacancy occurs on the board of directors, including a vacancy resulting from an increase in the number of directors, the vacancy may be filled by the shareholders, board of directors, or, if the directors remaining in office constitute fewer than a quorum of the Board, by the affirmative vote of a majority of all directors remaining in office. If the vacant office was held by a director elected by a voting group of shareholders, only the holders of shares of that voting group or the remaining directors elected by that voting group are entitled to vote to fill the vacancy. SECTION 2.5. Committees. The board of directors may, by resolution, designate from among its members one or more committees, each committee to consist of one or more directors, except that committees appointed to take action with respect to indemnification of directors, directors' conflicting interest transactions or derivative proceedings shall consist of two or more directors qualified to serve pursuant to the Georgia Business Corporation Code. Any such committee, to the extent specified by the board of directors, articles of incorporation or bylaws, shall have and may exercise all of the authority of the board of directors in the management of the business affairs of the corporation, except that it may not (1) approve action that the Georgia Business Corporation Code requires to be approved by shareholders, (2) fill vacancies on the board of directors or any of its committees, (3) amend the articles of incorporation, (4) adopt, amend, or repeal bylaws or (5) approve a plan of merger not requiring shareholder approval. The creation of, delegation of authority to or action by a committee does not alone constitute compliance by a director with the standards of conduct described in Georgia Business Corporation Code Section 14-2-830. SECTION 2.6. Meetings. The board of directors shall meet annually, without notice, immediately following and at the same place as the annual meeting of shareholders. Regular meetings of the board of directors or any committee may be held between annual meetings without notice at such time and at such place, within or without the State of Georgia, as from time to time shall be determined by the board. Meetings other than regular meetings may be called at any time by the president or the chairman of the board and must be called by the president or by the secretary or an assistant secretary upon the request of any director. Notice of each meeting, other than a regular meeting (unless required by the board of directors), shall be given to each director by mailing the same to each director at his residence or business address at least two days before the meeting or by delivering the same to him personally or by telephone or facsimile at least one day before the meeting unless, in case of exigency, the chairman of the board, the president or the secretary shall prescribe a shorter notice to be given personally or by telephone, facsimile, telegraph, cable or wireless to all or any one or more of the directors at their respective residences or places of business. SECTION 2.7. Quorum and Voting. At all meetings of the board of directors or any committee thereof, a majority of the number of directors prescribed, or if no number is prescribed, a majority of the number in office immediately before the meeting begins, shall constitute a quorum for the transaction of business. The affirmative vote of a majority of the directors present at any meeting at which there is a quorum at the time of such act shall be the act of the Board or of the committee, except as might be otherwise specifically provided by statute or by the articles of incorporation or bylaws. SECTION 2.8. Action Without Meeting. Unless the articles of incorporation or bylaws provide otherwise, any action required or permitted to be taken at any meeting of the board of directors or any committee thereof may be taken without a meeting if the action is taken by all members of the Board or committee, as the case may be. The action must be evidenced by one or more written consents describing the action taken, signed by each director, and filed with the minutes of the proceedings of the Board or committee or filed with the corporate records. SECTION 2.9. Remote Participation in a Meeting. Unless otherwise restricted by the articles of incorporation or the bylaws, any meeting of the board of directors may be conducted by the use of any means of communication by which all directors participating may simultaneously hear each other during the meeting. A director participating in a meeting by this means is deemed to be present in person at the meeting. SECTION 2.10. Compensation of Directors. The board of directors may fix the compensation of the directors for their services as directors, including, but not limited to, fees for attendance at all meetings of the board or any committee of the board. Directors shall in any event be paid their traveling expenses for attendance at all meetings of the board or any committee of the board. No provision of these bylaws shall be construed to preclude any director from serving the corporation in any other capacity and receiving compensation therefor. ARTICLE III NOTICES SECTION 3.1. Notice. Whenever, under the provisions of the articles of incorporation or of these bylaws or by law, notice is required to be given to any director or shareholder, it shall not be construed to require personal notice, but such notice may be given in writing, by mail, or by telegram, telex or facsimile transmission and such notice shall be deemed to be effective, unless otherwise provided herein, when received, or when delivered, properly addressed, to the addressee's last known principal place of business or residence, or five days after the same shall be deposited in the United States mail if mailed with first-class postage prepaid and correctly addressed or on the date shown on the return receipt, if sent by registered or certified mail, and the receipt is signed by or on behalf of the addressee. Notice to any director or shareholder may also be oral if oral notice is reasonable under the circumstances. If these forms of personal notice are impractical, notice may be communicated by a newspaper of general circulation in the area where published, or by radio, television, or other form of public broadcast communication. SECTION 3.2. Waiver of Notice. Whenever any notice is required to be given under provisions of the articles of incorporation or of these bylaws or by law, a waiver thereof, signed by the person entitled to notice and delivered to the corporation for inclusion in the minutes or filing with the corporate records, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting and of all objections to the place or time of the meeting or the manner in which it has been called or convened, except when the person attends a meeting for the express purpose of stating, at the beginning of the meeting, any such objection and, in the case of a director, does not thereafter vote for or assent to action taken at the meeting. Neither the business to be transacted at nor the purpose of any regular or special meeting of the shareholders, directors or a committee of directors need be specified in any written waiver of notice; provided, however, that any waiver of notice of a meeting of shareholders required with respect to a plan of merger or a plan of consolidation shall be effective only upon compliance with Section 14-2-706(c) of the Georgia Business Corporation Code or successor provisions. ARTICLE IV OFFICERS SECTION 4.1. Titles and Election. The officers of the corporation shall be president, a secretary and a treasurer, who shall initially be elected as soon as convenient by the board of directors and thereafter, in the absence of earlier resignations or removals, shall be elected at the first meeting of the board following any annual shareholders' meeting, each of whom shall hold office at the pleasure of the board except as may otherwise be approved by the board or executive committee, or until his earlier resignation, removal under these bylaws or other termination of his employment. Any person may hold more than one office if the duties can be consistently performed by the same person, and to the extent permitted by the laws of the State of Georgia. The board of directors, in its discretion, may also at any time elect or appoint a chairman of the board of directors, who shall be a director, and one or more vice presidents, assistant secretaries and assistant treasurers and such other officers as it may deem advisable, each of whom shall hold office at the pleasure of the board, except as may otherwise be approved by the board or executive committee, or until his earlier resignation, removal or other termination of employment, and shall have such authority and shall perform such duties as be prescribed or determined from time to time by the board or in case of officers other than the chairman of the board, if not so prescribed or determined by the board, the president or the then senior executive officer may prescribe or determine. The board of directors may require any officer or other employee or agent to give bond for the faithful performance of his duties in such form and with such sureties as the board may require. SECTION 4.2. Duties. Subject to such extension, limitations, and other provisions as the board of directors or the bylaws may from time to time prescribe or determine, the following officers shall have the following powers and duties: (a) Chairman of the Board. The chairman of the board may be designated the chief executive officer of the corporation and, when present, shall preside at all meetings of the shareholders and of the board of directors, shall be charged with general supervision of the management and policy of the corporation, and shall have such other powers and perform such other duties as the board of directors may prescribe from time to time. (b) President. Subject to the board of directors and the provisions of these bylaws, the president shall be the chief executive officer of the corporation, shall exercise the powers and authority and perform all of theduties commonly incident to his office, shall in the absence of the chairman of the board preside at all meetings of the shareholders and of the board of directors if he is a director, and shall perform such other duties as the board of directors or the executive committee shall specify from time to time. The president or a vice president, unless some other person is thereunto specifically authorized by the board of directors or executive committee, shall sign all bonds, debentures, promissory notes, deeds and contracts of the corporation. (c) Vice President. The vice president or vice presidents shall perform such duties as may be assigned to them from time to time by the board of directors or by the chief executive officer if the board does not do so. In the absence or disability of the president, the vice presidents in order of seniority may, unless otherwise determined by the board, exercise the powers and perform the duties pertaining to the office of president, except that if one or more executive vice presidents has been elected or appointed, the person holding such office in order of seniority shall exercise the powers and perform the duties of the office of president. (d) Secretary. The secretary or in his absence an assistant secretary shall keep the minutes of all meetings of shareholders and of the board of directors, give and serve all notices, attend to such correspondence as may be assigned to him, keep in safe custody the seal of the corporation, and affix such seal to all such instruments properly executed as may require it, and shall have such other duties and powers as may be prescribed or determined from time to time by the board of directors or by the chief executive officer if the board does not do so. (e) Treasurer. The treasurer, subject to the order of the board of directors, shall have the care and custody of the moneys, funds, valuable papers and documents of the corporation (other than his own bond, if any, which shall be in the custody of the chief executive officer), and shall have, under the supervision of the board of directors, all the powers and duties commonly incident to his office. He shall deposit all funds of the corporation in such bank or banks, trust company or trust companies, or with such firm or firms doing a banking business as may be designated by the board of directors or by the chief executive officer if the board does not do so. He may endorse for deposit or collection all checks, notes, and similar instruments payable to the corporation or to its order. He shall keep accurate books of account of the corporation's transactions, which shall be the property of the corporation, and together with all property of the corporation in his possession, shall be subject at all times to the inspection and control of the board of directors. The treasurer shall be subject in every way to the order of the board of directors, and shall render to the board of directors and/or the chief executive officer of the corporation, whenever they may require it, an account of all his transactions and of the financial condition of the corporation. In addition to the foregoing, the treasurer shall have such duties as may be prescribed or determined from time to time by the board of directors or by the chief executive officer if the board does not do so. SECTION 4.3. Delegation of Authority. The board of directors or the executive committee may at any time delegate the powers and duties of any officer for the time being to any other officer, director or employee. SECTION 4.4. Compensation. The compensation of the chairman of the board, the president, all vice presidents, the secretary and the treasurer shall be fixed by the board of directors or a committee thereof, and the fact that any officer is a director shall not preclude him from receiving compensation or from voting upon the resolution providing the same. ARTICLE V RESIGNATIONS, VACANCIES AND REMOVALS SECTION 5.1. Resignations. Any director or officer may resign at any time by giving written notice thereof to the board of directors, the chief executive officer or the secretary. Any such resignation shall take effect at the time specified therein or, if the time be not specified, upon receipt thereof; and unless otherwise specified therein, the acceptance of any resignation shall not be necessary to make it effective. SECTION 5.2. Vacancies. (a) Directors. Subject to the provisions of the articles of incorporation, when the office of any director becomes vacant or unfilled, whether by reason of death, resignation, removal, increase in the authorized number of directors or otherwise, such vacancy or vacancies may be filled by the remaining director or directors, although less than a quorum. Any director so elected by the board shall serve until the election and qualification of his successor or until his earlier resignation or removal as provided in these bylaws. The directors may also reduce their authorized number by the number of vacancies in the board, provided such reduction does not reduce the board to less than the minimum authorized by the laws of the State of Georgia. (b) Officers. The board of directors may at any time or from time to time fill any vacancy among the officers of the corporation. SECTION 5.3. Removals. (a) Directors. Except as may otherwise be prohibited or restricted under the laws of the State of Georgia or the articles of incorporation of the corporation, the shareholders may, at any meeting called for the purpose or by consent of the shareholders in lieu of a meeting, remove any director from office, with or without cause, and may elect his successor. Except as may otherwise be prohibited or restricted under the laws of the State of Georgia, the board of directors at any meeting called for the purpose by vote of a majority of the then total authorized number of directors may remove from office for cause any director and may elect his successor, and by similar vote may remove from office without cause any director elected by the board, and may elect his successor. (b) Officers. Subject to the provisions of any validly existing agreement, the board of directors may at any meeting remove from office any officer, with or without cause, and may elect or appoint a successor; provided that if action is to be taken to remove the chief executive officer or president, the notice of meeting or waiver of notice thereof shall state that one of the purposes thereof is to consider and take action on his removal. ARTICLE VI CAPITAL STOCK SECTION 6.1. Share Certificates. Unless the articles of incorporation or these bylaws provide otherwise, the board of directors may authorize the issue of some or all of the shares of any or all of its classes or series with or without certificates. Unless the Georgia Business Corporation Code provides otherwise, there shall be no differences in the rights and obligations of shareholders based on whether or not their shares are represented by certificates. In the event that the board of directors authorizes shares with certificates, each certificate representing shares of stock of the corporation shall be in such form as shall be approved by the board of directors and shall set forth upon the face thereof the name of the corporation and that it is organized under the laws of the State of Georgia, the name of the person to whom the certificate is issued, and the number and class of shares and the designation of the series, if any, the certificate represents. The board of directors may designate any one or more officers to sign each share certificate, either manually or by facsimile. In the absence of such designation, each share certificate must be signed by the chief executive officer, president or a vice president and the secretary or an assistant secretary. If the person who signed a share certificate, either manually or in facsimile, no longer holds office when the certificate is issued, the certificate is nevertheless valid. SECTION 6.2. Record of Shareholders. The corporation or an agent designated by the board of directors shall maintain a record of the corporation's shareholders in a form that permits preparation of a list of names and addresses of all shareholders, in alphabetical order by class or shares showing the number and class of shares held by each shareholder. SECTION 6.3. Lost Certificates. In the event that a share certificate is lost, stolen or destroyed, the board of directors may direct that a new certificate be issued in place of such certificate. When authorizing the issue of a new certificate, the board of directors may require such proof of loss as it may deem appropriate as a condition precedent to the issuance thereof, including a requirement that the owner of such lost, stolen or destroyed certificate, or his or her legal representative, advertise the same in such manner as the Board shall require and/or that he or she give the corporation a bond in such sum as the Board may direct as indemnity against any claim that may be made against the corporation with respect to the certificate alleged to have been lost, stolen or destroyed. SECTION 6.4. Transfers of Shares. (a) Transfers of shares of the capital stock of the corporation shall be made only upon the books of the corporation by the registered holder thereof, or by his or her duly authorized attorney, or with a transfer clerk or transfer agent appointed as provided in Section 6.5 hereof, and, in the case of a share represented by certificate, on surrender of the certificate or certificates for such shares properly endorsed and the payment of all taxes thereon. (b) The corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, to vote as such owner, and for all other purposes, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by law. SECTION 6.5. Transfer Agents and Registrars. The board of directors may establish such other regulations as it deems appropriate governing the issue, transfer, conversion and registration of stock certificates, including appointment of transfer agents, clerks or registrars. ARTICLE VII INDEMNIFICATION AND INSURANCE SECTION 7.1. Indemnification of Officers, Employees and Agents. The corporation may indemnify and advance expenses to an officer, in-house legal counsel, employee or agent who is not a director to the extent permitted by the articles of incorporation, the bylaws or by law. SECTION 7.2. Insurance. The corporation may purchase and maintain insurance, at its expense, on behalf of an individual who is or was a director, officer, employee or agent of the corporation or who, while a director, officer, employee or agent of the corporation, is or was serving at the request of the corporation as a director, officer, partner, trustee, employee, or agent of another foreign or domestic corporation, partnership, joint venture, trust, employee benefit plan, or other enterprise, against liability asserted against or incurred by him or her in any such capacity or arising from his or her status as a director, officer, employee or agent, whether or not the corporation would have power to indemnify him or her against the same liability under this Article. SECTION 7.3. Indemnification of Directors. The corporation shall indemnify directors to the full extent permitted by law. ARTICLE VIII GENERAL PROVISIONS SECTION 8.1. Seal. The corporation may have a seal, which shall be in such form as the board of directors may from time to time determine. In the event that the use of the seal is at any time inconvenient, the signature of an officer of the corporation, followed by the word "Seal" enclosed in parenthesis, shall be deemed the seal of the corporation. SECTION 8.2. Amendment of Bylaws. These bylaws may be amended or repealed and new bylaws may be adopted by the board of directors at any regular or special meeting of the board of directors unless the articles of incorporation or the Georgia Business Corporation Code reserve this power exclusively to the shareholders in whole or in part or the shareholders, in amending or repealing the particular bylaw, provide expressly that the board of directors may not amend or repeal that bylaw. Unless the shareholders have fixed a greater quorum or voting requirement, these bylaws also may be altered, amended or repealed and new bylaws may be adopted by a majority vote of all shares voted at any annual or special meeting of the shareholders. A bylaw limiting the authority of the board of directors or establishing staggered terms for directors may only be adopted, amended or repealed by the shareholders. Except as provided in Sections 14-2-1113 and -1133 of the Georgia Business Corporation Code, a bylaw that fixes a greater quorum or voting requirement for shareholders may be adopted, amended or repealed only by the shareholders. A bylaw that fixes a greater quorum or voting requirement for the board of directors may be adopted only by the affirmative vote of holders of a majority of the shares entitled to be cast or by a majority of the entire board of directors. Notwithstanding any other provisions of the articles of incorporation or the bylaws (and notwithstanding the fact that a lesser percentage for separate class votes for certain actions may be permitted by law, by the articles of incorporation or by the bylaws), the affirmative vote of the holders of not less than 80% of the votes entitled to be cast by the holders of all then outstanding shares of voting stock, voting together as a single class, will be required to amend or repeal any provision of the articles of incorporation or the bylaws to the extent that such action is inconsistent with the purpose of Sections 1.1, 1.2, 1.11 and 2.8; provided, however, that the provisions of this paragraph shall not apply to amendments to the bylaws or articles of incorporation that are recommended by not less than 75% of the members of the board of directors. SECTION 8.3. Powers of Attorney. The board of directors or a committee of the board may authorize one or more of the officers of the corporation to execute powers of attorney delegating to named representatives or agents power to represent or act on behalf of the corporation, with or without power of substitution. In the absence of any action by the board or a committee of the board, the chief executive officer or the president, any vice president, the secretary or the treasurer of the corporation may execute for and on behalf of the corporation waivers of notice of shareholders' meetings and proxies for such meetings in any company in which the corporation may hold voting securities. EX-10.32 4 SED INTERNATIONAL HOLDINGS, INC. 1999 STOCK OPTION PLAN TABLE OF CONTENTS ARTICLE 1 Purpose . . . . . . . . . . . . . . . . . . . . . . . Page 1 1.1 General Purpose . . . . . . . . . . . . . Page 1 1.2 Intended Tax Effects of Stock Rights . . Page 1 ARTICLE 2 Definitions . . . . . . . . . . . . . . . . . . . . . Page 1 2.1 1933 Act . . . . . . . . . . . . . . . . . Page 1 2.2 1934 Act . . . . . . . . . . . . . . . . . Page 1 2.3 Beneficiary . . . . . . . . . . . . . . . . Page 1 (a) Designation of Beneficiary . . . . . . Page 1 (b) No Designated Beneficiary . . . . . . Page 2 (c) Designation of Multiple Beneficiaries. Page 2 2.4 Board . . . . . . . . . . . . . . . . . . . Page 2 2.5 Cause . . . . . . . . . . . . . . . . . . . Page 2 2.6 Change of Control . . . . . . . . . . . . . Page 2 (a) Acquisition By Person of Substantial Percentage of the Company's Voting Power. . . . . . . . . . . . . . . . . Page 2 (b) Substantial Change of Board Members. . Page 2 (c) Disposition of Assets. . . . . . . . . Page 2 (a) Acquisition By Person of Substantial Percentage of a Subsidiary's Voting Power . . . . . . . . . . . . . . . . Page 3 (e) Disposition of Assets of a Subsidiary. Page 3 2.7 Code. . . . . . . . . . . . . . . . . . . . Page 4 2.8 Committee . . . . . . . . . . . . . . . . . Page 4 2.9 Common Stock. . . . . . . . . . . . . . . . Page 4 2.10 Company . . . . . . . . . . . . . . . . . . Page 5 2.11 Consultant. . . . . . . . . . . . . . . . . Page 5 2.12 Director. . . . . . . . . . . . . . . . . . Page 5 2.13 Disability. . . . . . . . . . . . . . . . . Page 5 2.14 Effective Date. . . . . . . . . . . . . . . Page 5 2.15 Fair Market Value . . . . . . . . . . . . . Page 5 (a) Stock Listed and Shares Traded. . . . . Page 5 (b) Stock Listed But No Shares Traded . . . Page 5 (c) Stock Not Listed . . . . . . . . . . . Page 6 2.16 NQSO. . . . . . . . . . . . . . . . . . . . Page 6 2.17 Option. . . . . . . . . . . . . . . . . . . Page 6 2.18 Option Agreement. . . . . . . . . . . . . . Page 6 2.19 Option Price. . . . . . . . . . . . . . . . Page 6 2.20 Optionee. . . . . . . . . . . . . . . . . . Page 6 2.21 Person. . . . . . . . . . . . . . . . . . . Page 6 2.22 Plan. . . . . . . . . . . . . . . . . . . . Page 6 2.23 Recipient . . . . . . . . . . . . . . . . . Page 6 2.24 Restricted Stock. . . . . . . . . . . . . . Page 6 2.25 Restriction Agreement . . . . . . . . . . . Page 7 2.26 Stock Rights. . . . . . . . . . . . . . . . Page 7 ARTICLE 3 Administration . . . . . . . . . . . . . . . . . . . Page 7 3.1 General Administration. . . . . . . . . . . Page 7 3.2 Appointment . . . . . . . . . . . . . . . . Page 7 3.3 Organization. . . . . . . . . . . . . . . . Page 7 3.4 Indemnification . . . . . . . . . . . . . . Page 8 ARTICLE 4 Stock . . . . . . . . . . . . . . . . . . . . . . . Page 8 ARTICLE 5 Eligibility to Receive and Grant of Stock Rights. . . Page 8 5.1 Individuals Eligible for Grants of Stock Rights. . . . . . . . . . . . . . . . . . . Page 8 5.2 Grants of Stock Rights. . . . . . . . . . . Page 9 5.3 Restriction on Grant of Stock Options . . . Page 9 ARTICLE 6 Terms and Conditions of Options . . . . . . . . . . . Page 9 6.1 Requirement of Option Agreement . . . . . . Page 9 6.2 Optionee and Number of Shares . . . . . . .Page 10 6.3 Vesting . . . . . . . . . . . . . . . . . .Page 10 6.4 Option Price. . . . . . . . . . . . . . . .Page 10 6.5 Terms of Options. . . . . . . . . . . . . .Page 10 6.6 Terms of Exercise . . . . . . . . . . . . .Page 11 6.7 Method of Exercise. . . . . . . . . . . . .Page 11 6.8 Medium and Time of Payment. . . . . . . . .Page 11 6.9 Effect of Termination of Employment, Disability or Death. . . . . . . . . . . . Page 12 (a) Termination of Employment . . . . . . Page 12 (b) Termination of Employment by Company Without Cause . . . . . . . . . . . . Page 13 (c) Disability. . . . . . . . . . . . . . Page 13 (b) Death . . . . . . . . . . . . . . . . Page 13 6.10 Restrictions on Transfer and Exercise of Options. . . . . . . . . . . . . . . . . . Page 13 6.11 Rights as a Stockholder . . . . . . . . . .Page 14 6.12 No Obligation to Exercise Option. . . . . .Page 14 6.13 Acceleration. . . . . . . . . . . . . . . .Page 14 ARTICLE 7 Terms and Conditions of Restricted Stock Awards . . Page 14 7.1 Requirement of Restriction Agreement. . . Page 14 7.2 Effect of Grant of Restricted Stock . . . Page 14 7.3 Restricted Stock Recipient and Number of Shares . . . . . . . . . . . . . . . . Page 14 7.4 Restrictions on Stock . . . . . . . . . . .Page 14 7.5 Delivery of Restricted Stock. . . . . . . .Page 15 7.6 Termination of Service. . . . . . . . . . .Page 16 7.7 Restrictions on Transfer. . . . . . . . . .Page 17 7.8 Rights as a Stockholder . . . . . . . . . .Page 17 7.9 Acceleration. . . . . . . . . . . . . . . .Page 17 7.10 Restrictions on Grants. . . . . . . . . . .Page 17 ARTICLE 8 Adjustments Upon Changes in Capitalization. . . . . .Page 17 8.1 Recapitalization. . . . . . . . . . . . . .Page 17 8.2 Reorganization. . . . . . . . . . . . . . .Page 18 8.3 Dissolution and Liquidation . . . . . . . .Page 18 8.4 Limits on Adjustments . . . . . . . . . . .Page 18 ARTICLE 9 Agreement by Optionee or Recipient and Securities Registration. . . . . . . . . . . . . . . . . . . . .Page 19 9.1 Agreement . . . . . . . . . . . . . . . . .Page 19 9.2 Registration. . . . . . . . . . . . . . . .Page 19 ARTICLE 10 Effective Date . . . . . . . . . . . . . . . . . . . Page 20 ARTICLE 11 Amendment and Termination. . . . . . . . . . . . . . Page 20 11.1 Amendment and Termination By the Board. . .Page 20 11.2 Restrictions on Amendment and Termination .Page 20 ARTICLE 12 Miscellaneous Provisions . . . . . . . . . . . . . . Page 20 12.1 Application of Funds. . . . . . . . . . . .Page 20 12.2 Notices . . . . . . . . . . . . . . . . . .Page 21 12.3 Term of Plan. . . . . . . . . . . . . . . .Page 21 12.4 Governing Law . . . . . . . . . . . . . . .Page 21 12.5 Additional Provisions By Committee. . . . .Page 21 12.6 Plan Document Controls. . . . . . . . . . .Page 21 12.7 Gender and Number . . . . . . . . . . . . .Page 21 12.8 Headings. . . . . . . . . . . . . . . . . .Page 21 12.9 Legal References. . . . . . . . . . . . . .Page 21 12.10 No Rights to Employment or to Perform Services. . . . . . . . . . . . . . . . . Page 21 12.11 Unfunded Arrangement . . . . . . . . . . Page 21 SED INTERNATIONAL HOLDINGS, INC. 1999 STOCK OPTION PLAN ARTICLE 1 Purpose 1.1 General Purpose. The purpose of this Plan is to further the growth and development of the Company by encouraging employees, Directors and Consultants of the Company to obtain a proprietary interest in the Company. The Company intends that the Plan will provide such persons with an added incentive to continue in the employ of the Company, or to continue to serve as a Director or Consultant, as applicable, and will stimulate their efforts in promoting the growth, efficiency and profitability of the Company. The Company also intends that the Plan will afford the Company a means of attracting to its service persons of outstanding quality. 1.2 Intended Tax Effects of Stock Rights. The tax effects of any NQSO or Restricted Stock granted hereunder should be determined under Code Paragraph 83. ARTICLE 2 Definitions The following words and phrases as used in this Plan shall have the meanings set forth in this Article unless a different meaning is clearly required by the context: 2.1 1933 Act shall mean the Securities Act of 1933, as amended. 2.2 1934 Act shall mean the Securities Exchange Act of 1934, as amended. 2.3 Beneficiary shall mean, with respect to an Optionee, or Restricted Stock Recipient, the individual or individuals to whom the Optionee's Options or Restricted Stock Recipient's Restricted Stock shall be transferred upon the Optionee's or Restricted Stock Recipient's death (i.e., the Optionee's or Restricted Stock Recipient's Beneficiary). (a) Designation of Beneficiary. An Optionee's or Restricted Stock Recipient's Beneficiary shall be the individual who is last designated in writing by the Optionee or Restricted Stock Recipient as such Optionee's or Restricted Stock Recipient's Beneficiary hereunder. An Optionee or Restricted Stock Recipient shall designate his or her original Beneficiary in writing on his or her Option Agreement or Restricted Stock Agreement. Any subsequent modification of the Optionee's or Restricted Stock Recipient's Beneficiary shall be in a written executed and notarized letter addressed to the Company and shall be effective when it is received and accepted by the Committee, as determined in the Committee's sole discretion. (b) No Designated Beneficiary. If, at any time, no Beneficiary has been validly designated by an Optionee or Restricted Stock Recipient, or the Beneficiary designated by the Optionee or Restricted Stock Recipient is no longer living at the time of the Optionee's or Restricted Stock Recipient's death, then the Optionee's or Restricted Stock Recipient's Beneficiary shall be deemed to be the Optionee's estate. (c) Designation of Multiple Beneficiaries. An Optionee or Restricted Stock Recipient may not designate more than one individual as a Beneficiary. To the extent that a designation purports to designate more than one individual as a Beneficiary, the designation shall be null and void. 2.4 Board shall mean the Board of Directors of SED International Holdings, Inc. 2.5 Cause shall mean an act or acts by an individual involving the commission of a felony, willful misconduct, fraud, embezzlement, dishonesty, breach of fiduciary duty or violation or breach of a written employment or consulting agreement or of Company policy as described in a Company employee handbook, any of which acts cause the Company material damage, as determined by the Committee in its sole discretion. 2.6 Change of Control shall mean the occurrence of any one of the following events: (a) Acquisition By Person of Substantial Percentage of the Company's Voting Power. Any individual, corporation, partnership, Group, association or other person or entity, together with his, its or their Affiliates and Associates, other than a trustee or other fiduciary holding securities under an employee benefit plan of the Company, hereafter becomes the Beneficial Owner of securities of the Company representing thirty percent (30%) or more of the combined voting power of the Company's then outstanding securities entitled to vote generally in the election of directors; (b) Substantial Change of Board Members. The Continuing Directors of the Company shall at any time fail to constitute a majority of the members of the Board of Directors of the Company; (c) Disposition of Assets. All or substantially all of the assets of the Company are sold, conveyed, transferred or otherwise disposed of, whether through one event or a series of related events, without being Duly Approved by the Continuing Directors of the Company; (d) Acquisition By Person of Substantial Percentage of a Subsidiary's Voting Power. Any individual, corporation, partnership, Group, association or other person or entity, together with his, its or their Affiliates and Associates, other than the Company, directly or indirectly, or a trustee or other fiduciary holding securities under an employee benefit plan of a Subsidiary, hereafter becomes the beneficial owner of securities of that Subsidiary representing thirty percent (30%) or more of the combined voting power of that Subsidiary's then outstanding securities entitled to vote generally in the election of directors without being Duly Approved by the Continuing Directors of that Subsidiary; or (e) Disposition of Assets of a Subsidiary. All or substantially all of the assets of a Subsidiary are sold, conveyed, transferred or otherwise disposed of, whether through one event or a series of related events, without being Duly Approved by the Continuing Directors of that Subsidiary. For purposes of this Section 2.6 only, the following definitions apply: Affiliate or Affiliated means any person, firm, corporation, partnership, association or entity, either directly or indirectly, that controls, is controlled by, or is under common control with a specified person, firm, corporation, partnership, association or entity. Associate means (1) any corporation, partnership or other entity of which a specified person is an officer or partner, or is, directly or indirectly, the beneficial owner of ten percent (10%) or more of any class of equity securities thereof, (2) any trust or estate in which the specified person has a substantial beneficial interest or as to which the specified person serves as trustee or in a similar fiduciary capacity, (3) any relative or spouse of such specified person, or any relative of such spouse, who has the same home as such specified person, and (4) any person who is a trustee, officer or partner of such specified person or of any corporation, partnership or other entity that is an Affiliate of such specified person. Beneficial Owner shall be defined by reference to Rule 13d-3 under the 1934 Act as such Rule is in effect on the Effective Date; provided, however, that any individual, corporation, partnership, Group, association or other person or entity which, directly or indirectly, owns or has the right to acquire any of the Company's or a Subsidiary's outstanding securities entitled to vote generally in the election of directors at any time in the future, whether such right is contingent, absolute, direct or indirect, pursuant to any agreement, arrangement or understanding or upon exercise of conversion rights, warrants or options or otherwise, shall be deemed the Beneficial Owner of such securities. Company means SED International Holdings, Inc. Continuing Director means a director who either was a member of the Board of Directors of either the Company or a Subsidiary, as the case may be, on the Effective Date, or who becomes a member of the Board of Directors of either the Company or a Subsidiary, as the case may be, subsequent to such date and whose election or nomination for election by the Board of Directors of that company was Duly Approved by the Continuing Directors of that company at the time of such election or nomination, either by a specific vote or by approval of the proxy statement issued by the company on behalf of the Board of Directors of the company in which such person is named as a nominee for director. Duly Approved by the Continuing Directors means an action approved by the vote of at least a majority of the Continuing Directors then on the Board of Directors of either the Company or a Subsidiary, as the case may be; provided, however, if the votes of such Continuing Directors in favor of such action would be insufficient to constitute an act of the entire Board of Directors of that company as if a vote by all of its members had been taken, or if the number of persons constituting the Continuing Directors of that company shall be equal to or less than three, then the term Duly Approved by the Continuing Directors shall mean an action approved by the unanimous vote of the Continuing Directors then on the Board of Directors of that company. Group means persons who act in concert as described in Section 13(d)(3) of the 1934 Act as in effect on the date hereof. Subsidiary means SED International, Inc., a Georgia corporation, and each other subsidiary which is majority-owned by the Company, whether directly or indirectly. 2.7 Code shall mean the Internal Revenue Code of 1986, as amended. 2.8 Committee shall mean the committee appointed by the Board to administer and interpret the Plan in accordance with Article 3 below. 2.9 Common Stock shall mean the common stock, par value $.01 per share, of SED International Holdings, Inc. 2.10 Company shall mean SED International Holdings, Inc., a Georgia corporation, and shall also mean any parent or subsidiary corporation of SED International Holdings, Inc. unless otherwise specified. 2.11 Consultant shall mean an individual who is performing services for the Company pursuant to an agreement with the Company. 2.12 Director shall mean an individual who is serving as a member of the Board or who is serving as a member of the board of directors of a parent or subsidiary corporation of the Company. 2.13 Disability shall mean, with respect to an individual, the total and permanent disability of such individual as determined by the Committee in its sole discretion. 2.14 Effective Date shall mean the date on which this Plan is adopted by the Board. 2.15 Fair Market Value of the Common Stock as of a date of determination shall mean the following: (a) Stock Listed and Shares Traded. If the Common Stock is listed and traded on a national securities exchange (as such term is defined by the 1934 Act) or on The Nasdaq National Market on the date of determination, the Fair Market Value per share shall be the closing price of a share of the Common Stock on said national securities exchange or The Nasdaq National Market on the trading date immediately preceding the date of determination. If the Common Stock is traded in the over-the-counter market, the Fair Market Value per share shall be the average of the closing bid and asked prices on the trading date immediately preceding the date of determination. (b) Stock Listed But No Shares Traded. If the Common Stock is listed on a national securities exchange or on The Nasdaq National Market but no shares of the Common Stock were traded on the date specified in Section 2.15(a) above but there were shares traded on a date within a reasonable period before the date of determination, the Fair Market Value shall be the closing price of the Common Stock on the most recent date before the date of determination. If the Common Stock is regularly traded in the over-the-counter market but no shares of the Common Stock were traded on the date specified in Section 2.15(a) above (or if records of such trades are unavailable or burdensome to obtain) but there were shares traded on a date within a reasonable period before the date of determination, the Fair Market Value shall be the average of the closing bid and asked prices of the Common Stock on the most recent date before the date of determination. (c) Stock Not Listed. If the Common Stock is not listed on a national securities exchange or on The Nasdaq National Market or is not regularly traded in the over-the-counter market, then the Committee shall determine the Fair Market Value of the Common Stock from all relevant available facts, which may include the average of the closing bid and ask prices reflected in the over-the-counter market on a date within a reasonable period either before or after the date of determination or opinions of independent experts as to value and may take into account any recent sales and purchases of such Common Stock to the extent they are representative. The Committee's determination of Fair Market Value, which shall be made pursuant to the foregoing provisions, shall be final and binding for all purposes of this Plan. 2.16 NQSO shall mean an option to which Code Paragraph 421 (relating generally to certain incentive stock options under Code Paragraph 422(b) and other options) does not apply. 2.17 Option shall mean NQSOs granted to individuals pursuant to the terms and provisions of this Plan. 2.18 Option Agreement shall mean a written agreement, executed and dated by the Company and an Optionee, evidencing an Option granted under the terms and provisions of this Plan, setting forth the terms and conditions of such Option, and specifying the name of the Optionee and the number of shares of stock subject to such Option. 2.19 Option Price shall mean the purchase price of the shares of Common Stock underlying an Option. 2.20 Optionee shall mean an individual who is granted an Option pursuant to the terms and provisions of this Plan. 2.21 Person shall mean any individual, organization, corporation, partnership or other entity. 2.22 Plan shall mean this SED International Holdings, Inc. 1999 Stock Option Plan. 2.23 Recipient shall mean an individual who is granted Restricted Stock pursuant to the terms and provisions of this Plan. 2.24 Restricted Stock shall mean Common Stock subject to a Restriction Agreement between the Recipient and the Company, whereby the Recipient has immediate rights of ownership in the shares of Common Stock underlying the award but such shares are subject to restrictions in accordance with the terms and provisions of this Plan and the Restriction Agreement and are subject to forfeiture by the Recipient until the earlier of (a) the time such restrictions lapse or are satisfied, or (b) the time such shares are forfeited. 2.25 Restriction Agreement shall mean a written agreement, executed and dated by the Company and a Recipient, evidencing restrictions placed on the ownership of Restricted Stock by a Recipient. 2.26 Stock Rights shall mean Options and/or Restricted Stock. ARTICLE 3 Administration 3.1 General Administration. The Plan shall be administered and interpreted by the Committee. Subject to the express provisions of the Plan, the Committee shall have authority to interpret the Plan, to prescribe, amend and rescind rules and regulations relating to the Plan, to determine the terms and provisions of the Option Agreements or Restriction Agreements (as applicable) by which Stock Rights shall be evidenced (which shall not be inconsistent with the terms of the Plan), and to make all other determinations necessary or advisable for the administration of the Plan, all of which determinations shall be final, binding and conclusive. 3.2 Appointment. The Board shall appoint the Committee from among its members to serve at the pleasure of the Board. The Board from time to time may remove members from, or add members to, the Committee and shall fill all vacancies thereon. The Committee at all times shall be composed of two or more directors. Each director serving on the Committee must be a "non-employee director." To be a non-employee director, the director must not (i) be an employee or officer of the Company, (ii) have received compensation directly or indirectly as a consultant or in any non-director capacity, or have an interest in any transaction of the Company, for which disclosure would be required under Item 404(a) of Regulation S-K of the 1934 Act, or (iii) have been engaged through another entity in a business relationship with the Company for which disclosure would be required under Item 404(b) of Regulation S-K of the 1934 Act. The requirements of this subsection are intended to comply with the "non-employee director rule" of Rule 16b-3 under Section 16 of the 1934 Act or any successor rule or regulation, and shall be interpreted and construed in a manner which assures compliance with said Rule. To the extent said Rule 16b-3 is modified to reduce or increase the restrictions on who may serve on the Committee, the Plan shall be deemed modified in a similar manner. 3.3 Organization. The Board or the Committee may select one of the Committee's members as chairman of the Committee. The Committee shall hold its meetings at such times, in such manner, and at such places as the Committee or its chairman shall deem advisable. A majority of the members of the Committee shall constitute a quorum, and such majority shall determine the Committee's actions. The Committee shall keep minutes of its proceedings and shall report the same to the Board at the meeting next succeeding. 3.4 Indemnification. In addition to such other rights of indemnification as they have as directors or as members of the Committee, the members of the Committee, to the extent permitted by applicable law, shall be indemnified by the Company against reasonable expenses (including, without limitation, attorneys' fees) actually and necessarily incurred in connection with the defense of any action, suit or proceeding, or in connection with any appeal, to which they or any of them may be a party by reason of any action taken or failure to act under or in connection with the Plan or any Stock Rights granted hereunder, and against all amounts paid by them in settlement thereof (provided such settlement is approved to the extent required by and in the manner provided by the articles or certificate of incorporation or the bylaws of the Company relating to indemnification of directors) or paid by them in satisfaction of a judgment in any such action, suit or proceeding, except in relation to matters as to which it shall be adjudged in such action, suit or proceeding that such Committee member or members did not act in good faith and in a manner he or they reasonably believed to be in or not opposed to the best interest of the Company. ARTICLE 4 Stock The stock subject to the Stock Rights and other provisions of the Plan shall be authorized but unissued or reacquired shares of Common Stock. Subject to readjustment in accordance with the provisions of Article 8, the total number of shares of Common Stock which may be granted to, or for which Options may be granted to, persons participating in the Plan shall not exceed in the aggregate 1,400,000 shares of Common Stock, subject to adjustment as provided herein. Notwithstanding the foregoing, shares of Common Stock allocable to the unexercised portion of any expired or terminated Option or shares of Restricted Stock returned to the Company by forfeiture again may become subject to Stock Rights under the Plan. ARTICLE 5 Eligibility to Receive and Grant of Stock Rights 5.1 Individuals Eligible for Grants of Stock Rights. The individuals eligible to receive Stock Rights hereunder shall be employees, Directors and Consultants of the Company. It is the Company's intent that the Plan shall be a "broad-based plan" and that, at all times, no more than fifty percent (50%) of the optionees and recipients under the Plan shall be officers or "affiliates" (as such term is defined in Rule 144 promulgated by the Securities and Exchange Commission under the Securities Act of 1933, as amended) of the Company, and that no more than fifty percent (50%) of the Common Stock issued under the Plan shall be issued to such officers or "affiliates" of the Company. 5.2 Grants of Stock Rights. Subject to the provisions of the Plan, the Committee or the Board shall have the authority and sole discretion to determine and designate, from time to time, those individuals (from among the individuals eligible for a grant of Stock Rights under the Plan pursuant to Section 5.1 above) to whom Stock Rights will actually be granted, the Option Price of the shares covered by any Options granted, the manner in and conditions under which Options are exercisable (including, without limitation, any limitations or restrictions thereon), the manner in and conditions under which shares of Restricted Stock shall vest and the time or times at which Stock Rights shall be granted. In making such determinations, the Committee may take into account the nature of the services rendered or to be rendered by the respective individuals to whom Stock Rights may be granted, their present and potential contributions to the Company's success and such other factors as the Committee, in its sole discretion, shall deem relevant. In its authorization of the granting of an Option hereunder, the Committee shall specify the name of the Optionee and the number of shares of stock subject to such Option. In its authorization of an award of Restricted Stock hereunder, the Committee shall specify the name of the Recipient, the number of shares of Restricted Stock to be awarded and the restrictions to which such Restricted Stock shall be subject. The Committee may grant, at any time, new Stock Rights to an Optionee or a Recipient who previously has received Stock Rights, whether such Stock Rights include prior Stock Rights that still are outstanding, previously have been exercised in whole or in part, have expired or are canceled in connection with the issuance of new Stock Rights. No individual shall have any claim or right to be granted Stock Rights under the Plan. 5.3 Restriction on Grant of Stock Options. No more than the maximum number of shares of Common Stock available under the Plan may be made subject to Options granted during a calendar year to any one individual. ARTICLE 6 Terms and Conditions of Options Options granted hereunder and Option Agreements shall comply with and be subject to the following terms and conditions: 6.1 Requirement of Option Agreement. Upon the grant of an Option hereunder, the Committee shall prepare (or cause to be prepared) an Option Agreement. The Committee shall present such Option Agreement to the Optionee. Upon execution of such Option Agreement by the Optionee, such Option shall be deemed to have been granted effective as of the date of grant. The failure of the Optionee to execute the Option Agreement within 30 days after the date of the receipt of same shall render the Option Agreement and the underlying Option null and void ab initio. 6.2 Optionee and Number of Shares. Each Option Agreement shall state the name of the Optionee and the total number of shares of the Common Stock to which it pertains, the Option Price, the Beneficiary of the Optionee and the date as of which the Option was granted under this Plan. 6.3 Vesting. Each Option shall first become exercisable (i.e., vested) with respect to such portions of the shares subject to such Option as are specified in the schedule set forth hereinbelow, except as may be otherwise specified by the Committee: (a) Commencing as of the first anniversary of the date the Option is granted, the Optionee shall have the right to exercise the Option with respect to, and to thereby purchase, 25% of the shares subject to such Option. Prior to said date, the Option shall be unexercisable in its entirety. (b) Commencing as of the second anniversary of the date the Option is granted, the Optionee shall have the right to exercise the Option with respect to, and to thereby purchase, an additional 25% of the shares subject to the Option. (c) Commencing as of the third anniversary of the date the Option is granted, the Optionee shall have the right to exercise the Option with respect to, and to thereby purchase, an additional 25% of the shares subject to the Option. (d) Commencing as of the fourth anniversary of the date the Option is granted, the Optionee shall have the right to exercise the Option with respect to, and to thereby purchase, the remainder of the shares subject to such Option. (e) Notwithstanding subsections (a) through (d) above, any Options previously granted to an Optionee shall become immediately vested and exercisable for 100% of the number of shares subject to the Options upon the Optionee's death or becoming Disabled or upon a Change of Control of the Company. Other than as provided above, if an Optionee ceases to be an employee, Director or Consultant of the Company, his rights with regard to all non-vested Options shall cease immediately. 6.4 Option Price. The Option Price of the shares of Common Stock underlying each Option shall be the Fair Market Value of the Common Stock on the date the Option is granted. Upon execution of an Option Agreement by both the Company and Optionee, the date as of which the Committee granted the Option as specified in the Option Agreement shall be considered the date on which such Option is granted. 6.5 Terms of Options. Terms of Options granted under the Plan shall commence on the date of grant and shall expire on such date as the Committee may determine for each Option; provided, in no event shall any Option be exercisable after ten years from the date the Option is granted. No Option shall be granted hereunder after ten years from the date the Plan is adopted by the Board. 6.6 Terms of Exercise. The exercise of an Option may be for less than the full number of shares of Common Stock subject to such Option, but such exercise shall not be made for less than (i) 100 shares, or (ii) the total remaining shares subject to the Option, if such total is less than 100 shares. Subject to the other restrictions on exercise set forth herein, the unexercised portion of an Option may be exercised at a later date by the Optionee. 6.7 Method of Exercise. All Options granted hereunder shall be exercised by written notice directed to the Secretary of the Company at its principal place of business or to such other person as the Committee may direct. Each notice of exercise shall identify the Option which the Optionee is exercising (in whole or in part) and shall be accompanied by payment of the Option Price for the number of shares specified in such notice and by any documents required by Section 9.1. The Company shall make delivery of such shares within a reasonable period of time; provided, if any law or regulation requires the Company to take any action (including, but not limited to, the filing of a registration statement under the 1933 Act and causing such registration statement to become effective) with respect to the shares specified in such notice before the issuance thereof, then the date of delivery of such shares shall be extended for the period necessary to take such action. 6.8 Medium and Time of Payment. (a) The Option Price shall be payable upon the exercise of the Option in an amount equal to the number of shares then being purchased times the per share Option Price. Payment, at the election of the Optionee (or his Beneficiary as provided in subsection (c) of Section 6.9), shall be (A) in cash; (B) by delivery to the Company of a certificate or certificates for shares of the Common Stock duly endorsed for transfer to the Company with signature guaranteed by a member firm of a national stock exchange or by a national or state bank or a federally chartered thrift institution (or guaranteed or notarized in such other manner as the Committee may require) or by instructing the Company to retain shares of Common Stock upon the exercise of the Option with a Fair Market Value equal to the exercise price as payment; or (C) by a combination of (A) and (B). (b) If all or part of the Option Price is paid by delivery of shares of the Common Stock, the Optionee must have held such shares as of the date of the payment for at least six months from (i) the date of acquisition, in the case of shares acquired other than through a stock option or other stock award plan, or (ii) the date of grant or award in the case of shares acquired through such a plan; and the value of such Common Stock (which shall be the Fair Market Value of such Common Stock on the date of exercise) shall be less than or equal to the total Option Price payment. If the Optionee delivers shares of Common Stock with a value that is less than the total Option Price, then such Optionee shall pay the balance of the total Option Price in cash as provided in subsection (a) above. (c) In addition to the payment of the purchase price of the shares then being purchased, an Optionee also shall pay in cash (or have withheld from his normal pay) or, if permitted by the Board or the Committee, in shares of Common Stock held for the minimum period of time as specified in Section 6.8 above, an amount equal to the amount, if any, which the Company at the time of exercise is required to withhold under the income tax or Federal Insurance Contribution Act tax withholding provisions of the Code, of the income tax laws of the state of the Optionee's residence, and of any other applicable law. 6.9 Effect of Termination of Employment, Disability or Death. Except as provided in subsections (a), (b), (c) and (d) below, no Option shall be exercisable unless the Optionee thereof shall have been an employee, Director or Consultant of the Company from the date of the granting of the Option until the date of exercise; provided, the Committee, in its sole discretion, may waive the application of this Section and, instead, may provide a different expiration date or dates in an Option Agreement. (a) Termination of Employment. In the event an Optionee ceases to be an employee, Director or Consultant of the Company for any reason other than death, Disability or termination by the Company without Cause of the Optionee's service as employee, Director or Consultant of the Company, any Option or unexercised portion thereof granted to him shall terminate on and shall not be exercisable after the earliest to occur of (i) the expiration date of the Option, (iii) the date on which the Optionee ceases to be an employee, Director or Consultant of the Company or (iii) the date on which the Company gives notice to such Optionee of termination of service as employee, Director or Consultant if such service is terminated by the Company for Cause (an Optionee's resignation of such service in anticipation of termination of service by the Company for Cause shall constitute a notice of termination by the Company); rovided, the Committee may provide in the Option Agreement that such Option or any unexercised portion thereof shall terminate sooner. Notwithstanding the foregoing and any provision of subsection (b), in the event that an Optionee's service as employee, Director or Consultant of the Company terminates for a reason other than death or Disability at any time after a Change of Control, the term of all Options of that Optionee shall be extended through the end of the three-month period immediately following the date of such termination. Prior to the earlier of the dates specified in the preceding sentences of this subsection (a), the Option shall be exercisable only in accordance with its terms and only for the number of shares exercisable on the date of termination of service. The question of whether an authorized leave of absence or absence for military or government service or for any other reason shall constitute a termination of service for purposes of the Plan shall be determined by the Committee, which determination shall be final and conclusive. (b) Termination of Employment by Company Without Cause. In the event that the Company terminates an Optionee's service as employee, Director or Consultant of the Company without Cause, any Option or unexercised portion thereof granted to him shall terminate and not be exercisable after the earlier of (i) the expiration date of such option or (ii) three months after the date the Optionee ceases to be an employee, Director or Consultant of the Company; provided, the Committee may provide in the Option Agreement that such Option or any unexercisedportion thereof shall terminate sooner. Prior to the earlier of such dates, such option shall be exercisable on the date such Optionee's service is terminated by the Company without Cause. (c) Disability. Upon the termination of an Optionee's service as employee, Director or Consultant of the Company due to Disability, any Option or unexercised portion thereof granted to him which is otherwise exercisable shall terminate on and shall not be exercisable after the earlier to occur of (i) the expiration date of such Option, or (ii) one year after the date on which such Optionee ceases to be an employee, Director or Consultant of the Company due to Disability; provided, the Committee may provide in the Option Agreement that such Option or any unexercised portion thereof shall terminate sooner. Prior to the earlier of such dates, such Option shall be exercisable only in accordance with its terms and only for the number of shares exercisable on the date such Optionee's service ceases due to Disability. (b) Death. In the event of the death of the Optionee while he is an employee, Director or Consultant of the Company, any Option or unexercised portion thereof granted to him which is otherwise exercisable may be exercised by his Beneficiary at any time prior to the expiration of one year from the date of death of such Optionee, but in no event later than the date of expiration of the option period; provided, the Committee may provide in the Option Agreement that such Option or any unexercised portion thereof shall terminate sooner. Such exercise shall be effected pursuant to the terms of this Section as if such Beneficiary is the named Optionee. 6.10 Restrictions on Transfer and Exercise of Options. No Option shall be assignable or transferable by the Optionee except by transfer to a Beneficiary upon the death of the Optionee, and any purported transfer (other than as excepted above) shall be null and void. During the lifetime of an Optionee, the Option shall be exercisable only by him; provided, however, that in the event the Optionee is incapacitated and unable to exercise Options, such Options may be exercised by such Optionee's legal guardian or duly appointed attorney-in-fact whom the Committee deems appropriate based on applicable facts and circumstances. 