-----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, MVjEUWDygYzEX7Re6UlxJszRJ7g0EAR8NLaFxH2WP/NSgEUDMdj1ticq0/0s9ttr 3y1/TKZglIS162u1dKJV2g== 0000907098-98-000047.txt : 19980929 0000907098-98-000047.hdr.sgml : 19980929 ACCESSION NUMBER: 0000907098-98-000047 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980928 SROS: NASD 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: 98716320 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, 1998 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) DELAWARE 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 Registrants'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 $35,168,788 as of September 14, 1998 based upon the last sale price of the Common Stock as reported on the Nasdaq National Market on that day. There were 9,613,603 shares of Common Stock, $.01 par value, outstanding at September 14, 1998. DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Annual Report to Stockholders for the fiscal year ended June 30, 1998 are incorporated by reference into Part II. Part III incorporates information by reference from the Registrant's definitive proxy statement for the 1998 annual meeting of stockholders presently scheduled to be held on November 10, 1998, which proxy statement will be filed no later than 120 days after the close of the Registrant's fiscal year ended June 30, 1998. PART I Item 1. BUSINESS (a) General Development of Business SED International Holdings, Inc., a Delaware corporation and its wholly owned operating subsidiary, SED International, Inc., a Delaware 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. As used herein, the term "Registrant" means SED International Holdings, Inc. and its subsidiaries, including SED International, unless the context otherwise indicates. The Registrant is a leading international distributor of microcomputer products, including personal computers, printers and other peripherals and networking 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 130 vendors, including such market leaders as Hewlett-Packard, Seagate, Maxtor, Western Digital, Microsoft, Intel, Creative Labs, Acer, Epson and Canon, 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 and City of Industry, California, as well as its Harrisburg, Pennsylvania warehouse that opened in April 1998. The Registrant services Latin America through its wholly-owned subsidiaries SED Magna Distribuidora Ltda. in Sao Paulo, Brazil and SED International de Colombia Ltda., Inc. in Bogota, Colombia. The Registrant's net sales increased to $892.6 million in fiscal 1998 from $646.3 million in fiscal 1997, and the Registrant had a net loss of $0.3 million in fiscal 1998 compared to net earnings of $7.9 million in fiscal 1997. 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 Motorola, Mitsubishi, Audiovox and Advanced Fox, and an indirect distributor for other leading wireless telephone product vendors such as Ericsson, Nokia and NEC. In fiscal 1998, the Registrant's net sales of microcomputer products generated approximately 88.0% of the Registrant's total net sales and wireless telephone products represented the remaining 12.0%. On December 1, 1997, the Registrant began leasing an approximately 12,900 square foot distribution facility in Tambore, Brazil. The Tambore, facility serves as a distribution center for SED Magna Distribuidora Ltda., a wholly owned subsidiary of the Registrant. Monthly payments for the lease will total approximately $12,000. The lease will expire on December 31, 1998, unless the Registrant elects to exercise its option to renew the lease for an additional one-year period. On December 1, 1997, the Registrant began leasing an approximately 4,300 square foot administrative center and sales office in Sao Paulo, Brazil. The Sao Paulo, Brazil facility serves as an administrative center and sales office for SED Magna Distribuidora Ltda., a wholly owned subsidiary of the Registrant. Monthly payments for the lease totaled approximately $18,000 for the first month of the lease, after which the rent decreased to approximately $11,000 for each of the next three months of the lease, then decreased to approximately $7,000 for the following three months of the lease. The remaining lease payments will total approximately $12,000 for each of the remaining six months of the lease. Pursuant to its terms, the lease will expire on March 31, 1999 unless the Registrant elects to exercise its option to renew the lease for an additional one-year period. On March 1, 1998, the Registrant began leasing an approximately 102,000 square foot distribution facility in Harrisburg, PA. Payments for the lease will total approximately $33,000 for each of the twenty-four months during the period beginning April 1, 1998 and ending March 31, 2000, approximately $34,000 for each of the twelve months during the period beginning April 1, 2000 and ending March 31, 2001, approximately $36,000 for each of the twelve months during the period beginning April 1, 2001 and ending March 31, 2002, and approximately $35,000 for each of the twelve months beginning April 1, 2002 and ending March 31, 2003. The average amount of payments for the lease for each of the sixty months during the period beginning April 1, 1998 and ending March 31, 2003 will be approximately $34,000. 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. 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 thirty-four 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. The Registrant is in the process of relocating its channel assembly center from its previous location in Stone Mountain, Georgia to the same premises as its distribution facility in Tucker, Georgia. The Stone Mountain lease is scheduled to terminate on September 30, 2000 and provides for lease payments of approximately $12,000 per month. The Registrant may terminate the lease upon completion of each year of the lease by paying any unamortized brokers' fee with respect to the lease. (b) Financial Information about Industry Segments The Registrant operates in only one business segment. (c) Narrative Description of Business 1. Products and Vendors The Registrant offers its customers a broad inventory of more than 3,500 products from approximately 130 vendors, including such market leaders as Hewlett-Packard, Seagate, Maxtor, Western Digital, Microsoft, Intel, Creative Labs, Acer, Epson and Canon. The Registrant is a direct distributor of wireless telephone products for Motorola, Mitsubishi, Audiovox and Advanced Fox, and an indirect distributor for other leading wireless telephone product vendors such as Ericsson, Nokia and NEC. Microcomputer related products accounted for $785.7 million or 88.0% of the Registrant's net sales for fiscal 1998, $588.4 million or 91.0% of net sales in fiscal 1997, and $429.4 million or 91.7% of net sales in fiscal 1996, which included sales of mass storage products, printers and other imaging products, microprocessing and memory chips, monitors, modems, networking products, notebook and personal computers and accessories. Approximately $106.9 million or 12.0% of the Registrant's net sales for fiscal 1998, $58.0 million or 9.0% of net sales for fiscal 1997, and $38.9 million or 8.3% of net sales for fiscal 1996 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 130 vendors and has negotiated favorable terms from certain vendors by purchasing a substantial volume of those vendors' products. In fiscal 1998, products purchased from Hewlett-Packard, Seagate and Maxtor accounted for 19.1%, 11.1% and 8.3%, respectively, of the Registrant's total purchases and the loss of any one of these three vendors could materially adversely affect the financial condition of the Registrant. The percentage of goods purchased by the Registrant from Hewlett-Packard increased to 19.1% during fiscal 1998 from 11.5% during fiscal 1997 as a result of the acquisition of distribution rights for certain Hewlett-Packard products in the United States in June 1997. 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 could have a material adverse effect on the Registrant's business, financial condition or 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 and Bogota, Colombia 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. 2. Sales and Marketing The Registrant's sales are generated by a telemarketing sales force, which consisted of approximately 186 persons on June 30, 1998 in sales offices located in Atlanta, Georgia, Miami, Florida, Carlsbad, California, City of Industry, California, S o Paulo, Brazil and Bogota, Colombia. Of the total number of salespersons at June 30, 1998, 43 persons focused on sales to customers for export to Latin America and on sales in Brazil and Colombia, 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 its resellers. 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 of association members. In most markets, the Registrant utilizes various levels of credit insurance to control credit risks and enable the Registrant to extend higher levels of credit. The Registrant establishes reserves for estimated credit losses in the normal course of business. 3. Customers The Registrant serves an active, nonexclusive customer base over 13,000 resellers of microcomputer and wireless telephone products. Resellers includes 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 1998, 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. 4. 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 competitively its products, 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. 5. Employees As of June 30, 1998, the Registrant had 537 full-time employees, 186 of whom were engaged in telemarketing and sales, 187 in administration and 164 in shipping. The Registrant also utilized 36 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. 6. 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." 7. Financial Information about Foreign and Domestic Operations and Export Sales For the fiscal years ended June 30, 1996 and 1997, approximately 37% and 45%, respectively, 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 with sales denominated in the respective local currencies of these two locations. 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. See also note 9 to the consolidated financial statements of the Registrant on page 23 of the Registrant's 1998 Annual Report to Stockholders incorporated herein by reference 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 Tucker, Georgia, where 93 of its sales employees are also located. The Registrant leases its executive, administrative and sales office from Royal Park Company, a Georgia general partnership comprised of certain minority stockholders of the Registrant. The lease expires in October 1999 after an 8-year term and supersedes the original 15-year lease 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 October 1, 1999, subject to increase based upon periodic changes in the Consumer Price Index. 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 non less favorable than those available from unaffiliated parties. The Registrant maintains warehouse facilities in Atlanta, Georgia, City of Industry, California, Miami, Florida , Harrisburg, Pennsylvania, S o Paulo, Brazil and Bogota, Colombia. The Registrant's distribution facility in Atlanta, Georgia consists of approximately 100,000 square feet subject to a lease expiring January 31, 1999. The Registrant also leases additional warehouse and sales office space near its executive, administrative and sales office in Atlanta. 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. On January 10, 1996, the Registrant amended the lease pertaining to its sales and distribution facility, located in the Beacon Centre Technology Park in Miami, Florida to allow the Registrant to relocate such facility to another building within the Beacon Centre complex having a leased space of approximately 31,200 square feet (the "Relocation Space"). The monthly rent for the Relocation Space is approximately $17,000 and the term of the lease pertaining thereto expires on March 31, 2001. On July 24, 1996, the Registrant executed an amendment to the lease which allowed the Registrant to expand the space subject to the lease 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. The aggregate monthly rent for the Miami facility is, therefore, $34,000. 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 thirty-six months of the lease and will then increase to $19,669 per month. 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 December 1, 1997, the Registrant began leasing an approximately 12,900 square foot distribution facility in Tambore, Brazil. The Tambore, facility serves as a distribution center for SED Magna Distribuidora Ltda., a wholly owned subsidiary of the Registrant. Monthly payments for the lease will total approximately $12,000. The lease will expire on December 31, 1998, unless the Registrant elects to exercise its option to renew the lease for an additional one-year period. On December 1, 1997, the Registrant began leasing an approximately 4,300 square foot administrative center and sales office in Sao Paulo, Brazil. The Sao Paulo, Brazil facility serves as an administrative center and sales office for SED Magna Distribuidora Ltda., a wholly owned subsidiary of the Registrant. Monthly payments for the lease totaled approximately $18,000 for the first month of the lease, after which the rent decreased to approximately $11,000 for each of the next three months of the lease, then decreased to approximately $7,000 for the following three months of the lease. The remaining lease payments will total approximately $12,000 for each of the remaining six months of the lease. Pursuant to its terms, the lease will expire on March 31, 1999 unless the Registrant elects to exercise its option to renew the lease for an additional one-year period. On March 1, 1998, the Registrant began leasing an approximately 102,000 square foot distribution facility in Harrisburg, PA. Payments for the lease will total approximately $33,000 for each of the twenty-four months during the period beginning April 1, 1998 and ending March 31, 2000, approximately $34,000 for each of the twelve months during the period beginning April 1, 2000 and ending March 31, 2001, approximately $36,000 for each of the twelve months during the period beginning April 1, 2001 and ending March 31, 2002, and approximately $35,000 for each of the twelve months beginning April 1, 2002 and ending March 31, 2003. The average amount of payments for the lease for each of the sixty months during the period beginning April 1, 1998 and ending March 31, 2003 will be approximately $34,000. 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. 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 thirty-four 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. The Registrant is in the process of relocating its channel assembly center from its previous location in Stone Mountain, Georgia to the same premises as its distribution facility in Tucker, Georgia. The Stone Mountain lease is scheduled to terminate on September 30, 2000 and provides for lease payments of approximately $12,000 per month. The Registrant may terminate the lease upon completion of each year of the lease by paying any unamortized brokers' fee with respect to the lease. The Registrant believes that suitable replacement facilities can be obtained on comparable terms if lease extentions are not negotiated. The Registrant anticipates that additional space will be required as business expands and believes that it will be able to obtain suitable space as needed. 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 applicable. Item 4(A). EXECUTIVE OFFICERS OF THE COMPANY The executive officers of the Registrant, their ages and their present positions are as follows: Name Age Position Gerald Diamond 60 Chairman of the Board, Chief Executive Officer and Director of the Registrant and SED International Ray D. Risner 53 President, Chief Operating Officer and Director of the Registrant and SED International Larry G. Ayers 52 Vice President-Finance, Chief Financial Officer, Secretary and Treasurer of the Registrant and SED International Mark Diamond 33 Executive Vice President and Director of the Registrant and SED International Jean Diamond 57 Vice President of SED International Harvey R. Linder 49 Vice President, General Counsel and Assistant Secretary of the Registrant and SED International Brian D. Paterson 29 Senior Vice President-Purchasing and Marketing of the Registrant and SED International Gerald Diamond. Mr. Diamond has been a director of the Registrant 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 September 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. Harvey R. Linder. Mr. Linder was elected Vice President, General Counsel and Assistant Secretary of the Registrant and SED International effective December 1, 1997. Mr. Linder served as Vice President, General Counsel and Secretary of Orion Management Services, Inc. from November 1996 to July 1997. Mr. Linder served as Vice President, General Counsel and Secretary of Laroche Industries Inc. from 1986 through 1996. From 1975 through 1986 Mr. Linder held various positions with U.S. Steel, including Superintendent of Employee Relations of USS Clairton Works and Director of Employee Relations for the U.S. Steel Agri-Chemicals Division. Brian D. Paterson. Mr. Paterson has served as Senior Vice President - Purchasing/Marketing of the Registrant and SED International since August 1997. Mr. Paterson has been employed by SED International since July 1992 and served in various capacities, most recently as Vice President - Purchasing, from October 1995 to August 1997. Mr. Paterson is the son-in-law of Gerald Diamond and Jean Diamond. PART II Item 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Information regarding the range of high and low sales prices for the common stock of the Registrant for each full quarterly period for fiscal 1998 and 1997 as reported by the Nasdaq National Market ("Nasdaq") and the number of holders of common stock of the Registrant (including individual participants in securities position listings) is incorporated by reference to "Price Range of Common Stock" on the inside back cover of the Registrant's 1998 Annual Report to Stockholders. 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 Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources." Item 6. SELECTED FINANCIAL DATA Selected financial information about the Registrant is incorporated herein by reference to "Selected Income Statement Data" and "Selected Balance Sheet Data" on page 1 of the Registrant's 1998 Annual Report to Stockholders. Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Information and a discussion regarding the Registrant's financial condition and results of operations are incorporated herein by reference to "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 10 through 14 of the Registrant's 1998 Annual Report to Stockholders. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated financial statements of the Registrant, notes thereto, and independent auditors' report thereon are incorporated herein by reference to pages 15 through 24 of the Registrant's 1998 Annual Report to Stockholders. 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 Stockholders scheduled for November 10, 1998 (the "Proxy Statement") entitled "Proposal 1 - Election of Directors." Information regarding the Registrant's executive officers is incorporated herein by reference to Item 4(A) of Part I of this Form 10-K. 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, 1997 and 1998 - Consolidated Statements of Earnings for the years ended June 30, 1996, 1997 and 1998 - Consolidated Statements of Stockholders' Equity for the years ended June 30, 1996, 1997 and 1998 - Consolidated Statements of Cash Flows for the years ended June 30, 1996, 1997 and 1998 - Notes to Consolidated Financial Statements 2. Financial Statement Schedules. - Schedules: Schedule Description II Valuation and Qualifying Accounts 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 Restated Certificate of Incorporation of SED International Holdings, Inc. (the "Registrant").+ 3.2 Amended and Restated By-Laws of the Registrant.(1) 4.1 See Exhibits 3.1 and 3.2 for provisions of the Certificate of Incorporation, as amended, and Amended and Restated By-Laws of the Registrant 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 (2) 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")(3) 10.2 Lease Agreement dated May 16, 1990 between The Equitable Life Assurance Society of the United States and SED International(4), as amended March 20,1992.(5) 10.3 Lease Agreement dated September 16, 1989 between Industrial Distribution Group, Inc. and SED International(6), as amended August 19, 1991.(7) 10.4 Lease Agreement dated January 15, 1992 between SED International and RW Building One Associates.(8) 10.5 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.(9)/*/ 10.6 Form of First Amendment dated September 14, 1989 to Southern Electronics Corporation 1986 Stock Option Plan.(10)/*/ 10.7 Second Amendment dated November 7, 1989 to Southern Electronics Corporation 1996 Stock Option Plan.(11)/*/ 10.8 Third Amendment dated July 17, 1992 to Southern Electronics Corporation 1986 Stock Option Plan.(12)/*/ 10.9 Southern Electronics Corporation 1988 Restricted Stock Plan, together with related form of Restricted Stock Agreement.(13)/*/ 10.10 First Amendment dated November 7, 1989 to Southern Electronics Corporation 1988 Restricted Stock Plan.(14)/*/ 10.11 Second Amendment dated July 17, 1992 to Southern Electronics Corporation 1988 Restricted Stock Plan.(15)/*/ 10.12 Form of Southern Electronics Corporation 1991 Stock Option Plan, together with related forms of Incentive Stock Option Agreement and NonQualified Stock Option Agreement. (16) /*/ 10.13 First Amendment dated July 17, 1992 to Southern Electronics Corporation 1991 Stock Option Plan.(17)/*/ 10.14 Second Amendment dated August 30, 1996 to Southern Electronics Corporation 1991 Stock Option Plan.(18) 10.17 Form of NonQualified Stock Option Agreement dated as of August 28, 1992 between the Registrant and Cary Rosenthal.(19)/*/ 10.18 Form of NonQualified Stock Option Agreement dated as of August 28, 1992 between the Registrant and G. William Speer.(20)/*/ 10.19 Employment Agreements dated November 7, 1989, between the Registrant, SED International and each of Gerald Diamond and Jean Diamond (21)/*/, each as amended by form of Amendment No. 1 dated September 24, 1991.(22)/*/ 10.20 SED International, Inc. Savings Plan effective as of January 1, 1991, together with Savings Plan Trust and Savings Plan Adoption Agreement.(23)/*/ 10.21 Form of Indemnification Agreement entered into with each of the directors and officers of the Registrant and SED International.(24)/*/ 10.22 Form of Indemnification Agreement entered into with each of the directors and officers of the Registrant and the Registrant.(25) 10.23 Lease Agreement dated November 1992 between H.G. Pattillo and Elizabeth M. Pattillo and SED International.(26) 10.24 Lease Agreement dated August 9, 1993 between New World Partners Joint Venture and SED International and Addendum I thereto ("NWPJV Lease"). (27) 10.25 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. (28) 10.26 Third Addendum to NWPJV Lease dated July 24, 1996 between New World Partners Joint Venture Number Two and SED International. (29) 10.27 Amendment to Lease for 4775 N. Royal Atlanta Drive.(30) 10.28 Form of NonQualified Stock Option Agreement dated as of May 21, 1993 between the Registrant and Cary Rosenthal (see Exhibit 10.17)./*/ 10.29 Form of NonQualified Stock Option Agreement dated as of May 21, 1993 between the Registrant and G. William Speer (see Exhibit 10.18)./*/ 10.30 Form of NonQualified Stock Option Agreement, dated as of September 13, 1994 between the Registrant and Cary Rosenthal (see Exhibit 10.18)./*/ 10.31 Form of NonQualified Stock Option Agreement dated as of September 13, 1994 between the Registrant and G. William Speer (see Exhibit 10.18)./*/ 10.32 Form of NonQualified Stock Option Agreement for Directors.(31) 10.34 1995 Formula Stock Option Plan, together with related form of NonQualified Stock Option Agreement.(32) 10.35 Agreement and Plan of Reorganization dated December 14, 1995, among USC Acquisition Corporation, U.S. Computer of North America, Inc. and David Steiner.(33) 10.36 Adoption Agreement for Swerdlin & Registrant Regional Prototype Standardized 401(k) Profit Sharing Plan and Trust, as amended. (34) 10.37 Third Amendment dated September 12, 1996 to the Southern Electronics Corporation Stock Option Plan (35) 10.38 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. (36) 10.39 Asset Purchase Agreement dated as of June 27, 1997, between SED International and Globelle, Inc. (37) 10.40 Lease Agreement made August 11, 1997, between Gwinnett Industries, Inc. and SED International. (38) 10.41 Amended and Restated Credit Agreement dated as of August 13, 1997 among the Registrant and SED International, as Borrowers, Wachovia Bank, N.A. and National City Bank of Columbus, as Banks, and Wachovia Bank, N.A., as Agent. (39) 10.42 First Amendment to Amended and Restated Credit Agreement dated as of September 22, 1997 among the Registrant and SED International, as Borrowers, Wachovia Bank, N.A. and National City Bank of Columbus, as Banks, and Wachovia Bank, N.A., as Agent. + 10.43 Second Amendment to Amended and Restated Credit Agreement dated as of October 15, 1997 among the Registrant and SED International, as Borrowers, Wachovia Bank, N.A. and National City Bank of Columbus, as Banks, and Wachovia Bank, N.A., as Agent. (40) 10.44 Third Amendment to Amended and Restated Credit Agreement dated as of January 8, 1998 among the Registrant and SED International, as Borrowers, Wachovia Bank, N.A. and National City Bank of Columbus, as Banks, and Wachovia Bank, N.A., as Agent. (41) 10.45 Lease Agreement made February 3, 1998, between First Industrial Harrisburg, L.P. and SED International. + 10.46 Fourth Amendment to Amended and Restated Credit Agreement dated as of June 30, 1998 among the Registrant and SED International, as Borrowers, Wachovia Bank, N.A. and National City Bank of Columbus, as Banks, and Wachovia Bank, N.A., as Agent. + 10.47 Fifth Amendment to Amended and Restated Credit Agreement dated as of June 30, 1998 among the Registrant and SED International, as Borrowers, Wachovia Bank, N.A. and National City Bank of Columbus, as Banks, and Wachovia Bank, N.A., as Agent. + 10.48 Second Amendment to Employment Agreement effective July 1, 1998 between SED International and Gerald Diamond. + 10.49 Second Amendment to Employment Agreement effective July 1, 1998 between SED International and Jean Diamond. + 11 Statement regarding computation of per share earnings. + 13 Form of SED International Holdings, Inc. 1998 Annual Report to Stockholders (only the portions incorporated by reference into this report are deemed "filed" with the Securities and Exchange Commission). + 21 Subsidiaries of the Registrant. + 23 Independent Auditors' Consent. + 24 Power of Attorney. See signature page to this Registration Statement. 27 Financial Data Schedule. + - -------------------- + Filed herewith. /*/Management contract or compensatory plan or arrangement with one or more directors or executive officers. (1) Incorporated herein by reference to exhibit of same number to Registrant's Registration Statement ("Registration Statement") on Form S1, filed September 5, 1986 (Reg. No. 338494). (2) Incorporated herein by reference to Exhibit 7 to the Registrant's Current Report on Form 8-K dated October 30, 1996. (3) Incorporated herein by reference to exhibit of same number to Registrant's Annual Report on Form 10K for the fiscal year ended June 30, 1991 (SEC File No. 016345) ("1991 Form 10K"). (4) Incorporated herein by reference to Exhibit 10.8 to Registrant's Annual Report on Form 10K for the fiscal year ended June 30, 1990 (SEC File No. 016345) ("1990 Form 10K"). (5) Incorporated herein by reference to Exhibit 10.5 to Registrant's Annual Report on Form 10K for the fiscal year ended June 30, 1992 (SEC File No. 016345) ("1992 Form 10K"). (6) Incorporated herein by reference to Exhibit 10.9 to Registrant's 1990 Form 10K. (7) Incorporated herein by reference to Exhibit 10.6 to Registrant's Registration Statement. (8) Incorporated herein by reference to Exhibit 10.7 to Registrant's 1992 Form 10K. (9) Incorporated herein by reference to Exhibit 10.12 to Registrant's Registration Statement. (10) Incorporated herein by reference to Exhibit 10.22 to Registrant's Annual Report on Form 10K for the fiscal year ended June 30, 1988 (SEC File No. 016345). (11) Incorporated herein by reference to Exhibit 10.25 to Registrant's 1990 Form 10K. (12) Incorporated herein by reference to Exhibit 10.12 to Registrant's 1992 Form 10K. (13) Incorporated herein by reference to Exhibit 10.21 to Registrant's Annual Report on Form 10K for the fiscal year ended June 30, 1988 (SEC File No. 016345). (14) Incorporated herein by reference to Exhibit 10.26 to Registrant's 1990 Form 10K. (15) Incorporated herein by reference to Exhibit 10.15 to Registrant's 1992 Form 10K. (16) Incorporated herein by reference to Annex A to Registrant's definitive Supplemental Proxy Statement dated October 18, 1991 (SEC File No. 016345). (17) Incorporated herein by reference to Exhibit 10.17 to Registrant's 1992 Form 10K. (18) 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. 016345). (19) Incorporated herein by reference to Exhibit 10.18 to Registrant's 1992 Form 10K. (20) Incorporated herein by reference to Exhibit 10.19 to Registrant's 1992 Form 10K. (21) Incorporated herein by reference to Exhibit 6(a) to Registrant's Quarterly Report on Form 10Q for the quarterly period ended December 31, 1989 (SEC File No. 016345). (22) Incorporated herein by reference to Exhibit 10.13 to Registrant's 1991 Form 10K. (23) Incorporated herein by reference to Exhibit 10.15 to Registrant's 1991 Form 10K. (24) Incorporated herein by reference to Exhibit 10.16 to Registrant's 1991 Form 10K. (25) Incorporated herein by reference to Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1995 (SEC File No. 016345) ("1995 Form 10K"). (26) Incorporated herein by reference to Exhibit 10.24 to Registrant's Annual Report on Form 10K for the fiscal year ended June 30, 1993 (SEC File No. 016345) ("1993 Form 10K"). (27) Incorporated herein by reference to Exhibit 10.25 to Registrant's 1993 Form 10K. (28) Incorporated herein by reference to Exhibit 10.32 to Registrant's Annual Report on Form l0K for the fiscal year ended June 30, 1996 (SEC File No. 016345) ("1996 Form 10K"). (29) Incorporated herein by reference to Exhibit 10.33 to Registrant's 1996 Form 10K. (30) Incorporated herein by reference to Exhibit 10.26 to Registrant's 1995 Form 10K. (31) Incorporated herein by reference to Exhibit 10.29 to Registrant's 1995 Form 10K. (32) 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. 016345). (33) Incorporated herein by reference to Exhibit 2 to Registrant's Current Report on Form 8K filed with the SEC on December 28, 1995 (SEC File No. 016345). (34) Incorporated herein by reference to Exhibit 10.41 to Registrant's 1996 Form 10K. (35) 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. 016345). (36) 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. 016345). (37) Incorporated herein by reference to the Registrant's Current Report on Form 8-K dated June 27, 1997. (38) Incorporated herein by reference to Exhibit 10.40 to Registrant's Annual report on Form 10K for the fiscal year ended June 30, 1997 (SEC File No. 016345) ("1997 Form 10K"). (39) Incorporated herein by reference to Exhibit 10.41 to Registrant's 1997 Form 10K. (40) 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, 1997 (SEC File No. 016345). (41) Incorporated herein by reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1998 (SEC File No. 016345). (b) Reports on Form 8-K. No reports on Form 8-K were filed by the Registrant during the quarter ended June 30, 1998. SED INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS - ---------------------------------------------------------------------------------------------------------------------------- A B C D E F Balance at Charged to Charged Balance at Beginning Costs and to Other End Description of Period Expenses Deductions1 Accounts2 of Period - ----------------------------------------------------------------------------------------------------------------------------- Year ended June 30, 1996; allowance for doubtful accounts. . . . . . . $ 845,000 $1,642,000 $(1,846,000) $500,000 $1,141,000 Year ended June 30, 1997; allowance for doubtful accounts . . . . 1,141,000 1,391,000 (1,430,000) 1,102,000 Year ended June 30, 1998; allowance for doubtful accounts . . . . 1,102,000 5,911,000 (4,813,000) 162,000 2,362,000
