-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Q+JGYVPoYaPvXHHGvaoajT3IUH/1TsuZ6v6+TSCOQLYgG5RfgXM6WEeaDyD76O0h 5klwZ4n/Y+NHO0c2+EyXsw== 0000931763-97-001494.txt : 19970912 0000931763-97-001494.hdr.sgml : 19970912 ACCESSION NUMBER: 0000931763-97-001494 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970905 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: SOUTHERN ELECTRONICS CORP CENTRAL INDEX KEY: 0000800286 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-COMPUTER & PERIPHERAL EQUIPMENT & SOFTWARE [5045] IRS NUMBER: 222715444 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-16345 FILM NUMBER: 97676274 BUSINESS ADDRESS: STREET 1: 4916 N ROYAL ATLANTA DR CITY: TUCKER STATE: GA ZIP: 30085 BUSINESS PHONE: 7709418962 MAIL ADDRESS: STREET 1: 4916 NORTH ROYAL ATLANTA DRIVE CITY: TUCKER STATE: GA ZIP: 30085 10-K405 1 FORM 10-K FOR FISCAL YEAR END 30-JUNE-1997 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, 1997 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 SOUTHERN ELECTRONICS CORPORATION (Exact name of Registrant as specified in its charter) DELAWARE 22-271544 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 4916 North Royal Atlanta Drive, Atlanta, Georgia 30085 Address of principal executive offices) (Zip Code) Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, $.01 PAR VALUE (Title of Class) COMMON STOCK PURCHASE RIGHTS (Title of Class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ------ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrants's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K. [X] The aggregate market value of the voting stock held by nonaffiliates of the Registrant was $89,020,917 as of September 2, 1997 based upon the last sale price of the Common Stock as reported on the Nasdaq National Market on that day. There were 7,229,640 shares of Common Stock, $.01 par value, outstanding at September 2, 1997. DOCUMENTS INCORPORATED BY REFERENCE: Part III incorporates information by reference from the Registrant's definitive proxy statement for the 1997 annual meeting of stockholders presently scheduled to be held on November 11, 1997, which proxy statement will be filed no later than 120 days after the close of the Registrant's fiscal year ended June 30, 1997. PART I Item 1. BUSINESS (a) General Development of Business Southern Electronics Corporation, 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 Southern Electronics Corporation 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 12,000 reseller customers a broad inventory of more than 3,500 products from approximately 125 vendors, including such market leaders as Seagate, Hewlett-Packard, Maxtor, Samsung, 3Com, Intel, Creative Labs, Acer, Canon, Epson, IBM and Novell, through a dedicated and highly motivated sales force. The Registrant believes it is the fourth largest microcomputer products distributor in the United States, where it recently has expanded its vendor lines, sales force and warehouse locations, and a leading microcomputer products distributor to Latin America, one of the fastest growing markets for personal computers in the world. The Registrant distributes products in the United States from its strategically located warehouses in Atlanta, Georgia, Miami, Florida and City of Industry, California, while servicing Latin America from its Miami facility. The Registrant's net sales increased to $646.3 million in fiscal 1997 from $398.8 million in fiscal 1995, and its net earnings increased to $7.9 million in fiscal 1997 from $5.2 million in fiscal 1995, representing compound annual growth rates of 27.3% and 23.0%, respectively. 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 OKI Telecom and an indirect distributor for other leading wireless telephone product vendors such as Motorola, Ericsson, Nokia and NEC. In fiscal 1997, the Registrant's net sales of microcomputer products generated approximately 91.0% of the Registrant's total net sales and wireless telephone products represented the remaining 9.0%. Over the past two years, the Registrant has 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. As a result of a transaction with Globelle, Inc. ("Globelle") in June 1997, the Registrant acquired the distribution rights for certain significant vendor lines in the United States including Hewlett-Packard and Intel, and subsequently hired 36 experienced salespeople formerly with Globelle. The addition of brand name vendor lines and salespeople, coupled with the opening of a warehouse facility in California in May 1997, provide the Registrant with greater sales penetration in the western United States and more efficient nationwide distribution capabilities. Beginning in December 1995, the Registrant substantially increased its sales to Latin America with the acquisition of U.S. Computer of North America, Inc. ("U.S. Computer"). As a result of this acquisition and the Registrant's increased focus on the region, net sales to Latin America have increased to $290.7 million or 45.0% of total net sales in fiscal 1997 from $14.3 million in fiscal 1994. 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 will serve as a distribution center for the Registrant. Payments under the lease will total approximately $18,000 for each of the first 36 months of the lease and will then increase to $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. The Registrant intends to begin operating a configuration center to perform certain configuration services in connection with products distributed by the Registrant. The facility is located in Stone Mountain, Georgia and it consists of approximately 40,160 square feet. The Registrant will begin leasing the facility on October 1, 1997 and the lease will terminate on September 30, 2000 unless the Registrant exercises its option to renew the lease for an additional three-year period. The Registrant may also terminate the lease at any time following commencement of the fourth year of the lease upon payment of any unamortized brokers' fee payable with respect to the lease. Rent under the lease is $11,982 per month. (b) Financial Information about Industry Segments The Registrant operates in only one business segment. 2 (c) Narrative Description of Business 1. Products and Vendors The Registrant offers its customers a broad inventory of more than 3,500 products from approximately 125 vendors, including such market leaders as Seagate, Hewlett-Packard, Maxtor, Samsung, 3Com, Intel, Creative Labs, Acer, Canon, Epson, IBM and Novell. The Registrant is a direct distributor of wireless telephone products for OKI Telecom and an indirect distributor for other leading wireless telephone product vendors such as Motorola, Ericsson, Nokia and NEC. Microcomputer related products accounted for $588.4 million or 91.0% of the Registrant's net sales for fiscal 1997, $429.4 million or 91.7% of net sales in fiscal 1996, and $362.4 or 91.0% of net sales in fiscal 1995, 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 $58.0 million or 9.0% of the Registrant's net sales for fiscal 1997, $38.9 million or 8.3% of net sales for fiscal 1996, and $36.4 million or 9.0% of net sales for fiscal 1995 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 125 vendors and has negotiated favorable terms from certain vendors by purchasing a substantial volume of those vendors' products. In fiscal 1997, products purchased from Seagate, Hewlett-Packard and Maxtor accounted for 19.7%, 11.5% and 11.5%, respectively, of the Registrant's total purchases and the loss of any one of these three vendors could materially adversely affect the financial condition of the Registrant. The Registrant expects that the percentage of goods purchased from Hewlett-Packard will increase for fiscal 1998 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 Miami, Florida warehouse. 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 national telemarketing sales force, which consisted of approximately 144 persons on June 30, 1997 in seven sales offices located in Atlanta, Georgia, Miami, Florida, Minneapolis, Minnesota, Carlsbad, California, St. Louis, Missouri, Boca Raton, Florida and Chicago, Illinois. Since June 30, 1997, the Registrant has hired an additional 39 salespersons, primarily as a result of the Globelle transaction. Of the total number of salespersons at August 31, 1997, 38 persons focused on sales to customers for export to Latin America, substantially all of whom are fluent in Spanish or Portuguese. The Registrant's Atlanta sales office maintains a separate telemarketing sales force for the sale of wireless telephone products to retailers and wireless telephone carriers and their authorized agents located throughout the United States and Latin America. Members of the sales staff are trained through intensive in-house sales training programs, along with vendor-sponsored product seminars. This training allows sales personnel to provide customers with product information and to use their marketing expertise to answer customers' questions about important new product considerations, such as compatibility and capability, while offering advice on which products meet specific performance and price criteria. The Registrant's salespeople are able to analyze quickly the Registrant's extensive inventory through a sophisticated management information system and recommend the most appropriate cost-effective systems and hardware for each customer--whether a full-line retailer or an industry-specific reseller. The sales force is organized in teams generally consisting of 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 recently installed Internet web page providing 24-hour access to on-line order entry. The Registrant's web page provides customers secured access to place orders and review product specifications at times that are convenient to them. Customers also can determine inventory availability and pricing on a real-time basis and in the near future verify the status of previously placed orders through hyperlinks to certain independent shipping companies. The Registrant prides itself on being service oriented and has a number of on-going value-added services intended to benefit both the Registrant's vendors and its resellers. For example, the Registrant is committed to training its salespeople to be technically knowledgeable about the products they sell. This core competency supplements the sophisticated technical support and configuration services also provided by the Registrant. Salespeople who are knowledgeable about the products they sell often can assist in the configuration of microcomputer systems according to specifications given by the resellers. The Registrant believes that its salesperson's ability to listen to a reseller's needs and recommend a cost- efficient solution strengthens the relationship between the salesperson and his or her reseller and promotes customer loyalty to a vendor's products. In addition, the Registrant provides such other value-added services as new product demonstrations and technical education programs for resellers, order fulfillment and electronic ordering, and informational assistance through the Registrant's web page. Management continually evaluates the Registrant's product mix and the needs of its customers in order to minimize inventory obsolescence and carrying costs. The Registrant's rapid delivery terms are available to all of its customers, and the Registrant seeks to pass through its shipping and handling costs to its customers. The Registrant offers various credit terms including open account, prepay, credit card and COD to qualifying customers. The Registrant closely monitors customers' creditworthiness through its on-line computer system which contains detailed information on each customer's payment history and other relevant information. In addition, the Registrant participates in national and international credit associations that exchange credit rating information on customers of association members. In most markets, the Registrant utilizes various levels of credit insurance to control credit risks and enable the Registrant to extend higher levels of credit. The Registrant establishes reserves for estimated credit losses in the normal course of business. 3. Customers The Registrant serves an active, nonexclusive customer base over 12,000 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 1997, no single customer accounted for more than 3.0% of the net sales of the Registrant. The Registrant believes that most of its customers rely on distributors as their principal source of microcomputer and wireless telephone products. 4. Competition The microcomputer and wireless telephone distribution industries are highly competitive, both in the United States and in Latin America. Competition in these industries is typically characterized by pricing pressures, product availability and potential obsolescence, speed and accuracy of delivery, effectiveness of sales and marketing programs, credit availability, ability to tailor specific solutions to customer needs, quality of product lines and services, and availability of technical support and product information. Additionally, the Registrant's ability to compete favorably is principally dependent upon its ability to control inventory and other operating costs, react timely and appropriately to short- and long-term trends, price competitively its products, increase its net sales and maintain economies of scale. In the early 1990s, the United States microcomputer industry moved toward open sourcing pursuant to which vendors authorized multiple distributors to sell to resellers on equal terms rather than relying on exclusive relationships. As a result, the competitive environment has become more intense, leading to accelerating industry consolidation and declining gross margins. The Registrant's competitors include regional, national and international microcomputer and wireless distributors, many of which have substantially greater technical, financial and other resources than the Registrant, as well as vendors that sell directly to resellers and large resellers that sell to other resellers. Major competitors include Ingram Micro, Inc., Merisel, Inc. and Tech Data Corporation in the United States, and CHS Electronics, Inc. in Latin America. 5. Employees As of June 30, 1997, the Registrant had 363 full-time employees, 144 of whom were engaged in telemarketing, 127 in administration and 92 in shipping. The Registrant also utilizes 26 part-time employees. Since June 30, 1997, the Registrant has hired an additional 39 salespersons, primarily as a result of the Globelle transaction. 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, 1995, 1996 and 1997, approximately 21%, 37%, and 45%, respectively, of the Registrant's 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. Subsequent to June 30, 1997, the Registrant opened a sales office in Bogota, Columbia. Item 2. PROPERTIES The Registrant maintains its executive offices at 4916 North Royal Atlanta Drive in Tucker, Georgia, where 112 of its sales employees are also located. The Registrant leases its executive, administrative and sales office from Royal Park Company, a Georgia general partnership comprised of certain minority stockholders of the Registrant. The lease expires in October 1999 after an 8-year term and supersedes the original 15-year lease entered into in 1984 between the Registrant's predecessor and Royal Park Company. The facility consists of approximately 30,000 square feet, with an annual rental of approximately $176,000 through October 1, 1999, subject to increase based upon periodic changes in the Consumer Price Index. The Registrant has a right of first refusal to purchase the facility should it be offered for sale. The Registrant believes that the lease is on terms no less favorable than those available from unaffiliated parties. The Registrant maintains warehouse facilities in Atlanta, Georgia, City of Industry, California, and Miami, Florida. 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. 3 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. Besides the leased premises, the Registrant is currently using an additional space in the same property of approximately 50,000 square feet. The Registrant does not have a lease with respect to the additional space, and is not paying any rent for the use of such space. The Registrant is in the process of negotiating a lease for the additional space at this time. The Registrant intends to begin operating a distribution and configuration center to perform certain configuration services in connection with products distributed by the Registrant. The facility is located in Stone Mountain, Georgia, and it consists of approximately 40,160 square feet. The Registrant will begin leasing the facility on October 1, 1997, and the lease will terminate on September 30, 2000, unless the Registrant exercises its option to renew the lease for an additional three- year period. The Registrant may also terminate the lease upon completion of each year of the lease by paying any unamortized brokers' fee payable with respect to the lease. Rent under the lease is $11,982 per month. 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. 4 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 59 Chairman of the Board, Chief Executive Officer and Director of the Registrant and SED International Ray D. Risner 52 President, Chief Operating Officer and Director of the Registrant and SED International Larry G. Ayers 51 Vice President-Finance, Chief Financial Officer, Secretary and Treasurer of the Registrant and SED International Mark Diamond 32 Executive Vice President and Director of the Registrant and SED International Jean Diamond 56 Vice President-Credit of 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 August 1995. Mr. Risner served as Vice Chairman of RJM Group, Inc., a private investment advisory firm, from 1989 to 1994. From 1987 to 1989, he served as Vice President, Financial Administration of RJR Nabisco, Inc. Mr. Risner is also a trustee and Vice Chairman of The National Faculty and a member of the Board of American Red Cross Chapter, Atlanta, Georgia. 5 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 July 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 - Credit 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. PART II Item 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS (a) Market Information. The following table sets forth the range of high and low sale prices per share for the Registrant's Common Stock as reported by the Nasdaq National Market, where the stock trades under the symbol "SECX," for the periods indicated.
Fiscal Year Period High Low - ----------- ------ ---- --- 1996 First Quarter $ 6.50 $ 5.00 Second Quarter 6.25 4.63 Third Quarter 6.25 4.75 Fourth Quarter 6.88 5.00
6
Fiscal Year Period High Low - ----------- ------ ---- --- 1997 First Quarter $ 9.50 $ 5.38 Second Quarter 12.63 8.50 Third Quarter 12.50 7.81 Fourth Quarter 13.38 8.25
(b) Holders. As of August 31, 1997, there were 193 holders of record of the Common Stock. Management of the Registrant believes that there are in excess of 400 beneficial holders of Common Stock. (c) Dividends. 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." 7 Item 6. SELECTED FINANCIAL DATA The following table sets forth selected consolidated financial data for each of the five years ended June 30, 1997, derived from the Registrant's Audited Consolidated Financial Statements. The following data should be read in conjunction with the Consolidated Financial Statements and the Notes thereto appearing elsewhere herein, as well as "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations", and "Item 1. Business."
Years Ended June 30, ------------------------------------------------ (In thousands, except per share data) 1993 1994 1995 1996 1997 -------- -------- -------- -------- -------- Statement of Income Data: Net Sales........................... $249,472 $296,173 $398,753 $468,298 $646,336 Cost of Sales....................... 223,122 271,982 370,548 438,837 607,437 -------- -------- -------- -------- -------- Gross profit........................ 26,350 24,191 28,205 29,461 38,899 Selling, general and administrative expenses......................... 13,015 14,448 19,104 19,493 23,941 -------- -------- -------- -------- -------- Operating income.................... 13,335 9,743 9,101 9,968 14,958 Interest expense, net............... 20 193 688 902 2,128 -------- -------- -------- -------- -------- Earnings before income taxes........ 13,315 9,550 8,413 9,066 12,830 Income taxes........................ 4,929 3,606 3,191 3,516 4,925 -------- -------- -------- -------- -------- Net earnings........................ $ 8,386 $ 5,944 $ 5,222 $ 5,550 $ 7,905 ======== ======== ======== ======== ======== Net earnings per share.............. $ 1.13 $ 0.81 $ 0.74 $ 0.76 $ 1.04 Weighted average common shares outstanding........................ 7,427 7,355 7,069 7,280 7,634 At June 30 ------------------------------------------------ 1993 1994 1995 1996 1997 -------- -------- -------- -------- -------- Balance Sheet Data: Working capital..................... $ 20,099 $ 25,489 $ 41,355 $ 40,496 $ 79,350 Total assets........................ 56,290 65,572 87,375 131,305 197,329 Total debt.......................... 9,258 -- 11,500 10,610 56,000 Stockholders' equity................ 23,281 29,348 34,633 41,650 48,896
8 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with, and qualified in its entirety by, the Consolidated Financial Statements of the Registrant and the Notes thereto and the Selected Financial Data, included in this Form 10-K. Historical operating results are not necessarily indicative of trends in operating results for any future period. OVERVIEW 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 believes it is the fourth largest microcomputer products distributor in the United States, where it recently has expanded its vendor lines, sales force and warehouse locations, and a leading microcomputer products distributor to Latin America, one of the fastest growing markets in the world for personal computers. Over the past two years, the Registrant has 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 1997, the Registrant's net sales to customers in the United States represented approximately 55.0% of total net sales and net sales for export to Latin America represented approximately 45.0% of total net sales. Net sales of microcomputer products generated approximately 91.0% of total net sales and wireless telephone products represented the remaining 9.0% for fiscal 1997. While the microcomputer products distribution industry has experienced significant growth in recent years, the competitive environment has simultaneously become more intense, leading to accelerating industry consolidation and declining gross margins. As a result, the Registrant has placed greater emphasis on the conservative management of relative selling, general and administrative expenses to offset potential declines in operating margins. Over the last four fiscal years, the Registrant has reduced selling, general and administrative expenses as a percentage of net sales to 3.7% in fiscal 1997 from 5.2% in fiscal 1993. Although the Registrant has successfully controlled these expenses as a percentage of net sales over the last four fiscal years, there can be no assurance that it will be able to do so in the future. The Registrant also anticipates some quarterly fluctuations in these expenses from the transition period following the closing of future business acquisitions, both in the United States and in Latin America. As a result of a transaction with Globelle in June 1997, the Registrant has acquired the distribution rights for certain significant vendor lines in the United States, including Hewlett-Packard and Intel, and subsequently hired 36 experienced salespeople formerly with Globelle to benefit from their pre-existing customer relationships. In addition, the Registrant anticipates entering into additional authorized United States distributor agreements for other product lines previously sold by Globelle. Because the Globelle transaction was not an acquisition of a going business concern, management expects a transition period following the closing of that transaction during which the newly-hired former salespeople of Globelle and their respective customer base are acclimated to the Registrant's policies, procedures and product offerings and the inventory of new product lines is stocked at the Registrant's warehouses. The Globelle transaction affords the Registrant the opportunity to leverage a national sales presence with its strategically located national warehouses, thereby providing timely and efficient product distribution to its customers located anywhere in the United States. As a result of the Globelle transaction, the Registrant expects to incur one-time after tax start-up costs of approximately $900,000 during its first fiscal quarter ending September 30, 1997. This charge reflects the costs associated with hiring new salespeople, opening new sales offices and other related items. Beginning in December 1995, the Registrant substantially increased its sales to Latin America with the acquisition of U.S. Computer. As a result of this acquisition and the Registrant's increased focus on the region, sales to Latin America have increased to $290.7 million or 45.0% of total net sales in fiscal 1997 from $14.3 million in fiscal 1994. Gross margins for sales to Latin America generally are lower than those in the United States primarily due to lower product prices required to absorb additional costs from a relatively more layered distribution channel. Selling, general and administrative expenses as a percentage of net sales, however, generally are lower primarily due to larger average customer orders resulting in fewer Registrant resources required for customer support. The Registrant's resulting operating margins for sales to Latin America generally are similar to those in the United States. The Registrant derives all of its operating income and cash flow from SED International, which is organized in and operates from the United States. Consequently, all purchases and sales of inventory are in United States dollars. As the Registrant expands internationally to establish an in-country presence throughout Latin America, the Registrant may begin buying and selling inventory using locally denominated currencies. The use of foreign currencies could subject the Registrant to the risk of currency fluctuations, which the Registrant may seek to limit through hedging activities. RESULTS OF OPERATIONS The following table sets forth, for the periods presented, the percentage of net sales represented by certain items in the Registrant's Consolidated Statements of Earnings:
YEAR ENDED JUNE 30, ------------------- 1995 1996 1997 ----- ----- ----- Net sales.................................................. 100.0% 100.0% 100.0% Cost of sales, including buying and occupancy expenses..... 92.9 93.7 94.0 ----- ----- ----- Gross profit............................................... 7.1 6.3 6.0 Selling, general and administrative expenses............... 4.8 4.2 3.7 ----- ----- ----- Operating income........................................... 2.3 2.1 2.3 Interest expense, net...................................... 0.2 0.2 0.3 ----- ----- ----- Earnings before income taxes............................... 2.1 1.9 2.0 Income taxes............................................... 0.8 0.7 0.8 ----- ----- ----- Net earnings............................................... 1.3% 1.2% 1.2% ===== ===== =====
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 and the Registrant's increased focus on Latin America. Sales of microcomputer products represented approximately 91.0% of the Registrant's fiscal 1997 net sales compared to 91.7% for fiscal 1996. Sales of wireless telephone products accounted for approximately 9.0% of the Registrant'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. 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 Registrant's ability to control variable costs over a larger sales base and a greater proportion of the Registrant'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. Fiscal 1996 Compared to Fiscal 1995 Net sales increased 17.4%, or $69.5 million, to $468.3 million in fiscal 1996 compared to $398.8 million in fiscal 1995. This growth resulted from an increase in net sales for export principally into Latin America, offset by a decrease in United States net sales. United States net sales decreased 5.7%, or $18.0 million, to $296.8 million in fiscal 1996 compared to $314.8 million in fiscal 1995, primarily due to a temporary industry shortage of certain disk drive products. Net sales for export increased 104.2%, or $87.5 million, to $171.5 million in fiscal 1996 compared to $84.0 million in fiscal 1995, primarily as a result of the December 1995 acquisition of U.S. Computer. Sales of microcomputer products represented approximately 91.7% of the Registrant's fiscal 1996 net sales compared to 90.9% for fiscal 1995. Sales of wireless telephone products accounted for approximately 8.3% of the Registrant's fiscal 1996 net sales compared to 9.1% for fiscal 1995. Gross profit increased 4.5%, or $1.3 million, to $29.5 million in fiscal 1996, compared to $28.2 million in fiscal 1995. Gross profit as a percentage of net sales decreased to 6.3% in fiscal 1996 from 7.1% in fiscal 1995. 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 significantly higher proportion of total net sales for export. Selling, general and administrative expenses increased 2.0%, or $389,000 to $19.5 million in fiscal 1996 compared to $19.1 million in fiscal 1995. These expenses as a percentage of net sales decreased to 4.2% in fiscal 1996 compared to 4.8% in fiscal 1995. The dollar increase in these expenses was primarily due to increased salaries and commissions for salespeople. The percentage decrease in these expenses was primarily due to the Registrant's ability to control variable costs over a larger sales base and a greater proportion of the Registrant's business derived from Latin America, which generally has lower selling, general and administrative expenses than in the United States. Net interest expense increased 31.1%, or $214,000, to $902,000 in fiscal 1996 compared to $688,000 in fiscal 1995. Net interest expense as a percentage of net sales was 0.2% for both fiscal 1996 and fiscal 1995. The dollar 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 38.8% in fiscal 1996 compared to 37.9% in fiscal 1995. The increase in the fiscal 1996 effective rate relates primarily to non-deductible goodwill amortization expense resulting from the Registrant's December 1995 acquisition of U.S. Computer. QUARTERLY DATA; SEASONALITY The following table sets forth certain unaudited quarterly historical consolidated financial data for each of the Registrant's last eight fiscal quarters ended June 30, 1997. This unaudited quarterly information has been prepared on the same basis as the annual information presented elsewhere herein and, in the Registrant'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 in this Form 10-K. The operating results for any quarter shown are not necessarily indicative of results for any future period.
QUARTER ENDED ------------------------------------------------------------------------------------------- SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, 1995 1995 1996 1996 1996 1996 1997 1997 ------------- ------------ --------- -------- ------------- ------------ --------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Net sales............... $109,993 $101,865 $117,261 $139,179 $160,114 $153,286 $165,168 $167,768 Gross profit............ 6,608 6,859 7,440 8,554 9,001 9,840 9,857 10,201 Operating income........ 1,901 2,345 2,619 3,103 3,302 3,581 4,014 4,061 Net earnings............ 1,010 1,354 1,469 1,717 1,818 1,945 2,010 2,132 Earnings per share...... 0.14 0.19 0.20 0.23 0.24 0.25 0.27 0.28
Although the Registrant does not presently experience any material quarterly seasonality for its sales, the Registrant anticipates some seasonality in net sales and net income occurring within the second and third fiscal quarters as a result of increased holiday sales during those periods, especially with respect to sales to Latin America. LIQUIDITY AND CAPITAL RESOURCES The Registrant's liquidity requirements arise primarily from the funding of working capital needs, including inventories and trade accounts receivable. Historically, the Registrant has financed its liquidity needs largely through internally generated funds, borrowings under its credit agreement and vendor lines of credit. The Registrant derives all of its operating income and cash flow from its subsidiary and relies on payments from its subsidiary to generate the funds necessary to meet its obligations. As the Registrant 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 Registrant's present and future subsidiaries in those countries to make payments to the Registrant. Operating activities used $29.0 million, provided $2.2 million, and used $10.0 million of cash in fiscal 1997, 1996 and 1995, respectively. The use of cash in fiscal 1997 resulted primarily from increases of $12.5 million in accounts receivable and $40.3 million in inventory partially offset by net earnings of $7.9 million and a $12.6 million increase in accounts payable. 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. The use of cash in fiscal 1995 resulted primarily from increases of $7.7 million in accounts receivable and $14.7 million in inventory partially offset by net earnings of $5.2 million and a $4.5 million increase in accounts payable. Investing activities used $15.5 million, $1.4 million and $1.5 million of cash in fiscal 1997, 1996 and 1995, respectively. 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 remaining use of cash in fiscal 1997, as well as the use of cash in fiscal 1996 and 1995 was primarily due to the upgrade of the Registrant's computer and telephone systems as well as the expansion of warehouse and other facilities in each year. Financing activities provided $44.6 million, used $882,000 and provided $11.5 million of cash in fiscal 1997, 1996 and 1995, respectively. These activities related primarily to borrowings and repayments under the Registrant's revolving credit facility then in effect. Additionally, in fiscal 1997 the Registrant 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. The Registrant and SED International are parties to a credit agreement (the "Credit Agreement") with its lenders, which provides for a secured line of credit of $100.0 million and expires on August 13, 2000. The Registrant may borrow at the prime rate offered by Wachovia Bank, N.A. (8.50% at August 31, 1997) or the Registrant 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 0.25% 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 August 31, 1997, the Registrant had principal borrowings of $55.0 million under the Credit Agreement at a weighted average interest rate of 8.57% per annum. Average borrowings, maximum borrowings and the weighted average interest rate for fiscal 1997 were $28.7 million, $56.0 million and 7.60%, respectively. The Registrant intends to use the net proceeds of the Offering to repay outstanding indebtedness under the Credit Agreement. Management believes that the Credit Agreement, as amended, together with vendor lines of credit and internally generated funds, will be sufficient to satisfy its working capital needs during fiscal 1998. 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 Registrant's business because of the typically decreasing costs of products sold by the Registrant. The Registrant 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 Registrant prior to the Registrant's sale of such goods, the Registrant 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 Registrant pursues its growth strategy to acquire businesses and assets in foreign countries, the Registrant 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 Registrant's business in the immediate future. FORWARD-LOOKING STATEMENTS This Form 10-K contains certain "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), which represent the Registrant's expectations or beliefs, including, but not limited to, statements concerning sales of the Registrant's products and operating income. When used in this Form 10-K, 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 Registrant's control. The Registrant cautions that various factors, including the factors described under the captions "Management's Discussion and Analysis of Financial Condition and Results of Operations" as well as general economic conditions and industry trends, the level of acquisition opportunities available to the Registrant and the Registrant'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 Registrant made by or on behalf of the Registrant. Any forward-looking statement speaks only as of the date on which such statement is made, and the Registrant undertakes no obligation to update any forward-looking statement or statements to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of an unanticipated event. New factors emerge from time to time, and it is not possible for management to predict all of such factors. Further, management cannot assess the impact of each such factor on the business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated financial statements of the Registrant, notes thereto, and independent auditors' report thereon are filed herewith. Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY Information regarding the Registrant's directors is incorporated herein by reference to the section of the Registrant's Proxy Statement for the Annual Meeting of Stockholders scheduled for November 11, 1997 (the "Proxy Statement") entitled "Proposal 1 - Election of Directors." 9 Information regarding the Registrant's executive officers is incorporated herein by reference to Item 4(A) of Part I of this Form 10-K. Item 11. EXECUTIVE COMPENSATION Information regarding the Registrant's compensation of its executive officers and directors is incorporated herein by reference to the sections of the Proxy Statement entitled "Proposal 1 -Election of Directors" and "Executive Compensation". Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information regarding the security ownership of certain beneficial owners and management of the Registrant is incorporated by reference to the section of the Proxy Statement entitled "Ownership of Shares". Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information regarding certain relationships and related transactions is incorporated herein by reference to the section of the Proxy Statement entitled "Compensation Committee Interlocks and Insider Participation." PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this Report: 1. Financial Statements. The following financial statements and the report of the Registrant's independent auditors thereon, are filed herewith. - Independent Auditors' Report - Consolidated Balance Sheets at June 30, 1996 and 1997 - Consolidated Statements of Earnings for the years ended June 30, 1995, 1996 and 1997 - Consolidated Statements of Stockholders' Equity for the years ended June 30, 1995, 1996 and 1997 10 - Consolidated Statements of Cash Flows for the years ended June 30, 1995, 1996 and 1997 - 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 Certificate of Incorporation, as amended, of Southern Electronics Corporation (the "Registrant").(1) 3.2 Amended and Restated By-Laws of the Registrant.(2) 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 (3) 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")(4) 10.2 Lease Agreement dated May 16, 1990 between The Equitable Life Assurance Society of the United States and SED International(5), as amended March 20, 1992.(6)
11
Exhibit Number Description - ------ ----------------------------------------------------------------------- 10.3 Lease Agreement dated September 16, 1989 between Industrial Distribution Group, Inc. and SED International(7), as amended August 19, 1991.(8) 10.4 Lease Agreement dated January 15, 1992 between SED International and RW Building One Associates.(9) 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.(10)/*/ 10.6 Form of First Amendment dated September 14, 1989 to Southern Electronics Corporation 1986 Stock Option Plan.(11)/*/ 10.7 Second Amendment dated November 7, 1989 to Southern Electronics Corporation 1996 Stock Option Plan.(12)/*/ 10.8 Third Amendment dated July 17, 1992 to Southern Electronics Corporation 1986 Stock Option Plan.(13)/*/ 10.9 Southern Electronics Corporation 1988 Restricted Stock Plan, together with related form of Restricted Stock Agreement.(14)/*/ 10.10 First Amendment dated November 7, 1989 to Southern Electronics Corporation 1988 Restricted Stock Plan.(15)/*/ 10.11 Second Amendment dated July 17, 1992 to Southern Electronics Corporation 1988 Restricted Stock Plan.(16)/*/ 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. (17) /*/ 10.13 First Amendment dated July 17, 1992 to Southern Electronics Corporation 1991 Stock Option Plan.(18)/*/ 10.14 Second Amendment dated August 30, 1996 to Southern Electronics Corporation 1991 Stock Option Plan.(19) 10.17 Form of NonQualified Stock Option Agreement dated as of August 28, 1992 between the Registrant and Cary Rosenthal.(20)/*/ 10.18 Form of NonQualified Stock Option Agreement dated as of August 28, 1992 between the Registrant and G. William Speer.(21)/*/
12
Exhibit Number Description - ------ ----------------------------------------------------------------------- 10.19 Employment Agreements dated November 7, 1989, between the Registrant, SED International and each of Gerald Diamond and Jean Diamond (22)/*/, each as amended by form of Amendment No. 1 dated September 24, 1991.(23)/*/ 10.20 SED International, Inc. Savings Plan effective as of January 1, 1991, together with Savings Plan Trust and Savings Plan Adoption Agreement.(24)/*/ 10.21 Form of Indemnification Agreement entered into with each of the directors and officers of the Registrant and SED International.(25)/*/ 10.22 Form of Indemnification Agreement entered into with each of the directors and officers of the Registrant and the Registrant.(26) 10.23 Lease Agreement dated November 1992 between H.G. Pattillo and Elizabeth M. Pattillo and SED International.(27) 10.24 Lease Agreement dated August 9, 1993 between New World Partners Joint Venture and SED International and Addendum I thereto ("NWPJV Lease"). (28) 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. (29) 10.26 Third Addendum to NWPJV Lease dated July 24, 1996 between New World Partners Joint Venture Number Two and SED International. (30) 10.27 Amendment to Lease for 4775 N. Royal Atlanta Drive.(31) 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.(32) 10.34 1995 Formula Stock Option Plan, together with related form of NonQualified Stock Option Agreement.(33)
13
Exhibit Number Description - ------ ----------------------------------------------------------------------- 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.(34) 10.36 Adoption Agreement for Swerdlin & Registrant Regional Prototype Standardized 401(k) Profit Sharing Plan and Trust, as amended. (35) 10.37 Third Amendment dated September 12, 1996 to the Southern Electronics Corporation Stock Option Plan (36) 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. (37) 10.39 Asset Purchase Agreement dated as of June 27, 1997, between SED International and Globelle, Inc. (38) 10.40 Lease Agreement made August 11, 1997, between Gwinnett Industries, Inc. And SED International.+ 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.+ 11.1 Statement regarding computation of per share earnings.+ 21 Subsidiaries of the Registrant.(39) 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. 14 (1) Incorporated herein by reference to exhibit 3.1 to Registrant's Annual Report on Form 10K for the fiscal year ended June 30, 1995 (SEC File No. 016345)(the "1995 Form 10K"). (2) 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). (3) Incorporated herein by reference to Exhibit 7 to the Registrant's Current Report on Form 8-K dated October 30, 1996. (4) 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"). (5) 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"). (6) 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"). (7) Incorporated herein by reference to exhibit 10.9 to Registrant's 1990 Form 10K. (8) Incorporated herein by reference to exhibit 10.6 to Registrant's Registration Statement. (9) Incorporated herein by reference to exhibit 10.7 to Registrant's 1992 Form 10K. (10) Incorporated herein by reference to exhibit 10.12 to Registrant's Registration Statement. (11) 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). (12) Incorporated herein by reference to exhibit 10.25 to Registrant's 1990 Form 10K. (13) Incorporated herein by reference to exhibit 10.12 to Registrant's 1992 Form 10K. (14) 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). (15) Incorporated herein by reference to exhibit 10.26 to Registrant's 1990 Form 10K. (16) Incorporated herein by reference to exhibit 10.15 to Registrant's 1992 Form 10K. (17) Incorporated herein by reference to Annex A to Registrant's definitive Supplemental Proxy Statement dated October 18, 1991 (SEC File No. 016345).
15 (18) Incorporated herein by reference to exhibit 10.17 to Registrant's 1992 Form 10K. (19) 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). (20) Incorporated herein by reference to exhibit 10.18 to Registrant's 1992 Form 10K. (21) Incorporated herein by reference to exhibit 10.19 to Registrant's 1992 Form 10K. (22) 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). (23) Incorporated herein by reference to exhibit 10.13 to Registrant's 1991 Form 10K. (24) Incorporated herein by reference to exhibit 10.15 to Registrant's 1991 Form 10K. (25) Incorporated herein by reference to exhibit 10.16 to Registrant's 1991 Form 10K. (26) Incorporated herein by reference to Registrant's 1995 Form 10K. (27) 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"). (28) Incorporated herein by reference to exhibit 10.25 to Registrant's 1993 Form 10K. (29) 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") (30) Incorporated herein by reference to exhibit 10.33 to Registrant's 1996 Form 10K. (31) Incorporated herein by reference to exhibit 10.26 to Registrant's 1995 Form 10K. (32) Incorporated herein by reference to exhibit 10.29 to Registrant's 1995 Form 10K. (33) 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). (34) 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). (35) Incorporated herein by reference to Exhibit 10.41 to Registrant's 1996 Form 10K. (36) 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).
16 (37) 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) (38) Incorporated herein by reference to the Registrant's Current Report on Form 8-K dated June 27, 1997. (39) Incorporated herein by reference to exhibit 21 to Registrant's 1993 Form 10K. (b) Reports on Form 8K. No reports on Form 8-K were filed by the Registrant during the quarter ended June 30, 1997.
