<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
FORM 10-KSB
--------------------
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1996 COMMISSION FILE NUMBER: 1-12842
--------------------
SCANSOURCE, INC.
(Name of small business issuer in its charter)
SOUTH CAROLINA 57-0965380
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6 LOGUE COURT, SUITE G
GREENVILLE, SOUTH CAROLINA 29615
(Address of principal executive offices) (Zip Code)
ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE: (864) 288-2432
--------------------
SECURITIES REGISTERED UNDER SECTION 12(B) OF THE EXCHANGE ACT:
None.
SECURITIES REGISTERED UNDER TO SECTION 12(G) OF THE EXCHANGE ACT:
Common Stock, no par value
Check whether the Registrant: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 |_|
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. |X|
The Registrant's revenues for the year ended June 30, 1996, its most recent
fiscal year, were $55,670,000.
The aggregate market value of the voting stock of the Registrant held by
non-affiliates of the Registrant at September 18, 1996 was $36,850,101, as
computed by reference to the average bid and asked prices of such stock on such
date.
As of September 18, 1996, 3,245,986 shares of the Registrant's Common Stock, no
par value, were outstanding. The Registrant had no other classes of common
equity outstanding as of such date.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to Shareholders for the fiscal year
ended June 30, 1996 (Parts I and II) and portions of the Registrant's Proxy
Statement to be furnished in connection with its 1996 Annual Meeting of
Shareholders (Part III).
===============================================================================
Exhibit Index begins on page 8.
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
ScanSOURCE Inc., ("ScanSource" or the "Company") is a national
value-added distributor of automatic identification ("Auto ID") and point of
sale ("POS") products. These products interface with computer systems used to
automate the collection, processing and communication of information used in
connection with retail sales and other commercial and industrial applications,
including distribution, shipping, inventory control, materials handling and
warehouse management. Auto ID products distributed by the Company include bar
code scanners and printers, portable data collection terminals, keyboard wedges,
magnetic stripe readers and other related equipment. POS products distributed by
the Company include personal computer-based terminals, receipt printers, cash
drawers, keyboards and related peripheral equipment used primarily in connection
with the sale of goods and services in the retail market.
PRODUCTS AND SYSTEMS INTEGRATION SERVICES
The Company markets more than 5,000 products used in Auto ID and POS
technology applications. The Company's principal product lines focus on Auto ID
data collection equipment and systems based on bar code labeling and scanning
technologies. Auto ID consists of the automatic entry of data into computers and
data storage devices without the need for manual key strokes. Among the Auto ID
products sold by the Company are bar code printers and labeling devices, contact
wands, light pens, hand-held and fixed-mount laser scanners, portable data
collection devices, keyboard wedges, and magnetic stripe readers. The Company's
POS product lines focus on POS computer-based terminals, monitors, receipt
printers, pole displays, cash drawers, keyboards, related peripheral equipment,
and complete personal computer-based POS systems used by end-users primarily in
retail sales applications.
In addition to product sales, the Company offers its customers a broad
range of technical services including pre-sale consulting on the selection and
operation of equipment suitable for specific end-user applications, and
toll-free technical support following the sale.
VENDORS
The Company markets Auto ID and POS products from 45 national vendors.
These vendors include Advent, American Power Conversion, Cherry, Cognitive
Solutions, DataCap Systems, Datamax, Eltron, Epson America, Hand Held Products,
IBM, Ithaca Peripherals, Logic Controls, Mag-Tek, Metrologic, MicroTouch, MMF
Cash Drawer, Monarch Marking Systems, Percon, PSC, Psion, Sato America, Spectra
Physics, Strandware, Symbol Technologies, Unitech and Zebra Technologies.
The Company generally enters into non-exclusive written distribution
agreements with the vendors of substantially all of the products the Company
distributes. These agreements typically provide the Company with stock rotation
and price protection provisions that reduce in part ScanSOURCE's risk of loss
due to slow moving inventory, vendor price reductions, product updates or
obsolescence. Some of these agreements contain minimum purchase amounts in order
to receive preferential prices. The agreements are generally terminable on 30 to
120 days' notice by either party.
CUSTOMERS AND CUSTOMER SERVICES
The Company's customer base currently consists of more than 4,000
active reseller accounts located nationwide. These customers consist primarily
of value-added resellers but also include systems integrators and vertical
software manufacturers that concentrate on the Auto ID and POS markets. The
Company believes that its policy of not selling to end-users enhances customer
loyalty and provides another means for ScanSOURCE to increase its market
penetration among resellers. No single customer accounted for more than 5% of
the Company's revenues during the fiscal year ended June 30, 1996.
2
<PAGE>
Each of the Company's customers has a specifically assigned sales
representative at the Company who develops a continuing relationship with that
customer. Sales representatives continually update each customer's file with
product, sales and other customer specific information in order to tailor the
Company's services to better suit the customer's needs.
The Company's staff of technical experts provides to both the customer
base and the Company's sales force information regarding the technical
characteristics of the ScanSOURCE product lines. These experts are available
through toll-free telephone communication to directly aid the customer both
before and after the sale. In addition, the Company's sales team receives
substantial ongoing technical training through vendor programs and seminars
which greatly enhances their ability to respond effectively to customer's
technical inquiries and assist with their product selection.
Using the Company's computerized inventory control system, the Company
monitors inventory levels at its distribution facility, allowing ScanSOURCE to
provide customers with accurate and current information on the availability of
products. The system also tracks merchandise returns from customers and assists
in forecasting product requirements and minimizing out-of-stock inventory
positions.
The Company's sales are made on the basis that the product meets the
specifications set out by the manufacturer and that the benefits of the
manufacturer's warranty are passed on to the customer. It remains the
manufacturer's responsibility to correct any problems and ScanSOURCE bears no
warranty obligation. Customers may return any defective merchandise purchased
from the Company provided that ScanSOURCE is allowed to return the product to
the vendor.
SALES AND MARKETING
The Company's sales force currently consists of a 27 person sales team
located in the Company's executive offices and a regional office in Tustin,
California. Each member of the Company's sales force receives comprehensive
training with respect to the technical characteristics of the Company's
products. An ongoing training program is supplemented by product seminars
conducted by manufacturers' representatives and through the Company's weekly
meeting among all product managers, technical staff and sales representatives
during which relevant product and customer information is shared.
Using the Company's computerized data base, sales representatives can
immediately enter customer orders, obtain descriptive information regarding
products, check inventory status, determine customer credit limits and obtain
special pricing and promotion information. Upon placement of an order, the order
is immediately transmitted electronically to the Company's staff at a central
distribution facility where the ordered products are available for shipment. An
invoice for the order is printed on the Company's invoice documentation and upon
fulfillment of the order, the package is immediately shipped to the ordering
reseller or to an end-user specified by the reseller.
The Company's product managers are responsible for maintaining
up-to-date knowledge about the latest technology, product life cycles and
innovative new products. These managers provide training for the sales personnel
and other support functions in the sales and technical areas. Product managers
also communicate information about particular applications for specific
customers to the rest of the sales force so that both the concept and the
technical details can be applied across the group.
In addition to maintaining contact with existing customers, the sales
team solicits new business through its distribution three times each year to
existing and potential customers a sales catalog containing product and price
information and through its follow-up with prospects identified on data bases
purchased from trade publications. Sales leads and referrals are also generated
by on-going interaction with existing customers and vendors.
The Company also conducts a comprehensive advertising and promotion
program that includes exhibits at national and regional trade shows,
Company-sponsored seminars and product demonstrations in regional areas,
advertisements in trade publications that serve the Auto ID and POS industries,
and direct mail campaigns to targeted reseller groups. The Company is able to
recoup a substantial portion of its advertising and promotion spending through
manufacturer-sponsored "cooperative advertising" programs.
3
<PAGE>
DISTRIBUTION
All of the Company's warehousing, shipping and receiving functions are
handled by Company employees working out of a central warehouse facility leased
by the Company and located near the Federal Express distribution hub in Memphis,
Tennessee. The Company believes that the use of a central distribution and
shipping facility provides it with certain competitive advantages, including
prompt order fulfillment and delivery, lower inventory requirements and improved
inventory control, simplified purchasing and tracking, higher order fill rates
and the flexibility to respond quickly to various customer needs, including
offerings of new and additional products. Products are ordered by the Company
pursuant to its contracts with various vendors and are shipped by the Company's
vendors directly to the central distribution facility. The ownership and the
risk of physical loss or destruction of these products remain with the Company.
Customer orders are filled by the Company's staff at the distribution facility.
All customer shipments are distributed nationwide from the central distribution
facility using either overnight air express or ground delivery services. Through
a direct on-line computer link to the distribution facility, the Company is able
to continually monitor the status of product deliveries and customer shipments.
COMPETITION
The Auto ID and POS distribution industry is highly competitive. The
Company's competitors include manufacturers, including some of the Company's own
vendors who sell directly to the Company's customer base, and other, mostly
regional, Auto ID and POS distributors. Competition in the Auto ID and POS
distribution industry is based on several factors, including price, breadth,
quality and availability of product lines, speed of product delivery,
availability of financing and the level of technical support. Although certain
of the Company's competitors sell various products from time to time at prices
below those charged by the Company, the Company believes its aggressive product
pricing and the substantial value-added services the Company provides to the
reseller are its primary competitive advantages among other distributors.
EMPLOYEES
As of August 12, 1996, ScanSOURCE had 87 employees, none of whom was a
member of an industry trade union or collective bargaining unit. ScanSOURCE
considers its relations with its employees to be excellent.
ITEM 2. DESCRIPTION OF PROPERTY.
The Company leases approximately 13,000 square feet in Greenville,
South Carolina for its principal executive and sales office. This lease expires
in September 1998 and the aggregate annual rental payments are approximately
$60,000. The Company leases approximately 600 square feet in Tustin, California
for a sales office. This lease expires in October 1996 and the aggregate annual
rental payments are approximately $8,900. The Company also leases approximately
1,800 square feet in Norcross, Georgia. This lease expires in January 1998 and
the aggregate annual rental payments are approximately $21,000.