6.11 Rights as a Stockholder. An Optionee shall have no rights as a stockholder with respect to shares covered by his Option until the date of issuance of the shares to him and only after the Option Price of such shares is fully paid and the tax withholding amount is paid or withheld. Unless specified in Article 8, no adjustment will be made for dividends or other rights for which the record date is prior to the date of such issuance. 6.12 No Obligation to Exercise Option. The granting of an Option shall impose no obligation upon the Optionee to exercise such Option. 6.13 Acceleration. The Committee shall at all times have the power to accelerate the vesting date of Options previously granted under this Plan. ARTICLE 7 Terms and Conditions of Restricted Stock Awards Restriction Agreements and the Restricted Stock awarded under this Plan shall comply with and be subject to the following terms and conditions: 7.1 Requirement of Restriction Agreement. Upon the grant of Restricted Stock hereunder, the Committee shall prepare (or cause to be prepared) a Restriction Agreement, and shall present such Restriction Agreement to the Recipient. The failure of the Recipient to execute the Restriction Agreement within 30 days after the date of the receipt of same shall render the Restriction Agreement and the underlying award of Restricted Stock null and void ab initio. 7.2 Effect of Grant of Restricted Stock. An award of Restricted Stock granted under the Plan shall provide the Recipient with immediate rights of ownership in the shares of Common Stock underlying the award, but such shares shall be subject to such restrictions as the Committee shall specify and shall be subject to forfeiture by the Recipient until the earlier of (i) the time such restrictions lapse or are satisfied, or (ii) the time such shares are forfeited. 7.3 Restricted Stock Recipient and Number of Shares. Each Restriction Agreement shall state the name of the Restricted Stock Recipient and the total number of shares of the Common Stock to which it pertains, the Beneficiary of the Restricted Stock Recipient and the date as of which the Restricted Stock was granted under this Plan. 7.4 Restrictions on Stock. (a) The vesting of complete ownership rights in any Restricted Stock awarded under this Plan shall be subject to such terms and conditions as the Committee may determine in its sole discretion; provided, no Recipient shall be required to pay any consideration in the form of cash or other property as a condition to acquiring the Restricted Stock. A Recipient shall vest and obtain a nonforfeitable interest in the Restricted Stock as of the date that the last of such terms and conditions is satisfied; provided, if such terms and conditions are not satisfied by the deadline, if any, designated by the Committee and specified in the Restriction Agreement, the portion of Restricted Stock still subject to such terms and conditions shall be forfeited and returned to the Company. The Committee, in its sole discretion, may provide for the lapse of the terms and conditions to which Restricted Stock is subject in installments and may provide for different terms and conditions and/or a different restriction period with respect to each award, or any portion of an award, of Restricted Stock. (b) In addition to such terms and conditions as the Committee may determine with respect to the vesting of any shares of Restricted Stock, all Restricted Stock shall vest with respect to such portion of each grant of Restricted Stock as is specified in the schedule set forth hereinbelow, except as may otherwise be specified by the Committee. (i) Commencing as of the first anniversary of the date the Restricted Stock is granted, complete ownership rights shall vest (subject to such other terms and conditions as the Committee may determine) in 25% of the Restricted Stock so granted. Prior to said date, none of such Restricted Stock shall be vested. (ii) Commencing as of the second anniversary of the date the Restricted Stock is granted, complete ownership rights shall vest (subject to such other terms and conditions as the Committee may determine) in an additional 25% of the Restricted Stock so granted. (iii) Commencing as of the third anniversary of the date the Restricted Stock is granted, complete ownership rights shall vest (subject to such other terms and conditions as the Committee may determine) in an additional 25% of the Restricted Stock so granted. (iv) Commencing as of the fourth anniversary of the date the Restricted Stock is granted, complete ownership rights shall vest (subject to such other terms and conditions as the Committee may determine) in the remainder of the Restricted Stock so granted. Notwithstanding (a) and (b) above, 100% of the shares of Restricted Stock previously granted to a Restricted Stock Recipient shall become immediately vested upon a Change of Control or upon a Restricted Stock Recipient's becoming Disabled or upon his death. 7.5 Delivery of Restricted Stock. (a) The Company shall make delivery of the shares of Restricted Stock within a reasonable period of time after execution of a Restriction Agreement; provided, if any law or regulation requires the Company to take any action (including, but not limited to, the filing of a registration statement under the 1933 Act and causing such registration statement to become effective) with respect to such shares before the issuance thereof, then the date of delivery of such shares shall be extended for the period necessary to take such action. (b) Unless the certificates representing shares of the Restricted Stock are deposited with a custodian pursuant to subsection (c) of this Section, each such certificate shall bear the following legend (in addition to any other restrictive legend required pursuant to Article 9): The transferability of this certificate and the shares of stock represented hereby are subject to the restrictions, terms and conditions (including forfeiture and restrictions against transfer) contained in the SED International Holdings, Inc. 1999 Stock Option Plan and a Restriction Agreement, dated ___________, ______, between ________________________ and SED International Holdings, Inc. The Plan and Restriction Agreement are on file in the office of the Secretary of SED International Holdings, Inc. Such legend shall be removed from any certificate evidencing such shares of Restricted Stock as of the date that such shares become nonforfeitable. Such legend shall be removed from any certificate evidencing such shares of Restricted Stock as of the date that such shares become nonforfeitable. (c) As an alternative to delivering a stock certificate to the Recipient pursuant to subsection (b) of this Section, any certificate evidencing Restricted Stock may be deposited by the Company with a custodian to be designated by the Committee. The Company shall cause the custodian to issue to the Recipient a receipt for any Restricted Stock deposited with it in accordance with this subsection. Such custodian shall hold the deposited certificates and deliver the same to the Recipient in whose name the shares of Restricted Stock evidenced thereby are registered only after such shares become nonforfeitable. (d) A Recipient shall pay in cash (or have withheld from his normal pay) or, if permitted by the Board or the Committee, in shares of Common Stock held for the minimum period of time as specified in Section 6.8(b) hereof, an amount equal to the amount, if any, which the Company is required at any time to withhold under the income tax or Federal Insurance Contributions Act tax withholding provisions of the Code, of the income tax laws of the state of the Recipient's residence, and any other applicable law. 7.6 Termination of Service. Except as otherwise determined by the Committee and set forth in a Restriction Agreement, in the event that the service as employee, Director or Consultant of the Company of a Recipient to whom Restricted Stock has been granted is terminated for any reason (including retirement of the Recipient or a termination by the Company whether or not for Cause) other than a Change of Control, or the Disability or death of the Recipient, before satisfaction of the terms and conditions to which the Restricted Stock is subject, all shares of Restricted Stock still subject to restriction shall be forfeited and shall be reacquired by the Company. 7.7 Restrictions on Transfer. No shares of Restricted Stock shall be assignable or transferable by the Recipient, except by transfer to a Beneficiary upon the death of the Recipient, while such shares are still subject to restriction, and any purported transfer (other than as excepted above) shall be null and void. 7.8 Rights as a Stockholder. Upon delivery of Restricted Stock to the Recipient (or the custodian, if any), the Recipient shall, except as otherwise set forth in this Article and in the Restriction Agreement, have all of the rights of a stockholder with respect to the Restricted Stock, including the right to vote the shares of Restricted Stock and receive all dividends or other distributions paid or made with respect to the Restricted Stock. Until such delivery, the Recipient shall have no rights as a stockholder. 7.9 Acceleration. The Committee shall at all times have the power to accelerate the vesting date of Restricted Stock previously granted under this Plan. 7.10 Restrictions on Grants. No Restricted Stock shall be granted hereunder after ten years from the date the Plan is adopted by the Board. ARTICLE 8 Adjustments Upon Changes in Capitalization 8.1 Recapitalization. In the event that the outstanding shares of the Common Stock of the Company are hereafter increased or decreased or changed into or exchanged for a different number or kind of shares or other securities of the Company by reason of a recapitalization, reclassification, stock split, combination of shares or dividend payable in shares of the Common Stock, the following rules shall apply: (a) The Committee shall make an appropriate adjustment in the number and kind of shares available for the granting of Stock Rights under the Plan. (b) The Committee also shall make an appropriate adjustment in the number and kind of shares as to which outstanding Options, or portions thereof then unexercised, shall be exercisable; any such adjustment in any outstanding Options shall be made without change in the total price applicable to the unexercised portion of such Option and with a corresponding adjustment in the Option Price per share. No fractional shares shall be issued or optioned in making the foregoing adjustments, and the number of shares available under the Plan or the number of shares subject to any outstanding Options shall be the next lower number of shares, rounding all fractions downward. (c) If any rights or warrants to subscribe for additional shares are given pro rata to holders of outstanding shares of the class or classes of stock then set aside for the Plan, each Optionee shall be entitled to the same rights or warrants on the same basis as holders of the outstanding shares with respect to such portion of his Option as is exercised on or prior to the record date for determining stockholders entitled to receive or exercise such rights or warrants. 8.2 Reorganization. Subject to any required action by the stockholders, if the Company shall be a party to any reorganization involving merger, consolidation, acquisition of the stock or acquisition of the assets of the Company which does not constitute a Change of Control, the Committee, in its discretion, may declare that: (a) any Option granted but not yet exercised shall pertain to and apply, with appropriate adjustment as determined by the Committee, to the securities of the resulting corporation to which a holder of the number of shares of the Common Stock subject to such Option would have been entitled; (b) any or all outstanding Stock Rights granted hereunder shall become immediately nonforfeitable and fully exercisable or vested (to the extent permitted under federal or state securities laws); and/or (c) any or all Stock Rights granted hereunder shall become immediately nonforfeitable and fully exercisable or vested (to the extent permitted under federal or state securities laws) and are to be terminated after giving at least 30 days' notice to the Optionees and/or Recipients to whom such Stock Rights have been granted. 8.3 Dissolution and Liquidation. If the Board adopts a plan of dissolution and liquidation that is approved by the stockholders of the Company, the Committee shall give each Optionee and Recipient written notice of such event at least ten days prior to its effective date, and the rights of all Optionees and Recipients shall become immediately nonforfeitable and fully exercisable or vested (to the extent permitted under federal or state securities laws). 8.4 Limits on Adjustments. Any issuance by the Company of stock of any class, or securities convertible into shares of stock of any class, shall not affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of the Common Stock subject to any Option, except as specifically provided otherwise in this Article. The grant of Stock Rights pursuant to the Plan shall not affect in any way the right or power of the Company to make adjustments, reclassifications, reorganizations or changes of its capital or business structure or to merge, consolidate or dissolve, or to liquidate, sell or transfer all or any part of its business or assets. All adjustments the Committee makes under this Article shall be conclusive. ARTICLE 9 Agreement by Optionee or Recipient and Securities Registration 9.1 Agreement. If, in the opinion of counsel to the Company, such action is necessary or desirable, no Stock Rights shall be granted to any Optionee or Recipient, and no Option shall be exercisable, unless, at the time of grant or exercise, as applicable, such Optionee or Recipient (i) represents and warrants that he will acquire the Common Stock for investment only and not for purposes of resale or distribution, and (ii) makes such further representations and warranties as are deemed necessary or desirable by counsel to the Company with regard to holding and resale of the Common Stock. The Optionee or Recipient shall, upon the request of the Committee, execute and deliver to the Company an agreement or affidavit to such effect. Should the Committee have reasonable cause to believe that such Optionee or Recipient did not execute such agreement or affidavit in good faith, the Company shall not be bound by the grant of the Option or Restricted Stock or by the exercise of the Option. All certificates representing shares of Common Stock issued pursuant to the Plan shall be marked with the following restrictive legend or similar legend, if such marking, in the opinion of counsel to the Company, is necessary or desirable: The shares represented by this certificate have not been registered under the Securities Act of 1933, as amended, or the securities laws of any state and are held by an "affiliate" (as such term is defined in Rule 144 promulgated by the Securities and Exchange Commission under the Securities Act of 1933, as amended) of the Company. Accordingly, these shares may not be sold, hypothecated, pledged or otherwise transferred except (i) pursuant to an effective registration statement under the Securities Act of 1933, as amended, and any applicable securities laws or regulations of any state with respect to such shares, (ii) in accordance with Securities and Exchange Commission Rule 144, or (iii) upon the issuance to the Company of a favorable opinion of counsel or the submission to the Company of such other evidence as may be satisfactory to the Company that such proposed sale, assignment, encumbrance or other transfer will not be in violation of the Securities Act of 1933, as amended, or any applicable securities laws of any state or any rules or regulations thereunder. Any attempted transfer of this certificate or the shares represented hereby which is in violation of the preceding restrictions will not be recognized by the Company, nor will any transferee be recognized as the owner thereof by the Company. If the Common Stock is (A) held by an Optionee or Recipient who is not an "affiliate," as that term is defined in Rule 144 of the 1933 Act, or who ceases to be an "affiliate," or (B) registered under the 1933 Act and all applicable state securities laws and regulations as provided in Section 9.2, the Committee, in its discretion and with the advice of counsel, may dispense with or authorize the removal of the restrictive legend set forth above or the portion thereof which is inapplicable. 9.2 Registration. In the event that the Company in its sole discretion shall deem it necessary or advisable to register, under the 1933 Act or any state securities laws or regulations, any shares with respect to which Stock Rights have been granted hereunder, then the Company shall take such action at its own expense before or, if appropriate and upon the advice of legal counsel, after delivery of the certificates representing such shares to an Optionee or Recipient. In such event, and if the shares of Common Stock of the Company shall be listed on any national securities exchange or on The Nasdaq National Market at the time of the exercise of any Option or the vesting of any shares of Restricted Stock, the Company shall make prompt application at its own expense for the listing on such stock exchange or The Nasdaq National Market of the shares of Common Stock to be issued. ARTICLE 10 Effective Date The Plan shall be effective as of the Effective Date, and no Stock Rights shall be granted hereunder prior to said date. ARTICLE 11 Amendment and Termination 11.1 Amendment and Termination By the Board. Subject to Section 11.2 below, the Board shall have the power at any time to add to, amend, modify or repeal any of the provisions of the Plan, to suspend the operation of the entire Plan or any of its provisions for any period or periods or to terminate the Plan in whole or in part. In the event of any such action, the Committee shall prepare written procedures which, when approved by the Board, shall govern the administration of the Plan resulting from such addition, amendment, modification, repeal, suspension or termination. 11.2 Restrictions on Amendment and Termination. Notwithstanding the provisions of Section 11.1 above, no addition, amendment, modification, repeal, suspension or termination shall adversely affect, in any way, the rights of the Optionees or Recipients who have outstanding Stock Rights, without the consent of such Optionees or Recipients. ARTICLE 12 Miscellaneous Provisions 12.1 Application of Funds. The proceeds received by the Company from the sale of the Common Stock subject to the Stock Rights granted hereunder will be used for general corporate purposes. 12.2 Notices. All notices or other communications by an Optionee or Recipient to the Committee pursuant to or in connection with the Plan shall be deemed to have been duly given when received in the form specified by the Committee at the location, or by the person, designated by the Committee for the receipt thereof. 12.3 Term of Plan. Subject to the terms of Article 11, the Plan shall terminate upon the later of (i) the complete exercise or lapse of the last outstanding Stock Right, or (ii) the last date upon which Options may be granted hereunder. 12.4 Governing Law. The Plan shall be governed by and construed in accordance with the laws of the State of Georgia. 12.5 Additional Provisions By Committee. The Option Agreements authorized under the Plan may contain such other provisions, including, without limitation, restrictions upon the exercise of an Option, as the Committee shall deem advisable. The Restriction Agreements authorized under the Plan may contain such other provisions, including, without limitation, restrictions upon the complete ownership of Restricted Stock, as the Committee shall deem advisable. 12.6 Plan Document Controls. In the event of any conflict between the provisions of an Option Agreement and the Plan, or between a Restriction Agreement and the Plan, the Plan shall control. 12.7 Gender and Number. Wherever applicable, the masculine pronoun shall include the feminine pronoun, and the singular shall include the plural. 12.8 Headings. The titles in this Plan are inserted for convenience of reference; they constitute no part of the Plan and are not to be considered in the construction hereof. 12.9 Legal References. Any references in this Plan to a provision of law which is, subsequent to the Effective Date of this Plan, revised, modified, finalized or redesignated, shall automatically be deemed a reference to such revised, modified, finalized or redesignated provision of law. 12.10 No Rights to Employment or to Perform Services. Nothing contained in the Plan, or any modification thereof, shall be construed to give any individual any rights to employment with the Company, or to perform services for the Company. 12.11 Unfunded Arrangement. The Plan shall not be funded, and except for reserving a sufficient number of authorized shares to the extent required by law to meet the requirements of the Plan, the Company shall not be required to establish any special or separate fund or to make any other segregation of assets to assure the payment of any grant under the Plan. ADOPTED BY BOARD OF DIRECTORS ON JULY 20, 1999. NOT TO BE SUBMITTED FOR SHAREHOLDER VOTE NONQUALIFIED STOCK OPTION NO. ________ SED INTERNATIONAL HOLDINGS, INC. 1999 STOCK OPTION PLAN NONQUALIFIED STOCK OPTION AGREEMENT This Nonqualified Stock Option Agreement (the "Agreement") is entered into as of the ____ day of ___________________, ________, by and between SED International Holdings, Inc. (the "Company") and ______________________________________ ("Optionee"). W I T N E S S E T H: WHEREAS, the Company (which term as used herein shall include any parent or subsidiary of the Company) has adopted the SED International Holdings, Inc. 1999 Stock Option Plan (the "Plan") which is administered by a committee appointed by the Board of Directors of SED International Holdings, Inc. (the "Committee"); and WHEREAS, effective as of _________________, ________, the Committee granted to Optionee a nonqualified stock option under, and in accordance with, the terms of the Plan to reward Optionee for his efforts on behalf of the Company and to encourage his continued loyalty and diligence; and WHEREAS, to comply with the terms of the Plan and to further the interests of the Company and Optionee, the parties hereto have set forth the terms of such option in writing in this Agreement; NOW, THEREFORE, for and in consideration of the premises and mutual promises herein contained, and for other good and valuable consideration, the receipt and sufficiency of which are acknowledged, the parties agree as follows: 1. Grant of Option. Effective as of _________________, ________, the Committee granted Optionee a nonqualified stock option under the Plan. Under that option and subject to the terms and conditions set forth herein, Optionee shall have the right to purchase ________ shares of the $.01 par value common stock of SED International Holdings, Inc. (the "Common Stock"); such ________ shares hereinafter are referred to as the "Optioned Shares", and this option hereinafter is referred to as the "Option". 2. Option Price. The price per share for each of the Optioned Shares shall be $________________ (the "Option Price"), which is not less than 100% of the per share Fair Market Value of the Optioned Shares on the date of grant specified above. 3. Exercise of Option. (a) General. The Option may be exercised by Optionee's delivery to the Secretary of the Company of a written notice of exercise executed by Optionee (the "Notice of Exercise"). The Notice of Exercise shall be substantially in the form set forth as Exhibit A, attached hereto and made a part hereof, and shall identify the Option and the number of Optioned Shares that are being exercised. (b) Beginning of Exercise Period. The Option first shall become exercisable (i.e., vested) according to the following schedule; provided, if Optionee ceases to be an employee, Director or Consultant of the Company, his rights with regard to all nonvested Options under this schedule shall cease immediately: [Describe meeting schedule] Notwithstanding the foregoing, the Option shall become 100% vested immediately upon the death or Disability of Optionee or upon a Change of Control. (c) Partial Exercise. Optionee may exercise the Option for less than the full number of exercisable Optioned Shares, but such exercise may not be made for less than 100 shares or the total remaining shares subject to the Option, if less than 100 shares. 4. Termination of Option. Notwithstanding any provisions to the contrary herein, the Option shall not be exercisable either in whole or in part after the earliest of: (a) Ten years from the date of grant; (b) The date that is immediately prior to the first anniversary of the date on which Optionee dies while in the service of the Company as an employee, Director or Consultant; (c) The date of expiration of the one-year period that begins on the date on which Optionee ceases to be an employee, Director or Consultant of the Company due to Disability; (d) The date of expiration of the three-month period that begins on the date on which Optionee ceases to be an employee, Director or Consultant of the Company for any reason other than death or Disability; (e) The date on which the Company gives notice (or is deemed to have given notice) to Optionee of his termination of service as an employee, Director or Consultant for Cause, all as described in Section 6.9(a) of the Plan. (f) Such other earlier date as may be required under the terms of the Plan. 5. Option Non-Transferable. The Option shall not be transferable by Optionee other than by will or by the laws of descent and distribution except by transfer to a Beneficiary upon the death of the Optionee, and any purported transfer (other than as excepted above) shall be null and void. During the lifetime of Optionee, the Option shall be exercisable only by Optionee (or, if he becomes disabled or otherwise incapacitated, by the legal guardian of his property or his duly appointed attorney-in-fact), and shall not be assignable or transferable by Optionee and, subject to Section 6 hereof, no other person shall acquire any rights in the Option. 6. Death of Optionee and Transfer of Option. In the event of the death of Optionee while in the service of the Company as an employee, Director or Consultant, all or any of the unexercised portion of the Option owned by the deceased Optionee may be exercised by Optionee's Beneficiary at any time prior to the first anniversary of the date of the death of Optionee, but in no event later than the date as of which such Option expires pursuant to Section 4 hereof. Such exercise shall be effected in accordance with the terms hereof as if such Beneficiary was Optionee herein. The Optionee agrees that the following individual shall initially be his Beneficiary: Name: ______________________________________ Address: ______________________________________ ______________________________________ ______________________________________ Any subsequent modification of the Optionee's Beneficiary shall be made pursuant to the terms and provisions of the Plan. 7. Medium and Time of Payment of Option Price. (a) General. The Option Price shall be payable by Optionee (or his Beneficiary in accordance with Section 6 hereof) upon exercise of the Option and shall be paid in cash, in shares of the Common Stock, or any combination thereof. (b) Payment in Shares of the Common Stock. If Optionee pays all or part of the Option Price with shares of the Common Stock, the following conditions shall apply: (i) Optionee shall deliver to the Secretary of the Company a certificate or certificates for shares of the Common Stock duly endorsed for transfer to the Company with signature guaranteed by a member firm of a national stock exchange or by a national or state bank (or guaranteed or notarized in such other manner as the Committee may require); (ii) Optionee must have held any shares of the Common Stock used to pay the Option Price for at least six months prior to the date such payment is made; (iii) Such shares shall be valued on the basis of the Fair Market Value of the Common Stock on the date of exercise pursuant to the terms of the Plan; and (iv) The value of such Common Stock shall be less than or equal to the Option Price. If Optionee delivers Common Stock with a value that is less than the Option Price, then Optionee shall pay the balance of the Option Price in a form allowed under subsection (a) above. In addition to the payment of the Option Price, Optionee also shall pay in cash (or have withheld from his normal pay) or, if permitted by the Board or the Committee, in shares of Common Stock held for the minimum period of time as specified in Section 6.8 of the Plan an amount equal to, the amount, if any, which the Company at the time of exercise is required to withhold under the income tax and FICA withholding provisions of the Internal Revenue Code of 1986, as amended, and of the income tax laws of the state of Optionee's residence. 8. Agreement of Optionee. Optionee acknowledges that he has read Section 9 of the Plan and understands that certain restrictions may apply with respect to shares of the Common Stock acquired by him pursuant to his exercise of the Option (including restrictions on resale applicable to "affiliates" under Rule 144 of the Securities Act of 1933, as amended, and restrictions on resale applicable to shares of the Common Stock that have not been registered under the Securities Act of 1933, as amended, and applicable state securities laws). Optionee hereby agrees to execute such documents and take such actions as the Company may require with respect to state and federal securities laws and any restrictions on the resale of such shares which may pertain. 9. Delivery of Stock Certificates. As promptly as practical after the date of exercise of the Option and the receipt by the Company of full payment therefor, as well as full payment of amounts required to be withheld by the Company for income tax and FICA purposes, the Company shall deliver to Optionee a stock certificate representing the shares of the Common Stock acquired by Optionee pursuant to his exercise of the Option. 10. Notices. All notices or other communications hereunder shall be in writing and shall be effective (i) when personally delivered by courier (including overnight carriers) or otherwise to the party to be given such notice or other communication or (ii) on the third business day following the date deposited in the United States mail if such notice or other communication is sent by certified or registered mail with return receipt requested and postage thereon fully prepaid. The addresses for such notices shall be as follows: If to the Company: SED International Holdings, Inc. Attention: Corporate Secretary 4916 North Royal Atlanta Drive Tucker, Georgia 30085 If to Optionee: __________________________ __________________________ __________________________ __________________________ Any party hereto, by notice of the other party hereunder, may change its address for receipt of notices hereunder. 11. Other Terms and Conditions. In addition to the terms and conditions set forth herein, the Option is subject to and governed by the other terms and conditions set forth in the Plan, which is hereby incorporated by reference. In the event of any conflict between the provisions of this Agreement and the Plan, the Plan shall control. 12. Miscellaneous. (a) The granting of the Option and the execution of this Agreement shall not give Optionee any rights to similar grants in future years or any right to be retained in the service of the Company or to interfere in any way with the right of the Company to terminate Optionee's service with the Company as an employee, Director or Consultant at any time. (b) Unless and except as otherwise specifically provided in this Agreement, Optionee shall have no rights of a stockholder with respect to any shares covered by the Option until the date of issuance of a stock certificate to him for such shares. (c) If any term, provision, covenant or restriction contained in this Agreement is held by a court or a federal regulatory agency of competent jurisdiction to be invalid, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions contained in this Agreement shall remain in full force and effect, and shall in no way be affected, impaired or invalidated. If for any reason such court or regulatory agency determines that this Agreement will not permit Optionee to acquire the full number of Optioned Shares as provided in Section 1 hereof, it is the express intention of the Company to allow Optionee to acquire such lesser number of shares as may be permissible without any amendment or modification hereof. (d) This Agreement shall be construed and enforced in accordance with the laws of Georgia. (e) This Agreement, together with the Plan, contains the entire understanding among the parties and supersedes any prior understanding and agreements between them representing the subject matter hereof. There are no representations, agreements, arrangements or understandings, oral or written, between and among the parties hereto relating to the subject matter hereof which are not fully expressed herein, in the Plan. (f) Section and other headings contained in this Agreement are for reference purposes only and are in no way intended to describe, interpret, define or limit the scope, extent or intent of this Agreement or any provision hereof. (g) This Agreement may be executed in multiple counterparts, each of which shall be deemed an original and all of which shall constitute one agreement, and the signatures of any party or any counterpart shall be deemed to be a signature to, and may be appended to, any other counterpart. (h) All capitalized terms in this Agreement shall be construed in accordance with their defined terms under the Plan. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the first date written above. SED INTERNATIONAL HOLDINGS, INC. By:______________________________________ Title:___________________________________ OPTIONEE: __________________________________________ Signature __________________________________________ Print or type name EXHIBIT A SED INTERNATIONAL HOLDINGS, INC. 1999 STOCK OPTION PLAN NOTICE OF EXERCISE FOR NONQUALIFIED STOCK OPTION AGREEMENT This Notice of Exercise is given pursuant to the terms of the Nonqualified Stock Option Agreement, dated __________________, _______, between SED International Holdings, Inc. (the "Company") and the undersigned Optionee (the "Agreement"), which Agreement represents Nonqualified Stock Option No. ________ and which is made a part hereof and incorporated herein by reference. EXERCISE OF OPTION. Optionee hereby exercises his option to purchase _______ of his Optioned Shares. Optionee hereby delivers, together with this written statement of exercise, the full Option Price with respect to the exercised Optioned Shares, which consists of: [COMPLETE ONLY ONE] [ ] cash in the total amount of $________________. [ ] ________ shares of the Company's Common Stock. [ ] cash in the total amount of $_________________ and _________ shares of the Company's Common Stock. ACKNOWLEDGMENT. Optionee hereby acknowledges that, to the extent he is an "affiliate" of the Company (as that term is defined in Rule 144 promulgated under the Securities Act of 1933, as amended) or to the extent that the Optioned Shares have not been registered under the Securities Act of 1933, as amended, or applicable state securities laws, any shares of the Company's Common Stock acquired by him as a result of his exercise of the Option pursuant to this Notice are subject to, and the certificates representing such shares shall be legended to reflect, certain trading restrictions under applicable securities laws (including particularly the Securities and Exchange Commission's Rule 144), all as described in Section 9 of the Plan, and Optionee hereby agrees to comply with all such restrictions and to execute such documents or take such other actions as the Company may require in connection with such restrictions. Executed this ______ day of _________________, _________. OPTIONEE: _______________________________________ _______________________________________ Print or Type Name The Company hereby acknowledges receipt of this Notice of Exercise and receipt of payment in the form and amount indicated above, all on this ______ day of ____________________, ________. SED INTERNATIONAL HOLDINGS, INC. By:_____________________________________ Title:__________________________________ RESTRICTION AGREEMENT NO. ____ SED INTERNATIONAL HOLDINGS, INC. 1999 STOCK OPTION PLAN RESTRICTION AGREEMENT This Restriction Agreement (the "Agreement") is entered into as of the _________ day of ________________, ____, by and between SED International Holdings, Inc. (the "Company") and ________________________________________ ("Recipient"). W I T N E S S E T H: WHEREAS, the Company (which term as used herein shall include any parent or subsidiary of the Company) has adopted the SED International Holdings, Inc. 1999 Stock Option Plan (the "Plan") which is administered by a Committee appointed by the Board of Directors of SED International Holdings, Inc. (the "Committee"); and WHEREAS, effective as of ____________________, _____, the Committee granted to Recipient an award of restricted stock under, and in accordance with, the terms of the Plan to reward Recipient for his efforts on behalf of the Company and to encourage his continued loyalty and diligence; and WHEREAS, to comply with the terms of the Plan and to further the interests of the Company and Recipient, the parties hereto have set forth the terms of such award in writing in this Agreement; NOW, THEREFORE, for and in consideration of the mutual promises herein contained, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: 1. Grant of Award. Effective as of ___________________, _____, the Committee granted to Recipient an Award of _____________________ shares of the $.01 par value common stock of SED International Holdings, Inc. to Recipient, which Award is hereinafter referred to as the "Restricted Shares." 2. Vesting Restrictions. The Restricted Shares shall be subject to the following vesting restrictions; provided, if Recipient ceases to be an employee, Director or Consultant of the Company, his rights with respect to all nonvested Restricted Shares under this schedule shall cease immediately: [Describe vesting schedule] Notwithstanding the foregoing, the Restricted Shares shall become 100% vested and nonforfeitable immediately upon the death or Disability of Recipient or upon a Change of Control of the Company. 3. Restrictions on Transfer. Restricted Shares shall not be transferred or assignable by the Recipient, except by transfer to a Beneficiary on the death of the Recipient, and any purported transfer (other than as excepted above) shall be null and void. The Recipient agrees that the following individual shall initially be his Beneficiary: Name: _______________________________ Address: _______________________________ _______________________________ _______________________________ Any subsequent modifications of the Recipient's Beneficiary shall be made pursuant to the terms and provisions of the Plan. 4. Agreement of Recipient. Recipient acknowledges that Recipient has read the Plan and understands that certain restrictions may apply with respect to the Restricted Shares acquired by Recipient pursuant to the Award. Specifically, Recipient acknowledges that, to the extent Recipient is an "affiliate" of the Company , as that term is defined by the Securities Act of 1933 (the "1933 Act"), the Restricted Shares acquired by Recipient as a result of the Award are subject to, and the certificate or certificates, if any, representing the Restricted Shares shall be legended to reflect, certain trading restrictions under applicable securities laws (including particularly the Securities and Exchange Commission's Rule 144). Recipient hereby agrees to execute such documents and take such actions as the Company may require with respect to state and federal securities laws and any restrictions on the resale of such shares which may pertain. Recipient further acknowledges that the securities represented by the Award have been registered under the 1933 Act and all applicable state securities acts. 5. Execution of Agreement; Issuance of Restricted Stock. Recipient shall execute the Agreement within 30 days after receipt of same or the Agreement and the Award shall be null and void ab initio. Within a reasonable time after the date of execution of the Agreement, the Company shall cause the Restricted Shares to be issued to Recipient. 6. Withholding. Recipient shall pay in cash (or have withheld from his normal pay) or, if permitted by the Board or the Committee, in shares of Common Stock held for the minimum period of time as specified in Section 6.8 of the Plan an amount equal to the amount, if any, which the Company is required at any time to withhold under such tax withholding requirements, which is sufficient to fully satisfy the tax withholding requirements of the Internal Revenue Code of 1986, as amended, and of any applicable state or local tax laws. 7. Other Terms and Conditions. In addition to the terms and conditions set forth herein, the Award is subject to and governed by the terms and conditions set forth in the Plan, each of which is hereby incorporated by reference. In the event of any conflict between the provisions of the Agreement and the Plan, the Plan shall control. 8. Notices. All notices or other communications hereunder shall be in writing and shall be effective (i) when personally delivered by courier (including overnight carriers) or otherwise to the party to be given such notice or other communication or (ii) on the third business day following the date deposited in the United States mail if such notice or other communication is sent by certified or registered mail with return receipt requested and postage thereon fully prepaid. The addresses for such notices shall be as follows: If to the Company: SED International Holdings, Inc. Attention: Corporate Secretary 4916 North Royal Atlanta Drive Tucker, Georgia 30085 If to Recipient: __________________________ __________________________ __________________________ __________________________ Any party hereto, by notice of the other party hereunder, may change its address for receipt of notices hereunder. 9. Miscellaneous. (a) Limitation of Rights. The granting of the Award and the execution of the Agreement shall not give Recipient any rights to similar grants in future years or any right to be retained in the employ or service of the Company or to interfere in any way with the right of the Company to terminate Recipient's employment or services at any time. (b) Voting Rights and Dividends. Upon issuance of the Restricted Shares, Recipient shall have the rights of a shareholder to vote the Restricted Shares and to receive all dividends or other distributions paid or made with respect to such Restricted Shares. (c) Severability. If any term, provision, covenant or restriction contained in the Agreement is held by a court or a federal regulatory agency of competent jurisdiction to be invalid, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions contained in the Agreement shall remain in full force and effect, and shall in no way be affected, impaired or invalidated. (d) Controlling Law. The Agreement shall be construed and enforced in accordance with the laws of Georgia. (e) Construction. The Agreement, together with the Plan, contains the entire understanding between the parties and supersedes any prior understanding and agreements between them representing the subject matter hereof. There are no representations, agreements, arrangements or understandings, oral or written, between and among the parties hereto relating to the subject matter hereof which are not fully expressed herein other than in the Plan. (f) Headings. Section and other headings contained in the Agreement are for reference purposes only and are in no way intended to describe, interpret, define or limit the scope, extent or intent of the Agreement or any provision hereof. IN WITNESS WHEREOF, the parties hereto have executed the Agreement as of the date first above written. SED INTERNATIONAL HOLDINGS, INC. By:_____________________________________ Title: _________________________________ RECIPIENT _________________________________________ Signature _________________________________________ Print or Type Name EX-10.34 5 THIRD AMENDMENT TO EMPLOYMENT AGREEMENT THIS THIRD AMENDMENT TO EMPLOYMENT AGREEMENT is made this 7th day of June, 1999, effective as of July 1, 1999, between SED INTERNATIONAL, INC., a Georgia corporation (the "Subsidiary") and a wholly-owned subsidiary of SED INTERNATIONAL HOLDINGS, INC., a Georgia corporation, and Gerald Diamond, an individual resident of the State of Georgia (the "Employee"). W I T N E S S E T H: WHEREAS, on November 7, 1989, Employee and the Subsidiary entered into an Employment Agreement (the "Agreement") setting forth the terms and conditions of Employee's employment with the Subsidiary; and WHEREAS, effective July 1, 1991, Employee and the Subsidiary entered into the First Amendment to the Employment Agreement, modifying certain terms and conditions of Employee's employment with the Subsidiary; and WHEREAS, effective July 1, 1998, Employee and the Subsidiary entered into the Second Amendment to the Employment Agreement, modifying certain terms and conditions of Employee's employment with the Subsidiary; and WHEREAS, the Subsidiary and Employee agree that it is in the best interest of both parties to make certain further modifications to the terms and conditions of Employee's employment with the Subsidiary. NOW, THEREFORE, in consideration of the foregoing, the continued employment of the Employee, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. AMENDMENT TO SECTION 3(H) OF THE AGREEMENT. Pursuant to Section 15(d) of the Agreement, Section 3(h) is hereby deleted in its entirety and replaced by the following paragraphs: (h) If a Change of Control occurs while the Employee is employed by the Subsidiary during the term of this Agreement, or during any extension thereof, and: (1) the Employee's employment is terminated involuntarily, or voluntarily by the Employee based on (i) material changes in the nature or scope of the Employee's duties or employment, (ii) a reduction in compensation of the Employee made without the Employee's consent, (iii) a relocation of the Subsidiary's executive offices other than in compliance with the provisions of Section 2(b) of this Agreement, or (iv) a good faith determination made by the Employee, upon consultation with the Board of Directors of the Subsidiary, that it is necessary or appropriate for the Employee to relocate from the Atlanta, Georgia Metropolitan Area to enable Employee to perform his duties hereunder, the Employee may, in his sole discretion, give written notice within thirty (30) days after the date of termination of employment to the Secretary or Assistant Secretary of the Subsidiary that he is exercising his rights hereunder and requests payment of the amounts provided for under this Section 3(h); or (2) the Employee gives written notice of his termination of employment for any reason concurrently with the time a Change of Control occurs or any time within thirty (30) days after the date the Change of Control becomes effective to the Secretary or Assistant Secretary of the Subsidiary, he may exercise his rights hereunder and request payment of the amounts provided for under this Section 3(h) (the notice provided pursuant to Subsection 3(h)(1) or Subsection 3(h)(2) is referred to as the "Notice of Exercise"). If the Employee gives a Notice of Exercise to receive the payments provided for hereunder, the Subsidiary shall pay to or for the benefit of the Employee, immediately upon the Subsidiary's receipt of the Notice of Exercise, a single cash payment for damages suffered by the Employee by reason of the Change in Control (the "Executive Payment") in an amount equal to (as determined in accordance with Section 280G(d) (4) of the Code) all annual salary, Bonuses and other benefits owing to Employee for the period from Employee's date of termination hereunder through the remainder of the Initial Term of this Agreement, as may be extended; provided, however, in the event the period from the date of Employee's termination hereunder through the remainder of the Initial Term of this Agreement, as may be extended, is less than twelve (12) months, then the Employee shall receive an Executive Payment equal to the sum of (as determined in accordance with Section 280G(d)(4) of the Code) (i) the current annual salary and the value of all other benefits payable to the Employee annualized for a twelve (12) month period, and (ii) an amount equal to any Bonus that would have been paid for such period of less than twelve (12) months based on an extrapolation of SEC's Pretax Adjusted Annual Income for the full quarterly periods from the end of the most recent fiscal year to the date of termination; and further provided, however, if Employee's termination of employment hereunder occurs in the first fiscal quarter of a fiscal year, then the Bonus shall be based on SEC's Pretax Adjusted Annual Income for the immediately preceding fiscal year. The Executive Payment shall be in addition to and shall not be offset or reduced by (i) any other amounts that have been earned or accrued or that have otherwise become payable or will become payable to the Employee or his beneficiaries, but have not been paid by SEC or the Subsidiary at the time the Employee gives the Notice of Exercise including, without limitation, salary, bonuses, severance pay, consulting fees, disability benefits, termination benefits, retirement benefits, life and health insurance benefits or any other compensation or benefit payment that is part of any previous, current or future contract, plan or agreement, written or oral, and (ii) any indemnification payments that may have accrued but not paid or that may thereafter become payable to the Employee pursuant to the provisions of SEC's and the Subsidiary's Articles of Incorporation, Bylaws or similar policies, plans or agreements relating to indemnification of directors and officers of SEC and the Subsidiary under certain circumstances. The Executive Payment shall not be reduced by any present value calculations. In the event the Employee dies during the term of this Agreement, the Employee's legal representative shall be entitled to receive the Executive Payment, provided that the Notice of Exercise has been or is given either by the Employee or his legal representative, as the case may be. 2. OTHER PROVISIONS OF THE AGREEMENT. Except as otherwise provided herein, all other provisions of the Agreement shall remain in full force and effect and Employee's employment thereunder shall continue on the terms described therein throughout the term of the Agreement, as amended hereby. IN WITNESS WHEREOF, the parties have duly executed and delivered this Third Amendment to Employment Agreement as of the day and year first indicated above. SED INTERNATIONAL, INC. By: _______________________________________ Name: RAY D. RISNER Title: PRESIDENT AND COO _____________________________________(SEAL) Gerald Diamond (Employee) EX-10.35 6 FOURTH AMENDMENT TO EMPLOYMENT AGREEMENT THIS FOURTH AMENDMENT TO EMPLOYMENT AGREEMENT is made this 7th day of June, 1999, effective as of July 1, 1999, between SED INTERNATIONAL, INC., a Georgia corporation (the "Subsidiary") and a wholly-owned subsidiary of SED INTERNATIONAL HOLDINGS, INC., a Georgia corporation, and Jean Diamond, an individual resident of the State of Georgia (the "Employee"). W I T N E S S E T H: WHEREAS, on November 7, 1989, Employee and the Subsidiary entered into an Employment Agreement (the "Agreement") setting forth the terms and conditions of Employee's employment with the Subsidiary; and WHEREAS, effective July 1, 1991, Employee and the Subsidiary entered into the First Amendment to the Employment Agreement, modifying certain terms and conditions of Employee's employment with the Subsidiary; and WHEREAS, effective July 1, 1998, Employee and the Subsidiary entered into the Second Amendment to the Employment Agreement, modifying certain terms and conditions of Employee's employment with the Subsidiary; and WHEREAS, effective December 1, 1998, Employee and the Subsidiary entered into the Third Amendment to the Employment Agreement, modifying certain terms and conditions of Employee's employment with the Subsidiary; and WHEREAS, the Subsidiary and Employee agree that it is in the best interest of both parties to make certain further modifications to the terms and conditions of Employee's employment with the Subsidiary. NOW, THEREFORE, in consideration of the foregoing, the continued employment of the Employee, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. AMENDMENT TO SECTION 3(F) OF THE AGREEMENT. Pursuant to Section 15(d) of the Agreement, Section 3(f) is hereby deleted in its entirety and replaced by the following paragraphs: (f) If a Change of Control occurs while the Employee is employed by the Subsidiary during the term of this Agreement, or during any extension thereof, and: (1) the Employee's employment is terminated involuntarily, or voluntarily by the Employee based on (i) material changes in the nature or scope of the Employee's duties or employment, (ii) a reduction in compensation of the Employee made without the Employee's consent, (iii) a relocation of the Subsidiary's executive offices other than in compliance with the provisions of Section 2(b) of this Agreement, or (iv) a good faith determination made by the Employee, upon consultation with the Board of Directors of the Subsidiary, that it is necessary or appropriate for the Employee to relocate from the Atlanta, Georgia Metropolitan Area to enable Employee to perform her duties hereunder, the Employee may, in her sole discretion, give written notice within thirty (30) days after the date of termination of employment to the Secretary or Assistant Secretary of the Subsidiary that she is exercising her rights hereunder and requests payment of the amounts provided for under this Section 3(f); or (2) the Employee gives written notice of her termination of employment for any reason concurrently with the time a Change of Control occurs or any time within thirty (30) days after the date the Change of Control becomes effective to the Secretary or Assistant Secretary of the Subsidiary, she may exercise her rights hereunder and request payment of the amounts provided for under this Section 3(f) (the notice provided pursuant to Subsection (f)(1) or Subsection (f)(2) is referred to as the "Notice of Exercise"). If the Employee gives a Notice of Exercise to receive the payments provided for hereunder, the Subsidiary shall pay to or for the benefit of the Employee, immediately upon the Subsidiary's receipt of the Notice of Exercise, a single cash payment for damages suffered by the Employee by reason of the Change in Control (the "Executive Payment") in an amount equal to (as determined in accordance with Section 280G(d) (4) of the Code) all annual salary and other benefits owing to Employee for the period from Employee's date of termination hereunder through the remainder of the Initial Term of this Agreement, as may be extended; provided, however, in the event the period from the date of Employee's termination hereunder through the remainder of the Initial Term of this Agreement, as may be extended, is less than twelve (12) months, then the Employee shall receive an Executive Payment equal to the sum of (as determined in accordance with Section 280G(d)(4) of the Code) the current annual salary and the value of all other benefits payable to the Employee annualized for a twelve (12) month period. The Executive Payment shall be in addition to and shall not be offset or reduced by (i) any other amounts that have been earned or accrued or that have otherwise become payable or will become payable to the Employee or her beneficiaries, but have not been paid by SEC or the Subsidiary at the time the Employee gives the Notice of Exercise including, without limitation, salary, bonuses, severance pay, consulting fees, disability benefits, termination benefits, retirement benefits, life and health insurance benefits or any other compensation or benefit payment that is part of any previous, current or future contract, plan or agreement, written or oral, and (ii) any indemnification payments that may have accrued but not paid or that may thereafter become payable to the Employee pursuant to the provisions of SEC's and the Subsidiary's Articles of Incorporation, Bylaws or similar policies, plans or agreements relating to indemnification of directors and officers of SEC and the Subsidiary under certain circumstances. The Executive Payment shall not be reduced by any present value calculations. In the event the Employee dies during the term of this Agreement, the Employee's legal representative shall be entitled to receive the Executive Payment, provided that the Notice of Exercise has been or is given either by the Employee or her legal representative, as the case may be. 2. OTHER PROVISIONS OF THE AGREEMENT. Except as otherwise provided herein, all other provisions of the Agreement shall remain in full force and effect and Employee's employment thereunder shall continue on the terms described therein throughout the term of the Agreement, as amended hereby. IN WITNESS WHEREOF, the parties have duly executed and delivered this Fourth Amendment to Employment Agreement as of the day and year first indicated above. SED INTERNATIONAL, INC. By: _______________________________________ Name: RAY D. RISNER Title: PRESIDENT AND COO _____________________________________(SEAL) Jean Diamond (Employee) EX-10.36 7 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (the "Agreement") is made as of the first day of June, 1999 between Ronell Rivera (hereinafter referred to as "Employee") and SED International, Inc., a Georgia Corporation (hereinafter referred to as the "Company"). W I T N E S S E T H : WHEREAS, the Company desires to enter into this Agreement regarding Employee's employment by the Company, and Employee desires to accept the terms of said employment; NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, it is hereby agreed as follows: 1. EMPLOYMENT OF EMPLOYEE. This Agreement is effective for a period of one (1) year commencing on June 1, 1999, unless this Agreement is sooner terminated pursuant to the provisions hereof. Employee agrees to such employment on the terms and conditions herein set forth and agrees to devote his best efforts to his duties under this Agreement and to perform such duties diligently and efficiently and in accordance with the written policies of the Company. During the term of this Agreement, Employee shall be employed as President, SED Magna, and Senior V.P. Latin America Division, reporting to the President, SED International. In Employee's capacity as President, SED Magna, Employee shall be responsible for all operations of SED Magna, oversight management of the Company's Latin America Division consisting of Argentina, Columbia, Miami and Puerto Rico and such other and further duties as may from time to time become necessary for management of the Company and the Latin American Division, as determined by either the Chief Executive Officer or President of SED International. Employee shall devote substantially all of Employee's business time, attention and energies to the business of the Company, shall act at all times in the best interests of the Company, and shall not during the term of this Agreement be engaged in any other significant business activity, whether or not such business is pursued for gain, profit or other pecuniary advantage, except as contemplated by this Agreement. 2. COMPENSATION AND BENEFITS. (a) Employee's annual base salary during the term of this Agreement shall be $160,000. (b) Employee's base salary shall be paid by the Company pursuant to its customary payroll practices. (c) Furthermore, the employee will receive a Brazilian Premium as additional compensation as a result of accepting the position to relocate himself and his family to Sao Paulo, Brazil. The Brazilian Premium will be payable only as long as the employee is stationed in Sao Paulo, Brazil and will be pro-rated over the year if the employee vacates the Sao Paulo position before one year from June 1, 1999. The Brazilian Premium consists of the following: [bullet] Additional compensation equal to U.S. $60,000 per year payable in Reals. [bullet] Exclusive use of a four-bedroom apartment in the Paraiso district of Sao Paulo with the rent, utilities and maintenance costs paid by SED Magna after final approval by the President of the Company of the original lease. [bullet] Furniture at a cost limited to $20,000 for an unfurnished apartment in Sao Paulo. [bullet] Four-family round-trip airline tickets (equal to 16 tickets) between Sao Paulo and Miami for one year beginning on June 1, 1999 on a coach level basis. Arrangements for these trips, with reasonable notice, must be made through the Company. [bullet] $1 million term life insurance for the benefit of employee's family paid for by the Company for the duration of this assignment. [bullet] An incentive of U.S. $60,000 if the performance of SED Magna equals or exceeds U.S. $1 million in net income fully taxed U.S. GAAP basis for the twelve months beginning June 1, 1999. (d) The Company or SED Magna will pay off the lease balance on the Employee's Expedition not to exceed $5,790.84. SED Magna will lease or buy, during the term of the Employee's assignment at SED Magna, one four-door, mid-size vehicle for his use in Brazil. (e) The Company shall provide Employee such medical coverage and other benefits as mandated by Brazilian law for employees of SED Magna, subject to Employee meeting any eligibility or other requirements of such coverages or benefits. Employee and immediate family members will have medical and dental coverage equal to coverage as if the Employee was an U.S. Employee of the Company, paid for by SED Magna. (f) Employee shall be entitled to three (3) weeks of paid vacation per year. (g) Employee and family will be covered under the Company's kidnap insurance policy. 3. PERSONNEL POLICIES. Employee shall conduct himself at all times in a businesslike and professional manner as appropriate for a person in his position and shall represent the Company in all respects as complies with good business and ethical practices. 4. BUSINESS EXPENSES. Employee shall be reimbursed by the Company for ordinary, necessary and reasonable business expenses consistent with the Company's policies concerning reimbursement of such expenses; provided that, Employee shall first document said business expenses in the manner generally required by the Company under its policies and procedures, and in any event, the manner required to meet applicable regulations of the Internal Revenue Service relating to the deductibility of such expenses. 5. LOCATION OF EMPLOYMENT. From June 1, 1999 to May 31, 2000 the position and place of employment is in Sao Paulo, Brazil at SED Magna Distribuidora LDTA. 6. TERMINATION. (a) This Agreement may be terminated for good cause by the Company upon written notice to Employee. As used herein, "good cause" means: (i) any act of fraud or malfeasance; (ii) any act of theft or embezzlement; (iii) the breach of any material provision of this Agreement by Employee (provided that such breach is not cured by Employee within 30 days of receiving written notice of such breach from the Company); (iv) failure to comply with the written directions of the President of SED International provided that those directions would not require the Employee to break any law in the U.S. or Brazil; (v) engaging in any unlawful harassment or discrimination; (vi) the conviction of Employee of any crime involving moral turpitude (whether felony or misdemeanor) or involving any felony; (vii) any act of moral turpitude by Employee that materially adversely affects the Company or its business reputation; (viii) violation of state or federal securities laws; (ix) violation of the laws, rules and regulations of any stock exchange, over-the-counter trading system, including the Nasdaq Stock Market, Inc., or the National Association of Securities Dealers, Inc. (b) This Agreement also shall terminate immediately upon the death of Employee, or immediately upon written notice to Employee if Employee shall at any time be unable to perform the essential functions of his job hereunder, by reason of a physical or mental illness or condition, with or without physical accommodation, for a continuous period of 180 consecutive days, as certified by a physician or physicians selected by the Board of Directors of the Company. (c) In the event of termination under subsections (a) or (b) of this Section 6, the salary and other benefits provided herein shall be paid to Employee up to the effective date of termination of this Agreement, and not thereafter, subject to any benefit continuation requirements under applicable laws or regulations. (d) The Company may terminate this Employment Agreement at any time without "good cause" upon written notice to Employee. In the event of such termination, Company shall pay to Employee the (i) greater of (a) Employee's base salary, less applicable withholdings, for the remaining period of the Agreement or (b) three (3) months of base salary, less applicable withholdings and for the remaining period of the Agreement, the Brazilian premium pro rated for period of time employed at SED Magna, and vesting of options and grants. All such payments owing under this Section shall be payable concurrently at the time of termination. Other than the payments of the base salary, benefits amounts and Brazilian premium as specified herein, no further payments of any kind shall be made to Employee. 