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. 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, 1998 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 Southern Electronics Corporation, 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, 1998. /s/ Gerald Diamond Gerald Diamond Chairman of the Board, Chief Executive Officer and Director (principal executive officer) /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 EXHIBIT 3.1 RESTATED CERTIFICATE OF INCORPORATION OF SED INTERNATIONAL HOLDINGS, INC. First: The name of the corporation is SED International Holdings, Inc. (the "Corporation"). Second: The address of the Corporation's registered office in Delaware is 229 South State Street, City of Dover, County of Kent, Delaware 19901. The name of the Corporation's registered agent at that address is The Prentice-Hall Corporation System, Inc. Third: The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware. Fourth: 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 shares (100,129,500). The number of shares of Common Stock authorized is one hundred million shares (100,000,000), and the par value of each share is $0.01. 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 provisions 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. Fifth: The name and mailing address of the incorporator is: Name Mailing Address Steven A. Hobbs 400 Park Avenue New York, New York 10022 Sixth: The Board of Directors is expressly authorized to adopt, amend, or repeal the By-laws of the Corporation. Seventh: Pursuant to Section 211(e) of the General Corporation Law of Delaware, the directors of the Corporation shall not be required to be elected by written ballots. Eighth: To the fullest extent permitted by the General Corporation Law of Delaware, as the same exists or may hereafter be amended, a director of the Corporation shall not be liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director. Ninth: At the 1994 Annual Meeting of Stockholders, 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. At the 1994 Annual Meeting of Stockholders, Class I directors shall be elected for a one-year term, Class II directors for a two-year term and Class III directors for a three-year term. At each succeeding Annual Meeting of Stockholders beginning in 1995, successors to the class of directors whose term expires at that Annual Meeting of Stockholders shall be elected for a three-year term. If the number of directors has changed, any increase or decrease shall be apportioned among the classes so as to maintain the number of directors in each class at as nearly equal a number as possible, and each additional director of any class number as possible, and each additional director of any class elected to fill a vacancy resulting from an increase in the size of such class shall hold office for a term that shall coincide with the remaining term of that class, unless otherwise required by law, but in no case shall a decrease in the number of directors within a class shorten the term of an incumbent director. Notwithstanding any other provisions of the Certificate of Incorporation or the By-laws (and notwithstanding the fact that a lesser percentage for separate class votes for certain actions may be permitted by law, by the Certificate of Incorporation or by the By-laws), 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 Certificate of Incorporation or the By-laws to the extent that such action is inconsistent with the purpose of this Article Ninth; provided, however, that the provisions of this paragraph shall not apply to amendments to the By-laws or Certificate of Incorporation that are recommended by not less than 75% of the members of the Board of Directors. EX-10.42 3 EXHIBIT 10.42 FIRST AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT THIS FIRST AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT (this "Amendment") is dated as of the 22nd day of September, 1997, among SOUTHERN ELECTRONICS CORPORATION and SED INTERNATIONAL, INC., jointly and severally (collectively, the "Borrowers"), WACHOVIA BANK, N.A., as Agent (the "Agent") and WACHOVIA BANK, N.A. and NATIONAL CITY BANK OF COLUMBUS, as Banks (collectively, the "Banks"); W I T N E S S E T H: WHEREAS, the Borrowers, the Agent and the Banks executed and delivered that certain $100,000,000 Amended and Restated Credit Agreement, dated as of the 13th day of August, 1997 (the "Credit Agreement"); WHEREAS, the Borrowers have requested and the Agent and the Banks have agreed to make certain amendments to the Credit Agreement, subject to the terms and conditions hereof; NOW, THEREFORE, for and in consideration of the above premises and other good and valuable consideration, the receipt and sufficiency of which hereby is acknowledged by the parties hereto, the Borrowers, the Agent and the Banks hereby covenant and agree as follows: 1. Definitions. Unless otherwise specifically defined herein, each term used herein which is defined in the Credit Agreement shall have the meaning assigned to such term in the Credit Agreement. Each reference to "hereof", "hereunder", "herein" and "hereby" and each other similar reference and each reference to "this Agreement" and each other similar reference contained in the Credit Agreement shall from and after the date hereof refer to the Credit Agreement as amended hereby. 2. Amendments to Section 1.01. (a) The new definition of "Permitted Acquisitions" is hereby added to Section 1.01 in proper alphabetical order: "Permitted Acquisitions" means any investment in any Person (or in the acquisition of their assets) in substantially the same lines of business as now carried on and maintained by the Borrowers so long as the following conditions are satisfied: (i) no Default or Event of Default has occurred before or after such investment, (ii) such investment is to be made on a negotiated basis with the approval of the Board of Directors of such Person, (iii) the Borrowers have delivered pro forma financial statements demonstrating to the satisfaction of the Agent and the Banks that the Borrowers will be in compliance with all financial covenants contained in this Agreement through and including the Termination Date after giving effect to such investment, (iv) such Person, if such investment is a capital stock acquisition, simultaneously with the consummation of such investment, has executed and delivered to the Agent, for the ratable benefit of the Banks, a guaranty, security agreement and financing statements in connection therewith, satisfactory to the Agent and the Banks in all respects, whereby the Obligations are unconditionally guaranteed by such Person and secured by a first and only priority security interest in all assets of such Person which would constitute items included as "Collateral" defined under the Security Agreements (subject, however, to any Liens to which the Agent and the Banks have consented in the exercise of their sole discretion), such guaranty and security agreement to be accompanied by such corporate documents, certificates and opinions of counsel as may be reasonably required by the Agent, (v) if such investment is an acquisition of such Person's assets, the Obligations are secured by a first and only priority security interest in all such assets which would constitute items included as "Collateral" defined under the Security Agreements (subject, however, to any Liens to which the Agent and the Banks have consented in the exercise of their sole discretion), (vi) the total consideration paid for such investment, including, without limitation, cash, Debt and capital stock of SEC (such capital stock to be valued at the fair market value as of the date such investment is made), must not exceed $15,000,000 for any single investment or $30,000,000 for all such investments in the aggregate during any Fiscal Year, and (vii) on the date after giving effect to such investment, the Borrowers must be able to borrow Syndicated Loans in accordance with Section 2.01(a) in an amount equal to at least $10,000,000 on such date. (b) The definition "Restricted Investment" is hereby amended by deleting the word "and" after clause (iii) thereof and adding a new clause (v) after clause (iv) thereof as follows: "; and (v) investments consisting of Permitted Acquisitions." 3. Restatement of Representations and Warranties. Each of the Borrowers hereby restates and renews each and every representation and warranty heretofore made by it in the Credit Agreement and the other Loan Documents as fully as if made on the date hereof and with specific reference to this Amendment and all other loan documents executed and/or delivered in connection herewith. 4. Effect of Amendment. Except as set forth expressly hereinabove, all terms of the Credit Agreement and the other Loan Documents shall be and remain in full force and effect, and shall constitute the legal, valid, binding and enforceable obligations of the Borrowers. The amendments contained herein shall be deemed to have prospective application only, unless otherwise specifically stated herein. 5. Ratification. Each of the Borrowers hereby restates, ratifies and reaffirms each and every term, covenant and condition set forth in the Credit Agreement and the other Loan Documents effective as of the date hereof. 6. Counterparts. This Amendment may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which counterparts, taken together, shall constitute but one and the same instrument. 7. Section References. Section titles and references used in this Amendment shall be without substantive meaning or content of any kind whatsoever and are not a part of the agreements among the parties hereto evidenced hereby. 8. No Default; Release. To induce the Agent and the Banks to enter into this Amendment and to continue to make advances pursuant to the Credit Agreement, each of the Borrowers hereby acknowledges and agrees that, as of the date hereof, and after giving effect to the terms hereof, (i) there exists no Default or Event of Default, (ii) there exists no right of offset, defense, counterclaim, claim or objection in favor of the Borrowers arising out of or with respect to any of the Loans or other obligations of the Borrowers owed to the Banks under the Credit Agreement, and (iii) the Agent and each of the Banks has acted in good faith and has conducted its relationships with each of the Borrowers in a commercially reasonable manner in connection with the negotiations, execution and delivery of this Amendment and in all respects in connection with the Credit Agreement, each of the Borrowers hereby waiving and releasing any such claims to the contrary. 9. Further Assurances. Each of the Borrowers agrees to take such further actions as the Agent shall reasonably request in connection herewith to evidence the amendments herein contained to the Borrowers. 10. Governing Law. This Amendment shall be governed by and construed and interpreted in accordance with, the laws of the State of Georgia. 11. Conditions Precedent. This Amendment shall become effective only upon execution and delivery of this Amendment by each of the parties hereto. IN WITNESS WHEREOF, the Borrowers, the Agent and each of the Banks has caused this Amendment to be duly executed, under seal, by its duly authorized officer as of the day and year first above written. SOUTHERN ELECTRONICS CORPORATION (SEAL) By: /s/ Larry G. Ayers Title: V.P. Finance SED INTERNATIONAL, INC. (SEAL) By: /s/ Larry G. Ayers Title: V.P. Finance WACHOVIA BANK, N.A., as Agent and as a Bank (SEAL) By: /s/ Kevin B. Harrison Title: Vice President NATIONAL CITY BANK OF COLUMBUS (SEAL) By: /s/ Brian Strayton Title: Vice President EX-10.45 4 LEASE This LEASE made as of this 3rd day of February, 1998, between FIRST INDUSTRIAL HARRISBURG, L.P., a Delaware limited partnership (the "Landlord"), and SED INTERNATIONAL, INC., a Delaware corporation (the "Tenant"). B A C K G R O U N D The Premises (hereinafter defined) is a portion of certain property (the "Property") located in Middletown, Lower Swatara Township, Dauphin County, Pennsylvania. The Property currently consists of the land, buildings and improvements depicted on the site plan attached to this Lease as Exhibit "Site Plan," and is more particularly described on Exhibit "Legal Description". Tenant desires to lease that portion of the Property consisting of 103,217 square feet of Building 1 ("Building 1") on the Property, as more particularly shown on Exhibit "Premises" (the "Premises"). NOW, THEREFORE, intending to be legally bound, the parties agree as follows: ARTICLE I Term/Demise 0.1. Landlord leases the Premises to Tenant, and Tenant leases the Premises from Landlord, upon the terms and conditions of this Lease, for a term (the "Term") commencing on the Commencement Date (hereinafter defined) and expiring on the last day of the sixty-first (61st) calendar month following the Commencement Date, together with the non-exclusive right to use only for their intended purposes the roads, sidewalks, driveways, parking areas and landscaped areas intended for the common use of the tenants of the Property and others to whom Landlord has granted or may grant (subject to the provisions of Section 27.1) such rights (the "Common Areas"), except that Tenant shall not have any right to use the cross-hatched area shown on Exhibit "Site Plan". 0.2. Landlord shall prepare the Premises for Tenant's initial occupancy in accordance with the plans and specifications for the Premises, which plans and specifications are attached hereto as Exhibit "Specifications" (the "Specifications"). Landlord reserves the right, however; (a) to make substitutions of material of equivalent grade and quality when and if specified material shall not be readily and reasonably available, and (b) to make reasonable changes necessitated by conditions met in the course of construction which changes shall not substantially deviate from the intended results of the Specifications. The Premises shall be deemed to be substantially completed on the later of (i) the date when the Township of Lower Swatara, Pennsylvania issues a certificate of occupancy for the Premises and (ii) the date that all of the Premises heating, ventilating, air-conditioning, plumbing, lighting, life safety, mechanical and electrical systems are operational (the "Substantial Completion Date"). Landlord shall give Tenant notice of the Substantial Completion Date. The Term shall commence and Rent (as hereinafter defined) shall begin to accrue on the Commencement Date (the "Commencement Date") which shall be the earlier of (i) two (2) days after the date of Substantial Completion or (ii) the date Tenant takes possession of any portion of the Premises. Landlord shall confirm the Commencement Date to Tenant in writing. Within ten (10) days after the Commencement Date, Landlord and Tenant, and their respective construction representatives, shall inspect the Premises and shall prepare a punchlist of work required under Section this 1.2 not then actually completed by Landlord (the "Punchlist Inspection"). Landlord agrees that Landlord shall complete with commercially reasonable speed and diligence the items specified on such punchlist. Provided that Tenant notifies Landlord within sixty (60) days after the Commencement Date of latent defects in work required under this Section 1.2 which could not have been reasonably discovered at the time of the Punchlist Inspection, Landlord shall correct with commercially reasonable speed and diligence any such latent defects of which Landlord is notified within sixty (60) days after the Commencement Date. 0.3. Tenant and its agent shall have the right to enter and perform work at the Premises prior to the Commencement Date in order to prepare the Premises for occupancy, provided that Tenant shall not interfere with Landlord's work at the Premises. Any such early entry by Tenant shall be subject to the provisions of this Lease, except that such early entry shall not (i) constitute taking possession of the Premises by Tenant nor (ii) accelerate the Commencement Date or require the payment by Tenant of rent or any other amounts payable by Tenant hereunder. 0.4. Landlord presently estimates that the date of Substantial Completion will be March 1, 1998 (the "Scheduled Commencement Date"). If the Premises are not substantially completed by the Scheduled Commencement Date because of delays due to governmental regulation, Tenant Delay (hereinafter defined), unusual scarcity of or inability to obtain labor or materials, labor difficulties, casualty or any other causes whether or not within Landlord's reasonable control, Landlord shall not be subject to any liability to Tenant. Except as hereinafter provided in this Section 1.4 or Section 1.5, no such failure to complete the Premises by the Scheduled Commencement Date shall in any respect affect the validity of this Lease or any obligation of the Tenant hereunder. If the delay did not result from a Tenant Delay, the Rent reserved and covenanted to be paid herein shall not commence (which, except as hereinafter provided in this Section 1.4, shall be Tenant's sole and exclusive remedy for such delay) until the Substantial Completion Date of the Premises. In the event of any Tenant Delay, Tenant acknowledges that the Commencement Date of the Term and Tenant's obligation to pay Rent due hereunder shall begin on such date as the Commencement Date would have occurred but for such Tenant Delay. As used in this Lease, the term "Tenant Delay" shall mean any delays resulting in changes in the work to be performed by Landlord which are required by Tenant or any delays resulting from any activity or the performance of any work in or about the Premises by Tenant or any of its employees, agents or contractors. 0.5. If the Premises are not substantially completed by May 15, 1998 (which date shall be extended by the length of any delays in completion of the Premises attributable to governmental regulation, Tenant Delays, unusual scarcity of or inability to obtain labor or materials, labor difficulties, casualty, or any other causes not within Landlord's reasonable control), Tenant shall have the right to terminate this Lease by providing written notice of such termination to Landlord at any time prior to substantial completion of the Premises, in which event neither party shall have any further obligation hereunder. ARTICLE II Use 0.6. Tenant shall use the Premises only for warehousing and distributing Tenant's products that are not Hazardous Materials (hereinafter defined), with appurtenant offices and sales personnel offices and for the assembly of computers, and for no other purposes. ARTICLE III Rent 0.7. Tenant agrees to pay to Landlord, promptly when due, without notice or demand and without deduction or setoff of any amount for any reason whatsoever, except as provided in Section 20.7, as basic rent for the Premises ("Basic Rent") during the Term the total amount of $2,032,342.60 for the Term in monthly installments as set forth on Exhibit "Basic Rent" attached hereto and hereby made a part hereof. 0.8. Basic Rent is payable in monthly installments as set forth on Exhibit "Basic Rent" in advance, on or before the first day of each calendar month during the Term. Notwithstanding anything to the contrary set forth in the Lease, Tenant shall not be obligated to pay Basic Rent for the first (1st) calendar month of the Term. 0.9. All amounts payable by Tenant to Landlord under the terms of this Lease shall be paid to Landlord at 311 South Wacker Drive, Suite 4000, Chicago, Illinois 60606, or to such other entity or place as Landlord may from time to time designate by written notice to Tenant. 0.10. All amounts payable by Tenant pursuant to this Lease other than Basic Rent are additional rent ("Additional Rent") (Basic Rent and Additional Rent collectively being referred to as "Rent"), and Landlord shall have the same rights and remedies for nonpayment of Additional Rent as Landlord has for nonpayment of Basic Rent. ARTICLE IV Taxes; Utilities 0.11. Throughout the Term, Tenant shall pay to Landlord Tenant's Tax Proportionate Share of all Taxes (as those terms are defined below). Tenant shall pay to Landlord, at the time when the monthly installment of Basic Rent is payable, an amount equal to one-twelfth (1/12th) of Tenant's Tax Proportionate Share of the estimated annual Taxes for each Tax Year during the Term as reasonably estimated by Landlord. Upon Tenant's request, Landlord shall provide to Tenant copies of the tax assessor's bills upon which Tenant's Tax Proportionate Share is based and Landlord's calculation setting forth in reasonable detail the manner in which Tenant's Tax Proportionate Share was estimated. Tenant shall also pay to Landlord, within ten (10) days after receipt of Landlord's notice (which notice shall include copies of the tax assessors' bills on which Tenant's Tax Proportionate Share were based and shall set forth in reasonable detail the manner in which Tenant's Tax Proportionate Share was calculated), the amount, if any, by which Tenant's Tax Proportionate Share of the Taxes becoming due exceeds the monthly payments on account thereof previously made by Tenant to Landlord pursuant to the preceding sentence. Any overpayment of Taxes shall be credited against the next installments of Taxes due hereunder or, upon the expiration of the Term, repaid to Tenant (net of any sums due to Landlord under this Lease) upon the later of (a) within thirty (30) days after expiration or earlier termination of the Term or (b) at the time such excess is refunded by any mortgagee escrowing Taxes to Landlord, but in no event later than sixty (60) days after the expiration or earlier termination of the Term. The amounts paid by Tenant pursuant to this Section 4.1 shall be used to pay the Taxes, but such amounts shall not be deemed to be trust funds and no interest shall be payable thereon. Taxes payable for the Tax Years in which the Term begins and ends shall be prorated to correspond to that portion of such Tax Years occurring within the Term (calculated on the basis of 365 day Tax Years). Provided that Tenant pays Tenant's Tax Proportionate Share when due under the terms of this Lease, Tenant shall not in any event be liable for the payment of any interest or penalties on Taxes. As used in this Lease, the term "Taxes" means all taxes, liens, charges, imposts and burdens, general and special assessments of every kind and nature, ordinary and extraordinary, assessed or imposed by any governmental authority on or with respect to the Premises or the Lot 2 Property (herein defined), or both, which Landlord shall become obligated to pay because of or in connection with the ownership, leasing and operating of the Premises or the Lot 2 Property, or both, including any such Taxes which are levied or assessed in lieu of all or any part of Taxes or an increase in Taxes as provided in Section 4.2. Notwithstanding any contrary provision contained herein, Taxes shall not include increases that result from the sale or other transfer of the Premises, Building 1, the Property, or any portion of or any interest in any of the foregoing, or of any interest in Landlord. As used in this Lease, the term "Lot 2 Property" shall mean Tax Parcel 36-013-139, and all buildings and other improvements now or hereafter constructed thereon, consisting of approximately 68.73 acres shown as Lot 2 on Exhibit "Site Plan." As used in this Lease, the term "Tax Year" shall mean each calendar year, or such other period of twelve (12) months as hereafter may be duly adopted by any applicable governmental or quasi-governmental body or authority or special service district imposing Taxes on the Property or Premises, or both, as its fiscal year for purposes of Taxes, occurring during the Term. As used in this Lease, the term "Tenant's Tax Proportionate Share" means the ratio that the number of rentable square feet in the Premises bears to the number of rentable square feet of building space on the Lot 2 Property, as such number may change from time to time. 0.12. Nothing herein contained shall be interpreted as requiring Tenant to pay any income, excess profits, corporate capital stock, or franchise tax imposed or assessed upon Landlord, unless such tax or any similar tax is levied or assessed in lieu of all or any part of any Taxes or an increase in any Taxes. If under the requirements of any state or local laws with respect to such new method of taxation, Tenant is prohibited from paying such new tax which is in lieu of all or any part of any Taxes or any increase in Taxes, Landlord may, at its election, terminate this Lease and require that Tenant enter into a new lease for the balance of the Term, upon all of the same terms and conditions as this Lease, but which provides for a net rent to Landlord after the imposition of such tax, which is equal to the Rent payable hereunder, or Landlord may elect to amend this Lease to achieve the same economic result. 0.13. Notwithstanding the foregoing provisions of this Article IV, Landlord from time to time during the Term may elect to waive the requirement for payment of monthly installments on account of Taxes and, in such case, Tenant shall pay the full amount of Tenant's Tax Proportionate Share of unpaid Taxes for the then-current Tax Year within fifteen (15) days after Tenant receives any bill for Taxes from Landlord which, notwithstanding the foregoing, may be sent to Tenant at any time and from time to time for any Tax Year. Such election by Landlord shall not preclude Landlord from thereafter requiring Tenant to commence paying monthly installments on account of Taxes as set forth above in this Article IV. 0.14. Tenant shall, prior to any late payment or delinquency dates, pay all charges for any utility services at the Premises which are separately metered or submetered, including, without limitation, any of the following which are metered or submetered: water, sewer, electricity, gas, fuel, heat and telephone. Utilities provided to Tenant in common with other tenants of Building 1 shall be included in Operating Expenses. Landlord is not required to furnish to Tenant any of the foregoing or other facilities or services of any kind whatsoever. Landlord reserves the right, without any liability to Tenant and without affecting Tenant's covenants and obligations under this Lease, to stop service of the HVAC, electric, sanitary, elevator (if any), or other systems serving the Premises, or to stop any other services required by Landlord under this Lease, whenever and for so long as may be necessary by reason of (a) accidents, emergencies, strikes, or the making of repairs or changes which Landlord in good faith deems necessary or (b) any other cause beyond Landlord's reasonable control. Further, it is also understood and agreed that Landlord shall have no liability or responsibility for a cessation of services to the Premises or to the Property that occurs as a result of causes beyond Landlord's reasonable control. No such interruption of service shall be deemed an eviction or disturbance of Tenant's use and possession of the Premises or any part thereof, or render Landlord liable to Tenant for damages, or relieve Tenant from performance of Tenant's obligations under this Lease, including, but not limited to, the obligation to pay Rent. 1. ARTICLE V Insurance and Restoration 1.1. Landlord shall maintain and keep in effect or cause to be maintained and kept in effect such insurance as it deems commercially reasonable, including, without limitation, (a) insurance against loss or damage to the Premises or other buildings and improvements on the Property owned by Landlord by fire and such other casualties as may be included within fire and extended coverage insurance, in an amount equal to the full replacement costs of such buildings and improvements, (b) rent insurance against loss of Rent paid by Tenant due to loss or damage to the buildings on the Property owned by Landlord by fire and such other casualties as may be included within fire and extended coverage insurance, (c) commercial general liability insurance against claims for bodily injury, death and property damage in and about the Property owned by Landlord, and (d) commercial general liability insurance against claims for bodily injury, death and property damage in and about the Common Areas. 1.2. Throughout the Term, Tenant shall pay to Landlord as Additional Rent and as part of Tenant's Proportionate Share of Operating Expenses payable under Article X, Tenant's Operating Expense Proportionate Share of all premiums to be paid by Landlord for all insurance maintained by Landlord pursuant to Section 5.1. 1.3. Tenant, at Tenant's sole cost and expense, shall maintain and keep in effect the following insurance coverages throughout the Term: (a) insurance against liability for bodily injury (including death) and property damage in or about the Property under a policy of commercial general liability insurance and umbrella liability (if necessary), on an occurrence basis (and including, without limitation, contractual liability coverage for liabilities assumed by Tenant under this Lease) and with such limits as to each as may be reasonably required by Landlord from time to time, but not less than $5,000,000, combined single limit each occurrence; (b) business automobile liability insurance including owned, hired and non-owned automobiles, on an occurrence basis and with such limits as may be reasonably required by Landlord from time to time, but not less than $5,000,000 combined single limit; (c) causes of loss-special form insurance upon Tenant's personal property, fixtures and leasehold improvements and items stored on the Premises by Tenant for the full replacement costs thereof (subject, however, to the deductible permitted under Section 5.4); (d) workers' compensation insurance in statutorily required amounts and employers liability (with umbrella liability if necessary), with such limits as may be reasonably required by Landlord from time to time, but not less than $1,000,000 each accident/disease - policy limit/disease - each employee; and (e) at any time that the Premises shall be used to for the storage of property of persons other than Tenant, warehouseman's legal liability insurance (with umbrella liability, if necessary) in an amount equal to the greater of $1,000,000 or the full replacement value of property of others in the care, custody, and control of Tenant in, on, or about the Premises; (f) loss-of-income insurance in an amount sufficient to assure that Landlord shall recover the loss of Rent due and owing under this Lease for a period of at least twelve (12) consecutive months; and (g) such other policies as are (a) reasonably required by Landlord or any mortgagee and that is of a type then generally required o similar tenants leasing comparable space in projects similar to the Property, or (b) required by insurers by reason of Tenant's specific use of or activities at the Premises. 1.4. The policies of insurance required pursuant to Section 5.3 shall name Landlord, and Landlord's mortgagees as additional insured parties, as their interests may appear. Each policy of insurance required by Section 5.3 shall provide that it shall not be canceled without at least thirty (30) days prior written notice to Landlord and to any mortgagee named in any endorsement thereto; shall contain the insurer's waiver of subrogation against Landlord; shall be issued by an insurer licensed to do business in Pennsylvania and reasonably acceptable to Landlord and Landlord's mortgagee; and shall be in a form reasonably satisfactory to Landlord. Each policy shall provide that no act or omission of Tenant shall affect the obligation of the insurer to pay the full amount of any loss sustained. The total amount of any deductible under any policy of insurance which Tenant is required to maintain pursuant to Section 5.3 shall be no more than $25,000.00. 1.5. Prior to the Commencement Date, and at least thirty (30) days prior to the expiration of each policy required under this Article, Tenant shall deliver to Landlord certificates in form reasonably acceptable to Landlord evidencing the foregoing insurance or renewal thereof, as the case may be. 1.6. Each of the parties hereto hereby releases the other, and shall obtain a waiver of subrogation from its insurer, to the extent of the releasing party's required insurance coverage under Sections 5.1 and 5.3 and all deductibles, from any and all liability for, or right of recovery against, any loss or damage covered by such insurance which may be inflicted upon the property of such party, or which may be claimed for bodily injury or death, even if such claim, loss or damage shall be brought about by the fault or negligence of the other party, its agents or employees. In addition to the foregoing, Tenant hereby releases Landlord from all claims for loss of profits or earnings which would be covered under a policy of business interruption insurance in an amount sufficient to reimburse Tenant for loss of earnings attributable to loss of occupancy of the Premises for a period of at least one year, as a result of perils included in a standard comprehensive fire or casualty insurance policy or in a business or rent interruption insurance policy. The foregoing release shall apply even if such fire or other casualty shall have been caused by the fault or negligence of Landlord or anyone for whom Landlord is responsible, and shall apply irrespective of whether Tenant is insured for such loss. 1.7. Tenant will not do anything which would prevent Landlord from procuring either fire insurance on the Premises or public liability insurance with respect to the Property from companies and in a form satisfactory to Landlord. If Tenant shall cause the rate for any insurance maintained by Landlord to be increased, Tenant will pay the amount of such increase as Additional Rent within ten (10) days after being billed therefor. 1.8. (a) In the event of damage to or destruction of the Premises caused by fire or other casualty, Landlord shall undertake to make repairs as hereinafter provided, unless this Lease is terminated by Landlord or Tenant. In the event that such damage or destruction is due to the negligence or willful misconduct of Tenant, Tenant shall be responsible for the first costs incurred for such repairs, up to the amount of the deductible of Landlord's insurance, not to exceed $25,000. (b) If (a) the damage is of such nature or extent, in the opinion of Landlord's architect or contractor, that (i) more than one hundred eighty (180) consecutive days, after commencement of the work, would be required (with normal work crews and hours) to repair and restore the part of the Premises which has been damaged, or (ii) such restoration or repairs require the expenditure of more than fifty percent (50%) of the full replacement cost of the Premises prior to such casualty or (b) less than two (2) years remain on the Term, and Landlord reasonably estimates that the restoration will take one hundred and twenty (120) days or more after the commencement of the work, Landlord shall so advise Tenant promptly, and either party, for a period of thirty (30) days thereafter, shall have the right to terminate this Lease by written notice to the other, as of the date specified in such notice, which termination date shall be no later than thirty (30) days after the date of such notice. 1.9. In the event of such fire or other casualty, if this Lease is not terminated pursuant to the terms of Section 5.8, and if this Lease is then in full force and effect, and after the collection of insurance proceeds attributable to such fire or other casualty, Landlord shall proceed diligently to restore the Premises to substantially the same size and configuration existing prior to the occurrence of the damage. Landlord shall not be obligated to repair or restore any alterations, additions or fixtures which Tenant may have installed after the date of the execution of this Lease (whether or not Tenant has the right or the obligation to remove the same or is required to leave the same on the Premises as of the expiration or earlier termination of this Lease) unless Tenant, in a manner reasonably satisfactory to Landlord, assures payment in full of such costs as may be incurred by Landlord in connection therewith. If there be any such alteration, fixtures or additions and Tenant does not assure payment of the cost of restoration or repair as aforesaid, Landlord shall have the right to determine the manner in which the Premises shall be restored, as if such alterations, additions or fixtures had not then been made or installed. The validity and effect of this Lease shall not be impaired in any way by the failure of Landlord to complete repairs and restoration of the Premises within one hundred eighty (180) consecutive days after commencement of work, even if Landlord had in good faith notified Tenant that the repair and restoration could be completed within such period, provided that Landlord proceeds diligently with such repair and restoration. Notwithstanding anything to the contrary to the foregoing, if Landlord does not complete restoration of the Premises within the Permitted Restoration Period (hereinafter defined), then, in such event, Tenant may at any time prior to the substantial completion of such work, terminate this Lease whereupon this Lease shall become null and void as of the date of the casualty and neither party shall have any further liability or obligation under this Lease. The term "Permitted Restoration Period" means one hundred eighty (180) days after commencement of the work plus an additional period equal to the length of any delays caused by circumstances beyond the reasonable control of Landlord, not to exceed an additional sixty (60) days. 1.10. In the case of damage to the Premises which is of a nature or extent that all or a portion of the Premises is rendered untenantable during the period of repair and restoration by Landlord, the Rent otherwise payable by Tenant pursuant to this Lease shall be abated for the period of such untenantability in such proportion as the number of rentable square feet of the Premises rendered untenantable bears to the total number of rentable square feet in the Premises. ARTICLE VI Rent Absolute and Net to Landlord 1.11. This Lease is a net lease and Landlord shall receive, except as herein otherwise specifically provided in this Lease, all Basic Rent and all Additional Rent free from any charges, taxes, assessments, fees, impositions, expenses, or deductions of any and every kind or nature whatsoever, and, except as herein otherwise expressly provided in this Lease, free of all obligation to insure or to repair, restore, or maintain the Premises. Landlord shall not be responsible for any costs, expenses, or charges of any kind or nature respecting the Premises, except as otherwise expressly provided in this Lease. Landlord shall not be required to render any services of any kind to Tenant or to the Premises, except as otherwise expressly provided in this Lease. ARTICLE VII Signs; Alterations 1.12. Except for signs which are located wholly within the interior of the Premises and which are not visible from the exterior of the Premises, no signs shall be placed, erected, maintained or painted at any place upon the Premises without the prior written consent of Landlord, which consent shall not be unreasonably withheld or delayed. All signs shall be maintained by Tenant in good condition during the Term, and Tenant shall remove all signs at the termination of this Lease and shall repair and restore any damage caused by the installation or removal thereof. 