ITEM 3. LEGAL PROCEEDINGS.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
None.
4
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Price Range of Common Stock on the inside back cover page of the Annual
Report to Shareholders for the fiscal year ended June 30, 1996 is incorporated
herein by reference.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
Management's Discussion and Analysis of Financial Condition and Results
of Operations on pages 2 through 5 of the Annual Report to Shareholders for the
fiscal year ended June 30, 1996 is incorporated herein by reference.
ITEM 7. FINANCIAL STATEMENTS.
The financial statements included on pages 6 through 14 of the Annual
Report to Shareholders for the fiscal year ended June 30, 1996 are incorporated
herein by reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
None.
PART III
Information called for by PART III, (Items 9, 10, 11 and 12) of this Report on
Form 10-KSB has been omitted as the Company intends to file with the Securities
and Exchange Commission not later than 120 days after the close of its fiscal
year ended June 30, 1996 a definitive Proxy Statement pursuant to Regulation 14A
promulgated under the Securities Exchange Act of 1934. Such information will be
set forth in such Proxy Statement and is incorporated herein by reference.
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
Information called for by this Item is incorporated herein by reference
as set forth above.
ITEM 10. EXECUTIVE COMPENSATION.
Information called for by this Item is incorporated herein by reference
as set forth above.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
Information called for by this Item is incorporated herein by reference
as set forth above.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information called for by this Item is incorporated herein by reference
as set forth above.
5
<PAGE>
PART IV
ITEM 13. EXHIBIT LIST AND REPORTS ON FORM 8-K.
Unless otherwise indicated as being filed herewith, each of the
Exhibits listed below is incorporated herein by reference to the Exhibit of the
same number filed as part of the Company's Registration Statement on Form S-1
(File No.
33-75026A), as amended.
(A) EXHIBITS
Exhibit
Number Exhibit
3.1 Amended and Restated Articles of Incorporation of the Company.
3.2 Bylaws of the Company.
4.1 Form of Common Stock Certificate.
4.2 Form of Warrant Certificate.
4.3 Form of Unit Purchase Option granted to GKN Securities Corp.
4.4 Warrant Agreement between Continental Stock Transfer & Trust
Company and the Company.
10.7 Employment Agreement dated as of February 1, 1994 by and
between the Company and Steven H. Owings.
10.8 Employment Agreement dated as of February 1, 1994 by and
between the Company and Michael L. Baur.
10.9 Stock Option Agreement dated July 1, 1993 covering stock
options issued to Michael L. Baur.
10.10 1993 Incentive Stock Option Plan of the Company and form of
Stock Option Agreement.
10.11 1994 Stock Option Plan for Outside Directors of the Company
and form of Stock Option Agreement.
10.12 Stock Warrant dated September 27, 1993 issued by the Company
to Rev-Wood Merchant Partners.
10.13 Stock Option Agreement dated December 30, 1993 covering stock
options issued to Irwin Lieber.
10.18 Warehouse Service Agreement dated April 18, 1995 by and
between the Company and Technology Marketing Group, Inc. d/b/a
Globelle.
10.19* Stock Option Agreement dated September 1, 1995 by and between
Globelle, Inc., the Company and Dennis Gates.
10.20* Letter Agreement dated September 1, 1995 between the Company
and Transition Marketing, Inc.
13* The Company's Annual Report to Shareholders for the fiscal
year ending June 30, 1996.
24* Powers of Attorney.
* Filed herewith.
(B) REPORTS ON FORM 8-K:
None.
6
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the Company caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SCANSOURCE, INC.
September 20, 1996 By: /s/ STEVEN H. OWINGS
---------------------------------------------
Steven H. Owings
Chairman of the Board and Chief Executive Officer
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
Company and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ STEVEN H. OWINGS Chairman of the Board and Chief September 20, 1996
- -------------------------------
Steven H. Owings Executive Officer
/s/ MICHAEL L. BAUR President and Director September 20, 1996
- -------------------------------
Michael L. Baur
/s/ JEFFERY A. BRYSON Chief Financial Officer and Treasurer September 20, 1996
- -------------------------------
Jeffery A. Bryson (principal financial and accounting
officer)
* Director September 20, 1996
- --------------------------------
Steven R. Fischer
* Director September 20, 1996
- -------------------------------
James G. Foody
/s/ STEVEN H. OWINGS September 20, 1996
- -------------------------------
*By: Steven H. Owings
(attorney-in-fact for each of the
persons indicated)
</TABLE>
7
<PAGE>
EXHIBIT INDEX
Unless otherwise indicated as being filed herewith, each of the
Exhibits listed below is incorporated herein by reference to the Exhibit of the
same number filed as part of the Company's Registration Statement on Form S-1
(File No.
33-75026A), as amended.
Exhibit
Number Exhibit
3.1 Amended and Restated Articles of Incorporation of the
Company.
3.2 Bylaws of the Company.
4.1 Form of Common Stock Certificate.
4.2 Form of Warrant Certificate.
4.3 Form of Unit Purchase Option granted to GKN Securities Corp.
4.4 Warrant Agreement between Continental Stock Transfer & Trust
Company and the Company.
10.7 Employment Agreement dated as of February 1, 1994 by and
between the Company and Steven H. Owings.
10.8 Employment Agreement dated as of February 1, 1994 by and
between the Company and Michael L. Baur.
10.9 Stock Option Agreement dated July 1, 1993 covering stock
options issued to Michael L. Baur.
10.10 1993 Incentive Stock Option Plan of the Company and form of
Stock Option Agreement.
10.11 1994 Stock Option Plan for Outside Directors of the Company
and form of Stock Option Agreement.
10.12 Stock Warrant dated September 27, 1993 issued by the Company
to Rev-Wood Merchant Partners.
10.13 Stock Option Agreement dated December 30, 1993 covering stock
options issued to Irwin Lieber.
10.18 Warehouse Service Agreement dated April 18, 1995 by and
between the Company and Technology Marketing Group, Inc.
d/b/a Globelle.
10.19* Stock Option Agreement dated September 1, 1995 by and between
Globelle, Inc., the Company and Dennis Gates.
10.20* Letter Agreement dated September 1, 1995 between the Company
and Transition Marketing, Inc.
13* The Company's Annual Report to Shareholders for the fiscal
year ending June 30, 1996.
24* Powers of Attorney.
* Filed herewith.
8
<PAGE>
EXHIBIT 10.19
STOCK OPTION AGREEMENT
THIS OPTION AGREEMENT (the "Option") made as of this 1st day of
September, 1995 by and between GLOBELLE, INC. ("Globelle"), SCANSOURCE, INC.
("ScanSource") and DENNIS GATES ("Gates").
Gates is the owner of sixty-two percent (62%) of the shares of no par
value common stock (the "Stock") of Transition Marketing, Inc. (the "Company").
Globelle and ScanSource are each the record owners of 19,000 shares of no par
value common stock of the Company which is to be held in escrow. As
consideration for their stock in the Company, Globelle and ScanSource each
entered into letter agreements dated September ___, 1995 (the "Agreements") to
purchase One Hundred Eighty Thousand and no/100 Dollars ($180,000.00) worth of
marketing programs from the Company for the first year of the Company's
existence (August 1, 1995 through July 31, 1996, "Year 1"). In connection with
such Agreements, Gates wishes to afford each of ScanSource and Globelle the
opportunity to purchase a portion of the Stock in 1996 and 1997 (the "Option
Years"), provided that each ScanSource and Globelle abide by the terms and
conditions of the Agreements in the first option year and purchase at least an
additional $180,000.00 of marketing programs from the Company in the second
option year (August 1, 1996 through July 31, 1997, "Year 2"). In consideration
of the mutual agreements and other matters set forth herein, Gates, Globelle and
ScanSource hereby agree as follows:
A. OPTION TO PURCHASE
1. Grant of Option to Purchase and Purchase Price. Gates hereby grants
to ScanSource and Globelle the right and option to purchase from Gates the Stock
on the terms and conditions set forth hereinafter (the "Option"). This Option
shall be adjusted to include any increase or decrease in the number of shares of
the Stock resulting from any stock splits, stock dividends, reverse stock
splits, or other issuance or redemption of shares by the Company. This Option
shall only be exercisable by ScanSource and/or Globelle in the Option Years if
ScanSource and/or Globelle have complied with the terms of the Agreements in
Year 1 by purchasing at least $180,000.00 of marketing programs from the Company
and purchase at least $180,000.00 of marketing programs from the Company in Year
2. If either ScanSource or Globelle, or both, do not purchase at least
$180,000.00 of marketing programs in Year 1 such party shall lose its Option in
Years 1 and 2. If ScanSource and/or Globelle does purchase at least $180,000.00
of marketing programs in Year 1 then it may exercise its Option in Year 1. If
ScanSource and/or Globelle does purchase at least $180,000.00 of marketing
programs in Year 2 then it may exercise its Option in Year 2. However, if only
ScanSource and not Globelle, or Globelle and not ScanSource, does not purchase
$180,000.00 of marketing programs from the Company in Year 1 or Year 2, the
noncompliance with the conditions for the Option by one will not preclude the
other from exercising its Option for that year.
(a) During the month of August 1996, Globelle and ScanSource
shall have the right to purchase between them, in a ratio established as
provided in Section 1(c) below, 31,000 shares (or
1
<PAGE>
the equal number of shares due to any adjustments required as discussed above)
of the Stock for the purchase price of Five and 175/1000 Dollars ($5.175) per
share ($160,425.00 total consideration).
(b) During the month of August 1997, Globelle and ScanSource
shall have the right to purchase between them, in a ratio established as
provided in Section 1(c) below, Gate's remaining 31,000 shares (or the equal
number of shares resulting due to any adjustments required as discussed above)
of the Stock for the purchase price of Seven and 095/1000 Dollars ($7.095) per
share ($219,945.00 total consideration).
