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 [ ]
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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.
<PAGE>
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.
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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
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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
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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
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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
<PAGE>
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.
<PAGE>
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
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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
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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.
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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
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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.
<PAGE>
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.
<PAGE>
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
<PAGE>
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."
<PAGE>
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)
<PAGE>
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)/*/
<PAGE>
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)
<PAGE>
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.
<PAGE>
(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.
<PAGE>
(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.
<PAGE>
SED INTERNATIONAL HOLDINGS, INC.
AND SUBSIDIARIES
<TABLE>
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
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
</TABLE>
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.
<PAGE>
<PAGE>
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)
<PAGE>
/s/ Larry G. Ayers
Larry G. Ayers
Vice President - Finance, Chief
Financial Officer, Secretary and
Treasurer
(principal financial and accounting
officer)
/s/ Stewart I. Aaron
Stewart I. Aaron
Director
/s/ Joel Cohen
Joel Cohen
Director
/s/ Mark Diamond
Mark Diamond
Director
/s/ Ray D. Risner
Ray D. Risner
Director
/s/ Cary Rosenthal
Cary Rosenthal
Director
<PAGE>
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
<PAGE>
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
<PAGE>
(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
<PAGE>
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
<PAGE>
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.
<PAGE>
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
<PAGE>
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
<PAGE>
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.
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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.
<PAGE>
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
<PAGE>
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.
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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.
<PAGE>
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:
<PAGE>
(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
<PAGE>
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
<PAGE>
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
<PAGE>
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.
<PAGE>
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
<PAGE>
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.
<PAGE>
(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.
<PAGE>
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
<PAGE>
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.
<PAGE>
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
<PAGE>
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.
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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.
<PAGE>
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
<PAGE>
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.
<PAGE>
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
<PAGE>
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.
<PAGE>
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
<PAGE>
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.
<PAGE>
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
<PAGE>
(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
<PAGE>
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:
<PAGE>
(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
<PAGE>
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:
<PAGE>
(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,
<PAGE>
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.
<PAGE>
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.
<PAGE>
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
<PAGE>
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"
<PAGE>
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
<PAGE>
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
<PAGE>
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.
<PAGE>
(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
<PAGE>
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:
<PAGE>
"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.
<PAGE>
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%
<PAGE>
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
<PAGE>
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
<PAGE>
(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
<PAGE>
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.
<PAGE>
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
<PAGE>
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."
<PAGE>
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
<PAGE>
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) $________
<PAGE>
(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. ___________________________ $_____________
<PAGE>
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
<PAGE>
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)) $____________
<PAGE>
Schedule 1
Consolidated Operating Profits
Consolidated Operating Profits
__ quarter 199_ $_________
__ quarter 199_ $_________
__ quarter 199_ $_________
__ quarter 199_ $_________
Total $_________
<PAGE>
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 $_________
<PAGE>
Schedule 3
Debt
INTEREST
RATE MATURITY TOTAL
Secured
______________________________ ________ _______ $________
______________________________ ________ _______ $________
______________________________ ________ _______ $________
______________________________ ________ _______ $________
______________________________ ________ _______ $________
Total Secured $___________
Unsecured
______________________________ ________ _______ $________
______________________________ ________ _______ $________
______________________________ ________ _______ $________
______________________________ ________ _______ $________
Total Unsecured $__________
Guarantees
_______________________________________________________ $________
_______________________________________________________ $________
Total $__________
Redeemable Preferred Stock $________
Total $__________
Other Liabilities
_______________________________________________________ $________
_______________________________________________________ $________
_______________________________________________________ $________
Total Debt $=========
<PAGE>
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.
<PAGE>
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
<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:
<PAGE>
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.
<PAGE>
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:
<PAGE>
(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
<PAGE>
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:
<PAGE>
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
<PAGE>
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.
<PAGE>
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
<PAGE>
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 $__________
<PAGE>
(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. ___________________________ $_____________
<PAGE>
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 $_________
<PAGE>
(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 $__________
<PAGE>
Actual Consolidated Tangible
Net Worth - Schedule 4 $__________
Required Consolidated Tangible Net
Worth (sum of (a) plus (b) plus (c)
minus (d)) $__________
<PAGE>
Schedule 1
Consolidated Operating Profits
Consolidated Operating Profits
__ quarter 199_ $__________
__ quarter 199_ $__________
__ quarter 199_ $__________
__ quarter 199_ $__________
Total $__________
<PAGE>
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 $__________
<PAGE>
Schedule 3
Debt
INTEREST
RATE MATURITY TOTAL
Secured
______________________________ ________ _______ $________
______________________________ ________ _______ $________
______________________________ ________ _______ $________
______________________________ ________ _______ $________
______________________________ ________ _______ $________
Total Secured $___________
Unsecured
______________________________ ________ _______ $________
______________________________ ________ _______ $________
______________________________ ________ _______ $________
______________________________ ________ _______ $________
Total Unsecured $________
Guarantees
_______________________________________________________ $________
_______________________________________________________ $________
Total $__________
Redeemable Preferred Stock $________
Total $________
Other Liabilities
_______________________________________________________ $________
_______________________________________________________ $________
_______________________________________________________ $________
Total Debt $=========
<PAGE>
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.
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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]
<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)
<PAGE>
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.
<PAGE>
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").
<PAGE>
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
<PAGE>
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)
<PAGE>
EXHIBIT 11.1
SED INTERNATIONAL HOLDINGS, INC.
AND SUBSIDIARIES
<TABLE>
COMPUTATION OF EARNINGS (LOSS) PER SHARE (1)
YEAR ENDED JUNE 30,
1996 1997 1998
<S> <C> <C> <C>
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)
---------- ---------- ------------
</TABLE>
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.
<PAGE>
[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
<PAGE>
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.
<TABLE>
Selected Income Statement Data
Year Ended June 30,
(in thousands, except per share data) 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
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
</TABLE>
<TABLE>
Selected Balance Sheet Data
June 30 (in thousands) 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
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
</TABLE>
SED 1
<PAGE>
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
<PAGE>
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
<PAGE>
[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
<PAGE>
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.
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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
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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.
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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.
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SED 8
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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
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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:
<TABLE>
Year Ended June 30, 1998 1997 1996
<S> <C> <C> <C>
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%
</TABLE>
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
<PAGE>
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
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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.
<TABLE>
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
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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)
</TABLE>
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
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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
<PAGE>
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
<PAGE>
<TABLE>
Consolidated Balance Sheets
June 30, 1998 1997
<S> <C> <C>
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
============ ============
</TABLE>
See notes to consolidated financial statements.
SED 15
<PAGE>
<TABLE>
Consolidated Statements of Earnings
(in thousands except per share data)
Year Ended June 30, 1998 1997 1996
<S> <C> <C> <C>
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
</TABLE>
See notes to consolidated financial statements.
SED 16
<PAGE>
<TABLE>
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
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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)
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
SED 17
<PAGE>
<TABLE>
Consolidated Statements of Cash Flows
Year Ended June 30, 1998 1997 1996
<S> <C> <C> <C>
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
</TABLE>
See notes to consolidated financial statements.
SED 18
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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:
<TABLE>
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
<S> <C> <C> <C> <C> <C>
$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
</TABLE>
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
<PAGE>
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.
<TABLE>
Year Ended June 30, 1998 United States Latin America Eliminations Consolidated
<S> <C> <C> <C> <C>
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
</TABLE>
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
<PAGE>
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
<PAGE>
[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
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
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
<PAGE>
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)