17 INDEX TO FINANCIAL STATEMENTS
PAGE ---- Independent Auditors' Report.............................................. F-2 Consolidated Balance Sheets as of June 30, 1996 and 1997.................. F-3 Consolidated Statements of Earnings for the years ended June 30, 1995, 1996 and 1997............................................................ F-4 Consolidated Statements of Stockholders' Equity for the years ended June 30, 1995, 1996 and 1997.................................................. F-5 Consolidated Statements of Cash Flow for the years ended June 30, 1995, 1996 and 1997............................................................ F-6 Notes to Consolidated Financial Statements................................ F-7
F-1 INDEPENDENT AUDITORS' REPORT Board of Directors Southern Electronic Corporation We have audited the accompanying consolidated balance sheets of Southern Electronics Corporation and subsidiary as of June 30, 1996 and 1997 and the related consolidated statements of earnings, stockholders' equity and cash flows for each of the three years in the period ended June 30, 1997. Our audits also included the financial statement schedule listed in the Index at item 14. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule 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 Southern Electronics Corporation and subsidiary as of June 30, 1996 and 1997 and the results of their operations and their cash flows for each of the three years in the period ended June 30, 1997 in conformity with generally accepted accounting principles. Also, 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. DELOITTE & TOUCHE LLP Atlanta, Georgia August 13, 1997 F-2 SOUTHERN ELECTRONICS CORPORATION AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS
JUNE 30, -------------------------- 1996 1997 ------------ ------------ ASSETS CURRENT ASSETS: Cash and cash equivalents......................... $ 662,000 $ 783,000 Trade accounts receivable, less allowance for doubtful accounts of $1,141,000 (1996) and $1,102,000 (1997)................................ 44,621,000 55,745,000 Inventories....................................... 72,501,000 112,813,000 Deferred income taxes............................. 1,230,000 1,223,000 Other current assets.............................. 527,000 1,219,000 ------------ ------------ Total current assets........................... 119,541,000 171,783,000 PROPERTY AND EQUIPMENT--Net........................ 4,341,000 6,469,000 INTANGIBLES--Net................................... 7,423,000 19,077,000 ------------ ------------ $131,305,000 $197,329,000 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Trade accounts payable............................ $ 75,508,000 $ 88,070,000 Income taxes payable.............................. 695,000 -- Accrued and other current liabilities............. 2,842,000 4,363,000 ------------ ------------ Total current liabilities...................... 79,045,000 92,433,000 REVOLVING BANK DEBT................................ 10,610,000 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; 25,000,000 shares authorized, 7,444,712 (1996) and 7,522,786 (1997) shares issued.................................... 74,000 75,000 Additional paid-in capital........................ 12,204,000 12,719,000 Retained earnings................................. 31,190,000 39,095,000 Treasury stock at cost, 125,590 (1996) and 325,590 (1997) shares.................................... (1,390,000) (2,715,000) Prepaid compensation--stock awards................ (428,000) (278,000) ------------ ------------ Total stockholders' equity..................... 41,650,000 48,896,000 ------------ ------------ $131,305,000 $197,329,000 ============ ============
See notes to consolidated financial statements. F-3 SOUTHERN ELECTRONICS CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF EARNINGS
YEAR ENDED JUNE 30, -------------------------------------- 1995 1996 1997 ------------ ------------ ------------ NET SALES............................... $398,753,000 $468,298,000 $646,336,000 COST OF SALES, including buying and occupancy expenses..................... 370,548,000 438,837,000 607,437,000 ------------ ------------ ------------ GROSS PROFIT............................ 28,205,000 29,461,000 38,899,000 SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES............................... 19,104,000 19,493,000 23,941,000 ------------ ------------ ------------ OPERATING INCOME........................ 9,101,000 9,968,000 14,958,000 INTEREST EXPENSE--Net................... 688,000 902,000 2,128,000 ------------ ------------ ------------ EARNINGS BEFORE INCOME TAXES............ 8,413,000 9,066,000 12,830,000 INCOME TAXES............................ 3,191,000 3,516,000 4,925,000 ------------ ------------ ------------ NET EARNINGS............................ $ 5,222,000 $ 5,550,000 $ 7,905,000 ============ ============ ============ NET EARNINGS PER COMMON SHARE........... $ 0.74 $ 0.76 $ 1.04 WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING... 7,069,000 7,280,000 7,634,000
See notes to consolidated financial statements. F-4 SOUTHERN ELECTRONICS CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK TREASURY STOCK ------------------ ADDITIONAL ------------------- PREPAID PAR PAID-IN RETAINED COMPENSATION SHARES VALUE CAPITAL EARNINGS SHARES COST STOCK AWARDS --------- ------- ----------- ----------- ------- ----------- ------------ BALANCE--June 30, 1994.. 7,063,947 $71,000 $10,127,000 $20,418,000 105,304 $(1,268,000) $ -- Stock awards issued to employees............. 54,500 294,000 (294,000) Amortization of stock awards................ 23,000 Stock options exer- cised................. 4,045 Tax benefit of stock awards and options.... 162,000 Stock awards canceled.. (1,000) (4,000) 4,000 Treasury stock pur- chased................ 20,286 (122,000) Net earnings........... 5,222,000 --------- ------- ----------- ----------- ------- ----------- --------- 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 exer- cised................. 4,220 2,000 Tax benefit of stock awards and options.... 8,000 Stock issued in acqui- sition................ 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 exer- cised................. 83,074 1,000 396,000 Tax benefit of stock awards and options.... 147,000 Treasury stock pur- chased................ 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) ========= ======= =========== =========== ======= =========== =========
See notes to consolidated financial statements. F-5 SOUTHERN ELECTRONICS CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED JUNE 30, ---------------------------------------- 1995 1996 1997 ------------ ------------ ------------ OPERATING ACTIVITIES: Net earnings........................ $ 5,222,000 $ 5,550,000 $ 7,905,000 Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: Depreciation and amortization...... 569,000 1,168,000 1,731,000 Compensation-stock awards.......... 23,000 95,000 122,000 Provision for losses on accounts receivable........................ 1,143,000 1,642,000 1,391,000 Changes in assets and liabilities, net of effects of acquired business in fiscal 1996: Trade accounts receivable......... (7,709,000) (15,923,000) (12,515,000) Inventories....................... (14,716,000) (17,840,000) (40,312,000) Deferred income taxes............. 492,000 (86,000) 7,000 Other current assets.............. (108,000) 16,000 (692,000) Trade accounts payable............ 4,482,000 27,389,000 12,562,000 Income taxes payable.............. 63,000 1,174,000 (695,000) Accrued and other current liabili- ties............................. 536,000 (1,012,000) 1,521,000 ------------ ------------ ------------ Net cash provided by (used in) operating activities............ (10,003,000) 2,173,000 (28,975,000) INVESTING ACTIVITIES: Purchase of equipment............... (1,488,000) (1,398,000) (3,521,000) Purchase of business, net of cash acquired........................... (21,000) Purchase of distribution rights..... (11,992,000) ------------ ------------ ------------ Net cash used in investing activ- ities........................... (1,488,000) (1,419,000) (15,513,000) FINANCING ACTIVITIES: Revolving bank debt net proceeds (payments)......................... 11,500,000 (892,000) 45,390,000 Proceeds from issuance of common stock.............................. 2,000 397,000 Tax benefit from stock awards and options............................ 162,000 8,000 147,000 Purchase of treasury stock.......... (122,000) (1,325,000) ------------ ------------ ------------ Net cash provided by (used in) financing activities............ 11,540,000 (882,000) 44,609,000 ------------ ------------ ------------ INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS......................... 49,000 (128,000) 121,000 CASH AND CASH EQUIVALENTS: Beginning of year................... 741,000 790,000 662,000 ------------ ------------ ------------ End of year......................... $ 790,000 $ 662,000 $ 783,000 ============ ============ ============ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the year for: Interest........................... $ 688,000 $ 881,000 $ 2,167,000 Income taxes....................... 2,473,000 2,770,000 5,257,000
See notes to consolidated financial statements. F-6 SOUTHERN ELECTRONICS CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED JUNE 30, 1995, 1996 AND 1997 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation--The consolidated financial statements include the accounts of Southern Electronics Corporation and its wholly owned subsidiary, SED International, Inc. (formerly Southern Electronics Distributors, Inc.) (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 $34,500,000 at June 30, 1996 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, five 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. Earnings Per Common Share--Earnings per common share have been calculated based on the weighted average number of common shares and common share equivalents (principally for stock options) outstanding during each period in accordance with Accounting Principles Board Opinion Number ("APB") 15. Newly Issued Accounting Standards--In October 1995, Statement of Financial Accounting Standards Number ("SFAS") 123, "Accounting for Stock-Based Compensation," was issued. The adoption of the new recognition provisions for stock-based compensation expense included in SFAS 123 is optional; however, the pro forma effects on net income had the new recognition provisions been elected is required in financial statements. The Company will continue to follow the requirements of APB 25, "Accounting for Stock Issued to Employees," in its accounting for employee stock options; therefore, the adoption of SFAS 123 had no impact on the Company's results of operations. The Company adopted the new disclosure requirements of SFAS 123 in fiscal 1997. F-7 SFAS 128, "Earnings Per Share," is effective for both interim and annual periods ending after December 15, 1997. This Statement simplifies the standards for computing earnings per share ("EPS") previously found in APB 15. Presentation of basic and diluted EPS on the income statement will be 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 APB 15. The Company will adopt this Statement in the second quarter of fiscal 1998. Basic EPS on a pro forma basis for the years ended June 30, 1995, 1996, and 1997 would be $.75, $.77, and $1.10 respectively. Diluted EPS on a pro forma basis for each of the three years ended June 30, 1997 would be approximately equal to EPS as reflected in the accompanying consolidated statements of earnings. SFAS 130, "Reporting Comprehensive Income," and 131 "Disclosures about Segments of an Enterprise and Related Information," are effective for fiscal periods beginning after December 15, 1997 with early adoption permitted. 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. Reclassifications--Certain prior year amounts have been reclassified for comparative purposes. 2. ACQUISITIONS Distribution Rights--On June 30, 1997, as a result of a transaction with Globelle, Inc., 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 is obligated to pay Globelle up to an additional $1,350,000 if the Company receives certain other domestic distribution rights by June 1998. Business--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. Liabilities assumed in this acquisition aggregated $11,250,000. This acquisition has been accounted for using the purchase method of accounting. Goodwill arising from this acquisition is being amortized using the straight-line method over 30 years. The operating results of the acquired business are included in the Company's consolidated statements of earnings from the date of acquisition. The following unaudited pro forma consolidated financial information gives effect to this acquisition as if the transaction had occurred as of July 1, 1994. The pro forma consolidated information is not necessarily indicative of the results that would have been reported had the acquisition occurred on such date, nor is it indicative of the Company's future operations.
YEAR ENDED JUNE 30, ------------------------- 1995 1996 ------------ ------------ Net sales............................................ $449,972,000 $494,227,000 Net earnings......................................... 3,036,000 5,864,000 Net earnings per common share........................ 0.41 0.79
Special Charge--During the year ended June 30, 1995, the Company incurred $452,000 of expenses in connection with an attempted merger. These expenses were recorded as a special charge in that year when the related merger discussions were terminated. F-8 3. LONG-TERM ASSETS Long-term assets are comprised of the following:
JUNE 30, ---------------------- 1996 1997 ---------- ----------- PROPERTY AND EQUIPMENT Furniture and equipment................................ $5,587,000 $ 8,389,000 Leasehold improvements................................. 1,154,000 1,387,000 Other.................................................. 216,000 279,000 ---------- ----------- 6,957,000 10,055,000 Less accumulated depreciation.......................... 2,616,000 3,586,000 ---------- ----------- $4,341,000 $ 6,469,000 ========== =========== INTANGIBLES Distribution rights.................................... $ -- $11,992,000 Goodwill............................................... 7,243,000 7,243,000 Non-compete agreements................................. 500,000 500,000 ---------- ----------- 7,743,000 19,735,000 Less accumulated amortization.......................... 320,000 658,000 ---------- ----------- $7,423,000 $19,077,000 ========== ===========
Amortization expense of intangibles was $12,000, $188,000, and $338,000, in the years ended June 30, 1995, 1996, and 1997, respectively. 4. REVOLVING BANK DEBT The Company and SED International have an agreement with two banks, amended and restated in August 1997, for a $100 million revolving credit facility. At June 30, 1997, the Company had borrowings of $56,000,000 under the line and standby letters of credit of $1,350,000 leaving $42,650,000 available under the borrowing commitment. The Company may borrow at the prime rate offered by Wachovia Bank, N.A., 8.50% at June 30, 1997, 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 1/4% of the unused loan commitment. 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. This agreement expires in August 2000. The carrying value of revolving bank debt at June 30, 1997 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, --------------------- 1996 1997 ---------- ---------- Reserves not currently deductible........................ $ 573,000 $ 789,000 Inventory valuation...................................... 438,000 468,000 Other.................................................... 219,000 (34,000) ---------- ---------- $1,230,000 $1,223,000 ========== ==========
F-9 Components of income tax expense are as follows:
YEAR ENDED JUNE 30, ---------------------------------- 1995 1996 1997 ---------- ---------- ---------- Current: Federal..................................... $3,280,000 $3,416,000 $4,380,000 State....................................... 403,000 420,000 538,000 ---------- ---------- ---------- 3,683,000 3,836,000 4,918,000 Deferred (Benefit): Federal..................................... (426,000) (280,000) 6,000 State....................................... (66,000) (40,000) 1,000 ---------- ---------- ---------- (492,000) (320,000) 7,000 ---------- ---------- ---------- $3,191,000 $3,516,000 $4,925,000 ========== ========== ==========
Income tax benefits relating to the exercise of employee stock awards and options reduce taxes currently payable and are credited to additional paid-in capital. Such amounts approximated $162,000, $8,000, and $147,000 for fiscal 1995, 1996, and 1997, respectively. The Company's effective tax rates differ from statutory rates as follows:
YEAR ENDED JUNE 30, ---------------- 1995 1996 1997 ---- ---- ---- Statutory federal rate........................................ 34.0% 34.0% 34.2% State income taxes net of federal income tax benefit.......... 3.6 3.7 3.3 Non-deductible goodwill amortization.......................... 0.1 1.5 1.9 Other......................................................... 0.2 (0.4) (1.0) ---- ---- ---- 37.9% 38.8% 38.4% ==== ==== ====
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, 1995, 1996, and 1997 was $565,000, $663,000, and $949,000, respectively. As of June 30, 1997, the future minimum rental commitments under noncancelable operating leases are: 1998................................................................. $1,109,000 1999................................................................. 1,001,446 2000................................................................. 675,000 2001................................................................. 523,000 2002................................................................. 168,000 ---------- $3,476,446 ==========
7. STOCKHOLDERS' EQUITY Stock Options--The Company maintains stock option plans under which 1,548,552 shares of common stock have been reserved at June 30, 1997 for outstanding and future incentive and non-qualified stock option 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. Non-qualified 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. F-10 Stock option activity and related information under these plans is as follows:
WEIGHTED AVERAGE EXERCISE SHARES PRICE --------- -------- Shares under options June 30, 1994.......................... 835,765 $5.04 Granted.................................................... 127,450 5.45 Exercised.................................................. (4,045) 0.55 Canceled................................................... (79,575) 5.42 --------- Shares under options June 30, 1995.......................... 879,595 5.09 Granted.................................................... 369,950 5.62 Exercised.................................................. (4,220) 0.54 Canceled................................................... (49,725) 5.63 --------- Shares under options June 30, 1996.......................... 1,195,600 5.24 Granted.................................................... 401,200 8.21 Exercised.................................................. (83,074) 4.77 Canceled................................................... (85,940) 6.67 --------- Shares under options June 30, 1997.......................... 1,427,786 6.02 =========
Additionally, since 1992, the Board of Directors has granted non-qualified options to purchase 113,000 shares of common stock to certain directors of the Company at exercise prices ranging from $5.88 to $7.50 (their fair market value at date of grant). All options granted to directors of the Company are currently exercisable and expire ten years from the date of grant. No options have been exercised under such grants. The following table summarizes information pertaining to all options outstanding and exercisable at June 30, 1997:
OUTSTANDING OPTIONS EXERCISABLE OPTIONS --------------------------------- -------------------- WEIGHTED AVERAGE WEIGHTED RANGE OF REMAINING AVERAGE AVERAGE EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE PRICES OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE -------- ----------- ------------ -------- ----------- -------- $4.89-$ 6.00 1,139,586 4.3 $5.33 873,396 $5.22 7.50- 10.75 401,200 7.7 8.07 30,000 7.50
Fair Value--The weighted average fair value of options granted in fiscal 1996 and 1997 was $1,049,000 and $1,787,000, respectively, using the Black- Scholes option pricing model with the following assumptions:
1996 1997 ---- ---- Dividend yield................................................... 0.0% 0.0% Expected volatility.............................................. 49.3% 49.2% Risk free interest rate.......................................... 6.0% 6.3% Expected life, in years.......................................... 6.8 7.6
Had compensation cost for grants under the Company's stock option plans in fiscal 1996 and 1997 been determined based on the fair value at grant consistent with the methods of SFAS 123, the Company's pro forma net earnings and net earnings per share would have been as follows:
YEAR ENDED JUNE 30, --------------------- 1996 1997 ---------- ---------- Pro forma net earnings................................... $5,208,000 $7,128,000 Pro forma net earnings per share......................... 0.72 0.93
F-11 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. At June 30, 1997, 5,491 shares of common stock are reserved for future issuance under this plan. The individual awards vest generally after three to five years. Restricted stock activity is as follows:
YEAR ENDED JUNE 30, ----------------------- 1995 1996 1997 ------- ------ ------ Shares of restricted stock beginning of year........... 69,634 53,500 97,500 Issued................................................ 54,500 47,500 -- Vested................................................ (69,634) -- -- Canceled.............................................. (1,000) (3,500) (5,000) ------- ------ ------ Shares of restricted stock end of year................. 53,500 97,500 92,500 ======= ====== ======
The value of restricted stock awards is determined using the market price of the Company's common stock on the grant date and is amortized over the vesting period. The unamortized portion of such awards is deducted from stockholders' equity. Stockholder Rights Agreement--In October 1996, the Company adopted a stockholder rights agreement under which one common stock purchase right is presently attached to and trades with each outstanding share of the Company's common stock. The rights become exercisable and transferable apart from the common stock ten days after a person or group, without the Company's consent, acquires beneficial ownership of 12% or more of the Company's common stock or announces or commences a tender or exchange offer that could result in 12% ownership ("the Change Date"). Once exercisable, each right entitles the holder to purchase shares of common stock in number equal to eight multiplied by the product of the number of shares outstanding on the Change Date divided by the number of rights outstanding on the Change Date not owned by the person or group and at a price of 20% of the per share market value as of the Change Date. The rights have no voting power and, until exercisable, no dilutive effect on net earnings per common share. The rights expire in October 2006 and are redeemable at the discretion of the Company's Board of Directors at $.01 per right. 8. EMPLOYEE BENEFIT PLAN SED International maintains a voluntary retirement benefit program, the Southern Electronics Distributors, Inc. 401(k) Plan. All employees of SED International who have attained the age of 21 are eligible to participate after completing one year of service. SED International matches a portion of employee contributions to the plan. Employees are immediately vested in their own contributions. Vesting in SED International's matching contributions are based on years of continuous service. SED International's matching contribution expense for the years ended June 30, 1995, 1996, and 1997 was $79,000, $76,000, and $90,000, respectively. 9. SIGNIFICANT VENDORS AND EXPORT SALES During the year ended June 30, 1995, the Company purchased approximately 15% of its inventory from one vendor. During the year ended June 30, 1996, the Company purchased approximately 32% of its inventory from two vendors. During the year ended June 30, 1997, the Company purchased approximately 43% of its inventory from three vendors. For the years ended June 30, 1995, 1996, and 1997 approximately 21%, 37%, and 45%, respectively, of the Company's net sales were to customers for export principally into Latin America. F-12 SOUTHERN ELECTRONICS CORPORATION AND SUBSIDIARY SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS - ------------------------------------------------------------------------------- [CAPTION] A B C D E F Balance at Charged to Charged Balance at Beginning Costs and to Other End Description of Period Expenses Deductions1 Accounts2 of Period - --------------------------------- ---------- ---------- ----------- --------- ---------- Year ended June 30, 1995; allowance for doubtful accounts $ 664,000 $1,143,000 $ (962,000) $ 845,000 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
1 Deductions represent actual write-offs of specific accounts receivable charged against the allowance account, net of amounts recovered. 2 Represents balances of acquired business. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SOUTHERN ELECTRONICS CORPORATION Date: September 5, 1997 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 5th day of September, 1997. /s/ Gerald Diamond ---------------------------------------- Gerald Diamond Chairman of the Board, Chief Executive Officer and Director (principal executive officer) /s/ Larry G. Ayers ----------------------------------------- Larry G. Ayers Vice President - Finance, Chief Financial Officer, Secretary and Treasurer (principal financial and accounting officer) /s/ Stewart I. Aaron ----------------------------------------- Stewart I. Aaron Director /s/ Ray D. Risner ----------------------------------------- Ray D. Risner Director /s/ Cary Rosenthal ----------------------------------------- Cary Rosenthal Director /s/ G. William Speer ----------------------------------------- G. William Speer Director /s/ Mark Diamond ----------------------------------------- Mark Diamond Director EXHIBIT INDEX FORM 10-K 10.40 Lease Agreement made August 11, 1997, between Gwinnett Industries, Inc. and SED International. 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. 11.1 Statement regarding computation of per share earnings. 23 Independent Auditors' Consent. 27 Financial Data Schedule. EX-10.40 2 LEASE AGREEMENT EXHIBIT 10.40 LEASE AGREEMENT THIS LEASE is made this 11 day of August, 1997, by and between GWINNETT INDUSTRIES, INC., a Georgia corporation (hereinafter referred to as "Lessor"); and SED INTERNATIONAL, INC., a Delaware corporation (hereinafter referred to as "Lessee"). W I T N E S S E T H: Premises 1. Lessor, for and in consideration of the rents, covenants, agreements, and stipulations hereinafter mentioned, reserved, and contained, to be paid, kept and performed by the Lessee, has leased and rented, hereby does lease and rent, to the Lessee, and said Lessee hereby agrees to lease and take upon the terms and conditions which hereafter appear, the following described property (hereinafter called the "Premises"): All that tract or parcel of land lying and being in Land Lot 138 of the 18th District of DeKalb County, Georgia, and being more particularly described as follows: BEGINNING at an iron pin staked on the east right-of-way of Rock Mountain Boulevard 1,477.6 feet south of the center line of Lewis Road as measured along the right-of-way line of Rock Mountain Boulevard; running thence in an easterly direction 386.0 feet to an iron pin staked, thence in a southerly direction 260.0 feet to a point; thence in a westerly direction 386.0 feet, more or less, to a point on the east right-of-way line of Rock Mountain Boulevard; thence in a northerly direction 260.0 feet along the east right-of-way line of Rock Mountain Boulevard to an iron pin staked and the point of beginning. Included in this lease is a 40,160 square foot building and premises known as 1475 Rock Mountain Boulevard, Stone Mountain, GA 30083. This Lease is subject to all encumbrances, easements, covenants and restrictions of record. Term 2. To have and to hold for a term of three (3) years, said term to begin on the *1st day of October, 1997, and to end at midnight on the 30th day of September, 2000, unless sooner terminated as hereinafter provided. _____________________ * Lessee may begin utilizing the warehouse, rent free, upon full execution of this Lease by both parties through September 30, 1997. All other terms and conditions of this Lease, including building security and utility payments, will apply during this early occupancy period. Rental 3. Lessee shall pay to Lessor monthly base rent of $11,982.00 due on the first day of each month in advance, without offset or demand, commencing on October 1, 1997. Upon execution of this Lease, Lessee has paid to Lessor $0 representing the first month's rent due hereunder. In the event Lessee fails to pay the rent or any other payment called for under this Lease within ten (10) days of the time period specified, Lessee shall pay a late charge equal to five percent (5%) of the unpaid amount, which late charge shall be paid with the required payment. Upon execution of this Lease, Lessee has deposited $0 (the "Security Deposit") with Lessor to secure Lessee's performance of its obligations hereunder. If Lessee defaults hereunder, then Lessor may, after the appropriate notices have been given as provided herein, without prejudice to Lessor's other remedies, apply part or all of the Security Deposit to cure Lessee's default. If Lessor so uses part or all of the Security Deposit, Lessee shall, within ten (10) days after written demand, pay Lessor the amount necessary to restore the Security Deposit to its original amount. Lessor shall not be required to pay any interest on the Security Deposit. If Lessor sells the Premises, the Security Deposit shall be transferred to the purchaser and Lessor shall be relieved of any further liability in relation to the Security Deposit. At the termination of this lease and after Lessee has vacated the Premises, Lessor may use the Security Deposit to cure any defaults of Lessee or to apply to expenses or repairing or cleaning the Premises, if necessary. In the event all or any portion of the Security Deposit remains after paying for such items, said amount shall be paid to Lessee within thirty (30) days of said termination and vacating of the Premises. Utility Bills 4. Lessee shall place utility bills of all types in its name and shall pay same, along with all assessments pertaining to the Premises, including, but not limited to, water and sewer, natural gas, electricity, fire protection and sanitary pick up bills for the Premises, or used by Lessee in connection therewith. If Lessee does not pay same, Lessor may pay the same and such payment shall be added to and treated as additional rental of the Premises. Mortgage Rights 5. Lessee's rights shall be subject to any bona fide mortgage or deed to secure debt which is now, or may hereafter be, placed upon the Premises by Lessor, and Lessee agrees to execute and deliver such documentation as may be required by any such mortgagee to effect any subordination within ten (10) days of receipt of a request for such execution provided, however, that such subordination shall be upon the express condition that the validity of this Lease shall be recognized by the mortgagee or other lender and that, notwithstanding any default by the mortgagor or borrower with respect to said mortgage or deed to secure debt or any foreclosure 2 thereof, Lessee's possession and right of use under this Lease shall not be disturbed by such mortgagee or other lender unless and until Lessee shall breach any of the provisions hereof and this Lease or Lessee's right to possession hereunder shall have been terminated in accordance with the provisions hereof. Maintenance and Repairs by Lessee 6. Lessee shall not allow the Premises to fall out of repair or deteriorate, and, at Lessee's own expense, Lessee shall keep and maintain the Premises, including paving, in good order and repair, except portions of the Premises to be repaired by Lessor under terms of Paragraph 7 below and keep the Premises free and clear of trash and debris and in a clean and sanitary condition, free from pests and rodents. Lessor agrees to care for the grounds around the building, including regular mowing of grass, mulching, lawn and landscape maintenance and general landscaping. In the event Lessee fails to make said repairs, then Lessor may, but shall not be obligated to, make such repairs, in which event, Lessee shall promptly reimburse Lessor, as additional rent, for all expenses incurred thereby. Lessee also agrees to keep all systems pertaining to water, fire protection, drainage, sewer, electrical, heating, ventilation, air conditioning and lighting in good order and repair, and shall maintain at all times a maintenance contract for the heating, ventilation and air conditioning equipment. Said maintenance contract shall provide for regular inspection and filter changes. The Lessee covenants and agrees that during the term of this Lease and for such further time as the Lessee, or any person claiming under it, shall hold the Premises or any part thereof, it shall not cause the estate of the Lessor in the Premises to become subject to any lien, charge or encumbrance whatsoever, it being agreed that the Lessee shall have no authority, express or implied, to create any lien, charge or encumbrance upon the estate of the Lessor in the Premises. Repairs by Lessor 7. Lessor agrees to keep in good repair the roof, foundations and exterior walls, exclusive of painting, exclusive of all glass and exclusive of all exterior doors. Lessor gives to Lessee exclusive control of the Premises and shall be under no obligation to inspect the Premises. Lessee shall promptly notify Lessor of any damage covered under this paragraph, and Lessor shall be under no duty to repair unless it receives notice of such damage. Modifications and Alterations to the Premises 8. No modifications or alterations to the building on the Premises or openings cut through the roof are allowed without prior written consent of Lessor, which consent shall not be unreasonably withheld. In the event any such modifications or alterations are performed, same shall be completed in accordance with all applicable codes and regulations. Any alterations or improvements to the Premises made by Lessee shall at once become the property of Lessor and shall be surrendered to Lessor upon the expiration or prior termination of this Lease; provided, however, Lessor, at its option, may require Lessee to remove any improvements or repair any 3 alterations in order to restore the Premises to the condition existing at the time Lessee took possession. This clause shall not apply to moveable equipment or trade fixtures owned by Lessee, which may be removed by Lessee at the end of the term, provided that any damage caused by such removal shall be repaired by Lessee. Lessor agrees that, upon request of Lessee made prior to the making of any permanent modifications or alterations, Lessor shall notify Lessee as to whether it will require the removal of such modifications or alterations upon the expiration or termination of the Lease. If Lessor notifies Lessee that it will not require such removal and Lessee thereafter proceeds with the making of such modifications or alterations, Lessor shall be bound by such notification. Return of Premises 9. Lessee agrees to return the Premises to Lessor, at the expiration or prior termination of this Lease, broom clean and in as good condition and repair as when first received, natural wear and tear, damage by storm, fire, lightning, earthquake or other casualty excepted. Lessee agrees to remove its personal property from the Premises at the expiration or prior termination of this Lease. Failure to comply with this paragraph will constitute holding over by Lessee. Destruction of or Damage to Premises 10. If the Premises are totally destroyed by storm, fire, lightning, earthquake or other casualty, this Lease shall terminate as of the date of such destruction, and rental shall be accounted for as between Lessor and Lessee as of that date. If the Premises are damaged, but not wholly destroyed by any of such casualties, rental shall abate in such proportion as use of the Premises has been destroyed, and Lessor shall restore the Premises to substantially the same condition as before damage as speedily as practicable, whereupon full rental shall recommence; provided however, that if the damage shall be so extensive that the same cannot be reasonably repaired and restored within six (6) months from date of the casualty, then either Lessor or Lessee may terminate this Lease by giving written notice to the other party within thirty (30) days from the date of such casualty. In the event of such termination, rental shall be apportioned and paid up to date of such casualty. Indemnity 11. Lessee agrees to indemnify and hold harmless the Lessor against all claims for injuries to persons or damages to property by reason of the use or occupancy of the Premises, the improvements on the Premises or the failure or cessation of services to the Premises except for claims for injuries or damages which are the result of the gross negligence or willful misconduct of Lessor, its employees, agents or contractors. and all expenses incurred by Lessor because of such injuries or occupancy, including attorneys' fees and court costs. 4 Governmental Orders 12. Lessee agrees, at its own expense, to promptly comply with all requirements of any legally constituted public authority made necessary by reason of Lessee's use or occupancy of the Premises or operation of its business. Lessor agrees to promptly comply with any such requirements if not made necessary by reason of Lessee's occupancy or operation of the Premises. It is mutually agreed, however, between Lessor and Lessee, that if in order to comply with such requirements, the cost to Lessor or Lessee, as the case may be, shall exceed a sum equal to one year's rent (as measured by the year in which the requirements arise), then Lessor or Lessee who is obligated to comply with such requirements is privileged to terminate this Lease by giving written notice of termination to the other party, which termination shall become effective sixty (60) days after receipt of such notice, and which notice shall eliminate necessity of compliance with such requirement by the party giving notice unless the party receiving such notice of termination shall, before termination becomes effective, pay to the party giving notice all cost of compliance in excess of one year's rent, or secure payment of such sum in manner satisfactory to the party giving notice. Notwithstanding any provisions or limitations to this paragraph to the contrary, Lessee shall be responsible for any and all costs and expenses arising from any violations of environmental laws or regulations caused by Lessee's activities or occupancy of the Premises. Further, Lessee's option to terminate this Lease due to the cost of compliance with environmental laws or regulations shall only be available to Lessee if the law or regulation in question was enacted after the date of this Lease. Condemnation 13. If the whole of the Premises, or such portion thereof as will make the Premises unusable for the purpose herein leased, shall be condemned by any legally constituted authority for any public use or purpose, or sold under threat of condemnation, then, in any of said events the term hereby granted shall cease from the time when possession or ownership thereof is taken by public authorities and rental shall be accounted for as between Lessor and Lessee as of that date. Such termination, however, shall be without prejudice to the rights of either Lessor or Lessee to recover compensation and damage caused by condemnation from the condemnor. It is further understood and agreed that neither the Lessee, nor Lessor, shall have any rights in any award made to the other by any condemnation. Assignment 14. Lessee may not assign this Lease, or any interest thereunder, or sublet the Premises in whole or in part without the prior express written consent, which consent shall not be unreasonably withheld or delayed, of Lessor and without giving prior written notice to Lessor of intent to assign or sublease. Subtenants or assignees shall become liable directly to Lessor for all obligations of Lessee hereunder, without relieving Lessee's liability. Lessee agrees not to assign or sublease the Premises to any one who will create a nuisance or trespass, nor use the Premises for any illegal purpose; nor in violation of any valid regulations of any governmental body; nor 5 in any manner to vitiate the insurance. Lessee further agrees that if such subtenant or assignee is required to pay a rental amount greater than the rental amount required to be paid by Lessee hereunder, then Lessor shall be entitled to receive and shall be paid such increased amount. Upon any such sublease or assignment, Lessee shall provide Lessor with copies of any and all documents pertaining to such sublease or assignment. Notwithstanding the foregoing, Lessor's consent shall not be required for an assignment of the Lease to any entity controlling, controlled by or under common control with Lessee, provided that (i) Lessee gives Lessor prior written notice of such assignment, and (ii) the creditworthiness of the assignee is of approximately equal to that of Lessee. Hazardous Substances 15. Lessee will not use or suffer the use (by Lessee or any other person or entity) of the Premises as a landfill or as a dump for garbage or refuse, and shall not permit any hazardous or toxic waste, substance, contaminant, asbestos, oil, radioactive or other material, the removal of which is required or the maintenance or storage of which is prohibited, regulated, or penalized by any local, state, or federal agency, authority, or governmental unit, to be brought onto the Premises or if so brought or found located thereon, shall cause the same to be immediately removed, unless the storage, use, treatment, and disposal of same is in full compliance with all applicable federal, state and local laws and regulations pertaining thereto, and Lessee's obligation to so remove shall survive the termination of this Lease. Lessee will not use or suffer the use of the Premises in any manner other than in full compliance with all applicable federal, state and local environmental laws and regulations. Lessor warrants and represents that it has not received any notice from a governmental agency for violation of any environmental laws and regulations, and each party agrees that if any such notice is received, it shall immediately notify the other party orally and in writing. Lessee shall indemnify, defend, and hold Lessor harmless from and against any and all costs, damages, and expenses (including, without limitation, environmental compliance or response costs, costs for all remedial action and/or damage to third parties, attorneys' fees and court costs at both trial and appellate levels, and damages for business interruption and any lost profits) resulting, directly or indirectly, from any environmental contamination of the Premises occurring during the term hereof or any misstatement or misrepresentation of facts concerning the matters recited in this paragraph. Lessor shall indemnify, defend, and hold Lessee harmless from and against any and all costs, damages, and expenses resulting, directly or indirectly, from any environmental contamination of the Premises occurring prior to the commencement of the term hereof. This indemnity shall survive the expiration or earlier termination of this Lease. In addition, at the end of the term of this Lease or earlier termination hereof, Lessee, upon request by the Lessor, shall cause, at Lessee's expense, an environmental study to be conducted of the Premises by a person or firm approved by Lessor to ensure that no hazardous wastes, hazardous substances or other such materials have been stored, handled, treated or disposed of on the Premises during the term of this Lease in violation of any applicable law. 6 Removal of Fixtures 16. Lessee may (if not in default hereunder) prior to the expiration of this Lease, or any extension hereof, remove all fixtures and equipment which Lessee has placed in the Premises, provided Lessee repairs all damages to the Premises caused by such removal. Provided, however, Lessee shall not remove, under any circumstances, the following: heating, ventilating, air conditioning, plumbing, electrical and lighting systems and fixtures or dock levelers. In the event this Lease is terminated for any reason, any property remaining in or upon the Premises may be deemed to become property of the Lessor and Lessor may dispose of same as it deems proper with no liability to Lessor and no obligation to Lessee. Default Remedies 17. It is mutually agreed that in the event: (A) the rent herein reserved is not paid at the time and place when and where due and Lessee fails to pay said rent within ten (10) days after written demand from Lessor; (B) the Premises shall be deserted or vacated without Lessor's prior written consent and Lessee fails to maintain the Premises or Lessee fails to give Lessor notice of its intent to vacate; (C) the Lessee shall fail to comply with any term, provision, condition, or covenant of this Lease, other than the payment of rent, and shall not cure such failure within twenty (20) days after notice to the Lessee of such failure to comply (except in the case of any default which cannot with diligence be cured within such twenty (20) day period provided that Lessee commences the cure of such default prior to the expiration of such twenty (20) day period and proceeds diligently to cure such default); or (D) Lessee shall fail to comply with any term, provision, condition, or covenant under any other agreement between Lessee and Lessor, or breach any obligation owing to Lessor or any affiliate of Lessor, and shall not cure such failure or breach within twenty (20) days after notice thereof to Lessee, in any of such events, Lessor shall have the option at once, or during continuance of such default or condition to do any of the following, in addition to, and not in limitation of any other remedy permitted by law or by this Lease: (1) Terminate this Lease, in which event Lessee shall immediately surrender the Premises to Lessor. Lessee agrees to indemnify Lessor for all loss, damage and expense which Lessor may suffer by reason of such termination, whether through inability to relet the Premises, through decrease in rent, through incurring court costs, actual attorneys' fees or other costs in enforcing this provision or otherwise. (2) Lessor, with or without terminating this Lease, may terminate Lessee's right of possession, and, at Lessor's option without notice or resort to legal proceedings, reenter, take possession of and rent the Premises at the best price obtainable by reasonable effort, without advertisement and by private negotiations and for any term Lessor deems proper. Lessee shall be liable to Lessor for the deficiency, if any, between Lessee's rent hereunder and the price obtained by Lessor on 7 reletting and for any damage, actual attorneys' fees or expenses incurred by Lessor in enforcing its rights under this provision. (3) Lessor also retains the right to apply for and obtain a dispossessory action against Lessee and to hold Lessee liable for all costs incident to seeking such dispossessory action, including actual attorneys' fees and court costs. Pursuit of any of the foregoing remedies shall not preclude pursuit of any other remedies herein provided or any other remedies provided by law. Lessor shall have the duty to mitigate any possible damages which may be incurred pursuant to any such default by Lessee except in the event Lessee deserts or vacates the Premises without prior notification to Lessor. Any notice in this provision may be given by Lessor or its attorney. Entry for Carding, Etc. 18. Lessor may card the Premises "For Lease" or "For Sale" one hundred ninety (90) days before the termination of this Lease, Lessor may enter the Premises with prior notice to Lessee at reasonable hours during the term of this Lease to exhibit same to prospective purchases or tenants and to make repairs required of Lessor under the terms hereof, or to make repairs to Lessor's adjoining property, if any. Effects of Termination of Lease 19. No termination of this Lease prior to the normal ending thereof, by lapse of time or otherwise, shall affect Lessor's right to collect rent for the period prior to termination thereof. No Estate in Land 20. This contract shall create the relationship of landlord and tenant between Lessor and Lessee; no estate shall pass out of Lessor; Lessee has only a usufruct, not subject to levy and sale, and not assignable by Lessee except as provided in Paragraph 14 above. Holding Over 21. If Lessee remains in possession of the Premises after expiration of the term hereof without Lessor's acquiescence, such holdover shall be as a tenant at sufferance and not as a tenant at will, and the rental rate shall become one and one-half times the amount in effect at the end of said term of this Lease. In no event shall the collection or payment or rent during such holdover period cause Lessee to be or be deemed a tenant at will. Lessee shall have no right to notice under O.C.G.A. Section 44-7-7 of the termination of its tenancy; Lessee agrees to vacate and deliver the Premises to Lessor immediately upon Lessee's receipt of notice from Lessor to vacate. Should Lessee fail to so vacate the Premises, Lessee shall be subject to dispossession without further notice, by summary dispossessory proceedings, in addition to any and all other remedies to 8 which Lessor may be entitled by law or under this Agreement. No holding over by Lessee, whether with or without the consent of Lessor, shall operate to extend the term of this Lease except as otherwise expressly provided in a written agreement executed by both Lessor and Lessee. Rights Cumulative 22. All rights, powers and privileges conferred hereunder upon parties hereto shall be cumulative but not restrictive to those given by law. Notices 23. Any notice given pursuant to this Lease shall be in writing and sent by certified mail, return receipt requested, or by reputable overnight courier to: (a) Lessor in care of Gwinnett Industries, Inc., P.O. Box 67, Tucker, GA 30085-0067, or such other address as Lessor may hereafter designate in writing to Lessee. (b) Lessee in care of SED International, Inc., Attn: Ray D. Risner, President 4916 N. Royal Atlanta Dr., Tucker, GA 30084, or such other address as Lessee may hereafter designate in writing to Lessor. Any notice sent in the manner set forth above shall be deemed sufficiently given for all purposes hereunder on the day said notice is deposited in the mail or with the courier. Waiver of Rights 24. No failure of Lessor to exercise any power given Lessor hereunder, or to insist upon strict compliance by Lessee with its obligations hereunder, and no custom or practice of the parties at variance with the terms hereof, shall constitute a waiver of Lessor's right to demand strict compliance with the terms hereof. Time of Essence 25. Time is of the essence in this Lease. Definitions 26. "Lessor" as used in this Lease shall include Lessor, its heirs, representatives, assigns, and successors in title to the Premises. "Lessee" shall include Lessee, its heirs and representatives, successors, and if this Lease shall be validly assigned or sublet, shall include also Lessee's assignees or subleassees, as to the Premises covered by such assignment or sublessees. 