(c) Subject to the restrictions set forth above and pursuant
to Sections 1(a) and (b), Globelle and ScanSource shall each be entitled to
purchase a percentage of the 31,000 shares of the Stock available each year. The
percentage of Stock which Globelle and ScanSource may purchase in each year
shall be based upon the dollar value of marketing programs each purchases from
the Company in that year, with the total of the two (2) percentages each year
equaling one hundred percent (100%)(eg: If Globelle purchases $360,000.00 of
marketing programs and ScanSource purchases $180,000.00 worth of marketing
programs then Globelle will have the option to purchase 66.7% of the 31,000
shares and ScanSource will have the option to purchase 33.3% of the 31,000
shares.).
(d) In the event either Globelle or ScanSource elects not to
exercise its Option following Year 1, Year 2, or both; elects to only partially
exercise such Option following Year 1, Year 2, or both; or does not comply with
the conditions for the Option in either year thereby losing its right to
exercise its Option in the relevant year, or both years, the other shall have a
right of first refusal in the relevant year to purchase the Stock not purchased
by the other. In the event a percentage of the 31,000 shares of the Stock
available in either Year 1 or Year 2 is left unpurchased by Globelle or
ScanSource because neither the Option nor a resulting right of first refusal is
exercised, Gates shall retain the unpurchased portion of the Stock.
2. Exercise and Closing. This Option shall be exercisable upon receipt
of written notice from each of Globelle and ScanSource addressed to Gates at the
notice address set forth hereinbelow, such notices to be provided by the last
day of August of each year in which the Option may be exercised. Closings of the
purchases of the shares of the Stock as to which this Option may be exercised
shall take place in a place or places agreed upon by Globelle and Gates and
ScanSource and Gates on or before thirty (30) days following receipt by Gates of
the written notices of intent to exercise the Option, or at a time thereafter as
agreed to by the parties. The purchase price for the applicable year multiplied
by the number of shares as to which the Option is exercised by each ScanSource
and/or Globelle shall be paid in full to Gates at the time of each closing in
cash (including check, bank draft, or money order payable to the order of Gates)
or, in a manner as otherwise agreed upon by the parties. If the parties so
agree, the closing of each purchase (if each Globelle and ScanSource exercises
the Option) may occur at the same time and place.
3. Term. This Option shall expire on September 1, 1997 and shall only
be exercisable by Globelle and ScanSource during the month of August for the
years 1996 and 1997 (the "Option Term"). If either Globelle or ScanSource is
sold or merged into another Corporation during the Option Term, the entity which
acquires either or into which either merges, may exercise this Option during the
Option Term. In the event either Globelle or ScanSource is dissolved and its
assets thus distributed during the Option Term, this Option shall terminate.
2
<PAGE>
B. MISCELLANEOUS
1. Transferability. The Option is not transferable or assignable, in
whole or in part, by Globelle or ScanSource other than by a transfer resulting
from the merger or complete sale of either.
2. Stock Restrictions. Globelle and ScanSource understand that at the
time of the execution of this Option Agreement, the shares of the Stock issuable
upon exercise of the Option have not been registered under the Securities Act of
1933, as amended (the "Act"), or under any state securities law, and that the
Company currently does not intend to effect any such registration. Globelle and
ScanSource agree that the shares of the Stock which Globelle or ScanSource may
acquire by exercising the Option shall be purchased by Globelle and ScanSource
for investment without a view to distribution within the meaning of the Act, and
shall not be sold, transferred, assigned, pledged, or hypothecated unless such
transfer has been registered under the Act and applicable state securities laws,
or the transfer duly qualifies for an applicable exemption from the registration
requirements of the Act and any applicable state securities laws. In any event,
Globelle and ScanSource agree that the shares of the Stock which each may
acquire by exercising the Option shall not be sold or otherwise disposed of in
any manner which would constitute a violation of any applicable securities laws,
whether federal or state.
In addition, Globelle and ScanSource agree that (i) the certificates
representing the shares of the Stock purchased under the Option may bear such
restrictive legend or legends as the Company's legal counsel deems appropriate
in order to assure compliance with applicable securities laws, (ii) the Company
may refuse to register the transfer of the shares of the Stock purchased under
the Option on the stock transfer records of the Company if such proposed
transfer would, in the opinion of counsel satisfactory to the Company,
constitute a violation of any applicable securities laws, and (iii) the Company
may give related instructions to its transfer agent to stop registration of the
transfer of the shares of Stock purchased under the Option.
3. Governing Law. This Agreement shall be governed and construed in
accordance with the laws of the State of South Carolina.
[Signatures on Next Page]
3
<PAGE>
IN WITNESS WHEREOF, Gates, Globelle, and ScanSource have caused this
Option to be duly executed as of the day and year first above written.
/s/ Dennis Gates
DENNIS GATES
NOTICE ADDRESS: 851 Arlington Blvd.
El Cerrito, CA 94530
GLOBELLE, INC.
/s/ Robert Zakheim
BY: Robert Zakheim
ITS: President
NOTICE ADDRESS: 6410 West Old Shakopee Rd.
Minneapolis, MN 55438
SCANSOURCE, INC.
/s/ Steven H. Owings
BY: Steven H. Owings
ITS: Chief Executive Officer
NOTICE ADDRESS: 6 Logue Ct., Suite G
Greenville, SC 29615
4
<PAGE>
EXHIBIT 10.20
September 1, 1995
Robert S. McLain, Jr.
Transition Marketing, Inc.
6 Logue Court, Suite G
Greenville, South Carolina 29615
Re: Agreement to Purchase Marketing Programs
Dear Bobby,
Pursuant to previous negotiations and discussions, this letter shall
serve to set forth the terms of the oral agreement reached between ScanSource,
Inc. ("ScanSource") and Transition Marketing, Inc. ("Transition") pursuant to
which ScanSource shall purchase marketing programs from Transition in exchange
for stock in Transition.
1. Purchase of Marketing Programs. ScanSource hereby agrees to purchase
One Hundred and Eighty Thousand and no/100 Dollars ($180,000.00) worth of
marketing programs from Transition by July 31, 1996, and by this agreement
evidences an intent to use its best efforts to continue to purchase identical
amounts of marketing programs annually. The $180,000.00 received by Transition
by July 31, 1996, for the purchase of marketing programs shall be deemed the
purchase price for 19,000 shares of stock in Transition to be owned by
ScanSource as an initial shareholder of Transition. For the purposes of this
agreement, marketing programs shall include, but not be limited to,
telemarketing, outbound sales, and trade shows. Notwithstanding any provision to
the contrary herein, if ScanSource purchases at least $120,000.00 of the
marketing programs from Transition by July 31, 1996, it shall be deemed that
ScanSource has purchased a prorated portion of the shares of stock in
Transition. Such prorated portion shall be based on the percentage of marketing
programs purchased divided by $180,000.00 (eg: If $135,000.00 worth of marketing
programs are purchased then 3/4's or 14,250 shares shall be deemed to be
purchased by ScanSource).
2. Escrow of Shares of Stock. As required by South Carolina Code ss.
33-6-210(e), as amended, the 19,000 shares of stock purchased by ScanSource for
the consideration evidenced by this agreement shall be held in escrow until the
earlier to occur of (a) August 1, 1996 or (b) completion of the obligation set
forth hereinabove, by an escrow agent named in that certain Escrow Agreement of
even date executed by and among the parties hereto and the escrow agent, such
stock to be subject to the terms and conditions set forth in the Escrow
Agreement.
<PAGE>
Robert S. McLain, Jr.
September 1, 1995
Page 2
This agreement shall be governed by and construed in accordance with
South Carolina law and shall be binding upon and inure to the benefit of any
successors of each party hereto.
If any provision hereof is held to be invalid or unenforceable, such
invalidity or unenforceability shall not affect the validity or enforceability
of any other provision hereof.
Sincerely,
/s/ Michael L. Baur
President, ScanSource, Inc.
On behalf of Transition Marketing, Inc., I, Robert S. McLain, Jr., its
President, hereby acknowledge and agree to abide by the terms set forth
hereinabove.
Transition Marketing, Inc.
/s/ Robert S. McLain, Jr.
By: Robert S. McLain, Jr
Its: President
<PAGE>
EXHIBIT 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, an officer and/or
director of SCANSOURCE, INC., a South Carolina corporation (hereinafter referred
to as the "Company"), does hereby constitute and appoint each of Steven H.
Owings and Jeffery A. Bryson the undersigned's true and lawful attorney-in-fact
and agent with full power to act with or without the undersigned, and with full
power of substitution, to do any and all acts and things and to execute any and
all instruments which said attorney-in-fact and agent may deem necessary or
advisable to enable the Company to comply with the Securities Exchange Act of
1934, as amended (the "Act"), and any rules, regulations and requirements of the
Securities and Exchange Commission (the "Commission") in respect thereof, in
connection with the filing under the Act of the Company's Annual Report on Form
10-KSB for the Company's fiscal year ended June 30, 1996, including all
amendments thereto (the "Form 10-KSB"), and including specifically, but without
limiting the generality of the foregoing, the power and authority to sign for
and on behalf of the undersigned the name of the undersigned as officer and/or
director of the Company to the Form 10-KSB filed with the Commission and to any
instrument or document filed as a part of, as an exhibit to, or in connection
with said Form 10-KSB; and the undersigned does hereby ratify and confirm as his
own act and deed all that said attorney-in-fact and agent shall do or cause to
be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has subscribed these presents, this
28th day of September, 1996.
Signature: /s/ James G. Foody
Print Name: James G. Foody
<PAGE>
EXHIBIT 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, an officer and/or
director of SCANSOURCE, INC., a South Carolina corporation (hereinafter referred
to as the "Company"), does hereby constitute and appoint each of Steven H.
Owings and Jeffery A. Bryson the undersigned's true and lawful attorney-in-fact
and agent with full power to act with or without the undersigned, and with full
power of substitution, to do any and all acts and things and to execute any and
all instruments which said attorney-in-fact and agent may deem necessary or
advisable to enable the Company to comply with the Securities Exchange Act of
1934, as amended (the "Act"), and any rules, regulations and requirements of the
Securities and Exchange Commission (the "Commission") in respect thereof, in
connection with the filing under the Act of the Company's Annual Report on Form
10-KSB for the Company's fiscal year ended June 30, 1996, including all
amendments thereto (the "Form 10-KSB"), and including specifically, but without
limiting the generality of the foregoing, the power and authority to sign for
and on behalf of the undersigned the name of the undersigned as officer and/or
director of the Company to the Form 10-KSB filed with the Commission and to any
instrument or document filed as a part of, as an exhibit to, or in connection
with said Form 10-KSB; and the undersigned does hereby ratify and confirm as his
own act and deed all that said attorney-in-fact and agent shall do or cause to
be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has subscribed these presents, this
28th day of September, 1996.