7. PRODUCTS, NOTES, RECORDS AND SOFTWARE. All memoranda, notes, records and other documents and computer software created, developed, compiled or used by Employee or made available to Employee during the term of this Agreement concerning or relative to the business of the Company, including without limitation, all customer data, marketing and sales information, billing information, service data and other technical material of the Company, is the Company's property. Employee agrees to deliver all such materials to the Company within three (3) business days after the termination of this Agreement. 8. NONDISCLOSURE. Employee acknowledges and agrees that during the term of this Agreement, he will have access to and become familiar with information that the parties acknowledge to be confidential, valuable and uniquely proprietary information regarding the Company, its customers and employees. Employee further acknowledges that the disclosure or unauthorized use of Trade Secrets or confidential information by Employee would harm the Company's business. Employee therefore promises and agrees that, during the term of Employee's employment and for two (2) years thereafter, Employee shall not use or disclose, directly or indirectly, for any purpose any such confidential or proprietary information which includes, without limitation, technical materials of the Company, sales and marketing information, customer account records, billing information, training and operations information, materials and memoranda, personnel records and pricing and financial information relating to the business, accounts, vendors, suppliers, customers, prospective customers, employees and affairs of the Company. Employee further agrees that Employee will not, at any time during or after the term of Employee's employment with the Company, use, reveal or divulge any Trade Secrets as defined under applicable state law. 9. RESTRICTIVE COVENANTS. Employee acknowledges and agrees that, because of his employment he has access to confidential or proprietary information concerning vendors, suppliers and customers of the Company and has established relationships with such vendors, suppliers and customers. In exchange for valuable consideration to be given by the Company to Employee, as provided herein, Employee agrees to the following provisions: (a) Employee agrees that during the term of his employment and for a period of one (1) year thereafter, if the Employee leaves voluntarily or Employee is terminated for "good cause," Employee shall not, directly or indirectly, either individually, in partnership, jointly, or in conjunction with, or on behalf of, any person, firm, partnership, corporation, or unincorporated association or entity of any kind, solicit or contact, for the purpose of providing products or services the same as or substantially similar to those provided by the Company, any person or entity that, during the term of Employee's employment with the Company, was a customer of the Company with whom Employee had contact during the last twelve (12) months of his employment, or was a prospective customer of the Company with whom Employee had contact during the last twelve (12) months of his employment; (b) Employee agrees that during the term of his employment and for a period of one (1) year thereafter, if the Employee leaves voluntarily or Employee is terminated for "good cause," Employee shall not, directly or indirectly, either individually, in partnership, jointly, or in conjunction with, or on behalf of, any person, firm, partnership, corporation, or unincorporated association or entity of any kind, hire or solicit, or attempt to hire or solicit, for employment any person who was employed by the Company up to 90 days prior to the date of termination of this Agreement, or persuade or attempt to persuade any such person to terminate or modify his or her employment relationship, whether or not pursuant to a written agreement, with the Company; and (c) Employee agrees that during the term of his employment, he shall not, directly or indirectly, either individually, in partnership, jointly, or in conjunction with, or on behalf of, any person, firm, partnership, corporation, or unincorporated association or entity of any kind (i) provide operational or management services to the following competitors of the Company: Ingram Micro, Inc., Tech Data Corp., CHS Electronics, Inc., Microage, Inc., ASI Corp. or Supercom, Inc., or any of their respective affiliates, which purchase, market and sell computer products, cellular telephones and related products; or (ii) otherwise obtain any interest in (except as a stockholder holding less than two percent (2%) interest in a corporation which is traded on a national exchange or over-the-counter), or perform services for, or otherwise participate in the ownership, management, or control of, the companies listed above. Employee acknowledges that the time restrictions and scope included in this Section 9 are as narrow as possible and cannot be reduced and still adequately protect the Company's business interests. Employee acknowledges that the scope of this Section 9 is reasonable and necessary to protect the Company's legitimate business interests. 10. REMEDY FOR BREACH. Employee agrees that the damage to the Company resulting from any actual or threatened breach by Employee of the covenants contained in Sections 7, 8 and 9 of this Agreement would be immediate, irreparable and difficult to measure, and that money damages would not be an adequate remedy. Therefore, Employee agrees that the Company shall be entitled to specific performance of the covenants in such sections or injunctive relief, by temporary or permanent injunction or other appropriate judicial remedy, writ or order, or both, in addition to any damages which the Company may be legally entitled to recover. 11. SURVIVAL. The provisions of Sections 7, 8, 9 and 10 shall survive termination of this Agreement. 12. INVALIDITY OF ANY PROVISION. It is the intent of the parties hereto that the provisions of this Agreement shall be enforced to the fullest extent permissible under the laws and public policies of each state and jurisdiction in which such enforcement is sought, but that the unenforceability (or the modification to conform with such laws or public policies) of any provision hereof shall not render unenforceable or impair the remainder of this Agreement which shall be deemed amended to delete or modify, as necessary, the invalid or unenforceable provisions. The parties further agree to alter the balance of this Agreement in order to render the same valid and enforceable. 13. APPLICABLE LAW. This Agreement shall be construed and enforced in accordance with the laws of the State of Florida. 14. WAIVER OF BREACH. The waiver by the Company of a breach by Employee of any provision of this Agreement may only be made in writing and shall not operate or be construed as a waiver of any subsequent breach by Employee. 15. SUCCESSORS AND ASSIGNS. This Agreement shall inure to the benefit of the Company, its subsidiaries and affiliates, and their respective successors and assigns. 16. ENTIRE AGREEMENT. This instrument contains the entire agreement of the parties and supersedes all prior agreements regarding Employee's employment by the Company, including, but not limited to, oral discussions, letter agreements, or any other document concerning the possibility of employment with the Company. This Agreement may only be changed by an agreement in writing signed by the party against whom enforcement of any waiver, changes, modification, extension or discharge is sought. It cannot be changed orally. IN WITNESS WHEREOF, the parties hereto have executed this Agreement under seal as of the date first above shown. EMPLOYEE: _____________________________(SEAL) COMPANY: SED INTERNATIONAL, INC. By:_______________________________ Title:____________________________ (CORPORATE SEAL) EX-10.37 8 $50,000,000 SECOND AMENDED AND RESTATED CREDIT AGREEMENT dated as of August 31, 1999 among SED INTERNATIONAL HOLDINGS, INC. AND SED INTERNATIONAL, INC. as Borrowers, AND WACHOVIA BANK, N.A., as Agent TABLE OF CONTENTS SECOND AMENDED AND RESTATED CREDIT AGREEMENT Page ARTICLE I DEFINITIONS............................................................1 SECTION 1.01. Definitions....................................................1 SECTION 1.02. Accounting Terms and Determinations...........................26 SECTION 1.03. References....................................................26 SECTION 1.04. Use of Defined Terms..........................................26 SECTION 1.05. Terminology...................................................27 ARTICLE II THE CREDITS...........................................................27 SECTION 2.01. Commitments to Lend Syndicated Loans..........................27 SECTION 2.02. Method of Borrowing...........................................29 SECTION 2.03. Notes.........................................................32 SECTION 2.04. Maturity of Loans.............................................32 SECTION 2.05. Interest Rates................................................33 SECTION 2.06. Fees..........................................................35 SECTION 2.07. Optional Termination or Reduction of Commitments...............................................35 SECTION 2.08. Mandatory Termination or Reduction of Commitments...............................................35 SECTION 2.09. Optional Prepayments..........................................35 (i) SECTION 2.10. Mandatory Prepayments.........................................36 SECTION 2.12. General Provisions as to Payments.............................36 SECTION 2.13. Computation of Interest and Fees..............................38 ARTICLE III LETTER OF CREDIT FACILITY.............................................39 SECTION 3.01. Obligation to Issue...........................................39 SECTION 3.02. Types and Amounts.............................................39 SECTION 3.03. Conditions....................................................39 SECTION 3.04. Issuance of Letters of Credit.................................40 (a) Request for Issuance..............................................40 (b) Issuance; Notice of Issuance......................................40 (c) No Extension or Amendment.........................................41 SECTION 3.05. Reimbursement Obligations; Duties of the Issuing Bank..............................................41 (a) Reimbursement...................................................41 (b) Duties of the Agent...............................................42 SECTION 3.06. Participations................................................42 (a) Purchase of Participations........................................42 (b) Sharing of Letter of Credit Payments..............................42 (c) Sharing of Reimbursement Obligation Payments......................43 (d) Documentation.....................................................43 (e) Obligations Irrevocable...........................................43 SECTION 3.07. Payment of Reimbursement Obligations..........................44 (a) Payments to Issuing Bank..........................................44 (b) Recovery or Avoidance of Payments...............................45 SECTION 3.08. Compensation for Letters of Credit and Agent Reporting Requirements....................................46 (a) Letter of Credit Fees and Fronting Fees.........................46 (b) Agent Charges...................................................46 SECTION 3.09. Indemnification; Exoneration..................................46 (a) Indemnification.................................................46 (b) Assumption of Risk by Borrowers.................................47 AT: 1030545v10 (ii) (c) Exoneration.....................................................47 SECTION 3.10. Credit Yield Protection; Capital Adequacy.....................47 ARTICLE IV CONDITIONS TO BORROWINGS..............................................50 SECTION 4.01. Conditions to Closing.........................................50 SECTION 4.02. Conditions to All Borrowings..................................52 ARTICLE V REPRESENTATIONS AND WARRANTIES........................................53 SECTION 5.01. Corporate Existence and Power.................................53 SECTION 5.02. Corporate and Governmental Authorization; No Contravention..........................................53 SECTION 5.03. Binding Effect................................................54 SECTION 5.04. Financial Information.........................................54 SECTION 5.05. No Litigation.................................................54 SECTION 5.06. Compliance with ERISA.........................................55 SECTION 5.07. Compliance with Laws; Payment of Taxes........................55 SECTION 5.08. Subsidiaries..................................................55 SECTION 5.09. Investment Company Act........................................56 SECTION 5.10. Public Utility Holding Company Act............................56 SECTION 5.11. Ownership of Property; Liens..................................56 SECTION 5.12. No Default....................................................56 SECTION 5.13. Full Disclosure...............................................56 SECTION 5.14. Environmental Matters.........................................56 AT: 1030545v10 (iii) SECTION 5.15. Capital Stock.................................................57 SECTION 5.16. Margin Stock..................................................57 SECTION 5.17. Insolvency....................................................58 SECTION 5.18. Y2K Plan......................................................58 ARTICLE VI COVENANTS.............................................................59 SECTION 6.01. Information...................................................59 SECTION 6.02. Inspection of Property, Books and Records.....................62 SECTION 6.03. Maintenance of Existence and Management.......................62 SECTION 6.04. Dissolution...................................................62 SECTION 6.05. Consolidations, Mergers and Sales of Assets...................63 SECTION 6.06. Use of Proceeds...............................................63 SECTION 6.07. Compliance with Laws; Payment of Taxes........................64 SECTION 6.08. Insurance.....................................................64 SECTION 6.09. Change in Fiscal Year.........................................64 SECTION 6.10. Maintenance of Property.......................................65 SECTION 6.11. Environmental Notices.........................................65 SECTION 6.12. Environmental Matters.........................................65 SECTION 6.13. Environmental Release.........................................65 SECTION 6.14. Transactions with Affiliates..................................65 SECTION 6.15. Restricted Payments...........................................66 SECTION 6.16. Loans or Advances.............................................66 SECTION 6.17. Investments...................................................66 AT: 1030545v10 (iv) SECTION 6.18. Negative Pledge...............................................66 SECTION 6.19. Restrictions on Ability of Subsidiaries to Pay Dividends..........................................68 SECTION 6.20. Leverage Ratio................................................68 SECTION 6.21. Fixed Charge Coverage.........................................68 SECTION 6.22. Current Ratio.................................................68 SECTION 6.23. Minimum Profitability.........................................69 SECTION 6.24. Minimum Consolidated Tangible Net Worth.......................69 SECTION 6.25. Distributor Agreements........................................69 SECTION 6.26. Accounts Receivable...........................................69 SECTION 6.27. Inventory.....................................................70 SECTION 6.28. Additional Debt...............................................70 SECTION 6.29. Post-Closing Matters..........................................71 SECTION 6.30. Y2K Compliance................................................71 ARTICLE VII DEFAULTS..............................................................71 SECTION 7.01. Events of Default.............................................71 SECTION 7.02. Notice of Default.............................................75 ARTICLE VIII THE AGENT.............................................................75 SECTION 8.01. Appointment; Powers and Immunities............................75 SECTION 8.02. Reliance by Agent.............................................76 SECTION 8.03. Defaults......................................................77 AT: 1030545v10 (v) SECTION 8.04. Rights of Agent and its Affiliates as a Bank..................77 SECTION 8.05. Indemnification...............................................78 SECTION 8.06 Consequential Damages.........................................78 SECTION 8.07. Payee of Note Treated as Owner................................78 SECTION 8.08. Nonreliance on Agent and Other Banks..........................79 SECTION 8.09. Failure to Act................................................79 SECTION 8.10. Resignation or Removal of Agent...............................79 ARTICLE IX CHANGE IN CIRCUMSTANCES; COMPENSATION.................................80 SECTION 9.01. Basis for Determining Interest Rate Inadequate or Unfair......................................80 SECTION 9.02. Illegality....................................................81 SECTION 9.03. Increased Cost and Reduced Return.............................81 SECTION 9.04. Base Rate Loans or Other Euro-Dollar Loans Substituted for Affected Euro-Dollar Loans................83 SECTION 9.05. Compensation..................................................83 ARTICLE X MISCELLANEOUS.........................................................84 SECTION 10.01. Notices......................................................84 SECTION 10.02. No Waivers...................................................85 SECTION 10.03. Expenses; Documentary Taxes..................................85 SECTION 10.04. Indemnification..............................................85 SECTION 10.05. Setoff; Sharing of Setoffs...................................86 AT: 1030545v10 (vi) SECTION 10.06. Amendments and Waivers.......................................87 SECTION 10.07. No Margin Stock Collateral...................................88 SECTION 10.08. Successors and Assigns.......................................88 SECTION 10.09. Confidentiality..............................................91 SECTION 10.10. Representation by Banks......................................92 SECTION 10.11. Obligations Several..........................................92 SECTION 10.12. Georgia Law..................................................92 SECTION 10.13. Severability.................................................92 SECTION 10.14. Interest.....................................................92 SECTION 10.15. Interpretation...............................................94 SECTION 10.16. Waiver of Jury Trial; Consent to Jurisdiction................94 SECTION 10.17. Counterparts.................................................94 SECTION 10.18. Source of Funds -- ERISA.....................................94 AT: 1030545v10 (vii) EXHIBIT A-1 Form of Syndicated Loan Note EXHIBIT A-2 Form of Swing Loan Note EXHIBIT B Form of Opinion of Special Counsel for the Borrowers EXHIBIT C Form of Opinion of Special Counsel for the Agent EXHIBIT D Form of Assignment and Acceptance EXHIBIT E Form of Notice of Borrowing EXHIBIT F Form of Borrowing Base Certificate EXHIBIT G Form of Notice of Letter of Credit EXHIBIT H Form of Compliance Certificate EXHIBIT I Form of Closing Certificate EXHIBIT J Form of Officer's Certificate EXHIBIT K Form of Landlord Agreement EXHIBIT L Form of Telephone Instruction Letter EXHIBIT M Form of Security Agreement EXHIBIT N Form of FINOVA Intercreditor Agreement EXHIBIT O Form of Subsidiary Guaranty Schedule 5.08 Subsidiaries Schedule 6.28 Debt AT: 1030545v10 (viii) SECOND AMENDED AND RESTATED CREDIT AGREEMENT SECOND AMENDED AND RESTATED CREDIT AGREEMENT dated as of August 31, 1999 among SED INTERNATIONAL HOLDINGS, INC. and SED INTERNATIONAL, INC., jointly and severally, and the BANKS listed on the signature pages hereof and WACHOVIA BANK, N.A., as Agent. This Agreement amends, restates and supersedes that certain Amended and Restated Credit Agreement dated as of August 13, 1997 (the "Existing Credit Agreement"), among the parties to this Agreement. The parties hereto agree as follows: ARTICLE I DEFINITIONS SECTION 1.01. Definitions. The terms as defined in this Section 1.01 shall, for all purposes of this Agreement and any amendment hereto (except as herein otherwise expressly provided or unless the context otherwise requires), have the meanings set forth herein: "Account Debtor" means the person who is obligated on any of the Accounts Receivable or otherwise is obligated as a purchaser or lessee of any of the Inventory. "Accounts Receivable" means all rights of either Borrower to payment for goods sold or leased, or to be sold or to be leased, or for services rendered or to be rendered, howsoever evidenced or incurred, including, without limitation, all accounts, instruments, chattel paper and general intangibles, all returned or repossessed goods and all books, records, computer tapes, programs and ledger books arising therefrom or relating thereto, whether now owned or hereafter acquired or arising. "Adjusted London Interbank Offered Rate" has the meaning set forth in Section 2.05(c). "Affiliate" of any relevant Person means (i) any Person that directly, or indirectly through one or more intermediaries, controls the relevant Person (a "Controlling Person"), (ii) any Person (other than the relevant Person or a Subsidiary of the relevant Person) which is controlled by or is under common control with a Controlling Person, or (iii) any Person (other than a Subsidiary of the relevant Person) of which the relevant Person owns, directly or indirectly, 20% or more of the common stock or equivalent equity interests. As used herein, the term "control" means possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of a Person, whether through the ownership of voting securities, by contract or otherwise. "Agent" means Wachovia Bank, N.A., a national banking association organized under the laws of the United States of America, in its capacity as agent for the Banks hereunder, and its successors and permitted assigns in such capacity. "Agreement" means this Second Amended and Restated Credit Agreement, together with all amendments and supplements hereto. "Aggregate Commitments" means, at any time, the aggregate amount of Commitments of all of the Banks. "Aggregate Principal Amount Outstanding" means, at any time, the sum of (i) the aggregate outstanding principal amount of the Syndicated Loans to both Borrowers, (ii) the aggregate outstanding principal amount of the Swing Loans to both Borrowers and (iii) the aggregate outstanding principal amount of the Letter of Credit Obligations with respect to both Borrowers. "Aggregate Unused Commitments" means at any date, an amount equal to the Aggregate Commitments less the Aggregate Principal Amount Outstanding (but without giving effect to any outstanding Swing Loans). "Applicable Margin" has the meaning set forth in Section 2.05(a). "Assignee" has the meaning set forth in Section 10.08(c). "Assignment and Acceptance" means an Assignment and Acceptance executed in accordance with Section 10.08(c) in the form attached hereto as Exhibit D. "Assignment of Claims Acts" means The Assignment of Claims Act of 1940, as may be amended from time to time, and any Federal, State, county or municipal statute, regulation, ordinance, constitution or charter, now or hereafter existing, similar in effect thereto, as determined by the Agent in its sole discretion. "Authority" has the meaning set forth in Section 9.02. "Availability" means the amount of Loans which the Borrowers are entitled to borrow at any time pursuant to Section 2.01. "Bank" means each bank listed on the signature pages hereof as having a Commitment, and its successors and assigns. "Base Rate" means for any Base Rate Loan for any day, the rate per annum equal to the higher as of such day of (i) the Prime Rate, or (ii) one-half of one percent above the Federal Funds Rate. For purposes of determining the Base Rate for any day, changes in the Prime Rate or the Federal Funds Rate shall be effective on the date of each such change. "Base Rate Loan" means a Loan which bears or is to bear interest at a rate based upon the Base Rate, and is to be made as a Base Rate Loan pursuant to the applicable Notice of Borrowing, Section 2.02(f), or Article IX, as applicable. "Borrower" means, both individually and collectively, as the context shall require, SEDH and SEDI, and their respective successors and permitted assigns, as joint and several primary obligors with respect to the principal of and interest on all Loans and Letter of Credit Obligations, all yield protection, compensation and indemnification obligations, and all fees, costs, expenses and other amounts payable hereunder. "Borrowing" means a borrowing hereunder consisting of Loans made to either Borrower (i) at the same time by all of the Banks, in the case of a Syndicated Loan, or (ii) separately by Wachovia, in the case of a Swing Borrowing, in each case pursuant to Article II. A Borrowing is a "Syndicated Borrowing" if such Loans are made pursuant to Section 2.01(a), (c) or (d), or a "Swing Borrowing" if such Loans are made pursuant to Section 2.01(b). A Borrowing is a "Base Rate Borrowing" if such Loans are Base Rate Loans, or a "Euro-Dollar Borrowing" if such Loans are Euro-Dollar Loans. "Borrowing Base" means the following sum: (i) (A) an amount equal to 75% (or such greater or lesser percentage which the Agent shall establish by written notice to the Borrowers in its good faith discretion) of the face dollar amount of Eligible Accounts as at the date of determination, PLUS (B) an amount equal to the lesser of (x) 40% (or such greater or lesser percentage which the Agent shall establish by written notice to the Borrowers in its good faith discretion) of the dollar amount of the Eligible Inventory, valued at the lower of its FIFO ("first-in, first-out") cost or market value, as at the date of determination, and (y) the lesser of (1) 50% of the Aggregate Commitments, and (2) the amount of clause (i)(A) of this definition, MINUS (ii) (A) the FINOVA Reserve, PLUS (B) any additional reserve determined by the Agent, in its sole discretion, as the Agent deems necessary as security for payment of the Obligations. "Borrowing Base Certificate" has the meaning given it in Section 6.01(f). "Borrowing Base Reporting Date" means each date the Borrowers deliver Borrowing Base Certificates to the Agent. "Capital Stock" means any nonredeemable capital stock of either Borrower or any Consolidated Subsidiary (to the extent issued to a Person other than such Borrower), whether common or preferred. "CERCLA" means the Comprehensive Environmental Response Compensation and Liability Act, 42 U.S.C. ss. 9601 et. seq. and its implementing regulations and amendments. "CERCLIS" means the Comprehensive Environmental Response Compensation and Liability Inventory System established pursuant to CERCLA. "Change of Law" shall have the meaning set forth in Section 9.02. "Closing Certificate" has the meaning set forth in Section 4.01(e). "Closing Date" means August 31, 1999. "Code" means the Internal Revenue Code of 1986, as amended, or any successor Federal tax code. "Collateral" has the meaning set forth in each Security Agreement. "Commitment" means, with respect to each Bank, (i) the amount set forth opposite the name of such Bank on the signature pages hereof, and (ii)as to any Bank which enters into any Assignment and Acceptance (whether as transferor Bank or as Assignee thereunder), the amount of such Bank's Commitment after giving effect to such Assignment and Acceptance, in each case as such amount may be reduced from time to time pursuant to Sections 2.07 and 2.09. "Compliance Certificate" has the meaning set forth in Section 6.01(c). "Compliance Reporting Date" means each date the Borrowers deliver Compliance Certificates to the Agent. "Consolidated Debt" means at any date the Debt of the Borrowers and the Consolidated Subsidiaries, determined on a consolidated basis as of such date. "Consolidated Fixed Charges" for any period means the sum of (i) Consolidated Interest Expense for such period, and (ii) all payment obligations of the Borrowers and the Consolidated Subsidiaries for such period under all operating leases and rental agreements. "Consolidated Interest Expense" for any period means interest, whether expensed or capitalized, in respect of Debt of the Borrowers or any of its Consolidated Subsidiaries outstanding during such period. "Consolidated Net Income" means, for any period, the Net Income of the Borrowers and the Consolidated Subsidiaries determined on a consolidated basis, but excluding (i) extraordinary items, (ii) gains or losses on sales of assets, and (iii) any equity interests of the Borrowers or any Subsidiary in the unremitted earnings of any Person that is not a Subsidiary. "Consolidated Operating Profits" means, for any period, the Operating Profits of the Borrowers and the Consolidated Subsidiaries. "Consolidated Subsidiary" means at any date any Subsidiary or other entity the accounts of which, in accordance with GAAP, would be consolidated with those of either Borrower in its consolidated financial statements as of such date. "Consolidated Tangible Net Worth" means, at any time, Stockholders' Equity, less the sum of the value, as set forth or reflected on the most recent consolidated balance sheet of the Borrowers and the Consolidated Subsidiaries, prepared in accordance with GAAP, of: (A) Any surplus resulting from any write-up of assets subsequent to December 31, 1998; (B) All assets which would be treated as intangible assets for balance sheet presentation purposes under GAAP, including without limitation goodwill (whether representing the excess of cost over book value of assets acquired, or otherwise), trademarks, tradenames, copyrights, patents and technologies, and unamortized debt discount and expense; (C) To the extent not included in (B) of this definition, any amount at which shares of Capital Stock of the Borrowers appear as an asset on the balance sheet of the Borrowers and the Consolidated Subsidiaries; (D) Loans or advances to stockholders, directors, officers or employees; and (E) To the extent not included in (B) of this definition, deferred expenses. "Consolidated Total Assets" means, at any time, the total assets of the Borrowers and the Consolidated Subsidiaries, determined on a consolidated basis, as set forth or reflected on the most recent consolidated balance sheet of the Borrowers and the Consolidated Subsidiaries, prepared in accordance with GAAP. "Controlled Group" means all members of a controlled group of corporations and all trades or businesses (whether or not incorporated) under common control which, together with either Borrower, are treated as a single employer under Section 414 of the Code. "Current Ratio" means, at any time of any determination thereof, the ratio of (a) the amount of all Accounts Receivable plus Inventory to (b) the amount of all accounts payable plus the outstanding balance of all Loans and Letter of Credit Obligations plus the FINOVA Indebtedness. Accounts Receivable and Inventory, for the purposes of this definition, shall be valued as set forth in the definitions of "Eligible Accounts" and "Eligible Inventory". "Debt" of a Person means all liabilities, obligations and indebtedness of such Person, of any kind or nature, whether now or hereafter owing, arising, due or payable, howsoever evidenced, created, incurred, acquired or owing, and whether primary, secondary, direct, contingent, fixed or otherwise, including, without in any way limiting the generality of the foregoing: (i) all obligations of such Person for borrowed money, (ii) all obligations of such Person evidenced by bonds, debentures, notes or other similar instruments, (iii) all obligations of such Person to pay the deferred purchase price of property or services, except trade accounts payable arising in the ordinary course of business, (iv) all obligations of such Person as lessee under capital leases, (v) all obligations of such Person to reimburse any bank or other Person in respect of amounts payable under a banker's acceptance, (vi) all Redeemable Preferred Stock of such Person (in the event such Person is a corporation), (vii) all obligations of such Person to reimburse any bank or other Person in respect of amounts paid or to be paid or to be paid under a letter of credit or similar instrument, (viii) all Debt of others secured by a Lien on any asset of such Person, whether or not such Debt is assumed by such Person, (ix) all obligations of such Person with respect to interest rate protection agreements, foreign currency exchange agreements or other hedging arrangements (valued as the termination value thereof computed in accordance with a method approved by the International Swap Dealers Association and agreed to by such Person in the applicable hedging agreement, if any), (x) all Debt of others Guaranteed by such Person, (xi) all accrued pension fund and other employee benefit plan obligations and liabilities, (xii) deferred taxes, and (xiii) all other liabilities of such Person, including, but not limited to trade payables and other monetized commercial obligations. "Default" means any condition or event which constitutes an Event of Default or which with the giving of notice or lapse of time or both would, unless cured or waived, become an Event of Default. "Default Rate" means, with respect to any Loan, on any day, the sum of 2% plus the then highest interest rate (including the Applicable Margin) which may be applicable to any Loans hereunder (irrespective of whether any such type of Loans are actually outstanding hereunder). "Distributor Agreements" means any agreement between a manufacturer or producer of electronics hardware or software and either of the Borrowers pursuant to which such Borrower purchases electronics hardware or software and acts as the distributor for the manufacturer or producer thereof, in each case as any of the foregoing may be extended, renewed, amended, supplemented or replaced from time to time. "Dollars" or "$" means dollars in lawful currency of the United States of America. "Domestic Business Day" means any day except a Saturday, Sunday or other day on which commercial banks in Georgia are authorized by law to close. "Domestic Subsidiary" means each of (i) SED Miami, (ii) SED Retail, and (iii) SED E-Store. "EBITDA" means for any period the sum of (i) Consolidated Net Income, (ii) taxes on income, (iii) Consolidated Interest Expense, (iv) depreciation expense, and (v) amortization expense, all determined with respect to the Borrowers and the Consolidated Subsidiaries on a consolidated basis for such period and in accordance with GAAP. "EBILTDA" means for any period the sum of (i) Consolidated Net Income, (ii) taxes on income, (iii) Consolidated Interest Expense, (iv) depreciation expense, (v) amortization expense, and (vi) all payment obligations for such period under all operating leases and rental agreements, all determined with respect to the Borrowers and the Consolidated Subsidiaries on a consolidated basis for such period and in accordance with GAAP. "Eligible Accounts" means that portion of the Accounts Receivable consisting of accounts actually owing to either Borrower by its Account Debtors subject to no counterclaim, defense, setoff or deduction, excluding, however, any account: (i) with respect to which any portion thereof is more than 60 days past due or 90 days past invoice date; (ii) which is owing by any Account Debtor affiliated with either Borrower or with any of its shareholders, directors or officers, as determined by the Agent in its sole discretion; (iii) which is owing by any Account Debtor having 50% or more in face value of its then existing accounts with either Borrower ineligible hereunder; (iv) the assignment of which is subject to any requirements set forth in any Assignment of Claims Acts, unless such requirements have been satisfied in all respects; (v) which is owing by any Account Debtor whose accounts, in face amount, with either Borrower exceed 10% of such Borrower's total accounts, but only to the extent of such excess; (vi) which is owing by an Account Debtor located outside the United States, unless it is (x) secured by an irrevocable letter of credit, which letter of credit shall have been confirmed by a financial institution acceptable to the Agent and shall be in form and substance acceptable to the Agent and pledged to the Agent, and (y) payable in full in United States dollars; (vii) is at any time not subject to the first priority security interest of the Agent under the Security Agreements; (viii) is subject to any Lien (other than in favor of the Agent), including, without limitation, any Lien under any of the Distributor Agreements (except to the extent permitted under any Lien Subordination Agreement) or otherwise; (ix) is subject to a contra account; (x) which arises from the sale of Special Inventory; and/or (xi) which has otherwise been determined by the Agent in its reasonable credit judgment not to be eligible for the purposes hereof. "Eligible Inventory" means that portion of the Inventory consisting of inventory located in the United States of America and in the possession and control of either Borrower which (i) is located on real property owned by either Borrower or on leased property with respect to which such landlord has executed and delivered to the Agent a Landlord Agreement and which was the subject of an invoice to such Borrower from the seller thereof dated not more than 90 days prior to the date of determination; (ii) was manufactured not more than 365 days prior to the date of determination; (iii) is at all times subject to the first priority security interest of the Agent under the Security Agreements and is not subject to any other Lien, including, without limitation, any Lien under any of the Distributor Agreements (except to the extent permitted under any Lien Subordination Agreement), the Liens against the FINOVA Collateral (defined in the FINOVA Intercreditor Agreement) or otherwise; (iv) is in good and saleable condition; (v) is not on consignment from any distributor; (vi) does not constitute returned, repossessed, damaged or slow-moving goods; (vii) conforms in all respects to the warranties and representations set forth herein and in each Security Agreement; (viii) is not subject to a negotiable document of title (unless issued or endorsed to the Agent); (ix) is not subject to any license or other agreement that limits or restricts either Borrower's or the Agent's right to sell or otherwise dispose of such inventory; (x) does not consist of Special Inventory; and (xi) has otherwise been determined by the Agent in its reasonable credit judgment not to be ineligible for the purposes hereof. "Environmental Authority" means any foreign, federal, state, local or regional government that exercises any form of jurisdiction or authority under any Environmental Requirement. "Environmental Authorizations" means all licenses, permits, orders, approvals, notices, registrations or other legal prerequisites for conducting the business of either Borrower or any Subsidiary required by any Environmental Requirement. "Environmental Judgments and Orders" means all judgments, decrees or orders arising from or in any way associated with any Environmental Requirements, whether or not entered upon consent, or written agreements with an Environmental Authority or other entity arising from or in any way associated with any Environmental Requirement, whether or not incorporated in a judgment, decree or order. "Environmental Liabilities" means any liabilities, whether accrued, contingent or otherwise, arising from and in any way associated with any Environmental Requirements. "Environmental Notices" means notice from any Environmental Authority or by any other person or entity, of possible or alleged noncompliance with or liability under any Environmental Requirement, including without limitation any complaints, citations, demands or requests from any Environmental Authority or from any other person or entity for correction of any violation of any Environmental Requirement or any investigations concerning any violation of any Environmental Requirement. "Environmental Proceedings" means any judicial or administrative proceedings arising from or in any way associated with any Environmental Requirement. "Environmental Releases" means releases as defined in CERCLA or under any applicable state or local environmental law or regulation. "Environmental Requirements" means any legal requirement relating to health, safety or the environment and applicable to either Borrower, any Subsidiary or the Properties, including but not limited to any such requirement under CERCLA or similar state legislation and all federal, state and local laws, ordinances, regulations, orders, writs, decrees and common law. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time, or any successor law. Any reference to any provision of ERISA shall also be deemed to be a reference to any successor provision or provisions thereof. "Euro-Dollar Business Day" means any Domestic Business Day on which dealings in Dollar deposits are carried out in the London interbank market. "Euro-Dollar Loan" means a Loan which bears or is to bear interest at a rate based upon the London Interbank Offered Rate and to be made as a Euro-Dollar Loan pursuant to the applicable Notice of Borrowing. "Euro-Dollar Reserve Percentage" has the meaning set forth in Section 2.05(c). "Event of Default" has the meaning set forth in Section 7.01. "Federal Funds Rate" means, for any day, the rate per annum (rounded upward, if necessary, to the next higher 1/100th of 1%) equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published by the Federal Reserve Bank of New York on the Domestic Business Day next succeeding such day, provided that (i) if the day for which such rate is to be determined is not a Domestic Business Day, the Federal Funds Rate for such day shall be such rate on such transactions on the next preceding Domestic Business Day as so published on the next succeeding Domestic Business Day, and (ii) if such rate is not so published for any day, the Federal Funds Rate for such day shall be the average rate charged to the Agent on such day on such transactions, as determined by the Agent. "FINOVA Indebtedness" means, without duplication, all Debt and other liabilities which the Borrowers and their Subsidiaries owe to FINOVA Capital Corporation. "FINOVA Intercreditor Agreement" means that certain Intercreditor Agreement among the Agent, SEDI, and FINOVA Capital Corporation dated as of even date with this Agreement, satisfactory to the Agent in all respects and substantially in the form of EXHIBIT N. "FINOVA Reserve" means (i) as of the date of this Agreement, $15,000,000, or (ii) upon obtaining the Agent's prior written consent thereto and an amendment to the FINOVA Intercreditor Agreement satisfactory to the Agent in all respects, such lesser or greater amount that may be available to the Borrower under the FINOVA Loan Documents from time to time. "Fiscal Month" means any fiscal month of the Borrowers. "Fiscal Quarter" means any fiscal quarter of the Borrowers. "Fiscal Year" means any fiscal year of the Borrowers. "Foreign Equity Lien Limitation" means the lesser of (x) 100% of the equity interests issued by each Foreign Subsidiary owned by SEDI at any time, or (y) in the event SEDI owns more than 65% of all of the issued and outstanding equity interests of such Foreign Subsidiary at any time, an amount not greater than 65% of all of such issued and outstanding equity interests of such Foreign Subsidiary. "Foreign Subsidiary" means each of (i) SED Magna, (ii) SED Argentina, and (iii) SED Colombia. "Fronting Fee" shall have the meaning ascribed to it in Section 3.08. "GAAP" means generally accepted accounting principles applied on a basis consistent with those which, in accordance with Section 1.02, are to be used in making the calculations for purposes of determining compliance with the terms of this Agreement. "Guarantee" by any Person means any obligation, contingent or otherwise, of such Person directly or indirectly guaranteeing any Debt or other obligation of any other Person and, without limiting the generality of the foregoing, any obligation, direct or indirect, contingent or otherwise, of such Person (i) to secure, purchase or pay (or advance or supply funds for the purchase or payment of) such Debt or other obligation (whether arising by virtue of partnership arrangements, by agreement to keep-well, to purchase assets, goods, securities or services, to provide collateral security, to take-or-pay, or to maintain financial statement conditions or otherwise) or (ii) entered into for the purpose of assuring in any other manner the obligee of such Debt or other obligation of the payment thereof or to protect such obligee against loss in respect thereof (in whole or in part), provided that the term Guarantee shall not include endorsements for collection or deposit in the ordinary course of business. The term "Guarantee" used as a verb has a corresponding meaning. "Hazardous Materials" includes, without limitation, (a) solid or hazardous waste, as defined in the Resource Conservation and Recovery Act of 1980, 42 U.S.C. ss. 6901 et seq. and its implementing regulations and amendments, or in any applicable state or local law or regulation, (b) "hazardous substance", "pollutant", or "contaminant" as defined in CERCLA, or in any applicable state or local law or regulation, (c) gasoline, or any other petroleum product or by-product, including, crude oil or any fraction thereof, (d) toxic substances, as defined in the Toxic Substances Control Act of 1976, or in any applicable state or local law or regulation and (e) insecticides, fungicides, or rodenticides, as defined in the Federal Insecticide, Fungicide, and Rodenticide Act of 1975, or in any applicable state or local law or regulation, as each such Act, statute or regulation may be amended from time to time. "HP (US) Agreement" means the U.S. Distributor Agreement dated June 27, 1997, between Hewlett-Packard Company and SEDI, as the same may be extended, renewed, amended, supplemented or replaced from time to time. "Interest Period" means: (1) with respect to each Euro-Dollar Borrowing, the period commencing on the date of such Borrowing and ending on the numerically corresponding day in the first, second, third or sixth month thereafter, as the relevant Borrower may elect in the applicable Notice of Borrowing; provided that, with respect to all Euro-Dollar Borrowings: (a) any Interest Period (subject to paragraph (c) below) which would otherwise end on a day which is not a Euro-Dollar Business Day shall be extended to the next succeeding Euro-Dollar Business Day unless such Euro-Dollar Business Day falls in another calendar month, in which case such Interest Period shall end on the next preceding Euro-Dollar Business Day; (b) any Interest Period which begins on the last Euro-Dollar Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the appropriate subsequent calendar month) shall, subject to paragraph (c) below, end on the last Euro-Dollar Business Day of the appropriate subsequent calendar month; and (c) no Interest Period may be selected which begins before the Termination Date and would otherwise end after the Termination Date. (2) with respect to each Base Rate Borrowing the period commencing on the date of such Borrowing and ending 30 days thereafter; provided that: (a) any Interest Period (subject to paragraph (b) below) which would otherwise end on a day which is not a Domestic Business Day shall be extended to the next succeeding Domestic Business Day; and (b) no Interest Period which begins before the Termination Date and would otherwise end after the Termination Date may be selected. "Inventory" means all inventory of each Borrower, or in which it has rights, whether now owned or hereafter acquired, wherever located, including, without limitation, all goods of each Borrower held for sale or lease or furnished or to be furnished under contracts of service, all goods held for display or demonstration, goods on lease or consignment, spare parts, repair parts, returned and repossessed goods, all raw materials, work-in-process, finished goods and supplies used or consumed in such Borrower's business, together with all documents, documents of title, dock warrants, dock receipts, warehouse receipts, bills of lading or orders for the delivery of all, or any portion, of the foregoing. "Landlord Agreement" means a landlord agreement in favor of the Agent substantially in the form set forth as Exhibit K attached hereto. "Lending Office" means, as to each Bank, its office located at its address set forth on the signature pages hereof (or identified on the signature pages hereof as its Lending Office) or such other office as such Bank may hereafter designate as its Lending Office by notice to the Borrowers and the Agent. "Letter of Credit" shall mean a commercial or standby letter of credit issued by the Agent for the account of either Borrower pursuant to Article III. "Letter of Credit Fee" shall have the meaning ascribed to it in Section 3.08. "Letter of Credit Obligations" shall mean, at any particular time, the sum of (a) the Reimbursement Obligations at such time, (b) the aggregate maximum amount available for drawing under the Letters of Credit at such time and (c) the aggregate maximum amount available for drawing under Letters of Credit which have been requested pursuant to Section 3.04(a) and approved for issuance by the Agent pursuant to Section 3.04(b) and which are to be, but have not yet been, issued. "Letter of Credit Application Agreement" shall mean, with respect to a Letter of Credit, such form of application therefor (whether in a single or several documents) as the Agent may employ in the ordinary course of business for its own account, whether or not providing for collateral security, with such modifications thereto as may by agreed upon by the Agent and the relevant Borrower and are not materially adverse to the interests of the Banks; provided, however, that in the event of any conflict between the terms of any Letter of Credit Application Agreement and this Agreement, the terms of this Agreement shall control. "Leverage Ratio" means the ratio of Consolidated Debt to Consolidated Tangible Net Worth, determined at any applicable time. "Lien" means, with respect to any asset, any mortgage, deed to secure debt, deed of trust, lien, pledge, charge, security interest, security title, preferential arrangement which has the practical effect of constituting a security interest or encumbrance, or encumbrance or servitude of any kind in respect of such asset to secure or assure payment of any Debt, whether by consensual agreement or by operation of statute or other law, or by any agreement, contingent or otherwise, to provide any of the foregoing. For the purposes of this Agreement, each Borrower or any Subsidiary shall be deemed to own subject to a Lien any asset which it has acquired or holds subject to the interest of a vendor or lessor under any conditional sale agreement, capital lease or other title retention agreement relating to such asset. "Lien Subordination Agreement" means (i) the Lien Subordination Agreement among the Agent, SEDI, and Hewlett- Packard Company dated as of June 27, 1997, as the same may be extended, renewed, amended, supplemented or replaced from time to time, and (ii) each additional lien subordination agreement among the Agent, SEDI or SEDH, and the respective distributor, in form and substance satisfactory to the Agent and the Banks in all respects. "Loan" means a Base Rate Loan, Euro-Dollar Loan, Syndicated Loan, or Swing Loan, and "Loans" means Base Rate Loans, Euro-Dollar Loans, Syndicated Loans, Swing Loans, or any or all of them, as the context shall require. "Loan Documents" means this Agreement, the Notes, each Letter of Credit Application Agreement, each Borrowing Base Certificate, each Lien Subordination Agreement, the FINOVA Intercreditor Agreement, each Landlord Agreement, each Security Agreement, each Guarantee executed by a Domestic Subsidiary guaranteeing the Loans, any other document evidencing, relating to or securing the Loans or the Letters of Credit, and any other document or instrument delivered from time to time in connection with this Agreement, the Notes, the Loans, the FINOVA Intercreditor Agreement, each Lien Subordination Agreement, each Landlord Agreement, each Security Agreement, each Subsidiary Guarantee, or the Letters of Credit, as such documents and instruments may be amended or supplemented from time to time. "London Interbank Offered Rate" has the meaning set forth in Section 2.05(c). "Margin Stock" means "margin stock" as defined in Regulations U, T or X. "Material Adverse Effect" means, with respect to any event, act, condition or occurrence of whatever nature (including any adverse determination in any litigation, arbitration, or governmental investigation or proceeding), whether singly or in conjunction with any other event or events, act or acts, condition or conditions, occurrence or occurrences, whether or not related, a material adverse change in, or a material adverse effect upon, any of (a) the financial condition, operations, business, properties or prospects of the Borrowers and the Consolidated Subsidiaries taken as a whole, (b) the rights and remedies of the Agent or the Banks under the Loan Documents, or the ability of either Borrower to perform its obligations under the Loan Documents to which it is a party, as applicable, or (c) the legality, validity or enforceability of any Loan Document. "Mission Critical Systems and Equipment" means the Borrowers' and their Domestic Subsidiaries' hardware systems, software systems, and equipment relating to the operation of their businesses, with respect to which the failure to properly function would have a Material Adverse Effect. "Moody's" means Moody's Investor Service, Inc. "Multiemployer Plan" shall have the meaning set forth in Section 4001(a)(3) of ERISA. "Net Income" means, as applied to any Person for any period, the aggregate amount of net income of such Person, after taxes, for such period, as determined in accordance with GAAP. "Net Proceeds of Capital Stock" means any proceeds received by either Borrower or a Consolidated Subsidiary in respect of the issuance of Capital Stock, after deducting therefrom all reasonable and customary costs and expenses incurred by such Borrower or such Consolidated Subsidiary directly in connection with the issuance of such Capital Stock. "Notes" means each of the Syndicated Loan Notes or the Swing Loan Note, or any or all of them, as the context shall require. "Notice of Borrowing" has the meaning set forth in Section 2.02. "Obligations" shall mean any and all indebtednesses, liabilities and obligations of the Borrowers to the Agent and the Banks, arising under the Notes, any Letter of Credit Application Agreement or otherwise under this Agreement or any other Loan Document, including without limiting the generality of the foregoing, any indebtedness, liability or obligation of the Borrowers to the Agent and the Banks under any later or future advances or loans made hereunder, and any and all extensions or renewals thereof in whole or in part; and any and all future or additional indebtednesses, liabilities or obligations hereunder of the Borrowers to the Agent and the Banks whatsoever and in any event, whether existing as of the date hereof or hereafter arising, whether direct, indirect, absolute or contingent, as maker, endorser, guarantor, surety or otherwise, and whether evidenced by, arising out of, or relating to, a promissory note, bill of exchange, check, draft, bond, letter of credit, guaranty agreement, bankers' acceptance, foreign exchange contract, interest rate protection agreement, commitment fee, service charge or otherwise. "Officer's Certificate" has the meaning set forth in Section 4.01(f). "Operating Profits" means, as applied to any Person for any period, earnings before taxes plus interest of such Person for such period, as determined in accordance with GAAP. "Participant" has the meaning set forth in Section 10.08(b). "PBGC" means the Pension Benefit Guaranty Corporation or any entity succeeding to any or all of its functions under ERISA. "Permitted Encumbrances" means (i) Liens for taxes not yet due and payable or being actively contested as permitted by the Loan Documents, only if such Liens do not adversely affect Agent's rights or the priority of Agent's security interest in the Collateral; (ii) carriers', warehousemen's mechanics', materialmen's, repairmen's or other like Liens arising in the ordinary course of business, payment for which is not yet due or which are being actively contested in good faith and by appropriate, lawful proceedings, but only if such liens are and remain junior to liens granted against the Collateral in favor of Agent; (iii) pledges or deposits in connection with worker's compensation, unemployment insurance and other social security legislation; (iv) deposits to secure the performance of utilities, leases, statutory obligations and surety and appeal bonds and other obligations of a like nature arising by statute or under customary terms regarding depository relationships on deposits held by financial institutions with whom either Borrower has a banker-customer relationship; (vi) typical restrictions imposed by licenses and leases of software (including location and transfer restrictions); (vii) purchase money liens in favor of Hewlett Packard Company securing the purchase of inventory sold by Hewlett-Packard Company to the Borrowers; and (viii) Liens in favor of Agent. "Person" means an individual, a corporation, a partnership, an unincorporated association, a trust or any other entity or organization, including, but not limited to, a government or political subdivision or an agency or instrumentality thereof. "Plan" means at any time an employee pension benefit plan which is covered by Title IV of ERISA or subject to the minimum funding standards under Section 412 of the Code and is either (i) maintained by a member of the Controlled Group for employees of any member of the Controlled Group or (ii) maintained pursuant to a collective bargaining agreement or any other arrangement under which more than one employer makes contributions and to which a member of the Controlled Group is then making or accruing an obligation to make contributions or has within the preceding 5 plan years made contributions. "Prime Rate" refers to that interest rate so denominated and set by Wachovia from time to time as an interest rate basis for borrowings. The Prime Rate is but one of several interest rate bases used by Wachovia. Wachovia lends at interest rates above and below the Prime Rate. "Properties" means all real property owned, leased or otherwise used or occupied by either Borrower or any Subsidiary, wherever located. "Redeemable Preferred Stock" of any Person means any preferred stock issued by such Person which is at any time prior to the Termination Date either (i) mandatorily redeemable (by sinking fund or similar payments or otherwise) or (ii) redeemable at the option of the holder thereof. "Refunding Loan" means a new Syndicated Loan made on the day on which an outstanding Syndicated Loan is maturing or a Base Rate Borrowing is being converted to a Euro-Dollar Borrowing, if and to the extent that the proceeds thereof are used entirely for the purpose of paying such maturing Loan or Loan being converted, excluding any difference between the amount of such maturing Loan or Loan being converted and any greater amount being borrowed on such day and actually either being made available to the relevant Borrower pursuant to Section 2.02(c) or remitted to the Agent as provided in Section 2.12, in each case as contemplated in Section 2.02(d). "Regulation T" means Regulation T of the Board of Governors of the Federal Reserve System, as in effect from time to time, together with all official rulings and interpretations issued thereunder. "Regulation U" means Regulation U of the Board of Governors of the Federal Reserve System, as in effect from time to time, together with all official rulings and interpretations issued thereunder. "Regulation X" means Regulation X of the Board of Governors of the Federal Reserve System, as in effect from time to time, together with all official rulings and interpretations issued thereunder. "Reimbursement Obligations" means the reimbursement or repayment obligations of the Borrowers to the Agent pursuant to Section 3.05 with respect to Letters of Credit. "Reported Net Income" means, for any period, the Net Income of the Borrowers and the Consolidated Subsidiaries determined on a consolidated basis. "Required Banks" means (i) at any time during which any Bank holds 65% or more of the Aggregate Commitments, Banks having at least 85% of the Aggregate Commitments or, if the Commitments are no longer in effect, Banks holding at least 85% of the aggregate outstanding principal amount of the sum of the Syndicated Loans, and (ii) at any time during which no Bank holds 65% or more of the Aggregate Commitments, Banks having at least 66 2/3% of the Aggregate Commitments or, if the Commitments are no longer in effect, Banks holding at least 66 2/3% of the aggregate outstanding principal amount of the sum of the Syndicated Loans. "Restricted Investment" shall mean any investment in cash or by delivery of property to any Person, whether by acquisition of stock, indebtedness or other obligation (including, without limitation, by Guarantee of such Person) or security, or by loan, advance or capital contribution, or otherwise, or in any property, except that investments consisting of the following shall not constitute "Restricted Investments": (i) property used or to be used in the ordinary course of business; (ii) current assets arising from the sale of goods or the provision of services in the ordinary course of business;(iii) loans or advances to employees for salary, commissions, travel or the like, made in the ordinary course of business; (iv) unless immediately after giving effect to the making of any of the following investments, a Default or Event of Default shall have occurred and be continuing, investments in (A) direct obligations of the United States Government maturing within one year, (B) certificates of deposit issued by a commercial bank whose credit is satisfactory to the Agent, (C) commercial paper rated A1 or the equivalent thereof by S&P or P1 or the equivalent thereof by Moody's and in either case maturing within 6 months after the date of acquisition and/or (D) tender bonds the payment of the principal of and interest on which is fully supported by a letter of credit issued by a United States bank whose long-term certificates of deposit are rated at least AA or the equivalent thereof by S&P and Aa or the equivalent thereof by Moody's; (v) loans or advances to SED Magna not exceeding an aggregate principal balance outstanding at any time equal to $2,000,000, evidenced by a promissory note subject to the Agent's first priority perfected security interest therein as a part of the Collateral; (vi) equity or debt investments by SEDI in each Domestic Subsidiary (whether in cash or as a part of a stock or other equity interest