9 "Lessor" and "Lessee" include male and female, singular and plural, corporation, partnership or individual, as may fit the particular parties. Exterior Sign 27. Lessee shall have the right to erect at Lessee's sole expense a sign on an exterior wall of the building on the Premises. This sign shall be securely attached and parallel to said wall, and shall not be other than a customary trade sign identifying the business of Lessee. Lessee shall not erect this sign over the roof line or on the roof, nor shall it paint or otherwise deface the exterior walls of the building. The erection of this sign by Lessee shall be subject to and in conformity with all applicable laws, zoning ordinances and building restrictions or covenants of record and must be approved by Lessor, which approval shall not be unreasonably withheld or delayed, based on a scaled drawing provided by Lessee, before installation. In the event a sign is erected by Lessee without Lessor's consent, Lessor shall have the right to remove said sign and charge the cost of such removal to Lessee as additional rent hereunder. Except upon prior written consent from Lessor, in no event shall Lessee utilize any portable or vehicular signs at the Premises. On or before termination of this Lease Lessee shall remove the sign thus erected, and shall repair any damage or disfigurement, and close any holes, caused by such removal. Ad Valorem Taxes 28. Commencing in the year 1998, and during each remaining year of the Lease term herein granted, or any renewal hereof, Lessee shall pay as additional rent all ad valorem taxes levied or assessed against the Premises in excess of the ad valorem taxes levied against the Premises for the year 1997. Upon being notified by Lessor of said increased ad valorem taxes, Lessee will remit said amount to Lessor within thirty (30) days. Use of Premises and Insurance 29. (A) The Premises shall be used for distribution of electronic parts and related purposes, and shall not be used for any illegal purposes, nor in any manner to create any nuisance or trespass, nor in any manner to vitiate or increase insurance premiums on the Premises, nor for any other purpose. (B) Lessor will carry, at Lessor's cost and expense, "All Risk" Insurance Coverage on the Premises in an amount not less than $742,960.00 or the full insurable value, whichever is greater, based on occupancy and use by Lessee as defined above. The term "full insurable value" shall mean the actual replacement cost, excluding foundation and excavation costs, as determined by Lessor. Commencing in the year 1998, and during each remaining year of the Lease term herein granted, or any renewal hereof, Lessee shall reimburse Lessor as additional rent for all sums paid by Lessor for the above coverage in excess of the annual premium for said coverage for the year 1997. Lessee agrees that any increase in Lessor's 10 insurance premium caused by occupancy of any subtenant or assignee of Lessee will be paid by Lessee. Upon being notified by Lessor of said increased premium, Lessee will remit said amount to Lessor within thirty (30) days. (C) Lessee will carry, at Lessee's own expense, insurance coverage on all equipment, inventory, fixtures, furniture, appliances and other personal property on the Premises. (D) Lessee shall procure, maintain and keep in full force and effect at all times during the term of this Lease and any renewal hereof, commercial general liability insurance insuring Lessor and Lessee against all claims and demands for injury to, or death of, persons, or damage to property which may be claimed to have occurred upon the Premises in an amount not less than $2,000,000.00, per occurrence of coverage for injury (including death) to one or more persons attributable to a single occurrence and for property damage. To the full extent permitted by law, Lessor and Lessee each waives all right of recovery against the other for, and agrees to release the other from liability for, loss or damage to the extent such loss or damage is covered by valid and collectible insurance in effect at the time of such loss or damage; provided however, that the foregoing release by each party is conditioned upon the other party's carrying insurance with the above described waiver of subrogation, and if such coverage is not obtained or maintained by either party, then the other party's foregoing release shall be deemed to be rescinded until such waiver is either obtained or reinstated. All insurance provided for in this Lease shall be effected under enforceable policies issued by insurers of recognized responsibility licensed to do business in the state where the Premises are located. At least 15 days prior to the expiration date of any policy procured by Lessee, the original renewal policy for such insurance shall be delivered by the Lessee to the Lessor. Within 15 days after the premium on any such policy shall become due and payable, the Lessor shall be furnished with satisfactory evidence of its payment. An original binder certificate along with a copy of the original policy or policies shall be delivered to Lessor at the commencement of this Lease. If the Lessee provides any insurance required by this Lease in the form of a blanket policy, the Lessee shall furnish satisfactory proof that such blanket policy complies in all respects with the provisions of this Lease, and that the coverage thereunder is at least equal to the coverage which would be provided under a separate policy covering only the Premises. If the Lessor so requires, the policies of insurance provided for shall be payable to the holder of any mortgage, as the interest of such holder may appear, pursuant to a standard mortgagee clause. All such policies shall, to the extent obtainable provide that any loss shall be payable to the Lessor or to the holder of any mortgage notwithstanding any act or negligence of the Lessee which might otherwise result in forfeiture of such insurance. All such policies shall, to the extent obtainable, contain an agreement by the insurers that such policies shall not be 11 canceled without at least thirty days prior written notice to the Lessor and to the holder of any mortgage to whom loss hereunder may be payable. Miscellaneous 30. If any term, covenant or condition of this Lease or the application thereof to any person, entity or circumstance shall, to any extent, be invalid or unenforceable, the remainder of this Lease, or the application of such term, covenant or condition to persons, entities or circumstances other than those which or to which used may be held invalid or unenforceable, shall not be affected thereby, and each term, covenant or condition of this Lease shall be valid and enforceable to the fullest extent permitted by law. Any money judgment against Lessor shall be satisfied only out of the right, title and interest of Lessor in the Premises, and in no event shall Lessee have the right to levy execution against any property of Lessor other than its interest in the Premises. Lessor and Lessee hereby waive trial by jury in any action or proceeding arising under this Lease. This Lease contains the entire agreement of the parties hereto, and no representations, inducements, promises or agreements, oral or otherwise, between the parties, not embodied herein, shall be of any force or effect. IN WITNESS WHEREOF, the parties have hereunto set their hands and seals, the day and year first above written. Signed, sealed and delivered GWINNETT INDUSTRIES, INC. in the presence of: a Georgia corporation /s/ Michael G. Kearn By: /s/ Lawrence P. Callahan - ------------------------------- ---------------------------- Witness Title: Treasurer (Corp. Seal) LESSOR Signed, sealed and delivered SED INTERNATIONAL, INC. in the presence of: a Delaware corporation /s/ Larry Ayers CFO By: /s/ Ray D. Risner - ------------------------------- ----------------------------- Witness Title: Ray D. Risner, President (Corp. Seal) LESSEE 12 ADDENDUM TO LEASE AGREEMENT DATED AUGUST 11, 1997 BETWEEN GWINNETT INDUSTRIES, INC. ("LESSOR") AND SED INTERNATIONAL, INC. This Addendum to Lease Agreement ("Addendum") is attached to, and modifies and supplements, the Lease Agreement referenced above. Unless otherwise defined herein, capitalized terms used in this Addendum have the meanings given them in the Lease. Where the provisions of this Addendum conflict with the provisions of the Lease, this Addendum shall control. 1. Lessee has the option to cancel this Lease on the anniversary date of each year of the Lease by giving Lessor a 180-day written notice and penalty payments as follows: (A) Notice to be given by April 3, 1998 along with penalty payment of $16,000.00. (B) Notice to be given by April 3, 1999 along with penalty payment of $8,000.00. 2. Lessor, at Lessor's expense, will provide the following items by the lease and rent commencement date of October 1, 1997: (A) Insure all mechanical systems, including HVAC, plumbing, and electrical systems, are in good working order. (B) Renovation of existing office area and construction of additional office area to be agreed on between Lessee and Lessor. 3. Option to Renew --------------- Lessee shall have the option to extend this Lease for one additional three (3) year term commencing at the expiration of the original term at Eleven Thousand Nine Hundred Eighty-Two and No/100 ($11,982.00) Dollars per month, under the same terms and conditions, provided Lessee has fulfilled in a timely manner all of the terms and conditions of this Lease. Notice of Lessee's intent to exercise this option must be received in writing by April 3, 2000, if this option is to be exercised. 13 EX-10.41 3 AMENDED AND RESTATED CREDIT AGREEMENT EXHIBIT 10.41 $100,000,000 AMENDED AND RESTATED CREDIT AGREEMENT dated as of August 13, 1997 among SOUTHERN ELECTRONICS CORPORATION AND SED INTERNATIONAL, INC. (formerly known as Southern Electronics Distributors, Inc.) as Borrowers, AND WACHOVIA BANK, N.A. and NATIONAL CITY BANK OF COLUMBUS, as Banks, and WACHOVIA BANK, N.A., as Agent TABLE OF CONTENTS AMENDED AND RESTATED CREDIT AGREEMENT ARTICLE I DEFINITIONS. . . . . . . . . . . . . 1 SECTION 1.01. Definitions. . . . . . . . . . . . . . . . . . . . . 1 SECTION 1.02. Accounting Terms and Determinations. . . . . . . . . 19 SECTION 1.03. References . . . . . . . . . . . . . . . . . . . . . 19 SECTION 1.04. Use of Defined Terms . . . . . . . . . . . . . . . . 19 SECTION 1.05. Terminology. . . . . . . . . . . . . . . . . . . . . 19 ARTICLE II THE CREDITS. . . . . . . . . . . . . 20 SECTION 2.01. Commitments to Lend Syndicated Loans . . . . . . . . 20 SECTION 2.02. Method of Borrowing. . . . . . . . . . . . . . . . . 22 SECTION 2.03. Notes. . . . . . . . . . . . . . . . . . . . . . . . 24 SECTION 2.04. Maturity of Loans. . . . . . . . . . . . . . . . . . 25 SECTION 2.05. Interest Rates . . . . . . . . . . . . . . . . . . . 25 SECTION 2.06. Fees . . . . . . . . . . . . . . . . . . . . . . . . 28 SECTION 2.07. Optional Termination or Reduction of Commitments . . 28 SECTION 2.08. Mandatory Termination or Reduction of Commitments. . 28 SECTION 2.09. Optional Prepayments . . . . . . . . . . . . . . . . 28 SECTION 2.10. Mandatory Prepayments. . . . . . . . . . . . . . . . 29 SECTION 2.12. General Provisions as to Payments. . . . . . . . . . 29 SECTION 2.13. Computation of Interest and Fees . . . . . . . . . . 31 (i) ARTICLE III LETTER OF CREDIT FACILITY . . . . . . . . . 31 SECTION 3.01. Obligation to Issue. . . . . . . . . . . . . . . . . 31 SECTION 3.02. Types and Amounts. . . . . . . . . . . . . . . . . . 31 SECTION 3.03. Conditions . . . . . . . . . . . . . . . . . . . . . 32 SECTION 3.04. Issuance of Letters of Credit. . . . . . . . . . . . 32 (a) Request for Issuance. . . . . . . . . . . . . . . . . . . 32 (b) Issuance; Notice of Issuance. . . . . . . . . . . . . . . 33 (c) No Extension or Amendment . . . . . . . . . . . . . . . . 33 SECTION 3.05. Reimbursement Obligations; Duties of the Issuing Bank. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 (a) Reimbursement. . . . . . . . . . . . . . . . . . . . . . 33 (b) Duties of the Agent . . . . . . . . . . . . . . . . . . . 34 SECTION 3.06. Participations . . . . . . . . . . . . . . . . . . . 34 (a) Purchase of Participations. . . . . . . . . . . . . . . . 34 (b) Sharing of Letter of Credit Payments. . . . . . . . . . . 34 (c) Sharing of Reimbursement Obligation Payments. . . . . . . 35 (d) Documentation . . . . . . . . . . . . . . . . . . . . . . 35 (e) Obligations Irrevocable . . . . . . . . . . . . . . . . . 35 SECTION 3.07. Payment of Reimbursement Obligations . . . . . . . . 36 (a) Payments to Issuing Bank. . . . . . . . . . . . . . . . . 36 (b) Recovery or Avoidance of Payments. . . . . . . . . . . . 37 SECTION 3.08. Compensation for Letters of Credit and Agent Reporting Requirements. . . . . . . . . . . . . . . . . . . . 37 (a) Letter of Credit Fees and Fronting Fees. . . . . . . . . 37 (b) Agent Charges. . . . . . . . . . . . . . . . . . . . . . 37 SECTION 3.09. Indemnification; Exoneration . . . . . . . . . . . . 38 (a) Indemnification. . . . . . . . . . . . . . . . . . . . . 38 (b) Assumption of Risk by Borrowers. . . . . . . . . . . . . 38 (c) Exoneration. . . . . . . . . . . . . . . . . . . . . . . 38 SECTION 3.10. Credit Yield Protection; Capital Adequacy. . . . . . 38 (ii) ARTICLE IV CONDITIONS TO BORROWINGS. . . . . . . . . . 41 SECTION 4.01. Conditions to Closing. . . . . . . . . . . . . . . . 41 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 SECTION 4.02. Conditions to All Borrowings . . . . . . . . . . . . 43 ARTICLE V REPRESENTATIONS AND WARRANTIES . . . . . . . . 43 SECTION 5.01. Corporate Existence and Power. . . . . . . . . . . . 43 SECTION 5.02. Corporate and Governmental Authorization; No Contravention . . . . . . . . . . . . . . . . . . . . . . . . 44 SECTION 5.03. Binding Effect . . . . . . . . . . . . . . . . . . . 44 SECTION 5.04. Financial Information. . . . . . . . . . . . . . . . 44 SECTION 5.05. No Litigation. . . . . . . . . . . . . . . . . . . . 44 SECTION 5.06. Compliance with ERISA. . . . . . . . . . . . . . . . 45 SECTION 5.07. Compliance with Laws; Payment of Taxes . . . . . . . 45 SECTION 5.08. Subsidiaries . . . . . . . . . . . . . . . . . . . . 45 SECTION 5.09. Investment Company Act . . . . . . . . . . . . . . . 45 SECTION 5.10. Public Utility Holding Company Act . . . . . . . . . 46 SECTION 5.11. Ownership of Property; Liens . . . . . . . . . . . . 46 SECTION 5.12. No Default . . . . . . . . . . . . . . . . . . . . . 46 SECTION 5.13. Full Disclosure. . . . . . . . . . . . . . . . . . . 46 SECTION 5.14. Environmental Matters. . . . . . . . . . . . . . . . 46 SECTION 5.15. Capital Stock. . . . . . . . . . . . . . . . . . . . 47 (iii) SECTION 5.16. Margin Stock . . . . . . . . . . . . . . . . . . . . 47 SECTION 5.17. Insolvency . . . . . . . . . . . . . . . . . . . . . 47 ARTICLE VI COVENANTS . . . . . . . . . . . . . 48 SECTION 6.01. Information. . . . . . . . . . . . . . . . . . . . . 48 SECTION 6.02. Inspection of Property, Books and Records. . . . . . 50 SECTION 6.03. Maintenance of Existence and Management. . . . . . . 50 SECTION 6.04. Dissolution. . . . . . . . . . . . . . . . . . . . . 51 SECTION 6.05. Consolidations, Mergers and Sales of Assets. . . . . 51 SECTION 6.06. Use of Proceeds. . . . . . . . . . . . . . . . . . . 51 SECTION 6.07. Compliance with Laws; Payment of Taxes . . . . . . . 52 SECTION 6.08. Insurance. . . . . . . . . . . . . . . . . . . . . . 52 SECTION 6.09. Change in Fiscal Year. . . . . . . . . . . . . . . . 52 SECTION 6.10. Maintenance of Property. . . . . . . . . . . . . . . 52 SECTION 6.11. Environmental Notices. . . . . . . . . . . . . . . . 52 SECTION 6.12. Environmental Matters. . . . . . . . . . . . . . . . 53 SECTION 6.13. Environmental Release. . . . . . . . . . . . . . . . 53 SECTION 6.14. Transactions with Affiliates . . . . . . . . . . . . 53 SECTION 6.15. Restricted Payments. . . . . . . . . . . . . . . . . 53 SECTION 6.16. Loans or Advances. . . . . . . . . . . . . . . . . . 53 SECTION 6.17. Investments. . . . . . . . . . . . . . . . . . . . . 54 SECTION 6.18. Negative Pledge. . . . . . . . . . . . . . . . . . . 54 (iv) SECTION 6.19. Restrictions on Ability of Subsidiaries to Pay Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . 55 SECTION 6.20. Leverage Ratio . . . . . . . . . . . . . . . . . . . 55 SECTION 6.21. Fixed Charges Coverage . . . . . . . . . . . . . . . 55 SECTION 6.22. Adjusted Current Ratio . . . . . . . . . . . . . . . 55 SECTION 6.23. Minimum Consolidated Net Income. . . . . . . . . . . 55 SECTION 6.24. Minimum Consolidated Tangible Net Worth. . . . . . . 55 SECTION 6.25. Distributor Agreements . . . . . . . . . . . . . . . 56 SECTION 6.26. Accounts Receivable. . . . . . . . . . . . . . . . . 56 SECTION 6.27. Inventory. . . . . . . . . . . . . . . . . . . . . . 56 SECTION 6.28. Additional Debt . . . . . . . . . . . . . . . . . . 57 ARTICLE VII DEFAULTS. . . . . . . . . . . . . . 57 SECTION 7.01. Events of Default. . . . . . . . . . . . . . . . . . 57 SECTION 7.02. Notice of Default. . . . . . . . . . . . . . . . . . 60 ARTICLE VIII THE AGENT . . . . . . . . . . . . . 61 SECTION 8.01. Appointment; Powers and Immunities . . . . . . . . . 61 SECTION 8.02. Reliance by Agent. . . . . . . . . . . . . . . . . . 61 SECTION 8.03. Defaults . . . . . . . . . . . . . . . . . . . . . . 62 SECTION 8.04. Rights of Agent and its Affiliates as a Bank . . . . 62 SECTION 8.05. Indemnification. . . . . . . . . . . . . . . . . . . 62 SECTION 8.06 Consequential Damages. . . . . . . . . . . . . . . . 63 (v) SECTION 8.07. Payee of Note Treated as Owner . . . . . . . . . . . 63 SECTION 8.08. Nonreliance on Agent and Other Banks . . . . . . . . 63 SECTION 8.09. Failure to Act . . . . . . . . . . . . . . . . . . . 64 SECTION 8.10. Resignation or Removal of Agent. . . . . . . . . . . 64 ARTICLE IX CHANGE IN CIRCUMSTANCES; COMPENSATION . . . . . . 64 SECTION 9.01. Basis for Determining Interest Rate Inadequate or Unfair. . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 SECTION 9.02. Illegality . . . . . . . . . . . . . . . . . . . . . 65 SECTION 9.03. Increased Cost and Reduced Return. . . . . . . . . . 66 SECTION 9.04. Base Rate Loans or Other Euro-Dollar Loans Substituted for Affected Euro-Dollar Loans. . . . . . . . . . 67 SECTION 9.05. Compensation . . . . . . . . . . . . . . . . . . . . 67 ARTICLE X MISCELLANEOUS . . . . . . . . . . . . 68 SECTION 10.01. Notices . . . . . . . . . . . . . . . . . . . . . . 68 SECTION 10.02. No Waivers. . . . . . . . . . . . . . . . . . . . . 68 SECTION 10.03. Expenses; Documentary Taxes . . . . . . . . . . . . 68 SECTION 10.04. Indemnification . . . . . . . . . . . . . . . . . . 69 SECTION 10.05. Setoff; Sharing of Setoffs. . . . . . . . . . . . . 69 SECTION 10.06. Amendments and Waivers. . . . . . . . . . . . . . . 70 SECTION 10.07. No Margin Stock Collateral. . . . . . . . . . . . . 71 SECTION 10.08. Successors and Assigns. . . . . . . . . . . . . . . 71 SECTION 10.09. Confidentiality . . . . . . . . . . . . . . . . . . 73 (vi) SECTION 10.10. Representation by Banks . . . . . . . . . . . . . . 74 SECTION 10.11. Obligations Several . . . . . . . . . . . . . . . . 74 SECTION 10.12. Georgia Law . . . . . . . . . . . . . . . . . . . . 74 SECTION 10.13. Severability. . . . . . . . . . . . . . . . . . . . 74 SECTION 10.14. Interest. . . . . . . . . . . . . . . . . . . . . . 75 SECTION 10.15. Interpretation. . . . . . . . . . . . . . . . . . . 76 SECTION 10.16. Waiver of Jury Trial; Consent to Jurisdiction . . . 76 SECTION 10.17. Counterparts. . . . . . . . . . . . . . . . . . . . 76 SECTION 10.18. Source of Funds -- ERISA. . . . . . . . . . . . . . 76 EXHIBIT A-1 Form of Syndicated Loan Note EXHIBIT A-2 Form of Swing Loan Note EXHIBIT B Form of Opinion of Special Counsel for the Borrowers EXHIBIT C Form of Opinion of Special Counsel for the Agent EXHIBIT D Form of Assignment and Acceptance EXHIBIT E Form of Notice of Borrowing EXHIBIT F Form of Borrowing Base Certificate EXHIBIT G Form of Notice of Letter of Credit EXHIBIT H Form of Compliance Certificate EXHIBIT I Form of Closing Certificate EXHIBIT J Form of Officer's Certificate EXHIBIT K Form of Landlord Agreement EXHIBIT L Form of Telephone Instruction Letter Schedule 5.08 Subsidiaries (vii) AMENDED AND RESTATED CREDIT AGREEMENT AMENDED AND RESTATED CREDIT AGREEMENT dated as of August 13, 1997 among SOUTHERN ELECTRONICS CORPORATION and SED INTERNATIONAL, INC., jointly and severally, and the BANKS listed on the signature pages hereof and WACHOVIA BANK, N.A., as Agent. This Agreement amends, restates and supersedes that certain Credit Agreement dated as of January 24, 1997, among the parties to this Agreement. The parties hereto agree as follows: ARTICLE I DEFINITIONS SECTION 1.01. Definitions. The terms as defined in this Section 1.01 shall, for all purposes of this Agreement and any amendment hereto (except as herein otherwise expressly provided or unless the context otherwise requires), have the meanings set forth herein: "Account Debtor" means the person who is obligated on any of the Accounts Receivable or otherwise is obligated as a purchaser or lessee of any of the Inventory. "Accounts Receivable" means all rights of either Borrower to payment for goods sold or leased, or to be sold or to be leased, or for services rendered or to be rendered, howsoever evidenced or incurred, including, without limitation, all accounts, instruments, chattel paper and general intangibles, all returned or repossessed goods and all books, records, computer tapes, programs and ledger books arising therefrom or relating thereto, whether now owned or hereafter acquired or arising. "Adjusted Current Ratio" means the ratio of: (i) the sum of (x) the aggregate Accounts Receivable of the Borrowers plus (y) the aggregate Inventory of the Borrowers; to (ii) the sum of (x) the Aggregate Principal Amount Outstanding plus (y) the aggregate amount of all accounts payable of the Borrowers. "Adjusted London Interbank Offered Rate" has the meaning set forth in Section 2.05(c). "Affiliate" of any relevant Person means (i) any Person that directly, or indirectly through one or more intermediaries, controls the relevant Person (a "Controlling Person"), (ii) any Person (other than the relevant Person or a Subsidiary of the relevant Person) which is controlled by or is under common control with a Controlling Person, or (iii) any Person (other than a Subsidiary of the relevant Person) of which the relevant Person owns, directly or indirectly, 20% or more of the common stock or equivalent equity interests. As used herein, the term "control" means possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of a Person, whether through the ownership of voting securities, by contract or otherwise. "Agent" means Wachovia Bank, N.A., a national banking association organized under the laws of the United States of America, in its capacity as agent for the Banks hereunder, and its successors and permitted assigns in such capacity. "Agent's Letter Agreement" means the letter agreement dated July 1, 1997 between the Agent and SEC, as the same may be amended or otherwise modified from time to time. "Agreement" means this Amended and Restated Credit Agreement, together with all amendments and supplements hereto. "Aggregate Commitments" means, at any time, the aggregate amount of Commitments of all of the Banks. "Aggregate Principal Amount Outstanding" means, at any time, the sum of (i) the aggregate outstanding principal amount of the Syndicated Loans and Discretionary Loans to both Borrowers, (ii) the aggregate outstanding principal amount of the Swing Loans to both Borrowers and (iii) the aggregate outstanding principal amount of the Letter of Credit Obligations with respect to both Borrowers. "Aggregate Unused Commitments" means at any date, an amount equal to the Aggregate Commitments less the Aggregate Principal Amount Outstanding (but without giving effect to any outstanding Swing Loans). "Applicable Margin" has the meaning set forth in Section 2.05(a). 2 "Assignee" has the meaning set forth in Section 10.08(c). "Assignment and Acceptance" means an Assignment and Acceptance executed in accordance with Section 10.08(c) in the form attached hereto as Exhibit D. "Assignment of Claims Acts" means The Assignment of Claims Act of 1940, as may be amended from time to time, and any Federal, State, county or municipal statute, regulation, ordinance, constitution or charter, now or hereafter existing, similar in effect thereto, as determined by the Agent in its sole discretion. "Authority" has the meaning set forth in Section 9.02. "Bank" means each bank listed on the signature pages hereof as having a Commitment, and its successors and assigns. "Base Rate" means for any Base Rate Loan for any day, the rate per annum equal to the higher as of such day of (i) the Prime Rate, or (ii) one-half of one percent above the Federal Funds Rate. For purposes of determining the Base Rate for any day, changes in the Prime Rate or the Federal Funds Rate shall be effective on the date of each such change. "Base Rate Loan" means a Loan which bears or is to bear interest at a rate based upon the Base Rate, and is to be made as a Base Rate Loan pursuant to the applicable Notice of Borrowing, Section 2.02(f), or Article IX, as applicable. "Borrower" means, both individually and collectively, as the context shall require, SEC and SED, and their respective successors and permitted assigns, as joint and several primary obligors with respect to the principal of and interest on all Loans and Letter of Credit Obligations, all yield protection, compensation and indemnification obligations, and all fees, costs, expenses and other amounts payable hereunder. "Borrowing" means a borrowing hereunder consisting of Loans made to either Borrower (i) at the same time by all of the Banks, in the case of a Syndicated Borrowing, 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 3 to Section 2.01(a) or (c), or a "Swing Borrowing" if such Loans are made pursuant to Section 2.01(b). A Borrowing is a "Base Rate Borrowing" if such Loans are Base Rate Loans, or a "Euro-Dollar Borrowing" if such Loans are Euro-Dollar Loans. "Borrowing Base" means the following sum: (i) (A) an amount equal to 75% (or such greater or lesser percentage which the Agent shall establish by written notice to the Borrowers in its good faith discretion) of the face dollar amount of Eligible Accounts as at the date of determination, plus (B) an amount equal to 40% (or such greater or lesser percentage which the Agent shall establish by written notice to the Borrowers in its good faith discretion) of the dollar amount of the Eligible Inventory, valued at the lower of its FIFO ("first-in, first-out") cost or market value, as at the date of determination, minus (ii) any reserve determined by the Agent, in its sole discretion, as the Agent deems necessary as security for payment of the Obligations. "Borrowing Base Certificate" has the meaning given it in Section 6.01(f). "Capital Stock" means any nonredeemable capital stock of either Borrower or any Consolidated Subsidiary (to the extent issued to a Person other than such Borrower), whether common or preferred. "CERCLA" means the Comprehensive Environmental Response Compensation and Liability Act, 42 U.S.C. Paragraph 9601 et. seq. and its implementing regulations and amendments. "CERCLIS" means the Comprehensive Environmental Response Compensation and Liability Inventory System established pursuant to CERCLA. "Change of Law" shall have the meaning set forth in Section 9.02. "Closing Certificate" has the meaning set forth in Section 4.01(e). "Closing Date" means August 13, 1997. "Code" means the Internal Revenue Code of 1986, as amended, or any successor Federal tax code. 4 "Commitment" means, with respect to each Bank, (i) the amount set forth opposite the name of such Bank on the signature pages hereof, and (ii)as to any Bank which enters into any Assignment and Acceptance (whether as transferor Bank or as Assignee thereunder), the amount of such Bank's Commitment after giving effect to such Assignment and Acceptance, in each case as such amount may be reduced from time to time pursuant to Sections 2.07 and 2.09. "Compliance Certificate" has the meaning set forth in Section 6.01(c). "Consolidated Debt" means at any date the Debt of the Borrowers and the Consolidated Subsidiaries, determined on a consolidated basis as of such date. "Consolidated Fixed Charges" for any period means the sum of (i) Consolidated Interest Expense for such period, and (ii) all payment obligations of the Borrowers and the Consolidated Subsidiaries for such period under all operating leases and rental agreements. "Consolidated Interest Expense" for any period means interest, whether expensed or capitalized, in respect of Debt of the Borrowers or any of its Consolidated Subsidiaries outstanding during such period. "Consolidated Net Income" means, for any period, the Net Income of the Borrowers and the Consolidated Subsidiaries determined on a consolidated basis, but excluding (i) extraordinary items and (ii) any equity interests of the Borrowers or any Subsidiary in the unremitted earnings of any Person that is not a Subsidiary. "Consolidated Operating Profits" means, for any period, the Operating Profits of the Borrowers and the Consolidated Subsidiaries. "Consolidated Subsidiary" means at any date any Subsidiary or other entity the accounts of which, in accordance with GAAP, would be consolidated with those of either Borrower in its consolidated financial statements as of such date. "Consolidated Tangible Net Worth" means, at any time, Stockholders' Equity, less the sum of the value, as set forth or 5 reflected on the most recent consolidated balance sheet of the Borrowers and the Consolidated Subsidiaries, prepared in accordance with GAAP, of: (A) Any surplus resulting from any write-up of assets subsequent to September 30, 1996; (B) All assets which would be treated as intangible assets for balance sheet presentation purposes under GAAP, including without limitation goodwill (whether representing the excess of cost over book value of assets acquired, or otherwise), trademarks, tradenames, copyrights, patents and technologies, and unamortized debt discount and expense; (C) To the extent not included in (B) of this definition, any amount at which shares of Capital Stock of the Borrowers appear as an asset on the balance sheet of the Borrowers and the Consolidated Subsidiaries; (D) Loans or advances to stockholders, directors, officers or employees; and (E) To the extent not included in (B) of this definition, deferred expenses. "Consolidated Total Assets" means, at any time, the total assets of the Borrowers and the Consolidated Subsidiaries, determined on a consolidated basis, as set forth or reflected on the most recent consolidated balance sheet of the Borrowers and the Consolidated Subsidiaries, prepared in accordance with GAAP. "Controlled Group" means all members of a controlled group of corporations and all trades or businesses (whether or not incorporated) under common control which, together with either Borrower, are treated as a single employer under Section 414 of the Code. "Debt" of a Person means all liabilities, obligations and indebtedness of such Person, of any kind or nature, whether now or hereafter owing, arising, due or payable, howsoever evidenced, created, incurred, acquired or owing, and whether primary, secondary, direct, contingent, fixed or otherwise, including, without in any way limiting the generality of the foregoing: (i) all obligations of such Person for borrowed money, (ii) all obligations of such Person evidenced by bonds, debentures, notes or other similar instruments, 6 (iii) all obligations of such Person to pay the deferred purchase price of property or services, except trade accounts payable arising in the ordinary course of business, (iv) all obligations of such Person as lessee under capital leases, (v) all obligations of such Person to reimburse any bank or other Person in respect of amounts payable under a banker's acceptance, (vi) all Redeemable Preferred Stock of such Person (in the event such Person is a corporation), (vii) all obligations of such Person to reimburse any bank or other Person in respect of amounts paid or to be paid or to be paid under a letter of credit or similar instrument, (viii) all Debt of others secured by a Lien on any asset of such Person, whether or not such Debt is assumed by such Person, (ix) all obligations of such Person with respect to interest rate protection agreements, foreign currency exchange agreements or other hedging arrangements (valued as the termination value thereof computed in accordance with a method approved by the International Swap Dealers Association and agreed to by such Person in the applicable hedging agreement, if any), (x) all Debt of others Guaranteed by such Person, (xi) all accrued pension fund and other employee benefit plan obligations and liabilities, and (xii) deferred taxes. "Default" means any condition or event which constitutes an Event of Default or which with the giving of notice or lapse of time or both would, unless cured or waived, become an Event of Default. "Default Rate" means, with respect to any Loan, on any day, the sum of 2% plus the then highest interest rate (including the Applicable Margin) which may be applicable to any Loans hereunder (irrespective of whether any such type of Loans are actually outstanding hereunder). "Discretionary Loans" has the meaning set forth in Section 2.01(c). "Distributor Agreements" means any agreement between a manufacturer or producer of electronics hardware or software and either of the Borrowers pursuant to which such Borrower purchases electronics hardware or software and acts as the distributor for the manufacturer or producer thereof, in each case as any of the foregoing may be extended, renewed, amended, supplemented or replaced from time to time. 7 "Dollars" or "$" means dollars in lawful currency of the United States of America. "Domestic Business Day" means any day except a Saturday, Sunday or other day on which commercial banks in Georgia are authorized by law to close. "Eligible Accounts" means that portion of the Accounts Receivable consisting of accounts actually owing to either Borrower by its Account Debtors subject to no counterclaim, defense, setoff or deduction, excluding, however, any account: (i) with respect to which any portion thereof is more than 60 days past due or 90 days past invoice date; (ii) which is owing by any Account Debtor affiliated with either Borrower or with any of its shareholders, directors or officers, as determined by the Agent in its sole discretion; (iii) which is owing by any Account Debtor having 50% or more in face value of its then existing accounts with either Borrower ineligible hereunder; (iv) the assignment of which is subject to any requirements set forth in any Assignment of Claims Acts, unless such requirements have been satisfied in all respects; (v) which is owing by any Account Debtor whose accounts, in face amount, with either Borrower exceed 10% of such Borrower's total accounts, but only to the extent of such excess; (vi) which is owing by an Account Debtor located outside the United States, unless it is (x) secured by an irrevocable letter of credit, which letter of credit shall have been confirmed by a financial institution acceptable to the Agent and shall be in form and substance acceptable to the Agent and pledged to the Agent, and (y) payable in full in United States dollars; (vii) is at any time not subject to the first priority security interest of the Agent under the Security Agreements; (viii) is subject to any Lien (other than in favor of the Agent), including, without limitation, any Lien under any of the Distributor Agreements (except to the extent permitted under any Lien Subordination Agreement) or otherwise; (ix) is subject to a contra account; (x) which arises from the sale of Special Inventory; and/or (xi) which has otherwise been determined by the Agent in its reasonable credit judgment not to be eligible for the purposes hereof. "Eligible Inventory" means that portion of the Inventory consisting of inventory located in the United States of America and in the possession and control of either Borrower which (i) is located on real property owned by either Borrower or on leased property with respect to which such landlord has executed and delivered to the Agent 8 a Landlord Agreement and which was the subject of an invoice to such Borrower from the seller thereof dated not more than 90 days prior to the date of determination; (ii) was manufactured not more than 365 days prior to the date of determination; (iii) is at all times subject to the first priority security interest of the Agent under the Security Agreements and is not subject to any other Lien, including, without limitation, any Lien under any of the Distributor Agreements (except to the extent permitted under any Lien Subordination Agreement) or otherwise; (iv) is in good and saleable condition; (v) is not on consignment from any distributor; (vi) does not constitute returned, repossessed, damaged or slow-moving goods; (vii) conforms in all respects to the warranties and representations set forth herein and in each Security Agreement; (viii) is not subject to a negotiable document of title (unless issued or endorsed to the Agent); (ix) is not subject to any license or other agreement that limits or restricts either Borrower's or the Agent's right to sell or otherwise dispose of such inventory; (x) does not consist of Special Inventory; and (xi) has otherwise been determined by the Agent in its reasonable credit judgment not to be ineligible for the purposes hereof. "Environmental Authority" means any foreign, federal, state, local or regional government that exercises any form of jurisdiction or authority under any Environmental Requirement. "Environmental Authorizations" means all licenses, permits, orders, approvals, notices, registrations or other legal prerequisites for conducting the business of either Borrower or any Subsidiary required by any Environmental Requirement. "Environmental Judgments and Orders" means all judgments, decrees or orders arising from or in any way associated with any Environmental Requirements, whether or not entered upon consent, or written agreements with an Environmental Authority or other entity arising from or in any way associated with any Environmental Requirement, whether or not incorporated in a judgment, decree or order. "Environmental Liabilities" means any liabilities, whether accrued, contingent or otherwise, arising from and in any way associated with any Environmental Requirements. 9 "Environmental Notices" means notice from any Environmental Authority or by any other person or entity, of possible or alleged noncompliance with or liability under any Environmental Requirement, including without limitation any complaints, citations, demands or requests from any Environmental Authority or from any other person or entity for correction of any violation of any Environmental Requirement or any investigations concerning any violation of any Environmental Requirement. "Environmental Proceedings" means any judicial or administrative proceedings arising from or in any way associated with any Environmental Requirement. "Environmental Releases" means releases as defined in CERCLA or under any applicable state or local environmental law or regulation. "Environmental Requirements" means any legal requirement relating to health, safety or the environment and applicable to either Borrower, any Subsidiary or the Properties, including but not limited to any such requirement under CERCLA or similar state legislation and all federal, state and local laws, ordinances, regulations, orders, writs, decrees and common law. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time, or any successor law. Any reference to any provision of ERISA shall also be deemed to be a reference to any successor provision or provisions thereof. "Euro-Dollar Business Day" means any Domestic Business Day on which dealings in Dollar deposits are carried out in the London interbank market. "Euro-Dollar Loan" means a Loan which bears or is to bear interest at a rate based upon the London Interbank Offered Rate and to be made as a Euro-Dollar Loan pursuant to the applicable Notice of Borrowing. "Euro-Dollar Reserve Percentage" has the meaning set forth in Section 2.05(c). "Event of Default" has the meaning set forth in Section 7.01. 