Signature: /s/ Steven R. Fischer
Print Name: Steven R. Fischer
ScanSource
1996 ANNUAL REPORT
<PAGE>
Sales by Quarter Net Income by Quarter*
charts appears here --- customer to fill in plot points.
In millions In thousands
*Excludes net non-recurring income
<PAGE>
Corporate Profile
ScanSource is an international value-added distributor of automatic
identification (Auto ID) and Point-of-Sale (POS) products. These products
interface with computer systems used to automate the collection, processing and
communication of information used in retail sales, distribution, shipping,
(ScanSource logo appears here)
inventory control, materials handling and warehouse management. Auto-ID products
distributed by the Company include bar code scanners and printers, portable data
collection terminals, keyboard wedges, magnetic stripe readers and other related
equipment. POS products distributed by the Company include personal
computer-based terminals, receipt printers, cash drawers, keyboards and related
peripheral equipment used primarily in the retail market.
The Company distributes its products only to resellers, many of whom concentrate
on the Auto ID and POS markets. In addition to its broad product selection, the
Company provides resellers with key value-added services, including same-day
order fulfillment and next-day delivery at ground delivery rates, technical
training, pre-sale and post-sale technical support, financing and competitive
prices with additional discounts based on cumulative purchases across all
product lines.
ScanSource currently markets products from approximately 45 vendors. The
Company's vendors include most of the leading Auto-ID and POS product
manufacturers, such as Cherry, Cognitive Solutions, Datamax, Epson, Eltron, IBM,
Ithaca Peripherals, MMF Cash Drawers, Metrologic, MicroTouch, Percon, PSC, Sato,
Symbol and Zebra Technologies.
The Company's principle executive office is located at 6 Logue Court,
Suite G, Greenville, South Carolina 29615.
<PAGE>
(Photo of Mike Baur, President appears here)
Dear Shareholder:
I am pleased to report excellent results for ScanSource in fiscal year 1996.
For the fourth year, we have increased sales significantly, attaining $55.7
million in 1996 compared to $34.2 million in 1995. Net income without
non-recurring income rose substantially to $1,738,000 in 1996 compared to
$911,000 in 1995. Earnings per share without non-recurring income increased to
$0.50 per share from $0.32 in 1995.
Our marketing efforts to recruit new customers intensified this year. We began a
(Graphic appears here with face GBC/GLOBELLE & ScanSource Solutions USA Dallas)
trade show called Solutions USA, that visits a different region of the country
each quarter. Co-sponsored by PC-distributor GBC/GLOBELLE, Solutions USA allows
prospective customers to learn about new technologies by attending one of the
many seminars featuring ScanSource software partners and key hardware vendors.
The trade show offers a forum to combine the products from Point-of-Sale
(Photo of computer hardware appears here)
software vendors with IBM's hardware. Solutions USA provided a vehicle to launch
IBM's new SureOne Point-of-Sale System, targeted at small to medium size
retailers. The software companies we are partnering with are focused on over 20
specific retail segments such as apparel, hardware, sporting goods and food
service. By showcasing software and hardware solutions, we can make it easier
for resellers to begin selling these products.
As a result of these efforts, we have seen an increase in the number of active
customers. We are gaining customers from the existing Auto-ID and POS channel
and from computer resellers who are selling these products for the first time.
The existing Auto-ID and POS resellers are pleased with our
<PAGE>
broad in-stock inventory, volume discounts, overnight delivery and flexible
financing. These resellers are also very happy that we do not compete with them
for end user business. In addition, the resellers who are new to Auto-ID and POS
are utilizing our pre-sale consulting and technical services to take the
"mystery" out of selling these products.
As our customer base has grown, our sales and technical staff has increased to
keep pace. We have added a sales team on the West Coast to better service those
customers, and to offer late night ordering capability for our Eastern
customers.
In the Auto-ID industry, there are few off-the-shelf software solutions for
resellers. As a
(Drawing appears here ????)
result, we have launched a Professional Services Group to assist resellers with
designing and programming solutions. Technically sophisticated applications,
using radio frequency (RF) and pen-based architectures, will require this type
of software and hardware integration. We expect this level of expertise will
encourage manufacturers to direct more business through the reseller channel.
Operationally, we have expanded our warehousing facility in Memphis to
accommodate our growth and have begun shipments to Canada in support of our IBM
SureOne business. The computer software and hardware system we implemented last
year has proven to be extremely reliable and flexible, and will handle our
future growth.
The successful year we had in 1996 is a result of strong relationships we have
with our customers, suppliers and our employees. We take pride in our ability to
grow existing partnerships while creating new ones at the same time. Thank you
for your support as a shareholder and we look forward to reporting to you on our
future success.
Sincerely,
Michael L. Baur
President
September 9, 1996
3
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS FOR YEAR-END JUNE 30, 1996
RESULTS OF OPERATIONS
FISCAL 1996 COMPARED TO FISCAL 1995
NET SALES. Net sales for the fiscal year ended June 30, 1996 were $55,670,000
compared to sales of $34,235,000 for the prior fiscal year. Growth of net sales
resulted primarily from additions to the Company's sales force, competitive
product pricing, selective expansion of its product line, and increased
marketing efforts to automatic identification (Auto ID) and point of sale (POS)
resellers.
GROSS PROFIT. Gross profit for the fiscal year ended June 30, 1996 was
$7,813,000 compared to gross profit of $4,791,000 for the prior fiscal year.
Gross profit as a percentage of sales for the fiscal years ended June 30, 1996
and 1995 was 14.0%. Fluctuations in gross profit as a percentage of sales can
result from changes in the mix of sales of higher and lower-margin products and
the volume discounts which accompany large customer orders.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses, including amortization, (SG&A) for the fiscal year
ended June 30, 1996 were $5,037,000 compared to SG&A of $3,211,000 for the prior
year. SG&A as a percentage of sales was 9.0% for the fiscal year ended June 30,
1996, compared to 9.4% for the prior year. The decrease in SG&A as a percentage
of sales for the year ended June 30, 1996 is the result of efficiencies gained
through higher sales volume and accompanying economies of scale.
OPERATING INCOME. Operating income for the fiscal year ended June 30, 1996
increased to $2,776,000 from $1,581,000 for the same period in 1995, driven by
the improvement in gross profit from increased sales as described above.
INTEREST EXPENSE. Interest expense for the fiscal year ended June 30, 1996
decreased to $10,000 from $82,000 for the fiscal year ended June 30, 1995. Lower
interest resulted from the Company's paying off its line of credit in August
1995 with proceeds from the issuance of stock from the exercise of stock
purchase warrants. The Company's outstanding balance on its line of credit at
June 30, 1996 occurred from draws within the last two weeks of the fiscal year.
INTEREST INCOME. Interest income for the fiscal year ended June 30, 1996 was
$97,000 resulting from earnings on invested proceeds from common stock issued in
connection with warrant exercises through September 1995 as described in
Liquidity and Capital Resources below.
OTHER INCOME. In September 1994, Gates agreed to pay the Company $1.4 million
in connection with a reduction in the term of Gates's non-compete obligation
with the Company. The Company recognized the $1.4 million, net of $100,000 of
related expenses, as other income ratably over the term of the non-compete
period from September 1994 to August 1995. The Company recognized $1.1 million
of the $1.3 million as other income at a rate of $110,000 per month during the
year ended June 30, 1995, and recognized the remaining $200,000 for the year
ended June 30, 1996.
INCOME TAXES. Tax expense of $1,193,000 was provided at a 39% effective rate
for the fiscal year ended June 30, 1996, and included state and federal taxes on
the $200,000 of other income recognized from Gates described in the preceding
paragraph.
NET INCOME. The effect of improved operating income, lower interest expense,
and higher interest income resulted in net income for the fiscal year ended June
30, 1996 of $1,858,000.
FISCAL 1995 COMPARED TO FISCAL 1994
NET SALES. Net sales for the fiscal year ended June 30, 1995 were $34,235,000
compared to net sales of $16,089,000 for the prior fiscal year. Growth of net
sales resulted primarily from additions to the Company's sales force,
competitive product pricing, selective expansion of its product line, and
increased marketing efforts to Auto ID and POS resellers.
GROSS PROFIT. Gross profit for the fiscal year ended June 30, 1995 was
$4,791,000 compared to gross profit of $2,413,000 for the prior fiscal year.
Gross profit as a percentage of sales for the fiscal year ended June 30, 1995
was 14.0% compared to 15.0% for the prior fiscal year. The reduction in gross
profit as a percentage of sales for the fiscal year ended June 30, 1995 was a
result of sales of a higher number of lower-margin products. Generally these
lower margin sales were accompanied by decreases in the overhead costs required
to support the sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses, including amortization expense (SG&A), for the fiscal
year ended June 30, 1995 were $3,211,000 compared to SG&A of $1,768,000 for the
prior fiscal year. SG&A as a percentage of sales for the fiscal year ended June
30, 1995 was 9.4% compared to 11.0% for the prior fiscal year. Management
believes that the improvement in SG&A as a percentage of sales was a result of
efficiencies gained through increased sales volume and accompanying economies of
scale.
OPERATING INCOME. Operating income for the fiscal year ended June 30, 1995
increased to $1,581,000 from $645,000 for the prior fiscal year, driven by the
improvement in both gross profit and SG&A expenses as described above.
INTEREST EXPENSE. Interest expense for the fiscal year ended June 30, 1995
decreased to $82,000 from $180,000 for the prior fiscal year. This decrease
resulted primarily from the Company's March 1994 initial public offering which
allowed the Company to maintain adequate inventory while minimizing line of
credit use and related interest charges throughout fiscal 1995. See "Liquidity
and Capital Resources."