1.13. Tenant may, from time to time, at its expense, make such alterations, decorations, additions, or improvements to the Premises (hereinafter collectively referred to as "Alterations") in and to the Premises, excluding structural changes, as Tenant may reasonably consider necessary for the conduct of its business in the Premises; provided, however, that the written consent of the Landlord is first obtained. Landlord's consent to Alterations shall not be unreasonably withheld or delayed, provided that (a) the exterior of the improvements located on the Property shall not be affected; (b) the Alterations are non-structural and the structural integrity of the improvements located on the Property shall not be adversely affected; (c) the Alterations are to the interior of the Premises and no part of the outside of the Premises or Building 1 shall be affected; (d) the proper functioning of the mechanical, electrical, sanitary and other service systems of the Property shall not be adversely affected and such systems shall not be overburdened by their use by Tenant; (e) the Alterations do not have any effect on other leased premises or other tenants of the Property; (f) Tenant shall have appropriate insurance coverage reasonably satisfactory to Landlord regarding the performance and installation of the Alterations; and (g) before proceeding with any Alterations, Tenant shall submit for Landlord's approval, plans and specifications for the work to be done and Tenant shall not proceed with such work until it has received such approval. If the costs of the alterations exceeds Fifty Thousand Dollars ($50,000.00), Tenant shall obtain and deliver to Landlord (if so requested) either (i) a performance bond and a labor and materials payment bond (issued by a corporate surety licensed to do business in Pennsylvania) each in an amount equal to one hundred fifteen percent (115%) of the estimated cost of the Alterations and in form satisfactory to Landlord, or (ii) such other security as shall be reasonably satisfactory to Landlord. 1.14. Tenant, at its expense, shall obtain all necessary governmental permits and certificates for the commencement and prosecution of Alterations and for the final approval thereof upon completion, and shall cause the Alterations to be performed in compliance therewith and in compliance with all applicable laws and requirements of public authorities and with rules and regulations promulgated by Landlord in Landlord's reasonable discretion or any other restrictions that Landlord may, in the exercise of reasonable discretion, impose on the Alterations. Tenant shall not commence any Alterations without having first demonstrated, to Landlord's reasonable satisfaction, that all required permits and certificates have been obtained. The Alterations shall be diligently performed in a good and workmanlike manner, using new materials and equipment at least equal in quality and class to the standards for the Premises and Building 1 established by Landlord. Alterations shall be performed by contractors first approved by Landlord (which approval shall not be unreasonably withheld or delayed), and Tenant's agents, contractors, workmen, mechanics, suppliers and invitees shall work in harmony, and not interfere with, Landlord and its agents and contractors (if any) or the Premises. Tenant shall, and hereby does, indemnify, defend, and hold Landlord and Agent harmless from any and all claims, damages or losses of any nature (including reasonable fees of attorneys of Landlord's choosing), suffered by Landlord, as a result of, or due to, or arising from, the performance of any Alterations by, or on behalf of, Tenant. Tenant acknowledges that any Alterations commenced or performed in violation of any provision of this Article VII shall cause Landlord irreparable injury, and Landlord shall have the right to seek to enjoin any such violations by injunction or other equitable relief. Except as otherwise agreed to in writing by Landlord and Tenant, all Alterations shall be and remain part of the Premises, and shall not be removed by Tenant, unless Landlord requires Tenant to remove them, at Tenant's sole expense, at the expiration or sooner termination of the Term by written notice given to Tenant at the time Landlord consents to such Alteration; in performing such removal, Tenant shall restore the Premises to its condition prior to such Alteration, ordinary wear and tear excepted, shall repair any damage caused by such removal, and shall otherwise comply with this Article VII. 1.15. Tenant shall not permit any mechanics or materialmen's liens to attach to the Premises, Tenant's leasehold estate, or the Property. Tenant shall and hereby does defend, indemnify, and hold Landlord harmless from and against any and all mechanics and other liens and encumbrances filed in connection with Alterations or any other work, labor, services, or materials done for or supplied to Tenant, or any person claiming through or under Tenant including, without limitation, security interests in any materials, fixtures or articles installed in and constituting a part of the Premises and against all costs, expenses, and liabilities (including reasonable fees of attorneys of Landlord's choosing) incurred in connection with any such lien or encumbrance or any action or proceeding brought thereon. Tenant, at its expense, shall procure the satisfaction or discharge of record of all such liens and encumbrances within thirty (30) days after the filing thereof. In the event Tenant has not so performed, Landlord may, at its option, after ten (10) days written notice to Tenant, pay and discharge such liens and Tenant shall be responsible to reimburse Landlord for all costs and expenses incurred in connection therewith, together with interest thereon at the rate set forth in Section 26.4 below, which expenses shall include reasonable fees of attorneys of Landlord's choosing, and any costs in posting bond to effect discharge or release of the lien as an encumbrance against the Premises, Tenant's leasehold estate, or the Property or any part thereof. ARTICLE VIII Repairs 1.16. Except for the items specified in Section 8.3, Tenant, at its own cost and expense, shall keep the interior of the Premises in good order and condition and will make all necessary repairs and replacements thereto, ordinary and extraordinary, foreseen and unforeseen, and will make all necessary replacements thereto when necessary. Tenant shall hire and pay for all cleaning, custodial and janitorial services required to meet its obligations hereunder. All glass, both interior and exterior, is the sole responsibility of Tenant, and any broken glass shall promptly be replaced by Tenant at Tenant's expense with glass of the same kind (to the extent permitted by applicable building codes), size and quality. 1.17. All repairs and replacements required of Tenant hereunder shall be promptly made with new materials of like kind and quality and shall be made subject to Tenant's compliance with Article VII. 1.18. Landlord shall maintain in good order and repair, at Landlord's sole cost and expense, the structure and roof of the building of which the Premises is a part. In addition, Landlord shall keep in good order and repair, and replace when necessary (i) the exterior of the building of which the Premise is part, (ii) the lighting, heating, ventilating and air conditioning units, equipment and systems, and other units, equipment and systems serving the Premises and building of which the Premises is part (collectively, the "Systems") and (iii) the Common Areas; the costs of such maintenance, repair and replacement are a part of the Operating Expenses as set forth in Article X. The obligation of Landlord to maintain the items specified in this Section 8.3 does not include any maintenance, repairs or replacements due to the negligence or willful misconduct of Tenant, its employees, agents, contractors or invitees or to alterations made by Tenant all of which shall be the sole responsibility of Tenant. 1.19. At the option of Landlord, Landlord may enter into a service contract or service contracts providing for the maintenance, repair and replacement of all or any Systems, including Systems which serve only the Premises, in which event Tenant shall not be responsible for such maintenance, repair or replacement. The cost of such contracts(s) shall be included in Operating Expenses. Such election by Landlord shall not preclude Landlord from thereafter requiring Tenant to commence its maintenance obligations hereunder should Landlord terminate such service contract(s) ARTICLE IX Regulations; Compliance with Laws 1.20. Tenant, at all times during the Term hereof, and at its sole cost and expense, agrees: (a) to take such legal action as may be necessary to bring about the cessation of any work stoppage, picketing or labor activity by Tenant's employees or against Tenant, which may interfere with the operation of or access to the Property or any work being performed or to be performed in or about the Property. (b) to pay promptly and when due, all taxes, licenses, fees, assessments or other charges levied or imposed upon the business of Tenant or upon any fixtures, furnishings or equipment in, on or at the Premises; to pay Landlord any use and occupancy tax which Landlord is legally obligated to collect from Tenant; (c) not to knowingly commit, permit or allow any waste, damage or nuisance to or on the Property or any portion(s) thereof, or use, permit or allow the plumbing facilities to be used for any purpose injurious to same or dispose of any garbage or any other foreign substance therein, or place a load on any floor in the Premises which would damage the floor or install, attach, operate or maintain in the Premises any heavy equipment or apparatus (except fork lifts) without the consent of Landlord, or install, operate or maintain in the Premises any electrical equipment which would overload the electrical system therein, or any part thereof, beyond its capacity for proper and safe operation as determined by Landlord; (d) not to knowingly use, permit or allow the Premises to be used in any manner which would be illegal, noxious, or offensive because of the emission of noise, smoke, dust or odors or which could damage the Premises or the Property, or be a nuisance or menace to or interfere with, any other occupants or the public; (e) to comply with the requirements of all suppliers of utility services to the Premises and not to suffer or permit knowingly any act or omission, the consequence of which could be to cause the interruption, curtailment, limitation or cessation of any utility service to the Property; (f) not to store or discharge or otherwise use any Hazardous Materials, flammable, explosive, poisonous or other hazardous or dangerous substances on the Premises, except for (a) propane used in the operation of Tenant's forklifts, (b) materials and supplies used by Tenant in servicing its truck fleet and (c) substances or materials in commercially reasonable amounts which are customarily used in commercial warehouse and distribution operations, provided that the permitted materials, substances and supplies described in this subsection (f) shall be used, stored and disposed of in accordance all applicable laws, ordinances and regulations and the other requirements of this Lease; and (g) not to block or obstruct or otherwise impede access by others through or across the Common Areas. 1.21. Tenant, at its sole cost and expense, agrees to promptly comply with all non-discriminatory rules and regulations reasonably established by Landlord from time to time with respect to the Property. Landlord agrees not to enforce rules and regulations in a discriminatory manner. 1.22. The term "Legal Requirements" as used in this Lease means all present and future laws, orders, ordinances, rules, regulations and requirements of any lawful authorities and the orders, rules and regulations of the appropriate Board of Fire Underwriters or similar body, and all requirements of insurance companies writing policies covering the Premises. Tenant shall at Tenant's expense promptly comply with all Legal Requirements relating to or applicable to Tenant's specific use and occupancy of the Premises, including, without limitation, the Americans With Disabilities Act, provided that such compliance is not otherwise the obligation of Landlord under this Lease and provided further that Tenant's obligations under this Section 9.3 shall not apply to any matter relating to or arising from Hazardous Materials or Environmental Laws, is being specifically agreed that Tenant's obligations with respect to such matters shall be limited to its obligations as set forth in Article XXXI. Tenant shall pay all costs, expenses, claims, and penalties, that may in any manner arise out of the failure of Tenant to comply with the requirements of this section. ARTICLE X Operating Expenses 1.23. Tenant shall pay to Landlord, Tenant's Operating Expense Proportionate Share of all expenses incurred or paid by Landlord in connection with the maintenance, operation, repair, or replacement of (a) the Common Areas, and (b) all other portions of the Property (not including the buildings thereon, except as expressly set forth in this Section 10.1), even if such portions of the Property (not including the buildings thereon, except as expressly set forth in this Section 10.1) are reserved for the exclusive use of others (unless those having such exclusive right of use pay the entire expense of maintenance, operation, repair and replacement of such portion of the Property reserved for such exclusive use) (which portions of the Property shall, for purposes of this Section and Section 8 only, be deemed Common Areas). Such expenses shall include, without limitation, (a) the costs of (i) cleaning, maintenance, repair and replacement of the roads, sidewalks, parking areas, and driveways on or adjoining the Property, including the cost of snow and ice removal; (ii) repaving and restriping paved portions of the Property; (iii) maintenance, repair and replacement of all landscaped areas on the Property and exterior portions of the buildings on the Property; (iv) guards and security personnel, facilities and equipment for the Property; (v) maintenance, operation, repair and replacement of the lighting of the Property (not including the buildings thereon); (vi) insurance; (vii) maintenance, operation, repair and replacement of water, sewer and other utility equipment, lines and systems (interior and exterior to buildings and improvements) at the Property and the Systems, including the costs of service contracts entered into by Landlord for such equipment, lines and systems; (viii) maintenance, operation, repair and replacement of fire protection equipment, lines and systems (exterior and interior to buildings and improvements) at the Property; and (ix) compliance with Legal Requirements affecting the Common, and (b) a management/administrative fee equal to two and one half percent (2.5%) of the annual Basic Rent per lease year for each lease year of the Term with respect to the management and administration of the Property. All sums payable under this Section 10.1 shall be referred to in this Lease collectively as the "Operating Expenses." Notwithstanding anything herein to the contrary, in the event of any capital expense incurred by Landlord to maintain, operate, repair or replace the Common Areas, only the annual amortization of such expenditure (calculated by dividing the amount of the expenditure over the useful life of the improvement) shall be deemed an Operating Expense for each year of such period. The term "Operating Expenses" shall not include (a) the salaries or benefits of any executive officers of Landlord; (b) legal fees related to negotiation or enforcement of leases or any mortgages applicable to the Property; (c) costs incurred in connection with the original construction of the Common Areas or in connection with any major changes to the Common Areas, such as the relocation of driveways or roads; (d) depreciation, interest and principal payments on mortgages, and other debt costs, if any; (e) costs of correcting defects in or inadequacy of the initial design or construction of the Common Areas or any part thereof; (f) expenses resulting from the negligence or willful misconduct of Landlord, Landlord's authorized representatives or another tenant at the Property; (g) legal fees, space planners' fees, real estate brokers' leasing commissions and advertising expenses incurred in connection with the development or leasing of space at the Property or any part thereof; (h) costs reimbursable by any tenant or occupant of the Property or by insurance by its carrier or any tenant's carrier or by anyone else; (i) any bad debt loss, rent loss, or reserves for bad debts or rent loss; (j) costs associated with the operation of the business entity whichconstitutes the Landlord, as the same are distinguished from the costs of operation of the Property, including partnership accounting and legal matters, costs of defending any lawsuits with any mortgagee, costs of selling, syndicating, financing, mortgaging or hypothecating any of Landlord's interest in the Property, costs (including attorneys' fees and costs of settlement judgments and payments in lieu thereof) arising from claims, disputes or potential disputes in connection with potential or actual claims, litigation or arbitrations pertaining to Landlord and/or the Property; (k) wages and benefits of any employee who does not devote substantially all of his or her time to the Common Areas unless such wages and benefits are prorated to reflect time spent on operating and management of the Common Areas; (l) costs or expenses arising from or related to the EPA Agreement (as defined in Section 31.7), the PADEP Agreement (as defined in Section 31.8), or the Existing Contamination (as defined in the EPA Agreement) or any other costs or expenses arising from the presence of Hazardous Materials in or about the Property, including, without limitation, Hazardous Materials in the ground water or soil; (m) fines, penalties and interest; (n) amounts paid as ground rental by Landlord, if any; (o) capital expenditures to comply with Landlord's obligations under Section 31.10; (p) overhead and profit increment paid to Landlord or to subsidiaries or affiliates of Landlord for services to the extend the same exceeds the cost of such services rendered by unaffiliated third parties on a competitive basis; (q) costs arising from Landlord's political or charitable contributions; (r) costs incurred by Landlord due to the violation by Landlord or any tenant of the terms and conditions of any lease of space at the Property; (s) earthquake insurance, flood insurance and rental interruption insurance to the extent that rental interruption insurance is in excess of twelve (12) months' coverage; (t) costs for which Landlord has been compensated by a management fee; and (u) capital expenditures to comply with legal requirements applicable to the Property on the date of this Lease. The term "Tenant's Operating Expense Proportionate Share" means the ratio that the number of rentable square feet of the Premises bears to the number of rentable square feet of building space on the Property, as such number may change from time to time. 1.24. Tenant shall pay to Landlord at the time when the monthly installment of Basic Rent is payable, an amount equal to one-twelfth (1/12th) of Tenant's Operating Expense Proportionate Share of the annual Operating Expenses as reasonably estimated by Landlord. Such estimate shall itemize in reasonable detail the Operating Expenses and shall set forth Landlord's calculation of Tenant's Operating Expense Proportionate Share of the annual Operating Expenses, and may be reasonably changed by Landlord from time to time, whereupon the amounts payable hereunder shall change (so that amounts payable by Tenant shall be sufficient to pay in full Tenant's Operating Expense Proportionate Share of the annual Operating Expenses, as reasonably estimated by Landlord, over the balance of the calendar year). Tenant shall also pay to Landlord within ten (10) days after a statement is rendered for the applicable calendar year (the "Operating Expense Statement") the amount, if any, by which Tenant's Operating Expense Proportionate Share of the Operating Expenses for such calendar year exceeds the monthly payments on account thereof previously made by Tenant. Any overpayment of Operating Expenses shall be credited against the next installments of Tenant's Proportionate Share of Operating Expenses due hereunder or, upon the expiration or earlier termination of the Term, repaid to Tenant (net of any unpaid sums due to Landlord under this Lease) within thirty (30) days after expiration or earlier termination of the Term. The Operating Expense Statement shall be provided by Landlord within one hundred twenty (120) days after the expiration of the applicable calendar year, shall set forth in reasonable detail the Operating Expenses for the prior year and the calculation by which Tenants' Operating Expense Proportionate Share was determined and shall be signed and certified to be correct by Landlord. Landlord shall not be entitled to subsequently collect any Operating Expenses from Tenant for a specific calendar year which are not set forth on the Operating Expense Statement for such calendar year. Tenant shall have the right to review Landlord's records relative to Operating Expenses during normal business hours at the office at which Landlord maintains such records. If Tenant desires to review Landlord's records, Tenant shall give Landlord notice thereof within ninety (90) days following the furnishing of the Operating Expense Statement to Tenant. Such review shall be completed by Tenant, if at all, within sixty (60) days following the giving of such notice by Tenant to Landlord. If such review reveals that Landlord has overcharged Tenant, then within ten (10) days after Tenant's demand therefor, Landlord shall reimburse Tenant for the amount of such overcharge. Tenant agrees to pay the cost of such review; provided, however, that if the review reveals that Landlord's determination of Tenant's Operating Expense Proportionate Share as set forth in the applicable Operating Expense Statement was in error in Landlord's favor by more than five percent (5%), then Landlord shall pay the cost of such review. Landlord shall keep at its regular place of business full, accurate and separate books of account covering all of the Operating Expenses. The amounts paid by Tenant pursuant to this Section 10.2 shall be used to pay the Operating Expenses, but such amounts shall not be deemed to be trust funds and no interest shall be payable thereon. ARTICLE XI Landlord's Right of Entry 1.25. Tenant shall permit Landlord and the authorized representatives of Landlord and of any mortgagee or any prospective mortgagee, prospective purchaser or tenant to enter the Premises at all reasonable times upon one day prior notice (except no notice shall be required in the event of emergency), for the purpose of (a) inspecting or showing the same, or (b) performing any obligations of Landlord under this Lease, or (c) correcting any defaults by Tenant under this Lease. Landlord will exercise reasonable efforts to minimize interference with the operations of Tenant, but shall not be liable for inconvenience, annoyance, disturbance or other damage to Tenant by reason of making any repair or by bringing or storing materials, supplies, tools and equipment in the Premises during the performance of any work (except for damage caused by Landlord's gross negligence or willful misconduct), and, except as otherwise expressly provided for in this Lease, the obligations of Tenant under this Lease shall not be thereby affected in any manner whatsoever. ARTICLE XII Indemnification 1.26. Subject to the provisions of Section 5.6, and except as otherwise expressly provided in this Lease, Tenant will indemnify Landlord and save Landlord harmless from and against any and all claims, actions, damages, liability and expense (including, without limitation, reasonable fees of attorneys, investigators and experts) in connection with loss of life, personal injury or damage to property caused to any person in or about the Premises and arising out of the occupancy by Tenant or use by Tenant of the Property or occasioned wholly or in part (as to such part) by any act or omission of Tenant, its agents, contractors, employees, licensees or invitees, or by reason of any breach by Tenant of the terms and conditions of this Lease, unless such loss, injury or damage was caused by the negligence or willful misconduct of Landlord, its agents, employees, licensees or invitees. In case any such claim, action or proceeding is brought against Landlord, upon notice from Landlord and at Tenant's sole cost and expense, Tenant shall resist or defend such claim, action or proceeding or shall cause it to be resisted or defended by an insurer. 1.27. Subject to the provisions of Section 5.06, and except as otherwise expressly provided in this Lease, Landlord will indemnify Tenant and save Tenant harmless from and against any and all claims, actions, damages, liability and expense (including, without limitation, reasonable fees of attorneys, investigators and experts) in connection with loss of life, personal injury or damage to property caused to any person occasioned wholly or in part (as to such part) by any act or omission of Landlord, its agents, contractors, employees, licensees or invitees (excluding other tenants and the agents, contractors, employees, licensees and invitees of such other tenants) , unless such loss, injury or damage was caused by the negligence or willful misconduct of Tenant, its agents, employees, licensees or invitees. In case any such claim, action or proceeding is brought against Tenant, upon notice from Tenant and at Landlord's sole cost and expense, Landlord shall resist or defend such claim, action or proceeding or shall cause it to be resisted or defended by an insurer. 1.28. The foregoing indemnity shall not extend to any matter relating to or arising from Hazardous Materials or Environmental Laws, it being specifically agreed that any indemnity by Tenant with respect to such matters shall be limited to the indemnity set forth in Article XXXI. ARTICLE XIII Condemnation 1.29. (a) If the whole or any part of the Premises or Common Areas shall be taken under the power of eminent domain, this Lease shall terminate as to the part so taken on the date Tenant is required to yield possession thereof to the condemning authority. (b) (i) If the portion of the Premises so taken under the power of eminent domain substantially renders the remainder of the Premises untenantable for the use specified in Section 2.1, or if the portion of the Common Areas so taken under the power of eminent domain renders use of the Premises impractical, either Landlord or Tenant may terminate this Lease as of the date when Tenant is required to yield possession to the condemning authority by giving notice of termination within forty-five (45) days after the date of notice of such taking by Landlord to Tenant. (ii) If any portion of the Property or Common Areas is so taken thereby causing the use of the Premises specified in Section 2.1 to be unlawful under applicable governmental requirements, and Landlord cannot or does not deem it reasonably feasible to take action to make such use lawful, then Landlord or Tenant may elect to terminate this Lease as of the date on which possession thereof is required to be yielded to the condemning authority, by giving notice of such election within forty-five (45) days after the date of notice of such taking by Landlord to Tenant. (iii) If Tenant is permanently deprived of access to the Premises or if access to the Premises is permanently significantly reduced or impaired as a result of any condemnation affecting the Property, Tenant may elect to terminate this Lease as of the date the condemned property is required to be yielded to the possession of condemning authority by giving notice of termination within forty-five (45) days after receiving notice of such taking from Landlord. (c) If this Lease is not terminated under this Section 13.1, Landlord, subject to Section 5.9 of this Lease, shall make such repairs and alterations as may be necessary in order to restore the part of the Premises and/or Common Areas not taken to tenantable condition, (a) all Rent (other than any Additional Rent due Landlord by reason of Tenant's failure to perform any of its obligations hereunder) shall be reduced proportionately as to the portion of the Premises so taken commencing on the date the property taken is require to be yielded to the possession of the condemning authority, and (b) if the portion of the Premises being repaired is rendered untenantable during the period of repair and restoration by Landlord, the Rent otherwise payable by Tenant pursuant to this Lease shall be abated for the period of such untenantability in such proportion as the number of rentable square feet of the portion of the Premises rendered untenantable bears to the total number of rentable square feet of the Premises. (d) If any notice of termination is given pursuant to this section, this Lease shall terminate on the date the property taken is required to be yielded to the possession of the condemning authority and all Rent shall be adjusted as of the date of such termination. 1.30. In the event of a condemnation affecting Tenant, Tenant shall have the right to make a claim against the condemning authority for loss of personal property, relocation and moving expenses and the unamortized cost of alterations made by Tenant; provided and to the extent, however, that such claims or payments do not reduce the sums otherwise payable by the condemning authority to Landlord. Except as aforesaid, Tenant hereby waives all claims against Landlord and against the condemning authority, and Tenant hereby assigns to Landlord all claims against the condemning authority, including, without limitation, all claims for leasehold damages and diminution in value of Tenant's leasehold interest. ARTICLE XIV Quiet Enjoyment 1.31. Landlord hereby covenants that Tenant, upon paying all Rent and other charges herein provided for, and observing and keeping all covenants, agreements and conditions of this Lease on its part to be kept, shall quietly have and enjoy the Premises during the Term without hindrance or molestation by anyone claiming by or through Landlord, subject, however, to the exceptions, reservations and conditions of this Lease. ARTICLE XV Assignment and Subletting 1.32. (a) Tenant shall not, voluntarily, or by operation of law or otherwise, assign, mortgage, pledge or encumber this Lease, or sublet the whole or any part of the Premises, or permit the Premises to be used or occupied by anyone other than Tenant, without the prior written consent of Landlord, such consent not to be unreasonably withheld or delayed. (b) An assignment of this Lease shall include any transfer of a majority of the voting stock of Tenant or to any other change in voting control of Tenant (if Tenant is a corporation), in one (1) or more transactions, or to a transfer of a majority of the general partnership interests in Tenant or managerial control of Tenant (if Tenant is a partnership), or to any comparable transaction involving any other form of business entity, whether effectuated in one (1) or more transactions; but, Tenant shall have the right to assign this Lease or sublet the Premises or any portion thereof to a corporation into or with which Tenant is merged or consolidated, or to which all or substantially all of Tenant's assets are transferred, or to any corporation that controls or is controlled by Tenant, or is under common control with Tenant (a "Tenant Affiliate"), provided in any of such events (a) the successor to Tenant has a net worth (computed in accordance with generally accepted accounting principles), at least equal to the net worth of Tenant on the date of this Lease (b) proof satisfactory to Landlord of such net worth shall have been delivered to Landlord at least thirty (30) days prior to such assignment, and (c) Tenant complies with this Article in all other respects in connection with such assignment. 