exchange with respect to SEDH capital stock, valued at the amount of cash so invested, if cash, or the market value of SEDH capital stock, if capital stock), so long as such Domestic Subsidiary issues a Guarantee for all of the Obligations and all of the assets of such Domestic Subsidiaries are subject to the first priority perfected security interest of the Agent as a part of the Collateral pursuant to a Security Agreement; (vii) equity investments by SEDI in any Foreign Subsidiaries (whether in cash or as a part of a stock or other equity interest exchange with respect to SEDH capital stock) not exceeding an aggregate amount equal to $15,000,000 for all Foreign Subsidiaries (valued at the amount of cash so invested, if cash, or the market value of SEDH capital stock, if capital stock), which equity interests so obtained shall be subject to the Agent's first priority perfected security interest therein as a part of the Collateral (provided that the Agent's security interest therein shall not exceed the Foreign Equity Lien Limitation for any Foreign Subsidiary), and (viii) in addition to items in clause (vii) contained in this definition, SED Argentina Investments. "Restricted Payment" means (i) any dividend or other distribution on any shares of SEDH's Capital Stock (except dividends payable solely in shares of its Capital Stock) or (ii) any payment on account of the purchase, redemption, retirement or acquisition of (a) any shares of SEDH's Capital Stock (except shares acquired upon the conversion thereof into other shares of its Capital Stock) or (b) any option, warrant or other right to acquire shares of SEDH's Capital Stock. "SED Argentina" means Intermaco S.R.L., an Argentinian corporation. "SED Argentina Investments" means payments made by SEDI to the former owners of SED Argentina in Fiscal Years 2000 and 2001 not exceeding $3,000,000 for each such Fiscal Year. "SED Colombia" means SED de Colombia LDTA., a Colombian corporation. "SED E-Store" means e-store.com, Inc., a Georgia corporation. "SEDH" means SED International Holdings, Inc., a Georgia corporation. "SEDI" means SED International, Inc., a Georgia corporation. "SED Magna" means SED International de Brasil Distribuidora LTDA., a Brazilian corporation. "SED Miami" means SED Magna (Miami), Inc., a Delaware corporation. "SED Retail" means SED Retail, Inc., a Georgia corporation. "S&P" means Standard & Poor's Ratings Group, a division of McGraw-Hill, Inc. "Security Agreement(s)" means each Amended and Restated Security Agreement executed by each of the Borrowers dated as of even date herewith, and each Security Agreement executed by each Domestic Subsidiary from time to time, substantially in the form of EXHIBIT M, as the same may be extended, renewed, amended, supplemented or replaced from time to time. "Senior Management" means all officers of a Borrower having the title of Vice President or above. "Special Inventory" shall mean any Inventory purchased by either Borrower from a distributor who is offering for sale such Inventory pursuant to a one-time special cash discount offer which is not scheduled as a part of such distributor's standard, customary or contractual discounts. "Stockholders' Equity" means, at any time, the shareholders' equity of the Borrowers and the Consolidated Subsidiaries, as set forth or reflected on the most recent consolidated balance sheet of the Borrowers and the Consolidated Subsidiaries prepared in accordance with GAAP, but excluding any Redeemable Preferred Stock of either Borrower or any of the Consolidated Subsidiaries. Shareholders' equity generally would include, but not be limited to (i) the par or stated value of all outstanding Capital Stock, (ii) capital surplus, (iii) retained earnings, and (iv) various deductions such as (A) purchases of treasury stock, (B) valuation allowances, (C) receivables due from an employee stock ownership plan, (D) employee stock ownership plan debt guarantees, and (E) translation adjustments for foreign currency transactions. "Subsidiary" means any corporation or other entity of which securities or other ownership interests having ordinary voting power to elect a majority of the board of directors or other persons performing similar functions are at the time directly or indirectly owned by either Borrower. "Swing Loan" means a Loan made by Wachovia pursuant to Section 2.01(b), which must be a Base Rate Loan. "Swing Loan Note" means the Amended and Restated Swing Loan Note issued by the Borrowers, substantially in the form of Exhibit A-2, evidencing the obligation of the Borrowers to repay the Swing Loans, together with all amendments, consolidations, modifications, renewals, and supplements thereto. "Syndicated Loan Notes" means the Amended and Restated Syndicated Loans Notes issued by the Borrowers, substantially in the form of Exhibit A-1, evidencing the obligation of the Borrowers to repay Syndicated Loans, together with all amendments, consolidations, modifications, renewals and supplements thereto. "Syndicated Loans" means Base Rate Loans or Euro-Dollar Loans made pursuant to the terms and conditions set forth in Section 2.01. "Taxes" has the meaning set forth in Section 2.12(c). "Termination Date" means whichever is applicable of (i) August 31, 2001, (ii) the date the Commitments are terminated pursuant to Section 7.01 following the occurrence of an Event of Default, or (iii) the date the Borrowers terminate the Commitments entirely pursuant to Section 2.07. "Third Parties" means all lessees, sublessees, licensees and other users of the Properties, excluding those users of the Properties in the ordinary course of the Borrowers' business and on a temporary basis. "Transferee" has the meaning set forth in Section 10.08(d). "Unfunded Vested Liabilities" means, with respect to any Plan at any time, the amount (if any) by which (i) the present value of all vested nonforfeitable benefits under such Plan exceeds (ii) the fair market value of all Plan assets allocable to such benefits, all determined as of the then most recent valuation date for such Plan, but only to the extent that such excess represents a potential liability of a member of the Controlled Group to the PBGC or the Plan under Title IV of ERISA. "Wachovia" means Wachovia Bank, N.A., a national banking association, and its successors. "Wholly Owned Subsidiary" means any Subsidiary all of the shares of capital stock or other ownership interests of which (except directors' qualifying shares) are at the time directly or indirectly owned by either Borrower. "Y2K Plan" has the meaning set forth in Section 5.18. "Year 2000 Compliant and Ready" means that (a) the Mission Critical Systems and Equipment will: (i) handle date information involving any and all dates before, during and after January 1, 2000, including accepting input, providing output and performing date calculations in whole or in part; (ii) operate, accurately without interruption on and in respect of any and all dates before, during and after January 1, 2000 and without any materially adverse change in performance; (iii) store and provide date input information without creating any ambiguity as to the century; and (b) the Borrowers and their Domestic Subsidiaries have developed reasonable, alternative plans to ensure business continuity in the event of the failure of any or all of items (i) through (iii) in clause (a) above in this definition. SECTION 1.02. Accounting Terms and Determinations. Unless otherwise specified herein, all terms of an accounting character used herein shall be interpreted, all accounting determinations hereunder shall be made, and all financial statements required to be delivered hereunder shall be prepared, in accordance with GAAP, applied on a basis consistent (except for changes concurred in by the Borrowers' independent public accountants or otherwise required by a change in GAAP) with the most recent audited consolidated financial statements of the Borrowers and the Consolidated Subsidiaries delivered to the Banks unless with respect to any such change concurred in by the Borrowers' independent public accountants or required by GAAP, in determining compliance with any of the provisions of this Agreement or any of the other Loan Documents: (i) the Borrowers shall have objected to determining such compliance on such basis at the time of delivery of such financial statements, or (ii) the Required Banks shall so object in writing within 30 days after the delivery of such financial statements, in either of which events such calculations shall be made on a basis consistent with those used in the preparation of the latest financial statements as to which such objection shall not have been made (which, if objection is made in respect of the first financial statements delivered under Section 6.01, shall mean the financial statements referred to in Section 5.04). SECTION 1.03. References. Unless otherwise indicated, references in this Agreement to "Articles", "Exhibits", "Schedules", "Sections" and other Subdivisions are references to articles, exhibits, schedules, sections and other subdivisions hereof. SECTION 1.04. Use of Defined Terms. All terms defined in this Agreement shall have the same defined meanings when used in any of the other Loan Documents, unless otherwise defined therein or unless the context shall require otherwise. SECTION 1.05. Terminology. All personal pronouns used in this Agreement, whether used in the masculine, feminine or neuter gender, shall include all other genders; the singular shall include the plural, and the plural shall include the singular. Titles of Articles and Sections in this Agreement are for convenience only, and neither limit nor amplify the provisions of this Agreement, and all references in this Agreement to Articles, Sections, Subsections, paragraphs, clauses, subclauses or Exhibits shall refer to the corresponding Article, Section, Subsection, paragraph, clause, subclause of, or Exhibit attached to, this Agreement, unless specific reference is made to the articles, sections or other subdivisions divisions of, or Exhibit to, another document or instrument. Wherever in this Agreement reference is made to any instrument, agreement or other document, including, without limitation, any of the Loan Documents, such reference shall be understood to mean and include any and all amendments thereto or modifications, restatements, renewals or extensions thereof. Wherever in this Agreement reference is made to any statute, such reference shall be understood to mean and include any and all amendments thereof and all regulations promulgated pursuant thereto. Whenever any matter set forth herein or in any Loan Document is to be consented to or be satisfactory to the Agent or either of the Banks, or is to be determined, calculated or approved by the Agent or either of the Banks, then, unless otherwise expressly set forth herein or in any such Loan Document, such consent, satisfaction, determination, calculation or approval shall be in the sole discretion of the Agent or either of the Banks, exercised in good faith and, where required by law, in a commercially reasonable manner, and shall be conclusive absent manifest error. ARTICLE II THE CREDITS SECTION 2.01. Commitments to Lend Syndicated Loans. (a) Each Bank severally agrees, on the terms and conditions set forth herein, to make Syndicated Loans to either Borrower from time to time before the Termination Date; provided that, (i) immediately after each such Syndicated Loan is made, the sum of the aggregate outstanding principal amount of Syndicated Loans to both Borrowers by such Bank and the risk participation of such Bank in Letter of Credit Obligations of both Borrowers shall not exceed the amount of its Commitment, and (ii) the Aggregate Principal Amount Outstanding shall not exceed the lesser of (x) the Borrowing Base or (y) the Aggregate Commitments. Each Syndicated Borrowing under this Section shall be in an aggregate principal amount of: (i) for Euro-Dollar Loans, $1,000,000 or any larger integral multiple of $100,000; and (ii) for Base Rate Loans, (x) so long as there are fewer than 3 Banks parties hereto, $100,000 or any larger integral multiple of $50,000 and (y) at any time during which there are 3 or more Banks parties hereto, $1,000,000 or any larger integral multiple of $100,000 (except in each case that any such Syndicated Borrowing may be in the aggregate amount of the Aggregate Unused Commitments) and shall be made from the several Banks ratably in proportion to their respective Commitments. Within the foregoing limits, either Borrower may borrow under this Section, repay or, to the extent permitted by Section 2.09, prepay Syndicated Loans and reborrow under this Section at any time before the Termination Date. (b) Swing Loans. In addition to the foregoing, at any time during which there are 3 or more Banks parties hereto, Wachovia shall from time to time, upon the request of either Borrower, if the applicable conditions precedent in Article IV have been satisfied, make Swing Loans to such Borrower in an aggregate principal amount at any time outstanding not exceeding $5,000,000; provided that, immediately after such Swing Loan is made, the Aggregate Principal Amount Outstanding shall not exceed the lesser of (x) the Borrowing Base or (y) the Aggregate Commitments. Each Swing Borrowing under this Section 2.01(b) shall be in an aggregate principal amount of $100,000 or any larger multiple of $25,000. Within the foregoing limits, the Borrowers may borrow under this Section 2.01(b), prepay and reborrow under this Section 2.01(b) at any time before the Termination Date. Swing Loans shall be included in the calculation of "Aggregate Principal Amount Outstanding" hereunder, but shall not be considered a utilization of the Commitment of Wachovia or any other Bank hereunder. All Swing Loans shall be made as Base Rate Loans. At any time, upon the request of Wachovia, each Bank other than Wachovia shall, on the third Domestic Business Day after such request is made, purchase a participating interest in Swing Loans in an amount equal to its ratable share (based upon its respective Commitment) of such Swing Loans. On such third Domestic Business Day, each Bank will immediately transfer to Wachovia, in immediately available funds, the amount of its participation. Whenever, at any time after Wachovia has received from any such Bank its participating interest in a Swing Loan, the Agent receives any payment on account thereof, the Agent will distribute to such Bank its participating interest in such amount (appropriately adjusted, in the case of interest payments, to reflect the period of time during which such Bank's participating interest was outstanding and funded); provided, however, that in the event that such payment received by the Agent is required to be returned, such Bank will return to the Agent any portion thereof previously distributed by the Agent to it. Each Bank's obligation to purchase such participating interests shall be absolute and unconditional and shall not be affected by any circumstance, including, without limitation: (i) any set-off, counterclaim, recoupment, defense or other right which such Bank or any other Person may have against Wachovia requesting such purchase or any other Person for any reason whatsoever; (ii) the occurrence or continuance of a Default or an Event of Default or the termination of the Commitments; (iii) any adverse change in the condition (financial or otherwise) of either of the Borrowers or any other Person; (iv) any breach of this Agreement by either of the Borrowers or any other Bank; or (v) any other circumstance, happening or event whatsoever, whether or not similar to any of the foregoing. SECTION 2.02. Method of Borrowing. (a) The requesting Borrower shall give the Agent notice (a "Notice of Borrowing"), which shall be substantially in the form of Exhibit E, prior to 12:00 P.M. (Atlanta, Georgia time) on the same Domestic Business Day as each Base Rate Borrowing and at least 3 Euro-Dollar Business Days before each Euro-Dollar Borrowing, specifying: (i) the date of such Borrowing, which shall be a Domestic Business Day in the case of a Base Rate Borrowing or a Euro-Dollar Business Day in the case of a Euro-Dollar Borrowing, (ii) the aggregate amount of such Borrowing, (iii) whether such Borrowing is to be a Syndicated Borrowing or a Swing Borrowing, and in the case of a Syndicated Borrowing, whether the Syndicated Loans comprising such Borrowing are to be Base Rate Loans or Euro-Dollar Loans, (iv) in the case of a Euro-Dollar Borrowing, the duration of the Interest Period applicable thereto, subject to the provisions of the definition of Interest Period, and (v) the amount available to be borrowed under Section 2.01. (b) Upon receipt of a Notice of Borrowing, the Agent shall promptly notify each Bank of the contents thereof, and of such Bank's ratable share of such Syndicated Borrowing and such Notice of Borrowing, once received by the Agent, shall not thereafter be revocable by either Borrower. (c) Not later than (x) for Euro-Dollar Loans, 11:00 A.M., and (y) for Base Rate Loans, 2:00 P.M., (Atlanta, Georgia time) on the date of each Syndicated Borrowing, each Bank shall (except as provided in paragraph (d) of this Section) make available its ratable share of such Syndicated Borrowing, in Federal or other funds immediately available in Atlanta, Georgia, to the Agent at its address determined pursuant to Section 10.01. Unless the Agent determines that any applicable condition specified in Article IV has not been satisfied, the Agent will make the funds so received from the Banks available to the relevant Borrower at the Agent's aforesaid address. Unless the Agent receives notice from a Bank, at the Agent's address referred to in or specified pursuant to Section 10.01, no later than 2:00 P.M. (local time at such address) on the Domestic Business Day before the date of a Syndicated Borrowing stating that such Bank will not make a Syndicated Loan in connection with such Syndicated Borrowing, the Agent shall be entitled to assume that such Bank will make a Syndicated Loan in connection with such Syndicated Borrowing and, in reliance on such assumption, the Agent may (but shall not be obligated to) make available such Bank's ratable share of such Syndicated Borrowing to the requesting Borrower for the account of such Bank. If the Agent makes such Bank's ratable share available to the requesting Borrower and such Bank does not in fact make its ratable share of such Syndicated Borrowing available on such date, the Agent shall be entitled to recover such Bank's ratable share from such Bank or the Borrowers (and for such purpose shall be entitled to charge such amount to any account of the Borrowers maintained with the Agent), together with interest thereon for each day during the period from the date of such Syndicated Borrowing until such sum shall be paid in full at a rate per annum equal to the rate at which the Agent determines that it obtained (or could have obtained) overnight Federal funds to cover such amount for each such day during such period, provided that (i) any such payment by the Borrowers of such Bank's ratable share and interest thereon shall be without prejudice to any rights that the Borrowers may have against such Bank and (ii) until such Bank has paid its ratable share of such Syndicated Borrowing, together with interest pursuant to the foregoing, it will have no interest in or rights with respect to such Syndicated Borrowing for any purpose hereunder. If the Agent does not exercise its option to advance funds for the account of such Bank, it shall forthwith notify the Borrowers of such decision. Unless the Agent determines that any applicable condition specified in Article IV has not been satisfied, Wachovia will make available to the requesting Borrower at Wachovia's Lending Office the amount of any such Borrowing which is a Swing Borrowing. (d) If any Bank makes a new Syndicated Loan hereunder on a day on which the relevant Borrower is to repay all or any part of an outstanding Syndicated Loan from such Bank, such Bank shall apply the proceeds of its new Syndicated Loan to make such repayment as a Refunding Loan and only an amount equal to the difference (if any) between the amount being borrowed and the amount of such Refunding Loan shall be made available by such Bank to the Agent as provided in paragraph (c) of this Section, or remitted by the relevant Borrower to the Agent as provided in Section 2.12, as the case may be. (e) Notwithstanding anything to the contrary contained in this Agreement, no Euro-Dollar Borrowing may be made if there shall have occurred a Default or an Event of Default, which Default or Event of Default shall not have been cured or waived, and all Refunding Loans shall be made as Base Rate Loans (but shall bear interest at the Default Rate, if applicable). (f) In the event that a Notice of Borrowing fails to specify whether the Syndicated Loans comprising such Syndicated Borrowing are to be Base Rate Loans, or Euro-Dollar Loans, such Syndicated Loans shall be made as Base Rate Loans. If the Borrowers are otherwise entitled under this Agreement to repay any Syndicated Loans maturing at the end of an Interest Period applicable thereto with the proceeds of a new Borrowing, and either Borrower fails to repay such Syndicated Loans using its own moneys and fails to give a Notice of Borrowing in connection with such new Syndicated Borrowing, a new Syndicated Borrowing shall be deemed to be made on the date such Syndicated Loans mature in an amount equal to the principal amount of the Syndicated Loans so maturing, and the Syndicated Loans comprising such new Syndicated Borrowing shall be Base Rate Loans. (g) Notwithstanding anything to the contrary contained herein, there shall not be more than 7 Euro-Dollar Borrowings outstanding at any given time. SECTION 2.03. Notes. (a) The Syndicated Loans of each Bank shall be evidenced by a single Syndicated Loan Note from each Borrower payable to the order of such Bank for the account of its Lending Office in an amount equal to the original principal amount of such Bank's Commitment. (b) The Swing Loans made by Wachovia to each Borrower shall be evidenced by a single Swing Loan Note payable by such Borrower to the order of Wachovia for the account of its Lending Office in an amount equal to $5,000,000. (c) Upon receipt of each Bank's Notes pursuant to Section 4.01, the Agent shall deliver such Notes to such Bank. Each Bank (or Wachovia, with respect to the Swing Loan) shall record, and prior to any transfer of its Notes shall endorse on the schedules forming a part thereof (or on separate records of such Bank) appropriate notations to evidence, the date, amount and maturity of, and effective interest rate for, each Loan made by it, the date and amount of each payment of principal made by the Borrowers with respect thereto, and such schedules of each such Bank's Notes or other records of such Bank shall constitute rebuttable presumptive evidence of the respective principal amounts owing and unpaid on such Bank's Notes; provided that the failure of any Bank to make, or any error in making, any such recordation or endorsement shall not affect the obligation of the Borrowers hereunder or under the Notes or the ability of any Bank to assign its Notes. Each Bank is hereby irrevocably authorized by each Borrower so to endorse its Notes and to attach to and make a part of any Note a continuation of any such schedule as and when required. SECTION 2.04. Maturity of Loans. (a) Each Loan included in any Borrowing shall mature, and the principal amount thereof shall be due and payable, on the last day of the Interest Period applicable to such Borrowing. (b) Notwithstanding the foregoing, the outstanding principal amount of the Loans, if any, together with all accrued but unpaid interest thereon, if any, shall be due and payable on the Termination Date. SECTION 2.05. Interest Rates. (a) "Applicable Margin" means the sum of (x) with respect to Euro-Dollar Loans, 2.25%, and, with respect to Base Rate Loans, 0.0%, and (y) during any period in which the outstanding balance of the Loans plus the Letter of Credit Obligations exceeds 50% of the amount of the Borrowing Base (and to be increased and decreased retroactively, when applicable), then, during any such period, 0.50%. (b) Each Base Rate Loan shall bear interest on the outstanding principal amount thereof, for each day from the date such Loan is made until it becomes due, at a rate per annum equal to the Base Rate for such day plus the Applicable Margin. Such interest shall be payable for each Interest Period on the last day of the calendar month in which such Interest Period occurs. Any overdue principal of and, to the extent permitted by applicable law, overdue interest on any Base Rate Loan shall bear interest, payable on demand, for each day until paid at a rate per annum equal to the Default Rate. (c) Each Euro-Dollar Loan shall bear interest on the outstanding principal amount thereof, for the Interest Period applicable thereto, at a rate per annum equal to the sum of the Applicable Margin plus the applicable Adjusted London Interbank Offered Rate for such Interest Period. Such interest shall be payable for each Interest Period on the last day thereof and, if such Interest Period is longer than 3 months, at intervals of 3 months after the first day thereof. Any overdue principal of and, to the extent permitted by law, overdue interest on any Euro-Dollar Loan shall bear interest, payable on demand, for each day until paid at a rate per annum equal to the Default Rate. The "Adjusted London Interbank Offered Rate" applicable to any Interest Period means a rate per annum equal to the quotient obtained (rounded upwards, if necessary, to the next higher 1/100th of 1%) by dividing (i) the applicable London Interbank Offered Rate for such Interest Period by (ii) 1.00 minus the Euro-Dollar Reserve Percentage. The "London Interbank Offered Rate" applicable to any Euro-Dollar Loan means for the Interest Period of such Euro-Dollar Loan, the rate per annum determined on the basis of the offered rate for deposits in Dollars of amounts equal or comparable to the principal amount of such Euro-Dollar Loan offered for a term comparable to such Interest Period, which rates appear on the Telerate Page 3750 effective as of 11:00 A.M., London time, 2 Euro-Dollar Business Days prior to the first day of such Interest Period, provided that if no such offered rates appear on such page, the "London Interbank Offered Rate" for such Interest Period will be the arithmetic average (rounded upward, if necessary, to the next higher 1/100th of 1%) of rates quoted by not less than 2 major banks in New York City, selected by the Agent, at approximately 10:00 A.M., New York City time, 2 Euro-Dollar Business Days prior to the first day of such Interest Period, for deposits in Dollars offered by leading European banks for a period comparable to such Interest Period in an amount comparable to the principal amount of such Euro-Dollar Loan. "Euro-Dollar Reserve Percentage" means for any day that percentage (expressed as a decimal) which is in effect on such day, as prescribed by the Board of Governors of the Federal Reserve System (or any successor) for determining the maximum reserve requirement for a member bank of the Federal Reserve System in respect of "Eurocurrency liabilities" (or in respect of any other category of liabilities which includes deposits by reference to which the interest rate on Euro-Dollar Loans is determined or any category of extensions of credit or other assets which includes loans by a non-United States office of any Bank to United States residents). The Adjusted London Interbank Offered Rate shall be adjusted automatically on and as of the effective date of any change in the Euro-Dollar Reserve Percentage. (d) The Agent shall determine each interest rate applicable to the Loans hereunder. The Agent shall give prompt notice to the Borrowers and the Banks by telecopier of each rate of interest so determined, and its determination thereof shall be conclusive in the absence of manifest error. (e) After the occurrence and during the continuance of an Event of Default, the principal amount of the Loans (and, to the extent permitted by applicable law, all accrued interest thereon) may, at the election of the Required Banks, bear interest at the Default Rate. SECTION 2.06. Fees. (a) The Borrowers shall pay to the Agent, for the ratable account of each Bank, a commitment fee on the average daily amount of such Bank's Unused Commitment, at a rate per annum equal to the sum of (i) 0.25% of the entire Unused Commitment, and (ii) 0.75% of the amount of the Unused Commitment constituting the FINOVA Reserve. Such commitment fees shall accrue from and including the Closing Date to but excluding the Termination Date and shall be payable on each March 31, June 30, September 30 and December 31 and on the Termination Date. (b) The Borrowers shall pay to the Agent, for the ratable account of each Bank, a fully-earned and non-refundable facility fee equal to $50,000 on the Closing Date. SECTION 2.07. Optional Termination or Reduction of Commitments. The Borrowers may, upon at least 3 Domestic Business Days' notice to the Agent, terminate at any time, or proportionately and permanently reduce the Aggregate Unused Commitments from time to time by an aggregate amount of at least $5,000,000 or any larger integral multiple of $1,000,000. If the Commitments are terminated in their entirety, all accrued fees (as provided under Section 2.06) shall be due and payable on the effective date of such termination. SECTION 2.08. Mandatory Termination or Reduction of Commitments. The Commitments shall terminate on the Termination Date and any Loans then outstanding (together with accrued interest thereon) shall be due and payable on such date. SECTION 2.09. Optional Prepayments. (a) The Borrowers may, on notice to the Agent on or before the same Domestic Business Days as the prepayment, prepay any Base Rate Borrowing in whole at any time, or from time to time in part in amounts aggregating at least: (i) for Syndicated Borrowings, (x) so long as there are fewer than 3 Banks parties hereto, $100,000 or any larger integral multiple of $50,000 or (y) at any time during which there are 3 or more Banks parties hereto, $1,000,000 or any larger integral multiple of $100,000; and (ii) for Swing Borrowings, $100,000 and any larger integral multiple of $25,000, by paying the principal amount to be prepaid together with accrued interest thereon to the date of prepayment. Each such optional prepayment on the Syndicated Loans shall be applied to prepay ratably the Base Rate Loans of the several Banks included in such Base Rate Borrowing. AT: 1030545v10 35 (b) Subject to any payments required pursuant to the terms of Article IX for such Euro-Dollar Loan, upon 3 Domestic Business Day's prior written notice, the Borrowers may prepay in minimum amounts of $1,000,000 with additional increments of $100,000 (or any lesser amount equal to the outstanding balance of such Loan) all or any portion of the principal amount of any Euro-Dollar Loan prior to the maturity thereof. (c) Upon receipt of a notice of prepayment pursuant to this Section 2.09, the Agent shall promptly notify each Bank of the contents thereof and of such Bank's ratable share of such prepayment and such notice, once received by the Agent, shall not thereafter be revocable by the Borrowers. SECTION 2.10. Mandatory Prepayments. On each date on which the Commitments are reduced pursuant to Section 2.07 or Section 2.09, the Borrowers shall repay or prepay such principal amount of the outstanding Loans, if any (together with interest accrued thereon and any amount due under Section 9.05(a)), as may be necessary so that after such payment the Aggregate Principal Amount Outstanding does not exceed the Aggregate Commitments as then reduced. On each date on which the Borrowers are aware that the Aggregate Principal Amount Outstanding exceeds the lesser of (x) the Borrowing Base or (y) the Aggregate Commitments, the Borrowers shall repay or prepay such principal amount of the outstanding Loans, if any (together with interest accrued thereon and any amount due under Section 9.05(a)), as may be necessary so that after such payment the Aggregate Principal Amount Outstanding does not exceed the lesser of (x) the Borrowing Base or (y) the Aggregate Commitments. Each such payment or prepayment shall be applied ratably to the Loans of the Banks outstanding on the date of payment or prepayment in the following order of priority: (i) first, Swing Rate Loans; (iii) secondly, to Syndicated Loans which are Base Rate Loans; and (iv) lastly, to Euro-Dollar Loans. SECTION 2.12. General Provisions as to Payments. (a) The Borrowers shall make each payment of principal of, and interest on, the Loans and of fees hereunder, not later than 11:00 A.M. (Atlanta, Georgia time) on the date when due, in Federal or other funds immediately available in Atlanta, Georgia, to the Agent at its address referred to in Section 10.01. The Agent will promptly distribute to Wachovia each such payment received by the Agent on account of the Swing Loans and to each AT: 1030545v10 36 Bank its ratable share of each such payment of Syndicated Loans or fees received by the Agent for the account of the Banks. (b) Whenever any payment of principal of, or interest on, the Base Rate Loans or of fees hereunder shall be due on a day which is not a Domestic Business Day, the date for payment thereof shall be extended to the next succeeding Domestic Business Day. Whenever any payment of principal of or interest on, the Euro-Dollar Loans shall be due on a day which is not a Euro-Dollar Business Day, the date for payment thereof shall be extended to the next succeeding Euro-Dollar Business Day unless such Euro-Dollar Business Day falls in another calendar month, in which case the date for payment thereof shall be the next preceding Euro-Dollar Business Day. (c) All payments of principal, interest and fees and all other amounts to be made by the Borrowers pursuant to this Agreement with respect to any Loan or fee relating thereto shall be paid without deduction for, and free from, any tax, imposts, levies, duties, deductions, or withholdings of any nature now or at anytime hereafter imposed by any governmental authority or by any taxing authority thereof or therein excluding in the case of each Bank, taxes imposed on or measured by its net income, and franchise taxes imposed on it, by the jurisdiction under the laws of which such Bank is organized or any political subdivision thereof and, in the case of each Bank, taxes imposed on its income, and franchise taxes imposed on it, by the jurisdiction of such Bank's applicable Lending Office or any political subdivision thereof (all such non-excluded taxes, imposts, levies, duties, deductions or withholdings of any nature being "Taxes"). In the event that either Borrower is required by applicable law to make any such withholding or deduction of Taxes with respect to any Loan or fee or other amount, such Borrower shall pay such deduction or withholding to the applicable taxing authority, shall promptly furnish to any Bank in respect of which such deduction or withholding is made all receipts and other documents evidencing such payment and shall pay to such Bank additional amounts as may be necessary in order that the amount received by such Bank after the required withholding or other payment shall equal the amount such Bank would have received had no such withholding or other payment been made. If no withholding or deduction of Taxes are payable in respect to any Loan or fee relating thereto, the Borrowers shall furnish any Bank, at such Bank's request, a certificate from each applicable taxing authority or an opinion of counsel acceptable to such AT: 1030545v10 37 Bank, in either case stating that such payments are exempt from or not subject to withholding or deduction of Taxes. If the relevant Borrower fails to provide such original or certified copy of a receipt evidencing payment of Taxes or certificate(s) or opinion of counsel of exemption, the Borrowers hereby agree to compensate such Bank for, and indemnify them with respect to, the tax consequences of such Borrower's failure to provide evidence of tax payments or tax exemption. Each Bank which is not organized under the laws of the United States or any state thereof agrees, as soon as practicable after receipt by it of a request by either Borrower to do so, to file all appropriate forms and take other appropriate action to obtain a certificate or other appropriate document from the appropriate governmental authority in the jurisdiction imposing the relevant Taxes, establishing that it is entitled to receive payments of principal and interest under this Agreement and the Notes without deduction and free from withholding of any Taxes imposed by such jurisdiction; provided that if it is unable, for any reason, to establish such exemption, or to file such forms and, in any event, during such period of time as such request for exemption is pending, the Borrowers shall nonetheless remain obligated under the terms of the immediately preceding paragraph. In the event any Bank receives a refund of any Taxes paid by either Borrower pursuant to this Section 2.12(c), it will pay to such Borrower the amount of such refund promptly upon receipt thereof; provided that if at any time thereafter it is required to return such refund, such Borrower shall promptly repay to it the amount of such refund. Without prejudice to the survival of any other agreement of the Borrowers hereunder, the agreements and obligations of the Borrowers and the Banks contained in this Section 2.12(c) shall be applicable with respect to any Participant, Assignee or other Transferee, and any calculations required by such provisions (i) shall be made based upon the circumstances of such Participant, Assignee or other Transferee, and (ii) constitute a continuing agreement and shall survive the termination of this Agreement and the payment in full or cancellation of the Notes. SECTION 2.13. Computation of Interest and Fees. Interest on Base Rate Loans and Euro-Dollar Loans shall be computed on the basis of a year of 360 days and paid for the AT: 1030545v10 38 actual number of days elapsed (including the first day but excluding the last day). Commitment fees and any other fees payable hereunder shall be computed on the basis of a year of 360 days and paid for the actual number of days elapsed (including the first day but excluding the last day). ARTICLE III LETTER OF CREDIT FACILITY SECTION 3.01. Obligation to Issue. Subject to the terms and conditions of this Agreement, and in reliance upon the representations and warranties of the Borrowers herein set forth, the Agent shall issue for the account of either Borrower, one or more Letters of Credit denominated in Dollars, in accordance with this Article III, from time to time during the period commencing on the Closing Date and ending on the Domestic Business Day prior to the Termination Date. SECTION 3.02. Types and Amounts. The Agent shall have no obligation to issue any Letter of Credit at any time: (a) if the aggregate maximum amount then available for drawing under Letters of Credit, after giving effect to the issuance of the requested Letter of Credit, shall exceed any limit imposed by law or regulation upon the Agent; (b) if, after giving effect to the issuance of the requested Letter of Credit, (i) the aggregate Letter of Credit Obligations of both Borrowers would exceed $10,000,000, or (ii) the Aggregate Principal Amount Outstanding at such time would exceed the lesser of (x) the Borrowing Base or (y) the Aggregate Commitments; (c) which has an expiration date (i) more than 12 months after the date of issuance or (ii) after the Termination Date. SECTION 3.03. Conditions. In addition to being subject to the satisfaction of the conditions contained in Article IV, the obligation of the Agent to issue any Letter of Credit is subject to the satisfaction in full of the following conditions: AT: 1030545v10 39 (a) the relevant Borrower shall have delivered to the Agent at such times and in such manner as the Agent may prescribe, a Letter of Credit Application Agreement and such other documents and materials as may be required pursuant to the terms thereof all satisfactory in form and substance to the Agent and the terms of the proposed Letter of Credit shall be satisfactory in form and substance to the Agent; (b) as of the date of issuance no order, judgment or decree of any court, arbitrator or Authority shall purport by its terms to enjoin or restrain the Agent from issuing the Letter of Credit and no law, rule or regulation applicable to the Agent and no request or directive (whether or not having the force of law) from any Authority with jurisdiction over the Agent shall prohibit or request that the Agent refrain from the issuance of letters of credit generally or the issuance of that Letter of Credit; and (c) the Aggregate Unused Commitments shall not be less than the amount of the requested Letter of Credit. SECTION 3.04. Issuance of Letters of Credit. (a) Request for Issuance. At least 2 Domestic Business Days before the effective date for any Letter of Credit, the relevant Borrower shall give the Agent a written notice containing the original signature of an authorized officer or employee of such Borrower. Such notice shall be irrevocable and shall specify the original face amount of the Letter of Credit requested (which original face amount shall not be less than $100,000), the effective date (which day shall be a Domestic Business Day) of issuance of such requested Letter of Credit, the date on which such requested Letter of Credit is to expire, the amount of then outstanding Letter of Credit Obligations of both Borrowers, the purpose for which such Letter of Credit is to be issued, whether such Letter of Credit may be drawn in single or partial draws and the person for whose benefit the requested Letter of Credit is to be issued. (b) Issuance; Notice of Issuance. If the original face amount of the requested Letter of Credit is less than or equal to the Aggregate Unused Commitments at such time and the applicable conditions set forth in this Agreement are satisfied, the Agent shall issue the requested Letter of Credit. The Agent shall give each Bank written or telex notice in substantially the form of AT: 1030545v10 40 Exhibit G, or telephonic notice confirmed promptly thereafter in writing, of the issuance of a Letter of Credit, and shall deliver to each Bank in connection with such notice a copy of the Letter of Credit issued by the Agent. (c) No Extension or Amendment. The Agent shall not extend or amend any Letter of Credit if the issuance of a new Letter of Credit having the same terms as such Letter of Credit as so amended or extended would be prohibited by Section 3.02 or Section 3.03. SECTION 3.05. Reimbursement Obligations; Duties of the Issuing Bank. (a) Reimbursement. Notwithstanding any provisions to the contrary in any Letter of Credit Application Agreement: (i) the Borrowers shall reimburse the Agent for drawings under a Letter of Credit issued by it no later than the earlier of (A) the time specified in such Letter of Credit Application Agreement, or (B) 1 Domestic Business Day after the payment by the Agent; (ii) any Reimbursement Obligation with respect to any Letter of Credit shall bear interest from the date of the relevant drawing under the pertinent Letter of Credit until the date of payment in full thereof at a rate per annum equal to (A) prior to the date that is 3 Domestic Business Days after the date of the related payment by the Agent, the Base Rate and (B) thereafter, the Default Rate; and (iii) in order to implement the foregoing, upon the occurrence of a draw under any Letter of Credit, unless the Agent is reimbursed in accordance with subsection (i) above, the Borrowers irrevocably authorize the Agent to treat such nonpayment as a Notice of Borrowing in the amount of such Reimbursement Obligation and to make Loans to the relevant Borrower in such amount regardless of whether the conditions precedent to the making of Loans hereunder have been met. The Borrowers further authorize the Agent to credit the proceeds of such Loan so as to immediately eliminate the liability of the relevant Borrower for Reimbursement Obligations under such Letter of Credit. AT: 1030545v10 41 (b) Duties of the Agent. Any action taken or omitted to be taken by the Agent in connection with any Letter of Credit, if taken or omitted in the absence of willful misconduct or gross negligence, shall not put the Agent under any resulting liability to any Bank, or assuming that the Agent has complied with the procedures specified in Section 3.04 and such Bank has not given a notice contemplated by Section 3.06(a) that continues in full force and effect, relieve that Bank of its obligations hereunder to the Agent. In determining whether to pay under any Letter of Credit, the Agent shall have no obligation relative to the Banks other than to confirm that any documents required to have been delivered under such Letter of Credit appear to comply on their face, with the requirements of such Letter of Credit. SECTION 3.06. Participations. (a) Purchase of Participations. Immediately upon issuance by the Agent of any Letter of Credit in accordance with the procedures set forth in Section 3.04, each Bank shall be deemed to have irrevocably and unconditionally purchased and received from the Agent, without recourse or warranty, an undivided interest and participation, to the extent of such Bank's share of the Aggregate Commitments, in such Letter of Credit; provided, that a Letter of Credit shall not be entitled to the benefits of this Section 3.06 if the Agent shall have received written notice from any Bank on or before the Domestic Business Day immediately prior to the date of the Agent's issuance of such Letter of Credit that one or more of the conditions contained in Section 3.03 or Article IV is not then satisfied, and, in the event the Agent receives such a notice, it shall have no further obligation to issue any Letter of Credit until such notice is withdrawn by that Bank or until the Required Banks have effectively waived such condition in accordance with the provisions of this Agreement. (b) Sharing of Letter of Credit Payments. In the event that the Agent makes any payment under any Letter of Credit for which the relevant Borrower shall not have repaid such amount to the Agent pursuant to Section 3.07 or which cannot be paid by a Loan pursuant to subsection (iii) of Section 3.05, the Agent shall promptly notify each Bank of such failure, and each Bank shall promptly and unconditionally pay to the Agent such Bank's share of the Aggregate Commitments of the amount of such payment in Dollars and in same day funds. If the Agent so notifies such Bank prior to 10:00 A.M. (Atlanta, Georgia time) on any Domestic AT: 1030545v10 42 Business Day, such Bank shall make available to the Agent its ratable share of the amount of such payment on such Domestic Business Day in same day funds. If and to the extent such Bank shall not have so made its ratable share of the amount of such payment available to the Agent, such Bank agrees to pay to the Agent forthwith on demand such amount together with interest thereon, for each day from the date such payment was first due until the date such amount is paid to the Agent at the Base Rate for the first 3 days and thereafter at the Default Rate. The failure of any Bank to make available to the Agent its ratable share of any such payment shall neither relieve nor increase the obligation of any other Bank hereunder to make available to the Agent its ratable share of any payment on the date such payment is to be made. (c) Sharing of Reimbursement Obligation Payments. Whenever the Agent receives a payment on account of a Reimbursement Obligation, including any interest thereon, as to which the Agent has received any payments from the Banks pursuant to this Section 3.06, it shall promptly pay to each Bank which has funded its participating interest therein, in Dollars and in the kind of funds so received, an amount equal to such Bank's ratable share thereof. Each such payment shall be made by the Agent on the Domestic Business Day on which the funds are paid to such Person, if received prior to 10:00 am. (Atlanta, Georgia time) on such Domestic Business Day, and otherwise on the next succeeding Domestic Business Day. (d) Documentation. Upon the request of any Bank, the Agent shall furnish to such Bank copies of any Letter of Credit, Letter of Credit Application Agreement and other documentation relating to Letters of Credit issued pursuant to this Agreement. (e) Obligations Irrevocable. The obligations of the Banks to make payments to the Agent with respect to a Letter of Credit shall be irrevocable, not subject to any qualification or exception whatsoever and shall be made in accordance with, but not subject to, the terms and conditions of this Agreement under all circumstances (assuming that the Agent has issued such Letter of Credit in accordance with Section 3.04 and such Bank has not given a notice contemplated by Section 3.06(a) that continues in full force and effect), including, without limitation, any of the following circumstances: AT: 1030545v10 43 (i) any lack of validity or enforceability of this Agreement or any of the other Loan Documents; (ii) the existence of any claim, set-off, defense or other right which either Borrower may have at any time against a beneficiary named in a Letter of Credit or any transferee of any Letter of Credit (or any Person for whom any such transferee may be acting), the Agent, any Bank or any other Person, whether in connection with this Agreement, any Letter of Credit, the transactions contemplated herein or any unrelated transactions; (iii) any draft, certificate or any other document presented under the Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect; (iv) the surrender or impairment of any security for the performance or observance of any of the terms of any of the Loan Documents; (v) payment by the Agent under any Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect; (vi) payment by the Agent under any Letter of Credit against presentation of any draft or certificate that does not comply with the terms of such Letter of Credit, except payment resulting from the gross negligence or willful misconduct of the Agent; or (vii) any other circumstances or happenings whatsoever, whether or not similar to any of the foregoing, except circumstances or happenings resulting from the gross negligence or willful misconduct of the Agent. SECTION 3.07. Payment of Reimbursement Obligations. (a) Payments to Issuing Bank. Each Borrower agrees to pay to the Agent the amount of all Reimbursement Obligations, interest and other amounts payable to the Agent under or in connection with any Letter of Credit issued for either Borrower's account immediately when due, irrespective of: AT: 1030545v10 44 (i) any lack of validity or enforceability of this Agreement or any of the other Loan Documents; (ii) the existence of any claim, set-off, defense or other right which either Borrower may have at any time against a beneficiary named in a Letter of Credit or any transferee of any Letter of Credit (or any Person for whom any such transferee may be acting), the Agent, any Bank or any other Person, whether in connection with this Agreement, any Letter of Credit, the transactions contemplated herein or any unrelated transactions; (iii) any draft, certificate or any other document presented under the Letter of Credit proves to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect; (iv) the surrender or impairment of any security for the performance or observance of any of the terms of any of the Loan Documents; (v) payment by the Agent under any Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect; (vi) payment by the Agent under any Letter of Credit against presentation of any draft or certificate that does not comply with the terms of such Letter of Credit, except payment resulting from the gross negligence or willful misconduct of the Agent; or (vii) any other circumstances or happenings whatsoever, whether or not similar to any of the foregoing, except circumstances or happenings resulting from the gross negligence or willful misconduct of the Agent. (b) Recovery or Avoidance of Payments. In the event any payment by or on behalf of the Borrower received by the Agent with respect to a Letter of Credit and distributed by the Agent to the Banks on account of their participations is thereafter set aside, avoided or recovered from the Agent in connection with any receivership, liquidation or bankruptcy proceeding, each Bank that received such distribution shall, upon demand by such Agent, contribute such Bank's ratable share of the amount set aside, AT: 1030545v10 45 avoided or recovered together with interest at the rate required to be paid by the Agent upon the amount required to be repaid by it. SECTION 3.08. Compensation for Letters of Credit and Agent Reporting Requirements. (a) Letter of Credit Fees and Fronting Fees. The Borrowers shall pay to the Agent with respect to each Letter of Credit issued hereunder (i) a letter of credit fee ("Letter of Credit Fee") equal to the Applicable Margin in effect from time to time for Euro-Dollar Loans multiplied by the face amount of such Letter of Credit and (ii) to the Agent, solely for its own account, a fronting fee (the "Fronting Fee") equal to 0.125% per annum of the face amount. The Letter of Credit Fee and the Fronting Fee shall be payable on the Domestic Business Day on which such Letter of Credit is issued. Letter of Credit Fees and Fronting Fees payable hereunder shall be computed on the basis of a year of 360 days and paid for the actual number of days elapsed (including the first day but excluding the last day). The Agent shall promptly remit such Letter of Credit Fees, when paid, to the Banks in accordance with their ratable shares of the Aggregate Commitments. (b) Agent Charges. The Borrowers shall pay to the Agent, solely for its own account, the standard charges assessed by the Agent in connection with the issuance, administration, amendment and payment or cancellation of Letters of Credit issued hereunder, which charges shall be those typically charged by the Agent to its customers generally having credit and other characteristics similar to the Borrowers, as determined in good faith by the Agent. SECTION 3.09. Indemnification; Exoneration. (a) Indemnification. In addition to amounts payable as elsewhere provided in this Article III, the Borrowers shall protect, indemnify, pay and save the Agent and each Bank harmless from and against any and all claims, demands, liabilities, damages, losses, costs, charges and expenses (including reasonable attorneys' fees) which the Agent, or any Bank may incur or be subject to as a consequence of the issuance of any Letter of Credit for either Borrower's account other than as a result of its gross negligence or willful misconduct, as determined by a court of competent jurisdiction. AT: 1030545v10 46 (b) Assumption of Risk by Borrowers. As between the Borrowers, the Agent and the Banks, the Borrowers assume all risks of the acts and omissions of, or misuse of the Letters of Credit issued for either Borrower's account by, the respective beneficiaries of such Letters of Credit. In furtherance and not in limitation of the foregoing, the Agent and the Banks shall not be responsible for (i) the form, validity, sufficiency, accuracy, genuineness or legal effect of any document submitted by any party in connection with the application for and issuance of the Letters of Credit, even if it should in fact prove to be in any or all respects invalid, insufficient, inaccurate, fraudulent or forged, (ii) the validity or sufficiency of any instrument transferring or assigning or purporting to transfer or assign a Letter of Credit or the rights or benefits thereunder or proceeds thereof, in whole or in part, which may prove to be invalid or ineffective for any reason, (iii) failure of the beneficiary of a Letter of Credit to comply duly with conditions required in order to draw upon such Letter of Credit, (iv) errors, omissions, interruptions or delays in transmission or delivery of any messages, by mail, cable, telegraph, telex or otherwise, whether or not they be in cipher, for errors in interpretation of technical terms, (vi) any loss or delay in the transmission or otherwise of any document required in order to make a drawing under any Letter of Credit or of the proceeds thereof, (vii) the misapplication by the beneficiary of a Letter of Credit of the proceeds of any drawing under such Letter of Credit; and (viii) any consequences arising from causes beyond the control of the Agent and the Banks. (c) Exoneration. In furtherance and extension and not in limitation of the specific provisions hereinabove set forth, any action taken or omitted by the Agent under or in connection with the Letters of Credit or any related certificates if taken or omitted in good faith and with reasonable care, shall not put the Agent or any Bank under any resulting liability to the Borrowers or relieve the Borrowers of any of its obligations hereunder to any such Person. SECTION 3.10. Credit Yield Protection; Capital Adequacy. If the adoption after the date hereof of any applicable law, statute, rule, regulation, ordinance, writ, injunction, decree, order, judgment, guideline or decision of any Authority ("Governmental Rule"), any change after the date hereof in any interpretation or administration of any applicable Governmental Rule by any Person charged with its interpretation AT: 1030545v10 47 or administration or compliance by the Agent or any Bank (or its Lending Office) with any request or directive (whether or not having the force of law) of any such Person: (a) shall subject the Agent or any Bank (or its Lending Office) to any tax (other than overall net income taxation or franchise taxes), duty or other charge with respect to any amount drawn on any Letter of Credit or its obligation to make any payment under the Letters of Credit, or to maintain the Letters of Credit, or shall change the basis of taxation (other than overall net income taxation or franchise taxes) of payments to the Agent or any Bank (or its Lending Office) of any amounts due under this Agreement or any amount drawn on the Letters of Credit; or (b) shall impose, modify or deem applicable any reserve (including, without limitation, any imposed by the Board of Governors of the Federal Reserve System or any Person regulating insurance activities or insurance companies), special deposit or similar requirements against assets of, deposits with or for the account of, credit extended by, letters of credit issued or maintained by, or collateral subject to a lien in favor of the Agent or any Bank (or its Lending Office), or shall impose on the Agent or any Bank (or its Lending Office) any other condition affecting any amount drawn on the Letters of Credit, or its obligation to make any payment under the Letters of Credit, as the case may be, or to maintain the Letters of Credit; then the remaining provisions of this Section 3.10 shall apply. If the result of any of the foregoing (without regard to whether the Agent or any Bank shall have sold participations in its respective obligations under this Agreement) is to increase the cost to or to impose a cost on the Agent or any Bank (or its Lending Office) of making or maintaining any amounts payable hereunder, of maintaining the Letters of Credit, or to reduce the amount of any sum received or receivable by the Agent or any Bank (or its Lending Office) under any Letter of Credit, then: (i) the Agent or such Bank shall promptly deliver to the Borrowers a certificate stating the change which has occurred or the reserve requirements or other conditions which have been imposed on the Agent or such Bank (or its Lending Office) or the AT: 1030545v10 48 request, direction or requirement with which it has complied, together with the date hereof; and (ii) the Borrowers shall pay to the Agent or such Bank within 15 days of written request (which request shall state the amount of increased cost, reduction or payment and the way in which such amount has been calculated), such amount or amounts as will compensate the Agent or such Bank for the additional cost, reduction of return or payment incurred by the Agent or such other Bank; provided, that the Borrowers shall have no liability for amounts related to periods earlier than 90 days prior to the date of such written request. The written request of the Agent or such Bank as to the additional amounts payable pursuant to this paragraph delivered to the Borrowers shall be conclusive evidence of the amount thereof in the absence of manifest error. (c) If any Bank shall have determined that after the date hereof the adoption of any applicable law, rule or regulation regarding capital adequacy, or any change therein, or any change in the interpretation or administration thereof, or compliance by any Bank (or its Lending Office) with any request or directive regarding capital adequacy (whether or not having the force of law) of any Authority, has or would have the effect of reducing the rate of return on such Bank's capital as a consequence of its obligations hereunder to a level below that which such Bank could have achieved but for such adoption, change or compliance (taking into consideration such Bank's policies with respect to capital adequacy) by an amount deemed by such Bank to be material, then from time to time, within 15 days after demand by such Bank, the Borrowers shall pay to such Bank such additional amount or amounts as will compensate such Bank for such reduction; provided, that the Borrowers shall have no liability for amounts related to periods earlier than 90 days prior to the date of such written request. (d) Each Bank will promptly notify the Borrowers and the Agent of any event of which it has knowledge, occurring after the date hereof, which will entitle such Bank to compensation pursuant to this Section and will designate a different Lending Office if such designation will avoid the AT: 1030545v10 49 need for, or reduce the amount of, such compensation and will not, in the judgment of such Bank, be otherwise disadvantageous to such Bank. A certificate of any Bank claiming compensation under this Section and setting forth the additional amount or amounts to be paid to it hereunder shall be conclusive in the absence of manifest error. In determining such amount, such Bank may use any reasonable averaging and attribution methods. (e) The provisions of this Section 3.10 shall be applicable with respect to any Participant, Assignee or other Transferee, and any calculations required by such provisions shall be made based upon the circumstances of such Participant, Assignee or other Transferee. ARTICLE IV CONDITIONS TO BORROWINGS SECTION 4.01. Conditions to Closing. The obligation of the Agent and each Bank to enter into this Agreement is subject to the satisfaction of the conditions set forth in Section 4.02 and receipt by the Agent of the following (as to the documents described in paragraphs (a), (d), (e) and (f) below, in sufficient number of counterparts for delivery of a counterpart to each Bank and retention of one counterpart by the Agent): (a) from each of the parties hereto of either (i) a duly executed counterpart of this Agreement signed by such party or (ii) a facsimile transmission of such executed counterpart, with the original to be sent to the Agent by overnight courier; (b) a duly executed Syndicated Loan Note for the account of each Bank and a duly executed Swing Loan Note for the account of Wachovia, in each case complying with the provisions of Section 2.03; (c) evidence of perfected filings of UCC Financing Statements in connection with the Security Agreements in form and substance acceptable to the Agent; (d) an opinion letter (together with any opinions of local counsel relied on therein) of Long, Aldridge & Norman, AT: 1030545v10 50 counsel for the Borrowers, dated as of the Closing Date, substantially in the form of Exhibit B and covering such additional matters relating to the transactions contemplated hereby as the Agent or any Bank may reasonably request; (e) an opinion of Jones, Day, Reavis & Pogue, special counsel for the Agent, dated as of the Closing Date, substantially in the form of Exhibit C and covering such additional matters relating to the transactions contemplated hereby as the Agent may reasonably request; (f) a certificate (the "Closing Certificate") substantially in the form of Exhibit I), dated as of the Closing Date, signed by a principal financial officer of each of the Borrowers, to the effect that (i) no Default has occurred and is continuing on the Closing Date and (ii) the representations and warranties of the Borrowers contained in Article V are true on and as of the Closing Date; (g) Landlord Agreements with respect to SEDI for its (i) the City of Industry, California