OTHER INCOME. In September 1994, Gates agreed to pay the Company $1.4 million
in connection with a reduction in the term of Gates' non-compete obligation with
the Company and the termination of warehousing operations between Gates
4
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS FOR YEAR-END JUNE 30, 1996
and the Company. The Company is recognizing $1.3 million of such amount as other
income ratably over the term of the non-compete period from September 1994 to
August 1995, representing the $1.4 million payment due from Gates, net of
$100,000 of expenses incurred by the Company to move its inventory and connect
to a new computer system. For the year ended June 30, 1995, the Company had
recognized $1.1 million of the $1.3 million as other income. See Note 2 of Notes
to Financial Statements.
INCOME TAXES. Tax expense of $997,000 was provided at a 40% effective rate
for the year ended June 30, 1995, and included state and federal taxes on the
$1.1 million of other income from Gates described in the preceding paragraph.
NET INCOME. The effect of improved operating income, decreased interest
expense, and higher other income resulted in net income for the fiscal year
ended June 30, 1995 of $1,511,000.
LIQUIDITY AND CAPITAL RESOURCES
The Company financed its initial operating requirements and growth through
private financings. In March 1994, the Company closed a public offering of
common stock and common stock purchase warrants which provided the Company with
approximately $4,560,000. The Company also received net proceeds of
approximately $6,300,000 from common stock issued upon the exercise of stock
purchase warrants prior to their redemption date of September 19, 1995.
For the fiscal year ended June 30, 1996, net cash of $8,318,000 was used in
operating activities, compared to $1,826,000 used in operating activities for
the fiscal year ended June 30, 1995. Greater cash used in operations was
primarily to fund higher inventory and receivables, offset by growth in trade
payables to vendors. Cash used in operating activities for the fiscal year ended
June 30, 1995 would have been $2,476,000 except that in September 1994, the
Company received $650,000 of the $1.4 million Gates agreed to pay to the Company
in connection with the termination of the operations agreement between the
Company and Gates. Included in the terms of the agreement to terminate
distribution services with Gates was the conditional right of Gates to put its
250,000 shares of the Company's common stock to the Company for $3.00 per share
upon the earlier of April 18, 1996 or the expiration of the period for the
Company's exercise of its option to purchase such shares at $3.50 per share. To
ensure that the Company had sufficient liquidity to purchase the shares at that
price, Gates negotiated to pay $650,000 in September 1994, and to hold back
$750,000 of its $1.4 million contract termination payment. On March 19, 1996,
the Company collected the $750,000 due from Gates concurrent with the Company's
exercise of its call option to purchase the shares, described below.
Cash used in investing activities for the fiscal year ended June 30, 1996 was
$904,000 and included $659,000 for certain capital expenditures and payments of
$202,000 to MicroBiz Corporation (MicroBiz). Cash used in investing activities
for the fiscal year ended June 30, 1995 was $1,418,000 and consisted of $669,000
for capital expenditures, payments of $120,000 to a former shareholder of Alpha
Data Systems, Inc., and $531,000 for the purchase of the equipment distribution
business of MicroBiz.
Cash provided by financing activities for the fiscal year ended June 30, 1996
was $9,035,000 and included net advances from the line of credit of $2,579,000,
and net proceeds of $6,779,000 and $552,000 from the issuance of stock upon the
exercise of stock purchase warrants and a portion of the underwriter's unit
purchase option (UPO), and the exercise of stock options, respectively. A
portion of these proceeds was used in September 1995 to repay the Company's line
of credit for $1.2 million. In March 1996 the Company exercised its call option
and repurchased 250,000 of its common shares from Gates for $875,000. Cash
provided by financing activities for the fiscal year ended June 30, 1995 was
$1,287,000 and consisted of borrowings on the line of credit for $1,200,000 and
$134,000 from the sale of stock upon the exercise of stock purchase warrants and
a portion of the UPO.
In October 1995 the Company entered into a revolving credit facility with a
bank whereby the Company can borrow up to $8 million, based upon 80% of eligible
accounts receivable and 40% of non-IBM inventory at the 30-day LIBOR rate of
interest, plus 2.35%. The line of credit extends to October 31, 1996, and is
secured by accounts receivable and inventory. The line of credit contains
certain financial covenants including minimum net worth and current ratio
requirements, and a maximum debt to net worth ratio of 2.11 to 1. At June 30,
1996, the interest rate on the line of credit was 7.98%; the loan base exceeded
$8 million; and the outstanding balance was $3.8 million, leaving $4.2 million
available. The Company has a commitment from the bank, which the Company intends
to exercise, to renew the line of credit for amounts up to $15 million to
October 31, 1997 under terms similar to the existing agreement.
In April 1996 the Company signed an agreement for wholesale financing with
IBM Credit Corporation (ICC) whereby the Company has been extended
interest-free, 75-day credit terms for all purchases of IBM product. The credit
line is collateralized by IBM inventory, has a limit up to the value of IBM
inventory held by the Company, and is currently capped at $7 million payable to
ICC. The balance payable under this agreement was $3,501,000 at June 30, 1996.
The Company's current ratios at June 30, 1996 and at June 30, 1995 were 2.79
and 2.17, respectively.
ASSET MANAGEMENT
The Company manages the inventory held at the central distribution facility
by maintaining sufficient quantities to achieve high order fulfillment rates
while at the same time maximizing turnover rates. Inventory fluctuates as the
Company adds new product lines and when it authorizes large purchases from
vendors to take advantage of attractive terms. To
5
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS FOR YEAR-END JUNE 30, 1996
reduce the risk of loss to the Company due to vendor price reductions and slow
moving or obsolete inventory, contracts with most of the Company's vendors
contain price protection and stock return privileges. In addition, certain
vendor contracts provide that the vendor will repurchase such vendor's products
upon termination of the Company's contract with the vendor.
The Company attempts to control losses on credit sales by closely monitoring
customers' creditworthiness through its online computer system which contains
detailed information on each customer's payment history and other relevant
information. Customers who qualify for credit terms are typically granted net
20-day payment terms. The Company also sells products on prepayment and cash on
delivery terms.
SEASONALITY AND OTHER FACTORS
Due to the Company's lack of extended operating history, management has not
been able to determine the specific effect, if any, of seasonal or other factors
which may cause quarterly variability in operating results. Management believes,
however, that factors that may influence quarterly variability include the
overall growth in the Auto ID and POS industry and shifts in short-term demand
for the Company's products due to a variety of factors, including the
introduction of new products or updates of existing products. The Company
believes that results of operations for a quarterly period may not be indicative
of the results for any other quarter or for the full year.
EFFECTS OF INFLATION
Management believes that inflation has not had a material effect on the
Company's operations.
6
<PAGE>
BALANCE SHEETS
<TABLE>
<CAPTION>
June 30
ScanSOURCE, Inc.
1995 1996
<S> <C> <C>
ASSETS
Current assets
Cash............................................................................................. $ 186,572 --
Receivables:
Trade, less allowance for doubtful accounts of $316,910 at June 30, 1995 and $526,819 at June
30, 1996..................................................................................... 3,949,627 7,462,791
Other......................................................................................... 234,874 531,444
4,184,501 7,994,235
Inventories...................................................................................... 6,306,407 17,538,471
Prepaid expenses and other....................................................................... 49,249 51,898
Due from Gates/FA................................................................................ 750,000 --
Deferred tax asset............................................................................... 637,000 1,001,000
Total current assets........................................................................ 12,113,729 26,585,604
Property and equipment, at cost:
Computer and phone equipment..................................................................... 379,339 740,700
Furniture and equipment.......................................................................... 321,661 519,987
Leasehold improvements........................................................................... 186,181 285,732
887,181 1,546,419
Less accumulated depreciation.................................................................... (125,097) (362,633)
762,084 1,183,786
Intangible assets, net of accumulated amortization of $140,560 at June 30, 1995 and $223,136 at
June 30, 1996.................................................................................... 953,347 870,771
Note from officer.................................................................................. 40,000 83,000
Cost of pending warrant redemption................................................................. 47,151 --
Other assets....................................................................................... 23,071 19,332
Total assets................................................................................ $13,939,382 28,742,493
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable........................................................................... $ 3,377,227 4,785,527
Payable to IBM Credit............................................................................ -- 3,501,437
Accrued compensation cost........................................................................ 92,496 96,978
Accrued expenses and other liabilities........................................................... 403,898 600,388
Income tax payable............................................................................... 1,308,196 539,646
Deferred gain.................................................................................... 200,000 --
Other............................................................................................ 201,861 --
Total current liabilities................................................................... 5,583,678 9,523,976
Deferred tax liability............................................................................. 9,000 26,000
Line of credit..................................................................................... 1,200,000 3,779,029
Total liabilities........................................................................... 6,792,678 13,329,005
Common stock subject to put/call option............................................................ 750,000 --
Shareholders' equity:
Preferred stock, no par value; 3,000,000 shares authorized, none issued and outstanding.......... -- --
Common stock, no par value; 10,000,000 authorized; 2,175,130 and 3,235,186 issued and outstanding
at June 30, 1995 and 1996, respectively....................................................... 5,526,316 11,935,424
Less common stock subject to put/call option, 250,000 common shares at $3.00 per share........... (750,000) --
4,776,316 11,935,424
Retained earnings................................................................................ 1,620,388 3,478,064
Total shareholders' equity.................................................................. 6,396,704 15,413,488
Commitments
Total liabilities and shareholders' equity.................................................. $13,939,382 28,742,493
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
7
<PAGE>
STATEMENTS OF INCOME
For the years ended June 30, 1994, 1995 and 1996
<TABLE>
<CAPTION>
ScanSOURCE, Inc.
