<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 12, 1997
REGISTRATION NO. 333-20231
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
SCANSOURCE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
SOUTH CAROLINA 5045 57-0965380
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
INCORPORATION OR
ORGANIZATION)
6 LOGUE COURT, SUITE G
GREENVILLE, SOUTH CAROLINA 29615
(864) 288-2432
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
JEFFERY A. BRYSON
CHIEF FINANCIAL OFFICER
6 LOGUE COURT, SUITE G
GREENVILLE, SOUTH CAROLINA 29615
(864) 288-2432
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE OF AGENT FOR SERVICE)
----------------
COPIES TO:
G. MARCUS KNIGHT J. VAUGHAN CURTIS
NEXSEN PRUET JACOBS & POLLARD, LLP ALSTON & BIRD
FIRST UNION BUILDING ONE ATLANTIC CENTER
1441 MAIN STREET, SUITE 1500 1201 WEST PEACHTREE STREET
COLUMBIA, SOUTH CAROLINA 29201 ATLANTA, GA 30309-3424
PHONE: (803) 253-8245 PHONE: (404) 881-7000
FACSIMILE: (803) 253-8277 FACSIMILE: (404) 881-7777
----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration number of the earlier effective
registration statement for the same offering: [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the registration
statement number of the earlier effective registration statement for the same
offering: [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: [_]
----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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<PAGE>
+++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
+++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED FEBRUARY 12, 1997
[LOGO OF SCANSOURCE APPEARS HERE]
2,000,000 SHARES
COMMON STOCK
All of the shares of Common Stock offered hereby are being offered by
ScanSource, Inc. (the "Company"). On February 10, 1997, the last sale price of
the Common Stock as reported on The Nasdaq National Market was $18.50 per
share. See "Price Range of Common Stock." The Common Stock is traded on The
Nasdaq National Market under the symbol "SCSC."
----------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING AT PAGE 6.
----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS COMPANY (1)
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<S> <C> <C> <C>
Per Share........................... $ $ $
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Total (2)........................... $ $ $
</TABLE>
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(1) Before deducting estimated expenses of $400,000 payable by the Company.
(2) The Company and certain selling shareholders (the "Selling Shareholders")
have granted to the Underwriters a 30-day option to purchase up to 300,000
additional shares of Common Stock solely to cover over-allotments, if any.
If such over-allotment option is exercised in full, the total Price to
Public, Underwriting Discounts and Commissions and Proceeds to Company will
be $ , $ , and $ , respectively, and the proceeds to be received
by the Selling Shareholders will be $ . See "Principal and Selling
Shareholders" and "Underwriting."
----------
The Common Stock is offered by the Underwriters as stated herein, subject to
receipt and acceptance by them and subject to their right to reject any order
in whole or in part. It is expected that delivery of such shares will be made
through the offices of Robertson, Stephens & Company LLC ("Robertson, Stephens
& Company"), in San Francisco, California, on or about , 1997.
ROBERTSON, STEPHENS & COMPANY
THE ROBINSON-HUMPHREY COMPANY, INC.
WILLIAM BLAIR & COMPANY
The date of this Prospectus is , 1997.
<PAGE>
[INSIDE FRONT COVER GRAPHICS]
ScanSource logo with supporting text: "A leader in the value-added wholesale
distribution of specialty technology products exclusively to resellers"
Right hand side of page, vendor logos for: IBM, Metrologic, Zebra, Symbol,
Datamax, Cherry, Cognitive Solutions, Epson, MMF, PSC, Monarch, MicroTouch,
Intermec, Lucent Technologies, Eltron, Ithaca, Percon, StrandWare, Spectra-
Physics
Left margin with supporting text: "Serving Multiple Commercial and Industrial
Applications"
Right margin box with supporting text: "Representing the Leading Vendors of
Auto-ID, Point-of-Sale, and Telephony Products"
Picture(s) Caption Description of Picture
- ---------- ------- ----------------------
1 Inventory management Person at a lumberyard
2 Grocery Point-of-Sale Retail store cashier
3 Product identification Person scanning a product
4 Production control Laboratory scene
5 Retail Auto-ID Person with handheld computer at a retail
display rack
6 Retail Point-of-Sale Store cashier standing at countertop
2
<PAGE>
NO DEALER, SALES REPRESENTATIVE, OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS
OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS. ANY INFORMATION OR
REPRESENTATIONS NOT HEREIN CONTAINED, IF GIVEN OR MADE, MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, ANY SELLING SHAREHOLDER, OR ANY
UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES OTHER THAN THE REGISTERED
SECURITIES TO WHICH IT RELATES, OR AN OFFER TO, OR A SOLICITATION OF, ANY
PERSON IN ANY JURISDICTION WHERE SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL,
UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE
IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY TIME AFTER THE DATE HEREOF.