10 "Existing Letters of Credit" means, individually or collectively, as the context shall require, the letters of credit issued by Wachovia for the account of SED described below: L/C No. Issue Date Face Amount Beneficiary 80010 6/27/97 $100,000 Globelle, Inc. 80011 6/27/97 $ 70,000 Globelle, Inc. 80012 6/27/97 $ 70,000 Globelle, Inc. 80013 6/27/97 $ 70,000 Globelle, Inc. 80014 6/27/97 $ 70,000 Globelle, Inc. 80015 6/27/97 $200,000 Globelle, Inc. 80016 6/27/97 $ 70,000 Globelle, Inc. 80017 6/27/97 $100,000 Globelle, Inc. 80018 6/27/97 $500,000 Globelle, Inc. 80019 6/27/97 $100,000 Globelle, Inc. "Federal Funds Rate" means, for any day, the rate per annum (rounded upward, if necessary, to the next higher 1/100th of 1%) equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published by the Federal Reserve Bank of New York on the Domestic Business Day next succeeding such day, provided that (i) if the day for which such rate is to be determined is not a Domestic Business Day, the Federal Funds Rate for such day shall be such rate on such transactions on the next preceding Domestic Business Day as so published on the next succeeding Domestic Business Day, and (ii) if such rate is not so published for any day, the Federal Funds Rate for such day shall be the average rate charged to the Agent on such day on such transactions, as determined by the Agent. "Fiscal Month" means any fiscal month of the Borrowers. "Fiscal Quarter" means any fiscal quarter of the Borrowers. "Fiscal Year" means any fiscal year of the Borrowers. "Fronting Fee" shall have the meaning ascribed to it in Section 3.08. 11 "GAAP" means generally accepted accounting principles applied on a basis consistent with those which, in accordance with Section 1.02, are to be used in making the calculations for purposes of determining compliance with the terms of this Agreement. "Guarantee" by any Person means any obligation, contingent or otherwise, of such Person directly or indirectly guaranteeing any Debt or other obligation of any other Person and, without limiting the generality of the foregoing, any obligation, direct or indirect, contingent or otherwise, of such Person (i) to secure, purchase or pay (or advance or supply funds for the purchase or payment of) such Debt or other obligation (whether arising by virtue of partnership arrangements, by agreement to keep-well, to purchase assets, goods, securities or services, to provide collateral security, to take-or-pay, or to maintain financial statement conditions or otherwise) or (ii) entered into for the purpose of assuring in any other manner the obligee of such Debt or other obligation of the payment thereof or to protect such obligee against loss in respect thereof (in whole or in part), provided that the term Guarantee shall not include endorsements for collection or deposit in the ordinary course of business. The term "Guarantee" used as a verb has a corresponding meaning. "Hazardous Materials" includes, without limitation, (a) solid or hazardous waste, as defined in the Resource Conservation and Recovery Act of 1980, 42 U.S.C. Paragraph 6901 et seq. and its implementing regulations and amendments, or in any applicable state or local law or regulation, (b) "hazardous substance", "pollutant", or "contaminant" as defined in CERCLA, or in any applicable state or local law or regulation, (c) gasoline, or any other petroleum product or by-product, including, crude oil or any fraction thereof, (d) toxic substances, as defined in the Toxic Substances Control Act of 1976, or in any applicable state or local law or regulation and (e) insecticides, fungicides, or rodenticides, as defined in the Federal Insecticide, Fungicide, and Rodenticide Act of 1975, or in any applicable state or local law or regulation, as each such Act, statute or regulation may be amended from time to time. "HP (US) Agreement" means the U.S Distributor Agreement dated June 27, 1997, between Hewlett-Packard Company and SED, as the same may be extended, renewed, amended, supplemented or replaced from time to time. 12 "Income Available for Fixed Charges" for any period means the sum of (i) Consolidated Net Income, (ii) taxes on income, (iii) depreciation expense, (iv) amortization expense, and (v) Consolidated Fixed Charges, all determined with respect to the Borrowers and the Consolidated Subsidiaries on a consolidated basis for such period and in accordance with GAAP. "Interest Period" means: (1) with respect to each Euro-Dollar Borrowing, the period commencing on the date of such Borrowing and ending on the numerically corresponding day in the first, second, third or sixth month thereafter, as the relevant Borrower may elect in the applicable Notice of Borrowing; provided that: (a) any Interest Period (subject to paragraph (c) below) which would otherwise end on a day which is not a Euro-Dollar Business Day shall be extended to the next succeeding Euro-Dollar Business Day unless such Euro-Dollar Business Day falls in another calendar month, in which case such Interest Period shall end on the next preceding Euro-Dollar Business Day; (b) any Interest Period which begins on the last Euro-Dollar Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the appropriate subsequent calendar month) shall, subject to paragraph (c) below, end on the last Euro-Dollar Business Day of the appropriate subsequent calendar month; and (c) no Interest Period may be selected which begins before the Termination Date and would otherwise end after the Termination Date. (2) with respect to each Base Rate Borrowing, the period commencing on the date of such Borrowing and ending 30 days thereafter; provided that: (a) any Interest Period (subject to paragraph (b) below) which would otherwise end on a day which is not a Domestic Business Day shall be extended to the next succeeding Domestic Business Day; and (b) no Interest Period which begins before the Termination Date and would otherwise end after the Termination Date may be selected. 13 "Inventory" means all inventory of each Borrower, or in which it has rights,whether now owned or hereafter acquired, wherever located, including, without limitation, all goods of each Borrower held for sale or lease or furnished or to be furnished under contracts of service, all goods held for display or demonstration, goods on lease or consignment, spare parts, repair parts, returned and repossessed goods, all raw materials, work-in-process, finished goods and supplies used or consumed in such Borrower's business, together with all documents, documents of title, dock warrants, dock receipts, warehouse receipts, bills of lading or orders for the delivery of all, or any portion, of the foregoing. "Landlord Agreement" means a landlord agreement in favor of the Agent substantially in the form set forth as Exhibit K attached hereto. "Lending Office" means, as to each Bank, its office located at its address set forth on the signature pages hereof (or identified on the signature pages hereof as its Lending Office) or such other office as such Bank may hereafter designate as its Lending Office by notice to the Borrowers and the Agent. "Letter of Credit" shall mean a commercial or standby letter of credit issued by the Agent for the account of either Borrower pursuant to Article III. "Letter of Credit Fee" shall have the meaning ascribed to it in Section 3.08. "Letter of Credit Obligations" shall mean, at any particular time, the sum of (a) the Reimbursement Obligations at such time, (b) the aggregate maximum amount available for drawing under the Letters of Credit at such time and (c) the aggregate maximum amount available for drawing under Letters of Credit which have been requested pursuant to Section 3.04(a) and approved for issuance by the Agent pursuant to Section 3.04(b) and which are to be, but have not yet been, issued. "Letter of Credit Application Agreement" shall mean, with respect to a Letter of Credit, such form of application therefor (whether in a single or several documents) as the Agent may employ in the ordinary course of business for its own account, whether or not providing for collateral security, with such modifications thereto as may by agreed upon by the Agent and the relevant Borrower and are not 14 materially adverse to the interests of the Banks; provided, however, that in the event of any conflict between the terms of any Letter of Credit Application Agreement and this Agreement, the terms of this Agreement shall control. "Leverage Ratio" means the ratio of Debt to Consolidated Tangible Net Worth, determined at any applicable time. "Lien" means, with respect to any asset, any mortgage, deed to secure debt, deed of trust, lien, pledge, charge, security interest, security title, preferential arrangement which has the practical effect of constituting a security interest or encumbrance, or encumbrance or servitude of any kind in respect of such asset to secure or assure payment of any Debt, whether by consensual agreement or by operation of statute or other law, or by any agreement, contingent or otherwise, to provide any of the foregoing. For the purposes of this Agreement, each Borrower or any Subsidiary shall be deemed to own subject to a Lien any asset which it has acquired or holds subject to the interest of a vendor or lessor under any conditional sale agreement, capital lease or other title retention agreement relating to such asset. "Lien Subordination Agreement" means (i) the Lien Subordination Agreement among the Agent, SED, and Hewlett-Packard Company dated as of June 27, 1997, as the same may be extended, renewed, amended, supplemented or replaced from time to time, and (ii) each additional lien subordination agreement among the Agent, SED or SEC, and the respective distributor, in form and substance satisfactory to the Agent and the Banks in all respects. "Loan" means a Base Rate Loan, Euro-Dollar Loan, Syndicated Loan, Discretionary Loan, or Swing Loan, and "Loans" means Base Rate Loans, Euro-Dollar Loans, Syndicated Loans, Discretionary Loans, Swing Loans, or any or all of them, as the context shall require. "Loan Documents" means this Agreement, the Notes, each Letter of Credit Application Agreement, each Borrowing Base Certificate, each Lien Subordination Agreement, each Landlord Agreement, each Security Agreement, any other document evidencing, relating to or securing the Loans or the Letters of Credit, and any other document or instrument delivered from time to time in connection 15 with this Agreement, the Notes, the Loans, each Lien Subordination Agreement, each Landlord Agreement, each Security Agreement, or the Letters of Credit, as such documents and instruments may be amended or supplemented from time to time. "London Interbank Offered Rate" has the meaning set forth in Section 2.05(c). "Margin Stock" means "margin stock" as defined in Regulations G, T, U or X. "Material Adverse Effect" means, with respect to any event, act, condition or occurrence of whatever nature (including any adverse determination in any litigation, arbitration, or governmental investigation or proceeding), whether singly or in conjunction with any other event or events, act or acts, condition or conditions, occurrence or occurrences, whether or not related, a material adverse change in, or a material adverse effect upon, any of (a) the financial condition, operations, business, properties or prospects of the Borrowers and the Consolidated Subsidiaries taken as a whole, (b) the rights and remedies of the Agent or the Banks under the Loan Documents, or the ability of either Borrower to perform its obligations under the Loan Documents to which it is a party, as applicable, or (c) the legality, validity or enforceability of any Loan Document. "Moody's" means Moody's Investor Service, Inc. "Multiemployer Plan" shall have the meaning set forth in Section 4001(a)(3) of ERISA. "Net Income" means, as applied to any Person for any period, the aggregate amount of net income of such Person, after taxes, for such period, as determined in accordance with GAAP. "Net Proceeds of Capital Stock" means any proceeds received by either Borrower or a Consolidated Subsidiary in respect of the issuance of Capital Stock, after deducting therefrom all reasonable and customary costs and expenses incurred by such Borrower or such Consolidated Subsidiary directly in connection with the issuance of such Capital Stock. "Notes" means each of the Syndicated Loan Notes or the Swing Loan Note, or any or all of them, as the context shall require. 16 "Notice of Borrowing" has the meaning set forth in Section 2.02. "Obligations" shall mean any and all indebtednesses, li- abilities and obligations of the Borrowers to the Agent and the Banks, arising under the Notes, any Letter of Credit Application Agreement or otherwise under this Agreement or any other Loan Document, including without limiting the generality of the foregoing, any indebtedness, liability or obligation of the Borrowers to the Agent and the Banks under any later or future advances or loans made hereunder, and any and all extensions or renewals thereof in whole or in part; and any and all future or additional indebtednesses, liabilities or obliga- tions hereunder of the Borrowers to the Agent and the Banks whatsoever and in any event, whether existing as of the date hereof or hereafter arising, whether direct, indirect, absolute or contingent, as maker, endorser, guarantor, surety or otherwise, and whether evidenced by, arising out of, or relating to, a promissory note, bill of exchange, check, draft, bond, letter of credit, guaranty agreement, bankers' acceptance, foreign exchange contract, interest rate protection agreement, commitment fee, service charge or otherwise. "Officer's Certificate" has the meaning set forth in Section 4.01(f). "Operating Profits" means, as applied to any Person for any period, earnings before taxes plus interest of such Person for such period, as determined in accordance with GAAP. "Participant" has the meaning set forth in Section 10.08(b). "PBGC" means the Pension Benefit Guaranty Corporation or any entity succeeding to any or all of its functions under ERISA. "Performance Pricing Determination Date" has the meaning set forth in Section 2.05. "Person" means an individual, a corporation, a partnership, an unincorporated association, a trust or any other entity or organization, including, but not limited to, a government or political subdivision or an agency or instrumentality thereof. 17 "Plan" means at any time an employee pension benefit plan which is covered by Title IV of ERISA or subject to the minimum funding standards under Section 412 of the Code and is either (i) maintained by a member of the Controlled Group for employees of any member of the Controlled Group or (ii) maintained pursuant to a collective bargaining agreement or any other arrangement under which more than one employer makes contributions and to which a member of the Controlled Group is then making or accruing an obligation to make contributions or has within the preceding 5 plan years made contributions. "Prime Rate" refers to that interest rate so denominated and set by Wachovia from time to time as an interest rate basis for borrowings. The Prime Rate is but one of several interest rate bases used by Wachovia. Wachovia lends at interest rates above and below the Prime Rate. "Properties" means all real property owned, leased or otherwise used or occupied by either Borrower or any Subsidiary, wherever located. "Purchase Documents" means that certain Asset Purchase Agreement between SEC and Globelle, Inc. dated as of June 27, 1997. "Redeemable Preferred Stock" of any Person means any preferred stock issued by such Person which is at any time prior to the Termination Date either (i) mandatorily redeemable (by sinking fund or similar payments or otherwise) or (ii) redeemable at the option of the holder thereof. "Refunding Loan" means a new Syndicated Loan made on the day on which an outstanding Syndicated Loan is maturing or a Base Rate Borrowing is being converted to a Euro-Dollar Borrowing, if and to the extent that the proceeds thereof are used entirely for the purpose of paying such maturing Loan or Loan being converted, excluding any difference between the amount of such maturing Loan or Loan being converted and any greater amount being borrowed on such day and actually either being made available to the relevant Borrower pursuant to Section 2.02(c) or remitted to the Agent as provided in Section 2.12, in each case as contemplated in Section 2.02(d). "Regulation G" means Regulation G of the Board of Governors of the Federal Reserve System, as in effect from time to time, 18 together with all official rulings and interpretations issued thereunder. "Regulation T" means Regulation T of the Board of Governors of the Federal Reserve System, as in effect from time to time, together with all official rulings and interpretations issued thereunder. "Regulation U" means Regulation U of the Board of Governors of the Federal Reserve System, as in effect from time to time, together with all official rulings and interpretations issued thereunder. "Regulation X" means Regulation X of the Board of Governors of the Federal Reserve System, as in effect from time to time, together with all official rulings and interpretations issued thereunder. "Reimbursement Obligations" means the reimbursement or repayment obligations of the Borrowers to the Agent pursuant to Section 3.05 with respect to Letters of Credit. "Reported Net Income" means, for any period, the Net Income of the Borrowers and the Consolidated Subsidiaries determined on a consolidated basis. "Required Banks" means (i) at any time during which any Bank holds 65% or more of the Aggregate Commitments, Banks having at least 85% of the Aggregate Commitments or, if the Commitments are no longer in effect, Banks holding at least 85% of the aggregate outstanding principal amount of the sum of the Syndicated Loans, and (ii) at any time during which no Bank holds 65% or more of the Aggregate Commitments, Banks having at least 66 2/3% of the Aggregate Commitments or, if the Commitments are no longer in effect, Banks holding at least 66 2/3% of the aggregate outstanding principal amount of the sum of the Syndicated Loans. "Restricted Investment" shall mean any investment in cash or by delivery of property to any Person, whether by acquisition of stock, indebtedness or other obligation (including, without limitation, by Guarantee of such Person) or security, or by loan, advance or capital contribution, or otherwise, or in any property, except that investments consisting of the following shall not constitute "Restricted Investments": (i) property used or to be used 19 in the ordinary course of business; (ii) current assets arising from the sale of goods or the provision of services in the ordinary course of business; (iii) loans or advances to employees for salary, commissions, travel or the like, made in the ordinary course of business; and (iv) unless immediately after giving effect to the making of any of the following investments, a Default or Event of Default shall have occurred and be continuing, investments in (A) direct obligations of the United States Government maturing within one year, (B) certificates of deposit issued by a commercial bank whose credit is satisfactory to the Agent, (C) commercial paper rated A1 or the equivalent thereof by S&P or P1 or the equivalent thereof by Moody's and in either case maturing within 6 months after the date of acquisition and/or (D) tender bonds the payment of the principal of and interest on which is fully supported by a letter of credit issued by a United States bank whose long-term certificates of deposit are rated at least AA or the equivalent thereof by S&P and Aa or the equivalent thereof by Moody's. "Restricted Payment" means (i) any dividend or other distribution on any shares of SEC's Capital Stock (except dividends payable solely in shares of its Capital Stock) or (ii) any payment on account of the purchase, redemption, retirement or acquisition of (a) any shares of SEC's Capital Stock (except shares acquired upon the conversion thereof into other shares of its Capital Stock) or (b) any option, warrant or other right to acquire shares of SEC's Capital Stock. "SEC" means Southern Electronics Corporation, a Delaware corporation. "SED" means SED International, Inc., formerly known as Southern Electronics Distributors, Inc., a Delaware corporation. "S&P" means Standard & Poor's Ratings Group, a division of McGraw-Hill, Inc. "Security Agreement(s)" means each Security Agreement executed by each of the Borrowers dated as of June 27, 1997, as the same may be extended, renewed, amended, supplemented or replaced from time to time. "Senior Management" means all officers of a Borrower having the title of Vice President or above. 20 "Special Inventory" shall mean any Inventory purchased by either Borrower from a distributor who is offering for sale such Inventory pursuant to a one-time special cash discount offer which is not scheduled as a part of such distributor's standard, customary or contractual discounts. "Stockholders' Equity" means, at any time, the shareholders' equity of the Borrowers and the Consolidated Subsidiaries, as set forth or reflected on the most recent consolidated balance sheet of the Borrowers and the Consolidated Subsidiaries prepared in accordance with GAAP, but excluding any Redeemable Preferred Stock of either Borrower or any of the Consolidated Subsidiaries. Shareholders' equity generally would include, but not be limited to (i) the par or stated value of all outstanding Capital Stock, (ii) capital surplus, (iii) retained earnings, and (iv) various deductions such as (A) purchases of treasury stock, (B) valuation allowances, (C) receivables due from an employee stock ownership plan, (D) employee stock ownership plan debt guarantees, and (E) translation adjustments for foreign currency transactions. "Subsidiary" means any corporation or other entity of which securities or other ownership interests having ordinary voting power to elect a majority of the board of directors or other persons performing similar functions are at the time directly or indirectly owned by either Borrower. "Swing Loan" means a Loan made by Wachovia pursuant to Section 2.01(b), which must be a Base Rate Loan. "Swing Loan Note" means the Amended and Restated Swing Loan Note issued by the Borrowers, substantially in the form of Exhibit A-2, evidencing the obligation of the Borrowers to repay the Swing Loans, together with all amendments, consolidations, modifications, renewals, and supplements thereto. "Syndicated Loan Notes" means the Amended and Restated Syndicated Loans Notes issued by the Borrowers, substantially in the form of Exhibit A-1, evidencing the obligation of the Borrowers to repay Syndicated Loans, together with all amendments, consolidations, modifications, renewals and supplements thereto. 21 "Syndicated Loans" means Base Rate Loans or Euro-Dollar Loans made pursuant to the terms and conditions set forth in Section 2.01. "Taxes" has the meaning set forth in Section 2.12(c). "Termination Date" means whichever is applicable of (i) August 13, 2000, (ii) the date the Commitments are terminated pursuant to Section 7.01 following the occurrence of an Event of Default, or (iii) the date the Borrowers terminate the Commitments entirely pursuant to Section 2.07. "Third Parties" means all lessees, sublessees, licensees and other users of the Properties, excluding those users of the Properties in the ordinary course of the Borrowers' business and on a temporary basis. "Transferee" has the meaning set forth in Section 10.08(d). "Unfunded Vested Liabilities" means, with respect to any Plan at any time, the amount (if any) by which (i) the present value of all vested nonforfeitable benefits under such Plan exceeds (ii) the fair market value of all Plan assets allocable to such benefits, all determined as of the then most recent valuation date for such Plan, but only to the extent that such excess represents a potential liability of a member of the Controlled Group to the PBGC or the Plan under Title IV of ERISA. "Wachovia" means Wachovia Bank, N.A., a national banking association, and its successors. "Wholly Owned Subsidiary" means any Subsidiary all of the shares of capital stock or other ownership interests of which (except directors' qualifying shares) are at the time directly or indirectly owned by either Borrower. SECTION 1.02. Accounting Terms and Determinations. Unless otherwise specified herein, all terms of an accounting character used herein shall be interpreted, all accounting determinations hereunder shall be made, and all financial statements required to be delivered hereunder shall be prepared, in accordance with GAAP, applied on a basis consistent (except for changes concurred in by the Borrowers' independent public accountants or otherwise required by a change in GAAP) with the most recent audited consolidated financial statements of the Borrowers and the Consolidated Subsidiaries delivered to the Banks unless with respect to any such change concurred in by the Borrowers' independent public accountants or required by GAAP, in 22 determining compliance with any of the provisions of this Agreement or any of the other Loan Documents: (i) the Borrowers shall have objected to determining such compliance on such basis at the time of delivery of such financial statements, or (ii) the Required Banks shall so object in writing within 30 days after the delivery of such financial statements, in either of which events such calculations shall be made on a basis consistent with those used in the preparation of the latest financial statements as to which such objection shall not have been made (which, if objection is made in respect of the first financial statements delivered under Section 6.01, shall mean the financial statements referred to in Section 5.04). SECTION 1.03. References. Unless otherwise indicated, references in this Agreement to "Articles", "Exhibits", "Schedules", "Sections" and other Subdivisions are references to articles, exhibits, schedules, sections and other subdivisions hereof. SECTION 1.04. Use of Defined Terms. All terms defined in this Agreement shall have the same defined meanings when used in any of the other Loan Documents, unless otherwise defined therein or unless the context shall require otherwise. SECTION 1.05. Terminology. All personal pronouns used in this Agreement, whether used in the masculine, feminine or neuter gender, shall include all other genders; the singular shall include the plural, and the plural shall include the singular. Titles of Ar- ticles and Sections in this Agreement are for convenience only, and neither limit nor amplify the provisions of this Agreement, and all references in this Agreement to Articles, Sections, Subsections, paragraphs, clauses, subclauses or Exhibits shall refer to the corresponding Article, Section, Subsection, paragraph, clause, subclause of, or Exhibit attached to, this Agreement, unless specific reference is made to the articles, sections or other subdivisions divisions of, or Exhibit to, another document or instrument. Wherever in this Agreement reference is made to any instrument, agreement or other document, including, without limitation, any of the Loan Documents, such reference shall be understood to mean and include any and all amendments thereto or modifications, restatements, renewals or 23 extensions thereof. Wherever in this Agreement reference is made to any statute, such reference shall be understood to mean and include any and all amendments thereof and all regulations promulgated pursuant thereto. Whenever any matter set forth herein or in any Loan Document is to be consented to or be satisfactory to the Agent or either of the Banks, or is to be determined, calculated or approved by the Agent or either of the Banks, then, unless otherwise expressly set forth herein or in any such Loan Document, such consent, satisfaction, determination, calculation or approval shall be in the sole discretion of the Agent or either of the Banks, exercised in good faith and, where required by law, in a commercially reasonable manner, and shall be conclusive absent manifest error. ARTICLE II THE CREDITS SECTION 2.01. Commitments to Lend Syndicated Loans. (a) Each Bank severally agrees, on the terms and conditions set forth herein, to make Syndicated Loans to either Borrower from time to time before the Termination Date; provided that, (i) immediately after each such Syndicated Loan is made, the sum of the aggregate outstanding principal amount of Syndicated Loans and Discretionary Loans to both Borrowers by such Bank and the risk participation of such Bank in Letter of Credit Obligations of both Borrowers shall not exceed the amount of its Commitment, and (ii) the Aggregate Principal Amount Outstanding shall not exceed the lesser of (x) the Borrowing Base plus the outstanding principal amount of all Discretionary Loans, or (y) the Aggregate Commitments. Each Syndicated Borrowing under this Section shall be in an aggregate principal amount of: (i) for Euro-Dollar Loans, $1,000,000 or any larger integral multiple of $100,000; and (ii) for Base Rate Loans, (x) so long as there are fewer than 3 Banks parties hereto, $100,000 or any larger integral multiple of $50,000 and (y) at any time during which there are 3 or more Banks parties hereto, $1,000,000 or any larger integral multiple of $100,000 (except in each case that any 24 such Syndicated Borrowing may be in the aggregate amount of the Aggregate Unused Commitments) and shall be made from the several Banks ratably in proportion to their respective Commitments. Within the foregoing limits, either Borrower may borrow under this Section, repay or, to the extent permitted by Section 2.09, prepay Syndicated Loans and reborrow under this Section at any time before the Termination Date. (b) Swing Loans. In addition to the foregoing, at any time during which there are 3 or more Banks parties hereto, Wachovia shall from time to time, upon the request of either Borrower, if the applicable conditions precedent in Article IV have been satisfied, make Swing Loans to such Borrower in an aggregate principal amount at any time outstanding not exceeding $5,000,000; provided that, immediately after such Swing Loan is made, the Aggregate Principal Amount Outstanding shall not exceed the lesser of (x) the Borrowing Base plus the outstanding principal amount of all Discretionary Loans, or (y) the Aggregate Commitments. Each Swing Borrowing under this Section 2.01(b) shall be in an aggregate principal amount of $100,000 or any larger multiple of $25,000. Within the foregoing limits, the Borrowers may borrow under this Section 2.01(b), prepay and reborrow under this Section 2.01(b) at any time before the Termination Date. Swing Loans shall be included in the calculation of "Aggregate Principal Amount Outstanding" hereunder, but shall not be considered a utilization of the Commitment of Wachovia or any other Bank hereunder. All Swing Loans shall be made as Base Rate Loans. At any time, upon the request of Wachovia, each Bank other than Wachovia shall, on the third Domestic Business Day after such request is made, purchase a participating interest in Swing Loans in an amount equal to its ratable share (based upon its respective Commitment) of such Swing Loans. On such third Domestic Business Day, each Bank will immediately transfer to Wachovia, in immediately available funds, the amount of its participation. Whenever, at any time after Wachovia has received from any such Bank its participating interest in a Swing Loan, the Agent receives any payment on account thereof, the Agent will distribute to such Bank its participating interest in such amount (appropriately adjusted, in the case of interest payments, to reflect the period of time during which such Bank's participating interest was outstanding and funded); provided, however, that in the event that such payment received by the Agent is required to be returned, such Bank will return to the Agent any portion thereof previously distributed by the Agent to it. Each Bank's obligation to purchase 25 such participating interests shall be absolute and unconditional and shall not be affected by any circumstance, including, without limitation: (i) any set-off, counterclaim, recoupment, defense or other right which such Bank or any other Person may have against Wachovia requesting such purchase or any other Person for any reason whatsoever; (ii) the occurrence or continuance of a Default or an Event of Default or the termination of the Commitments; (iii) any adverse change in the condition (financial or otherwise) of either of the Borrowers or any other Person; (iv) any breach of this Agreement by either of the Borrowers or any other Bank; or (v) any other circumstance, happening or event whatsoever, whether or not similar to any of the foregoing. (c) Discretionary Loans. In the event that either Borrower desires to obtain a Loan to purchase Special Inventory but the making of such Loan would cause the Borrowers to exceed the Borrowing Base, the Banks may, in the exercise of their sole discretion, advance (in the amount of their pro rata Commitment percentage) to either Borrower an amount up to 100% of the inventory purchase cost of such Special Inventory as determined by the Agent in the exercise of its sole discretion (such Loan is hereinafter referred to as a "Discretionary Loan"); provided, however, that, in no event shall the aggregate outstanding principal balance of all Discretionary Loans exceed $10,000,000 at any one time. The principal and accrued interest balance of any Discretionary Loan shall be repaid by the Borrowers on or before 60 days after the date of the advance of each such Discretionary Loan; provided, however, collections of Accounts Receivable arising from the sale of Special Inventory shall be immediately applied as a prepayment of outstanding Discretionary Loans. Each Discretionary Loan shall bear interest as set forth in Section 2.05. All Discretionary Loans shall be evidenced by the Syndicated Loan Notes. SECTION 2.02. Method of Borrowing. (a) The requesting Borrower shall give the Agent notice (a "Notice of Borrowing"), which shall be substantially in the form of Exhibit E, prior to 12:00 P.M. (Atlanta, Georgia time) on the same Domestic Business Day as each Base Rate Borrowing and at least 3 Euro-Dollar Business Days before each Euro-Dollar Borrowing, specifying: (i) the date of such Borrowing, which shall be a Domestic Business Day in the case of a Base Rate Borrowing or a Euro-Dollar Business Day in the case of a Euro-Dollar Borrowing, 26 (ii) the aggregate amount of such Borrowing, (iii) whether such Borrowing is to be a Syndicated Borrowing or a Swing Borrowing, and in the case of a Syndicated Borrowing, whether the Syndicated Loans comprising such Borrowing are to be Base Rate Loans or Euro-Dollar Loans, (iv) in the case of a Euro-Dollar Borrowing, the duration of the Interest Period applicable thereto, subject to the provisions of the definition of Interest Period, and (v) the amount available to be borrowed under Section 2.01. (b) Upon receipt of a Notice of Borrowing, the Agent shall promptly notify each Bank of the contents thereof, and of such Bank's ratable share of such Syndicated Borrowing and such Notice of Borrowing, once received by the Agent, shall not thereafter be revocable by either Borrower. (c) Not later than (x) for Euro-Dollar Loans, 11:00 A.M., and (y) for Base Rate Loans, 2:00 P.M., (Atlanta, Georgia time) on the date of each Syndicated Borrowing, each Bank shall (except as provided in paragraph (d) of this Section) make available its ratable share of such Syndicated Borrowing, in Federal or other funds immediately available in Atlanta, Georgia, to the Agent at its address determined pursuant to Section 10.01. Unless the Agent determines that any applicable condition specified in Article IV has not been satisfied, the Agent will make the funds so received from the Banks available to the relevant Borrower at the Agent's aforesaid address. Unless the Agent receives notice from a Bank, at the Agent's address referred to in or specified pursuant to Section 10.01, no later than 2:00 P.M. (local time at such address) on the Domestic Business Day before the date of a Syndicated Borrowing stating that such Bank will not make a Syndicated Loan in connection with such Syndicated Borrowing, the Agent shall be entitled to assume that such Bank will make a Syndicated Loan in connection with such Syndicated Borrowing and, in reliance on such assumption, the Agent may (but shall not be obligated to) make available such Bank's ratable share of such Syndicated Borrowing to the requesting Borrower for the account of such Bank. If the Agent makes such Bank's ratable share available to the requesting 27 Borrower and such Bank does not in fact make its ratable share of such Syndicated Borrowing available on such date, the Agent shall be entitled to recover such Bank's ratable share from such Bank or the Borrowers (and for such purpose shall be entitled to charge such amount to any account of the Borrowers maintained with the Agent), together with interest thereon for each day during the period from the date of such Syndicated Borrowing until such sum shall be paid in full at a rate per annum equal to the rate at which the Agent determines that it obtained (or could have obtained) overnight Federal funds to cover such amount for each such day during such period, provided that (i) any such payment by the Borrowers of such Bank's ratable share and interest thereon shall be without prejudice to any rights that the Borrowers may have against such Bank and (ii) until such Bank has paid its ratable share of such Syndicated Borrowing, together with interest pursuant to the foregoing, it will have no interest in or rights with respect to such Syndicated Borrowing for any purpose hereunder. If the Agent does not exercise its option to advance funds for the account of such Bank, it shall forthwith notify the Borrowers of such decision. Unless the Agent determines that any applicable condition specified in Article IV has not been satisfied, Wachovia will make available to the requesting Borrower at Wachovia's Lending Office the amount of any such Borrowing which is a Swing Borrowing. (d) If any Bank makes a new Syndicated Loan hereunder on a day on which the relevant Borrower is to repay all or any part of an outstanding Syndicated Loan from such Bank, such Bank shall apply the proceeds of its new Syndicated Loan to make such repayment as a Refunding Loan and only an amount equal to the difference (if any) between the amount being borrowed and the amount of such Refunding Loan shall be made available by such Bank to the Agent as provided in paragraph (c) of this Section, or remitted by the relevant Borrower to the Agent as provided in Section 2.12, as the case may be. (e) Notwithstanding anything to the contrary contained in this Agreement, no Euro-Dollar Borrowing may be made if there shall have occurred a Default or an Event of Default, which Default or Event of Default shall not have been cured or waived, and all Refunding Loans shall be made as Base Rate Loans (but shall bear interest at the Default Rate, if applicable). 28 (f) In the event that a Notice of Borrowing fails to specify whether the Syndicated Loans comprising such Syndicated Borrowing are to be Base Rate Loans, or Euro-Dollar Loans, such Syndicated Loans shall be made as Base Rate Loans. If the Borrowers are otherwise entitled under this Agreement to repay any Syndicated Loans maturing at the end of an Interest Period applicable thereto with the proceeds of a new Borrowing, and either Borrower fails to repay such Syndicated Loans using its own moneys and fails to give a Notice of Borrowing in connection with such new Syndicated Borrowing, a new Syndicated Borrowing shall be deemed to be made on the date such Syndicated Loans mature in an amount equal to the principal amount of the Syndicated Loans so maturing, and the Syndicated Loans comprising such new Syndicated Borrowing shall be Base Rate Loans. (g) Notwithstanding anything to the contrary contained herein, there shall not be more than 7 Euro-Dollar Borrowings outstanding at any given time. SECTION 2.03. Notes. (a) The Syndicated Loans of each Bank shall be evidenced by a single Syndicated Loan Note from each Borrower payable to the order of such Bank for the account of its Lending Office in an amount equal to the original principal amount of such Bank's Commitment. (b) The Swing Loans made by Wachovia to each Borrower shall be evidenced by a single Swing Loan Note payable by such Borrower to the order of Wachovia for the account of its Lending Office in an amount equal to $5,000,000. (c) Upon receipt of each Bank's Notes pursuant to Section 4.01, the Agent shall deliver such Notes to such Bank. Each Bank (or Wachovia, with respect to the Swing Loan) shall record, and prior to any transfer of its Notes shall endorse on the schedules forming a part thereof (or on separate records of such Bank) appropriate notations to evidence, the date, amount and maturity of, and effective interest rate for, each Loan made by it, the date and amount of each payment of principal made by the Borrowers with respect thereto, and such schedules of each such Bank's Notes or other records of such Bank shall constitute rebuttable presumptive evidence of the respective principal amounts owing and unpaid on such Bank's Notes; provided that the failure of any Bank to make, or any error in making, any such recordation or endorsement shall not affect the obligation of the Borrowers hereunder or under the Notes or the ability of any Bank to 29 assign its Notes. Each Bank is hereby irrevocably authorized by each Borrower so to endorse its Notes and to attach to and make a part of any Note a continuation of any such schedule as and when required. SECTION 2.04. Maturity of Loans. (a) Except with respect to Discretionary Loans as set forth in Section 2.01(c), each Loan included in any Borrowing shall mature, and the principal amount thereof shall be due and payable, on the last day of the Interest Period applicable to such Borrowing. (b) Notwithstanding the foregoing, the outstanding principal amount of the Loans, if any, together with all accrued but unpaid interest thereon, if any, shall be due and payable on the Termination Date. SECTION 2.05. Interest Rates. (a) "Applicable Margin" means: (i) for the period commencing on the Closing Date to and including the first Performance Pricing Determination Date, (x) for any Base Rate Loan, 0.00%, and (y) for any Euro-Dollar Loan, 2.75%; and (ii) from and after the first Performance Pricing Determination Date, 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 Ratio Applicable Margin Base Rate Loan Euro-Dollar Loan [greater than] 6.0 to 1.0 3.25% 0.50% [greater than] 5.0 to 1.0 but [less than or equal to] 6.0 to 1.0 2.75% 0.0% [greater than] 3.0 to 1.0 but [less than or equal to] 5.0 to 1.0 2.25% 0.0% [less than or equal to] 3.0 to 1.0 2.00% 0.0%