location, and (ii) Dauphin County, Pennsylvania, along with copies of the executed leases therefor; (h) a certificate of insurance respecting all insurance coverage required by the Security Agreements in forms and substance acceptable to the Agent; (i) judgment, tax and UCC lien searches with respect to the Collateral and releases of all liens other than Permitted Encumbrances; (j) all documents which the Agent or any Bank may reasonably request relating to the existence of the Borrowers, the corporate authority for and the validity of this Agreement, the Notes, and the other Loan Documents, and any other matters relevant hereto, all in form and substance satisfactory to the Agent, including, without limitation, a certificate of each of the Borrowers substantially in the form of Exhibit J (the "Officer's Certificate"), signed by the Secretary or an Assistant Secretary of such Borrower, certifying as to the names, true signatures and incumbency of the officer or officers of such Borrower authorized to execute and deliver the Loan Documents, and certified copies of the following items: (i) such Borrower's Certificate of AT: 1030545v10 51 Incorporation, (ii) such Borrower's Bylaws, (iii) a certificate of the Secretary of State of the State of Georgia as to the good standing of such Borrower, respectively, and (iv) the action taken by the Board of Directors of such Borrower authorizing such Borrower's execution, delivery and performance of this Agreement, the Notes and the other Loan Documents to which such Borrower is a party; (k) a Notice of Borrowing and a Borrowing Base Certificate; (l) an executed Security Agreement from each Borrower and each Domestic Subsidiary, and an executed Guarantee from each Domestic Subsidiary substantially in the form of Exhibit O; (m) an executed FINOVA Intercreditor Agreement; (n) receipt by the Agent of a telephone instruction letter, concerning requests for Loans hereunder, to be substantially in the form of Exhibit L attached hereto; and (o) payment of (i) fees owed to the Agent pursuant to Section 2.06(b) hereof, and (ii) the Agent's attorney fees and expenses incurred in connection with this Agreement. In addition, if either Borrower desires funding of a Euro-Dollar Loan on the Closing Date, the Agent shall have received, the requisite number of days prior to the Closing Date, a funding indemnification letter satisfactory to it, pursuant to which (i) the Agent and such Borrower shall have agreed upon the interest rate, amount of Borrowing and Interest Period for such Euro- Dollar Loan, and (ii) such Borrower shall indemnify the Banks from any loss or expense arising from the failure to close on the anticipated Closing Date identified in such letter or the failure to borrow such Euro-Dollar Loan on such date. SECTION 4.02. Conditions to All Borrowings. The obligation of each Bank to make a Syndicated Loan on the occasion of each Borrowing, or of Wachovia to make a Swing Loan or of the Agent to issue a Letter of Credit is subject to the satisfaction of the following conditions: AT: 1030545v10 52 (a) receipt by the Agent of a Notice of Borrowing or notice pursuant to Section 3.04(b) of a request for a Letter of Credit, accompanied by a Letter of Credit Application Agreement and any other documents required pursuant to Section 3.03(a). (b) the fact that, immediately before and after such Borrowing or Letter of Credit Issuance, as applicable, no Default shall have occurred and be continuing; (c) the fact that the representations and warranties of the Borrowers contained in Article V of this Agreement shall be true on and as of the date of such Borrowing; and (d) the fact that, immediately after such Borrowing or issuance of a Letter of Credit, the conditions set forth in clauses (i) and (ii) of Section 2.01 shall have been satisfied. Each Syndicated Borrowing, each Swing Borrowing and each request for the issuance of a Letter of Credit hereunder shall be deemed to be a representation and warranty by the Borrowers on the date of such Borrowing as to the truth and accuracy of the facts specified in paragraphs (b), (c) and (d) of this Section. ARTICLE V REPRESENTATIONS AND WARRANTIES Each of the Borrowers represents and warrants that: SECTION 5.01. Corporate Existence and Power. Such Borrower is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation, is duly qualified to transact business in every jurisdiction where, by the nature of its business, the failure to qualify could have a Material Adverse Effect, and has all corporate powers and all governmental licenses, authorizations, consents and approvals required to carry on its business as now conducted. SECTION 5.02. Corporate and Governmental Authorization; No Contravention. The execution, delivery and performance by such Borrower of this Agreement, the Notes and the other Loan AT: 1030545v10 53 Documents (i) are within such Borrower's corporate powers, (ii) have been duly authorized by all necessary corporate action, (iii) require no action by or in respect of or filing with, any governmental body, agency or official, (iv) do not contravene, or constitute a default under, any provision of applicable law or regulation or of the certificate of incorporation or by-laws of such Borrower or of any agreement, judgment, injunction, order, decree or other instrument binding upon such Borrower or any of its Subsidiaries, and (v) do not result in the creation or imposition of any Lien on any asset of such Borrower or any of its Subsidiaries. SECTION 5.03. Binding Effect. This Agreement constitutes a valid and binding agreement of such Borrower enforceable in accordance with its terms, and the Notes and the other Loan Documents executed by such Borrower, when executed and delivered in accordance with this Agreement, will constitute valid and binding obligations of such Borrower enforceable in accordance with their respective terms, provided that the enforceability hereof and thereof is subject in each case to general principles of equity and to bankruptcy, insolvency and similar laws affecting the enforcement of creditors' rights generally. SECTION 5.04. Financial Information. (a) The consolidated balance sheet of the Borrowers and the Consolidated Subsidiaries as of June 30, 1999 and the related consolidated statements of income, shareholders' equity and cash flows for the Fiscal Year then ended, reported on by Deloitte & Touche LLP, copies of which have been delivered to each of the Banks, and the unaudited consolidated financial statements of the Borrowers for the interim period ended June 30, 1999 copies of which have been delivered to each of the Banks, fairly present, in conformity with GAAP, the consolidated financial position of the Borrowers and their Consolidated Subsidiaries as of such dates and their consolidated results of operations and cash flows for such periods stated. (b) Since June 30, 1999 there has been no event, act, condition or occurrence having a Material Adverse Effect. SECTION 5.05. No Litigation. There is no action, suit or proceeding pending, or to the knowledge of such Borrower threatened, against or affecting the Borrowers or any of the Subsidiaries before any court or arbitrator or any governmental AT: 1030545v10 54 body, agency or official which, if adversely determined, could have a Material Adverse Effect or which in any manner draws into question the validity of or could impair the ability of the Borrowers to perform their respective obligations under, this Agreement, the Notes, the Letter of Credit Application Agreements or any of the other Loan Documents executed by either of them. SECTION 5.06. Compliance with ERISA. (a) The Borrowers and each member of the Controlled Group have fulfilled their obligations under the minimum funding standards of ERISA and the Code with respect to each Plan and are in compliance in all material respects with the presently applicable provisions of ERISA and the Code, and have not incurred any liability to the PBGC or a Plan under Title IV of ERISA. (b) Neither of the Borrowers nor any member of the Controlled Group is or ever has been obligated to contribute to any Multiemployer Plan. SECTION 5.07. Compliance with Laws; Payment of Taxes. The Borrowers and the Subsidiaries are in compliance with all applicable laws, regulations and similar requirements of governmental authorities, except where such compliance is being contested in good faith through appropriate proceedings or where a failure to comply could not have a Material Adverse Effect. There have been filed on behalf of the Borrowers and the Subsidiaries all Federal, state and local income, excise, property and other tax returns which are required to be filed by them and all taxes due pursuant to such returns or pursuant to any assessment received by or on behalf of the Borrowers or any Subsidiary have been paid. The charges, accruals and reserves on the books of the Borrowers and the Subsidiaries in respect of taxes or other governmental charges are, in the opinion of the Borrowers, adequate. United States income tax returns of the Borrowers and the Subsidiaries have been examined and closed through the Fiscal Year ended 1993. SECTION 5.08. Subsidiaries. Each of the Borrowers' respective Subsidiaries is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation, is duly qualified to transact business in every jurisdiction where, by the nature of its business, failure to qualify could have a Material Adverse Effect, and has all corporate powers and all governmental licenses, authorizations, consents and approvals required to carry on its business as now AT: 1030545v10 55 conducted. The Borrowers have no Subsidiaries except for those Subsidiaries listed on Schedule 5.08, which accurately sets forth, by Borrower, each such Subsidiary's complete name and jurisdiction of incorporation. SECTION 5.09. Investment Company Act. Neither of the Borrowers nor any of the Subsidiaries is an "investment company" within the meaning of the Investment Company Act of 1940, as amended. SECTION 5.10. Public Utility Holding Company Act. Neither of the Borrowers nor any of the Subsidiaries is a "holding company", or a "subsidiary company" of a "holding company", or an "affiliate" of a "holding company" or of a "subsidiary company" of a "holding company", as such terms are defined in the Public Utility Holding Company Act of 1935, as amended. SECTION 5.11. Ownership of Property; Liens. Each of the Borrowers and their Consolidated Subsidiaries has title to its properties sufficient for the conduct of its business, and none of such property is subject to any Lien except as permitted in Section 6.18. SECTION 5.12. No Default. Neither of the Borrowers nor any of their Consolidated Subsidiaries is in default under or with respect to any agreement, instrument or undertaking to which it is a party or by which it or any of its property is bound which default could have or cause a Material Adverse Effect. No Default or Event of Default has occurred and is continuing. SECTION 5.13. Full Disclosure. All information heretofore furnished by the Borrowers to the Agent or any Bank for purposes of or in connection with this Agreement or any transaction contemplated hereby is, and all such information hereafter furnished by the Borrowers to the Agent or any Bank will be, true, accurate and complete in every material respect or based on reasonable estimates on the date as of which such information is stated or certified. The Borrowers have disclosed to the Banks in writing any and all facts which could have or cause a Material Adverse Effect. SECTION 5.14. Environmental Matters. (a) Neither the Borrowers nor any Subsidiary is subject to any Environmental Liability which could have or cause a Material Adverse Effect and AT: 1030545v10 56 neither the Borrowers nor any Subsidiary has been designated as a potentially responsible party under CERCLA or under any state statute similar to CERCLA. None of the Properties has been identified on any current or proposed (i) National Priorities List under 40 C.F.R. ss. 300, (ii) CERCLIS list or (iii) any list arising from a state statute similar to CERCLA. (b) To the Borrowers' knowledge, no Hazardous Materials have been or are being used, produced, manufactured, processed, treated, recycled, generated, stored, disposed of, managed or otherwise handled at, or shipped or transported to or from the Properties or are otherwise present at, on, in or under the Properties, or, to the best of the knowledge of the Borrowers, at or from any adjacent site or facility, except for Hazardous Materials, such as cleaning solvents, pesticides and other materials used, produced, manufactured, processed, treated, recycled, generated, stored, disposed of, managed, or otherwise handled in minimal amounts in the ordinary course of business in compliance with all applicable Environmental Requirements. (c) Each of the Borrowers, and each of the Subsidiaries and Affiliates, has procured all Environmental Authorizations necessary for the conduct of its business, and is in material compliance with all Environmental Requirements in connection with the operation of the Properties and the Borrowers', and each of their Subsidiary's and Affiliate's, respective businesses. SECTION 5.15. Capital Stock. All Capital Stock, debentures, bonds, notes and all other securities of the Borrowers and the Subsidiaries presently issued and outstanding are validly and properly issued in accordance with all applicable laws, including, but not limited to, the "Blue Sky" laws of all applicable states and the federal securities laws. The issued shares of Capital Stock of the Borrowers' respective Wholly Owned Subsidiaries are owned by the Borrowers free and clear of any Lien or adverse claim. At least a majority of the issued shares of capital stock of each of each Borrower's other Subsidiaries (other than Wholly Owned Subsidiaries) is owned by such Borrower free and clear of any Lien or adverse claim. SECTION 5.16. Margin Stock. Neither the Borrowers nor any of the Subsidiaries is engaged principally, or as one of its important activities, in the business of purchasing or carrying any Margin Stock, and no part of the proceeds of any Loan will be AT: 1030545v10 57 used to purchase or carry any Margin Stock or to extend credit to others for the purpose of purchasing or carrying any Margin Stock, or be used for any purpose which violates, or which is inconsistent with, the provisions of Regulation T, U or X. SECTION 5.17. Insolvency. After giving effect to the execution and delivery of the Loan Documents and the making of the Loans under this Agreement: (i) neither of the Borrowers will (x) be "insolvent," within the meaning of such term as used in O.C.G.A. ss. 18-2-22 or as defined in ss. 101 of the "Bankruptcy Code", or Section 2 of either the "UFTA" or the "UFCA", or as defined or used in any "Other Applicable Law" (as those terms are defined below), or (y) be unable to pay its debts generally as such debts become due within the meaning of Section 548 of the Bankruptcy Code, Section 4 of the UFTA or Section 6 of the UFCA, or (z) have an unreasonably small capital to engage in any business or transaction, whether current or contemplated, within the meaning of Section 548 of the Bankruptcy Code, Section 4 of the UFTA or Section 5 of the UFCA; and (ii) the obligations of the Borrowers under the Loan Documents and with respect to the Loans will not be rendered avoidable under any Other Applicable Law. For purposes of this Section 5.17, "Bankruptcy Code" means Title 11 of the United States Code, "UFTA" means the Uniform Fraudulent Transfer Act, "UFCA" means the Uniform Fraudulent Conveyance Act, and "Other Applicable Law" means any other applicable law pertaining to fraudulent transfers or acts voidable by creditors, in each case as such law may be amended from time to time. SECTION 5.18. Y2K Plan. The Borrowers have developed and have delivered to the Agent and the Banks a written plan (the "Y2K Plan") for the testing and, if necessary, repair, of all Mission Critical Systems and Equipment in order that they will be Year 2000 Compliant and Ready on or before January 1, 2000. The Borrowers have timely achieved all such tests and repairs as of the dates set forth on the Y2K Plan. AT: 1030545v10 58 ARTICLE VI COVENANTS The Borrowers agree that, so long as any Bank has any Commitment hereunder or any amount payable hereunder or under any Note remains unpaid: SECTION 6.01. Information. The Borrowers will deliver to each of the Banks: (a) as soon as available and in any event within 90 days after the end of each Fiscal Year, a consolidated balance sheet of the Borrowers and the Consolidated Subsidiaries as of the end of such Fiscal Year and the related consolidated statements of income, shareholders' equity and cash flows for such Fiscal Year, setting forth in each case in comparative form the figures for the previous fiscal year, all certified by Deloitte & Touche LLP or other independent public accountants of nationally recognized standing, with such certification to be free of exceptions and qualifications not acceptable to the Required Banks; (b) as soon as available and in any event within 30 days after the end of each of the first 12 Fiscal Months of each Fiscal Year, consolidated and consolidating balance sheets of the Borrowers and the Consolidated Subsidiaries as of the end of such Fiscal Month and the related statement of income and statement of cash flows for such Fiscal Month and for the portion of the Fiscal Year ended at the end of such Fiscal Month setting forth in each case in comparative form the figures for the corresponding Fiscal Month and the corresponding portion of the previous Fiscal Year, all certified (subject to normal year-end adjustments) as to fairness of presentation, GAAP and consistency by the chief financial officer or the chief accounting officer of each of the Borrowers; (c) simultaneously with the delivery of each set of financial statements referred to in paragraphs (a) and (b) above, a certificate, substantially in the form of Exhibit H (a "Compliance Certificate"), of the chief financial officer or the chief accounting officer of each of the Borrowers (i) setting forth in reasonable detail the calculations required to establish whether the Borrowers were in compliance with the requirements of Sections 6.05, 6.15, 6.18, and 6.20 through 6.24, inclusive, on AT: 1030545v10 59 the date of such financial statements and (ii) stating whether any Default exists on the date of such certificate and, if any Default then exists, setting forth the details thereof and the action which the Borrowers are taking or proposes to take with respect thereto; (d) simultaneously with the delivery of each set of annual financial statements referred to in paragraph (a) above, a statement of the firm of independent public accountants which reported on such statements to the effect that nothing has come to their attention to cause them to believe that any Default existed on the date of such financial statements; (e) as soon as practicable, but in any event on or before 10 days after the end of each Fiscal Month, a status report, certified by a duly authorized officer of each of the Borrowers, showing (i) the aggregate dollar value of the items comprising the Accounts Receivable and the age of each individual item thereof as of the last day of the preceding Fiscal Month (segregating such items to show any which are subject to a Lien under any of the Distributor Agreements, and otherwise segregating such items in such manner and to such degree as the Agent may request), (ii) the type, dollar value and location of the Inventory as at the end of the preceding Fiscal Month, valued at the lower of FIFO cost or market value (segregating such items to show separately those which are (x) subject to a Lien under any of the Distributor Agreements, (y) are the subject of an invoice to such Borrower from the seller thereof dated more than 90 days prior to the date of such report and (z) were manufactured more than 365 days prior to the date of such report) and (iii) the aggregate dollar value of the items comprising the accounts payable of the Borrowers and the age of each individual item thereof as of the last day of the preceding Fiscal Month (segregating such items in such manner and to such degree as the Agent may request); (f) at the end of each calendar week (i) a Borrowing Base Certificate (a "Borrowing Base Certificate") in substantially the form of Exhibit F, setting forth the calculations of the Borrowing Base, as of such date as of the date of report submission, certified as to truth and accuracy by a duly authorized officer of each of the Borrowers; (ii) (a) during the existence of a Default or Event of Default, confirmatory assignment schedules; (b) copies of Account Debtor invoices; and (c) such further schedules, documents and/or AT: 1030545v10 60 information regarding the Accounts Receivable as the Agent may require; and (iii) (a) a detailed aging schedule of all Accounts Receivable by Account Debtor, in such detail, and accompanied by such supporting information, as the Agent may from time to time reasonably request, (b) a detailed aging of all accounts payable by vendor or supplier, in such detail, and accompanied by such supporting information, as the Agent may from time to time reasonably request (The items to be provided under this Section shall be in form satisfactory to the Agent, and certified as true and correct by the Borrower's chief financial officer or president, and delivered to the Agent and the other Lenders from time to time solely for the Agent's and the other Lenders' convenience in maintaining records of the Collateral. The Borrower's failure to deliver any of such items to the Agent or the other Lenders shall not affect, terminate, modify, or otherwise limit the Agent's security interests in the Collateral); (g) within 5 Domestic Business Days after either Borrower becomes aware of the occurrence of any Default, a certificate of the chief financial officer or the chief accounting officer of each of the Borrowers setting forth the details thereof and the action which the Borrowers are taking or proposes to take with respect thereto; (h) promptly upon the mailing thereof to the shareholders of the Borrowers generally, copies of all financial statements, reports and proxy statements so mailed; (i) promptly upon the filing thereof, copies of all registration statements (other than the exhibits thereto and any registration statements on Form S-8 or its equivalent) and annual, quarterly or monthly reports which the Borrowers shall have filed with the Securities and Exchange Commission; (j) if and when any member of the Controlled Group (i) gives or is required to give notice to the PBGC of any "reportable event" (as defined in Section 4043 of ERISA) with respect to any Plan which might constitute grounds for a termination of such Plan under Title IV of ERISA, or knows that the plan administrator of any Plan has given or is required to give notice of any such reportable event, a copy of the notice of such reportable event given or required to be given to the PBGC; (ii) receives notice of complete or partial withdrawal liability under Title IV of ERISA, a copy of such notice; or (iii) receives AT: 1030545v10 61 notice from the PBGC under Title IV of ERISA of an intent to terminate or appoint a trustee to administer any Plan, a copy of such notice; and (k) from time to time such additional information regarding the financial position or business of the Borrowers and the Subsidiaries as the Agent, at the request of any Bank, may reasonably request. SECTION 6.02. Inspection of Property, Books and Records. The Borrowers will (i) keep, and cause each Subsidiary to keep, proper books of record and account in which full, true and correct entries in conformity with GAAP, subject to Section 1.02, shall be made of all dealings and transactions in relation to its business and activities; and (ii) permit, and cause each Subsidiary to permit, representatives of any Bank at such Bank's expense prior to the occurrence of a Default (except as provided below with respect to field examinations) and at the Borrowers' expense after the occurrence of a Default to visit and inspect any of their respective properties, to examine and make abstracts from any of their respective books and records and to discuss their respective affairs, finances and accounts with their respective officers, employees and independent public accountants. The foregoing shall include but not be limited to field examinations with respect to the Accounts and the Inventory, the reasonable and customary costs of which shall be borne by the Borrowers, whether or not a Default exists, but, so long as no Default exists, the Borrowers shall not be obligated to bear expenses for field examinations performed more frequently than once in each Fiscal Quarter. The Borrowers agree to cooperate and assist in such visits and inspections, in each case at such reasonable times during normal business hours and as often as may reasonably be desired. SECTION 6.03. Maintenance of Existence and Management. The Borrowers shall, and shall cause each Subsidiary to, (i) maintain its corporate existence and carry on its business in substantially the same manner and in substantially the same fields as such business is now carried on and maintained and (ii) maintain Senior Management reasonably acceptable to the Banks in keeping with their bylaws (and the Banks acknowledge that present Senior Management is acceptable as of the Closing Date). SECTION 6.04. Dissolution. Neither the Borrowers nor any of the Subsidiaries shall suffer or permit dissolution or AT: 1030545v10 62 liquidation either in whole or in part or redeem or retire any shares of its own stock or that of any Subsidiary, except through corporate reorganization to the extent permitted by Section 6.05. SECTION 6.05. Consolidations, Mergers and Sales of Assets. The Borrowers will not, nor will it permit any Subsidiary to, consolidate or merge with or into, or sell, lease or otherwise transfer all or any substantial part of its assets to, any other Person, or discontinue or eliminate any business line or segment, provided that (a) either Borrower may merge with another Person if (i) such Person was organized under the laws of the United States of America or one of its states, (ii) such Borrower is the corporation surviving such merger and (iii) immediately after giving effect to such merger, no Default shall have occurred and be continuing, (b) the Borrowers may merge with one another and Subsidiaries of the Borrowers may merge with one another, and (c) the foregoing limitation on the sale, lease or other transfer of assets and on the discontinuation or elimination of a business line or segment shall not prohibit (A) transfers of Accounts to insurers permitted by Section 6.26 or (B) during any Fiscal Quarter, a transfer of assets or the discontinuance or elimination of a business line or segment (in a single transaction or in a series of related transactions) unless the aggregate assets to be so transferred or utilized in a business line or segment to be so discontinued, when combined with all other assets transferred, and all other assets utilized in all other business lines or segments discontinued, during such Fiscal Quarter and the immediately preceding 3 Fiscal Quarters, either (x) constituted more than 2% of Consolidated Total Assets at the end of the most recent Fiscal Year immediately preceding such Fiscal Quarter, or (y) contributed more than 2% of Consolidated Operating Profits during the 4 Fiscal Quarters immediately preceding such Fiscal Quarter. SECTION 6.06. Use of Proceeds. No portion of the proceeds of the Loans will be used by the Borrowers or any Subsidiary (i) in connection with, whether directly or indirectly, any tender offer for, or other acquisition of, stock of any corporation with a view towards obtaining control of such other corporation, unless such tender offer or other acquisition is to be made on a negotiated basis with the approval of the Board of Directors of the Person to be acquired, and the provisions of Section 6.17 would not be violated, (ii) directly or indirectly, for the purpose, whether immediate, incidental or AT: 1030545v10 63 ultimate, of purchasing or carrying any Margin Stock, or (iii) for any purpose in violation of any applicable law or regulation. SECTION 6.07. Compliance with Laws; Payment of Taxes. The Borrowers will, will cause each of the Subsidiaries to and will use its best effort to cause each member of the Controlled Group to, comply with applicable laws (including but not limited to ERISA), regulations and similar requirements of governmental authorities (including but not limited to PBGC), except where the necessity of such compliance is being contested in good faith through appropriate proceedings diligently pursued. The Borrowers will, and will cause each of the Subsidiaries to, pay promptly when due all taxes, assessments, governmental charges, claims for labor, supplies, rent and other obligations which, if unpaid, might become a lien against the property of the Borrowers or any Subsidiary, except liabilities being contested in good faith and against which, if requested by the Agent (acting at the direction of the Required Banks), the Borrowers will set up reserves in accordance with GAAP. SECTION 6.08. Insurance. In addition to and cumulative with any other requirements herein imposed on each Borrower with respect to insurance under the Security Agreements, each Borrower shall maintain insurance with responsible insurance companies on such of its properties, in such amounts and against such risks as is customarily maintained by similar businesses operating in the same vicinity, but in any event to include loss, damage, flood, windstorm, fire, theft, extended coverage and product liability insurance in amounts satisfactory to the Agent, which such insurance shall not be cancelable by either Borrower, unless with the prior written consent of the Agent, or by such Borrower's insurer, unless with at least ten (10) days advance written notice to the Agent thereof. Each Borrower shall file with the Agent upon its request a detailed list of such insurance then in effect stating the names of the insurance companies, the amounts and rates of insurance, the date of expiration thereof, the properties and risks covered thereby and the insured with respect thereto, and, within thirty (30) days after notice in writing from the Agent, obtain such additional insurance as the Agent may reasonably request necessary to maintain insurance on Inventory in an amount equal to the full insurable value thereof. SECTION 6.09. Change in Fiscal Year. The Borrowers will not change their Fiscal Year without the consent of the Required Banks. AT: 1030545v10 64 SECTION 6.10. Maintenance of Property. The Borrowers shall, and shall cause each Subsidiary to, maintain all of its properties and assets in good condition, repair and working order, ordinary wear and tear excepted; provided, that each of the Borrowers and each of the Subsidiaries may dispose of used, worn out or obsolete equipment, so long as it obtains such replacements as are reasonably required for its operations. SECTION 6.11. Environmental Notices. The Borrowers shall furnish to the Banks and the Agent prompt written notice of all Environmental Liabilities, pending, or, to the extent either of the Borrowers is aware of the same, threatened or anticipated Environmental Proceedings, Environmental Notices, Environmental Judgments and Orders, and Environmental Releases at, on, in, under or in any way affecting the Properties or any adjacent property which, if adversely determined, could have a Material Adverse Effect, and all facts, events, or conditions that could lead to any of the foregoing. SECTION 6.12. Environmental Matters. The Borrowers and the Subsidiaries will not, and will not permit any Third Party to, use, produce, manufacture, process, treat, recycle, generate, store, dispose of, manage at, or otherwise handle, or ship or transport to or from the Properties any Hazardous Materials except for Hazardous Materials such as cleaning solvents, pesticides and other similar materials used, produced, manufactured, processed, treated, recycled, generated, stored, disposed, managed, or otherwise handled in minimal amounts in the ordinary course of business in compliance with all applicable Environmental Requirements. SECTION 6.13. Environmental Release. The Borrowers agree that upon the occurrence of an Environmental Release at or on any of the Properties it will act immediately to investigate the extent of, and to take appropriate remedial action to eliminate, such Environmental Release, whether or not ordered or otherwise directed to do so by any Environmental Authority. SECTION 6.14. Transactions with Affiliates. Neither the Borrowers nor any of the Subsidiaries shall enter into, or be a party to, any transaction with any Affiliate of the Borrowers or such Subsidiary (which Affiliate is not one of the Borrowers or a Wholly Owned Subsidiary), except as permitted by law and in the ordinary course of business and pursuant to reasonable terms which are fully disclosed to the Agent and the Banks, and are no AT: 1030545v10 65 less favorable to the Borrowers or such Subsidiary than would be obtained in a comparable arm's length transaction with a Person which is not an Affiliate. SECTION 6.15. Restricted Payments. SEDH will not declare or make any Restricted Payment in any Fiscal Year unless the Agent and the Banks have consented thereto in writing in the exercise of their sole discretion. SECTION 6.16. Loans or Advances. Neither the Borrowers nor any of the Subsidiaries shall make loans or advances to any Person except as permitted by Section 6.17 and except: (i) loans or advances to employees not exceeding $250,000 in the aggregate principal amount outstanding at any time, in each case made in the ordinary course of business and consistent with practices existing on December 31, 1998; (ii) deposits required by government agencies or public utilities; and (iii) loans and advances from one Borrower to the other; provided that after giving effect to the making of any loans, advances or deposits permitted by this Section, and no Default shall be in existence or be created thereby. SECTION 6.17. Investments. Neither the Borrowers nor any of the Subsidiaries shall make any Restricted Investments; provided, however, if immediately after giving effect to any SED Argentina Investment either (i) a Default or Event of Default is in existence, or (ii) the Borrowers do not have sufficient availability to borrow at least $10,000,000 in Loans in accordance with the terms of Section 2.01 of this Agreement, then, in either such event, the making of such SED Argentina Investment shall constitute an Event of Default hereunder. SECTION 6.18. Negative Pledge. Other than Liens in favor of the Agent and the Banks securing the Obligations and Permitted Encumbrances against the Collateral, neither the Borrowers nor any Consolidated Subsidiary will create, assume or suffer to exist any Lien on any asset now owned or hereafter acquired by it, and the Borrowers shall not permit any Subsidiary which is not a Borrower to incur any Lien, except the following Liens: (a) Liens existing on the date of this Agreement securing Debt outstanding on the date of this Agreement, which are in an aggregate principal amount not exceeding $250,000; AT: 1030545v10 66 (b) any Lien existing on any specific fixed asset of any corporation at the time such corporation becomes a Consolidated Subsidiary and not created in contemplation of such event; (c) any Lien on any specific fixed asset of any corporation existing at the time such corporation is merged or consolidated with or into one of the Borrowers or a Consolidated Subsidiary and not created in contemplation of such event; (d) any Lien existing on any specific fixed asset prior to the acquisition thereof by one of the Borrowers or a Consolidated Subsidiary and not created in contemplation of such acquisition; (e) Liens securing Debt owing by any Subsidiary to one of the Borrowers; (f) any Lien arising out of the refinancing, extension, renewal or refunding of any Debt secured by any Lien permitted by any of the foregoing paragraphs of this Section, provided that (i) such Debt is not secured by any additional assets, and (ii) the amount of such Debt secured by any such Lien is not increased; (g) Liens incidental to the conduct of its business or the ownership of its assets which (i) do not secure Debt and (ii) do not in the aggregate materially detract from the value of its assets or materially impair the use thereof in the operation of its business; (h) any Lien on Margin Stock securing Debt not to exceed $100,000; (i) Debt owing to the Borrowers or another Subsidiary; (j) any Lien permitted under any Lien Subordination Agreement or the FINOVA Intercreditor Agreement; and (k) any Lien on any specific fixed asset securing Debt incurred or assumed for the purpose of financing all or any part of the cost of acquiring or constructing such asset, provided that (x) such Lien attaches to such asset concurrently with or within 18 months after the acquisition or completion of construction thereof, (y) such Lien may not secure any other AT: 1030545v10 67 indebtedness, and (z) the aggregate outstanding principal amount of all Debt secured by such Liens shall not at any time exceed $1,500,000. SECTION 6.19. Restrictions on Ability of Subsidiaries to Pay Dividends. The Borrowers shall not permit any Subsidiary to, directly or indirectly, create or otherwise cause or suffer to exist or become effective any encumbrance or restriction on the ability of any such Subsidiary to (i) pay any dividends or make any other distributions on its Capital Stock or any other interest or (ii) make or repay any loans or advances to the Borrowers or the parent of such Subsidiary. SECTION 6.20. Leverage Ratio. Tested at the end of each Fiscal Quarter, the Leverage Ratio shall not at any time exceed 3.5 to 1.0. SECTION 6.21. Fixed Charge Coverage. Commencing on June 30, 1999, and tested on such date and at the end of each Fiscal Quarter thereafter, the ratio of EBILTDA to Consolidated Fixed Charges shall not at any time be less than the following amounts as of the end of each of the following Fiscal Quarters: Fiscal Quarters Ending Ratio June 30, 1999 through September 30, 1999 1.0 to 1.0 December 31, 1999 through March 31, 2000 1.25 to 1.0 Each Fiscal Quarter thereafter 1.5 to 1.0 The foregoing ratio shall be calculated on a cumulative basis for the Fiscal Quarter just ended and the immediately preceding three Fiscal Quarters; provided, however, for the 3 Fiscal Quarters ending after the Closing Date, the foregoing ratio shall be calculated as follows: (i) for the first Fiscal Quarter after the Closing Date, times 4, (ii) for the first and second Fiscal Quarters after the Closing Date on a cumulative basis, times 2, and (iii) for the first, second and third Fiscal Quarters after the Closing Date on a cumulative basis, times 1.3333. SECTION 6.22. Current Ratio. Tested at the end of each Fiscal Quarter, the Borrower will at all times maintain a Current Ratio greater than 1.25 to 1.0. AT: 1030545v10 68 SECTION 6.23. Minimum Profitability. Tested at the end of each Fiscal Quarter, the Borrower's EBITDA shall not be less than $500,000 for such Fiscal Quarter. SECTION 6.24. Minimum Consolidated Tangible Net Worth. Consolidated Tangible Net Worth will as of June 30, 1999 be not less than $40,000,000, and at all times thereafter will not be less than (x) $40,000,000 plus (y) the sum of (i) 75% of the cumulative Reported Net Income of the Borrowers and the Consolidated Subsidiaries during any period after March 31, 1999 (taken as one accounting period), calculated monthly at the end of each month (but excluding from such calculations of Reported Net Income for purposes of this clause (i), any month in which the Reported Net Income of the Borrowers and the Consolidated Subsidiaries is negative), and (ii) 100% of the cumulative Net Proceeds of Capital Stock received during any period after March 31, 1999, calculated monthly at the end of each month. SECTION 6.25. Distributor Agreements. The Borrowers will comply in all material respects with each of the Distributor Agreements and, promptly (and in any event within 5 Domestic Business Days) after the effective date thereof, furnish to each of the Banks a true and correct copy of each new Distributor Agreement and each document which extends, renews, amends, supplements or replaces any Distributor Agreement. SECTION 6.26. Accounts Receivable. The Borrowers will not sell or otherwise dispose of any of the Accounts Receivable without the prior written consent of the Agent (acting at the direction of the Required Banks) except (i) in the ordinary course of business for cash or on open account or on terms of payment ordinarily extended to its customers and (ii) with respect to Accounts the collectibility of which has been insured, transfers to the insurers of defaulted Accounts as to which the insurer has paid or contemporaneously with such transfer is paying the amount due to the Borrowers under the relevant policy on account of such defaulted Accounts. The Borrowers will not allow the Accounts Receivable to be encumbered, except as may be required pursuant to the HP (US) Agreement. Additionally, the Agent may, at any time in its sole discretion, require the Borrowers to permit the Agent to verify the individual account balances of the individual Account Debtors immediately upon its request therefor. In any event, upon request from the Agent, made at any time hereafter (but not more frequently than monthly, AT: 1030545v10 69 so long as no Default or Event of Default is in existence), the Borrowers shall furnish the Agent with a then current Account Debtor address list. SECTION 6.27. Inventory. Notwithstanding the first sentence of Section 4.1 of the Security Agreements, the Borrowers may sell, lease, exchange, or otherwise dispose of any of the Inventory as may be required by any of the Distributor Agreements. Notwithstanding Section 4.5 of the Security Agreement, the Borrowers may, without notice to or the consent of the Agent, transfer temporarily (for periods not to exceed 3 months in any event) Inventory from a location under its possession and control to another location at any time or from time to time hereafter for the limited purpose of having work performed on such Inventory if done in the ordinary course of the Borrowers' business. In the event that the Borrowers certify to the Agent in writing that the Borrowers have relocated Inventory from a closed location to another location (provided that the Lien created by the Security Agreements is perfected at such new location), then the Agent shall, upon request, file partial releases or terminations of filed UCC financing statements filed with respect to such Inventory at such closed location (but not with respect to any other Collateral which may be perfected thereby). SECTION 6.28. Additional Debt. Neither of the Borrowers or any of their Subsidiaries shall incur or permit to exist any Debt other than (i) Debt in the amounts listed on Schedule 6.28, (ii) Debt permitted to be secured by Liens permitted by Section 6.18, (iii) Debt of the types described in clause (vii) of the definition of Debt which is incurred in the ordinary course of business in connection with the sale or purchase of goods or to assure performance of any obligation to a utility or a governmental entity or a worker's compensation obligation; (iv) Debt permitted by the FINOVA Intercreditor Agreement; (v) other Debt not to exceed an aggregate amount outstanding at any time of $500,000; (vi) trade payables arising in the ordinary course of business; (vii) Investments in Subsidiaries consisting of Debt excluded under the definition of "Restricted Investment"; and (viii) Debt consisting of a Guarantee by SEDH of SED's obligations to purchase certain equity interests in SED Magna such investment amount permitted under the definition of "Restricted Investment." AT: 1030545v10 70 SECTION 6.29. Post-Closing Matters. The Borrowers agree that on or before September 30, 1999, the Borrowers shall have delivered to the Agent (i) executed pledge agreements (satisfactory to the Agent in all respects), blank stock powers, and original stock certificates whereby the Borrowers' equity interests in each Foreign Subsidiary becomes subject to the Agent's first priority perfected security interest as a part of the Collateral (provided that the Agent's security interest therein shall not exceed the Foreign Equity Lien Limitation for any Foreign Subsidiary), and (ii) Landlord's Agreements for the Borrowers' California and Pennsylvania locations. SECTION 6.30. Y2K Compliance. The Borrowers shall take, and cause their Domestic Subsidiaries to take, all actions reasonably necessary in order to become Y2K Compliant and Ready on or before January 1, 2000. In any event, and without limiting the Borrowers obligations set forth in the preceding sentence, the Borrowers shall cause all Mission Critical Systems and Equipment to be Y2K Compliant and Ready on or before February 15, 2000. ARTICLE VII DEFAULTS SECTION 7.01. Events of Default. If one or more of the following events ("Events of Default") shall have occurred and be continuing: (a) either of the Borrowers shall fail to pay when due any principal of any Loan or any Reimbursement Obligation, shall fail to pay any interest on any Loan within 5 Domestic Business Days after such interest shall become due, or shall fail to pay any fee or other amount payable hereunder within 5 Domestic Business Days after such fee or other amount becomes due; or (b) either of the Borrowers shall fail to observe or perform any covenant contained in Sections 6.01(g), 6.02(ii), 6.03 through 6.06, inclusive, Sections 6.15 through 6.17, inclusive, or Sections 6.19 through 6.24, inclusive, 6.26 through 6.28, inclusive, or any covenant (beyond any applicable cure period) contained in any Loan Document; or AT: 1030545v10 71 (c) either of the Borrowers shall fail to observe or perform any covenant or agreement contained or incorporated by reference in this Agreement (other than those covered by paragraph (a) or (b) above) and such failure shall not have been cured within 30 days after the earlier to occur of (i) written notice thereof has been given to the Borrowers by the Agent at the request of any Bank or (ii) either of the Borrowers otherwise becomes aware of any such failure; or (d) any representation, warranty, certification or statement made by either of the Borrowers in Article V of this Agreement or in any Loan Document, certificate, financial statement or other document delivered pursuant to this Agreement shall prove to have been incorrect or misleading in any material respect when made (or deemed made); or (e) either of the Borrowers or any Subsidiary shall fail to make any payment in respect of Debt in an aggregate amount outstanding of $500,000 or more (other than the Notes) when due or within any applicable grace period; or (f) any event or condition shall occur which results in the acceleration of the maturity of Debt in an aggregate amount outstanding of $500,000 or more of either of the Borrowers or any Subsidiary (including, without limitation, any required mandatory prepayment or "put" of such Debt to either of the Borrowers or any Subsidiary) or enables (or, with the giving of notice or lapse of time or both, would enable) the holders of such Debt or commitment or any Person acting on such holders' behalf to accelerate the maturity thereof or terminate any such commitment (including, without limitation, any required mandatory prepayment or "put" of such Debt to either of the Borrowers or any Subsidiary); or (g) either of the Borrowers or any Subsidiary shall commence a voluntary case or other proceeding seeking liquidation, reorganization or other relief with respect to itself or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, or shall consent to any such relief or to the appointment of or taking possession by any such official in an involuntary case or other proceeding commenced against AT: 1030545v10 72 it, or shall make a general assignment for the benefit of creditors, or shall fail generally, or shall admit in writing its inability, to pay its debts as they become due, or shall take any corporate action to authorize any of the foregoing; or (h) an involuntary case or other proceeding shall be commenced against either of the Borrowers or any Subsidiary seeking liquidation, reorganization or other relief with respect to it or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, and such involuntary case or other proceeding shall remain undismissed and unstayed for a period of 60 days; or an order for relief shall be entered against either of the Borrowers or any Subsidiary under the federal bankruptcy laws as now or hereafter in effect; or (i) either of the Borrowers or any member of the Controlled Group shall fail to pay when due any material amount which it shall have become liable to pay to the PBGC or to a Plan under Title IV of ERISA; or notice of intent to terminate a Plan or Plans shall be filed under Title IV of ERISA by either of the Borrowers, any member of the Controlled Group, any plan administrator or any combination of the foregoing; or the PBGC shall institute proceedings under Title IV of ERISA to terminate or to cause a trustee to be appointed to administer any such Plan or Plans or a proceeding shall be instituted by a fiduciary of any such Plan or Plans to enforce Section 515 or 4219(c)(5) of ERISA and such proceeding shall not have been dismissed within 30 days thereafter; or a condition shall exist by reason of which the PBGC would be entitled to obtain a decree adjudicating that any such Plan or Plans must be terminated; or either of the Borrowers or any other member of the Controlled Group shall enter into, contribute or be obligated to contribute to, terminate or incur any withdrawal liability with respect to, a Multiemployer Plan; or (j) one or more judgments or orders for the payment of money in an aggregate amount in excess of $500,000 shall be rendered against any one, or more or all of the Borrowers AT: 1030545v10 73 and the Subsidiaries unsatisfied and unstayed for a period of 30 days; or (k) a federal tax lien shall be filed against either of the Borrowers or any Subsidiary under Section 6323 of the Code or a lien of the PBGC shall be filed against either of the Borrowers or any Subsidiary under Section 4068 of ERISA and in either case such lien shall remain undischarged for a period of 25 days after the date of filing; or (l) (i) any Person or two or more Persons acting in concert shall have acquired beneficial ownership (within the meaning of Rule 13d-3 of the Securities and Exchange Commission under the Securities Exchange Act of 1934) of 20% or more of the outstanding shares of the voting stock of SEDH; or (ii) as of any date a majority of the Board of Directors of SEDH consists of individuals who were not either (A) directors of SEDH as of the corresponding date of the previous year, (B) selected or nominated to become directors by the Board of Directors of SEDH of which a majority consisted of individuals described in clause (A), or (C) selected or nominated to become directors by the Board of Directors of SEDH of which a majority consisted of individuals described in clause (A) and individuals described in clause (B); or (m) there shall have occurred uninsured damage to, or loss, theft or destruction of, any part of the Collateral, occurring in one or more incidents in which the cost of such uninsured Collateral exceeds $500,000; then, and in every such event, (i) the Agent shall, if requested by the Required Banks, by notice to the Borrowers terminate the Commitments and they shall thereupon terminate, (ii) Wachovia may terminate its obligation to fund Swing Loans, and (iii) the Agent shall, if requested by the Required Banks, by notice to the Borrowers declare the Notes, including the Swing Loan Note (in each case together with accrued interest thereon), and all other amounts payable hereunder and under the other Loan Documents, to be, and the Notes, including the Swing Loan Note (in each case together with accrued interest thereon), and all other amounts payable hereunder and under the other Loan Documents shall thereupon become, immediately due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrowers together with interest AT: 1030545v10 74 at the Default Rate accruing on the principal amount thereof from and after the date of such Event of Default; provided that if any Event of Default specified in paragraph (g) or (h) above occurs with respect to either of the Borrowers, without any notice to the Borrowers or any other act by the Agent or the Banks, the Commitments shall thereupon terminate and the Notes, including the Swing Loan Note (in each case together with accrued interest thereon) and all other amounts payable hereunder and under the other Loan Documents shall automatically and without notice become immediately due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrowers together with interest thereon at the Default Rate accruing on the principal amount thereof from and after the date of such Event of Default. In addition, upon the occurrence of an Event of Default, to the extent of any existing Letter of Credit Obligations, the Borrowers shall immediately deposit with the Agent cash collateral in an amount equal to 105% of the aggregate undrawn amount available under all outstanding Letters of Credit, which cash collateral shall be set aside as a collateral reserve for payment of the Reimbursement Obligations relating to Letters of Credit which are subsequently funded. After all Letters of Credit have been canceled and all Reimbursement Obligations have been satisfied, and the Agent has been reimbursed all amounts funded by it with respect thereto, any balance remaining in said collateral reserve may be applied to other amounts owed by the Borrowers hereunder, and, if none, shall be remitted to Borrowers. Notwithstanding the foregoing, the Agent shall have available to it all other remedies under each Loan Document and at law or equity, and shall exercise any one or all of them at the request of the Required Banks. SECTION 7.02. Notice of Default. The Agent shall give notice to the Borrowers of any Default under Section 7.01(c) promptly upon being requested to do so by any Bank and shall thereupon notify all the Banks thereof. ARTICLE VIII THE AGENT SECTION 8.01. Appointment; Powers and Immunities. Each Bank hereby irrevocably appoints and authorizes the Agent to act as its agent hereunder and under the other Loan Documents with such powers as are specifically delegated to the Agent by the AT: 1030545v10 75 terms hereof and thereof, together with such other powers as are reasonably incidental thereto. The Agent: (a) shall have no duties or responsibilities except as expressly set forth in this Agreement and the other Loan Documents, and shall not by reason of this Agreement or any other Loan Document be a trustee for any Bank; (b) shall not be responsible to the Banks for any recitals, statements, representations or warranties contained in this Agreement or any other Loan Document, or in any certificate or other document referred to or provided for in, or received by any Bank under, this Agreement or any other Loan Document, or for the validity, effectiveness, genuineness, enforceability, perfection, collectibility, or sufficiency of this Agreement or any other Loan Document or any other document referred to or provided for herein or therein or for any failure by either of the Borrowers to perform any of its obligations hereunder or thereunder; (c) shall not be required to initiate or conduct any litigation or collection proceedings hereunder or under any other Loan Document except to the extent requested by the Required Banks, and then only on terms and conditions satisfactory to the Agent, and (d) shall not be responsible for any action taken or omitted to be taken by it hereunder or under any other Loan Document or any other document or instrument referred to or provided for herein or therein or in connection herewith or therewith, except for its own gross negligence or wilful misconduct. The Agent may employ agents and attorneys-in-fact and shall not be responsible for the negligence or misconduct of any such agents or attorneys-in-fact selected by it with reasonable care. The provisions of this Article VIII are solely for the benefit of the Agent and the Banks, and the Borrowers shall not have any rights as a third party beneficiary of any of the provisions hereof. In performing its functions and duties under this Agreement and under the other Loan Documents, the Agent shall act solely as agent of the Banks and does not assume and shall not be deemed to have assumed any obligation towards or relationship of agency or trust with or for the Borrowers. The duties of the Agent shall be ministerial and administrative in nature, and the Agent shall not have by reason of this Agreement or any other Loan Document a fiduciary relationship in respect of any Bank. SECTION 8.02. Reliance by Agent. The Agent shall be entitled to rely upon any certification, notice or other communication (including any thereof by telephone, telecopier, telegram or cable) believed by it to be genuine and correct and to have been signed or sent by or on behalf of the proper Person or Persons, and upon advice and statements of legal counsel, AT: 1030545v10 76 independent accountants or other experts selected by the Agent. As to any matters not expressly provided for by this Agreement or any other Loan Document, the Agent shall in all cases be fully protected in acting, or in refraining from acting, hereunder and thereunder in accordance with instructions signed by the Required Banks, and such instructions of the Required Banks in any action taken or failure to act pursuant thereto shall be binding on all of the Banks. SECTION 8.03. Defaults. The Agent shall not be deemed to have knowledge of the occurrence of a Default or an Event of Default (other than the nonpayment of principal of or interest on the Loans) unless the Agent has received notice from a Bank or either of the Borrowers specifying such Default or Event of Default and stating that such notice is a "Notice of Default". In the event that the Agent receives such a notice of the occurrence of a Default or an Event of Default, the Agent shall give prompt notice thereof to the Banks. The Agent shall give each Bank prompt notice of each nonpayment of principal of or interest on the Loans whether or not it has received any notice of the occurrence of such nonpayment. The Agent shall (subject to Section 9.06) take such action hereunder with respect to such Default or Event of Default as shall be directed by the Required Banks, provided that, unless and until the Agent shall have received such directions, the Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Default or Event of Default as it shall deem advisable in the best interests of the Banks. SECTION 8.04. Rights of Agent and its Affiliates as a Bank. With respect to the Loans made by the Agent and any Affiliate of the Agent, Wachovia in its capacity as a Bank hereunder and any Affiliate of the Agent or such Affiliate in its capacity as a Bank hereunder shall have the same rights and powers hereunder as any other Bank and may exercise the same as though Wachovia were not acting as the Agent, and the term "Bank" or "Banks" shall, unless the context otherwise indicates, include Wachovia in its individual capacity and any Affiliate of the Agent in its individual capacity. The Agent and any Affiliate of the Agent may (without having to account therefor to any Bank) accept deposits from, lend money to and generally engage in any kind of banking, trust or other business with either of the Borrowers (and any of the Borrowers' Affiliates) as if Wachovia were not acting as the Agent, and the Agent and any Affiliate of the Agent may accept fees and other consideration from the AT: 1030545v10 77 Borrowers (in addition to any agency fees and arrangement fees heretofore agreed to between the Borrowers and the Agent) for services in connection with this Agreement or any other Loan Document or otherwise without having to account for the same to the Banks. SECTION 8.05. Indemnification. Each Bank severally agrees to indemnify the Agent, to the extent the Agent shall not have been reimbursed by the Borrowers, ratably in accordance with its Commitment, for any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses (including, without limitation, counsel fees and disbursements) or disbursements of any kind and nature whatsoever which may be imposed on, incurred by or asserted against the Agent in any way relating to or arising out of this Agreement or any other Loan Document or any other documents contemplated by or referred to herein or therein or the transactions contemplated hereby or thereby (excluding, unless an Event of Default has occurred and is continuing, the normal administrative costs and expenses incident to the performance of its agency duties hereunder) or the enforcement of any of the terms hereof or thereof or any such other documents; provided that no Bank shall be liable for any of the foregoing to the extent they arise from the gross negligence or wilful misconduct of the Agent. If any indemnity furnished to the Agent for any purpose shall, in the opinion of the Agent, be insufficient or become impaired, the Agent may call for additional indemnity and cease, or not commence, to do the acts indemnified against until such additional indemnity is furnished. SECTION 8.06 Consequential Damages. THE AGENT SHALL NOT BE RESPONSIBLE OR LIABLE TO ANY BANK, THE BORROWERS OR ANY OTHER PERSON OR ENTITY FOR ANY PUNITIVE, EXEMPLARY OR CONSEQUENTIAL DAMAGES WHICH MAY BE ALLEGED AS A RESULT OF THIS AGREEMENT, THE OTHER LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY. SECTION 8.07. Payee of Note Treated as Owner. The Agent may deem and treat the payee of any Note as the owner thereof for all purposes hereof unless and until a written notice of the assignment or transfer thereof shall have been filed with the Agent and the provisions of Section 10.08(c) have been satisfied. Any requests, authority or consent of any Person who at the time of making such request or giving such authority or consent is the holder of any Note shall be conclusive and binding on any subsequent holder, transferee or assignee of that AT: 1030545v10 78 Note or of any Note or Notes issued in exchange therefor or replacement thereof. SECTION 8.08. Nonreliance on Agent and Other Banks. Each Bank agrees that it has, independently and without reliance on the Agent or any other Bank, and based on such documents and information as it has deemed appropriate, made its own credit analysis of the Borrowers and decision to enter into this Agreement and that it will, independently and without reliance upon the Agent or any other Bank, and based on such documents and information as it shall deem appropriate at the time, continue to make its own analysis and decisions in taking or not taking action under this Agreement or any of the other Loan Documents. The Agent shall not be required to keep itself (or any Bank) informed as to the performance or observance by the Borrowers of this Agreement or any of the other Loan Documents or any other document referred to or provided for herein or therein or to inspect the properties or books of the Borrowers or any other Person. Except for notices, reports and other documents and information expressly required to be furnished to the Banks by the Agent hereunder or under the other Loan Documents, the Agent shall not have any duty or responsibility to provide any Bank with any credit or other information concerning the affairs, financial condition or business of the Borrowers or any other Person (or any of their Affiliates) which may come into the possession of the Agent. SECTION 8.09. Failure to Act. Except for action expressly required of the Agent hereunder or under the other Loan Documents, the Agent shall in all cases be fully justified in failing or refusing to act hereunder and thereunder unless it shall receive further assurances to its satisfaction by the Banks of their indemnification obligations under Section 8.05 against any and all liability and expense which may be incurred by the Agent by reason of taking, continuing to take, or failing to take any such action. SECTION 8.10. Resignation or Removal of Agent. Subject to the appointment and acceptance of a successor Agent as provided below, the Agent may resign at any time by giving notice thereof to the Banks and the Borrowers and the Agent may be removed at any time with or without cause by the Required Banks. Upon any such resignation or removal, the Required Banks shall have the right to appoint a successor Agent. If no successor Agent shall have been so appointed by the Required Banks and AT: 1030545v10 79 shall have accepted such appointment within 30 days after the retiring