--------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 4
Risk Factors.............................................................. 6
Use of Proceeds........................................................... 10
Price Range of Common Stock............................................... 10
Dividend Policy........................................................... 10
Capitalization............................................................ 11
Selected Financial Data................................................... 12
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 13
Business.................................................................. 19
Management................................................................ 26
Certain Transactions...................................................... 30
Principal and Selling Shareholders........................................ 31
Description of Capital Stock.............................................. 33
Shares Eligible for Future Sale........................................... 36
Underwriting.............................................................. 37
Legal Matters............................................................. 38
Experts................................................................... 38
Additional Information.................................................... 38
Index to Financial Statements ............................................ F-1
</TABLE>
--------------
"ScanSource" is a trademark of the Company. The Company also sells products
and provides services under various trademarks, service marks, and trade names
to which reference is made in this Prospectus that are the property of owners
other than the Company. Such owners have reserved all rights with respect to
their respective trademarks, service marks, and trade names.
The Company's principal executive offices are located at 6 Logue Court,
Suite G, Greenville, South Carolina 29615. The Company's telephone number is
(864) 288-2432.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK
ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 10b-6A UNDER THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. SEE "UNDERWRITING."
3
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the financial statements and notes thereto appearing elsewhere
in this Prospectus, including the information under "Risk Factors." Unless
otherwise indicated, (i) all information in this Prospectus assumes the
Underwriters' over-allotment option is not exercised and (ii) all references to
the Company's fiscal years refer to the fiscal years ending on June 30 of each
calendar year.
THE COMPANY
The Company is a leading value-added wholesale distributor of specialty
technology products exclusively to resellers. The Company primarily distributes
automatic-identification ("Auto-ID") and point-of-sale ("POS") products which
interface with computer systems used to automate the collection, processing,
and communication of information for commercial and industrial applications,
including retail sales, distribution, shipping, inventory control, materials
handling, and warehouse management. The Company currently markets more than
7,700 products from over 40 hardware and software vendors from its central
warehouse in Memphis, Tennessee to approximately 5,900 reseller customers in
the U.S. and Canada. From fiscal 1994 to fiscal 1996, the Company's net sales
increased at an 86.0% compound annual rate to $55.7 million, while operating
income increased at a 107.5% compound annual rate to $2.8 million.
The Company's vendors include most of the leading Auto-ID and POS
manufacturers, including Cherry Electrical, Cognitive Solutions, Datamax,
Eltron, Epson America, IBM, Intermec, Ithaca Peripherals, Metrologic, Micro-
Touch Systems, MMF Cash Drawer, Monarch Marking Systems, Percon, PSC, Spectra-
Physics, StrandWare, Symbol Technologies, and Zebra Technologies. In addition
to distributing Auto-ID and POS products, the Company recently entered into an
agreement with Lucent Technologies, Inc. for the distribution of telephony
products, including PBXs, key systems, telephone handsets, cabling, and voice
mail.
The Company's objective is to be a comprehensive source of specialty
technology products and value-added services for resellers. The Company's
business model features a sophisticated information system, streamlined
management, and centralized distribution enabling it to achieve the economies
of scale necessary for cost-effective order fulfillment. In addition, the
Company offers significant value-added services such as pre- and post-sale
technical support, bundling of separate product assortments into solution kits,
applications programming, systems integration, and project management services.