30 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 first day of the month 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. (b) Each Base Rate Loan shall bear interest on the outstanding principal amount thereof, for each day from the date such Loan is made until it becomes due, at a rate per annum equal to the Base Rate for such day plus the Applicable Margin. Such interest shall be payable for each Interest Period on the last day of the calendar month in which such Interest Period occurs. Any overdue principal of and, to the extent permitted by applicable law, overdue interest on any Base Rate Loan shall bear interest, payable on demand, for each day until paid at a rate per annum equal to the Default Rate. (c) Each Euro-Dollar Loan shall bear interest on the outstanding principal amount thereof, for the Interest Period applicable thereto, at a rate per annum equal to the sum of the Applicable Margin plus the applicable Adjusted London Interbank Offered Rate for such Interest Period. Such interest shall be payable for each Interest Period on the last day thereof and, if such Interest Period is longer than 3 months, at intervals of 3 months after the 31 first day thereof. Any overdue principal of and, to the extent permitted by law, overdue interest on any Euro-Dollar Loan shall bear interest, payable on demand, for each day until paid at a rate per annum equal to the Default Rate. The "Adjusted London Interbank Offered Rate" applicable to any Interest Period means a rate per annum equal to the quotient obtained (rounded upwards, if necessary, to the next higher 1/100th of 1%) by dividing (i) the applicable London Interbank Offered Rate for such Interest Period by (ii) 1.00 minus the Euro-Dollar Reserve Percentage. The "London Interbank Offered Rate" applicable to any Euro-Dollar Loan means for the Interest Period of such Euro-Dollar Loan, the rate per annum determined on the basis of the offered rate for deposits in Dollars of amounts equal or comparable to the principal amount of such Euro-Dollar Loan offered for a term comparable to such Interest Period, which rates appear on the Telerate Page 3750 effective as of 11:00 A.M., London time, 2 Euro-Dollar Business Days prior to the first day of such Interest Period, provided that if no such offered rates appear on such page, the "London Interbank Offered Rate" for such Interest Period will be the arithmetic average (rounded upward, if necessary, to the next higher 1/100th of 1%) of rates quoted by not less than 2 major banks in New York City, selected by the Agent, at approximately 10:00 A.M., New York City time, 2 Euro-Dollar Business Days prior to the first day of such Interest Period, for deposits in Dollars offered by leading European banks for a period comparable to such Interest Period in an amount comparable to the principal amount of such Euro-Dollar Loan. "Euro-Dollar Reserve Percentage" means for any day that percentage (expressed as a decimal) which is in effect on such day, as prescribed by the Board of Governors of the Federal Reserve System (or any successor) for determining the maximum reserve requirement for a member bank of the Federal Reserve System in respect of "Eurocurrency liabilities" (or in respect of any other category of liabilities which includes deposits by reference to which the interest rate on Euro-Dollar Loans is determined or any category of extensions of credit or other assets which includes loans by a non-United States office of any Bank to United States residents). The Adjusted London Interbank Offered Rate shall be adjusted automatically on and as of the effective date of any change in the Euro-Dollar Reserve Percentage. 32 (d) The Agent shall determine each interest rate applicable to the Loans hereunder. The Agent shall give prompt notice to the Borrowers and the Banks by telecopier of each rate of interest so determined, and its determination thereof shall be conclusive in the absence of manifest error. (e) After the occurrence and during the continuance of an Event of Default, the principal amount of the Loans (and, to the extent permitted by applicable law, all accrued interest thereon) may, at the election of the Required Banks, bear interest at the Default Rate. SECTION 2.06. Fees. (a) The Borrowers shall pay to the Agent, for the ratable account of each Bank, a commitment fee, calculated on the average daily amount of the Aggregate Unused Commitments, at the rate of 0.25% per annum. Such commitment fees shall accrue from and including the Closing Date to but excluding the Termination Date and shall be payable on each March 31, June 30, September 30 and December 31 and on the Termination Date. (b) The Borrowers shall pay to the Agent, for the ratable account of each Bank, a fee equal to $18,750 upon receipt of any proceeds received by either Borrower or a Consolidated Subsidiary in respect of the issuance of Capital Stock in connection with a public offering. (c) The Borrowers shall pay to the Agent, for the account and sole benefit of the Agent, such fees and other amounts at such times as set forth in the Agent's Letter Agreement. SECTION 2.07. Optional Termination or Reduction of Commitments. The Borrowers may, upon at least 3 Domestic Business Days' notice to the Agent, terminate at any time, or proportionately and permanently reduce the Aggregate Unused Commitments from time to time by an aggregate amount of at least $5,000,000 or any larger integral multiple of $1,000,000. If the Commitments are terminated in their entirety, all accrued fees (as provided under Section 2.06) shall be due and payable on the effective date of such termination. SECTION 2.08. Mandatory Termination or Reduction of Commitments. The Commitments shall terminate on the Termination Date and any Loans then outstanding (together with accrued interest thereon) shall be due and payable on such date. 33 SECTION 2.09. Optional Prepayments. (a) The Borrowers may, on notice to the Agent on or before the same Domestic Business Days as the prepayment, prepay any Base Rate Borrowing in whole at any time, or from time to time in part in amounts aggregating at least: (i) for Syndicated Borrowings, (x) so long as there are fewer than 3 Banks parties hereto, $100,000 or any larger integral multiple of $50,000 or (y) at any time during which there are 3 or more Banks parties hereto, $1,000,000 or any larger integral multiple of $100,000; and (ii) for Swing Borrowings, $100,000 and any larger integral multiple of $25,000, by paying the principal amount to be prepaid together with accrued interest thereon to the date of prepayment. Each such optional prepayment on the Syndicated Loans shall be applied to prepay ratably the Base Rate Loans of the several Banks included in such Base Rate Borrowing. 34 (b) Subject to any payments required pursuant to the terms of Article IX for such Euro-Dollar Loan, upon 3 Domestic Business Day's prior written notice, the Borrowers may prepay in minimum amounts of $1,000,000 with additional increments of $100,000 (or any lesser amount equal to the outstanding balance of such Loan) all or any portion of the principal amount of any Euro-Dollar Loan prior to the maturity thereof. (c) Upon receipt of a notice of prepayment pursuant to this Section 2.09, the Agent shall promptly notify each Bank of the contents thereof and of such Bank's ratable share of such prepayment and such notice, once received by the Agent, shall not thereafter be revocable by the Borrowers. SECTION 2.10. Mandatory Prepayments. On each date on which the Commitments are reduced pursuant to Section 2.07 or Section 2.09, the Borrowers shall repay or prepay such principal amount of the outstanding Loans, if any (together with interest accrued thereon and any amount due under Section 9.05(a)), as may be necessary so that after such payment the Aggregate Principal Amount Outstanding does not exceed the Aggregate Commitments as then reduced. On each date on which the Borrowers are aware that the Aggregate Principal Amount Outstanding exceeds the lesser of (x) the Borrowing Base plus the outstanding principal amount of all Discretionary Loans or (y) the Aggregate Commitments, the Borrowers shall repay or prepay such principal amount of the outstanding Loans, if any (together with interest accrued thereon and any amount due under Section 9.05(a)), as may be necessary so that after such payment the Aggregate Principal Amount Outstanding does not exceed the lesser of (x) the Borrowing Base plus the outstanding principal amount of all Discretionary Loans or (y) the Aggregate Commitments. Each such payment or prepayment shall be applied ratably to the Loans of the Banks outstanding on the date of payment or prepayment in the following order of priority: (i) first, to Discretionary Loans; (ii) secondly, to Swing Rate Loans; (iii) thirdly, to Syndicated Loans which are Base Rate Loans; and (iv) lastly, to Euro-Dollar Loans. SECTION 2.12. General Provisions as to Payments. (a) The Borrowers shall make each payment of principal of, and interest on, the Loans and of fees hereunder, not later than 11:00 A.M. (Atlanta, Georgia time) on the date when due, in Federal or other funds immediately available in Atlanta, Georgia, to the Agent at its address referred to in Section 10.01. The Agent will promptly distribute to Wachovia each such payment received by the Agent on account of the 35 Swing Loans and to each Bank its ratable share of each such payment of Syndicated Loans or fees received by the Agent for the account of the Banks. (b) Whenever any payment of principal of, or interest on, the Base Rate Loans or of fees hereunder shall be due on a day which is not a Domestic Business Day, the date for payment thereof shall be extended to the next succeeding Domestic Business Day. Whenever any payment of principal of or interest on, the Euro-Dollar Loans shall be due on a day which is not a Euro-Dollar Business Day, the date for payment thereof shall be extended to the next succeeding Euro-Dollar Business Day unless such Euro-Dollar Business Day falls in another calendar month, in which case the date for payment thereof shall be the next preceding Euro-Dollar Business Day. (c) All payments of principal, interest and fees and all other amounts to be made by the Borrowers pursuant to this Agreement with respect to any Loan or fee relating thereto shall be paid without deduction for, and free from, any tax, imposts, levies, duties, deductions, or withholdings of any nature now or at anytime hereafter imposed by any governmental authority or by any taxing authority thereof or therein excluding in the case of each Bank, taxes imposed on or measured by its net income, and franchise taxes imposed on it, by the jurisdiction under the laws of which such Bank is organized or any political subdivision thereof and, in the case of each Bank, taxes imposed on its income, and franchise taxes imposed on it, by the jurisdiction of such Bank's applicable Lending Office or any political subdivision thereof (all such non-excluded taxes, imposts, levies, duties, deductions or withholdings of any nature being "Taxes"). In the event that either Borrower is required by applicable law to make any such withholding or deduction of Taxes with respect to any Loan or fee or other amount, such Borrower shall pay such deduction or withholding to the applicable taxing authority, shall promptly furnish to any Bank in respect of which such deduction or withholding is made all receipts and other documents evidencing such payment and shall pay to such Bank additional amounts as may be necessary in order that the amount received by such Bank after the required withholding or other payment shall equal the amount such Bank would have received had no such withholding or other payment been made. If no withholding or deduction of Taxes are payable in respect to any Loan or fee relating thereto, the Borrowers shall furnish any Bank, at such Bank's request, a certificate from each applicable taxing authority or an opinion of 36 counsel acceptable to such Bank, in either case stating that such payments are exempt from or not subject to withholding or deduction of Taxes. If the relevant Borrower fails to provide such original or certified copy of a receipt evidencing payment of Taxes or certificate(s) or opinion of counsel of exemption, the Borrowers hereby agree to compensate such Bank for, and indemnify them with respect to, the tax consequences of such Borrower's failure to provide evidence of tax payments or tax exemption. Each Bank which is not organized under the laws of the United States or any state thereof agrees, as soon as practicable after receipt by it of a request by either Borrower to do so, to file all appropriate forms and take other appropriate action to obtain a certificate or other appropriate document from the appropriate governmental authority in the jurisdiction imposing the relevant Taxes, establishing that it is entitled to receive payments of principal and interest under this Agreement and the Notes without deduction and free from withholding of any Taxes imposed by such jurisdiction; provided that if it is unable, for any reason, to establish such exemption, or to file such forms and, in any event, during such period of time as such request for exemption is pending, the Borrowers shall nonetheless remain obligated under the terms of the immediately preceding paragraph. In the event any Bank receives a refund of any Taxes paid by either Borrower pursuant to this Section 2.12(c), it will pay to such Borrower the amount of such refund promptly upon receipt thereof; provided that if at any time thereafter it is required to return such refund, such Borrower shall promptly repay to it the amount of such refund. Without prejudice to the survival of any other agreement of the Borrowers hereunder, the agreements and obligations of the Borrowers and the Banks contained in this Section 2.12(c) shall be applicable with respect to any Participant, Assignee or other Transferee, and any calculations required by such provisions (i) shall be made based upon the circumstances of such Participant, Assignee or other Transferee, and (ii) constitute a continuing agreement and shall survive the termination of this Agreement and the payment in full or cancellation of the Notes. SECTION 2.13. Computation of Interest and Fees. Interest on Base Rate Loans and Euro-Dollar Loans shall be computed on the basis 37 of a year of 360 days and paid for the actual number of days elapsed (including the first day but excluding the last day). Commitment fees and any other fees payable hereunder shall be computed on the basis of a year of 360 days and paid for the actual number of days elapsed (including the first day but excluding the last day). ARTICLE III LETTER OF CREDIT FACILITY SECTION 3.01. Obligation to Issue. Subject to the terms and conditions of this Agreement, and in reliance upon the representations and warranties of the Borrowers herein set forth, the Agent shall issue for the account of either Borrower, one or more Letters of Credit denominated in Dollars, in accordance with this Article III, from time to time during the period commencing on the Closing Date and ending on the Domestic Business Day prior to the Termination Date. The Existing Letters of Credit shall be deemed for all purposes hereunder to have been issued under and shall be subject to this Agreement, and shall constitute Letters of Credit hereunder. SECTION 3.02. Types and Amounts. The Agent shall have no obligation to issue any Letter of Credit at any time: (a) if the aggregate maximum amount then available for drawing under Letters of Credit, after giving effect to the issuance of the requested Letter of Credit, shall exceed any limit imposed by law or regulation upon the Agent; (b) if, after giving effect to the issuance of the requested Letter of Credit, (i) the aggregate Letter of Credit Obligations of both Borrowers would exceed $10,000,000, or (ii) the Aggregate Principal Amount Outstanding at such time would exceed the lesser of (x) the Borrowing Base plus the outstanding principal amount of all Discretionary Loans, or (y) the Aggregate Commitments; (c) which has an expiration date (i) more than 12 months after the date of issuance or (ii) after the Termination Date. 38 SECTION 3.03. Conditions. In addition to being subject to the satisfaction of the conditions contained in Article IV, the obligation of the Agent to issue any Letter of Credit is subject to the satisfaction in full of the following conditions: (a) the relevant Borrower shall have delivered to the Agent at such times and in such manner as the Agent may prescribe, a Letter of Credit Application Agreement and such other documents and materials as may be required pursuant to the terms thereof all satisfactory in form and substance to the Agent and the terms of the proposed Letter of Credit shall be satisfactory in form and substance to the Agent; (b) as of the date of issuance no order, judgment or decree of any court, arbitrator or Authority shall purport by its terms to enjoin or restrain the Agent from issuing the Letter of Credit and no law, rule or regulation applicable to the Agent and no request or directive (whether or not having the force of law) from any Authority with jurisdiction over the Agent shall prohibit or request that the Agent refrain from the issuance of letters of credit generally or the issuance of that Letter of Credit; and (c) the Aggregate Unused Commitments shall not be less than the amount of the requested Letter of Credit. SECTION 3.04. Issuance of Letters of Credit. (a) Request for Issuance. At least 2 Domestic Business Days before the effective date for any Letter of Credit, the relevant Borrower shall give the Agent a written notice containing the original signature of an authorized officer or employee of such Borrower. Such notice shall be irrevocable and shall specify the original face amount of the Letter of Credit requested (which original face amount shall not be less than $100,000), the effective date (which day shall be a Domestic Business Day) of issuance of such requested Letter of Credit, the date on which such requested Letter of Credit is to expire, the amount of then outstanding Letter of Credit Obligations of both Borrowers, the purpose for which such Letter of Credit is to be issued, whether such Letter of Credit may be drawn in single or partial draws and the person for whose benefit the requested Letter of Credit is to be issued. 39 (b) Issuance; Notice of Issuance. If the original face amount of the requested Letter of Credit is less than or equal to the Aggregate Unused Commitments at such time and the applicable conditions set forth in this Agreement are satisfied, the Agent shall issue the requested Letter of Credit. The Agent shall give each Bank written or telex notice in substantially the form of Exhibit G, or telephonic notice confirmed promptly thereafter in writing, of the issuance of a Letter of Credit, and shall deliver to each Bank in connection with such notice a copy of the Letter of Credit issued by the Agent. (c) No Extension or Amendment. The Agent shall not extend or amend any Letter of Credit if the issuance of a new Letter of Credit having the same terms as such Letter of Credit as so amended or extended would be prohibited by Section 3.02 or Section 3.03. SECTION 3.05. Reimbursement Obligations; Duties of the Issuing Bank. (a) Reimbursement. Notwithstanding any provisions to the contrary in any Letter of Credit Application Agreement: (i) the Borrowers shall reimburse the Agent for drawings under a Letter of Credit issued by it no later than the earlier of (A) the time specified in such Letter of Credit Application Agreement, or (B) 1 Domestic Business Day after the payment by the Agent; (ii) any Reimbursement Obligation with respect to any Letter of Credit shall bear interest from the date of the relevant drawing under the pertinent Letter of Credit until the date of payment in full thereof at a rate per annum equal to (A) prior to the date that is 3 Domestic Business Days after the date of the related payment by the Agent, the Base Rate and (B) thereafter, the Default Rate; and (iii) in order to implement the foregoing, upon the occurrence of a draw under any Letter of Credit, unless the Agent is reimbursed in accordance with subsection (i) above, the Borrowers irrevocably authorize the Agent to treat such nonpayment as a Notice of Borrowing in the amount of such Reimbursement Obligation and to make Loans to the relevant Borrower in such amount regardless of whether the conditions 40 precedent to the making of Loans hereunder have been met. The Borrowers further authorize the Agent to credit the proceeds of such Loan so as to immediately eliminate the liability of the relevant Borrower for Reimbursement Obligations under such Letter of Credit. (b) Duties of the Agent. Any action taken or omitted to be taken by the Agent in connection with any Letter of Credit, if taken or omitted in the absence of willful misconduct or gross negligence, shall not put the Agent under any resulting liability to any Bank, or assuming that the Agent has complied with the procedures specified in Section 3.04 and such Bank has not given a notice contemplated by Section 3.06(a) that continues in full force and effect, relieve that Bank of its obligations hereunder to the Agent. In determining whether to pay under any Letter of Credit, the Agent shall have no obligation relative to the Banks other than to confirm that any documents required to have been delivered under such Letter of Credit appear to comply on their face, with the requirements of such Letter of Credit. SECTION 3.06. Participations. (a) Purchase of Participations. Immediately upon issuance by the Agent of any Letter of Credit in accordance with the procedures set forth in Section 3.04, each Bank shall be deemed to have irrevocably and unconditionally purchased and received from the Agent, without recourse or warranty, an undivided interest and participation, to the extent of such Bank's share of the Aggregate Commitments, in such Letter of Credit; provided, that a Letter of Credit shall not be entitled to the benefits of this Section 3.06 if the Agent shall have received written notice from any Bank on or before the Domestic Business Day immediately prior to the date of the Agent's issuance of such Letter of Credit that one or more of the conditions contained in Section 3.03 or Article IV is not then satisfied, and, in the event the Agent receives such a notice, it shall have no further obligation to issue any Letter of Credit until such notice is withdrawn by that Bank or until the Required Banks have effectively waived such condition in accordance with the provisions of this Agreement. (b) Sharing of Letter of Credit Payments. In the event that the Agent makes any payment under any Letter of Credit for which the relevant Borrower shall not have repaid such amount to the Agent pursuant to Section 3.07 or which cannot be paid by a Loan pursuant to 41 subsection (iii) of Section 3.05, the Agent shall promptly notify each Bank of such failure, and each Bank shall promptly and unconditionally pay to the Agent such Bank's share of the Aggregate Commitments of the amount of such payment in Dollars and in same day funds. If the Agent so notifies such Bank prior to 10:00 A.M. (Atlanta, Georgia time) on any Domestic Business Day, such Bank shall make available to the Agent its ratable share of the amount of such payment on such Domestic Business Day in same day funds. If and to the extent such Bank shall not have so made its ratable share of the amount of such payment available to the Agent, such Bank agrees to pay to the Agent forthwith on demand such amount together with interest thereon, for each day from the date such payment was first due until the date such amount is paid to the Agent at the Base Rate for the first 3 days and thereafter at the Default Rate. The failure of any Bank to make available to the Agent its ratable share of any such payment shall neither relieve nor increase the obligation of any other Bank hereunder to make available to the Agent its ratable share of any payment on the date such payment is to be made. (c) Sharing of Reimbursement Obligation Payments. Whenever the Agent receives a payment on account of a Reimbursement Obligation, including any interest thereon, as to which the Agent has received any payments from the Banks pursuant to this Section 3.06, it shall promptly pay to each Bank which has funded its participating interest therein, in Dollars and in the kind of funds so received, an amount equal to such Bank's ratable share thereof. Each such payment shall be made by the Agent on the Domestic Business Day on which the funds are paid to such Person, if received prior to 10:00 am. (Atlanta, Georgia time) on such Domestic Business Day, and otherwise on the next succeeding Domestic Business Day. (d) Documentation. Upon the request of any Bank, the Agent shall furnish to such Bank copies of any Letter of Credit, Letter of Credit Application Agreement and other documentation relating to Letters of Credit issued pursuant to this Agreement. (e) Obligations Irrevocable. The obligations of the Banks to make payments to the Agent with respect to a Letter of Credit shall be irrevocable, not subject to any qualification or exception whatsoever and shall be made in accordance with, but not subject to, the terms and conditions of this Agreement under all circumstances 42 (assuming that the Agent has issued such Letter of Credit in accordance with Section 3.04 and such Bank has not given a notice contemplated by Section 3.06(a) that continues in full force and effect), including, without limitation, any of the following circumstances: (i) any lack of validity or enforceability of this Agreement or any of the other Loan Documents; (ii) the existence of any claim, set-off, defense or other right which either Borrower may have at any time against a beneficiary named in a Letter of Credit or any transferee of any Letter of Credit (or any Person for whom any such transferee may be acting), the Agent, any Bank or any other Person, whether in connection with this Agreement, any Letter of Credit, the transactions contemplated herein or any unrelated transactions; (iii) any draft, certificate or any other document presented under the Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect; (iv) the surrender or impairment of any security for the performance or observance of any of the terms of any of the Loan Documents; (v) payment by the Agent under any Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect; (vi) payment by the Agent under any Letter of Credit against presentation of any draft or certificate that does not comply with the terms of such Letter of Credit, except payment resulting from the gross negligence or willful misconduct of the Agent; or (vii) any other circumstances or happenings whatsoever, whether or not similar to any of the foregoing, except circumstances or happenings resulting from the gross negligence or willful misconduct of the Agent. 43 SECTION 3.07. Payment of Reimbursement Obligations. (a) Payments to Issuing Bank. Each Borrower agrees to pay to the Agent the amount of all Reimbursement Obligations, interest and other amounts payable to the Agent under or in connection with any Letter of Credit issued for either Borrower's account immediately when due, irrespective of: (i) any lack of validity or enforceability of this Agreement or any of the other Loan Documents; (ii) the existence of any claim, set-off, defense or other right which either Borrower may have at any time against a beneficiary named in a Letter of Credit or any transferee of any Letter of Credit (or any Person for whom any such transferee may be acting), the Agent, any Bank or any other Person, whether in connection with this Agreement, any Letter of Credit, the transactions contemplated herein or any unrelated transactions; (iii) any draft, certificate or any other document presented under the Letter of Credit proves to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect; (iv) the surrender or impairment of any security for the performance or observance of any of the terms of any of the Loan Documents; (v) payment by the Agent under any Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect; (vi) payment by the Agent under any Letter of Credit against presentation of any draft or certificate that does not comply with the terms of such Letter of Credit, except payment resulting from the gross negligence or willful misconduct of the Agent; or (vii) any other circumstances or happenings whatsoever, whether or not similar to any of the foregoing, except circumstances or happenings resulting from the gross negligence or willful misconduct of the Agent. 44 (b) Recovery or Avoidance of Payments. In the event any payment by or on behalf of the Borrower received by the Agent with respect to a Letter of Credit and distributed by the Agent to the Banks on account of their participations is thereafter set aside, avoided or recovered from the Agent in connection with any receivership, liquidation or bankruptcy proceeding, each Bank that received such distribution shall, upon demand by such Agent, contribute such Bank's ratable share of the amount set aside, avoided or recovered together with interest at the rate required to be paid by the Agent upon the amount required to be repaid by it. SECTION 3.08. Compensation for Letters of Credit and Agent Reporting Requirements. (a) Letter of Credit Fees and Fronting Fees. The Borrowers shall pay to the Agent with respect to each Letter of Credit issued hereunder (i) a letter of credit fee ("Letter of Credit Fee") equal to the Applicable Margin in effect from time to time for Euro-Dollar Loans multiplied by the face amount of such Letter of Credit and (ii) to the Agent, solely for its own account, a fronting fee (the "Fronting Fee") equal to 0.125% per annum of the face amount. The Letter of Credit Fee and the Fronting Fee shall be payable on the Domestic Business Day on which such Letter of Credit is issued. Letter of Credit Fees and Fronting Fees payable hereunder shall be computed on the basis of a year of 360 days and paid for the actual number of days elapsed (including the first day but excluding the last day). The Agent shall promptly remit such Letter of Credit Fees, when paid, to the Banks in accordance with their ratable shares of the Aggregate Commitments. (b) Agent Charges. The Borrowers shall pay to the Agent, solely for its own account, the standard charges assessed by the Agent in connection with the issuance, administration, amendment and payment or cancellation of Letters of Credit issued hereunder, which charges shall be those typically charged by the Agent to its customers generally having credit and other characteristics similar to the Borrowers, as determined in good faith by the Agent. 45 SECTION 3.09. Indemnification; Exoneration. (a) Indemnification. In addition to amounts payable as elsewhere provided in this Article III, the Borrowers shall protect, indemnify, pay and save the Agent and each Bank harmless from and against any and all claims, demands, liabilities, damages, losses, costs, charges and expenses (including reasonable attorneys' fees) which the Agent, or any Bank may incur or be subject to as a consequence of the issuance of any Letter of Credit for either Borrower's account other than as a result of its gross negligence or willful misconduct, as determined by a court of competent jurisdiction. (b) Assumption of Risk by Borrowers. As between the Borrowers, the Agent and the Banks, the Borrowers assume all risks of the acts and omissions of, or misuse of the Letters of Credit issued for either Borrower's account by, the respective beneficiaries of such Letters of Credit. In furtherance and not in limitation of the foregoing, the Agent and the Banks shall not be responsible for (i) the form, validity, sufficiency, accuracy, genuineness or legal effect of any document submitted by any party in connection with the application for and issuance of the Letters of Credit, even if it should in fact prove to be in any or all respects invalid, insufficient, inaccurate, fraudulent or forged, (ii) the validity or sufficiency of any instrument transferring or assigning or purporting to transfer or assign a Letter of Credit or the rights or benefits thereunder or proceeds thereof, in whole or in part, which may prove to be invalid or ineffective for any reason, (iii) failure of the beneficiary of a Letter of Credit to comply duly with conditions required in order to draw upon such Letter of Credit, (iv) errors, omissions, interruptions or delays in transmission or delivery of any messages, by mail, cable, telegraph, telex or otherwise, whether or not they be in cipher, for errors in interpretation of technical terms, (vi) any loss or delay in the transmission or otherwise of any document required in order to make a drawing under any Letter of Credit or of the proceeds thereof, (vii) the misapplication by the beneficiary of a Letter of Credit of the proceeds of any drawing under such Letter of Credit; and (viii) any consequences arising from causes beyond the control of the Agent and the Banks. (c) Exoneration. In furtherance and extension and not in limitation of the specific provisions hereinabove set forth, any 46 action taken or omitted by the Agent under or in connection with the Letters of Credit or any related certificates if taken or omitted in good faith and with reasonable care, shall not put the Agent or any Bank under any resulting liability to the Borrowers or relieve the Borrowers of any of its obligations hereunder to any such Person. SECTION 3.10. Credit Yield Protection; Capital Adequacy. If the adoption after the date hereof of any applicable law, statute, rule, regulation, ordinance, writ, injunction, decree, order, judgment, guideline or decision of any Authority ("Governmental Rule"), any change after the date hereof in any interpretation or administration of any applicable Governmental Rule by any Person charged with its interpretation or administration or compliance by the Agent or any Bank (or its Lending Office) with any request or directive (whether or not having the force of law) of any such Person: (a) shall subject the Agent or any Bank (or its Lending Office) to any tax (other than overall net income taxation or franchise taxes), duty or other charge with respect to any amount drawn on any Letter of Credit or its obligation to make any payment under the Letters of Credit, or to maintain the Letters of Credit, or shall change the basis of taxation (other than overall net income taxation or franchise taxes) of payments to the Agent or any Bank (or its Lending Office) of any amounts due under this Agreement or any amount drawn on the Letters of Credit; or (b) shall impose, modify or deem applicable any reserve (including, without limitation, any imposed by the Board of Governors of the Federal Reserve System or any Person regulating insurance activities or insurance companies), special deposit or similar requirements against assets of, deposits with or for the account of, credit extended by, letters of credit issued or maintained by, or collateral subject to a lien in favor of the Agent or any Bank (or its Lending Office), or shall impose on the Agent or any Bank (or its Lending Office) any other condition affecting any amount drawn on the Letters of Credit, or its obligation to make any payment under the Letters of Credit, as the case may be, or to maintain the Letters of Credit; then the remaining provisions of this Section 3.10 shall apply. If the result of any of the foregoing (without regard to whether the Agent or any Bank shall have sold participations in its 47 respective obligations under this Agreement) is to increase the cost to or to impose a cost on the Agent or any Bank (or its Lending Office) of making or maintaining any amounts payable hereunder, of maintaining the Letters of Credit, or to reduce the amount of any sum received or receivable by the Agent or any Bank (or its Lending Office) under any Letter of Credit, then: (i) the Agent or such Bank shall promptly deliver to the Borrowers a certificate stating the change which has occurred or the reserve requirements or other conditions which have been imposed on the Agent or such Bank (or its Lending Office) or the request, direction or requirement with which it has complied, together with the date hereof; and (ii) the Borrowers shall pay to the Agent or such Bank within 15 days of written request (which request shall state the amount of increased cost, reduction or payment and the way in which such amount has been calculated), such amount or amounts as will compensate the Agent or such Bank for the additional cost, reduction of return or payment incurred by the Agent or such other Bank; provided, that the Borrowers shall have no liability for amounts related to periods earlier than 90 days prior to the date of such written request. The written request of the Agent or such Bank as to the additional amounts payable pursuant to this paragraph delivered to the Borrowers shall be conclusive evidence of the amount thereof in the absence of manifest error. (c) If any Bank shall have determined that after the date hereof the adoption of any applicable law, rule or regulation regarding capital adequacy, or any change therein, or any change in the interpretation or administration thereof, or compliance by any Bank (or its Lending Office) with any request or directive regarding capital adequacy (whether or not having the force of law) of any Authority, has or would have the effect of reducing the rate of return on such Bank's capital as a consequence of its obligations hereunder to a level below that which such Bank could have achieved but for such adoption, change or compliance (taking into consideration such Bank's policies with respect to capital adequacy) by an amount deemed by such Bank to be material, then 48 from time to time, within 15 days after demand by such Bank, the Borrowers shall pay to such Bank such additional amount or amounts as will compensate such Bank for such reduction; provided, that the Borrowers shall have no liability for amounts related to periods earlier than 90 days prior to the date of such written request. (d) Each Bank will promptly notify the Borrowers and the Agent of any event of which it has knowledge, occurring after the date hereof, which will entitle such Bank to compensation pursuant to this Section and will designate a different Lending Office if such designation will avoid the need for, or reduce the amount of, such compensation and will not, in the judgment of such Bank, be otherwise disadvantageous to such Bank. A certificate of any Bank claiming compensation under this Section and setting forth the additional amount or amounts to be paid to it hereunder shall be conclusive in the absence of manifest error. In determining such amount, such Bank may use any reasonable averaging and attribution methods. (e) The provisions of this Section 3.10 shall be applicable with respect to any Participant, Assignee or other Transferee, and any calculations required by such provisions shall be made based upon the circumstances of such Participant, Assignee or other Transferee. ARTICLE IV CONDITIONS TO BORROWINGS SECTION 4.01. Conditions to Closing. The obligation of the Agent and each Bank to enter into this Agreement is subject to the satisfaction of the conditions set forth in Section 4.02 and receipt by the Agent of the following (as to the documents described in paragraphs (a), (d), (e) and (f) below, in sufficient number of counterparts for delivery of a counterpart to each Bank and retention of one counterpart by the Agent): (a) from each of the parties hereto of either (i) a duly executed counterpart of this Agreement signed by such party or 49 (ii) a facsimile transmission of such executed counterpart, with the original to be sent to the Agent by overnight courier; (b) a duly executed Syndicated Loan Note for the account of each Bank and a duly executed Swing Loan Note for the account of Wachovia, in each case complying with the provisions of Section 2.03; (c) evidence of perfected filings of UCC Financing Statements in connection with the Security Agreements in form and substance acceptable to the Agent; (d) an opinion letter (together with any opinions of local counsel relied on therein) of Long, Aldridge & Norman, counsel for the Borrowers, dated as of the Closing Date, substantially in the form of Exhibit B and covering such additional matters relating to the transactions contemplated hereby as the Agent or any Bank may reasonably request; (e) an opinion of Jones, Day, Reavis & Pogue, special counsel for the Agent, dated as of the Closing Date, substantially in the form of Exhibit C and covering such additional matters relating to the transactions contemplated hereby as the Agent may reasonably request; (f) a certificate (the "Closing Certificate") substantially in the form of Exhibit I), dated as of the Closing Date, signed by a principal financial officer of each of the Borrowers, to the effect that (i) no Default has occurred and is continuing on the Closing Date and (ii) the representations and warranties of the Borrowers contained in Article V are true on and as of the Closing Date; (g) Landlord Agreements with respect to each leased premise of each Borrower (including, without limitation, the City of Industry, California location of SED) along with copies of such executed leases; (h) a certificate of insurance respecting all insurance coverage required by the Security Agreements in forms and substance acceptable to the Agent; (k) judgment, tax and UCC lien searches with respect to the Collateral (defined in each Security Agreement) and 50 releases of all liens other than Permitted Encumbrances (defined in each Security Agreement); (m) a copy of the executed Purchase Documents in form and substance acceptable to the Banks; (n) copies of the executed Distributor Agreements; (o) all documents which the Agent or any Bank may reasonably request relating to the existence of the Borrowers, the corporate authority for and the validity of this Agreement, the Notes, and the other Loan Documents, and any other matters relevant hereto, all in form and substance satisfactory to the Agent, including, without limitation, a certificate of each of the Borrowers substantially in the form of Exhibit J (the "Officer's Certificate"), signed by the Secretary or an Assistant Secretary of such Borrower, certifying as to the names, true signatures and incumbency of the officer or officers of such Borrower authorized to execute and deliver the Loan Documents, and certified copies of the following items: (i) such Borrower's Certificate of Incorporation, (ii) such Borrower's Bylaws, (iii) a certificate of the Secretaries of State of the States of Delaware and Georgia as to the good standing of such Borrower as a Delaware corporation and as a foreign corporation authorized to do business in Georgia, respectively, and (iv) the action taken by the Board of Directors of such Borrower authorizing such Borrower's execution, delivery and performance of this Agreement, the Notes and the other Loan Documents to which such Borrower is a party; (p) a Notice of Borrowing and a Borrowing Base Certificate; (q) receipt of the facility fee payable for the account of the Banks pursuant to Section 2.06(b) and of the servicing fee payable for the account of the Agent pursuant to Section 2.06(c); and (r) receipt by the Agent of a telephone instruction letter, concerning requests for Loans hereunder, to be substantially in the form of Exhibit L attached hereto. 51 In addition, if either Borrower desires funding of a Euro-Dollar Loan on the Closing Date, the Agent shall have received, the requisite number of days prior to the Closing Date, a funding indemnification letter satisfactory to it, pursuant to which (i) the Agent and such Borrower shall have agreed upon the interest rate, amount of Borrowing and Interest Period for such Euro-Dollar Loan, and (ii) such Borrower shall indemnify the Banks from any loss or expense arising from the failure to close on the anticipated Closing Date identified in such letter or the failure to borrow such Euro-Dollar Loan on such date. SECTION 4.02. Conditions to All Borrowings. The obligation of each Bank to make a Syndicated Loan on the occasion of each Borrowing, or of Wachovia to make a Swing Loan or of the Agent to issue a Letter of Credit is subject to the satisfaction of the following conditions: (a) receipt by the Agent of a Notice of Borrowing or notice pursuant to Section 3.04(b) of a request for a Letter of Credit, accompanied by a Letter of Credit Application Agreement and any other documents required pursuant to Section 3.03(a). (b) the fact that, immediately before and after such Borrowing or Letter of Credit Issuance, as applicable, no Default shall have occurred and be continuing; (c) the fact that the representations and warranties of the Borrowers contained in Article V of this Agreement shall be true on and as of the date of such Borrowing; and (d) the fact that, immediately after such Borrowing or issuance of a Letter of Credit, the conditions set forth in clauses (i) and (ii) of Section 2.01 shall have been satisfied. Each Syndicated Borrowing, each Swing Borrowing and each request for the issuance of a Letter of Credit hereunder shall be deemed to be a representation and warranty by the Borrowers on the date of such Borrowing as to the truth and accuracy of the facts specified in paragraphs (b), (c) and (d) of this Section. 