1.33. In the event of any assignment of this Lease or a subletting of all or any portion of the Premises, whether or not consent to such assignment or subletting is required, Tenant nevertheless shall remain liable for the performance of all of the terms, conditions and covenants of this Lease. In the event of an assignment, Tenant shall require any assignee to execute and deliver to Landlord an assumption of liability agreement in form reasonably satisfactory to Landlord, including an assumption by the assignee of all of the obligations of Tenant and the assignee's ratification of and agreement to be bound by all of the provisions of this Lease. Any subleases of the Premises, whether or not consent is required to such sublease, shall be under and subject to the terms of this Lease, and each sublease shall specifically so state. In addition to all sums payable hereunder, Landlord shall be entitled to, and Tenant shall promptly remit to Landlord, one hundred percent (100%) of any consideration received by Tenant as a result of any assignment of this Lease in excess of Tenant's reasonable costs incurred in connection with such assignment to a non-Tenant Affiliate, including, without limitation, the costs of preparing the Premises for the assignee, reasonable legal fees of preparing the assignment documents, and reasonable brokerage commissions paid to an independent third party broker in connection with such assignment, and one hundred percent (100%) of any rent and other consideration received by Tenant as a result of any subletting of the Premises to a non-Tenant Affiliate in excess of the Basic Rent and Tenant's reasonable costs incurred in connection with such subletting to a non-Tenant Affiliate, including, without limitation, of preparing the Premises (or a portion thereof) for the subtenant, the reasonable legal fees of preparing the sublease, and reasonable brokerage commissions paid to an independent third party broker in connection with such subletting. Tenant's request for consent to any assignment or subletting shall be given to Landlord at least thirty (30) days before the execution of any assignment or sublease, shall be in writing and contain the name, address, and description of the business of the proposed assignee or subtenant, its most recent financial statement and other evidence of financial responsibility, its intended use of Premises, the terms and conditions of the proposed assignment or subletting, and a copy of the proposed form of assignment or sublease. Tenant shall also give Landlord at least thirty (30) days prior notice of any assignment or sublease permitted under Section 15.1.b together with all of the information required by the immediately preceding sentence. Without limitation on any obligations or liabilities of Tenant in the event of any assignment or subletting, whether or not consent to such assignment or subletting is required, Tenant shall comply with and shall cause all proposed subtenants and assignees to agree to comply with the EPA Agreement and the PADEP Agreement, including, without limitation, any provisions of such agreements requiring prior notice to any governmental agency before any transfer, lease or assignment. ARTICLE XVI Subordination 1.34. This Lease and Tenant's rights hereunder shall be subject and subordinate at all times in lien and priority to all mortgages now or hereafter placed upon or affecting the Property, and to all renewals, modifications, consolidations and extensions thereof, without the necessity of any further instrument or act on the part of Tenant. Tenant shall execute and deliver upon demand any further instrument or instruments confirming the subordination of this Lease to the lien of any such mortgages and any further instrument or instruments of attornment that may be desired by any mortgagee. Notwithstanding the foregoing, any mortgagee may at any time subordinate its mortgage to this Lease, without Tenant's consent, by giving notice in writing to Tenant, and thereupon this Lease shall be deemed prior to such mortgage without regard to their respective dates of execution and delivery. Tenant hereby agrees to attorn (a) to any purchaser of any real estate of which the Premises is a part of any foreclosure sale, execution sale or private sale conducted pursuant to any mortgage, security instrument, or lien encumbering or affecting the Premises, and (b) to any grantee or transferee designated in any deed given in lieu of foreclosure. The foregoing provisions of this Section 16.1 are subject, however, to the condition that the holder of any mortgage to which this Lease is subordinate shall deliver to Tenant a recordable subordination, non-disturbance and attornment agreement in form reasonably satisfactory to Tenant and such mortgagee. 1.35. Landlord represents and warrants that, as of the date hereof, there are no mortgages encumbering all or any portion of the Property. 1.36. Tenant agrees that in the event the interest of Landlord becomes vested in the holder of any mortgage, or in anyone claiming by, through or under the holder of any mortgage, then such holder shall not be: (a) liable for any act or omission of any prior landlord (including Landlord herein) which is not of a continuing nature; or (b) subject to any offsets or defenses which Tenant may have against any prior landlord (including Landlord herein); or (c) required to make or complete any tenant improvements except for those set forth in Section 1.3 hereof; or (d) bound by any rent which Tenant may have paid for more than the current month to any landlord (including Landlord herein); or (e) bound by any amendment or modification of any provisions hereof, or any cancellation or surrender of this Lease, after the mortgage is placed of record unless such amendment, modification, cancellation or surrender shall have been approved in writing by the holder of such mortgage. ARTICLE XVII Estoppel Certificates; Financials 1.37. Tenant, at any time and from time to time and within ten (10) days after written request by Landlord, shall execute, acknowledge and deliver to the other a written instrument certifying: (a) whether this Lease has been modified or amended, and if so, the date, substance and manner of such modification or amendment; (b) the validity and force and effect of this Lease; (c) the existence of any default hereunder, and if so, the nature, scope and extent thereof; (d) the existence of any offsets, counterclaims or defenses thereto on the part of Tenant, and if so, the nature, scope and extent thereof; (e) the commencement and expiration dates of the Term; (f) the dates to which Rent has been paid; (g) any other matters as may be reasonably requested. Any such certificate may be relied upon by the Landlord and any other person, firm or corporation to whom the same may be exhibited or delivered, and the party executing such certificate shall be bound by the contents of the same. 1.38. Tenant further agrees to furnish to Landlord at any time, but not more frequently than twice per year, within ten (10) days after request by Landlord, a copy of its financial statements for its last full fiscal year, including a balance sheet and a profit and loss statement for such year, and for the year in which the request is made through the end of the last fiscal period of Tenant for such year. Landlord agrees that Tenant's annual report, together with any financial information available to shareholders of Tenant, shall be sufficient to satisfy the requirements of this Section 17.2. ARTICLE XVIII Curing Tenant's Defaults 1.39. If Tenant shall be in default in the performance of any of its obligations under this Lease, Landlord, without any obligation to do so, in addition to any other rights it may have in law or equity, may elect to cure such default on behalf of Tenant after providing Tenant written notice thereof, and such time to cure as Landlord determines is reasonable under the circumstances; provided, however, that no notice or opportunity to cure shall be required in case of emergency. Tenant shall reimburse Landlord for any sums paid or costs reasonably incurred by Landlord in curing such default, including interest thereon from the date of Tenant's receipt of Landlord's bill therefor, which sums and costs together with interest thereon shall be deemed Additional Rent payable within ten (10) days after Tenant receives a bill therefor (which bill shall set forth in reasonable detail the costs for which compensation is claimed). ARTICLE XIX Surrender 1.40. Subject to the provisions of Section 5.8, Article XIII and Landlord's obligations under this Lease, at the expiration or earlier termination of the Term, Tenant shall promptly yield up vacant, broom clean and neat, and in the same condition, order and repair in which they are required to be kept throughout the Term, the Premises and all improvements, alterations and additions thereto, ordinary wear and tear excepted. 1.41. All movable non-structural partitions, business and trade fixtures, machinery and equipment, communications equipment and office equipment, whether or not attached to, or built into, the Premises, which are installed in the Premises by, or for the account of, Tenant without expense to Landlord and that can be removed without structural damage to the Premises or Property, and all furniture, furnishings and other articles of movable personal property owned by Tenant, or property of others in the care, custody and control of Tenant (collectively, the "Tenant's Property") shall be and shall remain the property of Tenant. At or before the expiration of the Term or the date of any earlier termination, Tenant, at its expense, shall remove from the Premises all of Tenant's Property (except such items thereof as Landlord shall have expressly permitted, in writing, to remain, which property shall become the property of Landlord), and Tenant shall repair any damage to the Premises or Property resulting from any installation or removal of Tenant's Property. Any items of Tenant's Property that shall remain in the Premises or Property after the expiration date of the Term, or following an earlier termination date, may, at the option of Landlord, be deemed to have been abandoned, and in such case, such items may be retained by Landlord as its property or be disposed of by Landlord, in Landlord's sole and absolute discretion and without accountability, at Tenant's expense. Notwithstanding the foregoing, if Tenant is in default under the terms of this Lease, it may remove Tenant's Property from the Premises only upon the express written direction of Landlord. 1.42. If Tenant, or any person claiming through Tenant, shall continue to occupy the Premises after the expiration or earlier termination of the term or any renewal thereof, such occupancy shall be deemed to be under a month-to-month tenancy under the same terms and conditions set forth in this Lease; except, however, that the Basic Rent during such continued occupancy shall be one hundred fifty percent (150%) of the amount in effect immediately prior to such holdover. Anything to the contrary notwithstanding, any holding over by Tenant without Landlord's prior written consent shall constitute an event of default hereunder and shall be subject to all the remedies set forth in Article XX hereof. ARTICLE XX Default - Remedies 1.43. Tenant's Default. It shall be an event of default under this Lease: (a) If Tenant does not pay in full any and all installments of Basic Rent or Additional Rent or any other charges or payments whether or not herein defined as Rent, within ten (10) days after notice that the same is due, provided, however that Tenant shall not be entitled to any such notice or grace period more than twice in any twelve (12) month period; or (b) If Tenant violates or fails to perform or otherwise breaches any agreement, term, covenant or condition herein contained and such failure continues for more than thirty (30) days after written notice thereof to Tenant (unless such default is not susceptible of cure within thirty (30) days in which event Tenant shall have failed to commence curing such default within such thirty (30) day period and to diligently prosecute such cure to completion), or (c) If Tenant voluntarily abandons the Premises or removes or attempts to remove Tenant's goods or property therefrom other than in the ordinary course of business; or (d) If Tenant becomes insolvent or bankrupt in any sense or makes an assignment for the benefit of creditors or offers a composition or settlement to creditors, or if a petition in bankruptcy or for reorganization or for an arrangement with creditors under any federal or state law is filed by or against Tenant, or a bill in equity or other proceeding for the appointment of a receiver, trustee, liquidator, custodian, conservator or similar official for any of Tenant's assets is commenced, or if any of the real or personal property of Tenant shall be levied upon by any sheriff, marshal or constable; provided, however, that any proceeding brought by anyone other than the parties to this Lease under any bankruptcy, reorganization arrangement, insolvency, readjustment, receivership or similar law shall not constitute an event of default until such proceeding, decree judgment or order has continued unstayed for more than ninety (90) consecutive days. 1.44. Landlord's Remedies. Upon the occurrence of an event of default, Landlord shall have the following remedies and rights: (a) To terminate this Lease by giving written notice thereof to Tenant, and upon the giving of such notice the Term, and all rights of Tenant hereunder shall terminate, without affecting Tenant's liability for all sums due under this Lease; (b) To reenter the Premises, together with all additions, alterations and improvements, and, at the option of Landlord, remove all persons and all or any property therefrom, without being liable for prosecution or damages therefor, and repossess and enjoy the Premises; (c) At any time after repossession of the Premises, whether or not the Lease shall have been terminated by Landlord, Landlord may make such reasonable alterations and repairs as may be necessary in order to relet the Premises and relet the Premises or any part or parts thereof, either in Landlord's name or otherwise, for a term or terms which may, at Landlord's option, be less than or exceed the period which would otherwise have constituted the balance of the Term of this Lease and at such rent or rents and upon such other terms and conditions as Landlord may decide. If the rentals received from such reletting during any month after deducting all costs incurred by Landlord in exercising its rights hereunder shall be less than that to be paid during that month by Tenant, Tenant shall pay any such deficiency to Landlord, provided such reletting is a bona fide arms length transaction. Such deficiency shall be calculated and paid monthly. (d) To declare due and payable all unpaid Basic Rent for the unexpired period of the Term (and also all Additional Rent, as reasonably estimated by Landlord,) as if by the terms of this Lease the same were due and payable in advance, all discounted to present worth using a rate equal to the annual rate for United States obligations of equal duration to the period remaining in the term of the Lease, and upon payment of the same, Tenant shall be entitled to continue in possession pursuant to the terms of this Lease; (e) In the event of the termination of this Lease, or repossession of the Premises, Landlord shall be entitled to recover, in addition to any and all sums and damages for violation of Tenant's obligations hereunder in existence at the time of such termination, damages for Tenant's default in an amount equal to the amount of Basic Rent reserved for the balance of the Term of this Lease (plus Landlord's reasonable estimate of Additional Rent as well as all other charges, payments, costs and expenses herein agreed to be paid by Tenant), all discounted to present worth using a rate equal to the annual rate for United States obligations of equal duration to the period remaining in the term of the Lease, less the fair rental value of the Premises for the remainder of the Term, also discounted to present value at such rate, all of which shall be immediately due and payable from Tenant to Landlord; and (f) TENANT, IN CONSIDERATION OF THE EXECUTION OF THIS LEASE BY LANDLORD AND FOR THE COVENANTS AND AGREEMENTS ON THE PART OF LANDLORD HEREIN CONTAINED, AND FULLY COMPREHENDING THE RELINQUISHMENT OF CERTAIN RIGHTS, INCLUDING ANY AND ALL RIGHTS OF PREJUDGMENT NOTICE AND HEARING AND OF POST-JUDGMENT/PRE-EXECUTION NOTICE AND HEARING, AND AFTER DEFAULT BY TENANT UNDER THIS LEASE AND UPON PROVISION OF TEN (10) DAYS PRIOR WRITTEN NOTICE BY LANDLORD, HEREBY EXPRESSLY AUTHORIZES ANY ATTORNEY OF ANY COURT OF RECORD TO ACCEPT SERVICE OF PROCESS FOR, TO APPEAR FOR, AND TO CONFESS JUDGMENT IN EJECTMENT AGAINST TENANT IN ANY AND ALL ACTIONS BROUGHT HEREUNDER BY LANDLORD AGAINST TENANT TO RECOVER POSSESSION FROM TIME TO TIME OF THE PREMISES (AND TENANT AGREES THAT UPON THE ENTRY OF EACH JUDGMENT FOR SUCH POSSESSION A WRIT OF POSSESSION OR OTHER APPROPRIATE PROCESS MAY ISSUE FORTHWITH). THE RIGHT TO CONFESS JUDGMENT IN EJECTMENT SHALL NOT BE EXHAUSTED BY THE SINGLE OR MULTIPLE USE THEREOF. TENANT CONFIRMS THAT THIS IS A COMMERCIAL LEASE, THAT TENANT WAS REPRESENTED BY COUNSEL IN TENANT'S NEGOTIATION AND EXECUTION OF THIS LEASE, AND THAT TENANT KNOWINGLY, WILLINGLY, FREELY AND VOLUNTARILY EXECUTED THIS LEASE WITH THIS SECTION 20.2(f) AS A PART THEREOF. 1.45. Late Charge. Any payment of Basic Rent, Additional Rent, or any other charge under this Lease (including amounts due by acceleration) which is not paid within ten (10) days after the same is due, shall bear interest from the date due until the date paid by Tenant. In addition, Tenant shall pay to Landlord an administrative charge of five percent (5%) of any amount owed to Landlord pursuant to this Lease which is not paid within ten (10) days of the date which is set forth in this Lease if a date is specified as the due date for such payment, or, if a date is not specified, within ten (10) days after Tenant's receipt of Landlord's bill therefor. The five percent (5%) administrative charge paid by Tenant shall be applied against the amount of interest which accrues on any delinquent installment, so that once Tenant has paid the administrative charge, no further interest shall accrue on any delinquent installment until the amount of interest due exceeds the amount of the administrative charge. 1.46. No Waiver. No waiver by either Landlord or Tenant of any breach by the other of any obligations, agreements or covenants herein shall be a waiver of any subsequent breach or of any obligation, agreement or covenant, nor shall any forbearance by either Landlord or Tenant to seek a remedy for any breach by the other be a waiver of any rights and remedies with respect to such or any subsequent breach. 1.47. Non-Exclusive Remedies. No right or remedy herein conferred upon or reserved to Landlord or Tenant is intended to be exclusive of any other right or remedy provided herein or by law, but each shall be cumulative and in addition to every other right or remedy given herein or now or hereafter existing at law or in equity or by statute. 1.48. Tenant's Bankruptcy. In addition to, and in no way limiting the other remedies set forth herein, Landlord and Tenant agree that if Tenant ever becomes the subject of a voluntary or involuntary bankruptcy, reorganization, composition, or other similar type proceeding under the federal bankruptcy laws, as now enacted or hereinafter amended, then: (a) "Adequate assurance of future performance" by Tenant and/or any assignee of Tenant pursuant to Bankruptcy Code Section 365 will include (but not be limited to) payment of an additional/new security deposit in the amount of three (3) the then-current Base Rent payable hereunder. (b) Any person or entity to which this Lease is assigned pursuant to the provisions of the Bankruptcy Code, shall be deemed, without further act or deed, to have assumed all of the obligations of Tenant arising under this Lease on and after the effective date of such assignment. Any such assignee shall, upon demand by landlord, execute and deliver to landlord an instrument confirming such assumption of liability. (c) Notwithstanding anything in this Lease to the contrary, all amounts payable by Tenant to or on behalf of Landlord under this Lease, whether or not expressly denominated as "Rent", shall constitute "rent" for the purposes of Section 502(b)(6) of the Bankruptcy Code. (d) If this Lease is assigned to any person or entity pursuant to the provisions of the Bankruptcy Code, any and all monies or other considerations payable or otherwise to be delivered to Landlord (including Base Rent, Additional Rent and other amounts hereunder), shall be the remain the exclusive property of Landlord and shall not constitute property of Tenant or of the bankruptcy estate of Tenant. Any and all monies or other considerations constituting Landlord's property under the preceding sentence not paid or delivered to landlord or Agent shall be held in trust by Tenant or Tenant's bankruptcy estate for the benefit of Landlord and shall be promptly paid to or turned over the Landlord. 1.49. Landlord's Default. If Landlord shall be in default in the performance of any of its obligations under this Lease for thirty (30) consecutive days after written notice from Tenant (unless such default is not susceptible of cure within thirty (30) days in which event Landlord shall have failed to commence curing such default within such thirty (30) day period and to diligently prosecute such cure to completion), then Tenant shall notify Landlord in writing if Tenant intends to cure such default on behalf of Landlord. If, ten (10) days following such second notice Landlord has failed to commence curing such default, Tenant shall have the right to cure the default on behalf of Landlord. Landlord shall reimburse Tenant for any sums reasonably paid or costs reasonably incurred by Tenant in curing such default, including interest thereon from the date of Landlord's receipt of Tenant's bill therefor, within ten (10) days after Landlord receives a bill therefor (which bill shall set forth in reasonable detail the costs for which compensation is claimed). Notwithstanding the foregoing, Tenant shall not have any right in exercising its remedies under the preceding sentence to make any repairs or modifications to areas outside the Premises, except those solely serving the Premises. If Landlord fails to reimburse Tenant as required under this Section and such failure continues for thirty (30) days after request for payment, Tenant may deduct such amounts from Basic Rent until the full amount has been satisfied. All notices by Tenant to Landlord under this Section 20.7 shall simultaneously be given by Tenant to the holders of any first mortgage or second mortgage on the Premises, provided Tenant has been given notice of the names and addresses of such mortgagees. Any mortgagee shall have the right, but not the obligation, to cure, or commence to cure, any default of Landlord, and Tenant shall accept performance by any mortgagee with the same force and effect as performance by Landlord. ARTICLE XXI Condition of Title and of Premises 1.50. Landlord represents and warrants to Tenant that Landlord is the sole fee owner of the Property and has the right to enter into and perform this Lease without the approval or consent of any other party. Landlord represents and warrants to Tenant that the Premises in its state existing on the Commencement Date do not violate in any material respect any statutes, laws, building codes, regulations, ordinances, covenants, or restrictions of record applicable to the Premises and in effect on such Commencement Date, including, without limitation, the Americans With Disabilities Act. In the event it is determined that this representation and warranty has been violated, then it shall be the obligation of the Landlord, after notice from Tenant, to promptly, at Landlord's sole cost and expense, rectify any such violation. Landlord shall deliver the Premises to Tenant clean and free of debris on the Commencement Date and Landlord further represents and warrants to Tenant that the heating, ventilating, air conditioning, plumbing, lighting, life-safety, mechanical and electrical systems in the Premises and the Building and the roof, windows and sewer shall be in good operating condition on the Commencement Date. In the event that it is determined that this representation and warranty has been violated, then it shall be the obligation of Landlord, after notice from Tenant, to promptly, at Landlord's sole cost and expense, rectify any such violation. 1.51. Tenant represents that the Property and the Premises, the street or streets, sidewalks, parking areas, curbs and access ways adjoining them, any surface conditions, and the present uses and non-uses thereof, have been examined by Tenant, and Tenant accepts them AS-IS, WHERE-IS in the condition or state in which they now are, or any of them now is, without relying on any representation of Landlord, except as specifically set forth in this Lease, and subject, however, to the Landlord's obligations under this Lease including, without limitation, Landlord's obligations under Sections 1.2, 8.3 and 31.10. Subject to the provisions of Section 16.1, and the requirements of Section 32.1 respecting Tenant's access to and use of the Premises, and without limiting Landlord's obligations under this Lease, this Lease is made under and subject to all liens, encumbrances, easements, covenants, conditions, restrictions and other documents or matters now or hereafter of record. ARTICLE XXII Interruption of Services 1.52. In case Landlord is prevented or delayed in furnishing any service required to be provided by Landlord under this Lease due to any cause beyond the reasonable control of Landlord , Landlord shall not be liable to Tenant therefor, nor shall the same give rise to a claim in Tenant's favor that such absence of services constitutes actual or constructive, total or partial eviction or renders the Premises untenantable. ARTICLE XXIII Waiver of Landlord's Lien 1.53. Landlord hereby waives in favor of any lender providing financing to Tenant secured in whole or in part by Tenant's accounts receivable, inventory, machinery, equipment, furniture, furnishings and/or trade fixtures, whether now or hereafter acquired, and the proceeds and products thereof (collectively "Tenant's Personal Property") any and all right of Landlord to assert any lien, claim or right of levy or distraint for rent with respect to Tenant's Personal Property. At the request of Tenant, landlord will execute such waiver documentation as may be reasonably requested by any such lender, which documentation may include, without limitation, that Tenant's lender shall have the right, upon prior written notice to Landlord, to enter upon the Property to inspect or remove Tenant's Personal Property in the event Tenant defaults on its obligations in favor of Tenant's lender. Tenant shall be responsible for repairing any damage caused to the Property during the removal of any of Tenant's Personal Property. 2. ARTICLE XXIV Waiver of Jury Trial 2.1. Landlord and Tenant hereby waive trial by jury in any action, proceeding or counterclaim brought by either against the other on any matter arising out of or in any way connected with this Lease, the relationship of Landlord and Tenant, Tenant's use or occupancy of the Premises, or any claim of injury or damage, or any other remedy with respect thereto. ARTICLE XXV Waiver of Notices 2.2. Except for notices expressly provided for in this Lease, Tenant hereby waives all notices of any nature, including, without limitation, all notice requirements of the Pennsylvania Landlord and Tenant Act. ARTICLE XXV Enforcement Expenses 2.3. In the event any action or proceeding is brought by Landlord or Tenant to enforce any of the provisions of this Lease, the prevailing party shall be entitled to receive from the other all costs and expenses, including reasonable legal fees, incurred in connection therewith. In addition, each party shall pay upon demand all of the other party's reasonable costs and expenses, including reasonable legal fees, incurred in any litigation in which the defaulting party causes the other, without the other's fault, to become involved. Tenant shall pay Landlord's reasonable attorneys' fees incurred in connection with Tenant's request for Landlord's consent under provisions of this Lease governing assignment and subletting, or in connection with any other act which Tenant proposes to do and which requires Landlord's consent. ARTICLE XXVI Interpretation 2.4. The captions in this Lease are for convenience only and are not a part of this Lease and do not in any way define, limit, describe or amplify the terms and provisions of this Lease or the scope or intention thereof. 2.5. This Lease represents the entire agreement between the parties hereto and there are no collateral or oral agreements or understandings between Landlord and Tenant with respect to the Premises or the Property. No rights, easements or licenses are acquired in the Property or any land adjacent to the Property by Tenant by implication or otherwise. Tenant agrees, within twenty (20) days after request by Landlord, to make such changes to this Lease as are reasonably required by any institutional mortgagee, provided such changes do not increase any amounts payable by Tenant, impede Tenant's access to Premises, decrease the size of or change the location of the Premises, decrease Landlord's obligations hereunder or otherwise materially and adversely affect Tenant's rights and obligations under this Lease. This Lease shall not be modified in any manner except by an instrument in writing executed by the parties. The masculine (or neuter) pronoun, singular number, shall include the masculine, feminine and neuter genders and the singular and plural number. Tenant shall not record or file this Lease (or any memorandum hereof) in the public records of any county or state. Time is of the essence of Tenant's obligations, and the exercise of Tenant's rights under this Lease. This Lease shall be governed by the laws of the Commonwealth of Pennsylvania. 2.6. Each writing or plan referred to herein as being attached hereto as an Exhibit or otherwise designated herein as an Exhibit hereto is hereby made a part hereof. 2.7. Wherever interest is required to be paid hereunder, such interest shall be at the rate of three percent (3%) per annum over the rate announced publicly by First National Bank of Chicago, or its successors, from time to time as its prime rate. ARTICLE XXVII Common Areas 2.8. All Common Areas, including but not limited to roads, driveways, sidewalks, loading facilities, rail lines and other common facilities as may be provided, from time to time are for the general nonexclusive use, in common, of Landlord and all owners and tenants of the Property, their employees and guests, and at all times, are subject to the sole and exclusive control of the Landlord and the owners of other portions of the Property. Landlord and the owners of other portions of the Property shall have the right, from time to time, to establish, modify and enforce in a nondiscriminatory manner rules and regulations regarding the Common Areas, to alter, modify or otherwise change the Common Areas, to grant exclusive rights to use portions of the Common Areas and to do such other acts, in and to all Common Areas, as in Landlord's and such owners' sole judgment, shall be desirable or advisable to improve or maintain them; provided, however, that in the exercise of the rights set forth in this sentence, parking areas reasonably comparable to those available on the date hereof and access to and from the Premises shall be maintained and Tenant's use and enjoyment of the Premises for its intended purpose shall not be impaired. Landlord and the other owners of portions of the Property shall have the right to construct additional buildings and other improvements on the Property for such purposes as Landlord and such owners may deem appropriate and to alter, modify or otherwise change the Property provided parking areas reasonably comparable to those available on the date hereof and access to and from the Premises shall be maintained and Tenant's use and enjoyment of the Premises for its intended purpose shall not be impaired. ARTICLE XXVIII Definitions 2.9. The word "Landlord" is used herein to include the Landlord named above as well as its successors and assigns, each of which shall have the same rights, remedies, powers, authorities and privileges as it would have had it originally signed this Lease as Landlord. Any such person, whether or not named herein, shall have no liability hereunder after such person ceases to hold title to the Premises except for obligations which may have theretofore accrued. Neither Landlord nor any partner or other principal of Landlord nor any owner of the Premises, whether disclosed or undisclosed, shall have any personal liability with respect to any of the provisions of this Lease or the Premises, and if Landlord is in breach or default with respect to Landlord's obligations under this Lease or otherwise, Tenant shall look solely to the equity of Landlord in the Premises or insurance or condemnation proceeds from the Premises for the satisfaction of Tenant's claim. 2.10. The word "Tenant" is used herein to include the Tenant named above as well as its successors and assigns, each of which shall be under the same obligations, liabilities and disabilities and each of which shall have the same rights, privileges and powers as it would have possessed had it originally signed this Lease as Tenant. Each and every of the persons named above as Tenant shall be bound formally and severally by the terms, covenants and agreements contained herein. However, no such rights, privileges or power shall inure to the benefit of any assignee of Tenant immediate or remote, unless the assignment to such assignee is permitted or has been approved in writing by Landlord. 2.11. The word "mortgage" is used herein to include any lien or encumbrance on the Premises or the Property or on any part of or interest in or appurtenance to any of the foregoing. The word "mortgagee" is used herein to include the holder of any mortgage. Wherever any right is given to a mortgagee, that right may be exercised on behalf of such mortgagee by any representative or servicing agent of such mortgagee. 2.12. The word "person" is used herein to include a natural person, a partnership, a corporation, an association, and any other form of business association or entity. ARTICLE XXIX Notices 2.13. All notices, demands, requests, consents, certificates, waivers and other communications required or permitted hereunder from either party to the other shall be in writing and sent by recognized overnight delivery service providing receipted delivery, such as Federal Express, and shall be deemed delivered and received one (1) business day after delivery to such overnight delivery service. All such notices shall be addressed as follows: If to Landlord: First Industrial Harrisburg, L.P. c/o First Industrial Realty Trust, Inc. 6400 Flank Drive - Suite 600 Harrisburg, PA 17112 Attention: Mr. Craig Cosgrove and First Industrial Harrisburg, L.P. c/o First Industrial Realty Trust, Inc. 150 North Wacker Drive - Suite 150 Chicago, IL 60606 Attention: Mr. Michael W. Brennan and F. Michael Wysocki, Esquire Saul, Ewing, Remick & Saul LLP Centre Square West 1500 Market Street - 38th Floor Philadelphia, PA 19102 If to Tenant: SED International, Inc. 4916 North Royal Atlanta Drive Tucker, GA 30085-5044 Attention: Bill Burton, Vice-President Operations Either party may at any time, in the manner set forth for giving notices to the other, specify a different address to which notices to it shall be sent. ARTICLE XXX Brokers 2.14. Pursuant to a separate agreement, Landlord has agreed to pay a leasing commission to Lee & Associates and to CB Commercial Group, Inc. (collectively, the "Brokers"), both of whom represent Tenant in this transaction and Landlord agrees to and hereby does indemnify, defend and hold Tenant harmless from and against Landlord's failure to perform under such agreement and all costs, expenses, and liabilities in connection therewith, including without limitation, reasonable attorneys' fees and expenses. Landlord and Tenant each for itself, hereby covenants, warrants and represents to the other that neither Landlord nor Tenant has had any conversations or negotiations with any broker, other than the Brokers, concerning the leasing of the Premises by Tenant. Each party agrees to and hereby does indemnify, defend and hold the other harmless from and against any brokerage commissions or finder's fees or claims therefor by a party, other than the Brokers, claiming to have dealt with the indemnifying party and all costs, expenses, and liabilities in connection therewith, including, without limitation, reasonable attorney's fees and expenses, for any breach of the foregoing. The foregoing indemnifications shall survive the termination of the Lease for any reason. ARTICLE XXXI Environmental Matters 2.15. For purposes of this Lease, the term "Hazardous Materials" shall mean (a) radon gas, petroleum and petroleum-based products, friable asbestos, urea formaldehyde foam insulation, transformers or other equipment which contain dielectric fluid containing levels of polychlorinated biphenyls in excess of federal, state or local safety guidelines, whichever are more stringent; (b) any substance, gas, material or chemical which is defined as or included in the definition of "hazardous substances", "toxic substances", "hazardous materials", "hazardous wastes" or words of similar import under any federal, state or local statute, law, or ordinance applicable to the Premises or under the regulations adopted or guidelines promulgated pursuant thereto, including, but not limited to, the Comprehensive Environmental Response Compensation and Liability Act of 1980, as amended, 42 U.S.C. [PARAGRAPHS]9061 et seq. ("CERCLA"); the Hazardous Materials Transportation Act, as amended 49 U.S.C. [PARAGRAPHS]1801, et seq.; the Resource Conservation and Recovery Act, as amended, 42 U.S.C. [PARAGRAPHS]6901, et seq.; and (c) any other chemical, material, gas, or substance, exposure to or release of which is prohibited, limited or regulated by any governmental or quasi-governmental entity or authority that has jurisdiction over the Premises or the operations or activity at the Premises. 