1994 1995 1996
<S> <C> <C> <C>
Net sales.............................................. $16,089,104 34,235,436 55,669,733
Cost of goods sold..................................... 13,676,344 29,444,000 47,856,416
Gross profit.................................... 2,412,760 4,791,436 7,813,317
Selling, general and administrative expenses........... 1,717,861 3,127,812 4,954,608
Amortization of intangibles............................ 50,311 83,076 82,576
Operating income................................ 644,588 1,580,548 2,776,133
Other income (expense):
Interest income...................................... 45,422 16,627 97,096
Interest expense..................................... (179,692) (81,848) (9,763)
Other income (expense), net.......................... (15,333) 993,128 187,210
Total other income (expense)..................... (149,603) 927,907 274,543
Income before income taxes...................... 494,985 2,508,455 3,050,676
Income taxes........................................... 142,800 997,000 1,193,000
Net income...................................... $ 352,185 1,511,455 1,857,676
Per share data:
Primary
Net income........................................ $ .25 .50 .53
Weighted average shares outstanding............... 1,505,581 3,271,158 3,556,329
Fully diluted
Net income........................................ $ .23 .50 .53
Weighted average shares outstanding............... 1,662,603 3,271,158 3,560,361
Supplemental information as if initial public offering
of stock had occurred at July 1, 1993:
Proforma net income............................... $ 477,972 n/a N/A
Earnings per share................................ $ .15 n/a N/A
Weighted average shares outstanding............... 3,229,286 n/a N/A
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
8
STATEMENTS OF SHAREHOLDERS' EQUITY
For the years ended June 30, 1994, 1995 and 1996
<TABLE>
<CAPTION>
Common Stock
Subject to Retained
Preferred Common Put/ Earnings
ScanSOURCE, Inc. Stock Stock Call Option (Deficit) Total
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1993............................... $ -- 455,130 -- (243,252) 211,878
Issuance of stock due to exercise of option.......... -- 375,000 -- -- 375,000
Issuance of stock in initial public offering......... -- 4,562,436 -- -- 4,562,436
Issuance of put/call option on 250,000 shares........ -- -- (750,000) -- (750,000)
Net income........................................... -- -- -- 352,185 352,185
Balance at June 30, 1994............................... -- 5,392,566 (750,000) 108,933 4,751,499
Issuance of stock pursuant to the exercise of
warrants and the unit purchase option............. -- 133,750 -- -- 133,750
Net income........................................... -- -- -- 1,511,455 1,511,455
Balance at June 30, 1995............................... -- 5,526,316 (750,000) 1,620,388 6,396,704
Issuance of stock pursuant to the exercise of
warrants and the unit purchase price option, net
of offering costs................................. -- 6,732,295 -- -- 6,732,295
Issue of stock due to exercise of stock options...... -- 551,813 -- -- 551,813
Exercise of call option.............................. -- -- 750,000 -- 750,000
Purchase of shares owned by Gates/FA................. -- (875,000) -- -- (875,000)
Net income........................................... -- -- -- 1,857,676 1,857,676
Balance at June 30, 1996............................... $ -- 11,935,424 -- 3,478,064 15,413,488
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
9
<PAGE>
STATEMENTS OF CASH FLOWS
For the years ended June 30, 1994, 1995 and 1996
<TABLE>
<CAPTION>
1994 1995 1996
<S> <C> <C> <C>
Cash flows from operating activities:
Net income......................................................................... $ 352,185 1,511,455 1,857,676
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation.................................................................... 35,420 78,937 237,536
Amortization of intangible assets............................................... 50,311 83,076 82,576
Deferred income taxes, net...................................................... (155,900) (477,000) (347,000)
Deferred gain................................................................... -- 200,000 (200,000)
Other, net...................................................................... -- (3,014) --
Changes in operating assets and liabilities:
Receivables................................................................... (1,485,020) (1,710,522) (3,809,734)
Inventories................................................................... (10,046) (6,037,389) (11,232,064)
Prepaid expenses and other.................................................... (47,508) 4,080 (2,649)
Due from Gates/FA............................................................. -- (750,000) 750,000
Deposit with Gates/FA......................................................... (1,266,510) 1,266,510 --
Net assets acquired and held for liquidation.................................. 114,570 -- --
Trade accounts payable........................................................ (598,768) 2,685,206 1,408,300
Accounts payable to IBM....................................................... -- -- 3,501,437
Accrued compensation.......................................................... (16,533) 54,119 4,482
Accrued expenses and other liabilities........................................ 31,169 238,476 196,490
Income tax payable............................................................ 272,700 1,035,496 (768,550)
Other noncurrent assets....................................................... (3,501) (5,733) 3,739
Net cash used in operating activities...................................... (2,727,431) (1,826,303) (8,317,761)
Cash flows from investing activities:
Capital expenditures, net.......................................................... (102,885) (668,638) (659,238)
Advances to officer under note..................................................... (40,000) -- (43,000)
Repayments of amount due to former Alpha Data shareholder.......................... (250,000) (120,000) --
Purchase of MicroBiz............................................................... -- (531,401) --
Payments to MicroBiz............................................................... -- (98,139) (201,861)
Net cash used in investing activities...................................... (392,885) (1,418,178) (904,099)
Cash flows from financing activities:
Issuance of stock in initial public offering....................................... 4,562,436 -- --
Issuance of stock due to exercise of stock options................................. 375,000 -- 551,813
Issuance of stock pursuant to the exercise of warrants and the unit purchase
option, net of offering costs................................................... -- 133,750 6,779,446
Repurchase of shares from Gates/FA................................................. -- -- (875,000)
Advances from line of credit, net.................................................. -- 1,200,000 2,579,029
Cost of pending warrant redemption................................................. -- (47,151) --
Net cash provided by financing activities.................................. 4,937,436 1,286,599 9,035,288
Increase (decrease) in cash................................................ 1,817,120 (1,957,882) (186,572)
Cash at beginning of year............................................................ 327,334 2,144,454 186,572
Cash at end of year.................................................................. $ 2,144,454 186,572 --
Supplemental information:
Interest paid...................................................................... $ 170,000 439,000 15,000
Income taxes paid.................................................................. $ 26,000 76,000 2,309,000
Supplemental noncash information:
Note issued in connection with the purchase of MicroBiz............................ $ -- 300,000 --
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
10
<PAGE>
NOTES TO FINANCIAL STATEMENTS
June 30, 1995 and 1996
ScanSOURCE, Inc.
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
ORGANIZATION AND NATURE OF BUSINESS
ScanSOURCE, Inc. ("Company") is an international value-added distributor of
automatic identification and point of sale products. The Company is a South
Carolina corporation whose fiscal year end is June 30.
REVENUE RECOGNITION
The Company records revenue when products are shipped from the warehouse,
carried out under terms of the agreements described in note 2.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially expose the Company to concentrations
of credit risk consist primarily of trade accounts receivable. The Company has
not experienced significant losses related to receivables from individual
customers or groups of customers in a particular industry or geographic area. As
a result, management believes no additional credit risk beyond amounts provided
for collection losses is inherent in the Company's accounts receivable.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market. The Company first began holding its own inventory for resale on
September 26, 1994.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Amortization of leasehold
improvements is provided for over the term of the related lease. Computer and
phone equipment and furniture and equipment are depreciated over their estimated
useful lives. The straight-line method is used for financial reporting purposes
and an accelerated method is used, where applicable, for income tax purposes.
INTANGIBLE ASSETS
Intangible assets consist primarily of goodwill, which represents the excess
of purchase price over fair value of net assets acquired. Goodwill is amortized
on a straight-line basis over the expected periods to be benefited. The Company
assesses the recoverability of this intangible asset by determining whether the
amortization of the goodwill balance over its remaining life can be recovered
through projected undiscounted future results. The amount of goodwill
impairment, if any, is measured based on projected discounted future results
using a discount rate reflecting the Company's average cost of funds.
Goodwill related to the purchases of businesses is being amortized on the
straight-line method over an expected 15 year life. The methodology that
management used to project operations of the acquired businesses forward is
based on the historical trend line of actual results. Management believes that
projected future results based on this historical trend are the most likely
scenario.
MARKET DEVELOPMENT FUNDS
In general, vendors provide various incentive programs to the Company. The
funds received under these programs are determined based on purchases and/or
sales of the vendor's product. The funds are earned by the performance of
specific marketing programs or upon completion of predetermined objectives
dictated by the vendor. Once earned, the funds are accounted for either as a
reduction of selling, general and administrative expense or product cost,
according to the nature of the program.
INCOME TAXES
The Company records income taxes in accordance with Statement of Financial
Accounting Standards No. 109. Under the asset and liability method of Statement
109, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Under Statement 109, the
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
RECENT ACCOUNTING PRONOUNCEMENTS
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." SFAS No. 123 will be effective for fiscal years beginning after
December 15, 1995, and will require that the Company either recognize in its
financial statements costs related to its employee stock-based compensation
plans, such as stock option and stock purchase plans, or make pro forma
disclosures of such costs in a footnote to the financial statements.
The Company expects to continue to use the intrinsic value based method of
Accounting Principles Board Opinion No. 25, as allowed under SFAS No. 123, to
account for all of its employee stock-based compensation plans. Therefore, in
its financial statements for fiscal 1997, the Company will make the required pro
forma disclosures in a footnote to the financial statements. SFAS No. 123 is not
expected to have a material effect on the Company's statements of income or
financial position.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company values financial instruments as required by FASB Statement No.
107, "Disclosures About Fair Value of Financial Instruments".
11
<PAGE>
NOTES TO FINANCIAL STATEMENTS
June 30, 1995 and 1996
ScanSOURCE, Inc.
At June 30, 1995 and 1996, the carrying value of financial instruments such
as cash, accounts receivable, and accounts payable approximated their fair
values, based upon the short maturities of these instruments.
The fair value of the Company's long-term debt is estimated using discounted
cash flow analysis, based on the Company's current incremental borrowing rates
for similar types of borrowing arrangements. The carrying value of such
instruments approximated their fair value at June 30, 1995 and 1996.
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.
(2) OPERATIONS AGREEMENTS
(a) From December 1992 to September 1994, the Company operated under an
agreement with Gates/FA Distributing, Inc. ("Gates/FA"). An officer of Gates/FA
was a director of the Company. The chief executive officer and several directors
and shareholders of the Company were also directors and shareholders of
Gates/FA. The following were additional provisions of the agreement with
Gates/FA.