Agent's notice of resignation or the Required Banks' removal of the retiring Agent, then the retiring Agent may, on behalf of the Banks, appoint a successor Agent. Any successor Agent shall be a bank which has a combined capital and surplus of at least $500,000,000. Upon the acceptance of any appointment as Agent hereunder by a successor Agent, such successor Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Agent, and the retiring Agent shall be discharged from its duties and obligations hereunder. After any retiring Agent's resignation or removal hereunder as Agent, the provisions of this Article VII shall continue in effect for its benefit in respect of any actions taken or omitted to be taken by it while it was acting as the Agent hereunder. ARTICLE IX CHANGE IN CIRCUMSTANCES; COMPENSATION SECTION 9.01. Basis for Determining Interest Rate Inadequate or Unfair. If on or prior to the first day of any Interest Period: (a) the Agent determines that deposits in Dollars (in the applicable amounts) are not being offered in the relevant market for such Interest Period, or (b) the Required Banks advise the Agent that the London Interbank Offered Rate, as determined by the Agent will not adequately and fairly reflect the cost to such Banks of funding the relevant type of Euro-Dollar Loans for such Interest Period, the Agent shall forthwith give notice thereof to the Borrowers and the Banks, whereupon until the Agent notifies the Borrowers that the circumstances giving rise to such suspension no longer exist, the obligations of the Banks to make the type of Euro- Dollar Loans specified in such notice shall be suspended. Unless the Borrowers notify the Agent at least 2 Domestic Business Days before the date of any Borrowing of such type of Euro-Dollar Loans for which a Notice of Borrowing has previously been given that it elects not to borrow on such date, such Borrowing shall instead be made as a Base Rate Borrowing. AT: 1030545v10 80 SECTION 9.02. Illegality. If, after the date hereof, the adoption of any applicable law, rule or regulation, or any change therein or any existing or future law, rule or regulation, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof (any such agency being referred to as an "Authority" and any such event being referred to as a "Change of Law"), or compliance by any Bank (or its Lending Office) with any request or directive (whether or not having the force of law) of any Authority shall make it unlawful or impossible for any Bank (or its Lending Office) to make, maintain or fund its Euro-Dollar Loans and such Bank shall so notify the Agent, the Agent shall forthwith give notice thereof to the other Banks and the Borrowers, whereupon until such Bank notifies the Borrowers and the Agent that the circumstances giving rise to such suspension no longer exist, the obligation of such Bank to make such type of Euro-Dollar Loans shall be suspended. Before giving any notice to the Agent pursuant to this Section, such Bank shall designate a different Lending Office if such designation will avoid the need for giving such notice and will not, in the judgment of such Bank, be otherwise disadvantageous to such Bank. If such Bank shall determine that it may not lawfully continue to maintain and fund any of its outstanding Euro-Dollar Loans to maturity and shall so specify in such notice, the Borrowers shall immediately prepay in full the then outstanding principal amount of each Euro-Dollar Loan of such Bank, together with accrued interest thereon and any amount due such Bank pursuant to Section 9.05(a). Concurrently with prepaying each such Euro-Dollar Loan, the Borrowers shall borrow a Base Rate Loan in an equal principal amount from such Bank (on which interest and principal shall be payable contemporaneously with the related Euro-Dollar Loans of the other Banks), and such Bank shall make such a Base Rate Loan. SECTION 9.03. Increased Cost and Reduced Return. (a) If after the date hereof, a Change of Law or compliance by any Bank (or its Lending Office) with any request or directive (whether or not having the force of law) of any Authority: (i) shall impose, modify or deem applicable any reserve, special deposit or similar requirement (including, without limitation, any such requirement imposed by the Board of Governors of the Federal Reserve System, but excluding any such requirement included in an applicable Euro-Dollar Reserve Percentage) against assets of, deposits AT: 1030545v10 81 with or for the account of, or credit extended by, any Bank (or its Lending Office); or (ii) shall impose on any Bank (or its Lending Office) or on the United States market for the London interbank market or any other market used as the basis for any Euro- Dollar Loan any other condition affecting its Euro-Dollar Loans, its Notes or its obligation to make Euro-Dollar Loans; and the result of any of the foregoing is to increase the cost to such Bank (or its Lending Office) of making or maintaining any Loan, or to reduce the amount of any sum received or receivable by such Bank (or its Lending Office) under this Agreement or under its Notes with respect thereto, by an amount deemed by such Bank to be material, then, within 15 days after demand by such Bank (with a copy to the Agent), the Borrowers shall pay to such Bank such additional amount or amounts as will compensate such Bank for such increased cost or reduction; provided, that the Borrowers shall have no liability for amounts related to periods earlier than 90 days prior to the date of such written request. (b) If any Bank shall have determined that after the date hereof the adoption of any applicable law, rule or regulation regarding capital adequacy, or any change therein, or any change in the interpretation or administration thereof, or compliance by any Bank (or its Lending Office) with any request or directive regarding capital adequacy (whether or not having the force of law) of any Authority, has or would have the effect of reducing the rate of return on such Bank's capital as a consequence of its obligations hereunder to a level below that which such Bank could have achieved but for such adoption, change or compliance (taking into consideration such Bank's policies with respect to capital adequacy) by an amount deemed by such Bank to be material, then from time to time, within 15 days after demand by such Bank, the Borrowers shall pay to such Bank such additional amount or amounts as will compensate such Bank for such reduction. (c) Each Bank will promptly notify the Borrowers and the Agent of any event of which it has knowledge, occurring after the date hereof, which will entitle such Bank to compensation pursuant to this Section and will designate a different Lending Office if such designation will avoid the need for, or reduce the amount of, such compensation and will not, in the judgment of AT: 1030545v10 82 such Bank, be otherwise disadvantageous to such Bank. A certificate of any Bank claiming compensation under this Section and setting forth the additional amount or amounts to be paid to it hereunder and calculations in reasonable detail with respect thereto shall be conclusive in the absence of manifest error. In determining such amount, such Bank may use any reasonable averaging and attribution methods. (d) The provisions of this Section 9.03 shall be applicable with respect to any Participant, Assignee or other Transferee, and any calculations required by such provisions shall be made based upon the circumstances of such Participant, Assignee or other Transferee. SECTION 9.04. Base Rate Loans or Other Euro-Dollar Loans Substituted for Affected Euro-Dollar Loans. If (i) the obligation of any Bank to make or maintain any type of Euro- Dollar Loans has been suspended pursuant to Section 9.02 or (ii) any Bank has demanded compensation under Section 9.03, and the Borrowers shall, by at least 5 Euro-Dollar Business Days' prior notice to such Bank through the Agent, have elected that the provisions of this Section shall apply to such Bank, then, unless and until such Bank notifies the Borrowers that the circumstances giving rise to such suspension or demand for compensation no longer apply: (a) all Loans which would otherwise be made by such Bank as Euro-Dollar Loans shall be made instead as Base Rate Loans, and (b) after each of its Euro-Dollar Loans has been repaid, all payments of principal which would otherwise be applied to repay such Euro-Dollar Loans shall be applied to repay its Base Rate Loans instead. SECTION 9.05. Compensation. Upon the request of any Bank, delivered to the Borrowers and the Agent, the Borrowers shall pay to such Bank such amount or amounts as shall compensate such Bank for any loss, cost or expense incurred by such Bank as a result of: (a) any payment or prepayment (pursuant to Section 2.09, 2.10, 7.01, 9.02 or otherwise) of a Euro-Dollar Loan on a date other than the last day of an Interest Period for such Loan; or AT: 1030545v10 83 (b) any failure by the Borrowers to prepay a Euro- Dollar Loan on the date for such prepayment specified in the relevant notice of prepayment hereunder; or (c) any failure by the Borrowers to borrow a Euro- Dollar Loan on the date for the Fixed Rate Borrowing specified in the applicable Notice of Borrowing delivered pursuant to Section 2.02; such compensation to include, without limitation, with respect to Euro-Dollar Loans, an amount equal to the excess, if any, of (x) the amount of interest which would have accrued on the amount so paid or prepaid or not prepaid or borrowed for the period from the date of such payment, prepayment or failure to prepay or borrow to the last day of the then current Interest Period for such Euro-Dollar Loan (or, in the case of a failure to prepay or borrow, the Interest Period for such Euro-Dollar Loan which would have commenced on the date of such failure to prepay or borrow) at the applicable rate of interest for such Euro-Dollar Loan provided for herein over (y) the amount of interest (as reasonably determined by such Bank) such Bank would have paid on deposits in Dollars of comparable amounts having terms comparable to such period placed with it by leading banks in the London interbank market. ARTICLE X MISCELLANEOUS SECTION 10.01. Notices. All notices, requests and other communications to any party hereunder shall be in writing (including telecopier or similar writing) and shall be given to such party at its address or telecopier number set forth on the signature pages hereof or such other address or telecopier number as such party may hereafter specify for the purpose by notice to each other party. Each such notice, request or other communication shall be effective (i) if given by telecopier, when such telecopy is transmitted to the telecopier number specified in this Section and the confirmation is received, (ii) if given by mail, 72 hours after such communication is deposited in the mail with first class postage prepaid, addressed as aforesaid or (iii) if given by any other means, when delivered at the address specified in this Section; provided that notices to the Agent AT: 1030545v10 84 under Article II or Article X shall not be effective until received. SECTION 10.02. No Waivers. No failure or delay by the Agent or any Bank in exercising any right, power or privilege hereunder or under any Note or other Loan Document shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein provided shall be cumulative and not exclusive of any rights or remedies provided by law. SECTION 10.03. Expenses; Documentary Taxes. The Borrowers shall pay (i) all reasonable out-of-pocket expenses incurred by the Agent, including reasonable fees and disbursements of special outside counsel for the Banks and the Agent, in connection with the preparation of this Agreement and the other Loan Documents, any waiver or consent hereunder or thereunder or any amendment hereof or thereof or any Default or alleged Default hereunder or thereunder and (ii) if a Default occurs, all reasonable out-of-pocket expenses incurred by the Agent and the Banks, including reasonable fees and disbursements of counsel (including allocated costs of inside counsel for any Bank which does not use outside counsel), in connection with such Default and collection and other enforcement proceedings resulting therefrom, including out-of-pocket expenses incurred in enforcing this Agreement and the other Loan Documents. The Borrowers shall indemnify the Agent and each Bank against any transfer taxes, documentary taxes, assessments or charges made by any Authority by reason of the execution and delivery of this Agreement or the other Loan Documents. SECTION 10.04. Indemnification. The Borrowers shall indemnify the Agent, the Banks and each Affiliate thereof and their respective directors, officers, employees and agents from, and hold each of them harmless against, any and all losses, liabilities, claims or damages to which any of them may become subject, insofar as such losses, liabilities, claims or damages arise out of or result from any actual or proposed use by the Borrowers of the proceeds of any extension of credit by any Bank hereunder or breach by either of the Borrowers of this Agreement or any other Loan Document or from any investigation, litigation (including, without limitation, any actions taken by the Agent or any of the Banks to enforce this Agreement or any of the other Loan Documents) or other proceeding (including, without AT: 1030545v10 85 limitation, any threatened investigation or proceeding) relating to the foregoing, and the Borrowers shall reimburse the Agent and each Bank, and each Affiliate thereof and their respective directors, officers, employees and agents, upon demand for any expenses (including, without limitation, legal fees) incurred in connection with any such investigation or proceeding; but excluding any such losses, liabilities, claims, damages or expenses incurred by reason of the gross negligence or wilful misconduct of the Person to be indemnified. SECTION 10.05. Setoff; Sharing of Setoffs. (a) Each of the Borrowers hereby grants to the Agent and each Bank a lien for all indebtedness and obligations owing to them from the Borrowers upon all deposits or deposit accounts, of any kind, or any interest in any deposits or deposit accounts thereof, now or hereafter pledged, mortgaged, transferred or assigned to the Agent or any such Bank or otherwise in the possession or control of the Agent or any such Bank for any purpose for the account or benefit of either of the Borrowers and including any balance of any deposit account or of any credit of either of the Borrowers with the Agent or any such Bank, whether now existing or hereafter established hereby authorizing the Agent and each Bank at any time or times with or without prior notice to apply such balances or any part thereof to such of the indebtedness and obligations owing by either of the Borrowers to the Banks and/or the Agent then past due and in such amounts as they may elect, and whether or not the collateral, if any, or the responsibility of other Persons primarily, secondarily or otherwise liable may be deemed adequate. For the purposes of this paragraph, all remittances and property shall be deemed to be in the possession of the Agent or any such Bank as soon as the same may be put in transit to it by mail or carrier or by other bailee. (b) Each Bank agrees that if it shall, by exercising any right of setoff or counterclaim or resort to collateral security or otherwise, receive payment of a proportion of the aggregate amount of principal and interest owing with respect to the Note held by it which is greater than the proportion received by any other Bank in respect of the aggregate amount of all principal and interest owing with respect to the Note held by such other Bank, the Bank receiving such proportionately greater payment shall purchase such participations in the Notes held by the other Banks owing to such other Banks, and such other adjustments shall be made, as may be required so that all such payments of principal and interest with respect to the Notes held AT: 1030545v10 86 by the Banks owing to such other Banks shall be shared by the Banks pro rata; provided that (i) nothing in this Section shall impair the right of any Bank to exercise any right of setoff or counterclaim it may have and to apply the amount subject to such exercise to the payment of indebtedness of the Borrowers other than its indebtedness under the Notes, and (ii) if all or any portion of such payment received by the purchasing Bank is thereafter recovered from such purchasing Bank, such purchase from each other Bank shall be rescinded and such other Bank shall repay to the purchasing Bank the purchase price of such participation to the extent of such recovery together with an amount equal to such other Bank's ratable share (according to the proportion of (x) the amount of such other Bank's required repayment to (y) the total amount so recovered from the purchasing Bank) of any interest or other amount paid or payable by the purchasing Bank in respect of the total amount so recovered. The Borrowers agree, to the fullest extent it may effectively do so under applicable law, that any holder of a participation in a Note, whether or not acquired pursuant to the foregoing arrangements, may exercise rights of setoff or counterclaim and other rights with respect to such participation as fully as if such holder of a participation were a direct creditor of the Borrowers in the amount of such participation. SECTION 10.06. Amendments and Waivers. (a) Any provision of this Agreement, the Notes or any other Loan Documents may be amended or waived if, but only if, such amendment or waiver is in writing and is signed by the Borrowers and the Required Banks (and, if the rights or duties of the Agent are affected thereby, by the Agent); provided that, no such amendment or waiver shall, unless signed by all Banks, (i) change the Commitment of any Bank or subject any Bank to any additional obligation, (ii) change the principal of or rate of interest on any Loan or any fees (other than fees payable to the Agent) hereunder, (iii) change the date fixed for any payment of principal of or interest on any Loan or any fees hereunder, (iv) change the amount of principal, interest or fees due on any date fixed for the payment thereof, (v) change the percentage of the Commitments or of the aggregate unpaid principal amount of the Notes, or the percentage of Banks, which shall be required for the Banks or any of them to take any action under this Section or any other provision of this Agreement, (vi) change the manner of application of any payments made under this Agreement or the Notes, (vii) release or substitute all or any substantial part of AT: 1030545v10 87 the collateral (if any) held as security for the Loans, or (viii) release any Guarantee given to support payment of the Loans. (b) The Borrowers will not solicit, request or negotiate for or with respect to any proposed waiver or amendment of any of the provisions of this Agreement unless each Bank shall be informed thereof by the Borrowers and shall be afforded an opportunity of considering the same and shall be supplied by the Borrowers with sufficient information to enable it to make an informed decision with respect thereto. Executed or true and correct copies of any waiver or consent effected pursuant to the provisions of this Agreement shall be delivered by the Borrowers to each Bank forthwith following the date on which the same shall have been executed and delivered by the requisite percentage of Banks. The Borrowers will not, directly or indirectly, pay or cause to be paid any remuneration, whether by way of supplemental or additional interest, fee or otherwise, to any Bank (in its capacity as such) as consideration for or as an inducement to the entering into by such Bank of any waiver or amendment of any of the terms and provisions of this Agreement unless such remuneration is concurrently paid, on the same terms, ratably to all such Banks. SECTION 10.07. No Margin Stock Collateral. Each of the Banks represents to the Agent and each of the other Banks that it in good faith is not, directly or indirectly (by negative pledge or otherwise), relying upon any Margin Stock as collateral in the extension or maintenance of the credit provided for in this Agreement. SECTION 10.08. Successors and Assigns. (a) The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns; provided that the Borrowers may not assign or otherwise transfer any of their respective rights under this Agreement. (b) Any Bank may at any time sell to one or more Persons (each a "Participant") participating interests in any Loan owing to such Bank, any Note held by such Bank, any Commitment hereunder or any other interest of such Bank hereunder. In the event of any such sale by a Bank of a participating interest to a Participant, such Bank's obligations under this Agreement shall remain unchanged, such Bank shall remain solely responsible for the performance thereof, such Bank AT: 1030545v10 88 shall remain the holder of any such Note for all purposes under this Agreement, and the Borrowers and the Agent shall continue to deal solely and directly with such Bank in connection with such Bank's rights and obligations under this Agreement. In no event shall a Bank that sells a participation be obligated to the Participant to take or refrain from taking any action hereunder except that such Bank may agree that it will not (except as provided below), without the consent of the Participant, agree to (i) the change of any date fixed for the payment of principal of or interest on the related loan or loans, (ii) the change of the amount of any principal, interest or fees due on any date fixed for the payment thereof with respect to the related loan or loans, (iii) the change of the principal of the related loan or loans, (iv) any change in the rate at which either interest is payable thereon or (if the Participant is entitled to any part thereof) fee is payable hereunder from the rate at which the Participant is entitled to receive interest or fee (as the case may be) in respect of such participation, (v) the release or substitution of all or any substantial part of the collateral (if any) held as security for the Loans, or (vi) the release of any Guarantee given to support payment of the Loans. Each Bank selling a participating interest in any Loan, Note, Commitment or other interest under this Agreement, within 10 Domestic Business Days of such sale, shall provide the Borrowers and the Agent with written notification stating that such sale has occurred and identifying the Participant and the interest purchased by such Participant. The Borrowers agree that each Participant shall be entitled to the benefits of Article IX with respect to its participation in Loans outstanding from time to time. (c) Any Bank may at any time assign to one or more banks or financial institutions (each an "Assignee") all or a proportionate part of its rights and obligations under this Agreement, the Notes and the other Loan Documents, and such Assignee shall assume all such rights and obligations, pursuant to an Assignment and Acceptance, executed by such Assignee, such transferor Bank and the Agent (and, in the case of an Assignee that is not then a Bank, subject to clause (iii) below, by the Borrowers); provided that (i) no interest may be sold by a Bank pursuant to this paragraph (c) unless the Assignee shall agree to assume ratably equivalent portions of the transferor Bank's Commitment, (ii) if a Bank is assigning only a portion of its Commitment, then, the amount of the Commitment being assigned (determined as of the effective date of the assignment) shall be in an amount not less than $5,000,000, (iii) except during the AT: 1030545v10 89 continuance of a Default, no interest may be sold by a Bank pursuant to this paragraph (c) to any Assignee that is not then a Bank (or an Affiliate of a Bank) without the consent of the Borrowers and the Agent, which consent shall not be unreasonably withheld, and (iv) a Bank may not have more than 2 Assignees that are not then Banks at any one time. Upon (A) execution of the Assignment and Acceptance by such transferor Bank, such Assignee, the Agent and (if applicable) the Borrowers, (B) delivery of an executed copy of the Assignment and Acceptance to the Borrowers and the Agent, (C) payment by such Assignee to such transferor Bank of an amount equal to the purchase price agreed between such transferor Bank and such Assignee, and (D) payment of a processing and recordation fee of $2,500 to the Agent, such Assignee shall for all purposes be a Bank party to this Agreement and shall have all the rights and obligations of a Bank under this Agreement to the same extent as if it were an original party hereto with a Commitment as set forth in such instrument of assumption, and the transferor Bank shall be released from its obligations hereunder to a corresponding extent, and no further consent or action by the Borrowers, the Banks or the Agent shall be required. Upon the consummation of any transfer to an Assignee pursuant to this paragraph (c), the transferor Bank, the Agent and the Borrowers shall make appropriate arrangements so that, if required, a new Note is issued to each of such Assignee and such transferor Bank. Notwithstanding the foregoing, the Commitments of and Loans made by National City Bank of Columbus hereunder may be assigned by it to one of its Affiliates and such assignment (i) may be made without consent by either Borrower, the Agent or any Bank, and (ii) shall not be subject to the $2,500 processing and recordation fee described in this paragraph (c). (d) Subject to the provisions of Section 10.09, the Borrowers authorize each Bank to disclose to any Participant, Assignee or other transferee (each a "Transferee") and any prospective Transferee any and all financial information in such Bank's possession concerning the Borrowers which has been delivered to such Bank by the Borrowers pursuant to this Agreement or which has been delivered to such Bank by the Borrowers in connection with such Bank's credit evaluation prior to entering into this Agreement. (e) No Transferee shall be entitled to receive any greater payment under Section 10.03 than the transferor Bank would have been entitled to receive with respect to the rights AT: 1030545v10 90 transferred, unless such transfer is made with the Borrowers' prior written consent or by reason of the provisions of Section 9.02 or 9.03 requiring such Bank to designate a different Lending Office under certain circumstances or at a time when the circumstances giving rise to such greater payment did not exist. (f) Anything in this Section 10.08 to the contrary notwithstanding, any Bank may assign and pledge all or any portion of the Loans and/or obligations owing to it to any Federal Reserve Bank or the United States Treasury as collateral security pursuant to Regulation A of the Board of Governors of the Federal Reserve System and any Operating Circular issued by such Federal Reserve Bank, provided that any payment in respect of such assigned Loans and/or obligations made by the Borrowers to the assigning and/or pledging Bank in accordance with the terms of this Agreement shall satisfy the Borrowers' obligations hereunder in respect of such assigned Loans and/or obligations to the extent of such payment. No such assignment shall release the assigning and/or pledging Bank from its obligations hereunder. SECTION 10.09. Confidentiality. Each Bank agrees to exercise commercially reasonable efforts to keep any information delivered or made available by the Borrowers to it which is clearly indicated to be confidential information, confidential from anyone other than persons employed or retained by such Bank who are or are expected to become engaged in evaluating, approving, structuring or administering the Loans; provided that nothing herein shall prevent any Bank from disclosing such information (i) to any other Bank, (ii) upon the order of any court or administrative agency, (iii) upon the request or demand of any regulatory agency or authority having jurisdiction over such Bank, (iv) which has been publicly disclosed, (v) to the extent reasonably required in connection with any litigation to which the Agent, any Bank or their respective Affiliates may be a party, (vi) to the extent reasonably required in connection with the exercise of any remedy hereunder, (vii) to such Bank's legal counsel and independent auditors and (viii) to any actual or proposed Participant, Assignee or other Transferee of all or part of its rights hereunder which has agreed in writing to be bound by the provisions of this Section 10.09; provided that should disclosure of any such confidential information be required by virtue of clause (ii) of the immediately preceding sentence, to the extent permitted by law, any relevant Bank shall promptly notify the Borrowers of same so as to allow the Borrowers to seek a protective order or to take any other appropriate action; AT: 1030545v10 91 provided, further, that, no Bank shall be required to delay compliance with any directive to disclose any such information so as to allow the Borrowers to effect any such action. SECTION 10.10. Representation by Banks. Each Bank hereby represents that it is a commercial lender or financial institution which makes loans in the ordinary course of its business and that it will make its Loans hereunder for its own account in the ordinary course of such business; provided that, subject to Section 10.08, the disposition of the Note or Notes held by that Bank shall at all times be within its exclusive control. SECTION 10.11. Obligations Several. The obligations of each Bank hereunder are several, and no Bank shall be responsible for the obligations or commitment of any other Bank hereunder. Nothing contained in this Agreement and no action taken by the Banks pursuant hereto shall be deemed to constitute the Banks to be a partnership, an association, a joint venture or any other kind of entity. The amounts payable at any time hereunder to each Bank shall be a separate and independent debt, and each Bank shall be entitled to protect and enforce its rights arising out of this Agreement or any other Loan Document and it shall not be necessary for any other Bank to be joined as an additional party in any proceeding for such purpose. SECTION 10.12. Georgia Law. This Agreement and each Note shall be construed in accordance with and governed by the law of the State of Georgia. SECTION 10.13. Severability. In case any one or more of the provisions contained in this Agreement, the Notes or any of the other Loan Documents should be invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein and therein shall not in any way be affected or impaired thereby and shall be enforced to the greatest extent permitted by law. SECTION 10.14. Interest. In no event shall the amount of interest, and all charges, amounts or fees contracted for, charged or collected pursuant to this Agreement, the Notes or the other Loan Documents and deemed to be interest under applicable law (collectively, "Interest") exceed the highest rate of interest allowed by applicable law (the "Maximum Rate"), and in the event any such payment is inadvertently received by any Bank, AT: 1030545v10 92 then the excess sum (the "Excess") shall be credited as a payment of principal, unless the Borrowers shall notify such Bank in writing that it elects to have the Excess returned forthwith. It is the express intent hereof that the Borrowers not pay and the Banks not receive, directly or indirectly in any manner whatsoever, interest in excess of that which may legally be paid by the Borrowers under applicable law. The right to accelerate maturity of any of the Loans does not include the right to accelerate any interest that has not otherwise accrued on the date of such acceleration, and the Agent and the Banks do not intend to collect any unearned interest in the event of any such acceleration. All monies paid to the Agent or the Banks hereunder or under any of the Notes or the other Loan Documents, whether at maturity or by prepayment, shall be subject to rebate of unearned interest as and to the extent required by applicable law. By the execution of this Agreement, the Borrowers covenant, to the fullest extent permitted by law, that (i) the credit or return of any Excess shall constitute the acceptance by the Borrowers of such Excess, and (ii) the Borrowers shall not seek or pursue any other remedy, legal or equitable , against the Agent or any Bank, based in whole or in part upon contracting for charging or receiving any Interest in excess of the Maximum Rate. For the purpose of determining whether or not any Excess has been contracted for, charged or received by the Agent or any Bank, all interest at any time contracted for, charged or received from the Borrowers in connection with this Agreement, the Notes or any of the other Loan Documents shall, to the extent permitted by applicable law, be amortized, prorated, allocated and spread in equal parts throughout the full term of the Commitments. The Borrowers, the Agent and each Bank shall, to the maximum extent permitted under applicable law, (i) characterize any non- principal payment as an expense, fee or premium rather than as Interest and (ii) exclude voluntary prepayments and the effects thereof. The provisions of this Section shall be deemed to be incorporated into each Note and each of the other Loan Documents (whether or not any provision of this Section is referred to therein). All such Loan Documents and communications relating to any Interest owed by the Borrowers and all figures set forth therein shall, for the sole purpose of computing the extent of obligations hereunder and under the Notes and the other Loan Documents be automatically recomputed by the Borrowers, and by any court considering the same, to give effect to the adjustments or credits required by this Section. AT: 1030545v10 93 SECTION 10.15. Interpretation. No provision of this Agreement or any of the other Loan Documents shall be construed against or interpreted to the disadvantage of any party hereto by any court or other governmental or judicial authority by reason of such party having or being deemed to have structured or dictated such provision. SECTION 10.16. Waiver of Jury Trial; Consent to Jurisdiction. Each of the Borrowers (a) and each of the Banks and the Agent irrevocably waives, to the fullest extent permitted by law, any and all right to trial by jury in any legal proceeding arising out of this Agreement, any of the other Loan Documents, or any of the transactions contemplated hereby or thereby, (b) submits to the nonexclusive personal jurisdiction in the State of Georgia, the courts thereof and the United States District Courts sitting therein, for the enforcement of this Agreement, the Notes and the other Loan Documents, (c) waives any and all personal rights under the law of any jurisdiction to object on any basis (including, without limitation, inconvenience of forum) to jurisdiction or venue within the State of Georgia for the purpose of litigation to enforce this Agreement, the Notes or the other Loan Documents, and (d) agrees that service of process may be made upon it in the manner prescribed in Section 10.01 for the giving of notice to the Borrowers. Nothing herein contained, however, shall prevent the Agent from bringing any action or exercising any rights against any security and against the Borrowers personally, and against any assets of the Borrowers, within any other state or jurisdiction. SECTION 10.17. Counterparts. This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. SECTION 10.18. Source of Funds -- ERISA. Each of the Banks hereby severally (and not jointly) represents to the Borrowers that no part of the funds to be used by such Bank to fund the Loans hereunder from time to time constitutes (i) assets allocated to any separate account maintained by such Bank in which any employee benefit plan (or its related trust) has any interest nor (ii) any other assets of any employee benefit plan. As used in this Section, the terms "employee benefit plan" and "separate account" shall have the respective meanings assigned to such terms in Section 3 of ERISA. AT: 1030545v10 94 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed, under seal, by their respective authorized officers as of the day and year first above written. SED INTERNATIONAL HOLDINGS, INC. (SEAL) By: Title: SED INTERNATIONAL, INC. (SEAL) By: Title: SED International Holdings, Inc. SED International, Inc. 4916 North Royal Atlanta Drive Tucker, Georgia 30084 Attention: Larry G. Ayers, Vice President-Finance Telecopier number: 770-938-2414 Confirmation number: 770-491-8692 AT: 1030545v10 95 COMMITMENTS WACHOVIA BANK, N.A., as Agent and as a Bank (SEAL) $50,000,000 By: Title: Lending Office Wachovia Bank, N.A. 191 Peachtree Street, N.E. Atlanta, Georgia 30303-1757 Attention: Commercial Group Telecopier number: 404-332-6920 Confirmation number: 404-332-5269 TOTAL COMMITMENTS: $50,000,000 AT: 1030545v10 96 EXHIBIT A-1 AMENDED AND RESTATED SYNDICATED LOAN NOTE Atlanta, Georgia August 31, 1999 For value received, SED INTERNATIONAL HOLDINGS, INC. and SED INTERNATIONAL, INC., each a Georgia corporation, jointly and severally (individually and collectively, as the context shall require, the "Borrowers"), promise to pay to the order of (the "Bank"), for the account of its Lending Office, the principal sum of MILLION AND NO/100 DOLLARS ($ ), or such lesser amount as shall equal the unpaid principal amount of each Syndicated Loan made by the Bank to the Borrowers pursuant to the Credit Agreement referred to below, on the dates and in the amounts provided in the Credit Agreement. The Borrower promises to pay interest on the unpaid principal amount of this Syndicated Loan Note on the dates and at the rate or rates provided for in the Credit Agreement. Interest on any overdue principal of and, to the extent permitted by law, overdue interest on the principal amount hereof shall bear interest at the Default Rate, as provided for in the Credit Agreement. All such payments of principal and interest shall be made in lawful money of the United States in Federal or other immediately available funds at the office of Wachovia Bank, N.A., 191 Peachtree Street, N.E., Atlanta, Georgia 30303-1757, or such other address as may be specified from time to time pursuant to the Credit Agreement. All Loans made by the Bank, the respective maturities thereof, the interest rates from time to time applicable thereto, and all repayments of the principal thereof shall be recorded by the Bank and, prior to any transfer hereof, endorsed by the Bank on the schedule attached hereto, or on a continuation of such schedule attached to and made a part hereof; provided that the failure of the Bank to make any such recordation or endorsement shall not affect the obligations of the Borrowers hereunder or under the Credit Agreement. This Syndicated Loan Note is one of the Syndicated Loan Notes referred to in the Second Amended and Restated Credit Agreement dated as of even date herewith among the Borrowers, the AT: 1030545v10 97 Banks listed on the signature pages thereof and Wachovia Bank, N.A., as Agent (as the same may be amended and modified from time to time, the "Credit Agreement"), and amends and restates that certain Syndicated Loan Note dated as of August 13, 1997 issued by the Borrowers payable to the order of the Bank. Terms defined in the Credit Agreement are used herein with the same meanings. Reference is made to the Credit Agreement for provisions for the optional and mandatory prepayment and the repayment hereof and the acceleration of the maturity hereof, as well as the obligation of the Borrower to pay all costs of collection, including reasonable attorneys fees, in the event this Syndicated Loan Note is collected by law or through an attorney at law. The Borrowers hereby waive presentment, demand, protest, notice of demand, protest and nonpayment and any other notice required by law relative hereto, except to the extent as otherwise may be expressly provided for in the Credit Agreement. IN WITNESS WHEREOF, the Borrowers have caused this Syndicated Loan Note to be duly executed, under seal, by their respective duly authorized officers as of the day and year first above written. SED INTERNATIONAL HOLDINGS, INC. (SEAL) By: Title: SED INTERNATIONAL, INC. (SEAL) By: Title: AT: 1030545v10 98 Amended and Restated Syndicated Loan Note (cont'd) SYNDICATED LOANS AND PAYMENTS OF PRINCIPAL Base Rate Amount Amount of or Euro- of Principal Maturity Notation Date Dollar Loan Loan Repaid Date Made By AT: 1030545v10 99 EXHIBIT A-2 AMENDED AND RESTATED SWING LOAN NOTE Atlanta, Georgia August 31, 1999 For value received, SED INTERNATIONAL HOLDINGS, INC. and SED INTERNATIONAL, INC., each a Georgia corporation, jointly and severally (individually and collectively, as the context shall require, the "Borrowers"), promise to pay to the order of WACHOVIA BANK, N.A., a national banking association (the "Bank"), for the account of its Lending Office, the principal sum of FIVE MILLION and No/100 Dollars ($5,000,000), or such lesser amount as shall equal the unpaid principal amount of each Swing Loan made by the Bank to the Borrowers pursuant to the Credit Agreement referred to below, on the dates and in the amounts provided in the Credit Agreement. The Borrower promises to pay interest on the unpaid principal amount of this Swing Loan Note at the rate provided for Base Rate Loans on the dates provided for in the Credit Agreement. Interest on any overdue principal of and, to the extent permitted by law, overdue interest on the principal amount hereof shall bear interest at the Default Rate, as provided for in the Credit Agreement. All such payments of principal and interest shall be made in lawful money of the United States in Federal or other immediately available funds at the office of Wachovia Bank, N.A., 191 Peachtree Street, N.E., Atlanta, Georgia 30303-1757, or such other address as may be specified from time to time pursuant to the Credit Agreement. All Swing Loans made by the Bank, the respective maturities thereof, and all repayments of the principal thereof shall be recorded by the Bank and, prior to any transfer hereof, endorsed by the Bank on the schedule attached hereto, or on a continuation of such schedule attached to and made a part hereof; provided that the failure of the Bank to make any such recordation or endorsement shall not affect the obligations of the Borrower hereunder or under the Credit Agreement. This Swing Loan Note is the Swing Loan Note referred to in the Second Amended and Restated Credit Agreement dated as of even date herewith among the Borrowers, the Banks listed on the signature pages thereof and Wachovia Bank, N.A., as Agent (as the same may be amended and modified from time to time, the "Credit AT: 1030545v10 100 Agreement"), and amends and restates that certain Swing Loan Note dated as of August 13, 1997 issued by the Borrowers payable to the order of the Bank. Terms defined in the Credit Agreement are used herein with the same meanings. Reference is made to the Credit Agreement for provisions for the optional and mandatory prepayment and the repayment hereof and the acceleration of the maturity hereof. IN WITNESS WHEREOF, the Borrowers have caused this Swing Loan Note to be duly executed, under seal, by their respective duly authorized officers as of the day and year first above written. SED INTERNATIONAL HOLDINGS, INC. (SEAL) By: Title: SED INTERNATIONAL, INC. (SEAL) By: Title: AT: 1030545v10 101 Amended and Restated Swing Loan Note (cont'd) LOANS AND PAYMENTS OF PRINCIPAL Amount Amount of of Principal Maturity Notation Date Loan Repaid Date Made By AT: 1030545v10 102 EXHIBIT B OPINION OF LONG, ALDRIDGE & NORMAN SPECIAL COUNSEL FOR THE BORROWERS [Dated as provided in Section 4.01 of the Credit Agreement] To the Banks and the Agent Referred to Below c/o Wachovia Bank, N.A. 191 Peachtree Street, N.E. Atlanta, Georgia 30303-1757 Attn: Commercial Group [to be provided in substantially the same form as delivered for the Existing Credit Agreement] AT: 1030545v10 103 EXHIBIT C OPINION OF JONES, DAY, REAVIS & POGUE, SPECIAL COUNSEL FOR THE AGENT [Dated as provided in Section 4.01 of the Credit Agreement] To the Banks and the Agent Referred to Below c/o Wachovia Bank, N.A., as Agent 191 Peachtree Street, N.E. Atlanta, Georgia 30303-1757 Attn: Commercial Group Dear Sirs: We have participated in the preparation of the Second Amended and Restated Credit Agreement (the "Credit Agreement") dated as of August 31, 1999, among SED International Holdings, Inc. and SED International, Inc., each a Georgia corporation (individually and collectively, as the context requires, the "Borrowers"), the banks listed on the signature pages thereof (the "Banks") and Wachovia Bank, N.A., as Agent (the "Agent"), and have acted as special counsel for the Agent for the purpose of rendering this opinion pursuant to Section 4.01(e) of the Credit Agreement. Terms defined in the Credit Agreement are used herein as therein defined. This opinion letter is limited by, and is in accordance with, the January 1, 1992 edition of the Interpretive Standards applicable to Legal Opinions to Third Parties in Corporate Transactions adopted by the Legal Opinion Committee of the Corporate and Banking Law Section of the State Bar of Georgia which Interpretive Standards are incorporated herein by this reference. We have examined originals or copies, certified or otherwise identified to our satisfaction, of such documents, corporate records, certificates of public officials and other instruments and have conducted such other investigations of fact AT: 1030545v10 104 and law as we have deemed necessary or advisable for purposes of this opinion. Upon the basis of the foregoing, and assuming the due authorization, execution and delivery of the Credit Agreement, each of the Notes and each of the Letter of Credit Application Agreements by or on behalf of the Borrowers, we are of the opinion that the Credit Agreement and the Notes constitute, and upon execution and delivery thereof, each Letter of Credit Application Agreement will constitute, a valid and binding obligations of each Borrower which is a party thereto, in each case enforceable in accordance with its terms except as: (i) the enforceability thereof may be affected by bankruptcy, insolvency, reorganization, fraudulent conveyance, voidable preference, moratorium or similar laws applicable to creditors' rights or the collection of debtors' obligations generally; (ii) rights of acceleration and the availability of equitable remedies may be limited by equitable principles of general applicability; and (iii) the enforceability of certain of the remedial, waiver and other provisions of the Credit Agreement and the Notes may be further limited by the laws of the State of Georgia; provided that such additional laws do not, in our opinion, substantially interfere with the practical realization of the benefits expressed in the Credit Agreement, the Notes and the Letter of Credit Application Agreements, except for the economic consequences of any procedural delay which may result from such laws. In giving the foregoing opinion, we express no opinion as to the effect (if any) of any law of any jurisdiction except the State of Georgia. We express no opinion as to the effect of the compliance or noncompliance of the Agent or any of the Banks with any state or federal laws or regulations applicable to the Agent or any of the Banks by reason of the legal or regulatory status or the nature of the business of the Agent or any of the Banks. This opinion is delivered to you in connection with the transaction referenced above and may only be relied upon by you and any Assignee, Participant or other Transferee under the Credit Agreement without our prior written consent. Very truly yours, AT: 1030545v10 105 EXHIBIT D ASSIGNMENT AND ACCEPTANCE Dated , 19 Reference is made to the Second Amended and Restated Credit Agreement dated as of August 31, 1999 (together with all amendments and modifications thereto, the "Credit Agreement") among SED International Holdings, Inc. and SED International, Inc., each a Georgia corporation (individually and collectively, as the context shall require, the "Borrowers"), the Banks (as defined in the Credit Agreement) and Wachovia Bank, N.A., as Agent (the "Agent"). Terms defined in the Credit Agreement are used herein with the same meaning. (the "Assignor") and (the "Assignee") agree as follows: 1. The Assignor hereby sells and assigns to the Assignee, without recourse to the Assignor, and the Assignee hereby purchases and assumes from the Assignor, a % interest in and to all of the Assignor's rights and obligations under the Credit Agreement as of the Effective Date (as defined below) (including, without limitation, a % interest (which on the Effective Date hereof is $__________) in the Assignor's Commitment and a interest (which on the Effective Date hereof is $ ) in the Syndicated Loans [and Swing Loans] owing to the Assignor and a % interest in the Note[s] held by the Assignor (which on the Effective Date hereof is $----------). 2. The Assignor (i) makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with the Credit Agreement or the execution, legality, validity, enforceability, genuineness, sufficiency or value of the Credit Agreement or any other instrument or document furnished pursuant thereto, other than that it is the legal and beneficial owner of the interest being assigned by it hereunder, that such interest is free and clear of any adverse claim and that as of the date hereof its Commitment (without giving effect to assignments thereof which have not yet become effective) is AT: 1030545v10 106 $__________ and the aggregate outstanding principal amount of Syndicated Loans [and Swing Loans] owing to it (without giving effect to assignments thereof which have not yet become effective) is $ ; (ii) makes no representation or warranty and assumes no responsibility with respect to the financial condition of the Borrowers or the performance or observance by the Borrowers of any of their obligations under the Credit Agreement or any other instrument or document furnished pursuant thereto; and (iii) attaches the Note[s] referred to in paragraph 1 above and requests that the Agent exchange such Note[s] for [a new Syndicated Loan Note from each Borrower dated , in the principal amount of $__________ payable to the order of the Assignee and a new Swing Loan Note from each Borrower dated ___________, ____ in the principal amount of $______________ payable to the order of the Assignee] [new Notes as follows: a (i) Syndicated Loan Note from each Borrower dated , in the principal amount of $ payable to the order of the Assignor (ii) Syndicated Loan Note from each Borrower dated , in the principal amount of $ payable to the order of the Assignee, and (iii) and a new Swing Loan Note from each Borrower dated ___________, ____ in the principal amount of $______________ payable to the order of the Assignee]. 3. The Assignee (i) confirms that it has received a copy of the Credit Agreement, together with copies of the financial statements referred to in Section 5.04(a) (or any more recent financial statements of the Borrowers delivered pursuant to Section 6.01(a) or (b)) and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into this Assignment and Acceptance; (ii) agrees that it will, independently and without reliance upon the Agent, the Assignor or any other Bank and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the Credit Agreement; (iii) confirms that it is a bank or financial institution; (iv) appoints and authorizes the Agent to take such action as agent on its behalf and to exercise such powers under the Credit Agreement as are delegated to the Agent by the terms thereof, together with such powers as are reasonably incidental thereto; (v) agrees that it will perform in accordance with their terms all of the obligations which by the terms of the Credit Agreement are required to be performed by it as a Bank; (vi) specifies as its Lending Office (and address for notices) the office set forth AT: 1030545v10 107 beneath its name on the signature pages hereof, (vii) represents and warrants that the execution, delivery and performance of this Assignment and Acceptance are within its corporate powers and have been duly authorized by all necessary corporate action, (viii) makes the representation and warranty contained in Section 10.18 of the Credit Agreement[, and (ix) attaches the forms prescribed by the Internal Revenue Service of the United States certifying as to the Assignee's status for purposes of determining exemption from United States withholding taxes with respect to all payments to be made to the Assignee under the Credit Agreement and the Notes or such other documents as are necessary to indicate that all such payments are subject to such taxes at a rate reduced by an applicable tax treaty]. 4. The Effective Date for this Assignment and Acceptance shall be , 19 (the "Effective Date"). Following the execution of this Assignment and Acceptance, it will be delivered to the Agent for execution and acceptance by the Agent and [IF REQUIRED BY THE CREDIT AGREEMENT] to the Borrowers for execution by the Borrowers. 5. Upon such execution and acceptance by the Agent [and execution by the Borrowers] [IF REQUIRED BY THE CREDIT AGREEMENT], from and after the Effective Date, (i) the Assignee shall be a party to the Credit Agreement and, to the extent rights and obligations have been transferred to it by this Assignment and Acceptance, have the rights and obligations of a Bank thereunder and (ii) the Assignor shall, to the extent its rights and obligations have been transferred to the Assignee by this Assignment and Acceptance, relinquish its rights (other than under Sections 8.03, 9.03 and 9.04 of the Credit Agreement) and be released from its obligations under the Credit Agreement. 6. Upon such execution and acceptance by the Agent [and execution by the Borrowers] [IF REQUIRED BY THE CREDIT AGREEMENT], from and after the Effective Date, the Agent shall make all payments in respect of the interest assigned hereby to the Assignee. The Assignor and Assignee shall make all appropriate adjustments in payments for periods prior to such acceptance by the Agent directly between themselves. AT: 1030545v10 108 7. This Assignment and Acceptance shall be governed by, and construed in accordance with, the laws of the State of Georgia. [NAME OF ASSIGNOR] By: Title: [NAME OF ASSIGNEE] By: Title: Lending Office: [Address] WACHOVIA BANK, N.A., As Agent By: Title: SED INTERNATIONAL HOLDINGS, INC. IF REQUIRED BY THE CREDIT AGREEMENT By: Title: SED INTERNATIONAL, INC. IF REQUIRED BY THE CREDIT AGREEMENT By: Title: AT: 1030545v10 109 EXHIBIT E NOTICE OF BORROWING , 199 Wachovia Bank, N.A., as Agent 191 Peachtree Street, N.E. Atlanta, Georgia 30303-1757 Attention: Commercial Group Re: Second Amended and Restated Credit Agreement (as amended and modified from time to time, the "Credit Agreement") dated as of August 31, 1999 by and among SED International Holdings, Inc. and SED International, Inc., as the Borrowers, the Banks from time to time parties thereto, and Wachovia Bank, N.A., as Agent. Gentlemen: Unless otherwise defined herein, capitalized terms used herein shall have the meanings attributable thereto in the Credit Agreement. This Notice of Borrowing is delivered to you pursuant to Section 2.02 of the Credit Agreement. The undersigned Borrower hereby requests a [Euro-Dollar Borrowing] [Swing Borrowing] [Syndicated Borrowing which is a Base Rate Borrowing] in the aggregate principal amount of $ to be made on , 199 , and for interest to accrue thereon at the rate established by the Credit Agreement for [Euro-Dollar Loans] [Base Rate Loans]. The duration of the Interest Period with respect thereto shall be [1 month] [2 months] [3 months] [6 months] [30 days] [60 days] [90 days]. The amount available to be borrowed under Section 2.01 of the Credit Agreement, net of amounts to be paid with the proceeds of this Borrowing, is as follows: (a) Aggregate Commitments $ (b) Borrowing Base per most recent Borrowing Base Certificate $ AT: 1030545v10 110 (c) Principal amount outstanding under Syndicated Loans $ (d) Principal amount outstanding under Swing Loans $ (e) Aggregate outstanding principal amount of Letter of Credit Obligations $ (f) Amount available to be borrowed (lesser of: (a); or sum of (b), less (c) less (d) less (e) $ The undersigned Borrower has caused this Notice of Borrowing to be executed and delivered by its duly authorized officer this day of , 199 . [SED INTERNATIONAL HOLDINGS, INC.] [SED INTERNATIONAL, INC.] By: Title: AT: 1030545v10 111 EXHIBIT F FORM OF BORROWING BASE CERTIFICATE [TO BE PROVIDED BY WACHOVIA] AT: 1030545v10 112 EXHIBIT G FORM OF NOTICE IN RESPECT OF ISSUANCE OF LETTERS OF CREDIT TO: The Banks under that certain Second Amended and Restated Credit Agreement, dated as of August 31, 1999 ("Credit Agreement"), among SED International Holdings, Inc. and SED International, Inc., as the Borrowers, the Banks parties thereto and Wachovia Bank, N.A., as Agent ("Agent"). Pursuant to Section 3.04(b) of the Credit Agreement, the Agent hereby certifies to the Banks that it has issued the following Letters of Credit pursuant to Article III of the Credit Agreement: Face Date of Number Amount Issuance/Expiration Beneficiary Purpose A copy of each of the Letters of Credit listed above has been attached hereto. Unless otherwise defined herein, terms defined in the Credit Agreement shall have the same meaning in this notice. Date: , 19 . WACHOVIA BANK, N.A. By: Name: Title: Enclosures AT: 1030545v10 113 EXHIBIT H COMPLIANCE CERTIFICATE Reference is made to the Second Amended and Restated Credit Agreement dated as of August 31, 1999 (as modified and supplemented and in effect from time to time, the "Credit Agreement") among SED International Holdings, Inc. and SED International, Inc., as Borrowers, the Banks from time to time parties thereto, and Wachovia Bank, N.A., as Agent. Capitalized terms used herein shall have the meanings ascribed thereto in the Credit Agreement. Pursuant to Section 6.01(c) of the Credit Agreement, , the duly authorized of SED International Holdings, Inc. and , the duly authorized of SED International, Inc., hereby certify to the Agent and the Banks that the information contained in the Compliance Check List attached hereto is true, accurate and complete as of , 199 , and that no Default is in existence on and as of the date hereof. SED INTERNATIONAL HOLDINGS, INC. By: Title: SED INTERNATIONAL, INC. By: Title: AT: 1030545v10 114 Exhibit "H" COMPLIANCE CHECK LIST SED INTERNATIONAL HOLDINGS, INC. SED INTERNATIONAL, INC. , 1. Consolidations, Mergers and Sales of Assets. (Section 6.05.) The Borrowers will not, nor will it permit any Subsidiary to, consolidate or merge with or into, or sell, lease or otherwise transfer all or any substantial part of its assets to, any other Person, or discontinue or eliminate any business line or segment, provided that (a) either Borrower may merge with another Person if (i) such Person was organized under the laws of the United States of America or one of its states, (ii) such Borrower is the corporation surviving such merger and (iii) immediately after giving effect to such merger, no Default shall have occurred and be continuing, (b) the Borrowers may merge with one another and Subsidiaries of the Borrowers may merge with one another, and (c) the foregoing limitation on the sale, lease or other transfer of assets and on the discontinuation or elimination of a business line or segment shall not prohibit (A) transfers of Accounts to insurers permitted by Section 6.26 or (B) during any Fiscal Quarter, a transfer of assets or the discontinuance or elimination of a business line or segment (in a single transaction or in a series of related transactions) unless the aggregate assets to be so transferred or utilized in a business line or segment to be so discontinued, when combined with all other assets transferred, and all other assets utilized in all other business lines or segments discontinued, during such Fiscal Quarter and the immediately preceding 3 Fiscal Quarters, either (x) constituted more than 2% of Consolidated Total Assets at the end of the most recent Fiscal Year immediately preceding such Fiscal Quarter, or (y) contributed more than 2% of Consolidated Operating Profits during the 4 Fiscal Quarters immediately preceding such Fiscal Quarter. (a) Value of assets transferred or business AT: 1030545v10 115 lines or segments discontinued $ (b) Consolidated Total Assets $ (c) 2% of (b) $ ---------- (d) Consolidated Operating Profits - Schedule 1 $ (e) 2% of (d) $ ---------- Limitation (a) not to exceed (c) or (e) 2. Priority Debt (Section 6.18) None of the Borrowers' nor any Consolidated Subsidiary's property is subject to any Lien securing Debt, except for: Description of Lien and Property Amount of Debt subject to same Secured a. ___________________________ $_____________ b. ___________________________ $_____________ c. ___________________________ $_____________ d. ___________________________ $_____________ e. ___________________________ $_____________ f. ___________________________ $_____________ g. ___________________________ $_____________ Total $ Aggregate Debt secured by purchase money Liens permitted by Section 6.18(k) $ ------------- Limitation: $1,500,000 AT: 1030545v10 116 3. Leverage Ratio (Section 6.20) Tested at the end of each Fiscal Quarter, the Leverage Ratio shall not at any time exceed 3.5 to 1.0. (a) Consolidated Debt - Schedule 3 $ ---------- (b) Consolidated Tangible Net Worth - Schedule 4 $ ---------- Actual Ratio of (a) to (b) Maximum Ratio 3.5 to 1.0 4. Fixed Charge Coverage (Section 6.21) Commencing on June 30, 1999, and tested on such date and at the end of each Fiscal Quarter thereafter, the ratio of EBILTDA to Consolidated Fixed Charges shall not at any time be less than the following amounts as of the end of each of the following Fiscal Quarters: Fiscal Quarters Ending Ratio June 30, 1999 through September 30, 1999 1.0 to 1.0 December 31, 1999 through March 31, 2000 1.25 to 1.0 Each Fiscal Quarter thereafter 1.5 to 1.0 The foregoing ratio shall be calculated on a cumulative basis for the Fiscal Quarter just ended and the immediately preceding three Fiscal Quarters; provided, however, for the 3 Fiscal Quarters ending after the Closing Date, the foregoing ratio shall be calculated as follows: (i) for the first Fiscal Quarter after the Closing Date, times 4, (ii) for the first and second Fiscal Quarters after the Closing Date on a cumulative basis, times 2, and (iii) for the first, second and third Fiscal Quarters after the Closing Date on a cumulative basis, times 1.3333. (a) EBILTDA - Schedule 2 $ ---------- AT: 1030545v10 117 (b) Consolidated Interest Expense - Schedule 2 $ ---------- (c) operating leases and rentals - Schedule 2 $ ---------- (d) sum of (b) plus (c) $ Ratio of (a) to (d) to 1.0 ------ Requirement >= [1.0 to 1.0] [1.25 to 1.0] [1.5 to 1.0] 5. Current Ratio (Section 6.22) Tested at the end of each Fiscal Quarter, the Borrower will at all times maintain a Current Ratio greater than 1.25 to 1.0. (a) Aggregate Accounts Receivable $ (b) Aggregate Inventory $ (c) sum of (a) and (b) $ ---------- (d) Principal amount outstanding under Syndicated Loans $ (e) Principal amount outstanding under Swing Loans $ (f) Aggregate outstanding principal amount of Letter of Credit Obligations $ (g) Aggregate accounts payable $ (h) sum of (d) plus (e) plus (f) plus (g)$ (i) ratio of (c) to (h) to 1.0 ---- Limitation 1.25 to 1.0 AT: 1030545v10 118 6. Minimum Profitability (Section 6.23) Tested at the end of each Fiscal Quarter, the Borrower's EBITDA shall not be less than $500,000 for such Fiscal Quarter. (a) EBITDA - Schedule 5 $ --------- (b) Requirement $500,000 7. Minimum Consolidated Tangible Net Worth (Section 6.24) Consolidated Tangible Net Worth will as of June 30, 1999 be not less than $40,000,000, and at all times thereafter will not be less than (x) $40,000,000 plus (y) the sum of (i) 75% of the cumulative Reported Net Income of the Borrowers and the Consolidated Subsidiaries during any period after March 31, 1999 (taken as one accounting period), calculated monthly at the end of each month (but excluding from such calculations of Reported Net Income for purposes of this clause (i), any month in which the Reported Net Income of the Borrowers and the Consolidated Subsidiaries is negative), and (ii) 100% of the cumulative Net Proceeds of Capital Stock received during any period after March 31, 1999, calculated monthly at the end of each month. (a) $40,000,000 (b) 75% of positive Reported Net Income after March 31, 1999 $ ---------- (c) 100% of cumulative Net Proceeds of Capital Stock received after March 31, 1999 $ Actual Consolidated Tangible Net Worth - Schedule 4 $ ---------- Required Consolidated Tangible Net Worth (sum of (a) plus (b) plus (c) $ AT: 1030545v10 119 Schedule 1 Consolidated Operating Profits Consolidated Operating Profits quarter 199 $ --- - ---------- quarter 199 $ --- - ---------- quarter 199 $ --- - ---------- quarter 199 $ --- - ---------- Total $ AT: 1030545v10 120 Schedule 2 EBILTDA Consolidated Net Income for: quarter 199 $ --- - ---------- quarter 199 $ --- - ---------- quarter 199 $ --- - ---------- quarter 199 $ --- - ---------- Total $ Income taxes for: quarter 199 $ --- - ---------- quarter 199 $ --- - ---------- quarter 199 $ --- - ---------- quarter 199 $ --- - ---------- Total $ Depreciation expense for: quarter 199 $ --- - ---------- quarter 199 $ --- - ---------- quarter 199 $ --- - ---------- quarter 199 $ --- - ---------- Total $ Amortization expense for: quarter 199 $ --- - ---------- quarter 199 $ --- - ---------- AT: 1030545v10 121 quarter 199 $ --- - ---------- quarter 199 $ --- - ---------- Total $ Consolidated Interest Expense for: quarter 199 $ --- - ---------- quarter 199 $ --- - ---------- quarter 199 $ --- - ---------- quarter 199 $ --- - ---------- Total $ Operating Leases and Rentals for: quarter 199 $ --- - ---------- quarter 199 $ --- - ---------- quarter 199 $ --- - ---------- quarter 199 $ --- - ---------- Total $ TOTAL EBILTDA $ AT: 1030545v10 122 Schedule 3 Consolidated Debt INTEREST RATE MATURITY TOTAL Secured $ $ $ $ $ Total Secured $ Unsecured $ $ $ $ Total Unsecured $ Guarantees $ $ Total $ Redeemable Preferred Stock $ - -------------------------- ---------- Total $ ---------- Other Liabilities $ $ $ TOTAL DEBT $ AT: 1030545v10 123 Schedule 4 Consolidated Tangible Net Worth Stockholders' Equity $ Less: Surplus from write-up of assets subsequent to , 19 $ Intangibles $ Loans to stockholders, directors officers or employees $ ----------- Capital Stock shown as assets1 $ ----------- Deferred expenses $ ----------- Consolidated Tangible Net Worth $ Intangibles Description (a) $ (b) $ (c) $ Other $ Total $ - -------- 1 To the extent not included above as an Intangible. AT: 1030545v10 124 Schedule 5 EBITDA Consolidated Net Income for: quarter 199 $ --- - ----------- quarter 199 $ --- - ----------- quarter 199 $ --- - ----------- quarter 199 $ --- - ----------- Total $ Income taxes for: quarter 199 $ --- - ----------- quarter 199 $ --- - ----------- quarter 199 $ --- - ----------- quarter 199 $ --- - ----------- Total $ Depreciation expense for: quarter 199 $ --- - ----------- quarter 199 $ --- - ----------- quarter 199 $ --- - ----------- quarter 199 $ --- - ----------- Total $ Amortization expense for: quarter 199 $ --- - ----------- quarter 199 $ --- - ----------- quarter 199 $ --- - ----------- quarter 199 $ --- - ----------- Total $ Consolidated Interest Expense for: quarter 199 $ --- - ----------- quarter 199 $ --- - ----------- quarter 199 $ --- - ----------- quarter 199 $ --- - ----------- Total $ TOTAL EBITDA $ AT: 1030545v10 125 EXHIBIT I SED INTERNATIONAL HOLDINGS, INC. SED INTERNATIONAL, INC. CLOSING CERTIFICATE Reference is made to the Second Amended and Restated Credit Agreement (the "Credit Agreement") dated as of August 31, 1999, among SED International Holdings, Inc., SED International, Inc., the Banks listed therein, and Wachovia Bank, N.A., as Agent. Capitalized terms used herein have the meanings ascribed thereto in the Credit Agreement. Pursuant to Section 4.01(f) of the Credit Agreement, , the duly authorized of SED International Holdings, Inc., and , the duly authorized of SED International, Inc., hereby certify to the Agent and the Banks that (i) no Default has occurred and is continuing as of the date hereof, and (ii) the representations and warranties contained in Article V of the Credit Agreement are true on and as of the date hereof. Certified as of August 31, 1999. SED INTERNATIONAL HOLDINGS, INC. By: Printed Name: Title: SED INTERNATIONAL, INC. By: Printed Name: Title: AT: 1030545v10 126 EXHIBIT J [SED INTERNATIONAL HOLDINGS, INC.] [SED INTERNATIONAL, INC.] SECRETARY'S CERTIFICATE The undersigned, , , Secretary of [SED INTERNATIONAL HOLDINGS, INC.] [SED INTERNATIONAL, INC.], a Georgia corporation (the "Borrower"), hereby certifies that [s]he has been duly elected, qualified and is acting in such capacity and that, as such, [s]he is familiar with the facts herein certified and is duly authorized to certify the same, and hereby further certifies, in connection with the Second Amended and Restated Credit Agreement dated as of August 31, 1999 (the "Credit Agreement") among SED International Holdings, Inc. and SED International, Inc., as the Borrowers, Wachovia Bank, N.A. as Agent and as a Bank, and certain other Banks listed on the signature pages thereof, that: 1. Attached hereto as Exhibit A is a complete and correct copy of the Certificate of Incorporation of the Borrower as in full force and effect on the date hereof as certified by the Secretary of State of the State of Georgia, the Borrower's state of incorporation. 