2.16. For purposes of this Lease, the term "Environmental Laws" means all applicable statutes, regulations, rules, ordinances, codes, licenses, permits, orders, approvals, authorizations, agreements and similar items, of or with any and all governmental agencies, departments, commissions, boards, bureaus or instrumentalities of the United States, Pennsylvania and political subdivisions having jurisdiction over the Premises or Property, and all applicable judicial and administrative and regulatory decrees, judgments and orders relating to the protection of the environment, including, without limitation, all requirements pertaining to reporting, licensing, permitting, investigation and remediation of emissions, discharges, Releases or threatened releases of Hazardous Materials into the air, surface water, groundwater or land, or relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Hazardous Materials or relating to storage tanks. 2.17. For purposes of this Lease, the term "Release" means any releasing, spilling, leaking, pumping, pouring, emitting, emptying, discharging, injecting, escaping, leaching, disposing or dumping into soil, surface waters, ground waters, land, stream sediments, surface or subsurface strata, ambient air and any environmental medium comprising or proximate to the Premises or Property. 2.18. For purposes of this Lease, the term "Threat of Release" means a substantial likelihood of a Release which requires action to prevent or mitigate damage to the soil, surface waters, ground waters, land, stream sediments, surface or subsurface strata, ambient air and any environmental medium comprising or proximate to the Premises or Property which may result from such Release. 2.19. Tenant shall not store. place, use, generate, transport or dispose of any Hazardous Materials at, on, or in the Premises or Property (except to the extent permitted under Section 9.1.6), shall comply with Environmental Laws relating to Tenant's storage, placement, use, generation, transportation or disposal of Hazardous Materials, and promptly shall take all remedial action, at Tenant's sole cost and expense, necessary or desirable to remedy, clean-up and remove the presence of Hazardous Materials resulting from Tenant's violation of the prohibitions set forth in this section or Tenant's failure to comply with Environmental Laws relating to Tenant's storage, placement, use, generation, transportation or disposal of Hazardous Materials. Any such remedial action shall be performed by an independent reputable environmental remediation engineer, in strict compliance with the requirements of Environmental Laws, in accordance with environmental remediation industry practices, taking into account the then current and evolving state of environmental remediation technology, and in accordance with a remediation plan reasonably approved by Landlord. Such remediation shall comply with the terms of Sections 7.2, 7.3 and 7.4 of this Lease. Tenant shall immediately notify Landlord of any Release or Threat of Release caused by Tenant or of which Tenant has knowledge. Tenant shall promptly provide to Landlord copies of all correspondence relating to any Release, Threat of Release or remediation or other, environmental response action under this Section 31.5. Subject to Section 11.1 of this Lease, Landlord shall have the right, but not the obligation, from time to time during the performance of any remediation work and following the completion of the same, to inspect the Premises and all information and documentation relating thereto. 2.20. Tenant hereby agrees to indemnify, protect, defend and hold harmless Landlord, and Landlord's successors and assigns, officers, directors, shareholders, partners and employees ("Indemnified Parties") (with counsel reasonably acceptable to the Indemnified Parties) from and against, and shall pay and reimburse the Indemnified Parties for, any and all losses, claims, liabilities, damages, injunctive relief, injuries to persons, property or natural resources, fines, penalties, costs, expenses, including, without limitation, attorneys' fees, expenditures, expenses and court costs, actions, administrative investigations and/or proceedings, and causes of action and sums paid in settlement of litigation (it being understood that so long as Tenant is defending the Indemnified Party and is not in default of its obligations hereunder, no such litigation (other than relating to governmental fines and penalties or criminal actions) shall be settled without the reasonable consent of Tenant), arising directly or indirectly, in whole or in part out of any Release, Threat of Release or any discharge, threatened discharge, deposit, presence, treatment, transport, handling or disposal of any Hazardous Materials on, at, under, in or from the Property caused or generated by Tenant, its employees, agents or contractors, or in the air, land surface, subsurface strata, soil, surface water, groundwater, or soil vapor on, under, in or from any part of the Property caused or generated by Tenant, its employees, agents or contractors, or resulting from the migration or the alleged or potential migration of Hazardous Materials from the Property caused or generated by Tenant, its employees, agents or contractors (collectively, "Costs and Liabilities"). The foregoing indemnity and Costs and Liabilities shall include, without limitation, (a) all costs at law or in equity of inspection, clean-up, removal, remediation, testing, monitoring and restoration of any kind, and disposal of any Hazardous Materials, (b) all costs and liabilities associated with claims for damages to, and remedial action with respect to, persons, property or natural resources, (c) all fines and other penalties associated with claims of noncompliance with any Environmental Laws, and (d) all reasonable consultants' and attorneys' fees and costs. The foregoing indemnity shall survive any assignment or other transfer by any or all of the Indemnified Parties of their respective interests in the Premises and shall remain in full force and effect regardless of whether the Costs and Liabilities are incurred by the Indemnified Parties in question before or after termination of the Lease. Notwithstanding anything else contained in this Section 31.6 to the contrary, Tenant shall have no obligation to indemnify the Indemnified Parties under this Section 31.6, and the Indemnified Parties shall have no right to seek indemnification from Tenant under this Section 31.6, for any of the matters set forth in this Section 31.6 relating to Existing Contamination (as defined in the EPA Agreement (hereinafter defined)), unless and to the extent Tenant, its agents or contractors hereby violate any provisions of the EPA Agreement or the PADEP Agreement (hereinafter defined). 2.21. Landlord is party to a certain Agreement and Covenant Not to Sue with the United States Environmental Protection Agency in the Matter of First Industrial Harrisburg, L.P. (Docket #III-95-48-DC) (the "EPA Agreement"). Tenant acknowledges receipt and review of a copy of the EPA Agreement at least twenty-one (21) days before the date of this Lease and acknowledges that, as a tenant of a portion of the Property, Tenant is subject to the obligations of Landlord under the EPA Agreement and further acknowledges that the Property and Tenant's rights under this Lease are subject to the EPA Agreement, including, without limitation, the rights of the United States set forth in Section VII of the EPA Agreement (Access). As a tenant of a portion of the Property, Tenant shall comply with the applicable terms of the EPA Agreement. In accordance with EPA Agreement, Tenant shall execute an Agreement and Certification of Successor in Interest or Assign (as defined in the EPA Agreement) acknowledging Tenant's obligation to be bound by the applicable obligations of the EPA Agreement. 2.22. Landlord and Fruehauf Trailer Corporation are parties to a Consent Order and Agreement dated as of June 26, 1995 entered into with the Pennsylvania Department of Environmental Resources (now known as the Pennsylvania Department of Environmental Protection) in the Matter of Fruehauf Parcel (the "PADEP Agreement"). Tenant acknowledges receipt and review of a copy of the PADEP Agreement at least twenty-one (21) days before the date of this Lease and acknowledges that, as a tenant of a portion of the Property, Tenant is subject to the obligations of Landlord under the PADEP Agreement and further acknowledges that the Property and Tenant's rights under this Lease are subject to the PADEP Agreement. As a tenant of a portion of the Property, Tenant shall comply with the applicable terms of the PADEP Agreement. 2.23. Landlord represents and warrants that the EPA Agreement and the PADEP Agreement are in full force and effect and Landlord has complied with and performed its obligations under the EPA Agreement. Landlord shall perform obligations and maintain compliance with all requirements applicable to it under both the EPA Agreement and the PADEP Agreement throughout the Term and shall use commercially reasonable efforts to cause third parties to undertake such obligations as may be necessary to keep such agreements in effect. Landlord agrees that it shall take such actions, if any, that (i) are necessary to avail Tenant of the covenant not to sue contained of the EPA Agreement and PADEP Agreement, and (ii) may only be performed by Landlord under the EPA Agreement and PADEP Agreement. 2.24. With respect to (a) any Release, any Threat of Release or any discharge, threatened discharge, deposit, presence, treatment, transport, handling or disposal or any alleged release, discharge, deposit, presence, treatment, transport, handling or disposal of any Hazardous Materials on, at, under, in or from the Property which occurred prior to the commencement of the Term of this Lease, or is or was caused or generated by Landlord, its agents or contractors, during Landlord's ownership of the Property, and (b) any failure by Landlord during Landlord's ownership of the Property to comply with or perform its obligations under the EPA Agreement or the PADEP Agreement, Landlord hereby agrees to indemnify, protect, defend and hold harmless Tenant, and Tenant's successors and assigns, officers, directors, shareholders, partners and employees from and against the Cost and Liabilities, as defined in Section 31.6, and upon and under the same terms and conditions as provided for under Section 31.6. 2.25. Landlord shall immediately notify Tenant of any Release or Threat of Release at or in the immediate vicinity of the Premises caused by Landlord or of which Landlord has knowledge. Landlord shall provide to Tenant copies of all correspondence relating to any Release, Threat of Release or remediation or other, environmental response action under this Section 31.11. ARTICLE XXXII Subdivision or other Development of the Property 2.26. (a) Tenant acknowledges and agrees that Landlord and the other owners of the Property, if any, have the right to develop, alter, modify or otherwise change the Property in such manner and for such purposes as they may deem appropriate provided that Tenant's access to and right to use and occupy the Premises and parking areas in accordance with the terms of this Lease are not materially and adversely affected. Without limiting the generality of the foregoing, Tenant acknowledges and agrees that at any time and from time to time as Landlord or other owners of the Property shall deem necessary or appropriate, they, or any of them shall have the right to subdivide the Property, undertake development of the Property, or establish any easement, dedication, or right of way over the Property. Tenant shall, at the request of Landlord or any governmental authority, public utility or private utility operator, and at Landlord's cost, promptly execute, acknowledge and deliver such documents as Landlord, any governmental authority, public utility or private utility may deem necessary or desirable in connection with such subdivision, development, easement, dedication or right-of-way. Landlord shall give Tenant notice of any covenants, conditions or restrictions imposed upon the Property. (b) Tenant acknowledges and agrees that Landlord's activities pursuant to Section 32.1.1 may change the description of the Property and the denominator in the calculating Tenant's Operating Expense Proportionate Share. Landlord shall give Tenant notice of all such changes, and such changes shall become effective upon at least five (5) days' prior notice by Landlord to Tenant. ARTICLE XXXIII Option to Renew 2.27. Tenant is granted an option (the "Renewal Option") to extend the Term for one (1) additional period of five (5) years (the "Renewal Term"). 2.28. The Renewal Option is granted subject to the following conditions: (a) The Renewal Option must be exercised, if at all, by notice from Tenant to Landlord given on or before the one hundred eightieth (180th) day prior to the last day of the Term, time being of the essence. (b) At the time of exercise of the Renewal Option, Tenant shall not have exercised the Termination Option (hereinafter defined). If Tenant exercises the Renewal Option, Tenant shall not have any right to exercise the Termination Option. (c) At the time of exercise of the Renewal Option, and the commencement of the Renewal Term, this Lease must be in full force and effect and there may be no uncured event of default beyond an applicable cure period in the performance of Tenant's obligations under this Lease. 2.29. All terms, provisions and conditions contained in this Lease shall continue to apply during the Renewal Term, except that: (a) the Basic Rent payable during the Renewal Term shall be the total amount of $2,342,396.40 for the Renewal Term payable in monthly installments as set forth in Exhibit "Renewal Term Rent". (b) there shall be no further right of renewal under this Article XXXIII or termination under Article XXXIV of this Lease. After the proper exercise of the Renewal Option, (i) term "Term", as used in this Lease, shall include the Renewal Term and (ii) Landlord and Tenant shall enter into an amendment to this Lease confirming the new date of expiration of the Term. ARTICLE XXXIV Option to Terminate 2.30. Tenant is granted an option (the "Termination Option") to terminate this Lease as of 11:59 p.m. on the last day of the thirty-seventh (37th) calendar month of the Term (such early termination date herein referred to as the "Early Termination Date"). 2.31. The Termination Option is granted subject to the following conditions: (a) The Termination Option must be exercised, if at all, by notice from Tenant to Landlord (the "Termination Notice") given on or before the one hundred eightieth (180th) day prior to the Early Termination Date, and by the payment by Tenant to Landlord of the sum of (i) Two Hundred Seven Thousand Nine Hundred Eighty-Two Dollars ($207,982.00), such amount to be paid at the time of and together with the Termination Notice, plus (ii) an amount equal to Landlord's reasonable estimate of the amount of Tenant's Operating Expense Proportionate Share of Operating Expenses that would have been payable by Tenant for six (6) months of the year commencing with the thirty-eighth (38th) month of the Term, such amount to be due and payable within thirty (30) days after receipt by Tenant of an invoice therefor from Landlord, accompanied by Landlord's calculations of such estimate, time being of the essence. (b) At the time of exercise of the Termination Option, Tenant shall not have exercised the Renewal Option. If Tenant exercises the Termination Option, Tenant shall not have any right to exercise the Renewal Option, Tenant shall not have any Right of First Offer (hereinafter defined), and Tenant shall not have any Right of First Refusal (hereinafter defined). (c) At the time of exercise of such Termination Option and on the Early Termination Date, this Lease must be in full force and effect and there shall be no uncured event of default beyond any applicable cure period in the performance of Tenant's obligations under this Lease. 2.32. If Tenant properly exercises the Termination Option in accordance with this Article XXXIV, the Term of this Lease shall terminate on the Early Termination Date. ARTICLE XXXV Right of First Offer 2.33. (a) Subject to the conditions set forth in this Article XXXV, in the event that during the First Offer Period (as hereinafter defined) all or any portion of the First Offer Space (as hereinafter defined) becomes available for lease from time to time, Landlord shall offer to lease the First Offer Space to Tenant prior to leasing the same to another person or entity. The term "First Offer Period" shall mean the period from the Commencement Date through the date which is one year prior to the expiration of the Term, taking into account the Renewal Term, if the Renewal Option has been exercised by Tenant. The "First Offer Space" consists of all or any portion of the following: (i) the space in Building 1 currently occupied by Excel Logistics, Inc., and (ii) any other space in Building 1 (other than the Premises), once such space has been first leased to at least one tenant other than Tenant and then become available for lease. Tenant's rights hereunder are subordinate and subject to the right of all other current and future Building 1 tenants to renew or extend their leases, whether or not such leases grant such tenants the right to renew or extend. (b) Landlord shall make such offer by notice in writing to Tenant (the "First Offer Notice"). The First Offer Notice shall specify which portion of the First Offer Space Landlord proposes to lease to Tenant and shall also set forth the following terms and conditions for Tenant's lease of the First Offer Space, all of which shall be determined by Landlord in its sole discretion: (i) Basic Rent and Additional Rent; (ii) any rent credits, abatements, construction allowances and other concessions or economic terms; (iii) the commencement date for Tenant's lease of the First Offer Space; and (iv) the expiration date(s) of the term of the lease of the First Offer Space, which may be before or after the expiration date of the Term of this Lease. If the expiration date of the term as to the First Offer Space would occur after the expiration date of the Term of this Lease as to the original Premises, and Tenant elects to lease the First Offer Space pursuant to the terms of this Article XXXV, this Lease shall continue in full force and effect as to the First Offer Space until the expiration date of the term as to the First Offer Space, but the Term of this Lease as to the remainder of the Premises shall not be thereby extended. (c) (i) Tenant shall have the right (the "Right of First Offer") to lease all (but not less than all) of the portion of the First Offer Space specified in Landlord's First Offer Notice upon the terms and conditions set forth in Landlord's First Offer Notice and in this Section. Tenant shall exercise its Right of First Offer only by delivering written notice to Landlord within fifteen (15) days after Tenant's receipt of the First Offer Notice, time being of the essence. At the time of the exercise of the Right of First Offer, this Lease must be in full force and effect and there shall be no outstanding uncured event of default in the performance of Tenant's obligations under this Lease. If Tenant exercises the Right of First Offer as to any of the First Offer Space, Tenant shall not have any right to exercise the Termination Option. (ii) In the event Tenant does not exercise the Right of First Offer with respect to any particular portion of First Offer Space offered to Tenant under this Section 35.1, Tenant shall be deemed to have waived Tenant's Right of First Offer with respect to such particular portion of First Offer Space, and, subject to Tenant's Right of First Refusal (defined hereafter), Landlord may thereafter lease such First Offer Space to any person or entity or any terms and conditions that are not materially less favorable to Landlord than the terms and conditions set forth in the First Offer Notice. (d) Any First Offer Space as to which Tenant exercises its Right of First Offer shall become part of the Premises, and, except as otherwise set forth in the First Offer Notice, all of the terms and conditions applicable to the Premises shall also apply to such space. (e) Promptly following Tenant's exercise of any Right of First Offer, Landlord and Tenant shall execute an amendment to this Lease setting forth the Basic Rent and the other terms of Tenant's lease of such First Offer Space. ARTICLE XXXVI Right of First Refusal 2.34. (a) Landlord hereby grants to Tenant the right of first refusal to lease the First Refusal Space (hereinafter defined) subject to the conditions in this Article XXXVI (the "Right of First Refusal"). The First Refusal Space consists of that space contiguous to the Premises on shown on Exhibit "First Refusal Space" attached to this Lease. The term "First Refusal Period" as used in this Lease shall mean the period from the Commencement Date through the first anniversary of the Commencement Date. (b) If, at any time during the First Refusal Period, Landlord receives a bona fide offer to lease the First Refusal Space, or any portion thereof, which Landlord intends to accept (the "Lease Offer"), Landlord shall first send a copy of the Lease Offer to Tenant together with notice to Tenant that Tenant has the right to lease the First Refusal Space (or portion thereof) on precisely the same terms and conditions specified in the Lease Offer (such notice, the "First Refusal Notice"). Tenant shall exercise Tenant's Right of First Refusal only by giving Landlord written notice of such exercise within fifteen (15) days after Tenant's receipt of the First Refusal Notice, time being of the essence. At the time of the exercise of the Right of First Refusal, this Lease must be in full force and effect and there shall be no outstanding uncured event of default in the performance of Tenant's obligations under this Lease. If Tenant exercises the Right of First Refusal as to any of the First Refusal Space, Tenant shall not have any right to exercise the Termination Option. (c) If Tenant exercises Tenant's Right of First Refusal in accordance with Section 36.1(b), then Tenant shall be obligated to lease, strictly in accordance with the terms and conditions of the Lease Offer, the portion of the First Refusal Space which is the subject of the Lease Offer, and Landlord and Tenant shall enter into a lease for such First Refusal Space in accordance with such Lease Offer. If Tenant does not exercise its Right of First Refusal strictly in accordance Section 36.1(b) with respect to any First Refusal Space, Tenant shall be deemed to have waived Tenant's Right of First Refusal with respect to such First Refusal Space, and, subject to Tenant's Right of First Offer with respect to the First Refusal Space, Landlord may thereafter lease such First Refusal Space to any person or entity on any terms and conditions acceptable to Landlord, in Landlord's sole and absolute discretion. ARTICLE XXXVII Relocation 2.35. If Landlord or any Affiliate (hereinafter defined) of Landlord and Tenant execute a New Lease (hereinafter defined), and Tenant has requested, by written request to Landlord on or before the date of execution of the New Lease, that this Lease terminate on the date of commencement of the payment of rent under the New Lease, Landlord and Tenant agree that this Lease shall terminate on the date of commencement of the payment of rent under the New Lease, provided that Tenant has performed all of Tenant's obligations under this Lease through and including the date of such termination and further provided that the payment of rent has commenced under the New Lease. As used in this Section 37.1, the term "New Lease" shall mean (a) a lease between Landlord or an Affiliate and Tenant for space in a building in Pennsylvania owned by Landlord or an Affiliate at the time of execution of such new lease by Landlord or an Affiliate and Tenant, (b) a lease with a minimum lease term of at least five (5) years, such term commencing after the expiration of thirty seven (37) calendar months of the Term of this Lease, (c) a lease with leased premises to Tenant at least equal to 1.5 times the number of square feet in the Premises at the time of execution of such New Lease, and (d) except for the terms and conditions required by this Section 37.1, a lease otherwise on terms and conditions mutually acceptable to Landlord or the applicable Affiliate and Tenant. As used in this Lease, the term "Affiliate" shall mean any entity which is Controlled By (hereinafter defined) First Industrial Realty Trust, Inc. or First Industrial, L.P. As used in this Section, the term (a) "Controlled By" means the possession, directly, or indirectly through one (1) or more intermediaries, of the power to direct or cause the direction of the management and policies of an entity. IN WITNESS WHEREOF, and in consideration of the mutual entry into this Lease and for other good and valuable consideration, and intending to be legally bound, each party hereto has caused this agreement to be duly executed under seal. Landlord: FIRST INDUSTRIAL HARRISBURG, L.P., a Delaware limited partnership, by its sole general partner, First Industrial Harrisburg Corporation, a Maryland corporation Attest: /s/ Melanie B. Bowers By: /s/ Patrick M. McBride Print Name: Patrick M. McBride Print Title: Regional Director Tenant: Attest: SED INTERNATIONAL, INC., a Delaware corporation /s/ Larry G. Ayers By: /s/ Ray D. Risner Secretary Print Name: Ray D. Risner Print Title: President SCHEDULE OF EXHIBITS Exhibit "Site Plan" Exhibit "Legal Description" Exhibit "Premises" Exhibit "Specifications" Exhibit "Basic Rent" Exhibit "Renewal Term Rent" Exhibit "First Offer Space" Exhibit "First Refusal Space" EXHIBIT "BASIC RENT" Monthly Amount of Basic Rent During Term First (1st) calendar month $0. per month Second (2nd) calendar month through Twenty-Fifth (25th) calendar month $32,685.38 per month Twenty-Sixth (26th) calendar month through Thirty-Seventh (37th) calendar month $33,631.54 per month Thirty-Eighth (38th) calendar month through Forty-Ninth (49th) calendar month $34,663.71 per month Fiftieth (50th) calendar month through Sixty-First (61st) calendar month $35,695.88 per month EXHIBIT "RENEWAL TERM RENT" Monthly Amount of Basic Rent During Renewal Term Sixty-Second (62nd) calendar month through Seventy-Third (73rd) calendar month $36,766.75 per month Seventy-Fourth (74th) calendar month through Eighty-Fifth (85th) calendar month $37,869.75 per month Eighty-Sixth (86th) calendar month through Ninety-Seventh (97th) calendar month $39,005.85 per month Ninety-Eighth (98th) calendar month through One Hundred-Ninth (109th) calendar month $40,176.02 per month One Hundred-Tenth (110th) calendar month through One Hundred Twenty-First (121st) calendar month $41,381.30 per month EX-10.46 5 EXHIBIT 10.46 FOURTH AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT THIS FOURTH AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT (this "Amendment") is dated and is effective as of the 30th day of June, 1998, among SED INTERNATIONAL HOLDINGS, INC. (formerly known as SOUTHERN ELECTRONICS CORPORATION) and SED INTERNATIONAL, INC., jointly and severally (collectively, the "Borrowers"), WACHOVIA BANK, N.A., as Agent (the "Agent") and WACHOVIA BANK, N.A. and NATIONAL CITY BANK, as Banks (collectively, the "Banks"); W I T N E S S E T H: WHEREAS, the Borrowers, the Agent and the Banks executed and delivered that certain $100,000,000 Amended and Restated Credit Agreement, dated as of the 13th day of August, 1997, as amended by that certain First Amendment to Amended and Restated Credit Agreement, dated as of September 22, 1997, that certain Second Amendment to Amended and Restated Credit Agreement, dated as of October 15, 1997, and that certain Third Amendment to Amended and Restated Credit Agreement, dated as of January 8, 1998 (as so amended, the "Credit Agreement"); WHEREAS, the Borrowers have requested and the Agent and the Banks have agreed to make certain amendments to the Credit Agreement, subject to the terms and conditions hereof; NOW, THEREFORE, for and in consideration of the above premises and other good and valuable consideration, the receipt and sufficiency of which hereby is acknowledged by the parties hereto, the Borrowers, the Agent and the Banks hereby covenant and agree as follows: 1. Definitions. (a) Unless otherwise specifically defined herein, each term used herein which is defined in the Credit Agreement has the meaning assigned to such term in the Credit Agreement. Each reference to "hereof", "hereunder", "herein" and "hereby" and each other similar reference and each reference to "this Agreement" and each other similar reference contained in the Credit Agreement from and after the date hereof refer to the Credit Agreement as amended hereby. (b) The definitions of "Adjusted Current Ratio," "Income Available for Fixed Charges" and "Consolidated Fixed Charges" set forth in Section 1.01 of the Credit Agreement are deleted in their entirety. (c) The following definitions set forth in Section 1.01 of the Credit Agreement are amended and restated in their entirety as set forth below: "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, Overnight Loan, or Discretionary 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. "Interest Period" means: (1) with respect to each Euro-Dollar Borrowing that is: (x) a Discretionary Loan, the period commencing on the date of such Borrowing and ending on the numerically corresponding day in the first or second month thereafter, as the relevant Borrower may elect in the applicable Notice of Borrowing; (y) an Overnight Loan, the period commencing on the date of such Borrowing and ending on the next day after the date of such Borrowing; and (z) not a Discretionary Loan or an Overnight Loan, 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) (except for Overnight Loans) 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 that is: (x) an Overnight Loan, the period commencing on the date of such Borrowing and ending on the next day after the date of such Borrowing; and (y) not an Overnight Loan, 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. "Loan" means a Base Rate Loan, Euro-Dollar Loan, Syndicated Loan, Discretionary Loan, Overnight Loan, or Swing Loan, and "Loans" means Base Rate Loans, Euro-Dollar Loans, Syndicated Loans, Discretionary Loans, Overnight Loans, Swing Loans, or any or all of them, as the context shall require. "SEC" means SED International Holdings, Inc., formerly known as Southern Electronics Corporation, a Delaware corporation. "Syndicated Loans" means Base Rate Loans or Euro-Dollar Loans made pursuant to the terms and conditions set forth in Section 2.01, and includes, without limitation, Overnight Loans. "Termination Date" means whichever is applicable of (i) July 30, 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. (d) The following new definitions are added to Section 1.01 of the Credit Agreement in proper alphabetical order: "Availability" means the amount of Loans (excluding Discretionary Loans) which the Borrowers are entitled to borrow at any time pursuant to Section 2.01. "Borrowing Base Reporting Date" means each date the Borrowers deliver Borrowing Base Certificates to the Agent. "Compliance Reporting Date" means each date the Borrowers deliver Compliance Certificates to the Agent. "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. "Monthly Reporting Period" means a period which commences on the most recent previous Borrowing Base Reporting Date and continues so long as Availability remains greater than $20,000,000 during such entire period. "Overnight Loans" has the meaning set forth in Section 2.01(d). "Quarterly Reporting Period" means a period which commences on the most recent previous Compliance Reporting Date and continues so long as Availability remains greater than $50,000,000 during such entire period. 2. Addition of New Section 2.01(d). A new Section 2.01(d) is added to the Credit Agreement as set forth below: (d) Overnight Loans. Upon request by the Borrowers in a Notice of Borrowing, the Banks shall advance (in the amount of their pro rata Commitment percentage) to either Borrower an overnight loan (such Loan is hereinafter referred to as an "Overnight Loan"); provided, however, that, in no event shall the aggregate outstanding principal balance of all Overnight Loans exceed $10,000,000 at any one time. Each Overnight Loan shall bear interest as set forth in Section 2.05. All Overnight Loans shall be evidenced by the Syndicated Loan Notes. During the existence of an Event of Default, the Borrowers may not request Overnight Loans, and all outstanding Overnight Loans shall be refinanced by a Refunding Loan consisting of a Base Rate Loan at the end of the relevant Interest Period. 3. Amendment to Section 2.04(a). Section 2.04(a) of the Credit Agreement is hereby amended by deleting such Section in its entirety and substituting therefor the following: 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. 