(1) WAREHOUSING AND ADMINISTRATIVE SERVICES
Under the agreement, Gates/FA provided accounts payable, warehousing,
shipping and receiving, and limited management information system (MIS)
services. The Company paid Gates/FA for these services as a percentage of the
cost of all products shipped to the Company's customers, recorded as cost of
sales. Payments to Gates/FA, which ended in September 1994, were approximately
$127,000 and $60,000 for the years ended June 30, 1994 and 1995, respectively.
For the years ended June 30, 1994 and 1995, approximately $12,300,000 and
$5,700,000, respectively, of the Company's purchases were made through Gates/FA.
(2) LINE OF CREDIT
The Company paid Gates/FA monthly interest on working capital used by
Gates/FA, which had title to inventory held on the Company's behalf.
Approximately $180,000 and $10,000 of interest for the years ended June 30, 1994
and 1995, respectively, was paid to Gates/FA.
In December 1992, Gates/FA agreed to a non-compete contract in the data
collection or bar code industry, and in return, received an option to purchase
250,000 shares of the Company's common stock at $1.50 per share. On December 30,
1993, Gates/FA exercised this option and was a 11.5% shareholder of the Company
at June 30, 1995. These shares were repurchased by the Company in March 1996.
(See (b) below).
(b) Under terms of an Agreement to Terminate Distribution Services with
Gates/FA, the Company agreed to purchase the inventory held on its behalf by
Gates/FA and assume sole responsibility for accounts payable to vendors for all
future purchases related to such inventory. In connection with this transaction,
a deposit with Gates/FA of $1,266,510 was applied to the purchase of inventory.
Gates/FA also agreed to a more limited covenant not to compete for a period
reduced from two years to one year from the termination of services to the
Company.
As compensation for reducing the noncompete term and ending the operations
agreement before its scheduled expiration, Gates/FA agreed to pay the Company
$1.4 million. Of this amount, $650,000 was received on September 26, 1994 and
the remaining $750,000 was collected by April 1996 as described below. The
Company recognized the $1.4 million as other income in the statement of
operations ratably over the term of the noncompete agreement from September 1994
to August 1995, net of approximately $100,000 of expenses incurred by the
Company to move its inventory and connect to a new computer system. For the year
ended June 30, 1995, the Company recognized $1,100,000 as other income and
provided $440,000 for related income taxes. The remaining $200,000 of the amount
was shown as deferred gain at June 30, 1995 and was recognized as other income
in fiscal 1996, along with $80,000 of related income taxes.
Under terms of the termination agreement, Gates/FA had the conditional right
to put its 250,000 shares of the Company's common stock for $3.00 per share to
the Company. The Company had an option to call the shares at $3.50 per share,
which it exercised on March 19, 1996. Gates/FA's put expired concurrently with
the Company's exercise of its call option. To ensure that the Company had
sufficient liquidity to purchase the shares, Gates/FA negotiated to hold back
$750,000 of its contract termination payment at the time of the contract
renegotiation. The Company collected this amount on March 19, 1996 and used it
to pay $750,000 of the $875,000 call price of the repurchased shares.
(c) From September 1994 to May 1995, the Company's warehousing and MIS
services were provided under an agreement with a third party. Costs under this
agreement were not materially higher as a percentage of sales than costs
previously paid to Gates/FA.
12
<PAGE>
NOTES TO FINANCIAL STATEMENTS
CONTINUED
ScanSOURCE, Inc.
(d) In May 1995 the Company arranged for space in a third party facility in
Memphis, Tennessee, and began performing its product handling and management
information services (MIS) internally. For the fiscal year ended June 30, 1996
the Company paid approximately $144,000 to this third party; in June 1996 a
Company officer and director was elected to the Board of Directors of the third
party. Management believes the pricing of all transactions with the third party
is representative of arm's length costs, and is comparable to terms which could
be negotiated with others.
(3) ACQUISITION
In July 1994, the Company purchased the equipment distribution portion of
MicroBiz Corporation's business for $300,000 in cash and approximately $300,000
to be paid over two years, based upon the sales performance of certain former
MicroBiz customers. The purchase included MicroBiz' equipment inventory for
$231,000, certain customer lists and distribution contracts, and MicroBiz
agreeing not to compete for a period of 42 months. The Company agreed to provide
up to $45,000 in certain marketing programs to MicroBiz, and after costs of the
transaction of $5,000, recorded goodwill for approximately $650,000.
(4) OPERATING LEASES
The Company leases office space and a telephone system under noncancellable
operating leases which expire through 1999. Future minimum rentals are as
follows:
<TABLE>
<CAPTION>
Year Ending June 30
<S> <C>
1997........................................ $ 83,369
1998........................................ 74,838
1999........................................ 25,970
$184,177
</TABLE>
Rent expense was approximately $33,000, $73,000, and $74,000 for the years
ended June 30, 1994, 1995 and 1996, respectively.
(5) RELATED PARTY TRANSACTIONS
In December 1992 the Company's chief executive officer sold his ownership in
Datascan Corporation ("Datascan"), a customer of the Company. The Company had
sales of approximately $827,000 to Datascan during the year ended June 30, 1994.
The Company had no sales to Datascan after June 30, 1994.
In June 1994, the Company loaned an officer of the Company $40,000 to be
repaid under terms of a note at 7.25% interest, in interest only payments for
three years, with the principal balance due at June 9, 1997. During 1996 the
Company modified the loan to include additional advances of $43,000 to be repaid
under the same terms as the original note.
In July 1995, the Company was granted 19% ownership of Transition Marketing
(Transition), in exchange for the Company's commitment to use Transition as its
contract provider of marketing services. The Company purchased $278,000 of
marketing services from Transition for the year ended June 30, 1996 and had
loaned, at a 9% interest rate, $122,208 to Transition at June 30, 1996. A
Company officer and director is a member of the Board of Directors of
Transition. Management believes the pricing of all transactions with Transition
is representative of arm's length costs, and is comparable to terms which could
be negotiated with others.
(6) STOCK OPTIONS AND EQUITY TRANSACTIONS
On July 1, 1993, the Company implemented an incentive stock option plan which
reserved 200,000 shares of common stock for issuance to key employees. The plan
provides for three-year vesting of the options at a rate of 33% per year. The
options are exercisable over 10 years, and options are not to be granted at less
than the fair market value of the underlying shares at the date of grant.
A summary of activity in the incentive stock option plan through June 30,
1995 and 1996 is as follows:
<TABLE>
<CAPTION>
1995 1996
Exercise EXERCISE
Shares Price SHARES PRICE
<S> <C> <C> <C> <C>
Stock options
outstanding:
Beginning of
year............. 43,000 $ 1.50 - 4.50 111,834 $ 1.50 - 8.88
Granted........... 78,000 8.00 - 8.88 3,500 12.50
Exercised......... -- -- (17,167) 1.50 - 8.00
Terminated........ (9,166) 4.35 - 8.00 (3,000) 8.00
End of year....... 111,834 $ 1.50 - 8.88 95,167 $ 1.50 - 12.50
Exercisable, end of
year.............. 13,834 42,000
</TABLE>
The Company has issued additional options, including options issued under the
directors' stock option plan, which reserved 65,000 shares of common stock for
issuance to non-employee directors.
13
<PAGE>
NOTES TO FINANCIAL STATEMENTS
June 30, 1995 and 1996
ScanSOURCE, Inc.
Following is a summary of activity of all options not included in the
employee plan shown above:
<TABLE>
<CAPTION>
1995 1996
Exercise EXERCISE
Shares Price SHARES PRICE
<S> <C> <C> <C> <C>
Stock options
outstanding:
Beginning of
year........... 140,000 $ 1.50 - 3.75 205,000 $ 1.50 - 9.75
Granted......... 65,000 8.56 - 9.75 40,000 14.13 - 15.75
Exercised....... -- -- (50,000) 9.75
End of year..... 205,000 $ 1.50 - 9.75 195,000 $ 1.50 - 15.75
Exercisable...... 95,000 168,333
</TABLE>
(7) INCOME TAXES
Income tax expense (benefit) consists of:
<TABLE>
<CAPTION>
Current Deferred Total
<S> <C> <C> <C>
June 30, 1994:
Federal............ $ 250,700 $(133,900) $ 116,800
State and local.... 48,000 (22,000) 26,000
$ 298,700 $(155,900) $ 142,800
June 30, 1995:
Federal............ $1,314,000 $(427,000) $ 887,000
State and local.... 160,000 (50,000) 110,000
$1,474,000 $(477,000) $ 997,000
June 30, 1996:
Federal............ $1,382,000 $(292,000) $1,090,000
State and local.... 158,000 (55,000) 103,000
$1,540,000 $(347,000) $1,193,000
</TABLE>
Income tax expense differed from the amount computed by applying the Federal
income tax rate of 34% as a result of the following:
<TABLE>
<CAPTION>
1994 1995 1996
<S> <C> <C> <C>
Computed "expected" tax
expense...................... $168,300 852,900 1,037,200
Increase (decrease) in income
taxes resulting from:
Change in beginning of the
period balance of the
valuation allowance for
deferred tax assets
allocated to income tax
expense................... (95,600) -- --
Additional provision for
income taxes.............. 50,000 68,200 84,200
State and local income taxes,
net of Federal income tax
expense................... 17,100 72,600 68,000
Other........................ 3,000 3,300 3,600
$142,800 997,000 1,193,000
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax asset and deferred tax liability are presented
below:
<TABLE>
<CAPTION>
1995 1996
<S> <C> <C>
Deferred tax assets:
Valuation and other reserves......... $573,000 766,000
Inventory, principally due to
differences in capitalization..... 64,000 235,000
Intangibles, principally due to
differences in amortization....... 18,000 22,000
Net deferred tax asset............ 655,000 1,023,000
Deferred tax liability:
Plant and equipment, principally due
to differences in depreciation.... (27,000) (48,000)
Net deferred tax asset............ $628,000 975,000
</TABLE>
For the years ended June 30, 1995 and 1996 no valuation allowance was
provided. Management believes that a valuation allowance is not considered
necessary based upon the level of historical taxable income and the projections
for future taxable income over the periods during which the deferred tax assets
are deductible.