2. Attached hereto as Exhibit B is a complete and correct copy of the Bylaws of the Borrower as in full force and effect on the date hereof. 3. Attached hereto as Exhibit C is a complete and correct copy of the resolutions duly adopted by the Board of Directors of the Borrower on [ ] approving, and authorizing the execution and delivery of, the Credit Agreement, the Notes, the Letter of Credit Application Agreements and the other Loan Documents (as such terms are defined in the Credit Agreement) to which the Borrower is a party. Such resolutions have not been repealed or amended and are in full force and effect, and no other resolutions or consents have been adopted by the Board of Directors of the Borrower in connection therewith. 4. , who is of the Borrower signed the Credit Agreement, the Notes [, THE LETTER OF CREDIT APPLICATION AGREEMENTS EXECUTED ON THE CLOSING DATE] and the AT: 1030545v10 127 other Loan Documents to which the Borrower is a party, was duly elected, qualified and acting as such at the time [s]he signed the Credit Agreement, the Notes [, THE LETTER OF CREDIT APPLICATION AGREEMENTS EXECUTED ON THE CLOSING DATE] and other Loan Documents to which the Borrower is a party, and [his/her] signature appearing on the Credit Agreement, the Notes [, THE LETTER OF CREDIT APPLICATION AGREEMENTS EXECUTED ON THE CLOSING DATE] and the other Loan Documents to which the Borrower is a party is [his/her] genuine signature. IN WITNESS WHEREOF, the undersigned has hereunto set [his/her] hand as of August 31, 1999. AT: 1030545v10 128 EXHIBIT K LANDLORD'S AGREEMENT THIS LANDLORD'S AGREEMENT ("Agreement"), made and entered into as of [_______________] by the undersigned landlord (the "Landlord") in favor of WACHOVIA BANK, N.A., as agent (the "Agent") for the ratable benefit of itself and the other banks party to the "Financing Arrangement" defined below (the "Banks"). W I T N E S S E T H: RECITALS: 1.1. Landlord is the landlord under the Lease described on Exhibit "A" attached hereto (the "Lease"), covering the business premises likewise described on said Exhibit "A" (the "Premises"). 1.2. ("Tenant") is the tenant of Landlord under the Lease and, in such capacity, is operating its business on, or keeps property on, the Premises. 1.3. Tenant has notified Landlord that it intends to enter into a certain financing arrangement (the "Financing Arrangement") with the Agent and the Banks, pursuant to which the Agent and the Banks will make certain loans, advances and other financial accommodations to Tenant. 1.4. Tenant intends to secure the payment and performance of its obligations to the Agent, for the ratable benefit of the Banks, under the Financing Arrangement by granting to the Agent a security interest in, among other property of Tenant, all of its inventory, equipment and trade fixtures, whether now owned or hereafter acquired (the "Collateral"), portions of which are or hereafter may be located on the Premises. 1.5. In connection therewith, pursuant to the Agent's request, Tenant has requested that Landlord execute this Agreement in favor of the Agent. 1.6. Landlord has agreed, at Tenant's request and as an ac commodation to it, to execute this Agreement. AT: 1030545v10 129 IN CONSIDERATION of the foregoing and for other good and valuable consideration, the receipt and sufficiency of which are acknowledged by Landlord, Landlord acknowledges and agrees as follows in favor of the Agent: 1. Consent. Landlord hereby consents to the grant by the Tenant of a security interest in the Collateral to Agent. 2. Lien Subordination. Landlord acknowledges and agrees that: (a) the security interest of Agent in the Collateral shall be superior to any lien, right, title, claim or interest which Landlord may now or hereafter have therein; (b) Landlord shall not assert as against Agent's security interest therein any statutory, contractual or possessory lien, right, title, claim or interest in the Collateral, including without limitation, rights of levy or distraint for rent, all of which Landlord hereby subordinates to Agent for the term of this Agreement; (c) Agent shall have access to the Collateral and the Premises at all times hereafter during regular business hours to re move the Collateral therefrom should Agent elect to enforce the security interest granted in their favor in the Collateral, without hindrance or delay by Landlord; and (d) all Collateral which is now located or hereafter may be located on the Premises shall remain the personal property of Tenant. 3. Termination of the Lease or Sublease. If, after the date hereof, Landlord intends to terminate the Lease or otherwise exercise any right it may have to require Tenant to surrender the Premises or to remove any property of Tenant (including the Collateral) from the Premises, Landlord shall use its best efforts to notify Agent in writing at Wachovia Bank, N.A., 191 Peachtree Street, Atlanta, Georgia 30303, Attn: Structured Finance, of its intent to take such action and to permit Agent, at its option, either (a) to keep the Collateral on the Premises for a period of up to thirty (30) days after its receipt of such notice, at the then effective rental provided in the Lease (pro-rated on a daily basis) without incurring any other obligations of Tenant as a result thereof (including any obligations for past due rent), or (b) to enter onto the Premises within such thirty (30) day period in order to remove the Collateral therefrom, without charge, except for reasonable compensation to Landlord for any damage to the Premises caused by such removal; and in either such event, Landlord agrees to cooperate with Agent and not to hinder its actions in protecting or realizing upon the Collateral. 4. Term. This Agreement shall remain in full force and effect until the Financing Arrangement has been terminated, and all AT: 1030545v10 130 obligations and liabilities of Tenant to Agent arising therefrom have been paid and satisfied in full. 5. No Oral Modification; Successors and Assigns. The provisions of this Agreement may not be modified or terminated orally, and shall be binding upon the successors, assigns and personal representatives of Landlord, and upon any successor owner or transferee of the Premises, and shall inure to the benefit of the successors and assigns of Agent. IN WITNESS WHEREOF, Landlord has caused this Agreement to be executed, by its duly authorized officer, agent or other represen tative as of the date first above written. Signed and delivered LANDLORD: in the presence of: _______________________________ _________________________ By:____________________________ Witness Name: Title: Notary Public My Commission Expires: (NOTARY SEAL) AT: 1030545v10 131 EXHIBIT "A" Description of Lease: - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ Description of Premises: - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ (or add Exhibit) AT: 1030545v10 132 EXHIBIT L TELEPHONE INSTRUCTION LETTER August [___], 1999 Wachovia Bank, N.A. 191 Peachtree Street, N.E. Atlanta, Georgia 30303 Attention: Structured Finance Ladies and Gentlemen: Please refer to that certain Second Amended and Restated Credit Agreement of even date herewith between you and us ("Credit Agreement"). From any Loans under the Credit Agreement which you make to us, we hereby authorize and direct you to make disbursements from time to time for our account to our bank account number ______________ maintained with ________________ _________________ of _____________________, ________________ upon receipt of telephone instructions from any of the following persons or their respective designees: Name Title ---------------------------- ---------------------------- ---------------------------- ---------------------------- ---------------------------- ---------------------------- You shall have no liability to us whatsoever for acting upon any such telephone instruction which you, in good faith, believe was given by any of the above designated persons or their respective designees and you shall have no duty to inquire as to the propriety of any disbursement. You shall have the right to accept the telephone instructions of any of the above designated persons or their respective designees AT: 1030545v10 133 unless and until actual receipt by you from us of written notice of termination of the authority of any such designated persons. We may change persons designated to give you telephone instructions only by delivering to you written notice of such change. Unless and until you advise us to the contrary, each telephone instruction from the above-named persons or their respective designees shall be followed by a written confirmation of the request for disbursement in such form as you make available from time to time to use for such purpose. Very truly yours, SED INTERNATIONAL HOLDINGS, INC. By:______________________________ President SED INTERNATIONAL, INC. By:______________________________ President AT: 1030545v10 134 EXHIBIT M FORM OF SECURITY AGREEMENT PREAMBLE. THIS SECURITY AGREEMENT (this "Agreement"), made, entered into and effective as of June [__], 1999, by and between SED INTERNATIONAL, INC. ("Obligor") and WACHOVIA BANK, N.A. (successor by merger to Wachovia Bank of Georgia, N.A.), acting as agent (the "Agent") under the Credit Agreement (as defined below) for the ratable benefit of the Banks (as defined in the Credit Agreement) party to the Credit Agreement from time to time. This Agreement amends, restates and supersedes that certain Security Agreement dated as of June 27, 1997 between the parties to this Agreement. W I T N E S S E T H : WHEREAS, concurrently herewith, Obligor, SED INTERNATIONAL HOLDINGS, INC., the Agent and the Banks party thereto executed and delivered that certain Second Amended and Restated Credit Agreement, dated as of even date herewith (as amended, supplemented or otherwise modified from time to time hereafter, the "Credit Agreement"). Pursuant to the terms of the Credit Agreement, the Agent and the Banks have made available to the Obligor and SED INTERNATIONAL HOLDINGS, INC. certain financial accommodations. WHEREAS, Agent and the Banks are willing to extend such financial accommodations to Obligor and SED INTERNATIONAL HOLDINGS, INC. in accordance with the terms of the Credit Agreement upon the execution of this Agreement by Obligor, compliance by Obligor with all of the terms and provisions of this Agreement and fulfillment of all conditions precedent to the execution and delivery of the Credit Agreement by the Agent and the Banks; NOW, THEREFORE, to induce the Agent and the Banks to execute and deliver the Credit Agreement, and for other good and valuable consideration, the sufficiency and receipt of all of which are acknowledged by Obligor, Agent and Obligor agree as follows: 1 DEFINITIONS, TERMS AND REFERENCES. 1.1 CERTAIN DEFINITIONS. Capitalized terms contained in this Agreement, but not defined in this Agreement, shall be defined in and have the meanings attributed to them in the Credit Agreement. In addition to such other terms as elsewhere defined herein, as used in this Agreement, the following terms shall have the following meanings: AT: 1030545v10 135 "Accounts Receivable Collateral" shall mean and include all accounts, instruments, chattel paper and general intangibles, including, without limitation, all rights of Obligor to payment for goods sold or leased, or to be sold or to be leased, or for services rendered or to be rendered, howsoever evidenced or incurred, and together with all returned or repossessed goods and all books, records, computer tapes, programs and ledger books arising therefrom or relating thereto, all whether now owned or hereafter acquired or arising. "Account Debtor" shall mean the person who is obligated on any of the Accounts Receivable Collateral or otherwise is obligated as a purchaser or lessee of any of the Inventory Collateral. "Agent" shall have the meaning given to such term in the preamble to this Agreement. "Agreement" shall mean this Security Agreement, as it may be amended or supplemented from time to time. "Balances Collateral" shall mean all property of Obligor left with Agent or in Agent's possession, custody or control now or hereafter, all deposit accounts of Obligor now or hereafter opened with Agent, all certificates of deposit issued by Agent to Obligor, and all drafts, checks and other items deposited in or with Agent by Obligor for collection now or hereafter. "Bankruptcy Code" shall mean Title 11 of the United States Code, as it may be amended from time to time. "Collateral" shall mean the property of Obligor described in Article 2 in which Agent has, or is to have, for the ratable benefit of the Banks, a security interest as security for the payment of the Obligations. "Collateral Locations" shall mean the Executive Office and those additional locations, if any, set forth and described on Exhibit A hereto. "Collateral Reserve Account" shall mean any non-interest bearing, demand deposit account which Obligor is or may be required to open and maintain with Agent pursuant to the requirements of Section 4.4. "Equipment Collateral" shall mean all equipment and fixtures of Obligor, whether now owned or hereafter acquired, wherever located, AT: 1030545v10 136 including, without limitation, all machinery, furniture, furnishings, leasehold improvements, motor vehicles, forklifts, rolling stock, dies and tools used or useful in Obligor's business operations. "Intangibles Collateral" shall mean all general intangibles of Obligor, whether now existing or hereafter acquired or arising, including, without limitation, all rights to tax refunds or rebates, all copyrights, royalties, trademarks, trade names, service marks, patent and proprietary rights, blueprints, drawings, designs, trade secrets, plans, diagrams, schematics and assembly and display materials relating thereto, all customer lists and, all books and records and all computer software and programs. "Inventory Collateral" shall mean all inventory of Obligor, whether now owned or hereafter acquired, wherever located, including, without limitation, all goods of Obligor held for sale or lease or furnished or to be furnished under contracts of service, all goods held for display or demonstration, goods on lease or consignment, spare parts, repair parts, returned and repossessed goods, all raw materials, work-in-process, finished goods and supplies used or consumed in Obligor's business, together with all documents, documents of title, dock warrants, dock receipts, warehouse receipts, bills of lading or orders for the delivery of all, or any portion, of the foregoing. "Obligor" shall have the meaning given to such term in the preamble to this Agreement. "Permitted Liens" shall mean Liens (defined in the Credit Agreement) which are not prohibited under Section 6.18 of the Credit Agreement. "Person" shall mean any individual, partnership, corporation, joint venture, joint stock company, trust, governmental unit or other entity. "UCC" shall mean the Uniform Commercial Code- Secured Transactions of Georgia (OCGA Art. 11-9), as in effect on the date hereof. 1.2 UCC TERMS. The terms "accounts", "chattel paper", "in struments", "general intangibles", "inventory," "equipment" and "fixtures", as and when used in the Loan Documents, shall have the same meanings given such terms under the UCC. 1.3 TERMINOLOGY. All personal pronouns used in this Agreement, whether used in the masculine, feminine or neuter gender, shall include all other genders; the singular shall include the plural, and the plural shall include the singular. Titles of Articles and Sections in this AT: 1030545v10 137 Agreement are for convenience only, and neither limit nor amplify the provisions of this Agreement, and all references in this Agreement to Articles, Sections, Subsections, paragraphs, clauses, or subclauses shall refer to the corresponding Article, Section, Subsection, paragraph, clause, subclause of this Agreement, unless specific reference is made to the articles, sections or other subdivisions divisions of, or Exhibit to, another document or instrument. Wherever in this Agreement reference is made to any instrument, agreement or other document, including, without limitation, any of the Loan Documents, such reference shall be understood to mean and include any and all amendments thereto or modifications, restatements, renewals or extensions thereof. Wherever in this Agreement reference is made to any statute, such reference shall be understood to mean and include any and all amendments thereof and all regulations promulgated pursuant thereto. Whenever any matter set forth herein or in any Loan Document is to be consented to or be satisfactory to Agent, or is to be determined, calculated or approved by Agent, then, unless otherwise expressly set forth herein or in any such Loan Document, such consent, satisfaction, determination, calculation or approval shall be in Agent's sole discretion, exercised in good faith and, where required by law, in a commercially reasonable manner, and shall be conclusive absent manifest error. 2 SECURITY INTEREST. As security for the payment of all Obligations, Obligor hereby grants to Agent, for the ratable benefit of the Banks, a continuing, general Lien upon and security interest and security title in and to the following described property, wherever located, whether now existing or hereafter acquired or arising, namely: (a) the Accounts Receivable Collateral; (b) the Inventory Collateral; (c) the Equipment Collateral; (d) the Intangibles Collateral; (e) the Balances Collateral; and (f) all products and/or proceeds of any and all of the foregoing, including, without limitation, insurance proceeds. The Property of Obligor described hereinabove in this Article 2 are herein sometimes collectively called the "Collateral." 3 REPRESENTATIONS, WARRANTIES AND COVENANTS APPLICABLE TO ACCOUNTS RECEIVABLE COLLATERAL. With respect to the Accounts Receivable Collateral, Obligor hereby represents, warrants and covenants to Agent as set forth below. 3.1 BONA FIDE ACCOUNTS. Each item of the Accounts Receivable Collateral arises or will arise under a contract between Obligor and the Account Debtor, or from the bona fide sale or delivery of goods to or performance of services for, the Account Debtor. AT: 1030545v10 138 3.2 GOOD TITLE. Obligor has good title to the Accounts Receivable Collateral free and clear of all liens, security interests and encumbrances thereon other than any Permitted Liens, and no financing statement covering the Accounts Receivable Collateral is on file in any public office other than any evidencing Permitted Liens. 3.3 RIGHT TO ASSIGN. Obligor has full right, power and authority to make this assignment of the Accounts Receivable Collateral and hereafter will not pledge, hypothecate, grant a security interest in, sell, assign, transfer, or otherwise dispose of the Accounts Receivable Collateral, or any interest therein. 3.4 COLLATERAL RESERVE ACCOUNT. Simultaneously herewith, Obligor shall establish and maintain with Agent a Collateral Reserve Account and shall deposit in the Collateral Reserve Account all items of payment received (including, without limitation, cash, checks, drafts, items and other instruments for the payment of money) which it now has or may at any time hereafter receive in full or partial payment for the Inventory Collateral or otherwise as proceeds of the Accounts Receivable Collateral. All collected balances in the Collateral Reserve Account shall be applied by Agent on a daily basis in payment of amounts outstanding under the Obligations (first to interest, then to principal) then due and payable. Obligor shall not be entitled to draw on the Collateral Reserve Account without the prior written consent of Agent; provided, however, that, at any time during which collected balances exist in the Collateral Reserve Account, if there are no amounts outstanding under the Obligations, and provided that no Default Condition or Event of Default is in existence, Obligor may withdraw such collected balances, or any portion thereof, therefrom. Upon the occurrence of an Event of Default, the Agent may, additionally, at any time in its sole discretion, require that the Obligor obtain a lockbox with the Agent and direct Account Debtors to make payments on the Accounts Receivable Collateral, or portions thereof, to the lockbox or directly payable to the order of the Agent, and the Account Debtors are hereby authorized and directed to do so by Obligor upon Agent's direction, and the funds so received shall be also deposited in the Collateral Reserve Account and applied as aforesaid. In addition, after the occurrence of an Event of Default, the Obligor shall transfer and deliver to the Agent all such items of payment which it now has or may at any time hereafter receive in full or partial payment for the Inventory Collateral or otherwise as proceeds of the Accounts Receivable Collateral and, pending such transfer and delivery to the Agent, Obligor shall be deemed to hold same in trust for the benefit of Agent. AT: 1030545v10 139 3.5 TRADE STYLES. Except as may be set forth on Exhibit A hereto, Obligor uses no trade names or trade styles in its business operations (herein, "Trade Styles"), and Obligor covenants with Agent not to use any Trade Styles in its business operations hereafter, except as so specified on Exhibit A prior to having given Agent at least thirty (30) days prior written notice thereof. In any event, to the extent that, now or hereafter, Obligor uses any Trade Styles, Obligor hereby certifies and agrees with Agent that: (i) all of the accounts receivable and proceeds thereof arising out of sales under the Trade Styles shall be the property of, and belong to, Obligor; (ii) each of the Trade Styles is a trade name and trade style (and not an independent corporation or other legal entity) by which Obligor identifies and sells certain of its products or services and under which it may conduct a portion of its business; (iii) all accounts receivable, proceeds thereof, and returned merchandise which arise from the sale of products invoiced under the names of any of the Trade Styles shall be owned solely by Obligor and shall be subject to the terms of this Agreement as they relate to Accounts Receivable Collateral; and (iv) Obligor hereby appoints Agent as its attorney-in-fact to file such certificates disclosing Obligor's use of the Trade Styles and to take such other actions on its behalf as are necessary to comply with the statutes of any states relating to the use of fictitious or assumed business names, to the extent that borrower fails to do so. 3.6 POWER OF ATTORNEY. Obligor irrevocably designates and appoints Agent its true and lawful attorney either in the name of Agent or in the name of Obligor to ask for, demand, sue for, collect, compromise, compound, receive, receipt for and give acquittances for any and all sums owing or which may become due upon any items of the Inventory Collateral or the Accounts Receivable Collateral and, in connection therewith, to take any and all actions as Agent may deem necessary or desirable in order to realize upon the Inventory Collateral and the Accounts Receivable Collateral, including, without limitation, power to endorse in the name of Obligor, any checks, drafts, notes or other instruments received in payment of or on account of the Inventory Collateral or the Accounts Receivable Collateral, but Agent shall not be under any duty to exercise any such authority or power or in any way be responsible for the collection of the Inventory Collateral or the Accounts Receivable Collateral. 4 REPRESENTATIONS, WARRANTIES AND COVENANTS APPLICABLE TO INVENTORY COLLATERAL. With respect to the Inventory Collateral, Obligor hereby represents, warrants and covenants to Agent as set forth below: AT: 1030545v10 140 4.1 SALE OF INVENTORY COLLATERAL. Obligor will not sell, lease, exchange, or otherwise dispose of any of the Inventory Collateral without the prior written consent of Agent, except in the ordinary course of business for cash or on open account or on terms of payment ordinarily extended to its customers. Upon the sale, exchange or other disposition of the Inventory Collateral, the security interest and lien created and provided for herein, without break in continuity and without further formality or act, shall continue in and attach to any proceeds thereof, including, without limitation, accounts, contract rights, shipping documents, documents of title, bills of lading, warehouse receipts, dock warrants, dock receipts and cash or noncash proceeds, and in the event of any unauthorized sale, shall continue in the Inventory Collateral itself. 4.2 INSURANCE. Obligor agrees that it will obtain and maintain insurance on the Inventory Collateral with such companies, in such amounts and against such risks as Agent may request, with loss payable to Agent as its interests may appear. Such insurance shall not be cancellable by Obligor, unless with the prior written consent of Agent, or by Obligor's insurer, unless with at least ten (10) days advance written notice to Agent. 4.3 GOOD TITLE. Except with respect to any Permitted Liens, Obligor owns the Inventory Collateral free and clear of any prior security interest, lien or encumbrance, and no financing statements or other evidences of the grant of a security interest respecting the Inventory Collateral exist on the public records as of the date hereof other than any evidencing any Permitted Liens. 4.4 RIGHT TO GRANT SECURITY INTEREST. Obligor has the right to grant a security interest in the Inventory Collateral. Obligor will pay all taxes and other charges against the Inventory Collateral, and Obligor will not use the Inventory Collateral illegally or allow the Inventory Collateral to be encumbered except for the security interest in favor of Agent granted herein and except for any Permitted Liens. 4.5 LOCATION OF INVENTORY COLLATERAL. Obligor hereby represents and warrants to Agent that, as of the date hereof, the Inventory Collateral of Obligor is situated only at one or more of the Collateral Locations and Obligor covenants with Agent not to locate the Inventory Collateral at any location other than a Collateral Location without at least thirty (30) days prior written notice to Agent. 4.6 RETURNS OF INVENTORY COLLATERAL. Obligor agrees (i) to notify the Agent in writing of any return of Inventory Collateral by Obligor to AT: 1030545v10 141 any distributor with a value in excess of $1,000,000; and (ii) without the prior written consent of the Agent and the Banks that it shall not return Inventory Collateral to any distributor with a value in excess of $ 2,000,000 in the aggregate in any Fiscal Year. The "value" of Inventory Collateral in this Section 4.6 shall mean the purchase price paid to the relevant distributor therefor. 5 REPRESENTATIONS, WARRANTIES AND COVENANTS APPLICABLE TO EQUIPMENT COLLATERAL. With respect to the Equipment Collateral, Obligor hereby represents, warrants and covenants to Agent as set forth below: 5.1 SALE OF EQUIPMENT COLLATERAL. Obligor will not sell, lease, exchange, or otherwise dispose of any of the Equipment Collateral without the prior written consent of Agent; provided, however, that, with notice to, but without the necessity of consent of, Agent, from time to time hereafter, in the ordinary course of Obligor's business, Obligor may sell, exchange or otherwise dispose of portions of its Equipment Collateral which are obsolete, worn-out or unsuitable for continued use by Obligor if such Equipment Collateral is replaced promptly upon its disposition with equipment constituting Equipment Collateral having a market value equal to or greater than the Equipment Collateral so disposed of and in which Agent shall obtain and have a first priority security interest pursuant hereto. 5.2 INSURANCE. Obligor agrees that it will obtain and maintain insurance on the Equipment Collateral with such companies and in such amounts and against such risks as Agent may reasonably request, with loss payable to Agent as its interests may appear. Such insurance shall not be cancellable by Obligor, unless with the prior written consent of Agent, or by Obligor's insurer, unless with at least ten (10) days advance written notice to Agent. 5.3 GOOD TITLE. Obligor owns the Equipment Collateral free and clear of any prior security interest, lien or encumbrance thereon other than with respect to any Permitted Liens and no financing statements or other evidences of the grant of a security interest respecting the Equipment Collateral exist on the public records as of the date hereof other than any evidencing any Permitted Liens. 5.4 RIGHT TO GRANT SECURITY INTEREST. Obligor has the right to grant a security interest in the Equipment Collateral. Obligor will pay all taxes and other charges against the Equipment Collateral, Obligor will not use the Equipment Collateral illegally or allow the Equipment Collateral to be encumbered except for the security interest in favor of Agent granted herein and except for any Permitted Liens. AT: 1030545v10 142 5.5 LOCATION. As of the date hereof, the Equipment Collateral is located only at one or more of the Collateral Locations and, hereafter, Obligor covenants with Agent not to locate Equipment Collateral at any location other than a Collateral Location without at least thirty (30) days written notice to Agent. 6 REPRESENTATIONS, WARRANTIES AND COVENANTS APPLICABLE TO BALANCES COLLATERAL. With respect to the Balances Collateral, Obligor hereby represents, warrants and covenants to Agent as set forth below: 6.1 OWNERSHIP. Obligor owns the Balances Collateral free and clear of any liens, mortgages, security interests or encumbrances thereon, except for any Permitted Liens. 6.2 REMEDIES. In addition to such other rights and remedies with respect to the Balances Collateral as may exist from time to time hereafter in favor of Agent, whether by way of set-off, banker's lien, consensual security interest or otherwise, upon the occurrence and during the continuation of any Event of Default hereunder, Agent may charge any part or all of the obligations of Agent to Obligor represented by items constituting the Balances Collateral in the possession and control of Agent against the Obligations, without the prior notice to or demand upon Obligor. 6.3 LIENS. Hereafter, Obligor will not incur, create or suffer to exist any lien, security interest or encumbrance upon the Balances Collateral, except for Permitted Liens, or sell, convey, hypothecate, pledge or assign its right, title or interest therein, without the prior written consent of Agent thereto. 7 REPRESENTATIONS, WARRANTIES AND COVENANTS APPLICABLE TO INTANGIBLES COLLATERAL. With respect to the Intangibles Collateral, each Obligor hereby represents, warrants and covenants to Agent as set forth below: 7.1 OWNERSHIP. Obligor owns the Intangibles Collateral free and clear of any liens, mortgages, security interests or encumbrances thereon other than with respect to any Permitted Liens and no financing statements or other evidences of the grant of a security interest respecting the Intangibles Collateral exist on the public records as of the date hereof other than any evidencing any Permitted Liens. 7.2 LIENS. Hereafter, Obligor will not incur, create or suffer to exist any lien, security interest or encumbrance upon the Intangibles AT: 1030545v10 143 Collateral except for the security interest granted herein and except for any Permitted Liens or sell, convey, hypothecate, pledge or assign its right, title or interest therein. 7.3 PRESERVATION. Hereafter, Obligor will take all necessary and appropriate measures to obtain, maintain, protect and preserve the Intangibles Collateral including, without limitation, registration thereof with the appropriate state or federal governmental agency or department. 8 REMEDIES. Upon the acceleration of any of the Obligations, Agent shall thereupon have the rights and remedies of a secured party under the UCC in effect on date thereof (regardless of whether the same has been enacted in the jurisdiction where the rights or remedies are asserted), including, without limitation, the right to take possession of any of the Collateral or the proceeds thereof, to sell or otherwise dispose of the same, to apply the proceeds therefrom to any of the Obligations in such order as Agent, in its sole discretion, may elect. Agent shall give Obligor written notice of the time and place of any public sale of the Collateral or the time after which any other intended disposition thereof is to be made. The requirement of sending reasonable notice shall be met if such notice is given to Obligor at least ten (10) days before such disposition. Expenses of retaking, holding, insuring, preserving, protecting, preparing for sale or selling or the like with respect to the Collateral shall include, in any event, reasonable attorneys' fees and other legally recoverable collection expenses, all of which shall constitute Obligations. 8.1 REPOSSESSION OF THE COLLATERAL. Agent may take the Collateral or any portion thereof into its possession, by such means (without breach of the peace) and through agents or otherwise as it may elect (and, in connection therewith, demand that Obligor assemble the Collateral at a place or places and in such manner as Agent shall prescribe), and sell, lease or otherwise dispose of the Collateral or any portion thereof in its then condition or following any commercially reasonable preparation or processing, which disposition may be by public or private proceedings, by one or more contracts, as a unit or in parcels, at any time and place and on any terms, so long as the same are commercially reasonable and Obligor hereby waives all rights which Obligor has or may have under and by virtue of OCGA Ch. 44-14, including, without limitation, the right of Obligor to notice and to a judicial hearing prior to seizure of any Collateral by Agent. 8.2 OTHER REMEDIES. Unless and except to the extent expressly provided for to the contrary herein, the rights of Agent specified AT: 1030545v10 144 herein shall be in addition to, and not in limitation of, Agent's rights under the UCC, as amended from time to time, or any other statute or rule of law or equity, or under any other provision of any of the Loan Documents, or under the provisions of any other document, instrument or other writing executed by Obligor or any third party in favor of Agent, all of which may be exercised successively or concurrently. 9 MISCELLANEOUS. 9.1 WAIVER. Each and every right granted to Agent under this Agreement or allowed it by law or in equity, shall be cumulative and may be exercised from time to time. No failure on the part of Agent to exercise, and no delay in exercising, any right shall operate as a waiver thereof, nor shall any single or partial exercise by Agent of any right preclude any other or future exercise thereof or the exercise of any other right. No waiver by Agent of any Default or Event of Default shall constitute a waiver of any subsequent Default or Event of Default. 9.2 GOVERNING LAW. THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER AND THEREUNDER, SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF GEORGIA. 9.3 SURVIVAL. All representations, warranties and covenants made herein shall survive the execution and delivery hereof and thereof. The terms and provisions of this Agreement shall continue in full force and effect, until all of the Obligations have been paid in full and Agent has terminated this Agreement in writing. 9.4 COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which when fully executed shall be an original, and all of said counterparts taken together shall be deemed to constitute one and the same agreement. 9.5 REIMBURSEMENT. Obligor shall pay to Agent on demand all out-of-pocket costs and expenses that Agent pays or actually incurs in connection with the negotiation, preparation, consummation, enforcement and termination of this Agreement and the other Loan Documents, including, without limitation: (a) attorneys' fees and paralegals' fees and disbursements of outside counsel; (b) costs and expenses (including outside attorneys' and paralegals' fees and disbursements) for any amendment, supplement, waiver, consent or subsequent closing in connection with the Loan Documents and the transactions contemplated AT: 1030545v10 145 thereby; (c) costs and expenses of lien and title searches and title insurance; (d) actual taxes, fees and other charges for recording any deeds to secure debt, deeds of trust, mortgages, filing financing statements and continuations, and other actions to perfect, protect and continue the Lien of Agent in the Collateral; (e) sums paid or incurred to pay for any amount or to take any action required of Obligor under the Loan Documents that Obligor fails to pay or take; (f) costs of appraisals, inspections, field audits and verifications of the Collateral, including, without limitation, costs of travel, for inspections of the Collateral and Obligor's operations by Agent; (g) costs and expenses of preserving and protecting the Collateral; and (h) after an Event of Default, costs and expenses (including attorneys' and paralegals' fees and disbursements) paid or incurred to obtain payment of the Obligations, enforce the Lien in the collateral, sell or otherwise realize upon the Collateral, and otherwise enforce the provisions of the Loan Documents or to defend any claim made or threatened against lender arising out of the transactions contemplated hereby (including, without limitation, preparations for and consultations concerning any such matters). The foregoing shall not be construed to limit any other provisions of the Loan Documents regarding costs and expenses to be paid to Obligor. In the event Obligor becomes a debtor under the Bankruptcy Code, Agent's secured claim in such case shall include interest on the Obligations and all fees, costs and charges provided for herein (including, without limitation, reasonable attorneys' fees actually incurred) all for the extent allowed by the Bankruptcy Code. 9.6 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and inure to the benefit of the successors and permitted assigns of the parties hereto and thereto. 9.7 SEVERABILITY. If any provision of this Agreement or the application thereof to any party thereto or circumstances shall be invalid or unenforceable to any extent, the remainder hereof and the application of such provisions to any other party thereto or circumstance shall not be affected thereby and shall be enforced to the greatest extent permitted by law. 9.8 NOTICES. All notices, requests and demands to or upon the respective parties hereto shall be deemed to have been given or made when given or made in accordance with Section 10.01 of the Credit Agreement. 9.9 TIME OF ESSENCE. Time is of the essence in this Agreement. AT: 1030545v10 146 9.10 INTERPRETATION. No provision of this Agreement shall be construed against or interpreted to the disadvantage of any party hereto by any court or other governmental or judicial authority by reason of such party having or being deemed to have structured or dictated such provision. 9.11 JURISDICTION. OBLIGOR AGREES THAT ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT OR ANY LOAN DOCUMENT MAY BE BROUGHT IN THE COURTS OF THE STATE OF GEORGIA OR THE UNITED STATES OF AMERICA FOR THE NORTHERN DISTRICT OF GEORGIA, ATLANTA DIVISION, ALL AS AGENT MAY ELECT. BY EXECUTION OF THIS AGREEMENT, OBLIGOR HEREBY SUBMITS TO EACH SUCH JURISDICTION, HEREBY EXPRESSLY WAIVING WHATEVER RIGHTS MAY CORRESPOND TO IT BY REASON OF ITS PRESENT OR FUTURE DOMICILE. NOTHING HEREIN SHALL AFFECT THE RIGHT OF AGENT TO COMMENCE LEGAL PROCEEDINGS OR OTHERWISE PROCEED AGAINST OBLIGOR IN ANY OTHER JURISDICTION OR TO SERVE PROCESS IN ANY MANNER PERMITTED OR REQUIRED BY LAW. 9.12 CURE OF DEFAULTS BY AGENT. If, hereafter, Obligor defaults in the performance of any duty or obligation to Agent or the Banks hereunder, Agent may, at its option, but without obligation, cure such default and any costs, fees and expenses incurred by Agent in connection therewith including, without limitation, for the purchase of insurance, the payment of taxes and the removal or settlement of liens and claims, shall be a part of the Obligations and payable upon demand. 9.13 RECITALS. All recitals contained herein are hereby incorporated by reference into this Agreement and made part thereof. 9.14 ATTORNEY-IN-FACT. Obligor hereby designates, appoints and empowers Agent irrevocably as its attorney-in-fact, at Obligor's cost and expense, to do in the name of Obligor any and all actions which Agent may deem necessary or advisable to carry out the terms of this Agreement upon the failure, refusal or inability of Obligor to do so and Obligor hereby agrees to indemnify and hold Agent harmless from any costs, damages, expenses or liabilities arising against or incurred by Agent in connection therewith. 9.15 JURY TRIAL WAIVER. OBLIGOR AND AGENT HEREBY WAIVE, TO THE EXTENT PERMITTED BY APPLICABLE LAW, THE RIGHT TO TRIAL BY JURY IN ANY ACTION, SUIT, PROCEEDING OR COUNTERCLAIM OF ANY KIND ARISING OUT OF OR RELATED TO ANY OF THE LOAN DOCUMENTS, OBLIGATIONS OR THE COLLATERAL. 9.16 PLACE(S) OF BUSINESS; FEDERAL IDENTIFICATION NUMBER. The Obligor represents and warrants that set forth on Exhibit A attached hereto are (i) the address of the Obligor's chief executive offices, AT: 1030545v10 147 (ii) each of its places of business, (iii) each place where the Collateral or any books or records relating thereto, and (iv) its Federal Identification number. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed and Obligor has caused its seal to be affixed hereto, as of the day and year first above written. "AGENT" WACHOVIA BANK, N.A. By:_____________________________ [Name/Title] "OBLIGOR" SED INTERNATIONAL, INC. (SEAL) By:_____________________________ [Name], President Attest:_________________________ [Name], Secretary AT: 1030545v10 148 EXHIBIT N FORM OF FINOVA INTERCREDITOR AGREEMENT INTERCREDITOR AGREEMENT THIS INTERCREDITOR AGREEMENT (this "Agreement") is made as of _________________________, 1999, by and among WACHOVIA BANK, N.A., as agent for itself and the other "Banks" party to the Credit Agreement (defined below) (the "Agent"); FINOVA CAPITAL CORPORATION ("FINOVA"); and SED INTERNATIONAL, INC. (the "Debtor"). WITNESSETH In order to induce the Agent and the Banks to enter into the Credit Agreement, the parties hereto agree as follows: ARTICLE 1 DEFINITIONS SECTION 1.1 As used in this Agreement, the term: "Bank Indebtedness" means all indebtedness, liabilities and obligations of the Debtor and SED International Holdings, Inc. to the Agent and the Banks of every kind and nature whatsoever, whether now existing or hereafter arising or created at any time under or pursuant to the Credit Agreement and the Bank Loan Documents. "Bank Loan Documents" means the collective reference to the Credit Agreement, and each and every note, instrument, security agreement, pledge agreement, guaranty agreement, mortgage, deed of trust, loan agreement, hypothecation agreement, indemnity agreement, letter of credit application, assignment, or any other document (whether similar or dissimilar to any of the foregoing) previously, simultaneously or hereafter executed and delivered by the Debtor, SED International Holdings, Inc. or any other Person, singly or jointly with another Person or Persons, in connection with any of the Bank Indebtedness. AT: 1030545v10 149 "Bank Priority Collateral" means all assets of the Debtor now owned or hereafter acquired, including all collateral security granted in favor of the Agent for the benefit of the Banks pursuant to the Bank Loan Documents, excluding therefrom, however, the FINOVA Priority Collateral. "Bankruptcy Code" means The Bankruptcy Code of 1978, as amended from time to time (11 U.S.C. Sections 101 et seq.), and any replacement or successor act which has a substantially similar purpose. "Credit Agreement" means that certain Second Amended and Restated Credit Agreement dated as of even date herewith among the Agent, the Banks, the Debtor and SED International Holdings, Inc., as the same may be amended or otherwise modified from time to time. "FINOVA Indebtedness" means all indebtedness, liabilities and obligations of the Debtor to FINOVA of every kind and nature whatsoever, whether now existing or hereafter arising or created at any time under the FINOVA Loan Agreement and the FINOVA Loan Documents. "FINOVA Loan Agreement" means that certain Dealer Loan and Security Agreement dated as of January 13, 1999 between FINOVA and the Debtor, as the same may be amended or otherwise modified from time to time. "FINOVA Loan Documents" means the collective reference to the FINOVA Loan Agreement, and each and every note, instrument, security agreement, pledge agreement, guaranty agreement, mortgage, mortgage, deed of trust, loan agreement, hypothecation agreement, indemnity agree ment, letter of credit application, assignment, or any other document (whether similar or dissimilar to any of the foregoing) previously, simultaneously or hereafter executed and delivered by any of the Debtor or any other Person, singly or jointly with another Person or Persons, in connection with any of the FINOVA Indebtedness. "FINOVA Priority Collateral" means all of the following assets of the Debtor, whether now owned or hereafter acquired: (i) all inventory and equipment manufactured or sold by or bearing the trademarks or tradenames of FINOVA Vendors; and all parts, accessories, accessions, exchanges, substitutions, replacements, reclaimed units, returns and repossessions thereof, and all editions and attachments thereto, and all documents of title arising therefrom; (ii) all price protection payments, credits, incentive payments, rebates, and refunds which at any time are due to Debtor with respect to or in connection with any inventory and equipment described in (i) above; and (iii) all identifiable cash proceeds received on or before delivery of inventory AT: 1030545v10 150 (excluding, however, accounts and proceeds of accounts arising from the sale of the foregoing by Debtor) of the foregoing and insurance proceeds payable by reason of loss or damage to any of the foregoing. "FINOVA Vendors" means Acer America Corporation; Acer Peripherals America, Inc.; A-Open America Incorporated; Western Digital Corporation; Super Micro Computer, Inc.; and Epson America, Inc., Lexmark International, Inc., Merisel Americas, Inc., Proview Technology, Inc., Synnex Information Technology, Inc., Tech Data Corporation. "Insolvency Proceeding" means any receivership, conservatorship, general meeting of creditors, insolvency or bankruptcy proceeding, assignment for the benefit of creditors, or any proceeding by or against the Debtor for any relief under any bankruptcy or insolvency law or other laws relating to the relief of debtors, readjustment of indebtedness, reorganizations, compositions or extensions, including, without limitation, proceedings under the Bankruptcy Code, or under other federal, state or local statute, laws, rules and regulations, all whether now or hereafter in effect. "Lien(s)" means any mortgage, deed of trust, deed to secure debt, grant, pledge, security interest, assignment, encumbrance, judgment, financing statement, lien or charge of any kind, whether perfected or unperfected, avoidable or unavoidable, consensual or non-consensual including, without limitation, any conditional sale or other title retention agreement, any lease in the nature thereof, and the filing of or agreement to give any financing statement under the Uniform Commercial Code of any jurisdiction. "Person" means an individual, a corporation, a partnership, a joint venture, a trust, an unincorporated association, a government or political subdivision or agency thereof or any other entity. "Shared Collateral" means the Bank Priority Collateral and the FINOVA Priority Collateral. SECTION 1.2 Other Definitional Provisions. Unless otherwise defined herein, all terms used herein which are defined by the Georgia Uniform Commercial Code shall have the same meanings as assigned to them by the Georgia Uniform Commercial Code unless and to the extent varied by this Agreement. The words "hereof", "herein" and "hereunder" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement, and section, subsection, schedule and exhibit references are AT: 1030545v10 151 references to sections or subsections of, or schedules or exhibits to, as the case may be, this Agreement unless otherwise specified. As used herein, the singular number shall include the plural, the plural the singular and the use of the masculine, feminine or neuter gender shall include all genders, as the context may require. Reference to any one or more of the Bank Loan Documents and the FINOVA Loan Documents shall mean the same as the foregoing may from time to time be amended, restated, substituted, extended, renewed, supplemented or otherwise modified. 2 ARTICLE COLLATERAL SECURITY SECTION 2.1 Consent to the FINOVA Liens; Consent to Agent Liens. (a) Upon (i) the execution and delivery hereof by all of the parties hereto, and the execution and delivery by the Debtor of the Credit Agreement, and (ii) upon the execution and delivery by FINOVA to the Agent of amendments to all UCC financing statements filed by the Debtor in favor of FINOVA whereby pursuant to such amendments reference is made to the subordination of FINOVA's interest in Bank Priority Collateral as provided in this Agreement, the Agent, on behalf of the Banks, hereby consents to the incurrence by the Debtor of the FINOVA Indebtedness and the FINOVA Liens against the FINOVA Priority Collateral and the other Shared Collateral and waives any default or event of default caused thereby under the Bank Loan Documents; provided, however, in no event shall such consent extend to any amendment or other modification to the FINOVA Loan Documents which increases the FINOVA Indebtedness at any time outstanding (i) in excess of $15,000,000, or (ii) in excess of $17,000,000, so long as the Agent shall have received written notice thereof from the Debtor 5 business days prior to any such increase above $15,000,000 under this clause (ii). (b) Upon (i) the execution and delivery hereof by all of the parties hereto and subject to the terms hereof, and (ii) upon the execution and delivery by the Agent to FINOVA of amendments to all UCC financing statements filed by the Debtor in favor of the Agent whereby pursuant to such amendments reference is made to the subordination of the Agent's interest in the FINOVA Priority Collateral as provided in this Agreement, FINOVA hereby consents to the incurrence by the Debtor of the Agent's Liens against the Bank Priority Collateral and the other Shared Collateral. SECTION 2.2 Bank Priority Collateral. (a) FINOVA hereby subordinates the Lien and priority of FINOVA's existing and future Liens and other interests, if any, in and to the Bank Priority Collateral to AT: 1030545v10 152 the interests of the Agent and the Banks therein notwithstanding the time of attachment of the interests of the Agent or FINOVA or the time the Bank Indebtedness or the FINOVA Indebtedness is incurred. The Lien priorities provided in this Section shall not be altered or otherwise affected by any amendment, modification, supplement, extension, renewal, restatement or refinancing of either the Bank Indebtedness or the FINOVA Indebtedness, nor by any action or inaction which either the Agent or the Banks or FINOVA may take or fail to take in respect of any collateral security held by them, except as otherwise provided above in this subsection. Notwithstanding anything to the contrary contained in this Agreement, under applicable law or otherwise, in the event that the Liens of the Agent are at any time unperfected with respect to any or all of the Bank Priority Collateral or the other Shared Collateral, the lack of perfection by the Agent as to the Bank Priority Collateral or the other Shared Collateral shall not affect the validity, enforceability or priority of any Lien of FINOVA against the Bank Priority Collateral or the other Shared Collateral. In any such event, the Liens of FINOVA shall have priority over any and all other Liens in favor of any third party with respect to the Bank Priority Collateral and the other Shared Collateral (including, but not limited to any trustee under the Bankruptcy Code), FINOVA shall be, and is hereby constituted, as the Agent's agent and bailee for purposes of perfection of the Liens of the Agent in the Bank Priority Collateral and the other Shared Collateral such that the Lien in favor of FINOVA shall be held by FINOVA for the benefit of the Agent and FINOVA and the proceeds of any disposition of the Bank Priority Collateral and the other Shared Collateral shall be and are in all respects subject to the priorities and rights of payment and satisfaction as provided in this Agreement, respectively, for the Agent and FINOVA. (b) Until the Bank Indebtedness has been fully and indefeasibly paid in cash and there exists no agreement between the Debtor and SED International Holdings, Inc. and the Agent and the Banks under which the Banks are required to or may make loans or provide other financial accommodations, FINOVA shall not, without the prior written consent of the Agent, sue for, liquidate, sell, foreclose, set off against, collect, accept a surrender, receive any proceeds, petition, or commence any other action against the Bank Priority Collateral. In the event the Agent may from time to time execute releases, partial releases, terminations, reconveyances, subordinations or other documents releasing or otherwise limiting the Agent's interests in the Bank Priority Collateral, FINOVA agrees to execute and deliver at such time such further documents as the Agent may require to effect a corresponding change to FINOVA's position in the Bank Priority Collateral. The Agent and the Banks shall have the exclusive right to exercise and enforce all AT: 1030545v10 153 privileges and rights with respect to the Bank Priority Collateral according to the Agent and the Banks' sole discretion and the exercise of their sole business judgment, subject to applicable law. (c) The Agent and the Banks shall not be liable to FINOVA for any error in judgment or for any action taken or omitted to be taken by the Agent or the Banks with respect to the Debtor or the Bank Priority Collateral. In no event and under no circumstances, whether existing before or after this Agreement, shall the Agent or the Banks be deemed to have assumed a fiduciary duty to FINOVA. SECTION 2.3 FINOVA Priority Collateral.(a) The Agent hereby subordinates the Lien and priority of the Agent's existing and future Liens and other interests, if any, in and to the FINOVA Priority Collateral to the interests of FINOVA therein notwithstanding the time of attachment of the interests of FINOVA or the Agent or the time the FINOVA Indebtedness or the Bank Indebtedness is incurred, provided, however, in no event shall such subordination by the Agent extend to Liens securing FINOVA Indebtedness at any time outstanding (i) in excess of $15,000,000, or (ii) in excess of $17,000,000, so long as the Agent shall have received written notice thereof from FINOVA at least 5 business days prior to any such increase above $15,000,000 under this clause (ii), subject to the further limitations thereon set forth in Section 2.1 hereof. The Lien priorities provided in this Section shall not be altered or otherwise affected by any amendment, modification, supplement, extension, renewal, restatement or refinancing of either the FINOVA Indebtedness or the Bank Indebtedness, nor by any action or inaction which either FINOVA or the Banks or the Agent may take or fail to take in respect of any collateral security held by them, except as otherwise provided above in this subsection. Notwithstanding anything to the contrary contained in this Agreement, under applicable law or otherwise, in the event that the Liens of FINOVA are at any time unperfected with respect to any or all of the FINOVA Priority Collateral or the Shared Collateral, the lack of perfection by FINOVA as to the FINOVA Priority Collateral or the other Shared Collateral shall not affect the validity, enforceability or priority of any Lien of the Agent against the FINOVA Priority Collateral or the other Shared Collateral. In any such event, the Liens of the Agent shall have priority over any and all other Liens in favor of any third party with respect to the FINOVA Priority Collateral and the other Shared Collateral (including, but not limited to any trustee under the Bankruptcy Code), the Agent shall be, and is hereby constituted, as FINOVA's agent and bailee for purposes of perfection of the Liens of FINOVA in the FINOVA Priority Collateral and the other Shared Collateral such that the Lien in favor of the Agent shall be held by the Agent for the benefit of FINOVA and AT: 1030545v10 154 the Agent and the proceeds of any disposition of the FINOVA Priority Collateral and the other Shared Collateral shall be and are in all respects subject to the priorities and rights of payment and satisfaction as provided in this Agreement, respectively, for FINOVA and the Agent. (b) Until the FINOVA Indebtedness has been fully and indefeasibly paid in cash and there exists no agreement between the Debtor and FINOVA under which FINOVA is required to or may make loans or provide other financial accommodations, the Agent shall not, without the prior written consent of FINOVA, sue for, liquidate, sell, foreclose, set off against, collect, accept a surrender, receive any proceeds, petition, or commence any other action against the FINOVA Priority Collateral. In the event FINOVA may from time to time execute releases, partial releases, terminations, reconveyances, subordinations or other documents releasing or otherwise limiting FINOVA's interests in the FINOVA Priority Collateral, the Agent agrees to execute and deliver at such time such further documents as FINOVA may require to effect a corresponding change to the Agent's position in the FINOVA Priority Collateral. FINOVA shall have the exclusive right to exercise and enforce all privileges and rights with respect to the FINOVA Priority Collateral according to FINOVA's sole discretion and the exercise of its sole business judgment, subject to applicable law. (c) FINOVA shall not be liable to the Agent or the Banks for any error in judgment or for any action taken or omitted to be taken by FINOVA with respect to the Debtor or the FINOVA Priority Collateral. In no event and under no circumstances, whether existing before or after this Agreement, shall FINOVA be deemed to have assumed a fiduciary duty to the Agent or the Banks. SECTION 2.4 Further Assurances. FINOVA, the Agent and the Debtor agree they shall promptly execute such further documents and acknowledgments as FINOVA and Agent may reasonably require to confirm or evidence their respective obligations and rights under this Agreement. 