4. Amendment to Section 2.05(a). Section 2.05(a) of the Credit Agreement is hereby amended by deleting such Section in its entirety and substituting therefor the following: (a) "Applicable Margin" means: (i) with respect to Euro-Dollar Loans, for the period commencing on June 30, 1998, to and including the first Performance Pricing Determination Date thereafter, 1.00%; and (ii) with respect to Base Rate Loans on and after June 30, 1998, and with respect to Euro-Dollar Loans, from and after the first Performance Pricing Determination Date after June 30, 1998, the percentage determined on each Performance Pricing Determination Date by reference to the table set forth below as to such type of Loan and the Leverage Ratio calculated by the Agent from the most recent 10-Q quarterly statement described in Section 6.01(i) for the quarterly period ending immediately prior to such Performance Pricing Determination Date. Leverage Applicable Base Rate Base Rate Ratio Margin for Loans Loans Euro-Dollar (Other than (Overnight Loans Overnight Loans Only) Loans) LESS THAN OR EQUAL TO 1.0 0.75% 0.0% -0.50% GREATER THAN 1.0 and LESS THAN OR EQUAL TO 2.0 1.00% 0.0% -0.50% GREATER THAN 2.0 and LESS THAN OR EQUAL TO 2.5 1.25% 0.0% -0.50% GREATER THAN 2.5 and LESS THAN OR EQUAL TO 3.5 1.50% 0.0% -0.50% GREATER THAN 3.5 and LESS THAN OR EQUAL TO 5.0 1.75% 0.0% -0.50% GREATER THAN 5.0 2.00% 0.0% -0.50% In determining interest for purposes of this Section 2.05 and fees for purposes of Section 2.06, the Borrowers and the Banks shall refer to the Borrowers' most recent 10-Q consolidated quarterly financial statements delivered pursuant to Section 6.01(i). If such financial statements require a change in interest pursuant to this Section 2.05 or fees pursuant to Section 2.06, the Borrowers shall deliver to the Agent, along with such financial statements, a notice to that effect, which notice shall set forth in reasonable detail the calculations supporting the required change. The "Performance Pricing Determination Date" is the fifth day after the date of receipt of such financial statements pursuant to Section 6.01(i). Any such required change in interest and fees shall become effective on such Performance Pricing Determination Date, and shall be in effect until the next Performance Pricing Determination Date, provided that: (i) for Euro-Dollar Loans, changes in interest shall only be effective for Interest Periods commencing on or after the Performance Pricing Determination Date; and (ii) no fees or interest shall be decreased pursuant to this Section 2.05 or Section 2.06 if a Default is in existence on the Performance Pricing Determination Date. In the event that the Borrowers fail to deliver their 10-Q quarterly financial statements to the Agent and the Banks on or before the 45th day after the end of any Fiscal Quarter, then the Applicable Margin shall be the highest Applicable Margin then in effect until the next Performance Pricing Determination Date. 5. Amendment to Section 2.06(a). Section 2.06(a) of the Credit Agreement is hereby amended by deleting such Section in its entirety and substituting therefor the following: (a) The Borrowers shall pay to the Agent, for the ratable account of each Bank, a commitment fee, in accordance with procedures described in 2.05(a)(ii), on the average daily amount of such Bank's Unused Commitment, at a rate per annum equal to: (i) for the period commencing on June 30, 1998 to and including the first Performance Pricing Determination Date thereafter, 0.125%; and (ii) from and after the first Performance Pricing Determination Date after June 30, 1998, the percentage determined on each Performance Pricing Determination Date by reference to the table set forth below and the Leverage Ratio for the quarterly or annual period ending immediately prior to such Performance Pricing Determination Date: Leverage Ratio Commitment Fee LESS THAN OR EQUAL TO 1.0 0.125% GREATERN THAN 1.0 and LESS THAN OR EQUAL TO 2.0 0.125% GREATER THAN 2.0 and LESS THAN OR EQUAL TO 2.5 0.250% GREATER THAN 2.5 and LESS THAN OR EQUAL TO 3.5 0.250% GREATER THAN 3.5 and LESS THAN OR EQUAL TO 5.0 0.250% GREATER THAN 5.0 0.250% 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. 6. Addition of Section 5.18. The Credit Agreement hereby is amended by adding the following Section 5.18. SECTION 5.18 Millennium Compliance. The Borrowers have implemented a plan, which plan is currently on schedule, to make certain that all computer systems used by the Borrowers and their Subsidiaries are capable of the following, before, during and/or after January 2000: (a) handling date information involving all and any dates before, during and/or after January 1, 2000, including accepting input, providing output and performing date calculations in whole or in part; (b) operating, accurately without interruption on and in respect of any and all dates before, during and/or after January 1, 2000 and without any change in performance; (c) responding to and processing two digit year input without creating any ambiguity as to the century; and (d) storing and providing date input information without creating any ambiguity as to the century. 7. Amendment to Section 6.01. Sections 6.01(c) and (f) of the Credit Agreement are hereby amended by deleting such Sections 6.01(c) and (f) in their entirety and substituting therefor the following: (c) simultaneously with the delivery of each set of financial statements referred to in paragraphs (a) and (b) above (or, so long as no Default or Event of Default exists, during any Quarterly Reporting Period, with respect to paragraph (b), only for such months at the end of each Fiscal Quarter), 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 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; (f) at the end of each calendar week (or, so long as no Default or Event of Default exists, during any Monthly Reporting Period, at the end of each Fiscal Month) 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. 8. Amendment to Section 6.15. Section 6.15 of the Credit Agreement is hereby amended by deleting such Section in its entirety and substituting therefor the following: SECTION 6.15. Restricted Payments. SEC will not declare or make any Restricted Payment in any Fiscal Year after December 31, 1996 unless (a) such Restricted Payments are made for the redemption or repurchase of capital stock of SEC and do not exceed an aggregate cumulative amount equal to $12,000,000, or (b) if the aggregate amount of such Restricted Payments (exclusive of Restricted Payments allowed in the foregoing clause (a)) for such Fiscal Year would exceed 15% of cumulative Consolidated Net Income for the prior Fiscal Year (commencing after December 31, 1996); provided that after giving effect to the payment of any such Restricted Payments in such clauses (a) or (b), no Default shall be in existence or be created thereby. 9. Amendment to Section 6.20. Section 6.20 of the Credit Agreement is hereby amended by deleting such Section in its entirety and substituting therefor the following: SECTION 6.20. Leverage Ratio. Tested at the end of each Fiscal Month, the Leverage Ratio shall not at any time exceed 5.5 to 1.0. 10. Amendment to Section 6.21. Section 6.21 of the Credit Agreement is hereby amended by deleting such Section in its entirety and substituting therefor the following: SECTION 6.21. Fixed Charges Coverage. Tested at the end of each Fiscal Month, the ratio of EBITDA to Consolidated Interest Expense (such ratio being calculated for the Fiscal Month just ended and the immediately preceding 11 Fiscal Months) shall not at any time be less than 3.0 to 1.0. 11. Deletion of Sections 6.22 and 6.23. Without affecting the numbering of Sections in the Credit Agreement, Sections 6.22 and 6.23 are deleted in their entirety. 12. Amendment to Section 6.24. Section 6.24 of the Credit Agreement is hereby amended by deleting such Section in its entirety and substituting therefor the following: SECTION 6.24. Minimum Consolidated Tangible Net Worth. Consolidated Tangible Net Worth will at no time be less than (x) $90,000,000 plus (y) the sum of (i) 100% of the cumulative Reported Net Income of the Borrowers and the Consolidated Subsidiaries during any period after June 30, 1998 (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 June 30, 1998, calculated monthly at the end of each month, minus the sum of (a) amounts paid to date for the redemption or repurchase of capital stock of SEC not exceeding an aggregate cumulative amount equal to $12,000,000, plus (b) amounts attributed to goodwill related to assets acquired after March 31, 1998, not exceeding an aggregate cumulative amount equal to $6,000,000. 13. Exhibits and Schedules. The Compliance Certificate attached to Exhibit H of the Credit Agreement is amended and restated in its entirety as set forth on Exhibit A to this Amendment. Exhibit E to the Credit Agreement is amended and restated in its entirety as set forth on Exhibit A to this Amendment. Schedule 5.08 to the Credit Agreement is amended and restated in its entirety as set forth on Exhibit C to this Amendment. 14. Restatement of Representations and Warranties. Each of the Borrowers hereby restates and renews each and every representation and warranty heretofore made by it in the Credit Agreement and the other Loan Documents as fully as if made on the date hereof and with specific reference to this Amendment and all other loan documents executed and/or delivered in connection herewith. 15. Effect of Amendment. Except as set forth expressly hereinabove, all terms of the Credit Agreement and the other Loan Documents remain in full force and effect, and constitute the legal, valid, binding and enforceable obligations of the Borrowers. The amendments contained herein will be deemed to have prospective application only, unless otherwise specifically stated herein. 16. Ratification. Each of the Borrowers hereby restates, ratifies and reaffirms each and every term, covenant and condition set forth in the Credit Agreement and the other Loan Documents effective as of the date hereof. 17. Counterparts. This Amendment may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered will be deemed to be an original and all of which counterparts, taken together, will constitute but one and the same instrument. 18. Section References. Section titles and references used in this Amendment have substantive meaning or content of any kind whatsoever and are not a part of the agreements among the parties hereto evidenced hereby. 19. No Default; Release. To induce the Agent and the Banks to enter into this Amendment and to continue to make advances pursuant to the Credit Agreement, each of the Borrowers hereby acknowledges and agrees that, as of the date hereof, and after giving effect to the terms hereof, (i) there exists no Default or Event of Default, (ii) there exists no right of offset, defense, counterclaim, claim or objection in favor of the Borrowers arising out of or with respect to any of the Loans or other obligations of the Borrowers owed to the Banks under the Credit Agreement, and (iii) the Agent and each of the Banks has acted in good faith and has conducted its relationships with each of the Borrowers in a commercially reasonable manner in connection with the negotiations, execution and delivery of this Amendment and in all respects in connection with the Credit Agreement, each of the Borrowers hereby waiving and releasing any such claims to the contrary. A default or breach of representation or warranty by the Borrowers under this Amendment shall constitute an Event of Default under the Credit Agreement. 20. Further Assurances. Each of the Borrowers agrees to take such further actions as the Agent reasonably requests in connection herewith to evidence the amendments herein contained to the Borrowers. 21. Governing Law. This Amendment is governed by, and construed and interpreted in accordance with, the laws of the State of Georgia. 22. Waiver of Subsidiary Guaranty and Security Agreement. The Agent and the Banks hereby agree that the acquisition of the capital stock of SED International de Colombia, Ltda. (the "Colombian Subsidiary") shall be deemed to be a Permitted Acquisition and waive any Default or Event of Default that occurred as a result such Investment in an amount not exceeding $2,000,000 in the Columbian Subsidiary without complying with Section 6.17 with respect thereto; provided, however, such waiver shall not extend to any future failure to comply with Section 6.17 hereafter. As consideration for the Agent's and the Banks' agreements contained in this paragraph, the Borrowers' represent and warrant that all requirements set forth in the definition of "Permitted Acquisitions" other than under clauses (iv) and (v) thereof have been satisfied in full with respect to the Borrowers' Investment in the Columbian Subsidiary. 23. Conditions Precedent. This Amendment becomes effective as of June 30, 1998 only upon (i) execution and delivery of this Amendment by each of the parties hereto, and (ii) execution and delivery of (A) new UCC financing statements to be filed in order to perfect the Agent's security interest in Collateral at the Borrowers' new Harrisburg, Pennsylvania location, and (B) to the extent not previously delivered, new UCC financing statements and amendments reflecting the name change of "SOUTHERN ELECTRONICS CORPORATION" to "SED INTERNATIONAL HOLDINGS, INC." IN WITNESS WHEREOF, the Borrowers, the Agent and each of the Banks has caused this Amendment to be duly executed, under seal, by its duly authorized officer as of the day and year first above written. SED INTERNATIONAL HOLDINGS, INC. By: /s/ Larry G. Ayers (SEAL) Title: V.P. Finance SED INTERNATIONAL, INC. By: /s/ Larry G. Ayers (SEAL) Title: V.P. Finance WACHOVIA BANK, N.A., as Agent and as a Bank By: /s/ Lisa Shawl (SEAL) Title: Vice President NATIONAL CITY BANK By: /s/ Brian Strayton (SEAL) Title: Vice President EXHIBIT A TO FOURTH AMENDMENT COMPLIANCE CHECK LIST SOUTHERN ELECTRONICS CORPORATION 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 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. Restricted Payments (Section 6.15) SEC will not declare or make any Restricted Payment in any Fiscal Year after December 31, 1996 unless (a) such Restricted Payments are made for the redemption or repurchase of capital stock of SEC and do not exceed an aggregate cumulative amount equal to $12,000,000, or (b) if the aggregate amount of such Restricted Payments (exclusive of Restricted Payments allowed in the foregoing clause (a)) for such Fiscal Year would exceed 15% of cumulative Consolidated Net Income for the prior Fiscal Year (commencing after December 31, 1996); provided that after giving effect to the payment of any such Restricted Payments in such clauses (a) or (b), no Default shall be in existence or be created thereby. (a) Restricted Payments after December 31, 1996 $________ (b) cumulative Consolidated Net Income after December 31, 1996 $________ (c) 15% of (b) $________ Limitation: (a) may not exceed (c) (d) Aggregate cumulative redemption and repurchases of SEC capital stock to date $_________ (e) Limitation $12,000,000 3. 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 4. Leverage Ratio (Section 6.20) Tested at the end of each Fiscal Month, the Leverage Ratio shall not at any time exceed 5.5 to 1.0. (a) Debt - Schedule 3 $_____________ (b) Consolidated Tangible Net Worth - Schedule 4 $_____________ Actual Ratio of (a) to (b) Maximum Ratio 5.5 to 1.0 5. Fixed Charges Coverage (Section 6.21) Tested at the end of each Fiscal Month, the ratio of EBITDA to Consolidated Interest Expense (such ratio being calculated for the Fiscal Month just ended and the immediately preceding 11 Fiscal Months) shall not at any time be less than 3.0 to 1.0. (a) EBITDA - Schedule 2 $____________ (b) Consolidated Interest Expense - Schedule 2 $____________ Ratio of (a) to (b) ____ to 1.0 Requirement GREATER THAN OR EQUAL TO 3.0 to 1.0 6. Minimum Consolidated Tangible Net Worth (Section 6.24) Consolidated Tangible Net Worth will at no time be less than (x) $90,000,000 plus (y) the sum of (i) 100% of the cumulative Reported Net Income of the Borrowers and the Consolidated Subsidiaries during any period after June 30, 1998 (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 June 30, 1998, calculated monthly at the end of each month, minus (z) amounts paid to date for the redemption or repurchase of capital stock of SEC not exceeding an aggregate cumulative amount equal to $12,000,000. (a) $90,000,000 (b) positive Reported Net Income after June 30, 1998 $____________ (c) cumulative Net Proceeds of Capital Stock received after June 30, 1998 $____________ (d) amounts paid to date for the redemption or repurchase of capital stock of SEC (limited to an amount not exceeding an aggregate cumulative amount equal to $12,000,000) $____________ (e) amounts attributed to goodwill related to assets acquired after March 31, 1998 not exceeding an aggregate cumulative amount equal to $6,000,000 $____________ Actual Consolidated Tangible Net Worth - Schedule 4 $_______ Required Consolidated Tangible Net Worth (sum of (a) plus (b) plus (c) minus (d)) $____________ Schedule 1 Consolidated Operating Profits Consolidated Operating Profits __ quarter 199_ $_________ __ quarter 199_ $_________ __ quarter 199_ $_________ __ quarter 199_ $_________ Total $_________ Schedule 2 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 $_________ Schedule 3 Debt INTEREST RATE MATURITY TOTAL Secured ______________________________ ________ _______ $________ ______________________________ ________ _______ $________ ______________________________ ________ _______ $________ ______________________________ ________ _______ $________ ______________________________ ________ _______ $________ Total Secured $___________ Unsecured ______________________________ ________ _______ $________ ______________________________ ________ _______ $________ ______________________________ ________ _______ $________ ______________________________ ________ _______ $________ Total Unsecured $__________ Guarantees _______________________________________________________ $________ _______________________________________________________ $________ Total $__________ Redeemable Preferred Stock $________ Total $__________ Other Liabilities _______________________________________________________ $________ _______________________________________________________ $________ _______________________________________________________ $________ Total Debt $========= 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 assets $__________ Deferred expenses $__________ Consolidated Tangible Net Worth $========== Intangibles Description (a)______________________________ $__________ (b)______________________________ $__________ (c)______________________________ $__________ Other $__________ Total $========== 1 To the extent not included above as an Intangible. EXHIBIT B TO FOURTH AMENDMENT 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: Amended and Restated Credit Agreement (as amended and modified from time to time, the "Credit Agreement") dated as of August 13, 1997 by and among Southern Electronics Corporation 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] [Discretionary Borrowing] [Overnight 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 day -- applicable solely for Overnight Borrowings] [30 days] [60 days] [90 days -- not available for Discretionary Loans]. 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 (minus $__________ Discretionary Loans) PAGE (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: EXHIBIT C TO FOURTH AMENDMENT [TO BE UP-DATED] Schedule 5.08 Subsidiaries of SED INTERNATIONAL HOLDINGS, INC. Name Jurisdiction of Incorporation SED International, Inc. Delaware SED Magna Distribuidora Ltda. Brazil SED International de Columbia, Ltda. Subsidiaries of SED INTERNATIONAL, INC. Name Jurisdiction of Incorporation None. EX-10.47 6 EXHIBIT 10.47 FIFTH AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT THIS FIFTH AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT (this "Amendment") is dated and is effective as of the 30th day of June, 1998, among SED INTERNATIONAL HOLDINGS, INC. (formerly known as SOUTHERN ELECTRONICS CORPORATION) and SED INTERNATIONAL, INC., jointly and severally (collectively, the "Borrowers"), WACHOVIA BANK, N.A., as Agent (the "Agent") and WACHOVIA BANK, N.A. and NATIONAL CITY BANK, as Banks (collectively, the "Banks"); W I T N E S S E T H: WHEREAS, the Borrowers, the Agent and the Banks executed and delivered that certain $100,000,000 Amended and Restated Credit Agreement, dated as of the 13th day of August, 1997, as amended by that certain First Amendment to Amended and Restated Credit Agreement, dated as of September 22, 1997, that certain Second Amendment to Amended and Restated Credit Agreement, dated as of October 15, 1997, that certain Third Amendment to Amended and Restated Credit Agreement, dated as of January 8, 1998, and that certain Fourth Amendment to Amended and Restated Credit Agreement, dated as of June 30, 1998 (as so amended, the "Credit Agreement"); WHEREAS, the Borrowers have requested and the Agent and the Banks have agreed to make certain amendments to the Credit Agreement, subject to the terms and conditions hereof; NOW, THEREFORE, for and in consideration of the above premises and other good and valuable consideration, the receipt and sufficiency of which hereby is acknowledged by the parties hereto, the Borrowers, the Agent and the Banks hereby covenant and agree as follows: 1. Definitions. (a) Unless otherwise specifically defined herein, each term used herein which is defined in the Credit Agreement has the meaning assigned to such term in the Credit Agreement. Each reference to "hereof", "hereunder", "herein" and "hereby" and each other similar reference and each reference to "this Agreement" and each other similar reference contained in the Credit Agreement from and after the date hereof refer to the Credit Agreement as amended hereby. (b) The following new definition is added to Section 1.01 of the Credit Agreement in proper alphabetical order: "Fixed Charge Coverage Ratio" has the meaning set forth in Section 6.21. 2. Amendment to Section 2.05(a). Section 2.05(a) of the Credit Agreement is hereby amended by deleting such Section in its entirety and substituting therefor the following: (a) "Applicable Margin" means: (i) with respect to Euro-Dollar Loans, for the period commencing on June 30, 1998, to and including the first Performance Pricing Determination Date thereafter, 1.00%; (ii) with respect to Base Rate Loans on and after June 30, 1998, and with respect to Euro-Dollar Loans, from and after the first Performance Pricing Determination Date after June 30, 1998, the percentage determined on each Performance Pricing Determination Date by reference to the table set forth below as to such type of Loan and the Leverage Ratio (as calculated by the Agent from the most recent 10-Q quarterly statement described in Section 6.01(i) for the quarterly period ending immediately prior to such Performance Pricing Determination Date); and Leverage Applicable Base Rate Base Rate Ratio Margin for Loans Loans Euro-Dollar (Other than (Overnight Loans Overnight Loans Only) Loans) LESS THAN OR EQUAL TO 1.0 0.75% 0.0% -0.50% GREATER THAN 1.0 and LESS THAN OR EQUAL TO 2.0 1.00% 0.0% -0.50% GREATER THAN 2.0 and LESS THAN OR EQUAL TO 2.5 1.25% 0.0% -0.50% GREATER THAN 2.5 and LESS THAN OR EQUAL TO 3.5 1.50% 0.0% -0.50% GREATER THAN 3.5 and LESS THAN OR EQUAL TO 5.0 1.75% 0.0% -0.50% GREATER THAN 5.0 2.00% 0.0% -0.50% (iii) in the event the Fixed Charge Coverage Ratio is equal to or less than 3.0 to 1.0 (as calculated by the Agent from the most recent 10-Q quarterly statement described in Section 6.01(i) for the quarterly period ending immediately prior to such Performance Pricing Determination Date), then in such event, the Applicable Margin shall be increased by 0.25%. In determining interest for purposes of this Section 2.05 and fees for purposes of Section 2.06, the Borrowers and the Banks shall refer to the Borrowers' most recent 10-Q consolidated quarterly financial statements delivered pursuant to Section 6.01(i). If such financial statements require a change in interest pursuant to this Section 2.05 or fees pursuant to Section 2.06, the Borrowers shall deliver to the Agent, along with such financial statements, a notice to that effect, which notice shall set forth in reasonable detail the calculations supporting the required change. The "Performance Pricing Determination Date" is the fifth day after the date of receipt of such financial statements pursuant to Section 6.01(i). Any such required change in interest and fees shall become effective on such Performance Pricing Determination Date, and shall be in effect until the next Performance Pricing Determination Date, provided that: (i) for Euro-Dollar Loans, changes in interest shall only be effective for Interest Periods commencing on or after the Performance Pricing Determination Date; and (ii) no fees or interest shall be decreased pursuant to this Section 2.05 or Section 2.06 if a Default is in existence on the Performance Pricing Determination Date. In the event that the Borrowers fail to deliver their 10-Q quarterly financial statements to the Agent and the Banks on or before the 45th day after the end of any Fiscal Quarter, then the Applicable Margin shall be the highest Applicable Margin then in effect until the next Performance Pricing Determination Date. 3. Amendment to Section 6.21. Section 6.21 of the Credit Agreement is hereby amended by deleting such Section in its entirety and substituting therefor the following: SECTION 6.21. Fixed Charges Coverage. Tested at the end of each Fiscal Quarter, the ratio of EBITDA to Consolidated Interest Expense (such ratio being calculated for the Fiscal Quarter just ended and the immediately preceding three Fiscal Quarters, the "Fixed Change Coverage Ratio") shall not at any time be less than the following: Fiscal Quarter: Ratio June 30, 1998 2.0 to 1.0 September 30, 1998 2.0 to 1.0 December 31, 1998 2.0 to 1.0 March 31, 1999 2.0 to 1.0 Each Fiscal Quarter thereafter 3.0 to 1.0 4. Amendment to Section 6.24. Section 6.24 of the Credit Agreement is hereby amended by deleting such Section in its entirety and substituting therefor the following: SECTION 6.24. Minimum Consolidated Tangible Net Worth. Consolidated Tangible Net Worth will not be less than $84,000,000 at all times during the period from June 30, 1998 through and including September 30, 1998, and at all times thereafter will not be less than (x) $84,500,000 plus (y) the sum of (i) 100% of the cumulative Reported Net Income of the Borrowers and the Consolidated Subsidiaries during any period after June 30, 1998 (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 June 30, 1998, calculated monthly at the end of each month, minus the sum of (a) amounts paid to date for the redemption or repurchase of capital stock of SEC not exceeding an aggregate cumulative amount equal to $12,000,000, plus (b) amounts attributed to goodwill related to assets acquired after March 31, 1998, not exceeding an aggregate cumulative amount equal to $6,000,000. 5. Exhibits and Schedules. The Compliance Certificate attached to Exhibit H of the Credit Agreement is amended and restated in its entirety as set forth on Exhibit A to this Amendment. 6. Effect of Amendment. Except as set forth expressly hereinabove, all terms of the Credit Agreement and the other Loan Documents remain in full force and effect, and constitute the legal, valid, binding and enforceable obligations of the Borrowers. The amendments contained herein will be deemed to have prospective application only, unless otherwise specifically stated herein. 7. Ratification. Each of the Borrowers hereby restates, ratifies and reaffirms each and every term, covenant and condition set forth in the Credit Agreement and the other Loan Documents effective as of the date hereof. 8. Counterparts. This Amendment may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered will be deemed to be an original and all of which counterparts, taken together, will constitute but one and the same instrument. 9. Section References. Section titles and references used in this Amendment have substantive meaning or content of any kind whatsoever and are not a part of the agreements among the parties hereto evidenced hereby. 10. No Default; Release. To induce the Agent and the Banks to enter into this Amendment and to continue to make advances pursuant to the Credit Agreement, each of the Borrowers hereby acknowledges and agrees that, as of the date hereof, and after giving effect to the terms hereof, (i) there exists no Default or Event of Default, (ii) there exists no right of offset, defense, counterclaim, claim or objection in favor of the Borrowers arising out of or with respect to any of the Loans or other obligations of the Borrowers owed to the Banks under the Credit Agreement, and (iii) the Agent and each of the Banks has acted in good faith and has conducted its relationships with each of the Borrowers in a commercially reasonable manner in connection with the negotiations, execution and delivery of this Amendment and in all respects in connection with the Credit Agreement, each of the Borrowers hereby waiving and releasing any such claims to the contrary. A default or breach of representation or warranty by the Borrowers under this Amendment shall constitute an Event of Default under the Credit Agreement. 11. Further Assurances. Each of the Borrowers agrees to take such further actions as the Agent reasonably requests in connection herewith to evidence the amendments herein contained to the Borrowers. 12. Governing Law. This Amendment is governed by, and construed and interpreted in accordance with, the laws of the State of Georgia. 13. Conditions Precedent. This Amendment becomes effective as of June 30, 1998 only upon (i) execution and delivery of this Amendment by each of the parties hereto, and (ii) payment in immediately available funds of an amendment fee equal to $25,000, to be paid to each Bank pro rata with its commitment. IN WITNESS WHEREOF, the Borrowers, the Agent and each of the Banks has caused this Amendment to be duly executed, under seal, by its duly authorized officer as of the day and year first above written. SED INTERNATIONAL HOLDINGS, INC. By:/s/ Ray D. Risner (SEAL) Title: President & COO SED INTERNATIONAL, INC. By:/s/ Ray D. Risner (SEAL) Title: President & COO WACHOVIA BANK, N.A., as Agent and as a Bank By:/s/ Lisa M. Shawl (SEAL) Title: Vice President NATIONAL CITY BANK By:/s/ Brian Strayton (SEAL) Title: Vice President Exhibit "H" EXHIBIT A TO FIFTH AMENDMENT COMPLIANCE CHECK LIST SOUTHERN ELECTRONICS CORPORATION 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 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. Restricted Payments (Section 6.15) SEC will not declare or make any Restricted Payment in any Fiscal Year after December 31, 1996 unless (a) such Restricted Payments are made for the redemption or repurchase of capital stock of SEC and do not exceed an aggregate cumulative amount equal to $12,000,000, or (b) if the aggregate amount of such Restricted Payments (exclusive of Restricted Payments allowed in the foregoing clause (a)) for such Fiscal Year would exceed 15% of cumulative Consolidated Net Income for the prior Fiscal Year (commencing after December 31, 1996); provided that after giving effect to the payment of any such Restricted Payments in such clauses (a) or (b), no Default shall be in existence or be created thereby. (a) Restricted Payments after December 31, 1996 $__________ (b) cumulative Consolidated Net Income after December 31, 1996 $__________ (c) 15% of (b) $__________ Limitation: (a) may not exceed (c) (d) Aggregate cumulative redemption and repurchases of SEC capital stock to date $__________ (e) Limitation $12,000,000 3. 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. ___________________________ $_____________ Total $============= Aggregate Debt secured by purchase money Liens permitted by Section 6.18(k) $__________ Limitation: $1,500,000 4. Leverage Ratio (Section 6.20) Tested at the end of each Fiscal Month, the Leverage Ratio shall not at any time exceed 5.5 to 1.0. (a) Debt - Schedule 3 $__________ (b) Consolidated Tangible Net Worth - Schedule 4 $__________ Actual Ratio of (a) to (b) __________ Maximum Ratio 5.5 to 1.0 5. Fixed Charges Coverage (Section 6.21) Tested at the end of each Fiscal Quarter, the ratio of EBITDA to Consolidated Interest Expense (such ratio being calculated for the Fiscal Quarter just ended and the immediately preceding three Fiscal Quarters) shall not at any time be less than the following: Fiscal Quarter: Ratio June 30, 1998 2.0 to 1.0 September 30, 1998 2.0 to 1.0 December 31, 1998 2.0 to 1.0 March 31, 1999 2.0 to 1.0 Each Fiscal Quarter thereafter 3.0 to 1.0 (a) EBITDA - Schedule 2 $_________ (b) Consolidated Interest Expense - Schedule 2 $_________ Ratio of (a) to (b) _____ to 1.0 Requirement GREATERN THAN OR EQUAL TO [2.0 to 1.0] [3.0 to 1.0] 6. Minimum Consolidated Tangible Net Worth (Section 6.24) SECTION 6.24. Minimum Consolidated Tangible Net Worth. Consolidated Tangible Net Worth will not be less than $84,000,000 at all times during the period from June 30, 1998 through and including September 30, 1998, and at all times thereafter will not be less than (x) $84,500,000 plus (y) the sum of (i) 100% of the cumulative Reported Net Income of the Borrowers and the Consolidated Subsidiaries during any period after June 30, 1998 (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 June 30, 1998, calculated monthly at the end of each month, minus the sum of (a) amounts paid to date for the redemption or repurchase of capital stock of SEC not exceeding an aggregate cumulative amount equal to $12,000,000, plus (b) amounts attributed to goodwill related to assets acquired after March 31, 1998, not exceeding an aggregate cumulative amount equal to $6,000,000. (a) $84,500,000 (b) positive Reported Net Income after June 30, 1998 $__________ (c) cumulative Net Proceeds of Capital Stock received after June 30, 1998 $__________ (d) amounts paid to date for the redemption or repurchase of capital stock of SEC (limited to an amount not exceeding an aggregate cumulative amount equal to $12,000,000) $__________ (e) amounts attributed to goodwill related to assets acquired after March 31, 1998 not exceeding an aggregate cumulative amount equal to $6,000,000 $__________ Actual Consolidated Tangible Net Worth - Schedule 4 $__________ Required Consolidated Tangible Net Worth (sum of (a) plus (b) plus (c) minus (d)) $__________ Schedule 1 Consolidated Operating Profits Consolidated Operating Profits __ quarter 199_ $__________ __ quarter 199_ $__________ __ quarter 199_ $__________ __ quarter 199_ $__________ Total $__________ Schedule 2 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 $__________ Schedule 3 Debt INTEREST RATE MATURITY TOTAL Secured ______________________________ ________ _______ $________ ______________________________ ________ _______ $________ ______________________________ ________ _______ $________ ______________________________ ________ _______ $________ ______________________________ ________ _______ $________ Total Secured $___________ Unsecured ______________________________ ________ _______ $________ ______________________________ ________ _______ $________ ______________________________ ________ _______ $________ ______________________________ ________ _______ $________ Total Unsecured $________ Guarantees _______________________________________________________ $________ _______________________________________________________ $________ Total $__________ Redeemable Preferred Stock $________ Total $________ Other Liabilities _______________________________________________________ $________ _______________________________________________________ $________ _______________________________________________________ $________ Total Debt $========= 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 assets $__________ Deferred expenses $_________ Consolidated Tangible Net Worth $========= Intangibles Description (a)__________________________________ $__________ (b)__________________________________ $__________ (c)__________________________________ $__________ Other $__________ Total $========== 1 To the extent not included above as an Intangible. EX-10.48 7 EXHIBIT 10.48 SECOND AMENDMENT TO EMPLOYMENT AGREEMENT THIS SECOND AMENDMENT TO EMPLOYMENT AGREEMENT is made this 29th day of June, 1998, effective as of July 1, 1998, between SED INTERNATIONAL, INC., a Delaware corporation (the "Subsidiary") and a wholly-owned subsidiary of SED INTERNATIONAL HOLDINGS, INC., a Delaware 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, the term of the Agreement is currently considered to be five (5) years, with automatic one (1) year extensions of the Termination Date of the Agreement, unless the Agreement and Employee's employment thereunder are sooner terminated in accordance with the terms of the Agreement; and WHEREAS, the Subsidiary and Employee wish to extend the term of the Agreement and Employee's employment thereunder from said five (5) year term to a seven (7) year term with the continuation thereafter to provide for automatic one (1) year extensions of the Termination Date of the Agreement; 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 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 4(a) of the Agreement. Pursuant to Section 15(d) of the Agreement, Section 4(a) of the Agreement is hereby deleted in its entirety and replaced by the following paragraph: (a) The term of this Agreement, and of Employee's employment hereunder, shall commence as of July 1, 1998 and shall continue for a period of seven (7) years (the "Initial Term") unless earlier terminated as provided in Section 4(b) of this Agreement. The Initial Term of this Agreement, and of Employee's employment hereunder, shall automatically be extended for an additional one (1) year period following the expiration of each year of employment under this Agreement without further action by Employee or the Subsidiary, unless notice not to renew for an additional one (1) year period is given by either Subsidiary or Employee to the other not less than six (6) months prior to the expiration of any year of employment under this Agreement. In the event a notice not to renew is given by one party to the other as provided in the immediately preceding sentence, then the automatic extension of the term of employment under this Agreement shall thereafter be of no further force and effect, and the Agreement shall expire at the end of the then current seven (7) year term. 2. Amendment to Section 3(d) of the Agreement. Pursuant to Section 15(d) of the Agreement, Section 3(d) is hereby modified so as to increase Employee's annual paid vacation from four (4) weeks to six (6) weeks per fiscal year. The words "four (4) weeks" in said Section 3(d) shall be deleted and the words "six (6) weeks" shall be replaced in its stead. 