52 ARTICLE V REPRESENTATIONS AND WARRANTIES Each of the Borrowers represents and warrants that: SECTION 5.01. Corporate Existence and Power. Such Borrower is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation, is duly qualified to transact business in every jurisdiction where, by the nature of its business, the failure to qualify could have a Material Adverse Effect, and has all corporate powers and all governmental licenses, authorizations, consents and approvals required to carry on its business as now conducted. SECTION 5.02. Corporate and Governmental Authorization; No Contravention. The execution, delivery and performance by such Borrower of this Agreement, the Notes and the other Loan Documents (i) are within such Borrower's corporate powers, (ii) have been duly authorized by all necessary corporate action, (iii) require no action by or in respect of or filing with, any governmental body, agency or official, (iv) do not contravene, or constitute a default under, any provision of applicable law or regulation or of the certificate of incorporation or by-laws of such Borrower or of any agreement, judgment, injunction, order, decree or other instrument binding upon such Borrower or any of its Subsidiaries, and (v) do not result in the creation or imposition of any Lien on any asset of such Borrower or any of its Subsidiaries. SECTION 5.03. Binding Effect. This Agreement constitutes a valid and binding agreement of such Borrower enforceable in accordance with its terms, and the Notes and the other Loan Documents executed by such Borrower, when executed and delivered in accordance with this Agreement, will constitute valid and binding obligations of such Borrower enforceable in accordance with their respective terms, provided that the enforceability hereof and thereof is subject in each case to general principles of equity and to bankruptcy, insolvency and similar laws affecting the enforcement of creditors' rights generally. SECTION 5.04. Financial Information. (a) The consolidated balance sheet of the Borrowers and the Consolidated 53 Subsidiaries as of June 30, 1996 and the related consolidated statements of income, shareholders' equity and cash flows for the Fiscal Year then ended, reported on by Deloitte & Touche LLP, copies of which have been delivered to each of the Banks, and the unaudited consolidated financial statements of the Borrowers for the interim period ended May 31, 1997 copies of which have been delivered to each of the Banks, fairly present, in conformity with GAAP, the consolidated financial position of the Borrowers and their Consolidated Subsidiaries as of such dates and their consolidated results of operations and cash flows for such periods stated. (b) Since June 30, 1997 there has been no event, act, condition or occurrence having a Material Adverse Effect. SECTION 5.05. No Litigation. There is no action, suit or proceeding pending, or to the knowledge of such Borrower threatened, against or affecting the Borrowers or any of the Subsidiaries before any court or arbitrator or any governmental body, agency or official which, if adversely determined, could have a Material Adverse Effect or which in any manner draws into question the validity of or could impair the ability of the Borrowers to perform their respective obligations under, this Agreement, the Notes, the Letter of Credit Application Agreements or any of the other Loan Documents executed by either of them. SECTION 5.06. Compliance with ERISA. (a) The Borrowers and each member of the Controlled Group have fulfilled their obligations under the minimum funding standards of ERISA and the Code with respect to each Plan and are in compliance in all material respects with the presently applicable provisions of ERISA and the Code, and have not incurred any liability to the PBGC or a Plan under Title IV of ERISA. (b) Neither of the Borrowers nor any member of the Controlled Group is or ever has been obligated to contribute to any Multiemployer Plan. SECTION 5.07. Compliance with Laws; Payment of Taxes. The Borrowers and the Subsidiaries are in compliance with all applicable laws, regulations and similar requirements of governmental authorities, except where such compliance is being contested in good faith through appropriate proceedings or where a failure to comply could not have a Material Adverse Effect. There have been filed on behalf of the Borrowers and the 54 Subsidiaries all Federal, state and local income, excise, property and other tax returns which are required to be filed by them and all taxes due pursuant to such returns or pursuant to any assessment received by or on behalf of the Borrowers or any Subsidiary have been paid. The charges, accruals and reserves on the books of the Borrowers and the Subsidiaries in respect of taxes or other governmental charges are, in the opinion of the Borrowers, adequate. United States income tax returns of the Borrowers and the Subsidiaries have been examined and closed through the Fiscal Year ended 1993. SECTION 5.08. Subsidiaries. Each of the Borrowers' respective Subsidiaries is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation, is duly qualified to transact business in every jurisdiction where, by the nature of its business, failure to qualify could have a Material Adverse Effect, and has all corporate powers and all governmental licenses, authorizations, consents and approvals required to carry on its business as now conducted. The Borrowers have no Subsidiaries except for those Subsidiaries listed on Schedule 5.08, which accurately sets forth, by Borrower, each such Subsidiary's complete name and jurisdiction of incorporation. SECTION 5.09. Investment Company Act. Neither of the Borrowers nor any of the Subsidiaries is an "investment company" within the meaning of the Investment Company Act of 1940, as amended. SECTION 5.10. Public Utility Holding Company Act. Neither of the Borrowers nor any of the Subsidiaries is a "holding company", or a "subsidiary company" of a "holding company", or an "affiliate" of a "holding company" or of a "subsidiary company" of a "holding company", as such terms are defined in the Public Utility Holding Company Act of 1935, as amended. SECTION 5.11. Ownership of Property; Liens. Each of the Borrowers and their Consolidated Subsidiaries has title to its properties sufficient for the conduct of its business, and none of such property is subject to any Lien except as permitted in Section 6.18. SECTION 5.12. No Default. Neither of the Borrowers nor any of their Consolidated Subsidiaries is in default under or 55 with respect to any agreement, instrument or undertaking to which it is a party or by which it or any of its property is bound which default could have or cause a Material Adverse Effect. No Default or Event of Default has occurred and is continuing. SECTION 5.13. Full Disclosure. All information heretofore furnished by the Borrowers to the Agent or any Bank for purposes of or in connection with this Agreement or any transaction contemplated hereby is, and all such information hereafter furnished by the Borrowers to the Agent or any Bank will be, true, accurate and complete in every material respect or based on reasonable estimates on the date as of which such information is stated or certified. The Borrowers have disclosed to the Banks in writing any and all facts which could have or cause a Material Adverse Effect. SECTION 5.14. Environmental Matters. (a) Neither the Borrowers nor any Subsidiary is subject to any Environmental Liability which could have or cause a Material Adverse Effect and neither the Borrowers nor any Subsidiary has been designated as a potentially responsible party under CERCLA or under any state statute similar to CERCLA. None of the Properties has been identified on any current or proposed (i) National Priorities List under 40 C.F.R. Paragraph 300, (ii) CERCLIS list or (iii) any list arising from a state statute similar to CERCLA. (b) To the Borrowers' knowledge, no Hazardous Materials have been or are being used, produced, manufactured, processed, treated, recycled, generated, stored, disposed of, managed or otherwise handled at, or shipped or transported to or from the Properties or are otherwise present at, on, in or under the Properties, or, to the best of the knowledge of the Borrowers, at or from any adjacent site or facility, except for Hazardous Materials, such as cleaning solvents, pesticides and other materials used, produced, manufactured, processed, treated, recycled, generated, stored, disposed of, managed, or otherwise handled in minimal amounts in the ordinary course of business in compliance with all applicable Environmental Requirements. (c) Each of the Borrowers, and each of the Subsidiaries and Affiliates, has procured all Environmental Authorizations necessary for the conduct of its business, and is in material compliance with all Environmental Requirements in connection with the operation of the Properties and the 56 Borrowers', and each of their Subsidiary's and Affiliate's, respective businesses. SECTION 5.15. Capital Stock. All Capital Stock, debentures, bonds, notes and all other securities of the Borrowers and the Subsidiaries presently issued and outstanding are validly and properly issued in accordance with all applicable laws, including, but not limited to, the "Blue Sky" laws of all applicable states and the federal securities laws. The issued shares of Capital Stock of the Borrowers' respective Wholly Owned Subsidiaries are owned by the Borrowers free and clear of any Lien or adverse claim. At least a majority of the issued shares of capital stock of each of each Borrower's other Subsidiaries (other than Wholly Owned Subsidiaries) is owned by such Borrower free and clear of any Lien or adverse claim. SECTION 5.16. Margin Stock. Neither the Borrowers nor any of the Subsidiaries is engaged principally, or as one of its important activities, in the business of purchasing or carrying any Margin Stock, and no part of the proceeds of any Loan will be used to purchase or carry any Margin Stock or to extend credit to others for the purpose of purchasing or carrying any Margin Stock, or be used for any purpose which violates, or which is inconsistent with, the provisions of Regulation G,T, U or X. SECTION 5.17. Insolvency. After giving effect to the execution and delivery of the Loan Documents and the making of the Loans under this Agreement and after giving effect to the purchase of certain assets of Globelle, Inc. pursuant to the Purchase Documents: (i) neither of the Borrowers will (x) be "insolvent," within the meaning of such term as used in O.C.G.A. Paragraph 18-2-22 or as defined in Paragraph 101 of the "Bankruptcy Code", or Section 2 of either the "UFTA" or the "UFCA", or as defined or used in any "Other Applicable Law" (as those terms are defined below), or (y) be unable to pay its debts generally as such debts become due within the meaning of Section 548 of the Bankruptcy Code, Section 4 of the UFTA or Section 6 of the UFCA, or (z) have an unreasonably small capital to engage in any business or transaction, whether current or contemplated, within the meaning of Section 548 of the Bankruptcy Code, Section 4 of the UFTA or Section 5 of the UFCA; and (ii) the obligations of the Borrowers under the Loan Documents and with respect to the Loans will not be rendered avoidable under any Other Applicable Law. For purposes of this Section 5.17, "Bankruptcy Code" means Title 11 of the United States Code, "UFTA" means the Uniform Fraudulent 57 Transfer Act, "UFCA" means the Uniform Fraudulent Conveyance Act, and "Other Applicable Law" means any other applicable law pertaining to fraudulent transfers or acts voidable by creditors, in each case as such law may be amended from time to time. ARTICLE VI COVENANTS The Borrowers agree that, so long as any Bank has any Commitment hereunder or any amount payable hereunder or under any Note remains unpaid: SECTION 6.01. Information. The Borrowers will deliver to each of the Banks: (a) as soon as available and in any event within 90 days after the end of each Fiscal Year, a consolidated balance sheet of the Borrowers and the Consolidated Subsidiaries as of the end of such Fiscal Year and the related consolidated statements of income, shareholders' equity and cash flows for such Fiscal Year, setting forth in each case in comparative form the figures for the previous fiscal year, all certified by Deloitte & Touche LLP or other independent public accountants of nationally recognized standing, with such certification to be free of exceptions and qualifications not acceptable to the Required Banks; (b) as soon as available and in any event within 30 days after the end of each of the first 12 Fiscal Months of each Fiscal Year, consolidated and consolidating balance sheets of the Borrowers and the Consolidated Subsidiaries as of the end of such Fiscal Month and the related statement of income and statement of cash flows for such Fiscal Month and for the portion of the Fiscal Year ended at the end of such Fiscal Month setting forth in each case in comparative form the figures for the corresponding Fiscal Month and the corresponding portion of the previous Fiscal Year, all certified (subject to normal year-end adjustments) as to fairness of presentation, GAAP and consistency by the chief financial officer or the chief accounting officer of each of the Borrowers; 58 (c) simultaneously with the delivery of each set of financial statements referred to in paragraphs (a) and (b) above, a certificate, substantially in the form of Exhibit H (a "Compliance Certificate"), of the chief financial officer or the chief accounting officer of each of the Borrowers (i) setting forth in reasonable detail the calculations required to establish whether the Borrowers were in compliance with the requirements of Sections 6.05, 6.15, 6.18, and 6.20 through 6.24, inclusive, on the date of such financial statements and (ii) stating whether any Default exists on the date of such certificate and, if any Default then exists, setting forth the details thereof and the action which the Borrowers are taking or proposes to take with respect thereto; (d) simultaneously with the delivery of each set of annual financial statements referred to in paragraph (a) above, a statement of the firm of independent public accountants which reported on such statements to the effect that nothing has come to their attention to cause them to believe that any Default existed on the date of such financial statements; (e) as soon as practicable, but in any event on or before 10 days after the end of each Fiscal Month, a status report, certified by a duly authorized officer of each of the Borrowers, showing (i) the aggregate dollar value of the items comprising the Accounts Receivable and the age of each individual item thereof as of the last day of the preceding Fiscal Month (segregating such items to show any which are subject to a Lien under any of the Distributor Agreements, and otherwise segregating such items in such manner and to such degree as the Agent may request), (ii) the type, dollar value and location of the Inventory as at the end of the preceding Fiscal Month, valued at the lower of FIFO cost or market value (segregating such items to show separately those which are (x) subject to a Lien under any of the Distributor Agreements, (y) are the subject of an invoice to such Borrower from the seller thereof dated more than 90 days prior to the date of such report and (z) were manufactured more than 365 days prior to the date of such report) and (iii) the aggregate dollar value of the items comprising the accounts payable of the Borrowers and the age of each individual item thereof as of the last day of the 59 preceding Fiscal Month (segregating such items in such manner and to such degree as the Agent may request); (f) at the end of each calendar week, 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. (g) within 5 Domestic Business Days after either Borrower becomes aware of the occurrence of any Default, a certificate of the chief financial officer or the chief accounting officer of each of the Borrowers setting forth the details thereof and the action which the Borrowers are taking or proposes to take with respect thereto; (h) promptly upon the mailing thereof to the shareholders of the Borrowers generally, copies of all financial statements, reports and proxy statements so mailed; (i) promptly upon the filing thereof, copies of all registration statements (other than the exhibits thereto and any registration statements on Form S-8 or its equivalent) and annual, quarterly or monthly reports which the Borrowers shall have filed with the Securities and Exchange Commission; (j) if and when any member of the Controlled Group (i) gives or is required to give notice to the PBGC of any "reportable event" (as defined in Section 4043 of ERISA) with respect to any Plan which might constitute grounds for a termination of such Plan under Title IV of ERISA, or knows that the plan administrator of any Plan has given or is required to give notice of any such reportable event, a copy of the notice of such reportable event given or required to be given to the PBGC; (ii) receives notice of complete or partial withdrawal liability under Title IV of ERISA, a copy of such notice; or (iii) receives notice from the PBGC under Title IV of ERISA of an intent to terminate or appoint a trustee to administer any Plan, a copy of such notice; and 60 (k) from time to time such additional information regarding the financial position or business of the Borrowers and the Subsidiaries as the Agent, at the request of any Bank, may reasonably request. SECTION 6.02. Inspection of Property, Books and Records. The Borrowers will (i) keep, and cause each Subsidiary to keep, proper books of record and account in which full, true and correct entries in conformity with GAAP, subject to Section 1.02, shall be made of all dealings and transactions in relation to its business and activities; and (ii) permit, and cause each Subsidiary to permit, representatives of any Bank at such Bank's expense prior to the occurrence of a Default (except as provided below with respect to field examinations) and at the Borrowers' expense after the occurrence of a Default to visit and inspect any of their respective properties, to examine and make abstracts from any of their respective books and records and to discuss their respective affairs, finances and accounts with their respective officers, employees and independent public accountants. The foregoing shall include but not be limited to field examinations with respect to the Accounts and the Inventory, the reasonable and customary costs of which shall be borne by the Borrowers, whether or not a Default exists, but, so long as no Default exists, the Borrowers shall not be obligated to bear expenses for field examinations performed more frequently than once in each Fiscal Quarter. The Borrowers agree to cooperate and assist in such visits and inspections, in each case at such reasonable times during normal business hours and as often as may reasonably be desired. SECTION 6.03. Maintenance of Existence and Management. The Borrowers shall, and shall cause each Subsidiary to, (i) maintain its corporate existence and carry on its business in substantially the same manner and in substantially the same fields as such business is now carried on and maintained and (ii) maintain Senior Management reasonably acceptable to the Banks in keeping with their bylaws (and the Banks acknowledge that present Senior Management is acceptable as of the Closing Date). SECTION 6.04. Dissolution. Neither the Borrowers nor any of the Subsidiaries shall suffer or permit dissolution or liquidation either in whole or in part or redeem or retire any shares of its own stock or that of any Subsidiary, except through corporate reorganization to the extent permitted by Section 6.05. 61 SECTION 6.05. Consolidations, Mergers and Sales of Assets. The Borrowers will not, nor will it permit any Subsidiary to, consolidate or merge with or into, or sell, lease or otherwise transfer all or any substantial part of its assets to, any other Person, or discontinue or eliminate any business line or segment, provided that (a) either Borrower may merge with another Person if (i) such Person was organized under the laws of the United States of America or one of its states, (ii) such Borrower is the corporation surviving such merger and (iii) immediately after giving effect to such merger, no Default shall have occurred and be continuing, (b) the Borrowers may merge with one another and Subsidiaries of the Borrowers may merge with one another, and (c) the foregoing limitation on the sale, lease or other transfer of assets and on the discontinuation or elimination of a business line or segment shall not prohibit (A) transfers of Accounts to insurers permitted by Section 6.26 or (B) during any Fiscal Quarter, a transfer of assets or the discontinuance or elimination of a business line or segment (in a single transaction or in a series of related transactions) unless the aggregate assets to be so transferred or utilized in a business line or segment to be so discontinued, when combined with all other assets transferred, and all other assets utilized in all other business lines or segments discontinued, during such Fiscal Quarter and the immediately preceding 3 Fiscal Quarters, either (x) constituted more than 2% of Consolidated Total Assets at the end of the most recent Fiscal Year immediately preceding such Fiscal Quarter, or (y) contributed more than 2% of Consolidated Operating Profits during the 4 Fiscal Quarters immediately preceding such Fiscal Quarter. SECTION 6.06. Use of Proceeds. No portion of the proceeds of the Loans will be used by the Borrowers or any Subsidiary (i) in connection with, whether directly or indirectly, any tender offer for, or other acquisition of, stock of any corporation with a view towards obtaining control of such other corporation, unless such tender offer or other acquisition is to be made on a negotiated basis with the approval of the Board of Directors of the Person to be acquired, and the provisions of Section 6.17 would not be violated, (ii) directly or indirectly, for the purpose, whether immediate, incidental or ultimate, of purchasing or carrying any Margin Stock, or (iii) for any purpose in violation of any applicable law or regulation. SECTION 6.07. Compliance with Laws; Payment of Taxes. The Borrowers will, will cause each of the Subsidiaries to and 62 will use its best effort to cause each member of the Controlled Group to, comply with applicable laws (including but not limited to ERISA), regulations and similar requirements of governmental authorities (including but not limited to PBGC), except where the necessity of such compliance is being contested in good faith through appropriate proceedings diligently pursued. The Borrowers will, and will cause each of the Subsidiaries to, pay promptly when due all taxes, assessments, governmental charges, claims for labor, supplies, rent and other obligations which, if unpaid, might become a lien against the property of the Borrowers or any Subsidiary, except liabilities being contested in good faith and against which, if requested by the Agent (acting at the direction of the Required Banks), the Borrowers will set up reserves in accordance with GAAP. SECTION 6.08. Insurance. In addition to and cumulative with any other requirements herein imposed on each Borrower with respect to insurance under the Security Agreements, each Borrower shall maintain insurance with responsible insurance companies on such of its properties, in such amounts and against such risks as is customarily maintained by similar businesses operating in the same vicinity, but in any event to include loss, damage, flood, windstorm, fire, theft, extended coverage and product liability insurance in amounts satis- factory to the Agent, which such insurance shall not be cancellable by either Borrower, unless with the prior written consent of the Agent, or by such Borrower's insurer, unless with at least ten (10) days advance written notice to the Agent thereof. Each Borrower shall file with the Agent upon its request a detailed list of such insurance then in effect stating the names of the insurance companies, the amounts and rates of insurance, the date of expiration thereof, the properties and risks covered thereby and the insured with respect thereto, and, within thirty (30) days after notice in writing from the Agent, obtain such additional insurance as the Agent may reasonably request necessary to maintain insurance on Inventory in an amount equal to the full insurable value thereof. SECTION 6.09. Change in Fiscal Year. The Borrowers will not change their Fiscal Year without the consent of the Required Banks. SECTION 6.10. Maintenance of Property. The Borrowers shall, and shall cause each Subsidiary to, maintain all of its properties and assets in good condition, repair and working order, ordinary wear and tear excepted; provided, that each of 63 the Borrowers and each of the Subsidiaries may dispose of used, worn out or obsolete equipment, so long as it obtains such replacements as are reasonably required for its operations. SECTION 6.11. Environmental Notices. The Borrowers shall furnish to the Banks and the Agent prompt written notice of all Environmental Liabilities, pending, or, to the extent either of the Borrowers is aware of the same, threatened or anticipated Environmental Proceedings, Environmental Notices, Environmental Judgments and Orders, and Environmental Releases at, on, in, under or in any way affecting the Properties or any adjacent property which, if adversely determined, could have a Material Adverse Effect, and all facts, events, or conditions that could lead to any of the foregoing. SECTION 6.12. Environmental Matters. The Borrowers and the Subsidiaries will not, and will not permit any Third Party to, use, produce, manufacture, process, treat, recycle, generate, store, dispose of, manage at, or otherwise handle, or ship or transport to or from the Properties any Hazardous Materials except for Hazardous Materials such as cleaning solvents, pesticides and other similar materials used, produced, manufactured, processed, treated, recycled, generated, stored, disposed, managed, or otherwise handled in minimal amounts in the ordinary course of business in compliance with all applicable Environmental Requirements. SECTION 6.13. Environmental Release. The Borrowers agree that upon the occurrence of an Environmental Release at or on any of the Properties it will act immediately to investigate the extent of, and to take appropriate remedial action to eliminate, such Environmental Release, whether or not ordered or otherwise directed to do so by any Environmental Authority. SECTION 6.14. Transactions with Affiliates. Neither the Borrowers nor any of the Subsidiaries shall enter into, or be a party to, any transaction with any Affiliate of the Borrowers or such Subsidiary (which Affiliate is not one of the Borrowers or a Wholly Owned Subsidiary), except as permitted by law and in the ordinary course of business and pursuant to reasonable terms which are fully disclosed to the Agent and the Banks, and are no less favorable to the Borrowers or such Subsidiary than would be obtained in a comparable arm's length transaction with a Person which is not an Affiliate. 64 SECTION 6.15. Restricted Payments. SEC will not declare or make any Restricted Payment after December 31, 1996, if the aggregate amount of such Restricted Payments for any 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, no Default shall be in existence or be created thereby. SECTION 6.16. Loans or Advances. Neither the Borrowers nor any of the Subsidiaries shall make loans or advances to any Person except as permitted by Section 6.17 and except: (i) loans or advances to employees not exceeding $250,000 in the aggregate principal amount outstanding at any time, in each case made in the ordinary course of business and consistent with practices existing on December 31, 1996; (ii) deposits required by government agencies or public utilities; and (iii) loans and advances from one Borrower to the other; provided that after giving effect to the making of any loans, advances or deposits permitted by this Section, and no Default shall be in existence or be created thereby. SECTION 6.17. Investments. Neither the Borrowers nor any of the Subsidiaries shall make any Restricted Investments. SECTION 6.18. Negative Pledge. Other than Liens in favor of the Agent and the Banks securing the Obligations, neither the Borrowers nor any Consolidated Subsidiary will create, assume or suffer to exist any Lien on any asset now owned or hereafter acquired by it, and the Borrowers shall not permit any Subsidiary which is not a Borrower to incur any Lien, except: (a) Liens existing on the date of this Agreement securing Debt outstanding on the date of this Agreement, which are in an aggregate principal amount not exceeding $250,000; (b) any Lien existing on any specific fixed asset of any corporation at the time such corporation becomes a Consolidated Subsidiary and not created in contemplation of such event; (c) any Lien on any specific fixed asset of any corporation existing at the time such corporation is merged or consolidated with or into one of the Borrowers or a 65 Consolidated Subsidiary and not created in contemplation of such event; (d) any Lien existing on any specific fixed asset prior to the acquisition thereof by one of the Borrowers or a Consolidated Subsidiary and not created in contemplation of such acquisition; (e) Liens securing Debt owing by any Subsidiary to one of the Borrowers; (f) any Lien arising out of the refinancing, extension, renewal or refunding of any Debt secured by any Lien permitted by any of the foregoing paragraphs of this Section, provided that (i) such Debt is not secured by any additional assets, and (ii) the amount of such Debt secured by any such Lien is not increased; (g) Liens incidental to the conduct of its business or the ownership of its assets which (i) do not secure Debt and (ii) do not in the aggregate materially detract from the value of its assets or materially impair the use thereof in the operation of its business; (h) any Lien on Margin Stock; (i) Debt owing to the Borrowers or another Subsidiary; (j) any Lien permitted under any Lien Subordination Agreement; and (k) any Lien on any specific fixed asset securing Debt incurred or assumed for the purpose of financing all or any part of the cost of acquiring or constructing such asset, provided that (x) such Lien attaches to such asset concurrently with or within 18 months after the acquisition or completion of construction thereof, (y) such Lien may not secure any other indebtedness, and (z) the aggregate outstanding principal amount of all Debt secured by such Liens shall not at any time exceed $1,500,000. SECTION 6.19. Restrictions on Ability of Subsidiaries to Pay Dividends. The Borrowers shall not permit any Subsidiary to, directly or indirectly, create or otherwise cause or suffer to exist or become effective any encumbrance or restriction on the ability of any such Subsidiary to (i) pay any dividends or 66 make any other distributions on its Capital Stock or any other interest or (ii) make or repay any loans or advances to the Borrowers or the parent of such Subsidiary. SECTION 6.20. Leverage Ratio. Tested at the end of each Fiscal Month, the Leverage Ratio shall not at any time exceed the following amounts during the following periods: Closing Date through June 30, 1998 6.5 to 1.0 July 1, 1998 through December 30, 1998 6.0 to 1.0 December 31, 1998 and thereafter 5.5 to 1.0 SECTION 6.21. Fixed Charges Coverage. Tested at the end of each Fiscal Month, the ratio of Income Available for Fixed Charges to Consolidated Fixed Charges for the Fiscal Month just ended and the immediately preceding 11 Fiscal Months shall not at any time be less than 2.5 to 1.0. SECTION 6.22. Adjusted Current Ratio. Tested at the end of each Fiscal Month, the Adjusted Current Ratio shall not at any time be less than 1.00 to 1.00. SECTION 6.23. Minimum Consolidated Net Income. At the end of each Fiscal Quarter, Consolidated Net Income will not at any time be less than (i) for the Fiscal Quarter just ended, $1,000,000, and (ii) for the Fiscal Year ending June 30, 1998 and each Fiscal Year thereafter, Consolidated Net Income will not be less than $7,000,000. SECTION 6.24. Minimum Consolidated Tangible Net Worth. Consolidated Tangible Net Worth will at no time be less than $25,000,000 plus the sum of (i) 100% of the cumulative Reported Net Income of the Borrowers and the Consolidated Subsidiaries during any period after June 27, 1997 (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 the Closing Date, calculated monthly at the end of each month. SECTION 6.25. Distributor Agreements. The Borrowers will comply in all material respects with each of the Distributor 67 Agreements and, promptly (and in any event within 5 Domestic Business Days) after the effective date thereof, furnish to each of the Banks a true and correct copy of each new Distributor Agreement and each document which extends, renews, amends, supplements or replaces any Distributor Agreement. SECTION 6.26. Accounts Receivable. The Borrowers will not sell or otherwise dispose of any of the Accounts Receivable without the prior written consent of the Agent (acting at the direction of the Required Banks) except (i) in the ordinary course of business for cash or on open account or on terms of payment ordinarily extended to its customers and (ii) with respect to Accounts the collectibility of which has been insured, transfers to the insurers of defaulted Accounts as to which the insurer has paid or contemporaneously with such transfer is paying the amount due to the Borrowers under the relevant policy on account of such defaulted Accounts. The Borrowers will not allow the Accounts Receivable to be encumbered, except as may be required pursuant to the HP (US) Agreement. Additionally, the Agent may, at any time in its sole discretion, require the Borrowers to permit the Agent to verify the individual account balances of the individual Account Debtors immediately upon its request therefor. In any event, upon request from the Agent, made at any time hereafter (but not more frequently than monthly, so long as no Default or Event of Default is in existence), the Borrowers shall furnish the Agent with a then current Account Debtor address list. SECTION 6.27. Inventory. Notwithstanding the first sentence of Section 4.1 of the Security Agreements, the Borrowers may sell, lease, exchange, or otherwise dispose of any of the Inventory as may be required by any of the Distributor Agreements. Notwithstanding Section 4.5 of the Security Agreement, the Borrowers may, without notice to or the consent of the Agent, transfer temporarily (for periods not to exceed 3 months in any event) Inventory from a location under its possession and control to another location at any time or from time to time hereafter for the limited purpose of having work performed on such Inventory if done in the ordinary course of the Borrowers' business. In the event that the Borrowers certify to the Agent in writing that the Borrowers have relocated Inventory from a closed location to another location (provided that the Lien created by the Security Agreements is perfected at such new location), then the Agent shall, upon request, file partial releases or terminations of filed UCC financing statements filed 68 with respect to such Inventory at such closed location (but not with respect to any other Collateral which may be perfected thereby). SECTION 6.28. Additional Debt. Neither of the Borrowers or any of their Subsidiaries shall incur or permit to exist any Debt not in existence on the Closing Date and disclosed in the Borrowers' most recent consolidated financial statements delivered to the Banks, and extensions or renewals thereof, other than (i) Debt permitted to be secured by Liens permitted by Section 6.18, (ii) Debt of the types described in clause (vii) of the definition of Debt which is incurred in the ordinary course of business in connection with the sale or purchase of goods or to assure performance of any obligation to a utility or a governmental entity or a worker's compensation obligation; (iii) Debt permitted by Section 6.18; (iv) other Debt not to exceed an aggregate amount outstanding at any time of $500,000; and (v) trade payables arising in the ordinary course of business. ARTICLE VII DEFAULTS SECTION 7.01. Events of Default. If one or more of the following events ("Events of Default") shall have occurred and be continuing: (a) either of the Borrowers shall fail to pay when due any principal of any Loan or any Reimbursement Obligation, shall fail to pay any interest on any Loan within 5 Domestic Business Days after such interest shall become due, or shall fail to pay any fee or other amount payable hereunder within 5 Domestic Business Days after such fee or other amount becomes due; or (b) either of the Borrowers shall fail to observe or perform any covenant contained in Sections 6.01(g), 6.02(ii), 6.03 through 6.06, inclusive, Sections 6.15 through 6.17, inclusive, or Sections 6.19 through 6.24, inclusive, 6.26 through 6.28, inclusive, or any covenant (beyond any applicable cure period) contained in any Loan Document; or 69 (c) either of the Borrowers shall fail to observe or perform any covenant or agreement contained or incorporated by reference in this Agreement (other than those covered by paragraph (a) or (b) above) and such failure shall not have been cured within 30 days after the earlier to occur of (i) written notice thereof has been given to the Borrowers by the Agent the request of any Bank or (ii) either of the Borrowers otherwise becomes aware of any such failure; or (d) any representation, warranty, certification or statement made by either of the Borrowers in Article V of this Agreement or in any Loan Document, certificate, financial statement or other document delivered pursuant to this Agreement shall prove to have been incorrect or misleading in any material respect when made (or deemed made); or (e) either of the Borrowers or any Subsidiary shall fail to make any payment in respect of Debt in an aggregate amount outstanding of $500,000 or more (other than the Notes) when due or within any applicable grace period; or (f) any event or condition shall occur which results in the acceleration of the maturity of Debt in an aggregate amount outstanding of $500,000 or more of either of the Borrowers or any Subsidiary (including, without limitation, any required mandatory prepayment or "put" of such Debt to either of the Borrowers or any Subsidiary) or enables (or, with the giving of notice or lapse of time or both, would enable) the holders of such Debt or commitment or any Person acting on such holders' behalf to accelerate the maturity thereof or terminate any such commitment (including, without limitation, any required mandatory prepayment or "put" of such Debt to either of the Borrowers or any Subsidiary); or (g) either of the Borrowers or any Subsidiary shall commence a voluntary case or other proceeding seeking liquidation, reorganization or other relief with respect to itself or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, or shall consent to any such relief or to the appointment of or taking possession by any such official in an involuntary case or other proceeding commenced against 70 it, or shall make a general assignment for the benefit of creditors, or shall fail generally, or shall admit in writing its inability, to pay its debts as they become due, or shall take any corporate action to authorize any of the foregoing; or (h) an involuntary case or other proceeding shall be commenced against either of the Borrowers or any Subsidiary seeking liquidation, reorganization or other relief with respect to it or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, and such involuntary case or other proceeding shall remain undismissed and unstayed for a period of 60 days; or an order for relief shall be entered against either of the Borrowers or any Subsidiary under the federal bankruptcy laws as now or hereafter in effect; or (i) either of the Borrowers or any member of the Controlled Group shall fail to pay when due any material amount which it shall have become liable to pay to the PBGC or to a Plan under Title IV of ERISA; or notice of intent to terminate a Plan or Plans shall be filed under Title IV of ERISA by either of the Borrowers, any member of the Controlled Group, any plan administrator or any combination of the foregoing; or the PBGC shall institute proceedings under Title IV of ERISA to terminate or to cause a trustee to be appointed to administer any such Plan or Plans or a proceeding shall be instituted by a fiduciary of any such Plan or Plans to enforce Section 515 or 4219(c)(5) of ERISA and such proceeding shall not have been dismissed within 30 days thereafter; or a condition shall exist by reason of which the PBGC would be entitled to obtain a decree adjudicating that any such Plan or Plans must be terminated; or either of the Borrowers or any other member of the Controlled Group shall enter into, contribute or be obligated to contribute to, terminate or incur any withdrawal liability with respect to, a Multiemployer Plan; or (j) one or more judgments or orders for the payment of money in an aggregate amount in excess of $500,000 shall be rendered against any one, or more or all of the Borrowers 71 and the Subsidiaries unsatisfied and unstayed for a period of 30 days; or (k) a federal tax lien shall be filed against either of the Borrowers or any Subsidiary under Section 6323 of the Code or a lien of the PBGC shall be filed against either of the Borrowers or any Subsidiary under Section 4068 of ERISA and in either case such lien shall remain undischarged for a period of 25 days after the date of filing; or (l) (i) any Person or two or more Persons acting in concert shall have acquired beneficial ownership (within the meaning of Rule 13d-3 of the Securities and Exchange Commission under the Securities Exchange Act of 1934) of 20% or more of the outstanding shares of the voting stock of SEC; or (ii) as of any date a majority of the Board of Directors of SEC consists of individuals who were not either (A) directors of SEC as of the corresponding date of the previous year, (B) selected or nominated to become directors by the Board of Directors of SEC of which a majority consisted of individuals described in clause (A), or (C) selected or nominated to become directors by the Board of Directors of SEC of which a majority consisted of individuals described in clause (A) and individuals described in clause (B); or (m) there shall have occurred uninsured damage to, or loss, theft or destruction of, any part of the Collateral, occurring in one or more incidents in which the cost of such uninsured Collateral exceeds $500,000; then, and in every such event, (i) the Agent shall, if requested by the Required Banks, by notice to the Borrowers terminate the Commitments and they shall thereupon terminate, (ii) Wachovia may terminate its obligation to fund Swing Loans, and (iii) the Agent shall, if requested by the Required Banks, by notice to the Borrowers declare the Notes, including the Swing Loan Note (in each case together with accrued interest thereon), and all other amounts payable hereunder and under the other Loan Documents, to be, and the Notes, including the Swing Loan Note (in each case together with accrued interest thereon), and all other amounts payable hereunder and under the other Loan Documents shall thereupon become, immediately due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrowers together with interest 72 at the Default Rate accruing on the principal amount thereof from and after the date of such Event of Default; provided that if any Event of Default specified in paragraph (g) or (h) above occurs with respect to either of the Borrowers, without any notice to the Borrowers or any other act by the Agent or the Banks, the Commitments shall thereupon terminate and the Notes, including the Swing Loan Note (in each case together with accrued interest thereon) and all other amounts payable hereunder and under the other Loan Documents shall automatically and without notice become immediately due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrowers together with interest thereon at the Default Rate accruing on the principal amount thereof from and after the date of such Event of Default. In addition, upon the occurrence of an Event of Default, to the extent of any existing Letter of Credit Obligations, the Borrowers shall immediately deposit with the Agent cash collateral in an amount equal to 105% of the aggregate undrawn amount available under all outstanding Letters of Credit, which cash collateral shall be set aside as a collateral reserve for payment of the Reimbursement Obligations relating to Letters of Credit which are subsequently funded. After all Letters of Credit have been cancelled and all Reimbursement Obligations have been satisfied, and the Agent has been reimbursed all amounts funded by it with respect thereto, any balance remaining in said collateral reserve may be applied to other amounts owed by the Borrowers hereunder, and, if none, shall be remitted to Borrowers. Notwithstanding the foregoing, the Agent shall have available to it all other remedies under each Loan Document and at law or equity, and shall exercise any one or all of them at the request of the Required Banks. SECTION 7.02. Notice of Default. The Agent shall give notice to the Borrowers of any Default under Section 7.01(c) promptly upon being requested to do so by any Bank and shall thereupon notify all the Banks thereof. ARTICLE VIII THE AGENT SECTION 8.01. Appointment; Powers and Immunities. Each Bank hereby irrevocably appoints and authorizes the Agent to act as its agent hereunder and under the other Loan Documents with such powers as are specifically delegated to the Agent by the 73 terms hereof and thereof, together with such other powers as are reasonably incidental thereto. The Agent: (a) shall have no duties or responsibilities except as expressly set forth in this Agreement and the other Loan Documents, and shall not by reason of this Agreement or any other Loan Document be a trustee for any Bank; (b) shall not be responsible to the Banks for any recitals, statements, representations or warranties contained in this Agreement or any other Loan Document, or in any certificate or other document referred to or provided for in, or received by any Bank under, this Agreement or any other Loan Document, or for the validity, effectiveness, genuineness, enforceability, perfection, collectibility, or sufficiency of this Agreement or any other Loan Document or any other document referred to or provided for herein or therein or for any failure by either of the Borrowers to perform any of its obligations hereunder or thereunder; (c) shall not be required to initiate or conduct any litigation or collection proceedings hereunder or under any other Loan Document except to the extent requested by the Required Banks, and then only on terms and conditions satisfactory to the Agent, and (d) shall not be responsible for any action taken or omitted to be taken by it hereunder or under any other Loan Document or any other document or instrument referred to or provided for herein or therein or in connection herewith or therewith, except for its own gross negligence or wilful misconduct. The Agent may employ agents and attorneys-in- fact and shall not be responsible for the negligence or misconduct of any such agents or attorneys-in-fact selected by it with reasonable care. The provisions of this Article VIII are solely for the benefit of the Agent and the Banks, and the Borrowers shall not have any rights as a third party beneficiary of any of the provisions hereof. In performing its functions and duties under this Agreement and under the other Loan Documents, the Agent shall act solely as agent of the Banks and does not assume and shall not be deemed to have assumed any obligation towards or relationship of agency or trust with or for the Borrowers. The duties of the Agent shall be ministerial and administrative in nature, and the Agent shall not have by reason of this Agreement or any other Loan Document a fiduciary relationship in respect of any Bank. SECTION 8.02. Reliance by Agent. The Agent shall be entitled to rely upon any certification, notice or other communication (including any thereof by telephone, telecopier, telegram or cable) believed by it to be genuine and correct and to have been signed or sent by or on behalf of the proper Person or Persons, and upon advice and statements of legal counsel, 74 independent accountants or other experts selected by the Agent. As to any matters not expressly provided for by this Agreement or any other Loan Document, the Agent shall in all cases be fully protected in acting, or in refraining from acting, hereunder and thereunder in accordance with instructions signed by the Required Banks, and such instructions of the Required Banks in any action taken or failure to act pursuant thereto shall be binding on all of the Banks. SECTION 8.03. Defaults. The Agent shall not be deemed to have knowledge of the occurrence of a Default or an Event of Default (other than the nonpayment of principal of or interest on the Loans) unless the Agent has received notice from a Bank or either of the Borrowers specifying such Default or Event of Default and stating that such notice is a "Notice of Default". In the event that the Agent receives such a notice of the occurrence of a Default or an Event of Default, the Agent shall give prompt notice thereof to the Banks. The Agent shall give each Bank prompt notice of each nonpayment of principal of or interest on the Loans whether or not it has received any notice of the occurrence of such nonpayment. The Agent shall (subject to Section 9.06) take such action hereunder with respect to such Default or Event of Default as shall be directed by the Required Banks, provided that, unless and until the Agent shall have received such directions, the Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Default or Event of Default as it shall deem advisable in the best interests of the Banks. SECTION 8.04. Rights of Agent and its Affiliates as a Bank. With respect to the Loans made by the Agent and any Affiliate of the Agent, Wachovia in its capacity as a Bank hereunder and any Affiliate of the Agent or such Affiliate in its capacity as a Bank hereunder shall have the same rights and powers hereunder as any other Bank and may exercise the same as though Wachovia were not acting as the Agent, and the term "Bank" or "Banks" shall, unless the context otherwise indicates, include Wachovia in its individual capacity and any Affiliate of the Agent in its individual capacity. The Agent and any Affiliate of the Agent may (without having to account therefor to any Bank) accept deposits from, lend money to and generally engage in any kind of banking, trust or other business with either of the Borrowers (and any of the Borrowers' Affiliates) as