3 ARTICLE DISTRIBUTIONS AND RECEIPTS SECTION 3.1 Distributions, etc.In the event of any distribution, division or application, partial or complete, voluntary or involuntary, by operation of law or otherwise, of all or any part of the assets of the Debtor or the proceeds thereof to creditors of the Debtor or to any indebtedness, liabilities and obligations of the Debtor, by AT: 1030545v10 155 reason of the liquidation, dissolution or other winding up of the Debtor or Debtor's business, or in the event of any sale or Insolvency Proceedings with respect to the Debtor or its assets, then in any such event, any payment, distribution or benefit of any kind whatsoever or character, either in cash, securities or other property, which shall be payable, deliverable or receivable upon or with respect to all or any part of the Debtor's assets shall be paid or delivered directly to the Agent or FINOVA in accordance with their respective rights thereto as set forth in this Agreement for application to, respectively, the Bank Indebtedness or the FINOVA Indebtedness (whether due or not due and in such order and manner, respectively, as the Agent or FINOVA may elect; and including, without limitation any interest accruing subsequent to the commencement of any such event or Insolvency Proceedings) until, respectively, the Bank Indebtedness and the FINOVA Indebtedness shall have been fully and indefeasibly paid in cash and satisfied (and any commitments of the Banks with respect thereto terminated). Should any payment or distribution not permitted by the provisions of this Agreement or property or proceeds thereof be received by FINOVA or the Agent upon or with respect to all or any part of the Bank Priority Collateral or FINOVA Priority Collateral prior to the full payment and satisfaction, respectively, of the Bank Indebtedness or the FINOVA Indebtedness (and any commitments of the Banks with respect thereto terminated), the Agent and FINOVA will deliver the same to the other in precisely the form received (except for the non-recourse endorsement or assignment of the Agent or FINOVA when the other deems appropriate), for application, respectively, to the Bank Indebtedness or the FINOVA Indebtedness (whether due or not due and in such order and manner, respectively, as the Agent or FINOVA may elect; and including, without limitation any interest accruing subsequent to the commencement of any such event or Insolvency Proceedings), and, until so delivered, the same shall be held in trust by the Agent and FINOVA as property of the other. In the event of the failure of FINOVA or the Agent to make any such endorsement or assignment, FINOVA and the Agent, or any of their respective officers or employees on behalf of FINOVA or the Agent, is hereby irrevocably authorized in its own name or in the respective name of the Agent and FINOVA to make the same, and is hereby appointed the other's attorney-in-fact solely for those purposes, that appointment being coupled with an interest and irrevocable. 4 ARTICLE ADDITIONAL AGREEMENTS SECTION 4.1 Consents, Waivers, etc. Except as provided in Section 2.1 above, each of the Agent and FINOVA hereby consents that at AT: 1030545v10 156 any time and from time to time and with or without consideration, the Agent and FINOVA may, respectively, without further consent of or notice (except for notice as required by applicable law) to the other and without in any manner affecting, impairing, lessening or releasing any of the provisions of this Agreement, renew, extend, change the manner, time, place and terms of payment of, sell, exchange, release, substi tute, surrender, realize upon, modify, waive, grant indulgences with respect to and otherwise deal with in any manner: (a) all or any part of the Bank Indebtedness or the FINOVA Indebtedness; (b) all or any of the Bank Loan Documents or the FINOVA Loan Documents; (c) all or any part of any property at any time by the Agent included within the Bank Priority Collateral, or all or any part of any property at any time by FINOVA included within FINOVA Priority Collateral; and (d) any Person at any time primarily or secondarily liable for all or any part of, respectively, the Bank Indebtedness, the FINOVA Indebtedness and/or any collateral and security therefor, all as if this Agreement did not exist. FINOVA hereby waives demand, presentment for payment, protest, notice of dishonor and of protest with respect to the Bank Indebtedness and/or the Bank Priority Collateral, notice of acceptance of this Agreement, notice of the making of any of the Bank Indebtedness and notice of default under any of the Bank Loan Documents. The Agent hereby waives demand, presentment for payment, protest, notice of dishonor and of protest with respect to the FINOVA Indebtedness and/or FINOVA Priority Collateral, notice of acceptance of this Agreement, notice of the making of any of the FINOVA Indebtedness and notice of default under any of the FINOVA Loan Documents. SECTION 4.2 Continuing Agreement. This is a continuing agreement until all of the Bank Indebtedness and the FINOVA Indebtedness has been fully and indefeasibly paid in cash. SECTION 4.3 No Third Party Beneficiaries. The provisions of this Agreement are solely for the benefit of the Agent, the Banks and FINOVA, their respective successors and assigns, and there are no other parties or Persons whatsoever (including, without limitation, the Debtor, its successors and assigns) who are intended to be benefitted in any manner whatsoever by this Agreement. SECTION 4.4 Notice of Defaults. The Debtor agrees that it shall, promptly upon receipt from FINOVA but in no event later than 5 business days after such receipt, send a copy to the Agent of any written notice of a default or event of default received by the Debtor from FINOVA under the FINOVA Loan Documents. The Debtor agrees that it shall, promptly upon receipt from the Agent but in no event later than 5 business days after such receipt, send a copy to FINOVA of any written AT: 1030545v10 157 notice of a default or event of default received by the Debtor from the Agent under the Bank Loan Documents. 5 ARTICLE MISCELLANEOUS SECTION 5.1 Further Advances. Nothing herein contained shall obligate the Agent or the Banks, or FINOVA, to grant credit to, or continue financing arrangements with, the Debtor. SECTION 5.2 Delay in Enforcement, etc. No delay or failure on the part of the Agent or FINOVA to exercise any of their respective rights or remedies hereunder or now or hereafter existing at law or in equity or by statute or otherwise, or any partial or single exercise thereof, shall constitute a waiver thereof. All such rights and remedies are cumulative and may be exercised singly or concurrently and the exercise of any one or more of them will not be a waiver of any other. No waiver of any of their rights and remedies hereunder, and no modification or amendment of this Agreement shall be deemed to be made by the parties hereto unless the same shall be in writing, duly signed on behalf of the respective parties, and each such waiver, if any, shall apply only with respect to the specific instance involved and shall in no way impair the rights and remedies of the Agent or FINOVA hereunder in any other respect at any other time. SECTION 5.3 Successors and Assigns. This Agreement shall be binding upon the Agent, FINOVA and the Debtor and the Agent's, FINOVA's and the Debtor's respective successors and assigns. SECTION 5.4 Headings. The titles and headings of Articles, sections or other parts of this Agreement are for convenience only, and shall not limit or otherwise affect any of the terms hereof. SECTION 5.5 Governing Law and Submission to Jurisdiction. This Agreement shall be governed and construed in accordance with the laws of the State of Georgia. Each of the parties hereto agrees that the Federal District Court of the Northern District of Georgia or any state court located in Fulton County, Georgia shall have jurisdiction to hear and determine any claims or disputes between or among the parties to this Agreement. Each of the parties hereto expressly submits and consents in advance to such jurisdiction in any action or proceeding commenced in such courts. AT: 1030545v10 158 SECTION 5.6 Notices. All notices, requests and demands to or upon the parties to this Agreement shall be deemed to have been given or made when delivered by hand, or three (3) days after the date when deposited in the mail, postage prepaid by registered or certified mail, return receipt requested, or, in the case of telegraphic notice, when delivered to the telegraphic company and when properly transmitted, or, when sent by overnight courier, on the first business day after the day when delivered to such overnight courier. All such notices shall be ad dressed to the Agent, the Debtor and FINOVA as set forth below the signature lines to this Agreement, or to such other address as may be hereafter designated by notice by one party to the other. IN WITNESS THEREOF, the signatures and seals of the Agent, FINOVA and of the Debtor are subscribed to this Agreement as of the date first written above. WITNESS: WACHOVIA BANK, N.A., as Agent _________________________ By:_____________________(SEAL) Name: Agent Address: Title: 191 Peachtree Street 30th Floor Atlanta, GA 30303 AT: 1030545v10 159 WITNESS: FINOVA CAPITAL CORPORATION _________________________ By:_____________________(SEAL) Name: FINOVA Address: Title: Attention: Pat Smith, VP Credit 1060 1st Avenue Suite 100 King of Prussia, PA 19406 WITNESS: SED INTERNATIONAL, INC. _________________________ By:_____________________(SEAL) Name: Debtor Address: Title: 4916 North Royal Atlanta Drive Tucker, GA 30084 AT: 1030545v10 160 EXHIBIT O FORM OF SUBSIDIARY GUARANTY GUARANTY THIS GUARANTY (this "Guaranty") is made as of , 199 , by , a corporation (the "Guarantor") in favor of the Agent, for the ratable benefit of the Banks, under the Credit Agreement referred to below; W I T N E S S E T H WHEREAS, SED INTERNATIONAL HOLDINGS, INC. and SED INTERNATIONAL, INC., jointly and severally, (the "Borrowers") and WACHOVIA BANK, N.A., as Agent (the "Agent"), and certain other Banks from time to time party thereto have entered into a certain Second Amended and Restated Credit Agreement dated as of , 1999 (as it may be amended or modified further from time to time, the "Credit Agreement"), providing, subject to the terms and conditions thereof, for extensions of credit to be made by the Banks to the Borrowers for the benefit of the Guarantor; WHEREAS, it is required by Section 4.01(l) of the Credit Agreement, that the Guarantor execute and deliver this Guaranty whereby the Guarantor shall guarantee the payment when due of all principal, interest and other amounts that shall be at any time payable by the Borrowers under the Credit Agreement, the Notes and the other Loan Documents; and WHEREAS, in consideration of the financial and other support that the Borrowers have provided, and such financial and other support as the Borrowers may in the future provide, to Guarantor, whether directly or indirectly, and in order to induce the Banks and the Agent to enter into the Credit Agreement, the Guarantor is willing to guarantee the obligations of the Borrowers under the Credit Agreement, the Notes, and the other Loan Documents; NOW, THEREFORE, in consideration of the premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: AT: 1030545v10 161 SECTION 1. Definitions. Terms defined in the Credit Agreement and not otherwise defined herein have, as used herein, the respective meanings provided for therein. SECTION 2. Representations and Warranties. The Guarantor incorporates herein by reference as fully as if set forth herein all of the representations and warranties pertaining to a Subsidiary contained in Article V of the Credit Agreement (which representations and warranties shall be deemed to have been renewed by the Guarantor upon each Borrowing under the Credit Agreement. SECTION 3. Covenants. The Guarantor covenants that, so long as any Bank has any Commitment outstanding under the Credit Agreement or any amount payable under the Credit Agreement or any Note shall remain unpaid, that the Guarantor will fully comply with those covenants pertaining to a Subsidiary contained in Article VI of the Credit Agreement. SECTION 4. The Guaranty. The Guarantor hereby unconditionally guarantees the full and punctual payment (whether at stated maturity, upon acceleration or otherwise) of the principal of and interest on each Note issued by the Borrowers pursuant to the Credit Agreement, and the full and punctual payment of all other Obligations (defined in the Credit Agreement) (all of the foregoing obligations being referred to collectively as the "Guaranteed Obligations"). Upon failure by the Borrowers to pay punctually any such amount, the Guarantor agrees that it shall forthwith on demand pay the amount not so paid at the place and in the manner specified in the Credit Agreement, the relevant Note or the relevant Loan Document, as the case may be. Notwithstanding the foregoing, the Guarantor shall not have any liability hereunder for an amount in excess of the greater of: (A) (i) the sum of (x) the aggregate principal amount of all loans, advances and other financial accommodations made to the Guarantor by the Borrowers, directly or indirectly, both prior to and after the date hereof, less (y) all amounts repaid by the Guarantor thereon; plus (ii) interest on the amount determined under clause (i) from the date due until the date paid at the Default Rate; plus (iii) all costs of collection, including reasonable attorneys fees; and (B) the maximum amount of liability which could be asserted against the Guarantor hereunder without (i) rendering the Guarantor "insolvent" within the meaning of Section 101(31) of the Federal Bankruptcy Code (the "Bankruptcy Code") or Section 2 of either the Uniform Fraudulent Transfer Act (the "UFTA") or the Uniform Fraudulent Conveyance Act (the "UFCA"), (ii) leaving the Guarantor with unreasonably small capital, within the meaning of Section 548 of the Bankruptcy Code or Section 4 of the UFTA or Section 5 of the UFCA or AT: 1030545v10 162 (iii) leaving such Contributing Party unable to pay its debts as they become due within the meaning of Section 548 of the Bankruptcy Code or Section 4 of the UFTA or Section 6 of the UFCA, or (iv) rendering the obligation of the Guarantor hereunder avoidable under any other applicable state statute pertaining to fraudulent transfers. SECTION 5. Guaranty Unconditional. The obligations of the Guarantor hereunder shall be unconditional and absolute and, without limiting the generality of the foregoing, shall not be released, discharged or otherwise affected by: (i) any extension, renewal, settlement, compromise, waiver or release in respect of any obligation of the Borrowers under the Credit Agreement, any Note, or any other Loan Document, by operation of law or otherwise or any obligation of any other guarantor of any of the Guaranteed Obligations; (ii) any modification or amendment of or supplement to the Credit Agreement, any Note, or any other Loan Document; (iii) any release, nonperfection or invalidity of any direct or indirect security for any obligation of the Borrowers under the Credit Agreement, any Note, any Loan Document, or any obligations of any other guarantor of any of the Guaranteed Obligations; (iv) any change in the corporate existence, structure or ownership of the Borrowers or any other guarantor of any of the Guaranteed Obligations, or any insolvency, bankruptcy, reorganization or other similar proceeding affecting the Borrowers, or any other guarantor of the Guaranteed Obligations, or its assets or any resulting release or discharge of any obligation of the Borrowers, or any other guarantor of any of the Guaranteed Obligations; (v) the existence of any claim, setoff or other rights which the Guarantor may have at any time against the Borrowers, any other guarantor of any of the Guaranteed Obligations, the Agent, any Bank or any other Person, whether in connection herewith or any unrelated transactions, provided that nothing herein shall prevent AT: 1030545v10 163 the assertion of any such claim by separate suit or compulsory counterclaim; (vi) any invalidity or unenforceability relating to or against the Borrowers, or any other guarantor of any of the Guaranteed Obligations, for any reason related to the Credit Agreement, any other Loan Document, or any other Guaranty, or any provision of applicable law or regulation purporting to prohibit the payment by the Borrowers, or any other guarantor of the Guaranteed Obligations, of the principal of or interest on any Note or any other amount payable by the Borrowers under the Credit Agreement, the Notes, or any other Loan Document; or (vii) any other act or omission to act or delay of any kind by the Borrowers, any other guarantor of the Guaranteed Obligations, the Agent, any Bank or any other Person or any other circumstance whatsoever which might, but for the provisions of this paragraph, constitute a legal or equitable discharge of the Guarantor's obligations hereunder, including without limitation, any failure, omission, delay or inability on the part of the Agent or any Bank to enforce, assert or exercise any right power or remedy conferred on the Agent or any Bank under the Credit Agreement or any other Loan Documents. SECTION 6. Discharge Only Upon Payment In Full; Reinstatement In Certain Circumstances. The Guarantor's obligations hereunder shall remain in full force and effect until all Guaranteed Obligations shall have been paid in full and the Commitments under the Credit Agreement shall have terminated or expired. If at any time any payment of the principal of or interest on any Note or any other amount payable by the Borrowers under the Credit Agreement or any other Loan Document is rescinded or must be otherwise restored or returned upon the insolvency, bankruptcy or reorganization of the Borrowers or otherwise, the Guarantor's obligations hereunder with respect to such payment shall be reinstated as though such payment had been due but not made at such time. SECTION 7. Waiver of Notice by the Guarantor. The Guarantor irrevocably waives acceptance hereof, presentment, demand, protest and, to the fullest extent permitted by law, any notice not provided for herein, as well as any requirement that at AT: 1030545v10 164 any time any action be taken by any Person against the Borrowers, any other guarantor of the Guaranteed Obligations, or any other Person. SECTION 8. Stay of Acceleration. If acceleration of the time for payment of any amount payable by the Borrowers under the Credit Agreement, any Note or any other Loan Document is stayed upon the insolvency, bankruptcy or reorganization of the Borrowers, all such amounts otherwise subject to acceleration under the terms of the Credit Agreement, any Note or any other Loan Document shall nonetheless be payable by the Guarantor hereunder forthwith on demand by the Agent made at the request of the Required Banks. SECTION 9. Notices. All notices, requests and other communications to any party hereunder shall be given or made by telecopier or other writing and telecopied or mailed or delivered to the intended recipient at its address or telecopier number set forth on the signature pages hereof or such other address or telecopy number as such party may hereafter specify for such purpose by notice to the Agent in accordance with the provisions of Section 10.01 of the Credit Agreement. Except as otherwise provided in this Guaranty, all such communications shall be deemed to have been duly given when transmitted by telecopier, or personally delivered or, in the case of a mailed notice, 72 hours after such communication is deposited in the mails with first class postage prepaid, in each case given or addressed as aforesaid. SECTION 10. No Waivers. No failure or delay by the Agent or any Banks in exercising any right, power or privilege hereunder shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies provided in this Guaranty, the Credit Agreement, the Notes, and the other Loan Documents shall be cumulative and not exclusive of any rights or remedies provided by law. SECTION 11. Successors and Assigns. This Guaranty is for the benefit of the Agent and the Banks and their respective successors and assigns and in the event of an assignment of any amounts payable under the Credit Agreement, the Notes, or the other Loan Documents, the rights hereunder, to the extent applicable to the indebtedness so assigned, may be transferred with such indebtedness. This Guaranty may not be assigned by the Guarantor without the prior written consent of the Agent and the Required AT: 1030545v10 165 Banks, and shall be binding upon the Guarantor and its successors and permitted assigns. SECTION 12. Changes in Writing. Neither this Guaranty nor any provision hereof may be changed, waived, discharged or terminated orally, but only in writing signed by the Guarantor and the Agent with the consent of the Required Banks. SECTION 13. GOVERNING LAW; SUBMISSION TO JURISDICTION; WAIVER OF JURY TRIAL. THIS GUARANTY SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAW OF THE STATE OF GEORGIA. EACH OF THE GUARANTOR AND THE AGENT HEREBY SUBMITS TO THE NONEXCLUSIVE JURISDICTION OF THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF GEORGIA AND OF ANY GEORGIA STATE COURT SITTING IN ATLANTA, GEORGIA AND FOR PURPOSES OF ALL LEGAL PROCEEDINGS ARISING OUT OF OR RELATING TO THIS GUARANTY OR THE TRANSACTIONS CONTEMPLATED HEREBY. THE GUARANTOR IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH ANY OF THEM MAY NOW OR HEREAFTER HAVE TO THE LAYING OF THE VENUE OF ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT AND ANY CLAIM THAT ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. EACH OF THE GUARANTOR AND THE AGENT HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS GUARANTY OR THE TRANSACTIONS CONTEMPLATED HEREBY. SECTION 14. Taxes, etc. All payments required to be made by the Guarantor hereunder shall be made without setoff or counterclaim and free and clear of and without deduction or withholding for or on account of, any present or future taxes, levies, imposts, duties or other charges of whatsoever nature imposed by any government or any political or taxing authority as required pursuant to the Credit Agreement. SECTION 15. Subrogation. Each Guarantor hereby agrees that it will not exercise any rights which it may acquire by way of subrogation under this Guaranty, by any payment made hereunder or otherwise, unless and until all of the Guaranteed Obligations shall have been paid in full. If any amount shall be paid to any Guarantor on account of such subrogation rights at any time when all of the Guaranteed Obligations shall not have been paid in full, such amount shall be held in trust for the benefit of the Agent and the Banks and shall forthwith be paid to the Agent to be credited and applied upon the Guaranteed Obligations, whether matured or unmatured, in accordance with the terms of the Credit Agreement. AT: 1030545v10 166 IN WITNESS WHEREOF, the Guarantor has caused this Guaranty to be duly executed, under seal, by its authorized officer as of the date first above written. , a corporation (SEAL) By: Title: Attention: Telecopier number: Confirmation number: AT: 1030545v10 167 Schedule 5.08 Subsidiaries of SED International Holdings, Inc. Name Jurisdiction of Incorporation SED International, Inc. Georgia Subsidiaries of SED International, Inc. DOMESTIC SUBSIDIARIES: Name Jurisdiction of Incorporation SED Magna (Miami), Inc. Delaware SED Retail, Inc. Georgia e-store.Com, Inc. Georgia FOREIGN SUBSIDIARIES: Name Jurisdiction of Incorporation SED International de Brasil Distribuidora Ltda. Brazil Intermaco S.R.L. Argentina SED de Colombia LDTA. Colombia AT: 1030545v10 168 EX-10.38 9 INDEMNIFICATION AGREEMENT FOR DIRECTORS OF SED INTERNATIONAL HOLDINGS, INC. This Indemnification Agreement ("Agreement") is made as of the ____ day of ______________, 1999, by and between SED International Holdings, Inc., a Georgia corporation (the "Company"), and ____________________, a member of the Board of Directors of the Company (the "Indemnitee"). RECITALS WHEREAS, the Company desires to attract and retain the services of certain individuals, including Indemnitee, to serve as directors of the Company; and WHEREAS, the Company believes that Indemnitee's service as a director is important to the Company and that the protection afforded by this Agreement will enhance Indemnitee's ability to discharge his or her responsibilities as a director; and WHEREAS, in order to induce Indemnitee to continue to serve as a director of the Company, the Board of Directors of the Company has determined that it is in its best interests of the Company for the Company to enter into this Agreement with Indemnitee which is intended to provide to Indemnitee at all times the broadest and most favorable possible indemnification permitted by applicable law (whether by legislative action or judicial decision); and WHEREAS, Indemnitee is willing, subject to certain conditions including, without limitation, the execution and performance of this Agreement by the Company, to continue to serve as a director of the Company; NOW, THEREFORE, for and in consideration of the premises, the mutual promises and covenants set forth in this Agreement, and Indemnitee's agreement to serve or continue to serve as a director of the Company after the date of this Agreement, the parties agree as follows: 1. SERVICE AS A DIRECTOR. Indemnitee will serve as a director of the Company so long as he or she is duly elected and qualified to serve in such capacity or until his or her earlier death, resignation or removal. 2. INDEMNIFICATION. (a) The Company shall indemnify and hold harmless the Indemnitee if and when he or she was or is made a party to, is threatened to be made a party to, or is otherwise involved in any manner (including without limitation as a deponent or a witness) or is threatened to be made so involved, in any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative, arbitrative or investigative (including without limitation any proceeding brought by or in the right of the Company), formal or informal, any appeals therefrom, and any inquiry or investigation that could lead to such an action, suit or proceeding (each a "Proceeding"), by reason of the fact that he or she is or was or had agreed to become a director, officer, employee or agent of the Company, or is or was serving or had agreed to serve at the request of the Company as a director, officer, partner, member, trustee, employee or agent (each an "Authorized Capacity") of another corporation, partnership, joint venture, trust or other enterprise (including, without limitation, service with respect to employee benefit plans), or by reason of any action alleged to have been taken or omitted in such capacity, against any and all costs, charges and expenses (including attorneys' and others' fees), judgments, fines and amounts paid in settlement (collectively, "Losses") actually and reasonably incurred by Indemnitee in connection with such Proceeding to the fullest extent permitted by applicable law, as currently or hereafter in force. In the event of any change in any law, statute or rule which narrows the right of a Georgia corporation to indemnify its directors, such change, to the extent not otherwise required by such law, statute or rule to be applied to this Agreement, shall have no affect on this Agreement or the parties' rights and obligations hereunder. (b) In the event of payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of the Indemnitee, who shall execute all papers required and shall do everything that may be necessary to secure such rights, including the execution of such documents necessary to enable the Company effectively to bring suit to enforce such rights. (c) The Company shall not be liable under this Agreement to make any payment in connection with any claim made against the Indemnitee: (i) for which payment is actually made to the Indemnitee under a valid and collectible insurance policy, except in respect of any excess beyond the amount of payment under such insurance; (ii) for which the Indemnitee is entitled to indemnity and/or payment by reason of having given notice of any circumstance which might give rise to a claim under any policy of insurance, the terms of which have expired prior to the effective date of this Agreement; (iii) for which the Indemnitee is indemnified by the Company otherwise than pursuant to this Agreement; (iv) based upon or attributable to the Indemnitee gaining in fact any personal profit or advantage to which he or she was not legally entitled; (v) for an accounting of profits made from the purchase or sale by the Indemnitee of securities of the Company within the meaning of Section 16(b) of the Securities Exchange Act of 1934, as amended, or similar provisions of any state statutory law; or (vi) brought about or contributed to by the dishonesty of the Indemnitee seeking payment hereunder; however, notwithstanding the foregoing, the Indemnitee shall be protected under this Agreement as to any claims upon which suit may be brought against him or her by reason of any alleged dishonesty on his or her part, unless a judgment or other final adjudication thereof adverse to Indemnitee shall establish that he or she committed acts of active and deliberate dishonesty with actual dishonest purpose and intent, which acts were material to the cause of action so adjudicated. 3. CERTAIN PROCEDURES RELATING TO INDEMNIFICATION AND ADVANCEMENT OF EXPENSES. (a) Except as otherwise permitted or required by the Georgia Business Corporation Code (the "GBCC"), for purposes of pursuing his or her rights to indemnification, the Indemnitee shall submit to the Company (to the attention of the Corporate Secretary) a statement of request for indemnification stating that he or she believes that he or she is entitled to indemnification pursuant to this Agreement, together with such documents supporting the request as are reasonably available to the Indemnitee and are reasonably necessary to determine whether and to what extent the Indemnitee is entitled to indemnification hereunder. Upon receipt of any Indemnification Statement, the Corporate Secretary will promptly advise the Board of Directors of the Company in writing that the Indemnitee has requested indemnification. The Indemnitee's entitlement to indemnification under SECTION 2 will be determined in accordance with the provisions of the GBCC within 30 calendar days after receipt by the Company of a request for Indemnification. (b) The Company shall advance all reasonable expenses incurred by Indemnitee in connection with any Proceeding if Indemnitee submits to the Company a written undertaking (the "Undertaking") substantially in the form attached hereto as Annex I, stating that (i) he or she believes that he or she has met the standard of conduct set forth in Section 14-2-851 of the GBCC or that the proceeding involves conduct for which liability has been eliminated under a provision of the Articles of Incorporation as authorized by paragraph (4) of subsection (b) of Section 14-2-202 of the GBCC, (ii) he or she has incurred or will incur actual expenses in connection with a Proceeding and (ii) if and to the extent required by law at the time of such advance, he or she undertakes to repay such amounts advanced as to which it ultimately is determined that the Indemnitee is not entitled to indemnification under this Agreement. Within 45 calendar days after receipt of an Undertaking, the Company will, in accordance with the provisions of Article 8, Part 5 of the GBCC, make payment of the costs, charges and expenses stated in the Undertaking. No security will be required in connection with any Undertaking and any Undertaking will be accepted, and all such payments shall be made, without reference to the Indemnitee's ability to make repayment. 4. ENFORCEMENT. (a) If the Company determines that Indemnitee is not entitled to indemnification under this Agreement, Indemnitee shall be entitled to seek adjudication of his or her entitlement to indemnification in an appropriate court in the State of Georgia. (b) It is the Company's intent that Indemnitee not be required to incur any expenses associated with the enforcement of his or her rights under this Agreement. Accordingly, if in any proceeding brought under this Section 4 the Indemnitee is found to be entitled to indemnification, the Company shall reimburse Indemnitee for all costs and expenses (including attorneys' fees) incurred in connection with the enforcement of this Agreement. (c) It shall be a defense to any proceeding brought under this Section 4 (other than a proceeding brought to enforce a claim for expenses incurred in connection with any action, suit or proceeding in advance of its final disposition) that Indemnitee has not met the standards of conduct which make it permissible under applicable law for the Company to indemnify Indemnitee for the amount claimed, but the burden of proving such defense shall be on the Company and Indemnitee shall be entitled to receive interim payments of interim expenses pursuant to Section 2 hereof unless and until such defense may be finally adjudicated by court order or judgment from which no further right of appeal exists. It is the parties intention that if the Company contests Indemnitee's right to indemnification, the question of Indemnitee's right to indemnification shall be for the court to decide, and neither the failure of the Company (including its Board of Directors, any committee of the Board of Directors, independent legal counsel, or its shareholders) to have made a determination that indemnification of Indemnitee is proper in the circumstances because Indemnitee has met the applicable standard of conduct required by applicable law, nor an actual determination by the Company (including its Board of Directors, any committee of the Board of Directors, independent legal counsel, or its shareholders) that Indemnitee has not met such applicable standard of conduct, shall create a presumption that Indemnitee has or has not met the applicable standard of conduct. 5. PARTIAL INDEMNITY. If the Indemnitee is entitled under any provisio of this Agreement to indemnification by the Company for some or a portion of the costs, charges, expenses, judgments, fines and amounts paid in settlement of a Proceeding but not, however, for the total amount thereof, the Company shall nevertheless indemnify the Indemnitee for the portion thereof to which the Indemnitee is entitled. 6. NONEXCLUSIVITY AND SEVERABILITY. (a) The right to indemnification and advancement of expenses provided by this Agreement is not exclusive of any other right to which the Indemnitee may be entitled under the Articles of Incorporation or the Bylaws of the Company or under the GBCC, any other statute, insurance policy, agreement, vote of shareholders or of directors or otherwise, both as to actions in an Authorized Capacity and as to actions in another capacity while holding such office, and will continue after the Indemnitee has ceased to serve in an Authorized Capacity and will inure to the benefit of his or her heirs, executors and administrators; PROVIDED, HOWEVER, that, to the extent the Indemnitee otherwise would have any greater right to indemnification or advancement of expenses under any provision of the Articles of Incorporation or the Bylaws, as the same exist or may hereafter be amended, the Indemnitee will be deemed to have such greater right pursuant to this Agreement; and, PROVIDED FURTHER, that, inasmuch as it is the intention of the Company to provide the Indemnitee with the broadest and most favorable possible indemnity permitted by applicable law (whether by legislative action or judicial decision), to the extent that the Georgia law currently or in the future permits (whether by legislative action or judicial decision) any greater right to indemnification or advancement of expenses than that provided under this Agreement, the Indemnitee will automatically, without the necessity of any further action by the Company or the Indemnitee, be deemed to have such greater right pursuant to this Agreement. (b) The Company will not adopt any amendment to the Articles of Incorporation or Bylaws of the Company the effect of which would be to deny, diminish or encumber the Indemnitee's rights to indemnity pursuant to the Articles of Incorporation or the Bylaws or under the GBCC or any other applicable law as applied to any act or failure to act occurring in whole or in part prior to the date upon which any such amendment was approved by the Board of Directors or the shareholders of the Company, as the case may be. Notwithstanding the foregoing, if the Company adopts any amendment to the Articles of Incorporation or Bylaws the effect of which is to so deny, diminish or encumber the Indemnitee's rights to such indemnity, such amendment will apply only to acts or failures to act occurring entirely after the effective date thereof. (c) If any provision or provisions of this Agreement are held to be invalid, illegal or unenforceable for any reason whatsoever: (i) the validity, legality and enforceability of the remaining provisions of this Agreement (including without limitation all portions of any paragraph of this Agreement containing any such provision held to be invalid, illegal or unenforceable, that are not themselves invalid, illegal or unenforceable) will not in any way be affected or impaired thereby and (ii) to the fullest extent possible, the provisions of this Agreement (including without limitation all portions of any paragraph of this Agreement containing any such provision held to be invalid, illegal or unenforceable, that are not themselves invalid, illegal or unenforceable) will be construed so as to give effect to the intent manifested by the provision held invalid, illegal or unenforceable. 7. LIABILITY INSURANCE. The Company shall maintain director and officer liability insurance coverage. If at any time after the date hereof the Company elects to change director and officer liability insurance carriers, it shall be a condition to such change that the new policy provide coverage for expenses and liability arising from or in connection with events, acts or omissions occurring, or alleged to have occurred, prior to the date of the new policy. 8. GOVERNING LAW. This Agreement will be governed by and construed in accordance with the laws of the State of Georgia, without giving effect to the principles of conflict of laws. 9. MODIFICATION; SURVIVAL. This Agreement contains the entire agreement of the parties relating to the subject matter hereof and supercedes all prior indemnification agreements, whether oral or written, between the Company and the Indemnitee; PROVIDED, however, that this provision shall not be construed to affect the Company's obligations to the Indemnitee under the Articles of Incorporation or Bylaws of the Company. This Agreement may be modified only by an instrument in writing signed by both parties hereto. The provisions of this Agreement will survive the death, disability or incapacity of the Indemnitee or the termination of the Indemnitee's service as a director of the Company or in an Authorized Capacity of or for the Company or another entity and will inure to the benefit of the Indemnitee's heirs, executors and administrators. 10. AMENDMENT AND TERMINATION. No amendment, modification, termination or cancellation of this Agreement shall be effective unless made in writing signed by both parties hereto. 11. CHANGE IN POSITION. Notwithstanding any change in the position(s) shown below as held by the Indemnitee with the Company, this Agreement shall continue in full force and effect, and a new agreement between the parties hereto need not be executed and delivered as long as Indemnitee continues to serve as an officer and/or member of the Board of Directors of the Company or any subsidiary of the Company. 12. NOTICES. All notices and other communications hereunder shall be in writing and shall be deemed to have been duly given if delivered personally, mailed by certified mail (return receipt requested) or sent by overnight delivery service, cable, telegram, facsimile transmission or telex to the parties at the following addresses or at such other addresses as shall be specified by the parties by like notice: (a) if to the Company: SED International Holdings, Inc. 4916 N. Royal Atlanta Drive Tucker, Georgia 30085-5044 Attn: Corporate Secretary Telephone: (770) 491-8962 Facsimile: (770) 938-2814 (b) if to the Indemnitee: __________________________ __________________________ __________________________ Telephone: _________________ Facsimile: _________________ Notice so given shall, in the case of notice so given by mail, be deemed to be given and received on the third calendar day after the date postmarked; in the case of notice so given by overnight delivery service, on the date of actual delivery; and, in the case of notice so given by cable, telegram, facsimile transmission, telex or personal delivery, on the date of actual transmission or, as the case may be, personal delivery. (Signatures on following page) IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the date first above written. SED INTERNATIONAL HOLDINGS, INC. By: Name: Title: INDEMNITEE Name: Title: ANNEX I UNDERTAKING AGREEMENT This AGREEMENT is made and entered into as of __________________, 1999, by and between SED INTERNATIONAL HOLDINGS, INC., a Georgia corporation (the "Company"), and ________________, a member of the Board of Directors of the Company ("Indemnitee"). WHEREAS, Indemnitee has become involved in investigations, claims, actions, suits or proceedings which have arisen as a result of Indemnitee's service to the Company; and WHEREAS, Indemnitee desires that the Company pay any and all expenses (including, but not limited to, attorneys' fees and court costs) actually and reasonably incurred by Indemnitee or on Indemnitee's behalf in defending or investigating any such suits or claims and that such payment be made in advance of the final disposition of such investigations, claims, actions, suits or proceedings to the extent that Indemnitee has not been previously reimbursed by insurance; and WHEREAS, the Company is willing to make such payments if it receives an undertaking from the Indemnitee to repay these amounts as required by Section 14-2-853 of the Georgia Business Corporations Code (the "GBCC"); and WHEREAS, Indemnitee is willing to give such an undertaking. NOW, THEREFORE, for and in consideration of the premises and the mutual promises contained herein, the parties agree as follows: 1. In regard to any payments advanced by the Company to Indemnitee pursuant to the terms of the Indemnification Agreement dated as of ___________, 1999 between the Company and Indemnitee, Indemnitee hereby undertakes and agrees to repay to the Company any and all amounts so advanced promptly and in any event within thirty (30) days after the disposition, including any appeals, of any litigation or threatened litigation on account of which payments were advanced; provided, however, that Indemnitee shall not be required to repay the amount as to which he or she is determined to be entitled to be indemnified by the Company under Article X of the Articles of Incorporation and Article VII of the Bylaws of the Company and Section 14-2-850 et al. of the GBCC or other applicable law. 2. The Indemnitee affirms his or her good faith belief that he or she has met the relevant standard of conduct described in Section 14-2-851 of the GBCC or that the proceeding involves conduct for which liability has been eliminated under a provision of the Articles of Incorporation as authorized by paragraph (4) of subsection (b) of Section 14-2-202 of the GBCC. 3. This Agreement shall not affect in any manner the rights which Indemnitee may have against the Company, any insurer or any other person to seek indemnification for or reimbursement of any expenses referred to herein or any judgment which may be rendered in any litigation or proceeding. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed on the date first above written. SED INTERNATIONAL HOLDINGS, INC. By: Name: Title: INDEMNITEE By: Name: Title: EX-10.39 10 INDEMNIFICATION AGREEMENT FOR OFFICERS OF SED INTERNATIONAL HOLDINGS, INC. This Indemnification Agreement ("Agreement") is made as of the ____ day of ______________, 1999, by and between SED International Holdings, Inc., a Georgia corporation (the "Company"), and ____________________, an officer of the Company (the "Indemnitee"). RECITALS WHEREAS, the Company desires to attract and retain the services of certain individuals, including Indemnitee, to serve as officers of the Company; and WHEREAS, the Company believes that Indemnitee's service as an officer is important to the Company and that the protection afforded by this Agreement will enhance Indemnitee's ability to discharge his or her responsibilities as an officer; and WHEREAS, in order to induce Indemnitee to continue to serve as an officer of the Company, the Board of Directors of the Company has determined that it is in its best interests of the Company for the Company to enter into this Agreement with Indemnitee which is intended to provide to Indemnitee at all times the broadest and most favorable possible indemnification permitted by applicable law (whether by legislative action or judicial decision); and WHEREAS, Indemnitee is willing, subject to certain conditions including, without limitation, the execution and performance of this Agreement by the Company, to continue to serve as an officer of the Company; NOW, THEREFORE, for and in consideration of the premises, the mutual promises and covenants set forth in this Agreement, and Indemnitee's agreement to serve or continue to serve as an officer of the Company after the date of this Agreement, the parties agree as follows: 1. SERVICE AS AN OFFICER. Indemnitee will serve as an officer of the Company so long as he or she is duly elected and qualified to serve in such capacity or until his or her earlier death, resignation or removal. For the purposes of this Agreement, the term "officer" includes in-house counsel to the Company. 2. INDEMNIFICATION. (a) The Company shall indemnify and hold harmless the Indemnitee if and when he or she was or is made a party to, is threatened to be made a party to, or is otherwise involved in any manner (including without limitation as a deponent or a witness) or is threatened to be made so involved, in any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative, arbitrative or investigative (including without limitation any proceeding brought by or in the right of the Company), formal or informal, any appeals therefrom, and any inquiry or investigation that could lead to such an action, suit or proceeding (each a "Proceeding"), by reason of the fact that he or she is or was or had agreed to become an officer of the Company, or is or was serving or had agreed to serve at the request of the Company as a director, officer, partner, member, trustee, employee or agent (each an "Authorized Capacity") of another corporation, partnership, joint venture, trust or other enterprise (including, without limitation, service with respect to employee benefit plans), or by reason of any action alleged to have been taken or omitted in such capacity, against any and all costs, charges and expenses (including attorneys' and others' fees), judgments, fines and amounts paid in settlement (collectively, "Losses") actually and reasonably incurred by Indemnitee in connection with such Proceeding to the fullest extent permitted by applicable law, as currently or hereafter in force. In the event of any change in any law, statute or rule which narrows the right of a Georgia corporation to indemnify its officers, such change, to the extent not otherwise required by such law, statute or rule to be applied to this Agreement, shall have no affect on this Agreement or the parties' rights and obligations hereunder. (b) In the event of payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of the Indemnitee, who shall execute all papers required and shall do everything that may be necessary to secure such rights, including the execution of such documents necessary to enable the Company effectively to bring suit to enforce such rights. (c) The Company shall not be liable under this Agreement to make any payment in connection with any claim made against the Indemnitee: (i) for which payment is actually made to the Indemnitee under a valid and collectible insurance policy, except in respect of any excess beyond the amount of payment under such insurance; (ii) for which the Indemnitee is entitled to indemnity and/or payment by reason of having given notice of any circumstance which might give rise to a claim under any policy of insurance, the terms of which have expired prior to the effective date of this Agreement; (iii) for which the Indemnitee is indemnified by the Company otherwise than pursuant to this Agreement; (iv) based upon or attributable to the Indemnitee gaining in fact any personal profit or advantage to which he or she was not legally entitled; (v) for an accounting of profits made from the purchase or sale by the Indemnitee of securities of the Company within the meaning of Section 16(b) of the Securities Exchange Act of 1934, as amended, or similar provisions of any state statutory law; or (vi) brought about or contributed to by the dishonesty of the Indemnitee seeking payment hereunder; however, notwithstanding the foregoing, the Indemnitee shall be protected under this Agreement as to any claims upon which suit may be brought against him or her by reason of any alleged dishonesty on his or her part, unless a judgment or other final adjudication thereof adverse to Indemnitee shall establish that he or she committed acts of active and deliberate dishonesty with actual dishonest purpose and intent, which acts were material to the cause of action so adjudicated. 3. CERTAIN PROCEDURES RELATING TO INDEMNIFICATION AND ADVANCEMENT OF EXPENSES. (a) Except as otherwise permitted or required by the Georgia Business Corporation Code (the "GBCC"), for purposes of pursuing his or her rights to indemnification, the Indemnitee shall submit to the Company (to the attention of the Corporate Secretary) a statement of request for indemnification stating that he or she believes that he or she is entitled to indemnification pursuant to this Agreement, together with such documents supporting the request as are reasonably available to the Indemnitee and are reasonably necessary to determine whether and to what extent the Indemnitee is entitled to indemnification hereunder. Upon receipt of any Indemnification Statement, the Corporate Secretary will promptly advise the Board of Directors of the Company in writing that the Indemnitee has requested indemnification. The Indemnitee's entitlement to indemnification under SECTION 2 will be determined in accordance with the provisions of the GBCC within 30 calendar days after receipt by the Company of a request for Indemnification. (b) The Company shall advance all reasonable expenses incurred by Indemnitee in connection with any Proceeding if Indemnitee submits to the Company a written undertaking (the "Undertaking") substantially in the form attached hereto as Annex I, stating that (i) he or she believes that he or she has met the standard of conduct set forth in Section 14-2-851 of the GBCC or that the proceeding involves conduct for which liability has been eliminated under a provision of the Articles of Incorporation as authorized by paragraph (4) of subsection (b) of Section 14-2-202 of the GBCC, (ii) he or she has incurred or will incur actual expenses in connection with a Proceeding and (ii) if and to the extent required by law at the time of such advance, he or she undertakes to repay such amounts advanced as to which it ultimately is determined that the Indemnitee is not entitled to indemnification under this Agreement. Within 45 calendar days after receipt of an Undertaking, the Company will, in accordance with the provisions of Article 8, Part 5 of the GBCC, make payment of the costs, charges and expenses stated in the Undertaking. No security will be required in connection with any Undertaking and any Undertaking will be accepted, and all such payments shall be made, without reference to the Indemnitee's ability to make repayment. 4. ENFORCEMENT. (a) If the Company determines that Indemnitee is not entitled to indemnification under this Agreement, Indemnitee shall be entitled to seek adjudication of his or her entitlement to indemnification in an appropriate court in the State of Georgia. (b) It is the Company's intent that Indemnitee not be required to incur any expenses associated with the enforcement of his or her rights under this Agreement. Accordingly, if in any proceeding brought under this Section 4 the Indemnitee is found to be entitled to indemnification, the Company shall reimburse Indemnitee for all costs and expenses (including attorneys' fees) incurred in connection with the enforcement of this Agreement. (c) It shall be a defense to any proceeding brought under this Section 4 (other than a proceeding brought to enforce a claim for expenses incurred in connection with any action, suit or proceeding in advance of its final disposition) that Indemnitee has not met the standards of conduct which make it permissible under applicable law for the Company to indemnify Indemnitee for the amount claimed, but the burden of proving such defense shall be on the Company and Indemnitee shall be entitled to receive interim payments of interim expenses pursuant to Section 2 hereof unless and until such defense may be finally adjudicated by court order or judgment from which no further right of appeal exists. It is the parties intention that if the Company contests Indemnitee's right to indemnification, the question of Indemnitee's right to indemnification shall be for the court to decide, and neither the failure of the Company (including its Board of Directors, any committee of the Board of Directors, independent legal counsel, or its shareholders) to have made a determination that indemnification of Indemnitee is proper in the circumstances because Indemnitee has met the applicable standard of conduct required by applicable law, nor an actual determination by the Company (including its Board of Directors, any committee of the Board of Directors, independent legal counsel, or its shareholders) that Indemnitee has not met such applicable standard of conduct, shall create a presumption that Indemnitee has or has not met the applicable standard of conduct. 5. PARTIAL INDEMNITY. If the Indemnitee is entitled under any provision of this Agreement to indemnification by the Company for some or a portion of the costs, charges, expenses, judgments, fines and amounts paid in settlement of a Proceeding but not, however, for the total amount thereof, the Company shall nevertheless indemnify the Indemnitee for the portion thereof to which the Indemnitee is entitled. 6. NONEXCLUSIVITY AND SEVERABILITY. (a) The right to indemnification and advancement of expenses provided by this Agreement is not exclusive of any other right to which the Indemnitee may be entitled under the Articles of Incorporation or the Bylaws of the Company or under the GBCC, any other statute, insurance policy, agreement, vote of shareholders or of directors or otherwise, both as to actions in an Authorized Capacity and as to actions in another capacity while holding such office, and will continue after the Indemnitee has ceased to serve in an Authorized Capacity and will inure to the benefit of his or her heirs, executors and administrators; PROVIDED, HOWEVER, that, to the extent the Indemnitee otherwise would have any greater right to indemnification or advancement of expenses under any provision of the Articles of Incorporation or the Bylaws, as the same exist or may hereafter be amended, the Indemnitee will be deemed to have such greater right pursuant to this Agreement; and, PROVIDED FURTHER, that, inasmuch as it is the intention of the Company to provide the Indemnitee with the broadest and most favorable possible indemnity permitted by applicable law (whether by legislative action or judicial decision), to the extent that the Georgia law currently or in the future permits (whether by legislative action or judicial decision) any greater right to indemnification or advancement of expenses than that provided under this Agreement, the Indemnitee will automatically, without the necessity of any further action by the Company or the Indemnitee, be deemed to have such greater right pursuant to this Agreement. (b) The Company will not adopt any amendment to the Articles of Incorporation or Bylaws of the Company the effect of which would be to deny, diminish or encumber the Indemnitee's rights to indemnity pursuant to the Articles of Incorporation or the Bylaws or under the GBCC or any other applicable law as applied to any act or failure to act occurring in whole or in part prior to the date upon which any such amendment was approved by the Board of Directors or the shareholders of the Company, as the case may be. Notwithstanding the foregoing, if the Company adopts any amendment to the Articles of Incorporation or Bylaws the effect of which is to so deny, diminish or encumber the Indemnitee's rights to such indemnity, such amendment will apply only to acts or failures to act occurring entirely after the effective date thereof. (c) If any provision or provisions of this Agreement are held to be invalid, illegal or unenforceable for any reason whatsoever: (i) the validity, legality and enforceability of the remaining provisions of this Agreement (including without limitation all portions of any paragraph of this Agreement containing any such provision held to be invalid, illegal or unenforceable, that are not themselves invalid, illegal or unenforceable) will not in any way be affected or impaired thereby and (ii) to the fullest extent possible, the provisions of this Agreement (including without limitation all portions of any paragraph of this Agreement containing any such provision held to be invalid, illegal or unenforceable, that are not themselves invalid, illegal or unenforceable) will be construed so as to give effect to the intent manifested by the provision held invalid, illegal or unenforceable. 7. LIABILITY INSURANCE. The Company shall maintain director and officer liability insurance coverage. If at any time after the date hereof the Company elects to change director and officer liability insurance carriers, it shall be a condition to such change that the new policy provide coverage for expenses and liability arising from or in connection with events, acts or omissions occurring, or alleged to have occurred, prior to the date of the new policy. 8. GOVERNING LAW. This Agreement will be governed by and construed in accordance with the laws of the State of Georgia, without giving effect to the principles of conflict of laws. 9. MODIFICATION; SURVIVAL. This Agreement contains the entire agreement of the parties relating to the subject matter hereof and supercedes all prior indemnification agreements, whether oral or written, between the Company and the Indemnitee; PROVIDED, however, that this provision shall not be construed to affect the Company's obligations to the Indemnitee under the Articles of Incorporation or Bylaws of the Company or under the GBCC. This Agreement may be modified only by an instrument in writing signed by both parties hereto. The provisions of this Agreement will survive the death, disability or incapacity of the Indemnitee or the termination of the Indemnitee's service as an officer of the Company or in an Authorized Capacity of or for the Company or another entity and will inure to the benefit of the Indemnitee's heirs, executors and administrators. 10. AMENDMENT AND TERMINATION. No amendment, modification, termination or cancellation of this Agreement shall be effective unless made in writing signed by both parties hereto. 11. CHANGE IN POSITION. Notwithstanding any change in the position(s) shown below as held by the Indemnitee with the Company, this Agreement shall continue in full force and effect, and a new agreement between the parties hereto need not be executed and delivered as long as Indemnitee continues to serve as an officer and/or member of the Board of Directors of the Company or any subsidiary of the Company. 12. NOTICES. All notices and other communications hereunder shall be in writing and shall be deemed to have been duly given if delivered personally, mailed by certified mail (return receipt requested) or sent by overnight delivery service, cable, telegram, facsimile transmission or telex to the parties at the following addresses or at such other addresses as shall be specified by the parties by like notice: (a) if to the Company: SED International Holdings, Inc. 4916 N. Royal Atlanta Drive Tucker, Georgia 30085-5044 Attn: Corporate Secretary Telephone: (770) 491-8962 Facsimile: (770) 938-2814 (b) if to the Indemnitee: ______________________________ ______________________________ ______________________________ Telephone: _________________ Facsimile: _________________ Notice so given shall, in the case of notice so given by mail, be deemed to be given and received on the third calendar day after the date postmarked; in the case of notice so given by overnight delivery service, on the date of actual delivery; and, in the case of notice so given by cable, telegram, facsimile transmission, telex or personal delivery, on the date of actual transmission or, as the case may be, personal delivery. (Signatures on following page) IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the date first above written. SED INTERNATIONAL HOLDINGS, INC. By: Name: Title: INDEMNITEE Name: Title: ANNEX I UNDERTAKING AGREEMENT This AGREEMENT is made and entered into as of __________________, 1999, by and between SED INTERNATIONAL HOLDINGS, INC., a Georgia corporation (the "Company"), and ________________, an officer of the Company ("Indemnitee"). WHEREAS, Indemnitee has become involved in investigations, claims, actions, suits or proceedings which have arisen as a result of Indemnitee's service to the Company; and WHEREAS, Indemnitee desires that the Company pay any and all expenses (including, but not limited to, attorneys' fees and court costs) actually and reasonably incurred by Indemnitee or on Indemnitee's behalf in defending or investigating any such suits or claims and that such payment be made in advance of the final disposition of such investigations, claims, actions, suits or proceedings to the extent that Indemnitee has not been previously reimbursed by insurance; and WHEREAS, the Company is willing to make such payments if it receives an undertaking from the Indemnitee to repay these amounts as required by Section 14-2-853 of the Georgia Business Corporations Code (the "GBCC"); and WHEREAS, Indemnitee is willing to give such an undertaking. NOW, THEREFORE, for and in consideration of the premises and the mutual promises contained herein, the parties agree as follows: 1. In regard to any payments advanced by the Company to Indemnitee pursuant to the terms of the Indemnification Agreement dated as of ___________, 1999 between the Company and Indemnitee, Indemnitee hereby undertakes and agrees to repay to the Company any and all amounts so advanced promptly and in any event within thirty (30) days after the disposition, including any appeals, of any litigation or threatened litigation on account of which payments were advanced; provided, however, that Indemnitee shall not be required to repay the amount as to which he or she is determined to be entitled to be indemnified by the Company under Article X of the Articles of Incorporation and Article VII of the Bylaws of the Company and Section 14-2-850 et al. of the GBCC or other applicable law. 2. The Indemnitee affirms Indemnitee's good faith belief that he or she has met the relevant standard of conduct described in Section 14-2-851 of the GBCC or that the proceeding involves conduct for which liability has been eliminated under a provision of the Articles of Incorporation as authorized by paragraph (4) of subsection (b) of Section 14-2-202 of the GBCC. 3. This Agreement shall not affect in any manner the rights which Indemnitee may have against the Company, any insurer or any other person to seek indemnification for or reimbursement of any expenses referred to herein or any judgment which may be rendered in any litigation or proceeding. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed on the date first above written. SED INTERNATIONAL HOLDINGS, INC. By: Name: Title: INDEMNITEE By: Name: Title: EX-21 11 EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT SED International, Inc., a Georgia corporation SED Magna (Miami), Inc., a Delaware corporation SED Retail, Inc., a Georgia corporation SED International do Brasil Ltda., a Brazilian corporation SED International de Colombia Ltda., a Colombian corporation Intermaco S.R.L., an Argentinean corporation EX-23 12 EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement Nos. 333-44103, 333-35055, 33-64133, 33-64135, 33-55730 and 33-33882 of SED International Holdings, Inc. on Form S-8 of our report dated September 22, 1999 appearing in this Annual Report on Form 10-K of SED International Holdings, Inc. for the year ended June 30, 1999. /s/ DELOITTE & TOUCHE LLP Atlanta, Georgia September 28, 1999 EXHIBIT 27 FINANCIAL DATA SCHEDULE THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SED INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEAR ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. PERIOD-TYPE 12-MOS FISCAL-YEAR-END JUN-30-1999 PERIOD-END JUN-30-1999 CASH 3,266,000 SECURITIES 0 RECEIVABLES 58,085,000 ALLOWANCES 3,253,000 INVENTORY 57,092,000 CURRENT ASSETS 124,973,000 PP&E 6,994,000 ACCUMULATED DEPRECIATION 5,539,000 TOTAL-ASSETS 141,090,000 CURRENT LIABILITIES 79,780,000 BONDS 0 PREFERRED 0 PREFERRED MANDATORY 0 COMMON 112,000 OTHER SE 52,698,000 TOTAL LIABILITY AND EQUITY 141,090,000 SALES 707,570,000 TOTAL REVENUES 707,570,000 CGS 676,342,000 TOTAL COSTS 676,342,000 OTHER EXPENSES 69,812,000 LOSS PROVISION 0 INTEREST EXPENSE 731,000 INCOME PRETAX (39,315,000) INCOME TAX BENEFIT (1,407,000) INCOME CONTINUING (37,908,000) DISCONTINUED 0 EXTRAORDINARY 0 CHANGES 0 NET LOSS (37,908,000) EPS BASIC (4.36) EPS DILUTED (4.36) -----END PRIVACY-ENHANCED MESSAGE-----