14
<PAGE>
NOTES TO FINANCIAL STATEMENTS
CONTINUED
ScanSOURCE, Inc.
(8) EMPLOYEE BENEFIT PLAN
Effective October 22, 1993, the Company established a defined contribution
plan under Section 401(k) of the Internal Revenue Code. This plan covers all
employees meeting certain eligibility requirements. For the years ended June 30,
1994, 1995 and 1996, the Company provided a matching contribution of $5,518,
$7,719 and $17,474, respectively, which was equal to one-half of each
participant's contribution, up to a maximum matching contribution of $500 per
participant. The Company can change its matching contributions annually and can
make discretionary contributions in addition to matching contributions. Employer
contributions are vested over a period of 3 to 5 years.
(9) SALES TO A SIGNIFICANT CUSTOMER
Sales to a significant customer were approximately $1,730,000 for the year
ended June 30, 1994. For the years ended June 30, 1995 and 1996 no single
customer accounted for more than 5% of the Company's sales.
(10) PUBLIC OFFERING OF COMMON STOCK
On March 25, 1994, the Company closed its initial public offering of
1,150,000 units for $5 each; each unit consisted of one share of common stock
and one redeemable common stock purchase warrant. The Company used the net
proceeds from the offering of approximately $4,560,000 to pay its trade accounts
payable to Gates/FA of approximately $1,660,000, to purchase its inventory from
Gates/FA for approximately $1,300,000, and to fund the purchase of MicroBiz for
approximately $531,000 (see note 3 above). The remainder of the net proceeds was
invested in short-term certificates of deposit.
(11) LINE OF CREDIT
On October 26, 1995, the Company closed a line of credit agreement with a
bank whereby the Company can borrow up to $8 million, based upon 80% of eligible
accounts receivable and 40% of non-IBM inventory at the 30 day LIBOR rate of
interest plus 2.35%; the LIBOR rate was 5.63% at June 30, 1996. The outstanding
balance on the line of credit was approximately $3,779,000, on a loan base which
exceeded $8 million, leaving approximately $4,221,000 available at June 30,
1996. The revolving credit facility extends to October 31, 1996 and is secured
by accounts receivable and inventory. The agreement contains certain financial
covenants including minimum net worth and current ratio requirements and a
maximum debt to tangible net worth ratio of 2.11 to 1. The Company was either in
compliance with the various covenants or had obtained waivers of noncompliance
at June 30, 1996.
The Company has a commitment from the bank, which it intends to exercise, to
renew the line of credit under terms similar to its existing agreement for
amounts up to $15 million to October 31, 1997.
On April 8, 1996, the Company signed an agreement for wholesale financing
with IBM Credit Corporation (ICC) whereby the Company has been extended
interest-free, 75-day credit terms on all purchases of IBM products. The credit
line is collateralized by IBM inventory, has a limit up to the value of IBM
inventory held by the Company, and is currently capped at $7 million payable to
ICC.
(12) EARNINGS PER SHARE
At June 30, 1995, warrants to acquire 1,130,000 shares of the Company's
common stock at $5.50 per share were outstanding. The warrants were exercisable
beginning March 18, 1995 and were to expire March 18, 1999. In connection with
the Company's initial public offering of units, the Company sold a unit purchase
option (UPO) for the right to purchase up to 100,000 units at $6 per unit. The
UPO became exercisable beginning March 18, 1995 and was to expire on March 18,
1999; 80,000 and 42,000 units were outstanding on the UPO at June 30, 1995 and
1996, respectively.
On September 19, 1995, the Company redeemed all of its then outstanding
common stock purchase warrants. Prior to the redemption date, substantially all
of the outstanding warrants were exercised, generating proceeds of $6.3 million
net of estimated costs of approximately $100,000.
Earnings per common share and common equivalent share (EPS) were computed by
dividing net income by the weighted average number of shares of common stock and
common stock equivalents outstanding. The number of common shares was increased
by the number of shares issuable on the exercise of the warrants and the UPO
when the market price of either the common stock or units, or both, exceed the
exercise price of the warrants or the UPO, respectively. This increase in the
number of common shares was reduced by the number of common shares that are
assumed to have been purchased with the proceeds from the exercise of the
warrants or UPO; those purchases were assumed to have been made at the average
price of the common stock during that part of the year when the market price of
the common stock or units exceeded the exercise price of the warrants or UPO.
15
<PAGE>
NOTES TO FINANCIAL STATEMENTS
June 30, 1995 and 1996
ScanSOURCE, Inc.
For 1994 earnings per share calculations, the warrants were considered
equivalents for 103 days of the year since the average market price of common
stock and units was $8.58 and $12.42, respectively, through June 30, 1994,
exceeding the exercise prices of both the warrant and the UPO. Proceeds from
assumed exercise of the warrants and UPO were assumed to be used first to
repurchase outstanding shares (limited to 20% of total shares outstanding) and
the remainder to pay trade debt and be invested for the 103-day period. Net
income was then adjusted for the after-tax effects of the interest expense
savings and interest earned during those 103 days.
Supplemental fully diluted earnings per share was computed as if the initial
public offering of units had occurred on the first day of fiscal 1994. Warrants
and the UPO were assumed exercised at the average market price of $8.58 and
$12.42, respectively, and the proceeds assumed used as described in the
preceding paragraph. Proforma net income was also computed as described in the
previous paragraph for the year ended June 30, 1994.
16
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
ScanSOURCE, Inc.
We have audited the accompanying balance sheets of
ScanSOURCE, Inc. as of June 30, 1995 and 1996 and the related
statements of income, shareholders' equity and cash flows for
each of the years in the three-year period ended June 30, 1996.
These financial statements are the responsibility of the
Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of ScanSOURCE, Inc. at June 30, 1995 and 1996 and the results of
its operations and its cash flows for each of the years in the
three-year period ended June 30, 1996 in conformity with
generally accepted accounting principles.
Greenville, South Carolina KPMG Peat Marwick LLP
August 16, 1996
17
<PAGE>
PRICE RANGE OF COMMON STOCK
The Company's Common Stock, which was first sold to the public on March 18,
1994, is quoted on the Nasdaq National Market under the symbol "SCSC." The
following tables present the quarterly high and low bid quotations of the Common
Stock in the over-the-counter market as quoted by Nasdaq. The Nasdaq quotations
reflect the inter-dealer prices, without retail mark-ups, mark-downs or
commissions and may not necessarily represent actual transactions.
<TABLE>
<CAPTION>
NASDAQ
HIGH
<S> <C>
Fiscal Year 1995
First Quarter............................................................................................... $ 9 5/8
Second Quarter.............................................................................................. $ 9 3/8
Third Quarter............................................................................................... $ 10 1/4
Fourth Quarter.............................................................................................. $ 9 7/8
Fiscal Year 1996
First Quarter............................................................................................... $ 13 1/4
Second Quarter.............................................................................................. $ 17
Third Quarter............................................................................................... $ 16 5/8
Fourth Quarter.............................................................................................. $ 15 1/2
<CAPTION>
LOW
<S> <C>
Fiscal Year 1995
First Quarter............................................................................................... $ 7 3/4
Second Quarter.............................................................................................. $ 8 1/4
Third Quarter............................................................................................... $ 8 1/2
Fourth Quarter.............................................................................................. $ 8 5/8
Fiscal Year 1996
First Quarter............................................................................................... $ 9 1/4
Second Quarter.............................................................................................. $ 11
Third Quarter............................................................................................... $ 12 1/2
Fourth Quarter.............................................................................................. $ 13 1/4
</TABLE>
As of September 11, the Company had approximately 54 shareholders of record.
Certain of these shareholders of record hold shares in nominee or street name
for other beneficial owners.
DIVIDEND POLICY
The Company has never paid any cash dividends on its Common Stock and it is
currently the intention of the Company not to pay cash dividends on its Common
Stock in the foreseeable future. Management intends to reinvest earnings, if
any, in the development and expansion of the Company's business. Any future
declaration of cash dividends will be at the discretion of the Board of
Directors and will depend upon the earnings, capital requirements and financial
position of the Company, general economic conditions and other pertinent
factors.
18
<PAGE>
Board of Directors
Steven H. Owings
Chief Executive Officer
ScanSource, Inc.
Greenville, South Carolina
Michael L. Baur
President
ScanSource, Inc.
Greenville, South Carolina
Steven R. Fischer
Sr. Vice-President
Transamerica Business
Credit Corporation
New York, New York
James G. Foody
Business Consultant
Greenville, South Carolina
Executive Officers
Steven H. Owings
Chief Executive Officer
Michael L. Baur
President
Jeffery A. Bryson
Chief Financial Officer
and Treasurer
Stock Listing
The Company's Stock is traded on the Nasdaq National Market under
the symbol SCSC.
General Counsel
Nexsen Pruet Jacobs & Pollard, LLP
Greenville, South Carolina
Transfer Agent
Continental Stock Transfer
and Trust Company
New York, New York
Independent Accountants
KPMG Peat Marwick, LLP
Greenville, South Carolina
Shareholder Inquiries
ScanSource, Inc., welcomes inquiries from its shareholders
and other interested investors. For further information or a copy of SEC form
10KSB, contact our Investor Relations Department. (800) 944-2439, x375.
Annual Meeting
The annual meeting of shareholders of the Company will be held at 10:00 a.m.
on Tuesday, December 3, 1996, at the Embassy Suites Hotel, 670 Verdae Boulevard,
Greenville, South Carolina.
Locations:
Corporate Headquarters
6 Logue Court, Suite G
Greenville, South Carolina 29615
800-944-2432
Professional Services Group
3850 Holcomb Bridge Road
Spaulding Woods, Suite 430
Norcross, Georgia 30092
800-292-3631
West Coast Sales Office
1442 Irvine Boulevard, Suite 234
Tustin, California 92680
800-944-2432
Distribution Center
3655 Knight Road, Suite 6
Memphis, Tennessee 38118