if Wachovia were not acting as the Agent, and the Agent and any Affiliate of the Agent may accept fees and other consideration from the 75 Borrowers (in addition to any agency fees and arrangement fees heretofore agreed to between the Borrowers and the Agent) for services in connection with this Agreement or any other Loan Document or otherwise without having to account for the same to the Banks. SECTION 8.05. Indemnification. Each Bank severally agrees to indemnify the Agent, to the extent the Agent shall not have been reimbursed by the Borrowers, ratably in accordance with its Commitment, for any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses (including, without limitation, counsel fees and disbursements) or disbursements of any kind and nature whatsoever which may be imposed on, incurred by or asserted against the Agent in any way relating to or arising out of this Agreement or any other Loan Document or any other documents contemplated by or referred to herein or therein or the transactions contemplated hereby or thereby (excluding, unless an Event of Default has occurred and is continuing, the normal administrative costs and expenses incident to the performance of its agency duties hereunder) or the enforcement of any of the terms hereof or thereof or any such other documents; provided that no Bank shall be liable for any of the foregoing to the extent they arise from the gross negligence or wilful misconduct of the Agent. If any indemnity furnished to the Agent for any purpose shall, in the opinion of the Agent, be insufficient or become impaired, the Agent may call for additional indemnity and cease, or not commence, to do the acts indemnified against until such additional indemnity is furnished. SECTION 8.06 Consequential Damages. THE AGENT SHALL NOT BE RESPONSIBLE OR LIABLE TO ANY BANK, THE BORROWERS OR ANY OTHER PERSON OR ENTITY FOR ANY PUNITIVE, EXEMPLARY OR CONSEQUENTIAL DAMAGES WHICH MAY BE ALLEGED AS A RESULT OF THIS AGREEMENT, THE OTHER LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY. SECTION 8.07. Payee of Note Treated as Owner. The Agent may deem and treat the payee of any Note as the owner thereof for all purposes hereof unless and until a written notice of the assignment or transfer thereof shall have been filed with the Agent and the provisions of Section 10.08(c) have been satisfied. Any requests, authority or consent of any Person who at the time of making such request or giving such authority or consent is the holder of any Note shall be conclusive and binding on any subsequent holder, transferee or assignee of that 76 Note or of any Note or Notes issued in exchange therefor or replacement thereof. SECTION 8.08. Nonreliance on Agent and Other Banks. Each Bank agrees that it has, independently and without reliance on the Agent or any other Bank, and based on such documents and information as it has deemed appropriate, made its own credit analysis of the Borrowers and decision to enter into this Agreement and that it will, independently and without reliance upon the Agent or any other Bank, and based on such documents and information as it shall deem appropriate at the time, continue to make its own analysis and decisions in taking or not taking action under this Agreement or any of the other Loan Documents. The Agent shall not be required to keep itself (or any Bank) informed as to the performance or observance by the Borrowers of this Agreement or any of the other Loan Documents or any other document referred to or provided for herein or therein or to inspect the properties or books of the Borrowers or any other Person. Except for notices, reports and other documents and information expressly required to be furnished to the Banks by the Agent hereunder or under the other Loan Documents, the Agent shall not have any duty or responsibility to provide any Bank with any credit or other information concerning the affairs, financial condition or business of the Borrowers or any other Person (or any of their Affiliates) which may come into the possession of the Agent. SECTION 8.09. Failure to Act. Except for action expressly required of the Agent hereunder or under the other Loan Documents, the Agent shall in all cases be fully justified in failing or refusing to act hereunder and thereunder unless it shall receive further assurances to its satisfaction by the Banks of their indemnification obligations under Section 8.05 against any and all liability and expense which may be incurred by the Agent by reason of taking, continuing to take, or failing to take any such action. SECTION 8.10. Resignation or Removal of Agent. Subject to the appointment and acceptance of a successor Agent as provided below, the Agent may resign at any time by giving notice thereof to the Banks and the Borrowers and the Agent may be removed at any time with or without cause by the Required Banks. Upon any such resignation or removal, the Required Banks shall have the right to appoint a successor Agent. If no successor Agent shall have been so appointed by the Required Banks and 77 shall have accepted such appointment within 30 days after the retiring Agent's notice of resignation or the Required Banks' removal of the retiring Agent, then the retiring Agent may, on behalf of the Banks, appoint a successor Agent. Any successor Agent shall be a bank which has a combined capital and surplus of at least $500,000,000. Upon the acceptance of any appointment as Agent hereunder by a successor Agent, such successor Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Agent, and the retiring Agent shall be discharged from its duties and obligations hereunder. After any retiring Agent's resignation or removal hereunder as Agent, the provisions of this Article VII shall continue in effect for its benefit in respect of any actions taken or omitted to be taken by it while it was acting as the Agent hereunder. ARTICLE IX CHANGE IN CIRCUMSTANCES; COMPENSATION SECTION 9.01. Basis for Determining Interest Rate Inadequate or Unfair. If on or prior to the first day of any Interest Period: (a) the Agent determines that deposits in Dollars (in the applicable amounts) are not being offered in the relevant market for such Interest Period, or (b) the Required Banks advise the Agent that the London Interbank Offered Rate, as determined by the Agent will not adequately and fairly reflect the cost to such Banks of funding the relevant type of Euro-Dollar Loans for such Interest Period, the Agent shall forthwith give notice thereof to the Borrowers and the Banks, whereupon until the Agent notifies the Borrowers that the circumstances giving rise to such suspension no longer exist, the obligations of the Banks to make the type of Euro-Dollar Loans specified in such notice shall be suspended. Unless the Borrowers notify the Agent at least 2 Domestic Business Days before the date of any Borrowing of such type of Euro-Dollar Loans for which a Notice of Borrowing has previously been given that it elects not to borrow on such date, such Borrowing shall instead be made as a Base Rate Borrowing. 78 SECTION 9.02. Illegality. If, after the date hereof, the adoption of any applicable law, rule or regulation, or any change therein or any existing or future law, rule or regulation, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof (any such agency being referred to as an "Authority" and any such event being referred to as a "Change of Law"), or compliance by any Bank (or its Lending Office) with any request or directive (whether or not having the force of law) of any Authority shall make it unlawful or impossible for any Bank (or its Lending Office) to make, maintain or fund its Euro-Dollar Loans and such Bank shall so notify the Agent, the Agent shall forthwith give notice thereof to the other Banks and the Borrowers, whereupon until such Bank notifies the Borrowers and the Agent that the circumstances giving rise to such suspension no longer exist, the obligation of such Bank to make such type of Euro-Dollar Loans shall be suspended. Before giving any notice to the Agent pursuant to this Section, such Bank shall designate a different Lending Office if such designation will avoid the need for giving such notice and will not, in the judgment of such Bank, be otherwise disadvantageous to such Bank. If such Bank shall determine that it may not lawfully continue to maintain and fund any of its outstanding Euro-Dollar Loans to maturity and shall so specify in such notice, the Borrowers shall immediately prepay in full the then outstanding principal amount of each Euro-Dollar Loan of such Bank, together with accrued interest thereon and any amount due such Bank pursuant to Section 9.05(a). Concurrently with prepaying each such Euro-Dollar Loan, the Borrowers shall borrow a Base Rate Loan in an equal principal amount from such Bank (on which interest and principal shall be payable contemporaneously with the related Euro-Dollar Loans of the other Banks), and such Bank shall make such a Base Rate Loan. SECTION 9.03. Increased Cost and Reduced Return. (a) If after the date hereof, a Change of Law or compliance by any Bank (or its Lending Office) with any request or directive (whether or not having the force of law) of any Authority: (i) shall impose, modify or deem applicable any reserve, special deposit or similar requirement (including, without limitation, any such requirement imposed by the Board of Governors of the Federal Reserve System, but excluding any such requirement included in an applicable Euro-Dollar Reserve Percentage) against assets of, deposits 79 with or for the account of, or credit extended by, any Bank (or its Lending Office); or (ii) shall impose on any Bank (or its Lending Office) or on the United States market for the London interbank market or any other market used as the basis for any Euro-Dollar Loan any other condition affecting its Euro-Dollar Loans, its Notes or its obligation to make Euro-Dollar Loans; and the result of any of the foregoing is to increase the cost to such Bank (or its Lending Office) of making or maintaining any Loan, or to reduce the amount of any sum received or receivable by such Bank (or its Lending Office) under this Agreement or under its Notes with respect thereto, by an amount deemed by such Bank to be material, then, within 15 days after demand by such Bank (with a copy to the Agent), the Borrowers shall pay to such Bank such additional amount or amounts as will compensate such Bank for such increased cost or reduction; provided, that the Borrowers shall have no liability for amounts related to periods earlier than 90 days prior to the date of such written request. (b) If any Bank shall have determined that after the date hereof the adoption of any applicable law, rule or regulation regarding capital adequacy, or any change therein, or any change in the interpretation or administration thereof, or compliance by any Bank (or its Lending Office) with any request or directive regarding capital adequacy (whether or not having the force of law) of any Authority, has or would have the effect of reducing the rate of return on such Bank's capital as a consequence of its obligations hereunder to a level below that which such Bank could have achieved but for such adoption, change or compliance (taking into consideration such Bank's policies with respect to capital adequacy) by an amount deemed by such Bank to be material, then from time to time, within 15 days after demand by such Bank, the Borrowers shall pay to such Bank such additional amount or amounts as will compensate such Bank for such reduction. (c) Each Bank will promptly notify the Borrowers and the Agent of any event of which it has knowledge, occurring after the date hereof, which will entitle such Bank to compensation pursuant to this Section and will designate a different Lending Office if such designation will avoid the need for, or reduce the amount of, such compensation and will not, in the judgment of 80 such Bank, be otherwise disadvantageous to such Bank. A certificate of any Bank claiming compensation under this Section and setting forth the additional amount or amounts to be paid to it hereunder and calculations in reasonable detail with respect thereto shall be conclusive in the absence of manifest error. In determining such amount, such Bank may use any reasonable averaging and attribution methods. (d) The provisions of this Section 9.03 shall be applicable with respect to any Participant, Assignee or other Transferee, and any calculations required by such provisions shall be made based upon the circumstances of such Participant, Assignee or other Transferee. SECTION 9.04. Base Rate Loans or Other Euro-Dollar Loans Substituted for Affected Euro-Dollar Loans. If (i) the obligation of any Bank to make or maintain any type of Euro-Dollar Loans has been suspended pursuant to Section 9.02 or (ii) any Bank has demanded compensation under Section 9.03, and the Borrowers shall, by at least 5 Euro-Dollar Business Days' prior notice to such Bank through the Agent, have elected that the provisions of this Section shall apply to such Bank, then, unless and until such Bank notifies the Borrowers that the circumstances giving rise to such suspension or demand for compensation no longer apply: (a) all Loans which would otherwise be made by such Bank as Euro-Dollar Loans shall be made instead as Base Rate Loans, and (b) after each of its Euro-Dollar Loans has been repaid, all payments of principal which would otherwise be applied to repay such Euro-Dollar Loans shall be applied to repay its Base Rate Loans instead. SECTION 9.05. Compensation. Upon the request of any Bank, delivered to the Borrowers and the Agent, the Borrowers shall pay to such Bank such amount or amounts as shall compensate such Bank for any loss, cost or expense incurred by such Bank as a result of: (a) any payment or prepayment (pursuant to Section 2.09, 2.10, 7.01, 9.02 or otherwise) of a Euro-Dollar Loan on a date other than the last day of an Interest Period for such Loan; or 81 (b) any failure by the Borrowers to prepay a Euro-Dollar Loan on the date for such prepayment specified in the relevant notice of prepayment hereunder; or (c) any failure by the Borrowers to borrow a Euro-Dollar Loan on the date for the Fixed Rate Borrowing specified in the applicable Notice of Borrowing delivered pursuant to Section 2.02; such compensation to include, without limitation, with respect to Euro-Dollar Loans, an amount equal to the excess, if any, of (x) the amount of interest which would have accrued on the amount so paid or prepaid or not prepaid or borrowed for the period from the date of such payment, prepayment or failure to prepay or borrow to the last day of the then current Interest Period for such Euro-Dollar Loan (or, in the case of a failure to prepay or borrow, the Interest Period for such Euro-Dollar Loan which would have commenced on the date of such failure to prepay or borrow) at the applicable rate of interest for such Euro-Dollar Loan provided for herein over (y) the amount of interest (as reasonably determined by such Bank) such Bank would have paid on deposits in Dollars of comparable amounts having terms comparable to such period placed with it by leading banks in the London interbank market. ARTICLE X MISCELLANEOUS SECTION 10.01. Notices. All notices, requests and other communications to any party hereunder shall be in writing (including telecopier or similar writing) and shall be given to such party at its address or telecopier number set forth on the signature pages hereof or such other address or telecopier number as such party may hereafter specify for the purpose by notice to each other party. Each such notice, request or other communication shall be effective (i) if given by telecopier, when such telecopy is transmitted to the telecopier number specified in this Section and the confirmation is received, (ii) if given by mail, 72 hours after such communication is deposited in the mail with first class postage prepaid, addressed as aforesaid or (iii) if given by any other means, when delivered at the address specified in this Section; provided that notices to the Agent under Article II or Article X shall not be effective until received. 82 SECTION 10.02. No Waivers. No failure or delay by the Agent or any Bank in exercising any right, power or privilege hereunder or under any Note or other Loan Document shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein provided shall be cumulative and not exclusive of any rights or remedies provided by law. SECTION 10.03. Expenses; Documentary Taxes. The Borrowers shall pay (i) all reasonable out-of-pocket expenses incurred by the Agent, including reasonable fees and disbursements of special outside counsel for the Banks and the Agent, in connection with the preparation of this Agreement and the other Loan Documents, any waiver or consent hereunder or thereunder or any amendment hereof or thereof or any Default or alleged Default hereunder or thereunder and (ii) if a Default occurs, all reasonable out-of-pocket expenses incurred by the Agent and the Banks, including reasonable fees and disbursements of counsel (including allocated costs of inside counsel for any Bank which does not use outside counsel), in connection with such Default and collection and other enforcement proceedings resulting therefrom, including out-of-pocket expenses incurred in enforcing this Agreement and the other Loan Documents. The Borrowers shall indemnify the Agent and each Bank against any transfer taxes, documentary taxes, assessments or charges made by any Authority by reason of the execution and delivery of this Agreement or the other Loan Documents. SECTION 10.04. Indemnification. The Borrowers shall indemnify the Agent, the Banks and each Affiliate thereof and their respective directors, officers, employees and agents from, and hold each of them harmless against, any and all losses, liabilities, claims or damages to which any of them may become subject, insofar as such losses, liabilities, claims or damages arise out of or result from any actual or proposed use by the Borrowers of the proceeds of any extension of credit by any Bank hereunder or breach by either of the Borrowers of this Agreement or any other Loan Document or from any investigation, litigation (including, without limitation, any actions taken by the Agent or any of the Banks to enforce this Agreement or any of the other Loan Documents) or other proceeding (including, without limitation, any threatened investigation or proceeding) relating to the foregoing, and the Borrowers shall reimburse the Agent and each Bank, and each Affiliate thereof and their respective 83 directors, officers, employees and agents, upon demand for any expenses (including, without limitation, legal fees) incurred in connection with any such investigation or proceeding; but excluding any such losses, liabilities, claims, damages or expenses incurred by reason of the gross negligence or wilful misconduct of the Person to be indemnified. SECTION 10.05. Setoff; Sharing of Setoffs. (a) Each of the Borrowers hereby grants to the Agent and each Bank a lien for all indebtedness and obligations owing to them from the Borrowers upon all deposits or deposit accounts, of any kind, or any interest in any deposits or deposit accounts thereof, now or hereafter pledged, mortgaged, transferred or assigned to the Agent or any such Bank or otherwise in the possession or control of the Agent or any such Bank for any purpose for the account or benefit of either of the Borrowers and including any balance of any deposit account or of any credit of either of the Borrowers with the Agent or any such Bank, whether now existing or hereafter established hereby authorizing the Agent and each Bank at any time or times with or without prior notice to apply such balances or any part thereof to such of the indebtedness and obligations owing by either of the Borrowers to the Banks and/or the Agent then past due and in such amounts as they may elect, and whether or not the collateral, if any, or the responsibility of other Persons primarily, secondarily or otherwise liable may be deemed adequate. For the purposes of this paragraph, all remittances and property shall be deemed to be in the possession of the Agent or any such Bank as soon as the same may be put in transit to it by mail or carrier or by other bailee. (b) Each Bank agrees that if it shall, by exercising any right of setoff or counterclaim or resort to collateral security or otherwise, receive payment of a proportion of the aggregate amount of principal and interest owing with respect to the Note held by it which is greater than the proportion received by any other Bank in respect of the aggregate amount of all principal and interest owing with respect to the Note held by such other Bank, the Bank receiving such proportionately greater payment shall purchase such participations in the Notes held by the other Banks owing to such other Banks, and such other adjustments shall be made, as may be required so that all such payments of principal and interest with respect to the Notes held by the Banks owing to such other Banks shall be shared by the Banks pro rata; provided that (i) nothing in this Section shall impair the right of any Bank to exercise any right of setoff or 84 counterclaim it may have and to apply the amount subject to such exercise to the payment of indebtedness of the Borrowers other than its indebtedness under the Notes, and (ii) if all or any portion of such payment received by the purchasing Bank is thereafter recovered from such purchasing Bank, such purchase from each other Bank shall be rescinded and such other Bank shall repay to the purchasing Bank the purchase price of such participation to the extent of such recovery together with an amount equal to such other Bank's ratable share (according to the proportion of (x) the amount of such other Bank's required repayment to (y) the total amount so recovered from the purchasing Bank) of any interest or other amount paid or payable by the purchasing Bank in respect of the total amount so recovered. The Borrowers agree, to the fullest extent it may effectively do so under applicable law, that any holder of a participation in a Note, whether or not acquired pursuant to the foregoing arrangements, may exercise rights of setoff or counterclaim and other rights with respect to such participation as fully as if such holder of a participation were a direct creditor of the Borrowers in the amount of such participation. SECTION 10.06. Amendments and Waivers. (a) Any provision of this Agreement, the Notes or any other Loan Documents may be amended or waived if, but only if, such amendment or waiver is in writing and is signed by the Borrowers and the Required Banks (and, if the rights or duties of the Agent are affected thereby, by the Agent); provided that, no such amendment or waiver shall, unless signed by all Banks, (i) change the Commitment of any Bank or subject any Bank to any additional obligation, (ii) change the principal of or rate of interest on any Loan or any fees (other than fees payable to the Agent) hereunder, (iii) change the date fixed for any payment of principal of or interest on any Loan or any fees hereunder, (iv) change the amount of principal, interest or fees due on any date fixed for the payment thereof, (v) change the percentage of the Commitments or of the aggregate unpaid principal amount of the Notes, or the percentage of Banks, which shall be required for the Banks or any of them to take any action under this Section or any other provision of this Agreement, (vi) change the manner of application of any payments made under this Agreement or the Notes, (vii) release or substitute all or any substantial part of the collateral (if any) held as security for the Loans, or (viii) release any Guarantee given to support payment of the Loans. 85 (b) The Borrowers will not solicit, request or negotiate for or with respect to any proposed waiver or amendment of any of the provisions of this Agreement unless each Bank shall be informed thereof by the Borrowers and shall be afforded an opportunity of considering the same and shall be supplied by the Borrowers with sufficient information to enable it to make an informed decision with respect thereto. Executed or true and correct copies of any waiver or consent effected pursuant to the provisions of this Agreement shall be delivered by the Borrowers to each Bank forthwith following the date on which the same shall have been executed and delivered by the requisite percentage of Banks. The Borrowers will not, directly or indirectly, pay or cause to be paid any remuneration, whether by way of supplemental or additional interest, fee or otherwise, to any Bank (in its capacity as such) as consideration for or as an inducement to the entering into by such Bank of any waiver or amendment of any of the terms and provisions of this Agreement unless such remuneration is concurrently paid, on the same terms, ratably to all such Banks. SECTION 10.07. No Margin Stock Collateral. Each of the Banks represents to the Agent and each of the other Banks that it in good faith is not, directly or indirectly (by negative pledge or otherwise), relying upon any Margin Stock as collateral in the extension or maintenance of the credit provided for in this Agreement. SECTION 10.08. Successors and Assigns. (a) The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns; provided that the Borrowers may not assign or otherwise transfer any of their respective rights under this Agreement. (b) Any Bank may at any time sell to one or more Persons (each a "Participant") participating interests in any Loan owing to such Bank, any Note held by such Bank, any Commitment hereunder or any other interest of such Bank hereunder. In the event of any such sale by a Bank of a participating interest to a Participant, such Bank's obligations under this Agreement shall remain unchanged, such Bank shall remain solely responsible for the performance thereof, such Bank shall remain the holder of any such Note for all purposes under this Agreement, and the Borrowers and the Agent shall continue to deal solely and directly with such Bank in connection with such 86 Bank's rights and obligations under this Agreement. In no event shall a Bank that sells a participation be obligated to the Participant to take or refrain from taking any action hereunder except that such Bank may agree that it will not (except as provided below), without the consent of the Participant, agree to (i) the change of any date fixed for the payment of principal of or interest on the related loan or loans, (ii) the change of the amount of any principal, interest or fees due on any date fixed for the payment thereof with respect to the related loan or loans, (iii) the change of the principal of the related loan or loans, (iv) any change in the rate at which either interest is payable thereon or (if the Participant is entitled to any part thereof) fee is payable hereunder from the rate at which the Participant is entitled to receive interest or fee (as the case may be) in respect of such participation, (v) the release or substitution of all or any substantial part of the collateral (if any) held as security for the Loans, or (vi) the release of any Guarantee given to support payment of the Loans. Each Bank selling a participating interest in any Loan, Note, Commitment or other interest under this Agreement, within 10 Domestic Business Days of such sale, shall provide the Borrowers and the Agent with written notification stating that such sale has occurred and identifying the Participant and the interest purchased by such Participant. The Borrowers agree that each Participant shall be entitled to the benefits of Article IX with respect to its participation in Loans outstanding from time to time. (c) Any Bank may at any time assign to one or more banks or financial institutions (each an "Assignee") all or a proportionate part of its rights and obligations under this Agreement, the Notes and the other Loan Documents, and such Assignee shall assume all such rights and obligations, pursuant to an Assignment and Acceptance, executed by such Assignee, such transferor Bank and the Agent (and, in the case of an Assignee that is not then a Bank, subject to clause (iii) below, by the Borrowers); provided that (i) no interest may be sold by a Bank pursuant to this paragraph (c) unless the Assignee shall agree to assume ratably equivalent portions of the transferor Bank's Commitment, (ii) if a Bank is assigning only a portion of its Commitment, then, the amount of the Commitment being assigned (determined as of the effective date of the assignment) shall be in an amount not less than $5,000,000, (iii) except during the continuance of a Default, no interest may be sold by a Bank pursuant to this paragraph (c) to any Assignee that is not then a Bank (or an Affiliate of a Bank) without the consent of the 87 Borrowers and the Agent, which consent shall not be unreasonably withheld, and (iv) a Bank may not have more than 2 Assignees that are not then Banks at any one time. Upon (A) execution of the Assignment and Acceptance by such transferor Bank, such Assignee, the Agent and (if applicable) the Borrowers, (B) delivery of an executed copy of the Assignment and Acceptance to the Borrowers and the Agent, (C) payment by such Assignee to such transferor Bank of an amount equal to the purchase price agreed between such transferor Bank and such Assignee, and (D) payment of a processing and recordation fee of $2,500 to the Agent, such Assignee shall for all purposes be a Bank party to this Agreement and shall have all the rights and obligations of a Bank under this Agreement to the same extent as if it were an original party hereto with a Commitment as set forth in such instrument of assumption, and the transferor Bank shall be released from its obligations hereunder to a corresponding extent, and no further consent or action by the Borrowers, the Banks or the Agent shall be required. Upon the consummation of any transfer to an Assignee pursuant to this paragraph (c), the transferor Bank, the Agent and the Borrowers shall make appropriate arrangements so that, if required, a new Note is issued to each of such Assignee and such transferor Bank. Notwithstanding the foregoing, the Commitments of and Loans made by National City Bank of Columbus hereunder may be assigned by it to one of its Affiliates and such assignment (i) may be made without consent by either Borrower, the Agent or any Bank, and (ii) shall not be subject to the $2,500 processing and recordation fee described in this paragraph (c). (d) Subject to the provisions of Section 10.09, the Borrowers authorize each Bank to disclose to any Participant, Assignee or other transferee (each a "Transferee") and any prospective Transferee any and all financial information in such Bank's possession concerning the Borrowers which has been delivered to such Bank by the Borrowers pursuant to this Agreement or which has been delivered to such Bank by the Borrowers in connection with such Bank's credit evaluation prior to entering into this Agreement. (e) No Transferee shall be entitled to receive any greater payment under Section 10.03 than the transferor Bank would have been entitled to receive with respect to the rights transferred, unless such transfer is made with the Borrowers' prior written consent or by reason of the provisions of Section 9.02 or 9.03 requiring such Bank to designate a different Lending 88 Office under certain circumstances or at a time when the circumstances giving rise to such greater payment did not exist. (f) Anything in this Section 10.08 to the contrary notwithstanding, any Bank may assign and pledge all or any portion of the Loans and/or obligations owing to it to any Federal Reserve Bank or the United States Treasury as collateral security pursuant to Regulation A of the Board of Governors of the Federal Reserve System and any Operating Circular issued by such Federal Reserve Bank, provided that any payment in respect of such assigned Loans and/or obligations made by the Borrowers to the assigning and/or pledging Bank in accordance with the terms of this Agreement shall satisfy the Borrowers' obligations hereunder in respect of such assigned Loans and/or obligations to the extent of such payment. No such assignment shall release the assigning and/or pledging Bank from its obligations hereunder. SECTION 10.09. Confidentiality. Each Bank agrees to exercise commercially reasonable efforts to keep any information delivered or made available by the Borrowers to it which is clearly indicated to be confidential information, confidential from anyone other than persons employed or retained by such Bank who are or are expected to become engaged in evaluating, approving, structuring or administering the Loans; provided that nothing herein shall prevent any Bank from disclosing such information (i) to any other Bank, (ii) upon the order of any court or administrative agency, (iii) upon the request or demand of any regulatory agency or authority having jurisdiction over such Bank, (iv) which has been publicly disclosed, (v) to the extent reasonably required in connection with any litigation to which the Agent, any Bank or their respective Affiliates may be a party, (vi) to the extent reasonably required in connection with the exercise of any remedy hereunder, (vii) to such Bank's legal counsel and independent auditors and (viii) to any actual or proposed Participant, Assignee or other Transferee of all or part of its rights hereunder which has agreed in writing to be bound by the provisions of this Section 10.09; provided that should disclosure of any such confidential information be required by virtue of clause (ii) of the immediately preceding sentence, to the extent permitted by law, any relevant Bank shall promptly notify the Borrowers of same so as to allow the Borrowers to seek a protective order or to take any other appropriate action; provided, further, that, no Bank shall be required to delay compliance with any directive to disclose any such information so as to allow the Borrowers to effect any such action. 89 SECTION 10.10. Representation by Banks. Each Bank hereby represents that it is a commercial lender or financial institution which makes loans in the ordinary course of its business and that it will make its Loans hereunder for its own account in the ordinary course of such business; provided that, subject to Section 10.08, the disposition of the Note or Notes held by that Bank shall at all times be within its exclusive control. SECTION 10.11. Obligations Several. The obligations of each Bank hereunder are several, and no Bank shall be responsible for the obligations or commitment of any other Bank hereunder. Nothing contained in this Agreement and no action taken by the Banks pursuant hereto shall be deemed to constitute the Banks to be a partnership, an association, a joint venture or any other kind of entity. The amounts payable at any time hereunder to each Bank shall be a separate and independent debt, and each Bank shall be entitled to protect and enforce its rights arising out of this Agreement or any other Loan Document and it shall not be necessary for any other Bank to be joined as an additional party in any proceeding for such purpose. SECTION 10.12. Georgia Law. This Agreement and each Note shall be construed in accordance with and governed by the law of the State of Georgia. SECTION 10.13. Severability. In case any one or more of the provisions contained in this Agreement, the Notes or any of the other Loan Documents should be invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein and therein shall not in any way be affected or impaired thereby and shall be enforced to the greatest extent permitted by law. SECTION 10.14. Interest. In no event shall the amount of interest, and all charges, amounts or fees contracted for, charged or collected pursuant to this Agreement, the Notes or the other Loan Documents and deemed to be interest under applicable law (collectively, "Interest") exceed the highest rate of interest allowed by applicable law (the "Maximum Rate"), and in the event any such payment is inadvertently received by any Bank, then the excess sum (the "Excess") shall be credited as a payment of principal, unless the Borrowers shall notify such Bank in writing that it elects to have the Excess returned forthwith. It is the express intent hereof that the Borrowers not pay and the 90 Banks not receive, directly or indirectly in any manner whatsoever, interest in excess of that which may legally be paid by the Borrowers under applicable law. The right to accelerate maturity of any of the Loans does not include the right to accelerate any interest that has not otherwise accrued on the date of such acceleration, and the Agent and the Banks do not intend to collect any unearned interest in the event of any such acceleration. All monies paid to the Agent or the Banks hereunder or under any of the Notes or the other Loan Documents, whether at maturity or by prepayment, shall be subject to rebate of unearned interest as and to the extent required by applicable law. By the execution of this Agreement, the Borrowers covenant, to the fullest extent permitted by law, that (i) the credit or return of any Excess shall constitute the acceptance by the Borrowers of such Excess, and (ii) the Borrowers shall not seek or pursue any other remedy, legal or equitable , against the Agent or any Bank, based in whole or in part upon contracting for charging or receiving any Interest in excess of the Maximum Rate. For the purpose of determining whether or not any Excess has been contracted for, charged or received by the Agent or any Bank, all interest at any time contracted for, charged or received from the Borrowers in connection with this Agreement, the Notes or any of the other Loan Documents shall, to the extent permitted by applicable law, be amortized, prorated, allocated and spread in equal parts throughout the full term of the Commitments. The Borrowers, the Agent and each Bank shall, to the maximum extent permitted under applicable law, (i) characterize any non-principal payment as an expense, fee or premium rather than as Interest and (ii) exclude voluntary prepayments and the effects thereof. The provisions of this Section shall be deemed to be incorporated into each Note and each of the other Loan Documents (whether or not any provision of this Section is referred to therein). All such Loan Documents and communications relating to any Interest owed by the Borrowers and all figures set forth therein shall, for the sole purpose of computing the extent of obligations hereunder and under the Notes and the other Loan Documents be automatically recomputed by the Borrowers, and by any court considering the same, to give effect to the adjustments or credits required by this Section. SECTION 10.15. Interpretation. No provision of this Agreement or any of the other Loan Documents shall be construed against or interpreted to the disadvantage of any party hereto by any court or other governmental or judicial authority by 91 reason of such party having or being deemed to have structured or dictated such provision. SECTION 10.16. Waiver of Jury Trial; Consent to Jurisdiction. Each of the Borrowers (a) and each of the Banks and the Agent irrevocably waives, to the fullest extent permitted by law, any and all right to trial by jury in any legal proceeding arising out of this Agreement, any of the other Loan Documents, or any of the transactions contemplated hereby or thereby, (b) submits to the nonexclusive personal jurisdiction in the State of Georgia, the courts thereof and the United States District Courts sitting therein, for the enforcement of this Agreement, the Notes and the other Loan Documents, (c) waives any and all personal rights under the law of any jurisdiction to object on any basis (including, without limitation, inconvenience of forum) to jurisdiction or venue within the State of Georgia for the purpose of litigation to enforce this Agreement, the Notes or the other Loan Documents, and (d) agrees that service of process may be made upon it in the manner prescribed in Section 10.01 for the giving of notice to the Borrowers. Nothing herein contained, however, shall prevent the Agent from bringing any action or exercising any rights against any security and against the Borrowers personally, and against any assets of the Borrowers, within any other state or jurisdiction. SECTION 10.17. Counterparts. This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. SECTION 10.18. Source of Funds -- ERISA. Each of the Banks hereby severally (and not jointly) represents to the Borrowers that no part of the funds to be used by such Bank to fund the Loans hereunder from time to time constitutes (i) assets allocated to any separate account maintained by such Bank in which any employee benefit plan (or its related trust) has any interest nor (ii) any other assets of any employee benefit plan. As used in this Section, the terms "employee benefit plan" and "separate account" shall have the respective meanings assigned to such terms in Section 3 of ERISA. 