3. 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: (b) 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 if 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 of the Subsidiary that he is exercising his rights hereunder and requests payment of the amounts provided for under this subsection (h) (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, within thirty (30) days after the Subsidiary's receipt of the Notice of Exercise, a single cash payment for damages suffered by the Employee by reason of a Change in Control causing the Subsidiary's breach of this Agreement (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 the 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; 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 Certificates of Incorporation, Bylaws or similar policies, plans or agreements relating to indemnification of directors and officers of SEC and the Subsidiary under certain circumstances. 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. 4. Amendment to Section 3 of the Agreement. Pursuant to Section 15(d) of the Agreement, Section 3 is hereby amended by inserting the following paragraph: (i) The Employee shall be entitled to an additional death benefit ("Salary Continuance"), payable to his surviving spouse, if any, upon his death. Said surviving spouse shall receive an annual payment equal to Employee's annual base salary at the time of said death. The term of said Salary Continuance shall be equal to number of years of employment remaining under the terms of this Agreement at the time of Employee's death, or the death of the surviving spouse, whichever shall come earlier. At the time of execution of this Amendment, it is the intent of the parties that the Salary Continuance be funded through a "key man" life insurance policy having the Employee as the Insured and the Subsidiary as the Beneficiary. 5. 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. [SIGNATURES ARE FOUND ON THE FOLLOWING PAGE] IN WITNESS WHEREOF, the parties have duly executed and delivered this Second Amendment to Employment Agreement as of the day and year first indicated above. SED INTERNATIONAL, INC. By: /s/ Ray D. Risner Name: Ray D. Risner Title: President and COO /s/ Gerald Diamond (SEAL) Gerald Diamond (Employee) EX-10.49 8 EXHIBIT 10.49 SECOND AMENDMENT TO EMPLOYMENT AGREEMENT THIS SECOND AMENDMENT TO EMPLOYMENT AGREEMENT is made this 29th day of June, 1998, effective as of July 1, 1998, between SED INTERNATIONAL, INC., a Delaware corporation (the "Subsidiary") and a wholly-owned subsidiary of SED INTERNATIONAL HOLDINGS, INC., a Delaware 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, 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 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(d) of the Agreement. Pursuant to Section 15(d) of the Agreement, Section 3(d) is hereby modified so as to increase Employee's annual paid vacation from four (4) weeks to six (6) weeks per fiscal year. The words "four (4) weeks" in said Section 3(d) shall be deleted and the words "six (6) weeks" shall be replaced in its stead. 2. 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 if 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 of the Subsidiary that she is exercising her rights hereunder and requests payment of the amounts provided for under this subsection (h) (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, within thirty (30) days after the Subsidiary's receipt of the Notice of Exercise, a single cash payment for damages suffered by the Employee by reason of a Change in Control causing the Subsidiary's breach of this Agreement (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 the 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; 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 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 Certificates of Incorporation, Bylaws or similar policies, plans or agreements relating to indemnification of directors and officers of SEC and the Subsidiary under certain circumstances. 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. 3. 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 Second Amendment to Employment Agreement as of the day and year first indicated above. SED INTERNATIONAL, INC. By: /s/ Ray D. Risner Name: Ray D. Risner Title: President and COO /s/ Jean Diamond (SEAL) Jean Diamond (Employee) EX-11.1 9 EXHIBIT 11.1 SED INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES COMPUTATION OF EARNINGS (LOSS) PER SHARE (1) YEAR ENDED JUNE 30, 1996 1997 1998 BASIC EARNINGS (LOSS) PER SHARE: Weighted average outstanding shares 7,190,000 7,183,000 9,602,000 ---------- ---------- ----------- Net earnings (loss) for per share computation (A) $5,550,000 $7,905,000 $ (255,000) ---------- ---------- ----------- Net earnings (loss) per common share $ 0.77 $ 1.10 $ (0.03) ---------- ---------- DILUTED EARNINGS (LOSS) PER SHARE: Average outstanding shares, including common stock equivalents(2)(B) 7,280,000 7,634,000 9,602,000 ---------- ---------- ------------ Net earnings (loss) per common share (A divided by B) $ 0.76 $ 1.04 $ (0.03) ---------- ---------- ------------
1 Effective October 1, 1997, the Company adopted Statement of Financial Accounting Standards Number ("SFAS") 128. All prior period earnings per share data has been restated to conform with SFAS 128. 2 Average shares outstanding include dilutive stock options as common stock equivalents. The dilutive effect of stock options was determined using the treasury stock method. Under that method of calculation, stock options are valued at average market prices. EX-13 10 [COVER OF ANNUAL REPORT CONSISTS OF SOLID BLACK BAR ACROSS THE TOP OF PAGE WITH VARNISHED GRAPHIC IN CENTER WITH SED INTERNATIONAL LOGO CENTERED AT BOTTOM] INSIDE FRONT COVER CONSISTS OF BAR CHARTS AND TABLE OF CONTENTS] NET SALES MILLIONS OF DOLLARS 1994 296.2 1995 398.8 1996 468.3 1997 646.3 1998 892.6 NET EARNINGS (LOSS) MILLIONS OF DOLLARS 1994 5.9 1995 5.2 1996 5.6 1997 7.9 1998 (.3) EARNINGS (LOSS) PER SHARE DOLLARS 1994 .81 1995 .74 1996 .76 1997 1.04 1998 (.03) WORKING CAPITAL MILLIONS OF DOLLARS 1994 25.5 1995 41.4 1996 40.5 1997 79.4 1998 107.7 TOTAL ASSETS MILLIONS OF DOLLARS 1994 65.6 1995 87.4 1996 131.3 1997 197.3 1998 266.6 STOCKHOLDERS' EQUITY MILLIONS OF DOLLARS 1994 29.3 1995 34.6 1996 41.7 1997 48.9 1998 106.3 Table of Contents 1 FINANCIAL HIGHLIGHTS 2 LETTER TO STOCKHOLDERS 4 THE COMPANY 12 MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS 15 CONSOLIDATED FINANCIAL STATEMENTS 20 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 24 INDEPENDENT AUDITORS' REPORT IBC DIRECTORS AND OFFICERS; STOCKHOLDER INFORMATION SED International Holdings, Inc. distributes microcomputer products, including personal computers, printers and other peripherals, and networking products as well as wireless telephone products to VARs and dealers in the United States and Latin America. Headquartered in Tucker, Georgia, SED International Holdings, Inc. had 573 employees as of June 30, 1998. The Company's shares are traded on the Nasdaq National MarketSM under the symbol SECX. Selected Income Statement Data Year Ended June 30, (in thousands, except per share data) 1998 1997 1996 1995 1994 Net sales $892,629 $646,336 $468,298 $398,753 $296,173 Cost of sales, including buying and occupancy expenses 848,090 607,437 438,837 370,548 271,982 Gross profit 44,539 38,899 29,461 28,205 24,191 Selling, general and administrative expenses 40,309 23,941 19,493 19,104 14,448 Start-up expenses 1,400 -- -- -- -- Operating income 2,830 14,958 9,968 9,101 9,743 Interest expense-net 2,728 2,128 902 688 193 Earnings before income taxes 102 12,830 9,066 8,413 9,550 Income taxes 357 4,925 3,516 3,191 3,606 Net earnings (loss) $ (255) $ 7,905 $ 5,550 $ 5,222 $ 5,944 Net earnings (loss) per common share Basic $ (.03) $ 1.10 $ .77 $ .75 $ .85 Diluted $ (.03) $ 1.04 $ .76 $ .74 $ .81 Weighted average number of shares outstanding Basic 9,602 7,183 7,190 6,964 6,991 Diluted 9,602 7,634 7,280 7,069 7,355
Selected Balance Sheet Data June 30 (in thousands) 1998 1997 1996 1995 1994 Working capital $107,741 $ 79,350 $ 40,496 $ 41,355 $ 25,489 Total assets 266,565 197,329 131,305 87,375 65,572 Long-term obligations less current portion 31,000 56,000 10,610 11,500 -- Total stockholders' equity 106,275 48,896 41,650 34,633 29,348
SED 1 Dear Stockholders: Fiscal 1998 started out with high expectations by management for another successful year of improved earnings and operations. Unfortunately, earnings declined throughout the year and culminated with a loss in the fourth quarter of fiscal 1998, resulting in a loss for the year as a whole of $255,000 or $.03 per share. The deteriorating results in the second half of the 1998 fiscal year and particularly in the fourth quarter were principally caused by difficulties in the hard disc drive market, the Company's largest product segment, where weak pricing and oversupply in the channel decreased profit margins. During the fourth quarter, accounts receivable losses exceeded the Company's estimates, resulting in the Company increasing its reserve for accounts receivable losses. Management of accounts receivable has always been a high priority at SED and this negative change in events has resulted in the Company providing additional focus on this function. In response to the increased losses in accounts receivable and increased international sales, the Company obtained international credit insurance to complement its existing domestic credit insurance. During the year the Company opened two major facilities: a 100,000 square foot distribution center in Harrisburg, Pennsylvania and a fully staffed selling and distribution center in Bogota, Colombia. The Company incurred start-up expenses associated with these two operations during fiscal 1998, but expects to gain increased sales and market penetration from these operations beginning in fiscal 1999. On October 2, 1997 the Company sold three million new shares of stock through an underwritten public offering that raised $54 million, thus increasing the strength of its balance sheet. At the same time, the Company's commercial banks also demonstrated their confidence in the Company by increasing the Company's borrowing capacity to $100 million from $50 million. Together, management expects these two funding vehicles will provide sufficient capital to sustain and grow the Company for the foreseeable future. SED 2 On December 1, 1997 SED Magna Distribuidora Ltda. in Brazil become part of the SED family of companies. SED Magna is based in Sao Paulo and is a leading distributor of Hewlett-Packard, Compaq, Epson, and Apple products. The Company is participating in the growing Brazilian market through SED Magna under the leadership of Jose de Miranda Dias, President of SED Magna. SED's linecard improved dramatically during the year. New vendor agreements include domestic contracts with Hewlett-Packard, Microsoft, Western Digital, Motorola and Audiovox as well as distribution agreements with Intel and Creative Labs for both the United States and Latin America. While SED is still mainly a computer components supplier to VARs and dealers, it now has systems to offer including the Vectra from Hewlett-Packard, Acer systems, AMS Tech, and its own configurated systems. Distributing product from the new vendors and these new lines has enabled the Company to achieve higher sales during fiscal 1998. Product sales in the Wireless Division also are increasing and are now a larger part of total Company sales. More resources have been placed in this segment and a higher emphasis on handset sales and accessories is allowing the Company more fully to participate in the growing telecommunications distribution business. The outlook for fiscal 1999 is reasonably encouraging and with cost reductions underway and other profit improvement programs, management will seek to return the Company to its historical pattern of profitable and consistent growth. /s/Gerald Diamond /s/Ray D. Risner GERALD DIAMOND RAY D. RISNER Chairman of the Board and President and Chief Operating Chief Executive Officer Officer SED 3 [GRAPHIC ELEMENT HERE OF VARIOUS PRODUCT BOXS] THE COMPANY SED International Holdings, Inc., hereinafter referred to as the "Company," is a leading international distributor of microcomputer and wireless communications products to value-added resellers and retailers throughout the United States and Latin America. The Company's product lines include personal computers, application software, printers and other computer peripherals, networking products and wireless telephone products. The Company offers a broad inventory of more than 3,500 products from approximately 130 market-leading vendors. With a sales and distribution center in its Tucker, Georgia, headquarters as well as in City of Industry, California; a satellite sales office in Carlsbad, California; a sales office, distribution center and export facility in Miami, Florida; a distribution center in Harrisburg, Pennsylvania; and an additional sales and distribution center in Bogota, Colombia, the Company continues to expand to reach a growing global market. The Company has also further enhanced its market presence in Brazil through an acquisition forming SED Magna Distribuidora Ltda. in Sao Paulo, Brazil. More information about the Company can be found on its website at http: //www.sedonline. com. The stock of SED International Holdings, Inc. is traded on the NASDAQ Stock MarketSM under the symbol SECX. SED 4 POSITIONING FOR FUTURE GROWTH Fiscal 1998 proved to be a year characterized by innovative responses to the challenges brought about by a turbulent marketplace. Thus, the Company's visions were executed by means of calculated investments to augment future growth and international expansion. The name change of the parent company to SED International Holdings, Inc., from Southern Electronics Corporation, Inc., aptly reflects the Company's forward-looking philosophy as well as its role in the industry as an emerging international contender. During fiscal 1998, the Company positioned itself for future growth via international investment, the implementation of strategies to strengthen its domestic marketshare, and the introduction of value-added services that increase the flexibility of its reseller partners. The development and maintenance of long-term relationships with reseller partners is a key component to the Company's current and future success. During fiscal 1998 the Company increased its credit facility with two prominent national banks to $100 million, thus improving the Company's utilization of resources to grow its product lines. During fiscal 1998, the Company also completed a primary offering of 3 million shares of its common stock. The share offering enabled the Company to improve its balance sheet and lower its borrowing cost, while improving the liquidity of its stock. The Company is optimistic about its investments in its individual employees and channel partners, as well as the continual development of its resources. VALUE-ADDED SERVICES Sales Force Development The Company is structured so the sales force--the primary source for company revenue -- serves as the hub of customer interaction. The Company therefore invests a great deal of time and economic resources to cultivate and retain a high caliber of personnel. The Company believes in the recognition of individual efforts to achieve a common goal. The marketing and purchasing departments of the Company work in conjunction with the Company's vendor partners to develop and implement marketing programs that solicit customer response through direct incentives and special promotions. The Company's sales force takes a proactive approach in maintaining current accounts and soliciting new accounts. It is the Company's intention to consistently provide the necessary resources that contribute to a long-term generation of revenue via the sales force. The Company continuously develops and sponsors programs that keep its sales force abreast of the latest technological developments, vendor promotions and competitive strategies. The computer hardware industry is rapidly evolving and providing these types of programs is an essential component of maintaining an aggressive presence in the volatile personal computer and cellular telephone wholesale distribution markets. On-line Ordering The role of distributors in the channel has changed drastically in recent years. Value-Added Resellers (VARs) and other channel partners rely heavily upon services such as electronic commerce on-line ordering, channel assembly and Electronic Data Interchange (EDI) reporting and ordering. The Company thus realizes the importance of offering value-added services to foster and maintain long-term customer relationships. During fiscal 1998, the Company developed SED Online Order Express in response to the growing channel demand for electronic commerce on-line ordering. The Company created an electronic commerce on-line ordering system in an effort to remain competitive in the industry and position the Company for future growth. With SED Online Order Express, customers are issued a password that enables them to peruse the site 24 hours a day, seven days a week. In a competitive marketplace, it is essential that customers are provided with a level of accessibility that complements their personal schedules and immediate business needs. The employment of an on-line ordering system serves as an efficient means to conduct transactions after normal business hours while still maintaining the ability to order from the Company's complete inventory. Accessibility is of great importance when addressing the needs of electronic commerce customers. SED Online Order Express regularly offers weekend specials that encourage after-hours use of the system, while the Express Team provides personalized service for instances when electronic commerce customers prefer to call in and speak with a sales representative during regular business hours. [A GRAPHIC ELEMENT IS FEATUED ON THIS PAGE OF A PRODUCT BOX] SED 5 SED Online Order Express offers the same caliber of information technology as the systems utilized by the largest distributors in the industry, including real-time inventory in all warehouse locations, real-time pricing, as well as real-time order submission, confirmation, and product allocation. The Company believes that its electronic commerce on-line ordering system will position it as an effective tool to compete with top industry competitors. The Company is also in the process of developing an on-line auctioning system for SED Online Order Express, which accepts the highest electronic bids on select inventory, to increase traffic and interaction on the site. The Company intends to continue growing its current customer base with the aid of SED Online Order Express, and believes that the advancements made in the system during fiscal 1998 will effectively position the Company for future growth. Channel Assembly The Company operates a channel assembly center that complements the Company's immediate and long-term goals due to its higher margin potential as well as an efficient inventory control system that allows for large orders from customers while still offering the benefits of custom assembly. Quality control is maintained by burn-in testing on the units that are assembled as well as technical support before and after the purchase. The channel assembly staff employs a team of technicians, including a designated research and development specialist, that implements quality assurance measures and provides customers support to address their specific needs. The channel assembly program provides additional value-added services to the Company's customers with potentially higher margins, thus creating a crucial step in fostering opportunities for future expansion. Electronic Data Interchange During fiscal 1998, the Company fully implemented Electronic Data Interchange reporting for select vendors--such as Hewlett-Packard, Intel, Seagate, and Creative Labs--as well as various top-tier reseller partners. The Company benefits from EDI reporting in a variety of ways. Primarily, the electronic transmission of sales and inventory data contributes to increased time-efficiency, reduced paperwork and lower overhead expenses. The EDI system enables the sales force to maintain current and solicit new accounts, while concurrently allowing order requests from large corporate resellers to be processed in one of the most time-efficient manners in the industry. EDI serves as an effective tool for forecasting inventory maintenance requirements. Tracking inventory electronically facilitates the Company's efforts to match its warehouse stock with customer demand. Additionally, EDI enables all documents sent and received by the Company to be integrated into the Company's business applications. The Company believes that EDI is an essential component to remaining competitive in a technologically advanced and time-sensitive industry. The Company adheres to the standards of the American National Standards Institute (ANSI) and complies with the guidelines suggested by the Computer Technology Industry Association (CompTIA) in the implementation of the EDI program. Domestic Expansion In the United States, the Company operates bi-coastal sales and distribution centers to remain accessible to its customers and deliver product in the most time-efficient manner possible. The Company maintains sales and distribution facilities in Tucker, Georgia, City of Industry, California, and Miami, Florida. The Company maintains an additional sales office in Carlsbad, California. During fiscal 1998, the Company also opened a new distribution facility in Harrisburg, Pennsylvania. The Harrisburg facility serves as the Company's fourth distribution location in the United States. Overall, the Company's domestic distribution network offers two day ground delivery service to approximately 80% of the population of the continental United States. The Harrisburg facility is strategically located near major transportation centers and offers one to two day ground delivery to customers in the New England and Middle Atlantic states. Expansion into this industrious, well-developed region brings about a multitude of opportunities for building the Company's domestic account base via more convenient service to its VAR, retail and wireless customers. The Company believes its relationship with its customers is good and that the Company serves as the preferred distributor for the majority of its customers. The completion of fiscal 1998 also marks the one year anniversary of the distribution center in City of Industry (suburban Los Angeles), California. The City of Industry distribution center expedites orders throughout the entire state of [A GRAPHIC ELEMENT IS FEATURED ON THIS PAGE OF A PRODUCT BOX] SED 6 California with one day ground service. The location of the warehouse has proven effective in reaching customers in the California marketplace and other locales in the Pacific and Mountain time zones. Direct Inbound Dialing During fiscal 1998, the Company also incorporated Direct Inbound Dialing (DID) into the Company's phone system. Direct Inbound Dialing enables calls to be routed directly to individual salespeople without the use of a switchboard operator, thus further increasing time and cost efficiency. Another enhancement facilitated by the Company's phone system was the retention of several top-producing salespeople via telecommuting--whereby regional salespeople can remain productive while retaining direct dial capabilities from the office, and the Company can further decrease its overhead costs. Relationships with Industry-Leading Vendors During fiscal 1998, the Company negotiated contracts for direct relationships with industry-leading vendors--including Hewlett-Packard, Microsoft, Intel, Creative Labs, Western Digital, and Epson. Direct relationships on key vendor lines is a fundamental component to the Company's success because it allows the Company to compete with the larger distributors in the industry while still providing the caliber of service reflective of a company of its size. The Company has cultivated an on-going partnership with Hewlett-Packard and other industry-leading vendors that has resulted in key channel advantages. The new agreement with Hewlett-Packard consists of distribution rights to the entire Hewlett-Packard line in the United States and designation as a Hewlett-Packard Master Distributor for major portions of Latin America. The Company believes its relationship with Hewlett-Packard and other key vendors is good and is pleased with the potential offered by these continued partnerships. A growing number of the Company's reseller partners sell Hewlett-Packard products primarily, if not exclusively. It is with the needs of these customers in mind that the Company developed the HP All Stars Team. The HP All Stars Team was organized to exclusively sell the full HP solution. Hewlett-Packard is one of many industry-leading vendors with which the Company has direct pricing agreements. The Company employs marketing and purchasing departments that work in conjunction with its vendor partners to develop programs that implement a pro-active approach in generating revenues and improving marketshare. WIRELESS SALES -- BUILDING PARTNERSHIPS AND INCREASING REVENUES The Company experienced promising growth with its wireless division during fiscal 1998, accounting for 12% of total revenues. Wireless revenues increased to $108 million, up from $58 million in fiscal 1997. The Company believes it is the third largest distributor of wireless products throughout the United States and Latin America, as it continues to advance its position in the wireless marketplace by means of product breadth, outstanding customer service, and expedited delivery. The Company has maintained a direct distribution relationship with Motorola since January 1, 1998 for the BellSouth geographical region in the southeastern United States. The Company can attribute its success with the Motorola line to close relationships with its reseller partners and joint efforts to provide customers with complete wireless solutions. The Company currently distributes Motorola StarTAC[trademark], Motorola Profile[trademark] 300, Motorola Populous[trademark], and Motorola TeleTAC[trademark] wireless handsets. The Company also anticipates distributing digital handsets (CDMA) in the near future. The Company continues to grow its industry presence by negotiating direct relationships with vendors and providing value-added services to its reseller partners. The Company believes that the current industry trend favoring digital technology and higher-quality analog technology, combined with rising average unit prices, will result in further opportunities to increase revenues and expand its wireless lines. The Company believes that offering wireless products in addition to computer products positions it as a more comprehensive communications solution source than other industry competitors, and thus eagerly anticipates further implementation of this strategy to increase its international market presence. [2 GRAPHIC ELEMENTS APPEAR ON THIS PAGE ONE OF A MAINFRAME AND ONE OF A WIRELESS PHONE] SED 7 FOCUS ON LATIN AMERICA In recent years, the Latin American marketplace has served as a progressive epicenter of international investment--especially in the areas of computer hardware and wireless communication technology. The Company believes that prudent investment in this influential market will prove to be advantageous in the long-term and that such investment will secure the Company's role as a major contender in the likely consolidation of the Latin American computer hardware market. The Company attributes a significant portion of its growing impact upon the Latin American marketplace to the aggressive expansion efforts of its Miami sales office and distribution center. SED International's trilingual Miami sales team works continuously to build long-term relationships with its clients in Latin America. The Company believes that it has also achieved further penetration in the Latin American marketplace by hosting regular road shows that facilitate the development of amicable and productive business partnerships. The Company is pleased with the continued success of the Miami office, as well as its impact upon the Latin American marketplace during fiscal 1998. Investment in the Latin American marketplace is a primary component of the Company's long-term growth. During fiscal 1998, the Company attained an in-country presence in Latin America via the acquisition of Magna Distribuidora Ltda. and consequential formation of SED Magna Distribuidora Ltda. in Sao Paulo, Brazil as well as the opening of a sales and distribution facility in Bogota, Colombia through the Company's wholly own subsidiary, SED International de Colombia Ltda. The Company recognizes a variety of strategic benefits to the acquisition of Magna Distribuidora Ltda. Of primary importance is the resulting formation of SED Magna Distribuidora Ltda., which represents the Company's first in-country presence. The Company believes that Brazil, with a population of approximately 150 million, offers promising long-term growth potential. The Company also realizes the importance of retaining an experienced management team that interacts with a well-established customer base and that is familiar with the Brazilian marketplace. The Company intends to increase its international presence by implementing this philosophy. The Company's Miami- and Brazil-based employees promote a personalized approach toward understanding the products that the Company sells, matching these with the needs of their customers in Latin America. The Company believes that this relationship philosophy distinguishes it from its industry competitors that merely sell a generic product to a homogenous public. The Company realizes that maintaining productive relationships with its reseller partners is two-pronged: satisfying the resellers' needs with a customer support system that includes a thorough merchandise selection, equitable credit terms and prompt product delivery, and providing its reseller partners with the tools necessary to build a loyal customer base among their end-user customers. Therefore, the role of the Company in the channel is not simply that of a source from which to buy product, but also a long-term solution provider. The Company's Miami office distributes major lines to Latin America--including Hewlett-Packard, Intel, Epson, Samsung, TrippLite, and Creative Labs. SED Magna Distribuidora Ltda. offers computer systems, peripherals and software, as well as networking and communication products from industry-leading vendors such as Hewlett-Packard, Compaq, Epson, and Apple. During fiscal 1998, SED Magna Distribuidora Ltda. signed an agreement with Intel as an authorized Intel Product Integrator (IPI) to over four-thousand integrators throughout Brazil. The Company believes that the Intel agreement will bring about opportunities for new business partnerships in Brazil. The Company believes that its senior management works effectively in conjunction with the management of SED Magna Distribuidora Ltda. and anticipates long-term success in a growing Brazilian market. The Company was also able to further penetrate into the Latin American marketplace with the opening of a sales and distribution center in Bogota, Colombia. The Bogota center offers a full range of services, including sales, product training and customer support to the Company's current Latin American customers and potential reseller partners. The Company is pleased with the current progress and future potential of its Miami sales and distribution center, SED Magna Distribuidora Ltda. and its Bogota, Colombia office to continue gaining marketshare, with an additional focus on generating profit. [2 GRAPHIC ELEMENTS APPEAR ON THIS PAGE OF PRODUCT BOXES] SED 8 [GRAPHIC ELEMENT HERE OF A GROUP OF PRODUCTS] OUTLOOK FOR FISCAL 1999 The Company believes that fiscal 1998 was a year of prudent investments to enhance domestic marketshare and establish a presence in the Latin American computer hardware and wireless communication market. The Company intends to increase its electronic commerce transactions and introduce other value-added services to grow its business. The investments of fiscal 1998 resulted in the implementation of strategies to provide better service to its customers in the United States and solicit new business. In Latin America, the Company acquired Magna Distribuidora Ltda. in fiscal 1998 through the formation of SED Magna Distribuidora Ltda., continued the expansion efforts of its Miami office, and established a sales and distribution center in Bogota, Colombia. The Company intends to expand its market presence in fiscal 1999 by building new and strengthening existing customer and vendor relationships and continuing to investigate future acquisitions of smaller and, possibly, larger companies. The Company feels that its investment in key personnel and new enterprises has positioned it as a major contender in both the computer and wireless communications distribution marketplaces. SED 9 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 SED International Holdings, Inc. (the "Company") is a leading 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 1998, the Company's net sales to customers in the United States represented approximately 59.2% of total net sales. Net sales for export principally into Latin America and net sales in-country, in Brazil and Colombia, represented approximately 40.8% of total net sales for fiscal 1998. Net sales of microcomputer products generated approximately 88.0% of total net sales and wireless telephone products represented the remaining 12.0% for fiscal 1998. 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, including Hewlett-Packard and Intel. In fiscal 1998, the Company entered into additional authorized United States distributor agreements for other product lines previously sold by Globelle. Beginning in December 1995, the Company substantially increased its sales to Latin America with the acquisition of U.S. Computer of North America, Inc. During fiscal 1998, the Company established an in-country sales and distribution presence in Latin America. In December 1997, the Company, through its wholly-owned subsidiary, SED Magna Distribuidora Ltda., acquired Magna Distribuidora Ltda. in Sao Paulo, Brazil. The Company believes that the in-country presence of SED Magna Distribuidora Ltda. will effectively establish customer relationships within the Brazil marketplace. In May 1998, the Company, through its subsidiary, SED International de Colombia Ltda., opened a sales and distribution facility in Bogota, Colombia. For the Company's domestic operations, all purchases and sales are denominated in United States dollars. For the Company's operations in Brazil and Colombia -- in-country transactions are conducted in the respective local currencies of these two locations while import purchases are denominated in United States dollars. 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, 1998 1997 1996 Net sales 100.0% 100.0% 100.0% Cost of sales, including buying and occupancy expenses 95.0 94.0 93.7 Gross profit 5.0 6.0 6.3 Selling, general and administrative expenses 4.5 3.7 4.2 Start-up expenses 0.2 -- -- Operating income 0.3 2.3 2.1 Interest expense, net 0.3 0.3 0.2 Earnings before income taxes -- 2.0 1.9 Income taxes -- 0.8 0.7 Net earnings 0.0% 1.2% 1.2%