92 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed, under seal, by their respective authorized officers as of the day and year first above written. SOUTHERN ELECTRONICS CORPORATION (SEAL) By: /s/ Larry G. Ayers -------------------------------------- Title: Vice President-Finance SED INTERNATIONAL, INC. (SEAL) By: /s/ Larry G. Ayers -------------------------------------- Title: Vice President-Finance Southern Electronics Corporation SED International, Inc. 4916 North Royal Atlanta Drive Tucker, Georgia 30084 Attention: Larry G. Ayers, Vice President-Finance Telecopier number: 770-938-2414 Confirmation number: 770-491-8692 93 COMMITMENTS WACHOVIA BANK, N.A., as Agent and as a Bank (SEAL) $75,000,000 By: /s/ Ken B. Harrison ---------------------------------------- Title: Vice President Lending Office Wachovia Bank, N.A. 191 Peachtree Street, N.E. Atlanta, Georgia 30303-1757 Attention: Commercial Group Telecopier number: 404-332-6920 Confirmation number: 404-332-5269 94 NATIONAL CITY BANK OF COLUMBUS (SEAL) $25,000,000 By: /s/ Brian T. Strayton ----------------------------------------- Title: Vice President Lending Office National City Bank of Columbus 155 East Broad Street Columbus, Ohio 43251-0034 Attention: Brian T. Strayton Vice President Telecopier number: 614-463-8572 Confirmation number: 614-463-8386 TOTAL COMMITMENTS: - ------------------ $100,000,000 95 EXHIBIT A-1 AMENDED AND RESTATED SYNDICATED LOAN NOTE Atlanta, Georgia June 27, 1997 For value received, SOUTHERN ELECTRONICS CORPORATION and SED INTERNATIONAL, INC., each a Delaware corporation, jointly and severally (individually and collectively, as the context shall require, the "Borrowers"), promise to pay to the order of ___________________________________________________________ (the "Bank"), for the account of its Lending Office, the principal sum of _____________________________ MILLION AND NO/100 DOLLARS ($_____________________________), or such lesser amount as shall equal the unpaid principal amount of each Syndicated Loan made by the Bank to the Borrowers pursuant to the Credit Agreement referred to below, on the dates and in the amounts provided in the Credit Agreement. The Borrower promises to pay interest on the unpaid principal amount of this Syndicated Loan Note on the dates and at the rate or rates provided for in the Credit Agreement. Interest on any overdue principal of and, to the extent permitted by law, overdue interest on the principal amount hereof shall bear interest at the Default Rate, as provided for in the Credit Agreement. All such payments of principal and interest shall be made in lawful money of the United States in Federal or other immediately available funds at the office of Wachovia Bank, N.A., 191 Peachtree Street, N.E., Atlanta, Georgia 30303-1757, or such other address as may be specified from time to time pursuant to the Credit Agreement. All Loans made by the Bank, the respective maturities thereof, the interest rates from time to time applicable thereto, and all repayments of the principal thereof shall be recorded by the Bank and, prior to any transfer hereof, endorsed by the Bank on the schedule attached hereto, or on a continuation of such schedule attached to and made a part hereof; provided that the failure of the Bank to make any such recordation or endorsement shall not affect the obligations of the Borrowers hereunder or under the Credit Agreement. This Syndicated Loan Note is one of the Syndicated Loan Notes referred to in the Amended and Restated Credit Agreement dated as of August 13, 1997 among the Borrowers, the Banks listed 96 on the signature pages thereof and Wachovia Bank, N.A., as Agent (as the same may be amended and modified from time to time, the "Credit Agreement"), and amends and restates that certain Syndicated Loan Note dated as of June 27, 1997 issued by the Borrowers payable to the order of the Bank. Terms defined in the Credit Agreement are used herein with the same meanings. Reference is made to the Credit Agreement for provisions for the optional and mandatory prepayment and the repayment hereof and the acceleration of the maturity hereof, as well as the obligation of the Borrower to pay all costs of collection, including reasonable attorneys fees, in the event this Syndicated Loan Note is collected by law or through an attorney at law. The Borrowers hereby waive presentment, demand, protest, notice of demand, protest and nonpayment and any other notice required by law relative hereto, except to the extent as otherwise may be expressly provided for in the Credit Agreement. IN WITNESS WHEREOF, the Borrowers have caused this Syndicated Loan Note to be duly executed, under seal, by their respective duly authorized officers as of the day and year first above written. SOUTHERN ELECTRONICS CORPORATION (SEAL) By: -------------------------------------- Title: SED INTERNATIONAL, INC. (SEAL) By: -------------------------------------- Title: 97 Amended and Restated Syndicated Loan Note (cont'd) SYNDICATED LOANS AND PAYMENTS OF PRINCIPAL - -------------------------------------------------------------- Base Rate Amount Amount of or Euro- of Principal Maturity Notation Date Dollar Loan Loan Repaid Date Made By - -------------------------------------------------------------- - -------------------------------------------------------------- - -------------------------------------------------------------- - -------------------------------------------------------------- - -------------------------------------------------------------- - -------------------------------------------------------------- - -------------------------------------------------------------- - -------------------------------------------------------------- - -------------------------------------------------------------- - -------------------------------------------------------------- - -------------------------------------------------------------- - -------------------------------------------------------------- - -------------------------------------------------------------- - -------------------------------------------------------------- - -------------------------------------------------------------- - -------------------------------------------------------------- - -------------------------------------------------------------- - -------------------------------------------------------------- 98 - -------------------------------------------------------------- 99 EXHIBIT A-2 AMENDED AND RESTATED SWING LOAN NOTE Atlanta, Georgia August 13, 1997 For value received, SOUTHERN ELECTRONICS CORPORATION and SED INTERNATIONAL, INC., each a Delaware corporation, jointly and severally (individually and collectively, as the context shall require, the "Borrowers"), promise to pay to the order of WACHOVIA BANK, N.A., a national banking association (the "Bank"), for the account of its Lending Office, the principal sum of FIVE MILLION and No/100 Dollars ($5,000,000), or such lesser amount as shall equal the unpaid principal amount of each Swing Loan made by the Bank to the Borrowers pursuant to the Credit Agreement referred to below, on the dates and in the amounts provided in the Credit Agreement. The Borrower promises to pay interest on the unpaid principal amount of this Swing Loan Note at the rate provided for Base Rate Loans on the dates provided for in the Credit Agreement. Interest on any overdue principal of and, to the extent permitted by law, overdue interest on the principal amount hereof shall bear interest at the Default Rate, as provided for in the Credit Agreement. All such payments of principal and interest shall be made in lawful money of the United States in Federal or other immediately available funds at the office of Wachovia Bank, N.A., 191 Peachtree Street, N.E., Atlanta, Georgia 30303-1757, or such other address as may be specified from time to time pursuant to the Credit Agreement. All Swing Loans made by the Bank, the respective maturities thereof, and all repayments of the principal thereof shall be recorded by the Bank and, prior to any transfer hereof, endorsed by the Bank on the schedule attached hereto, or on a continuation of such schedule attached to and made a part hereof; provided that the failure of the Bank to make any such recordation or endorsement shall not affect the obligations of the Borrower hereunder or under the Credit Agreement. This Swing Loan Note is the Swing Loan Note referred to in the Amended and Restated Credit Agreement dated as of even date herewith among the Borrowers, the Banks listed on the signature pages thereof and Wachovia Bank, N.A., as Agent (as the same may be amended and modified from time to time, the "Credit 100 Agreement"), and amends and restates that certain Swing Loan Note dated as of January 24, 1997 issued by the Borrowers payable to the order of the Bank. Terms defined in the Credit Agreement are used herein with the same meanings. Reference is made to the Credit Agreement for provisions for the optional and mandatory prepayment and the repayment hereof and the acceleration of the maturity hereof. IN WITNESS WHEREOF, the Borrowers have caused this Swing Loan Note to be duly executed, under seal, by their respective duly authorized officers as of the day and year first above written. SOUTHERN ELECTRONICS CORPORATION (SEAL) By: ---------------------------------------- Title: SED INTERNATIONAL, INC. (SEAL) By: --------------------------------------- Title: 101 Amended and Restated Swing Loan Note (cont'd) LOANS AND PAYMENTS OF PRINCIPAL - -------------------------------------------------------------- Amount Amount of of Principal Maturity Notation Date Loan Repaid Date Made By - -------------------------------------------------------------- - -------------------------------------------------------------- - -------------------------------------------------------------- - -------------------------------------------------------------- - -------------------------------------------------------------- - -------------------------------------------------------------- - -------------------------------------------------------------- - -------------------------------------------------------------- - -------------------------------------------------------------- - -------------------------------------------------------------- - -------------------------------------------------------------- - -------------------------------------------------------------- - -------------------------------------------------------------- - -------------------------------------------------------------- - -------------------------------------------------------------- - -------------------------------------------------------------- - -------------------------------------------------------------- - -------------------------------------------------------------- 102 - -------------------------------------------------------------- 103 EXHIBIT B OPINION OF LONG, ALDRIDGE & NORMAN SPECIAL COUNSEL FOR THE BORROWERS [Dated as provided in Section 4.01 of the Credit Agreement] To the Banks and the Agent Referred to Below c/o Wachovia Bank, N.A. 191 Peachtree Street, N.E. Atlanta, Georgia 30303-1757 Attn: Commercial Group Dear Sirs: We have acted as counsel for Southern Electronics Corporation and SED International, Inc., each a Delaware corporation (individually and collectively, as the context requires, the "Borrowers") in connection with the Amended and Restated Credit Agreement (the "Credit Agreement") dated as of August 13, 1997, among the Borrowers, the banks listed on the signature pages thereof and Wachovia Bank, N.A., as Agent. Terms defined in the Credit Agreement are used herein as therein defined. We have examined originals or copies, certified or otherwise identified to our satisfaction, of such documents, corporate records, certificates of public officials and other instruments and have conducted such other investigations of fact and law as we have deemed necessary or advisable for purposes of this opinion. We have assumed for purposes of our opinions set forth below that the execution and delivery of the Credit Agreement by each Bank and by the Agent have been duly authorized by each Bank and by the Agent. Upon the basis of the foregoing, we are of the opinion that: 104 1. Each of the Borrowers is a corporation duly incorporated, validly existing and in good standing under the laws of Delaware and has all corporate powers required to carry on its business as now conducted. 2. The execution, delivery and performance by the Borrowers of the Credit Agreement, the Notes and the Letter of Credit Application Agreements (i) are within each Borrower's corporate powers, (ii) have been duly authorized by all necessary corporate action, (iii) require no action by or in respect of, or filing with, any governmental body, agency or official, (iv) do not contravene, or constitute a default under, any provision of applicable law or regulation or of the certificate of incorporation or by-laws of either Borrower or of any agreement, judgment, injunction, order, decree or other instrument which to our knowledge is binding upon either Borrower and (v) to our knowledge, except as provided in the Credit Agreement, do not result in the creation or imposition of any Lien on any asset of either Borrower or any of the Subsidiaries. 3. The Credit Agreement and the Notes constitute, and upon execution and delivery thereof, each Letter of Credit Application Agreement will constitute, a valid and binding agreement of each Borrower which is a party thereto, enforceable against such Borrower in accordance with its terms, except as such enforceability may be limited by: (i) bankruptcy, insolvency or similar laws affecting the enforcement of creditors' rights generally and (ii) general principles of equity. 4. To our knowledge, there is no action, suit or proceeding pending, or threatened, against or affecting either of the Borrowers or any of the Subsidiaries before any court or arbitrator or any governmental body, agency or official in which there is a reasonable possibility of an adverse decision which could materially adversely affect the business, consolidated financial position or consolidated results of operations of the Borrowers and the Consolidated Subsidiaries, considered as a whole, or which in any manner questions the validity or enforceability of the Credit Agreement, any Note or any Letter of Credit Application Agreement. 5. Each of the Subsidiaries is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation, and has all corporate powers and all material governmental licenses, authorizations, 105 consents and approvals required to carry on its business as now conducted. 6. Neither of the Borrowers nor any of the Subsidiaries is an "investment company" within the meaning of the Investment Company Act of 1940, as amended. 7. Neither of the Borrowers nor any of the Subsidiaries is a "holding company", or a "subsidiary company" of a "holding company", or an "affiliate" of a "holding company" or of a "subsidiary company" of a "holding company", as such terms are defined in the Public Utility Holding Company Act of 1935, as amended. 8. Each Security Agreement creates in favor of the Agent, for the ratable benefit of the Banks, as security for the Obligations, a security interest, in each such Borrower's right, title and interest in the Collateral constituting "equipment," "fixtures," "inventory," "accounts," "general intangibles," "chattel paper," and "instruments" (each as defined in the UCC) to which Article 9 of the UCC is applicable (the "Article 9 Collateral"). 9. Upon creation of such security interest in the Article 9 Collateral and due filing of the Financing Statements with the filing office(s) located at Gilmore County, Georgia, the Agent, for the ratable benefit of the Banks, will have a perfected security interest in that portion of the Article 9 Collateral in which a security interest is perfected by filing a financing statement under the UCC (the "Filing Collateral"). We are qualified to practice in the State of Georgia and do not purport to be experts on any laws other than the laws of the United States and the State of Georgia and the General Corporation Law of Delaware and this opinion is rendered only with respect to such laws. We have made no independent investigation of the laws of any other jurisdiction. This opinion is delivered to you in connection with the transaction referenced above and may only be relied upon by you, any Assignee, Participant or other Transferee under the Credit Agreement, and Jones, Day, Reavis & Pogue without our prior written consent. Very truly yours, 106 EXHIBIT C OPINION OF JONES, DAY, REAVIS & POGUE, SPECIAL COUNSEL FOR THE AGENT [Dated as provided in Section 4.01 of the Credit Agreement] To the Banks and the Agent Referred to Below c/o WachoviaBank, N.A., as Agent 191 Peachtree Street, N.E. Atlanta, Georgia 30303-1757 Attn: Commercial Group Dear Sirs: We have participated in the preparation of the Amended and Restated Credit Agreement (the "Credit Agreement") dated as of August 13, 1997, among Southern Electronics Corporation and SED International, Inc., each a Delaware corporation (individually and collectively, as the context requires, the "Borrowers"), the banks listed on the signature pages thereof (the "Banks") and Wachovia Bank, N.A., as Agent (the "Agent"), and have acted as special counsel for the Agent for the purpose of rendering this opinion pursuant to Section 4.01(e) of the Credit Agreement. Terms defined in the Credit Agreement are used herein as therein defined. This opinion letter is limited by, and is in accordance with, the January 1, 1992 edition of the Interpretive Standards applicable to Legal Opinions to Third Parties in Corporate Transactions adopted by the Legal Opinion Committee of the Corporate and Banking Law Section of the State Bar of Georgia which Interpretive Standards are incorporated herein by this reference. We have examined originals or copies, certified or otherwise identified to our satisfaction, of such documents, 107 corporate records, certificates of public officials and other instruments and have conducted such other investigations of fact and law as we have deemed necessary or advisable for purposes of this opinion. Upon the basis of the foregoing, and assuming the due authorization, execution and delivery of the Credit Agreement, each of the Notes and each of the Letter of Credit Application Agreements by or on behalf of the Borrowers, we are of the opinion that the Credit Agreement and the Notes constitute, and upon execution and delivery thereof, each Letter of Credit Application Agreement will constitute, a valid and binding obligations of each Borrower which is a party thereto, in each case enforceable in accordance with its terms except as: (i) the enforceability thereof may be affected by bankruptcy, insolvency, reorganization, fraudulent conveyance, voidable preference, moratorium or similar laws applicable to creditors' rights or the collection of debtors' obligations generally; (ii) rights of acceleration and the availability of equitable remedies may be limited by equitable principles of general applicability; and (iii) the enforceability of certain of the remedial, waiver and other provisions of the Credit Agreement and the Notes may be further limited by the laws of the State of Georgia; provided that such additional laws do not, in our opinion, substantially interfere with the practical realization of the benefits expressed in the Credit Agreement, the Notes and the Letter of Credit Application Agreements, except for the economic consequences of any procedural delay which may result from such laws. In giving the foregoing opinion, we express no opinion as to the effect (if any) of any law of any jurisdiction except the State of Georgia. We express no opinion as to the effect of the compliance or noncompliance of the Agent or any of the Banks with any state or federal laws or regulations applicable to the Agent or any of the Banks by reason of the legal or regulatory status or the nature of the business of the Agent or any of the Banks. This opinion is delivered to you in connection with the transaction referenced above and may only be relied upon by you and any Assignee, Participant or other Transferee under the Credit Agreement without our prior written consent. Very truly yours, 108 EXHIBIT D ASSIGNMENT AND ACCEPTANCE Dated ____________ ___, 19___ Reference is made to the Amended and Restated Credit Agreement dated as of August 13, 1997 (together with all amendments and modifications thereto, the "Credit Agreement") among Southern Electronics Corporation and SED International, Inc., each a Delaware corporation (individually and collectively, as the context shall require, the "Borrowers"), the Banks (as defined in the Credit Agreement) and Wachovia Bank, N.A., as Agent (the "Agent"). Terms defined in the Credit Agreement are used herein with the same meaning. ___________________________________________________ (the "Assignor") and ________________________________________ (the "Assignee") agree as follows: 1. The Assignor hereby sells and assigns to the Assignee, without recourse to the Assignor, and the Assignee hereby purchases and assumes from the Assignor, a ______% interest in and to all of the Assignor's rights and obligations under the Credit Agreement as of the Effective Date (as defined below) (including, without limitation, a __ % interest (which on the Effective Date hereof is $______) in the Assignor's Commitment and a ______ interest (which on the Effective Date hereof is $ ______________) in the Syndicated Loans [and Swing Loans] owing to the Assignor and a ___% interest in the Note[s] held by the Assignor (which on the Effective Date hereof is $__________). 2. The Assignor (i) makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with the Credit Agreement or the execution, legality, validity, enforceability, genuineness, sufficiency or value of the Credit Agreement or any other instrument or document furnished pursuant thereto, other than that it is the legal and beneficial owner of the interest being assigned by it hereunder, that such interest is free and clear of any adverse claim and that as of the date hereof its Commitment (without giving effect to assignments thereof which have not yet become effective) is 109 $__________ and the aggregate outstanding principal amount of Syndicated Loans [and Swing Loans] owing to it (without giving effect to assignments thereof which have not yet become effective) is $______ _________; (ii) makes no representation or warranty and assumes no responsibility with respect to the financial condition of the Borrowers or the performance or observance by the Borrowers of any of their obligations under the Credit Agreement or any other instrument or document furnished pursuant thereto; and (iii) attaches the Note[s] referred to in paragraph 1 above and requests that the Agent exchange such Note[s] for [a new Syndicated Loan Note from each Borrower dated _____________, ____ in the principal amount of $__________ payable to the order of the Assignee and a new Swing Loan Note from each Borrower dated ___________, ____ in the principal amount of $______________ payable to the order of the Assignee] [new Notes as follows: a (i) Syndicated Loan Note from each Borrower dated ________________, ____ in the principal amount of $_____________ payable to the order of the Assignor (ii) Syndicated Loan Note from each Borrower dated ________, ____ in the principal amount of $______________ payable to the order of the Assignee, and (iii) and a new Swing Loan Note from each Borrower dated ___________, ____ in the principal amount of $______________ payable to the order of the Assignee]. 3. The Assignee (i) confirms that it has received a copy of the Credit Agreement, together with copies of the financial statements referred to in Section 5.04(a) (or any more recent financial statements of the Borrowers delivered pursuant to Section 6.01(a) or (b)) and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into this Assignment and Acceptance; (ii) agrees that it will, independently and without reliance upon the Agent, the Assignor or any other Bank and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the Credit Agreement; (iii) confirms that it is a bank or financial institution; (iv) appoints and authorizes the Agent to take such action as agent on its behalf and to exercise such powers under the Credit Agreement as are delegated to the Agent by the terms thereof, together with such powers as are reasonably incidental thereto; (v) agrees that it will perform in accordance with their terms all of the obligations which by the terms of the Credit Agreement are required to be performed by it as a Bank; (vi) specifies as its Lending Office (and address for notices) the office set forth 110 beneath its name on the signature pages hereof, (vii) represents and warrants that the execution, delivery and performance of this Assignment and Acceptance are within its corporate powers and have been duly authorized by all necessary corporate action, (viii) makes the representation and warranty contained in Section 10.18 of the Credit Agreement[, and (ix) attaches the forms prescribed by the Internal Revenue Service of the United States certifying as to the Assignee's status for purposes of determining exemption from United States withholding taxes with respect to all payments to be made to the Assignee under the Credit Agreement and the Notes or such other documents as are necessary to indicate that all such payments are subject to such taxes at a rate reduced by an applicable tax treaty]. 4. The Effective Date for this Assignment and Acceptance shall be __________, 19__ (the "Effective Date"). Following the execution of this Assignment and Acceptance, it will be delivered to the Agent for execution and acceptance by the Agent and [if required by the Credit Agreement] to the Borrowers for execution by the Borrowers. 5. Upon such execution and acceptance by the Agent [and execution by the Borrowers] [If required by the Credit Agreement], from and after the Effective Date, (i) the Assignee shall be a party to the Credit Agreement and, to the extent rights and obligations have been transferred to it by this Assignment and Acceptance, have the rights and obligations of a Bank thereunder and (ii) the Assignor shall, to the extent its rights and obligations have been transferred to the Assignee by this Assignment and Acceptance, relinquish its rights (other than under Sections 8.03, 9.03 and 9.04 of the Credit Agreement) and be released from its obligations under the Credit Agreement. 6. Upon such execution and acceptance by the Agent [and execution by the Borrowers] [If required by the Credit Agreement], from and after the Effective Date, the Agent shall make all payments in respect of the interest assigned hereby to the Assignee. The Assignor and Assignee shall make all appropriate adjustments in payments for periods prior to such acceptance by the Agent directly between themselves. 7. This Assignment and Acceptance shall be governed by, and construed in accordance with, the laws of the State of Georgia. 111 [NAME OF ASSIGNOR] By: -------------------------- Title: [NAME OF ASSIGNEE] By: -------------------------- Title: Lending Office: [Address] WACHOVIA BANK, N.A., As Agent By: ---------------------------- Title: 112 SOUTHERN ELECTRONICS CORPORATION If required by the Credit Agreement By: ----------------------------- Title: SED INTERNATIONAL, INC. If required by the Credit Agreement By: ----------------------------- Title: 113 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] in the aggregate principal amount of $ to be made on , 199 , ------- --------- -- and for interest to accrue thereon at the rate established by the Credit Agreement for [Euro-Dollar Loans] [Base Rate Loans]. The duration of the Interest Period with respect thereto shall be [1 month] [2 months] [3 months] [6months] [30 days] [60 days] [90 days]. The amount available to be borrowed under Section 2.01 of the Credit Agreement, net of amounts to be paid with the proceeds of this Borrowing, is as follows: (a) Aggregate Commitments $ ----------------- (b) Borrowing Base per most recent Borrowing Base Certificate $ ----------------- 114 (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 . ------- --- [SOUTHERN ELECTRONICS CORPORATION] [SED INTERNATIONAL, INC.] By: ------------------------------- Title: 115 EXHIBIT F 116 EXHIBIT G FORM OF NOTICE IN RESPECT OF ISSUANCE OF LETTERS OF CREDIT TO: The Banks under that certain Amended and Restated Credit Agreement, dated as of August 13, 1997 ("Credit Agreement"), among Southern Electronics Corporation and SED International, Inc., as the Borrowers, the Banks parties thereto and Wachovia Bank, N.A., as Agent ("Agent"). Pursuant to Section 3.04(b) of the Credit Agreement, the Agent hereby certifies to the Banks that it has issued the following Letters of Credit pursuant to Article III of the Credit Agreement: Face Date of Number Amount Issuance/Expiration Beneficiary Purpose A copy of each of the Letters of Credit listed above has been attached hereto. Unless otherwise defined herein, terms defined in the Credit Agreement shall have the same meaning in this notice. Date: 19 . ---------- -- WACHOVIA BANK, N.A. By: ------------------------- Name: Title: Enclosures 117 EXHIBIT H COMPLIANCE CERTIFICATE Reference is made to the Amended and Restated Credit Agreement dated as of August 13, 1997 (as modified and supplemented and in effect from time to time, the "Credit Agreement") among Southern Electronics Corporation and SED International, Inc., as Borrowers, the Banks from time to time parties thereto, and Wachovia Bank, N.A., as Agent. Capitalized terms used herein shall have the meanings ascribed thereto in the Credit Agreement. Pursuant to Section 6.01(c) of the Credit Agreement, , ----------- the duly authorized of Southern Electronics ----------- Corporation and , the duly authorized ------------------ of SED International, Inc., hereby certify to the - ------------------- Agent and the Banks that the information contained in the Compliance Check List attached hereto is true, accurate and complete as of 199 , and that no Default is in existence on and as of - ------------- -- the date hereof. SOUTHERN ELECTRONICS CORPORATION By: ----------------------- Title: SED INTERNATIONAL, INC. By: ----------------------- Title: 118 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 $ ---------- 119 (b) Consolidated Total Assets $ ---------- (c) 2% of (b) $ ---------- (d) Consolidated Operating Profits - Schedule 1 $ ---------- (e) 2% of (d) $ ---------- Limitation (a) not to exceed (c) or (e) 2. Restricted Payments (Section 6.15) SEC will not declare or make any Restricted Payment after December 31, 1996, if the aggregate amount of such Restricted Payments for any 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, 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) 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. $ ---------------------------- -------------- 120 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 the following amounts during the following periods: Closing Date through June 30, 1998 6.5 to 1.0 July 1, 1998 through December 30, 1998 6.0 to 1.0 December 31, 1998 and thereafter 5.5 to 1.0 (a) Debt - Schedule 3 $ ------------- (b) Consolidated Tangible Net Worth - Schedule 4 $ ------------- Actual Ratio of (a) to (b) ------------- Maximum Ratio [6.5 to 1.0] [6.0 to 1.0] [5.5 to 1.0] 5. Fixed Charges Coverage (Section 6.21) Tested at the end of each Fiscal Month, the ratio of Income Available for Fixed Charges to Consolidated Fixed Charges for the Fiscal Month just ended and the immediately preceding 11 Fiscal Months shall not at any time be less than 2.5 to 1.0. (a) Income Available for Fixed Charges - Schedule 2 $ --------------- 121 (b) Consolidated Interest Expense - Schedule 2 $ --------------- (c) operating leases and rentals - Schedule 2 $ --------------- (d) sum of (b) plus (c) $ ---------------- Ratio of (a) to (d) to 1.0 --------- Requirement [greater than or equal to] 2.5 to 1.0 6. Adjusted Current Ratio (Section 6.22) Tested at the end of each Fiscal Month, the Adjusted Current Ratio shall not at any time be less than 1.00 to 1.00. (a) Aggregate Accounts Receivable $ -------------- (b) Aggregate Inventory $ -------------- (c) sum of (a) and (b) $ -------------- (d) Principal amount outstanding under Syndicated Loans $ -------------- (e) Principal amount outstanding under Swing Loans $ -------------- (f) Aggregate outstanding principal amount of Letter of Credit Obligations $ -------------- (g) Aggregate accounts payable $ -------------- (h) sum of (d) plus (e) plus (f) plus (g) $ -------------- (i) ratio of (c) to (h) to 1.0 -------- Limitation 1.00 to 1.0 7. Minimum Consolidated Net Income (Section 6.23) 122 At the end of each Fiscal Quarter, Consolidated Net Income will not at any time be less than (i) for the Fiscal Quarter just ended, $1,000,000, and (ii) for the 4 consecutive Fiscal Quarters ending June 30, 1998, Consolidated Net Income will not be less than $7,000,000. (a) Consolidated Net Income for Fiscal Quarter just ended - Schedule 2 $ ------------------ (b) Consolidated Net Income for immediately preceding 3 Fiscal Quarters - Schedule 2 $ ------------------ (c) sum of (a) and (b) $ ------------------ Limitations: [$1,000,000] [$7,000,000] 8. Minimum Consolidated Tangible Net Worth (Section 6.24) Consolidated Tangible Net Worth will at no time be less than $25,000,000 plus the sum of (i) 100% of the cumulative Reported Net Income of the Borrowers and the Consolidated Subsidiaries during any period after June 27, 1997 (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 the Closing Date, calculated monthly at the end of each month. (a) $25,000,000 (b) positive Reported Net Income after June 27, 1997 $ ------------------ (c) cumulative Net Proceeds of Capital Stock received after June 27, 1997 $ ------------------ Actual Consolidated Tangible Net Worth - Schedule 4 $ ------------------ Required Consolidated Tangible Net Worth (sum of (a) plus (b) plus (c) $ ------------------ 123 Schedule 1 Consolidated Operating Profits Consolidated Operating Profits quarter 199 $ -------- -- --------------- quarter 199 $ -------- -- --------------- quarter 199 $ -------- -- --------------- quarter 199 $ -------- -- --------------- Total $ --------------- 124 Schedule 2 ---------- Income Available for Fixed Charges 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 $ ---------- -- ----------- 125 quarter 199 $ ---------- -- ----------- quarter 199 $ ---------- -- ----------- Total $ ----------- Capital Expenditures for: quarter 199 $ ---------- -- ----------- quarter 199 $ ---------- -- ----------- quarter 199 $ ---------- -- ----------- quarter 199 $ ---------- -- ----------- Total $ ----------- Consolidated Interest Expense for: quarter 199 $ ---------- -- ----------- quarter 199 $ ---------- -- ----------- quarter 199 $ ---------- -- ----------- quarter 199 $ ---------- -- ----------- Total $ ----------- Operating Leases and Rentals for: quarter 199 $ ---------- -- ----------- quarter 199 $ ---------- -- ----------- quarter 199 $ ---------- -- ----------- quarter 199 $ ---------- -- ----------- Total $ ----------- Total Income Available for Fixed Charges $ ----------- 126 Schedule 3 ---------- Debt - ---- INTEREST RATE MATURITY TOTAL -------- -------- ----- Secured - ------- - ------------------------------------ -------- --------- $----- - ------------------------------------ -------- --------- $----- - ------------------------------------ -------- --------- $----- - ------------------------------------ -------- --------- $----- - ------------------------------------ -------- --------- $----- Total Secured $----- Unsecured - --------- - ------------------------------------ -------- --------- $----- - ------------------------------------ -------- --------- $----- - ------------------------------------ -------- --------- $----- - ------------------------------------ -------- --------- $----- Total Unsecured $----- Guarantees - ---------- - ------------------------------------ -------- --------- $----- - ------------------------------------ -------- --------- $----- Total $----- Redeemable Preferred Stock $----- - -------------------------- Total $----- Other Liabilities - ----------------- - ------------------------------------------------------------- $----- - ------------------------------------------------------------- $----- - ------------------------------------------------------------- $----- Total Debt $ ---------- ======= 127 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/1/ $--------- Deferred expenses $--------- Consolidated Tangible Net Worth $========= Intangibles Description - ----------------------- (a) ----------------------------------- $--------- (b) ----------------------------------- $--------- (c) ----------------------------------- $--------- Other $--------- Total $--------- ------------------------ /1/ To the extent not included above as an Intangible. 128 EXHIBIT I SOUTHERN ELECTRONICS CORPORATION SED INTERNATIONAL, INC. CLOSING CERTIFICATE ------------------- Reference is made to the Amended and Restated Credit Agreement (the "Credit Agreement") dated as of August 13, 1997, among Southern Electronics Corporation, SED International, Inc., the Banks listed therein, and Wachovia Bank, N.A., as Agent. Capitalized terms used herein have the meanings ascribed thereto in the Credit Agreement. Pursuant to Section 4.01(f) of the Credit Agreement, ------------ , the duly authorized of - -------------------- --------------------- Southern Electronics Corporation, and , ------------------------ the duly authorized of SED International, ----------------------- Inc., hereby certify to the Agent and the Banks that (i) no Default has occurred and is continuing as of the date hereof, and (ii) the representations and warranties contained in Article V of the Credit Agreement are true on and as of the date hereof. Certified as of August 13, 1997. SOUTHERN ELECTRONICS CORPORATION By: -------------------------- Printed Name: -------------- Title: --------------------- SED INTERNATIONAL, INC. By: ----------------------------- Printed Name: ----------------- Title: ------------------------ 129 EXHIBIT J [SOUTHERN ELECTRONICS CORPORATION] [SED INTERNATIONAL, INC.] SECRETARY'S CERTIFICATE The undersigned, , -------------------------------------- , Secretary of [Southern - ------------------------------ Electronics Corporation] [SED International, Inc.], a Delaware corporation (the "Borrower"), hereby certifies that [s]he has been duly elected, qualified and is acting in such capacity and that, as such, [s]he is familiar with the facts herein certified and is duly authorized to certify the same, and hereby further certifies, in connection with the Amended and Restated Credit Agreement dated as of August 13, 1997 (the "Credit Agreement") among Southern Electronics Corporation and SED International, Inc., as the Borrowers, Wachovia Bank, N.A. as Agent and as a Bank, and certain other Banks listed on the signature pages thereof, that: 1. Attached hereto as Exhibit A is a complete and correct copy of the Certificate of Incorporation of the Borrower as in full force and effect on the date hereof as certified by the Secretary of State of the State of Delaware, the Borrower's state of incorporation. 2. Attached hereto as Exhibit B is a complete and correct copy of the Bylaws of the Borrower as in full force and effect on the date hereof. 3. Attached hereto as Exhibit C is a complete and correct copy of the resolutions duly adopted by the Board of Directors of the Borrower on [ ] approving, and ------------------------------- authorizing the execution and delivery of, the Credit Agreement, the Notes, the Letter of Credit Application Agreements and the other Loan Documents (as such terms are defined in the Credit Agreement) to which the Borrower is a party. Such resolutions have not been repealed or amended and are in full force and effect, and no other resolutions or consents have been adopted by the Board of Directors of the Borrower in connection therewith. 130 4. , who is --------------------------- ----------------------- of the Borrower signed the Credit Agreement, the Notes [, the Letter of Credit Application Agreements executed on the Closing Date] and the other Loan Documents to which the Borrower is a party, was duly elected, qualified and acting as such at the time [s]he signed the Credit Agreement, the Notes [, the Letter of Credit Application Agreements executed on the Closing Date] and other Loan Documents to which the Borrower is a party, and [his/her] signature appearing on the Credit Agreement, the Notes [, the Letter of Credit Application Agreements executed on the Closing Date] and the other Loan Documents to which the Borrower is a party is [his/her] genuine signature. IN WITNESS WHEREOF, the undersigned has hereunto set [his/her] hand as of August 13, 1997. -------------------------------------- 131 EXHIBIT K LANDLORD'S AGREEMENT -------------------- THIS LANDLORD'S AGREEMENT ("Agreement"), made and entered into as of June , 1997, by the undersigned landlord (the ----- "Landlord") in favor of WACHOVIA BANK, N.A., as agent (the "Agent") for the ratable benefit of itself and the other banks party to the "Financing Arrangement" defined below (the "Banks"). W I T N E S S E T H: Recitals: 1.1. Landlord is the landlord under the Lease described on Exhibit "A" attached hereto (the "Lease"), covering the business premises likewise described on said Exhibit "A" (the "Premises"). 1.2. --------------------------------------------------- ("Tenant") is the tenant of Landlord under the Lease and, in such capacity, is operating its business on, or keeps property on, the Premises. 1.3. Tenant has notified Landlord that it intends to enter into a certain financing arrangement (the "Financing Arrangement") with the Agent and the Banks, pursuant to which the Agent and the Banks will make certain loans, advances and other financial accommodations to Tenant. 1.4. Tenant intends to secure the payment and performance of its obligations to the Agent, for the ratable benefit of the Banks, under the Financing Arrangement by granting to the Agent a security interest in, among other property of Tenant, all of its inventory, equipment and trade fixtures, whether now owned or hereafter ac- quired (the "Collateral"), portions of which are or hereafter may be located on the Premises. 1.5. In connection therewith, pursuant to the Agent's request, Tenant has requested that Landlord execute this Agreement in favor of the Agent. 132 1.6. Landlord has agreed, at Tenant's request and as an ac- commodation to it, to execute this Agreement. IN CONSIDERATION of the foregoing and for other good and valuable consideration, the receipt and sufficiency of which are acknowledged by Landlord, Landlord acknowledges and agrees as follows in favor of the Agent: 1. Consent. Landlord hereby consents to the grant by the Tenant of a security interest in the Collateral to Agent. 2. Lien Subordination. Landlord acknowledges and agrees that: (a) the security interest of Agent in the Collateral shall be superior to any lien, right, title, claim or interest which Landlord may now or hereafter have therein; (b) Landlord shall not assert as against Agent's security interest therein any statutory, contractual or possessory lien, right, title, claim or interest in the Collateral, including without limitation, rights of levy or distraint for rent, all of which Landlord hereby subordinates to Agent for the term of this Agreement; (c) Agent shall have access to the Collateral and the Premises at all times hereafter during regular business hours to remove the Collateral therefrom should Agent elect to enforce the security interest granted in their favor in the Collateral, without hindrance or delay by Landlord; and (d) all Collateral which is now located or hereafter may be located on the Premises shall remain the personal property of Tenant. 3. Termination of the Lease or Sublease. If, after the date hereof, Landlord intends to terminate the Lease or otherwise exercise any right it may have to require Tenant to surrender the Premises or to remove any property of Tenant (including the Collateral) from the Premises, Landlord shall use its best efforts to notify Agent in writing at Wachovia Bank, N.A., 191 Peachtree Street, Atlanta, Georgia 30303, Attn: Structured Finance, of its intent to take such action and to permit Agent, at its option, either (a) to keep the Collateral on the Premises for a period of up to thirty (30) days after its receipt of such notice, at the then effective rental provided in the Lease (pro-rated on a daily basis) without incurring any other obligations of Tenant as a result thereof (including any obligations for past due rent), or (b) to enter onto the Premises within such thirty (30) day period in order to remove the Collateral therefrom, without charge, except for reasonable compensation to Landlord for any damage to the Premises caused by such removal; and in either such event, Landlord agrees to cooperate with Agent and not to hinder its actions in protecting or realizing upon the Collateral. 133 4. Term. This Agreement shall remain in full force and effect until the Financing Arrangement has been terminated, and all obligations and liabilities of Tenant to Agent arising therefrom have been paid and satisfied in full. 5. No Oral Modification; Successors and Assigns. The provisions of this Agreement may not be modified or terminated orally, and shall be binding upon the successors, assigns and personal representatives of Landlord, and upon any successor owner or transferee of the Premises, and shall inure to the benefit of the successors and assigns of Agent. IN WITNESS WHEREOF, Landlord has caused this Agreement to be executed, by its duly authorized officer, agent or other representative as of the date first above written. Signed and delivered LANDLORD: in the presence of: - ---------------------- - ------------------------- By:---------------------------- Witness Name: Title: Notary Public ----------------------- My Commission Expires: - ----------------------------------- (NOTARY SEAL) 134 EXHIBIT "A" ----------- Description of Lease: - --------------------------------------------------------------------------- - --------------------------------------------------------------------------- - --------------------------------------------------------------------------- - --------------------------------------------------------------------------- - --------------------------------------------------------------------------- Description of Premises: - --------------------------------------------------------------------------- - --------------------------------------------------------------------------- - --------------------------------------------------------------------------- - --------------------------------------------------------------------------- - --------------------------------------------------------------------------- (or add Exhibit) 135 TELEPHONE INSTRUCTION LETTER August , 1997 ----- Wachovia Bank, N.A. 191 Peachtree Street, N.E. Atlanta, Georgia 30303 Attention: Structured Finance Ladies and Gentlemen: Please refer to that certain Amended and Restated Credit Agreement of even date herewith between you and us ("Credit Agreement"). From any Loans under the Credit Agreement which you make to us, we hereby authorize and direct you to make disbursements from time to time for our account to our bank account number ----------------- maintained with of ---------------- -------------------- , upon receipt of telephone - -------------------- ------------------ instructions from any of the following persons or their respective designees: Name Title - ---------------------------- ------------------------------ - ---------------------------- ------------------------------ - ---------------------------- ------------------------------ You shall have no liability to us whatsoever for acting upon any such telephone instruction which you, in good faith, believe was given by any of the above designated persons or their respective designees and you shall have no duty to inquire as to the propriety of any disbursement. You shall have the right to accept the telephone instructions of any of the above designated persons or their respective designees unless and until actual receipt by you from us of written notice of termination of the authority of any such designated persons. We may change persons designated to give you telephone instructions only by delivering to you written notice of such change. 136 Unless and until you advise us to the contrary, each telephone instruction from the above-named persons or their respective designees shall be followed by a written confirmation of the request for disbursement in such form as you make available from time to time to use for such purpose. Very truly yours, SOUTHERN ELECTRONICS CORPORATION By: ------------------------- President SED INTERNATIONAL, INC. By: ------------------------- President 137 Schedule 5.08 Subsidiaries of Southern Electronics Corporation Name Jurisdiction of Incorporation SED International, Inc. Delaware Subsidiaries of SED International, Inc. Name Jurisdiction of Incorporation - ---- ----------------------------- None. 138 EX-11.1 4 STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS EXHIBIT 11.1 SOUTHERN ELECTRONICS CORPORATION AND SUBSIDIARY COMPUTATION OF EARNINGS PER SHARE - --------------------------------------------------------------------------------
YEAR ENDED JUNE 30, ---------------------------------------- 1995 1996 1997 ---------- ---------- ---------- EARNINGS PER SHARE - Based on weighted average shares outstanding: Average outstanding shares 6,961,518 7,176,929 7,183,467 ---------- ---------- ---------- Net earnings for per share computation(A) $5,222,000 $5,550,000 $7,905,000 ---------- ---------- ---------- Net earnings per common share $ 0.75 $ 0.77 $ 1.10 ---------- ---------- ---------- PRIMARY EARNINGS PER SHARE: Average outstanding shares, including common stock equivalents(1)(B) 7,068,512 7,279,599 7,633,925 ---------- ---------- ---------- Net earnings per common share (A divided by B) $ 0.74 $ 0.76 $ 1.04 ---------- ---------- ---------- FULLY DILUTED EARNINGS PER SHARE: Average outstanding shares, including common stock equivalents(1)(C) 7,070,182 7,288,968 7,659,893 ---------- ---------- ---------- Net earnings per common share (A divided by C) $ 0.74 $ 0.76 $ 1.03 ---------- ---------- ----------
/1/ Average shares outstanding include 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 for the primary calculation and at the higher of average or period-end market prices for the fully diluted calculation. EX-23 5 CONSENT OF DELOITTE & TOUCHE LLP EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement No. 333-05043 of Southern Electronics Corporation on Form S-3 and Registration Statement Nos. 33-64133, 33-64135, 33-55730 and 33-33882 of Southern Electronics Corporation on Form S-8 of our report dated August 13, 1997 appearing in the Annual Report on Form 10-K of Southern Electronics Corporation for the year ended June 30, 1997. DELOITTE & TOUCHE LLP Atlanta, Georgia September 4, 1997 EX-27 6 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SOUTHERN ELECTRONICS CORPORATION AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEAR ENDED JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED FINANCIAL STATEMENTS. 12-MOS JUN-30-1997 JUN-30-1996 JUN-30-1997 783,000 0 55,745,000 1,102,000 112,813,000 171,783,000 6,469,000 3,586,000 197,329,000 92,433,000 0 0 0 75,000 48,821,000 197,329,000 646,336,000 646,336,000 607,437,000 607,437,000 23,941,000 0 2,128,000 12,830,000 4,925,000 7,905,000 0 0 0 7,905,000 1.04 1.03
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