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- SED 10 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 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% 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. Fiscal 1997 Compared to Fiscal 1996 Net sales increased 38.0%, or $178.0 million, to $646.3 million in fiscal 1997 compared to $468.3 million in fiscal 1996. This growth resulted from an increase in both United States net sales and net sales to customers for export principally into Latin America. Net sales in the United States increased approximately 19.8%, or $58.8 million, to $355.6 million in fiscal 1997 compared to $296.8 million in fiscal 1996, primarily due to increased sales of mass storage products. Net sales for export increased 69.5%, or $119.2 million, to $290.7 million in fiscal 1997 compared to $171.5 million in fiscal 1996, primarily due to the December 1995 acquisition of U.S. Computer of North America, Inc. and the Company's increased focus on Latin America. Sales of microcomputer products represented approximately 91.0% of the Company's fiscal 1997 net sales compared to 91.7% for fiscal 1996. Sales of wireless telephone products accounted for approximately 9.0% of the Company's fiscal 1997 net sales compared to 8.3% for fiscal 1996. Gross profit increased 32.0%, or $9.4 million, to $38.9 million in fiscal 1997 compared to $29.5 million in fiscal 1996. Gross profit as a percentage of net sales decreased to 6.0% in fiscal 1997 from 6.3% in fiscal 1996. 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 continued highly competitive pricing and a higher proportion of total net sales for export. SED 11 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Selling, general and administrative expenses increased 22.8%, or $4.4 million, to $23.9 million in fiscal 1997, compared to $19.5 million in fiscal 1996. These expenses as a percentage of net sales decreased to 3.7% in fiscal 1997 compared to 4.2% in fiscal 1996. The dollar increase in these expenses was primarily due to increased salaries and commissions for salespeople and expanded sales and distribution facilities. The percentage decrease in these expenses was primarily due to the Company's ability to control variable costs over a larger sales base and a greater proportion of the Company's business derived from Latin America, which generally has lower selling, general and administrative expenses than in the United States. Net interest expense increased 135.9%, or $1.2 million, to $2.1 million in fiscal 1997 compared to $902,000 in fiscal 1996. Interest expense as a percentage of net sales increased to 0.3% in fiscal 1997 compared to 0.2% in fiscal 1996. 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 38.4% in fiscal 1997 compared to 38.8% in fiscal 1996. The decrease in the effective rate in fiscal 1997 relates primarily to slightly lower state income taxes net of federal income tax benefit, offset by slightly higher non-deductible goodwill amortization expense. 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, 1998. 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) September 30, December 31, March 31, June 30, September 30, December 31, March 31, June 30, 1996 1996 1997 1997 1997 1997 1998 1998 Net sales $160,114 $153,286 $165,168 $167,768 $214,032 $215,772 $243,281 $219,544 Gross profit 9,001 9,840 9,857 10,201 11,607 13,188 13,521 6,223 Operating income (loss) 3,302 3,581 4,014 4,061 3,433 4,958 3,892 (9,453) Net earnings (loss) 1,818 1,945 2,010 2,132 1,409 2,641 1,919 (6,224) Earnings (loss) per share Basic .26 .27 .28 .30 .20 .26 .18 (.59) Diluted .24 .25 .27 .28 .18 .25 .18 (.59)
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 used $23.3 million, $29.0 million, and provided $2.2 million of cash in fiscal 1998, 1997 and 1996, respectively. 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 SED12 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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. The source of cash in fiscal 1996 resulted primarily from net earnings of $5.6 million and a $27.4 million increase in accounts payable, offset by increases of $15.9 million in accounts receivable and $17.8 million in inventory. Investing activities used $6.3 million, $15.5 million and $1.4 million of cash in fiscal 1998, 1997 and 1996, respectively. The Company used $0.7 million in fiscal 1998 to purchase Magna Distribuidora Ltda. in Brazil. 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 and 1996, 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 provided $31.6 million, $44.6 million, and used $882,000 of cash in fiscal 1998, 1997 and 1996, respectively. 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 was $45.4 million. The Company has a Credit Agreement, which provides for a secured line of credit of $100.0 million. The Company may borrow at the prime rate offered by Wachovia Bank, N.A. (8.50% at June 30, 1998) 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 .125% of the unused commitment. The 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 Credit Agreement expires in August 2000. At June 30, 1998, the Company had principal borrowings of $31.0 million under the Credit Agreement at a weighted average interest rate of 7.73% per annum. Average borrowings, maximum borrowings and the weighted average interest rate for fiscal 1998 were $33.9 million, $80.0 million and 7.87%, respectively. 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 1999. The Credit Agreement permits up to $30.0 million to be borrowed for the purpose of financing acquisitions, subject to a limitation of $15.0 million for any one acquisition, and further subject to compliance with the other terms of the Credit Agreement. 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 is currently evaluating 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 include the following phases: inventorying affected technology and assessing SED 13 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 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 do not make necessary changes to their own systems and products successfully in a timely manner. The cost to the Company of software and hardware remediation was approximately $250,000 during fiscal 1998 and is estimated to be $200,000 during fiscal 1999, and $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 is currently taking measures to ensure that its systems that pose a potentially higher risk to the Company's overall operational abilities will be updated within a reasonable timeframe. 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 still 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 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, 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 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. SED 14 Consolidated Balance Sheets June 30, 1998 1997 Assets Current assets: Cash and cash equivalents $ 2,693,000 $ 783,000 Trade accounts receivable, less allowance for doubtful accounts of $2,362,000 (1998) and $1,102,000 (1997) 86,298,000 55,745,000 Inventories 141,196,000 112,813,000 Prepaid income taxes 3,489,000 -- Deferred income taxes 1,827,000 1,223,000 Other current assets 1,528,000 1,219,000 ------------ ------------ Total current assets 237,031,000 171,783,000 ------------ ------------ Property and equipment-net 9,490,000 6,469,000 Intangibles-net 20,044,000 19,077,000 ------------ ------------ Total assets $266,565,000 $197,329,000 ------------ ------------ Liabilities and Stockholders' Equity Current liabilities: Trade accounts payable $122,959,000 $ 88,070,000 Accrued and other current liabilities 6,331,000 4,363,000 ------------ ------------ Total current liabilities 129,290,000 92,433,000 ------------ ------------ Revolving bank debt 31,000,000 56,000,000 Commitments (Note 6) Stockholders' equity: Preferred stock, $1.00 par value; 129,500 shares authorized, none issued Common stock, $.01 par value; 100,000,000 shares authorized, 10,862,211 (1998) and 7,522,786 (1997) shares issued 108,000 75,000 Additional paid-in capital 70,659,000 12,719,000 Retained earnings 38,840,000 39,095,000 Cumulative translation cost (119,000) -- Treasury stock at cost, 345,608 (1998) and 325,590 (1997) shares (2,937,000) (2,715,000) Prepaid compensation-stock awards (276,000) (278,000) ------------ ------------ Total stockholders' equity 106,275,000 48,896,000 ------------ ------------ Total liabilities and stockholders' equity $266,565,000 $197,329,000 ============ ============
See notes to consolidated financial statements. SED 15 Consolidated Statements of Earnings (in thousands except per share data) Year Ended June 30, 1998 1997 1996 Net sales $892,629 $646,336 $468,298 Cost of sales, including buying and occupancy expenses 848,090 607,437 438,837 Gross profit 44,539 38,899 29,461 Selling, general and administrative expenses 40,309 23,941 19,493 Start-up expenses 1,400 -- -- Operating income 2,830 14,958 9,968 Interest expense-net 2,728 2,128 902 Earnings before income taxes 102 12,830 9,066 Income taxes 357 4,925 3,516 Net earnings (loss) $ (255) $ 7,905 $ 5,550 Net earnings (loss) per common share Basic $ (.03) $ 1.10 $ .77 Diluted $ (.03) $ 1.04 $ .76 Weighted average number of shares outstanding Basic 9,602 7,183 7,190 Diluted 9,602 7,634 7,280
See notes to consolidated financial statements. SED 16 Consolidated Statements of Stockholders' Equity Prepaid Common Stock Additional Cumulative Compensation- Par Paid-In Retained Translation Treasury Stock Stock Shares Value Capital Earnings Adjustment Shares Cost Awards BALANCE, JUNE 30, 1995 7,121,492 $ 71,000 $10,579,000 $25,640,000 $ -- 125,590 $(1,390,000) $(267,000) Stock awards issued to employees 47,500 261,000 (261,000) Amortization of stock awards 95,000 Stock awards canceled (3,500) (18,000) 5,000 Stock options exercised 4,220 2,000 Tax benefit of stock awards and options 8,000 Stock issued in acquisition 275,000 3,000 1,372,000 Net earnings 5,550,000 - ---------------------------------------------------------------------------------------------------------------------------------- BALANCE, JUNE 30, 1996 7,444,712 74,000 12,204,000 31,190,000 125,590 (1,390,000) (428,000) Amortization of stock awards 122,000 Stock awards canceled (5,000) (28,000) 28,000 Stock options exercised 83,074 1,000 396,000 Tax benefit of stock awards and options 147,000 Treasury stock purchased 200,000 (1,325,000) Net earnings 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) Stock awards issued to employees 16,600 199,000 (199,000) Amortization of stock awards 108,000 Stock awards canceled (11,900) (93,000) 93,000 Stock options exercised 255,006 2,000 1,576,000 Tax benefit of stock awards and options 818,000 Sale of common stock, net of offering costs of $955,000 3,000,000 30,000 54,395,000 Treasury stock purchased 20,018 (222,000) Issuance of common stock for business acquired 79,719 1,000 1,045,000 Net loss (255,000) Translation adjustments (119,000) - --------------------------------------------------------------------------------------------------------------------------------- BALANCE, JUNE 30, 1998 10,862,211 $108,000 $70,659,000 $38,840,000 $(119,000) 345,608 $(2,937,000) $(276,000) - ---------------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements. SED 17 Consolidated Statements of Cash Flows Year Ended June 30, 1998 1997 1996 Operating Activities Net earnings (loss) $ (255,000) $ 7,905,000 $ 5,550,000 Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 2,847,000 1,731,000 1,168,000 Compensation-stock awards 108,000 122,000 95,000 Provision for losses on accounts receivable 6,073,000 1,391,000 1,642,000 Changes in assets and liabilities, net of effects of acquired business in fiscal 1996 and 1998: Trade accounts receivable (33,254,000) (12,515,000) (15,923,000) Inventories (25,248.000) (40,312,000) (17,840,000) Prepaid income taxes (3,489,000) -- -- Deferred income taxes (604,000) 7,000 (86,000) Other current assets (129,000) (692,000) 16,000 Trade accounts payable 29,611,000 12,562,000 27,389,000 Income taxes payable -- (695,000) 1,174,000 Accrued and other current liabilities 1,063,000 1,521,000 (1,012,000) ------------ ------------ ------------ Net cash provided by (used in) operating activities (23,277,000) (28,975,000) 2,173,000 Investing Activities Purchase of equipment (4,767,000) (3,521,000) (1,398,000) Purchase of business, net of cash acquired (659,000) -- (21,000) Purchase of distribution rights (867,000) (11,992,000) -- ------------ ------------ ------------ Net cash used in investing activities (6,293,000) (15,513,000) (1,419,000) Financing Activities Revolving bank debt net proceeds (payments) (25,000,000) 45,390,000 (892,000) Net proceeds from issuance of common stock 56,003,000 397,000 2,000 Tax benefit from stock awards and options 818,000 147,000 8,000 Purchase of treasury stock (222,000) (1,325,000) -- ------------ ------------ ------------ Net cash provided by (used in) financing activities 31,599,000 44,609,000 (882,000) Effect of exchange rate changes on cash (119,000) -- -- Increase (Decrease) in Cash and Cash Equivalents 1,910,000 121,000 (128,000) Cash and Cash Equivalents Beginning of year 783,000 662,000 790,000 ------------ ------------ ------------ End of year $2,693,000 $783,000 $ 662,000 Supplemental Disclosures of Cash Flow Information Cash paid during the year for: Interest $2,765,000 $ 2,167,000 $ 881,000 Income taxes 3,545,000 5,257,000 2,770,000 Liabilities assumed in acquisition 6,183,000 -- 11,250,000
See notes to consolidated financial statements. SED 18 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS As of and for the years ended June 30, 1998, 1997 and 1996 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 Magna Distribuidora Ltda., SED Magna (Miami), Inc. and SED International de Colombia Ltda. (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 $26,171,000 at June 30, 1998 and $36,200,000 at June 30, 1997. 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, distribution rights and noncompete agreements. Goodwill represents the excess of the cost of an acquired business over the fair value of net identifiable assets acquired and is amortized using the straight-line method principally over 30 years. Distribution rights are amortized using the straight-line method over 25 years. Noncompete agreements are amortized using the straight-line method over five 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. 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 stockholders' 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--Beginning with the second quarter of fiscal 1998, earnings per share ("EPS") is computed in accordance with Statement of Financial Accounting Standards Number ("SFAS") 128. All prior period EPS data has been restated to conform with SFAS 128. Under SFAS 128, presentation of basic and diluted EPS on the income statement is required. 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 similarly to fully diluted EPS under Accounting Principles Board No. 15. For fiscal 1998, 1997 and 1996, the Company's diluted EPS differs from basic EPS solely from the effect of dilutive stock options. For fiscal 1998, 1997 and 1996 options for approximately 1,602,000, 53,000 and 328,000 common shares, respectively were excluded from the diluted EPS calculation due to their antidilutive effect. Newly Issued Accounting Standards-- SFAS 130, "Reporting Comprehensive Income," and 131, "Disclosures about Segments of an Enterprise and Related Information," are effective for fiscal 1999. The Company is evaluating the effects these statements will have on its financial reporting and disclosures. The statements will have no effect on the Company's consolidated results of operations or financial position. Fair Value of Financial Instruments--Financial instruments that are subject to fair value disclosurment requirements are carried in the consolidated financial statements at amounts that approximate fair value. 2. Acquisitions Distribution Rights--On June 30, 1997, as a result of a transaction with Globelle, Inc. ("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. SED 19 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS As of and for the years ended June 30, 1998, 1997 and 1996 Business--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. In December 1995, the Company acquired substantially all of the assets and assumed certain liabilities of U.S. Computer of North America, Inc., a distributor of Hewlett-Packard computer products in Latin America, for approximately $2,640,000, consisting of 275,000 shares of common stock valued at $1,375,000 and cash of $1,265,000. These acquisitions have been accounted for using the purchase method of accounting. 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 1998, 1997 and 1996 was not material. 3. Long-Term Assets Long-term assets are comprised of the following: June 30, 1998 1997 Property and equipment: Furniture and equipment $13,427,000 $ 8,389,000 Leasehold improvements 1,660,000 1,387,000 Other 150,000 279,000 ----------- ----------- 15,237,000 10,055,000 ----------- ----------- Less accumulated depreciation 5,747,000 3,586,000 ----------- ----------- $ 9,490,000 $ 6,469,000 Intangibles: Distribution rights $12,859,000 $11,992,000 Goodwill 8,003,000 7,243,000 Non-compete agreements 500,000 500,000 ----------- ----------- 21,362,000 19,735,000 ----------- ----------- Less accumulated amortization 1,318,000 658,000 ----------- ----------- $20,044,000 $19,077,000 =========== =========== Amortization expense of intangibles was $749,000, $338,000 and 188,000 in the years ended June 30, 1998, 1997 and 1996, respectively. 4. Revolving Bank Debt The Company has an agreement with two banks, amended and restated in August 1997, for a $100 million revolving credit facility. This agreement expires in August 2000. At June 30, 1998, the Company had borrowings of $31,000,000 under the line and standby letters of credit of $7,570,000, leaving $61,430,000 available under the borrowing commitment. The Company may borrow at the prime rate offered by Wachovia Bank, N.A., 8.5% at June 30, 1998, or the Company may fix the interest rate for periods of 30 to 180 days under various interest rate options. The Company pays a commitment fee of .125% of the unused loan commitment. Average borrowings, maximum borrowings and the weighted average interest rate for fiscal 1998 were $33.9 million, $80.0 million and 7.87% and for fiscal 1997 were $28.7 million, $56.0 million and 7.60%, respectively. The credit facility is secured by accounts receivable and inventories, requires maintenance of certain minimum working capital and other financial ratios, and has certain dividend restrictions. At June 30, 1998, the Company was not initially in compliance with the fixed charges coverage and minimum consolidated tangible net worth covenants; such covenants were retroactively amended by the banks effective June 30, 1998. The carrying value of revolving bank debt at June 30, 1998 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, 1998 1997 Reserves not currently deductible $1,317,000 $ 789,000 Inventory valuation 683,000 468,000 Foreign operating loss carryforwards 166,000 -- Other (10,000) (34,000) Valuation allowance (329,000) -- ---------- ---------- $1,827,000 $1,223,000 ========== ========== SED 20 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS As of and for the years ended June 30, 1998, 1997 and 1996 Components of income tax expense are as follows: Year Ended June 30, 1998 1997 1996 Current: Federal $914,000 $4,380,000 $3,416,000 State 47,000 538,000 420,000 -------- ---------- ---------- 961,000 4,918,000 3,836,000 -------- ---------- ---------- Deferred (Benefit): Federal (552,000) 6,000 (280,000) State (52,000) 1,000 (40,000) -------- ---------- ---------- (604,000) 7,000 (320,000) -------- ---------- ---------- $357,000 $4,925,000 $3,516,000 ======== ========== ========== 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, $147,000 and $8,000 for fiscal 1998, 1997 and 1996, respectively. The Company's effective tax rates differ from statutory rates as follows: Year Ended June 30, 1998 1997 1996 Statutory federal rate 34.0% 34.2% 34.0% State income taxes net of federal income tax benefit 28.4 3.3 3.7 Non-deductible goodwill amortization 82.4 1.9 1.5 Valuation allowance 163.7 -- -- Other 41.5 (1.0) (0.4) ----- ---- ----- 350.0% 38.4% 38.8% ----- ---- ----- 6. Lease Obligations SED International leases its main office facility under an operating lease with an entity owned by certain minority stockholders of the Company. The lease currently provides for an annual rent of $176,000 through October 1999, subject to escalation based upon periodic increases in the Consumer Price Index. 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, 1998, 1997 and 1996 was $2,090,000, $949,000 and $663,000, respectively. As of June 30, 1998, the future minimum rental commitments under noncancelable operating leases are: Year Ending June 30, 1999 $1,968,000 2000 1,498,000 2001 1,198,000 2002 670,000 2003 361,000 - ---------------------------------------------------------------------- $5,695,000 - ---------------------------------------------------------------------- 7. Stockholders' Equity Issuance of Common Stock--On October 6, 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. Stock Options--The Company maintains stock option plans under which 1,705,046 shares of common stock have been reserved at June 30, 1998 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 20% to 33.3% 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, 1995 879,595 $5.09 Granted 369,950 5.62 Exercised (4,220) .54 Canceled (49,725) 5.63 --------- ----- 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 ========= ===== SED 21 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS As of and for the years ended June 30, 1998, 1997 and 1996 Additionally, since 1992, the Board of Directors has granted nonqualified options to purchase 153,000 shares of common stock to certain directors of the Company at exercise prices ranging from $5.88 to $15.25 (their fair market value at date of grant). Options to purchase 10,000 shares of common stock were canceled during fiscal 1997. Options to purchase 61,500 shares of common stock were exercised at a weighted average price of $7.73 during fiscal 1998. At June 30, 1998, 81,500 options granted to directors of the Company were outstanding and exercisable at a weighted average exercise price of $8.61; 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, 1998: Outstanding Options Exercisable Options Weighted Average Weighted Remaining Average Average Range of Number Contractual Exercise Number Exercise Exercise Prices Outstanding Life (Years) Price Exercisable Price $4.89-$6.00 896,735 4.53 $ 5.27 806,252 $ 5.22 7.50-10.75 377,600 8.17 8.06 105,787 7.76 11.38-19.88 327,200 9.21 14.00 20,000 15.25
Fair Value--The weighted average fair value of options granted in fiscal 1998, 1997 and 1996 was $8.61, $4.45 and $2.83, respectively, using the Black-Scholes option pricing model with the following assumptions: 1998 1997 1996 Dividend yield 0.0% 0.0% 0.0% Expected volatility 55.5% 49.2% 49.3% Risk free interest rate 5.9% 6.3% 6.0% Expected life, in years 6.8 7.6 6.8 Had compensation cost for grants under the Company's stock option plans in fiscal 1998, 1997 and 1996 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 and net earnings per share would have been as follows: Year Ended June 30, 1998 1997 1996 Pro forma net earnings (loss) $(1,075,000) $7,446,000 $5,383,000 Pro forma net earnings (loss) per common share Basic (.11) 1.04 .75 Diluted (.11) .98 .74 Restricted Stock--In 1988, the Company's Board of 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, 1998, 10,791 shares of common stock are reserved for issuance under this plan. Restricted stock activity is as follows: Year Ended June 30, 1998 1997 1996 Shares of restricted stock beginning of year 92,500 97,500 53,500 Issued 16,600 -- 47,500 Vested (30,000) -- -- Canceled (11,900) (5,000) (3,500) Shares of restricted stock end of year 67,200 92,500 97,500 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, 1998, 1997 and 1996 was $114,000, $90,000 and $76,000, respectively. SED 22 9. Geographic Information Information concerning the Company's domestic and foreign operations is summarized below. Product sales to foreign subsidiaries are valued at market prices. Year Ended June 30, 1998 United States Latin America Eliminations Consolidated Net Revenues: 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 Income from operations $ 3,237,000 $ (390,000) $ (17,000) $ 2,830,000 Identifiable assets $254,626,000 $15,326,000 $(3,387,000) $266,565,000
Approximately 41% of the Company'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. For the years ended June 30, 1997 and 1996 approximately 45% and 37%, respectively, of the Company's net sales were to customers for export principally into Latin America. 10. Significant Vendors During the years ended June 30, 1998 and 1997 the Company purchased approximately 39% and 43%, respectively, of its inventory from three vendors. During the year ended June 30, 1996, the Company purchased approximately 32% of its inventory from two vendors. 11. Subsequent Event Between September 3, 1998 and September 11, 1998, the Company repurchased 903,400 shares of its common stock for approximately $4.1 million in open market transactions under a previously announced buy back program. SED 23 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, 1998 and 1997, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended June 30, 1998. 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, 1998 and 1997 and the results of their operations and their cash flows for each of the three years in the period ended June 30, 1998 in conformity with generally accepted accounting principles. /s/ Deloitte & Touche LLP Atlanta, Georgia August 19, 1998 (September 11, 1998 as to Note 11) SED 24 [INSIDE BACK COVER] [THIS LINE OF COPY RUNS VERTICAL ACROSS LEFT SIDE] The names of the various companies appearing in photography within this document hereof are names and/or trademarks of companies or other entities not affiliated with the Company. Directors and Officers Gerald Diamond Chairman of the Board, Chief Executive Officer and Director of the Company Ray D. Risner President, Chief Operating Officer and Director of the Company Stewart I. Aaron Director of the Company; President of LABS, Inc. Joel H. Cohen Director of the Company; Vice President of Marketing for Queen Carpet Corp. Mark Diamond Executive Vice President and Director of the Company Cary Rosenthal Director of the Company; President and CEO of Phoenix Communications, a division of Master Graphics, Inc. Larry G. Ayers Vice President - Finance, Chief Financial Officer, Secretary and Treasurer of the Company Jean Diamond Vice President of SED International, Inc. Harvey R. Linder Vice President and General Counsel of the Company Brian D. Paterson Senior Vice President - Purchasing/ Marketing of the Company Stockholder Information Corporate Address SED International Holdings, Inc. 4916 North Royal Atlanta Drive Tucker, Georgia 30085 (770) 491-8962 Registrar and Transfer Agent National City Bank Cleveland, Ohio Independent Auditors Deloitte &Touche LLP Atlanta, Georgia Corporate Counsel Long Aldridge & Norman LLP Atlanta, Georgia Form 10-K SED International Holdings, Inc.'s Annual Report on Form 10-K for fiscal 1998 (without exhibits) as filed with the Securities and Exchange Commission is available to stockholders without charge upon written request to Denise Valenti, SED International Holdings, Inc., 4916 North Royal Atlanta Drive, Tucker, Georgia 30085. Nasdaq National Market Symbol The Company's common stock is traded on the Nasdaq National Market under the symbol SECX. Market Makers The following firms make a market in the common stock of SED International Holdings, Inc.: * A.G. Edwards &Sons, Inc. * Bear, Stearns &Co., Inc. * C.L. King & Associates, Inc. * Cleary Gull Reiland McDevitt Inc. * Herzog, Heine, Geduld, Inc. * Interstate/Johnson Lane Corp. * Knight Securities L.P. * Mayer &Schweitzer Inc. * USCC Trading/Div. Fleet Secs * National Securities Corp. * Schroder, Wertheim & Co. * Starr Securities, Inc. * Sherwood Securities Corp. * Troster Singer Corp. Annual Meeting The annual meeting of stockholders of SED International Holdings, Inc. will be held at 12:00 p.m. local time on November 10, 1998, at the Company's corporate offices located at 4916 North Royal Atlanta Drive, Tucker, Georgia. Stockholders of record at the close of business on September 14, 1998 will be entitled to vote at this meeting. Price Range of Common Stock The following table sets forth the high and low sales prices for SED International Holdings, Inc.'s common stock as reported for each quarter of fiscal 1998 and 1997. The quotations are inter-dealer prices without retail mark-ups, mark-downs or commissions and may not represent actual transactions. 1998 Fiscal Quarter High Low First $20.00 $12.88 Second 19.75 8.75 Third 13.94 10.31 Fourth 13.13 8.00 1997 Fiscal Quarter High Low First $ 9.50 $5.38 Second 12.63 8.50 Third 12.50 7.81 Fourth 13.38 8.25 There were 9,613,603 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 14, 1998. The Company did not pay any cash dividends to its stockholders during the periods presented. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources" for a description of certain restrictions on the Company's payment of dividends. [BACK COVER] SED International Holdings, Inc. 4916 North Royal Atlanta Drive Tucker, Georgia 30085 770-491-8962 EX-21 11 EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT SED International, Inc., a Delaware corporation SED Magna (Miami), Inc., a Delaware corporation SED Retail, Inc., a Delaware corporation SED Magna Distribuidora, Ltda., a Brazilian corporation SED International de Colombia Ltda., a Colombian 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 August 19, 1998 (September 11, 1998 as to Note 11) incorporated by reference in the Annual Report on Form 10-K of SED International Holdings, Inc. for the year ended June 30, 1998. Our audits of the consolidated financial statements referred to in our aforementioned report also included the financial statement schedule of SED International Holdings, Inc. listed in Item 14(a). This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ Deloitte & Touche LLP Atlanta, Georgia September 28, 1998 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, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. PERIOD-TYPE. . . . . . . . . . . . . . . . . . . . 12 MONTHS FISCAL-YEAR-END. . . . . . . . . . . . . . . . . . JUNE 30, 1998 PERIOD-END . . . . . . . . . . . . . . . . . . . . JUNE 30, 1998 CASH . . . . . . . . . . . . . . . . . . . . . . . 2,693,000 SECURITIES . . . . . . . . . . . . . . . . . . . . -0- RECEIVABLES. . . . . . . . . . . . . . . . . . . . 86,298,000 ALLOWANCES . . . . . . . . . . . . . . . . . . . . 2,362,000 INVENTORY. . . . . . . . . . . . . . . . . . . . . 141,196,000 CURRENT ASSETS . . . . . . . . . . . . . . . . . . 237,031,000 PP&E . . . . . . . . . . . . . . . . . . . . . . . 9,490,000 ACCUMULATED DEPRECIATION . . . . . . . . . . . . . 5,747,000 TOTAL ASSETS . . . . . . . . . . . . . . . . . . . 266,565,000 CURRENT LIABILITIES. . . . . . . . . . . . . . . . 129,290,000 BONDS. . . . . . . . . . . . . . . . . . . . . . . -0- PREFERRED. . . . . . . . . . . . . . . . . . . . . -0- PREFERRED MANDATORY. . . . . . . . . . . . . . . . -0- COMMON . . . . . . . . . . . . . . . . . . . . . . 108,000 OTHER SE . . . . . . . . . . . . . . . . . . . . . 106,167,000 TOTAL LIABILITY AND EQUITY . . . . . . . . . . . . 266,565,000 SALES. . . . . . . . . . . . . . . . . . . . . . . 892,629,000 TOTAL REVENUES . . . . . . . . . . . . . . . . . . 892,629,000 CGS. . . . . . . . . . . . . . . . . . . . . . . . 848,090,000 TOTAL COSTS. . . . . . . . . . . . . . . . . . . . 848,090,000 OTHER EXPENSES . . . . . . . . . . . . . . . . . . 41,709,000 LOSS PROVISION . . . . . . . . . . . . . . . . . . -0- INTEREST EXPENSE . . . . . . . . . . . . . . . . . 2,728,000 INCOME PRETAX. . . . . . . . . . . . . . . . . . . 102,000 INCOME TAX . . . . . . . . . . . . . . . . . . . . 357,000 LOSS CONTINUING. . . . . . . . . . . . . . . . . . (255,000) DISCONTINUED . . . . . . . . . . . . . . . . . . . -0- EXTRAORDINARY. . . . . . . . . . . . . . . . . . . -0- CHANGES. . . . . . . . . . . . . . . . . . . . . . -0- NET LOSS . . . . . . . . . . . . . . . . . . . . . (255,000) EPS BASIC. . . . . . . . . . . . . . . . . . . . . (.03) EPS DILUTED. . . . . . . . . . . . . . . . . . . . (.03) -----END PRIVACY-ENHANCED MESSAGE-----