The Company believes that its value-added services and targeted marketing
programs provide it with significant competitive advantages and distinguish it
from conventional wholesale distributors engaged primarily in order
fulfillment.
The markets for Auto-ID and POS products accounted for revenues in excess of
$5 billion in 1996. The Auto-ID market experienced annual growth in excess of
15% from 1991 to 1996 and is expected to continue growing at an annual rate of
approximately 14% through 2000. Other specialty technology products such as
telephony may comprise even larger markets. In addition, the growth of the
wholesale distribution channel has been aided by the evolution of specialty
technology products. As these products move from proprietary to open-
architecture systems, the end-user base becomes more fragmented. In order to
service this fragmented market, both manufacturers and resellers increasingly
rely on wholesale distributors to provide such functions as order fulfillment,
delivery, inventory management, financing, technical support, and marketing.
The Company's strategy is to capitalize on the continuing shift of specialty
technology products toward wholesale distribution as well as the continuing
expansion of certain specialty technology markets. Key elements of the
Company's growth strategy include: (i) promoting the entry of additional
resellers into its core markets; (ii) expanding vendor relationships; (iii)
enhancing value-added service capabilities; (iv) entering additional specialty
technology markets; and (v) pursuing selective acquisitions.
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered by the Company......... 2,000,000 shares
Common Stock to be Outstanding after the
Offering................................... 5,247,986 shares(1)
Use of Proceeds ............................ To repay bank indebtedness
and for general corporate
purposes, including working
capital and possible acquisitions.
Nasdaq National Market Symbol............... SCSC
</TABLE>
SUMMARY FINANCIAL DATA
(In thousands, except per share data)
<TABLE>
<CAPTION>
SIX MONTHS
FISCAL YEAR ENDED JUNE 30, ENDED DECEMBER 31,
-------------------------------- ------------------
1993(2) 1994 1995 1996 1995 1996
------- ------- ------- ------- --------- ---------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Net sales................. $2,383 $16,089 $34,235 $55,670 $ 23,277 $ 42,110
Gross profit.............. 342 2,413 4,791 7,814 3,349 5,728
Operating income (loss)... (243) 645 1,580 2,776 1,091 2,130
Gain from contract
termination, net......... -- -- 1,000 200 200 --
Net income (loss)(3)...... (243) 352 1,511 1,858 813 1,216
Net income (loss) per
share(3)................. $(0.31) $ 0.23 $ 0.50 $ 0.53 $ 0.23 $ 0.35
Weighted average shares
outstanding.............. 773 1,663 3,271 3,560 3,552 3,478
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------------
ACTUAL AS ADJUSTED(4)
-------- --------------
(Unaudited)
<S> <C> <C>
BALANCE SHEET DATA:
Working capital........................................ $ 19,332 $48,643
Total assets........................................... 37,987 67,298
Total bank debt........................................ 5,069 --
Shareholders' equity................................... 16,652 51,032
</TABLE>
- --------
(1) Based on the number of shares outstanding at December 31, 1996. Excludes
(i) 444,117 shares of Common Stock issuable upon exercise of outstanding
options at a weighted average exercise price of $11.74 per share; (ii)
84,000 shares of Common Stock issuable upon exercise of outstanding unit
purchase options at a weighted average exercise price of $5.75 per share;
and (iii) 100,000 shares of Common Stock issuable upon exercise of
outstanding warrants at a weighted average exercise price of $2.00 per
share. See "Management--Stock Option Plans" and "Description of Capital
Stock--Warrants and Unit Purchase Options."
(2) Fiscal 1993 consisted of approximately seven months from the Company's
inception in December 1992.
(3) Excluding the net effect of a one-time gain from a contract termination
payment by Gates/FA Distributing, Inc., and the net effect of an additional
warehouse relocation in May 1995, the Company's net income and net income
per share for fiscal 1995 and 1996 and for the six months ended December
31, 1995 would have been $911,000, $1,738,000 and $693,000 and $0.32, $0.50
and $0.20, respectively. See "Certain Transactions."
(4) Adjusted to reflect the sale of 2,000,000 shares of Common Stock by the
Company at an assumed public offering price of $18.50 per share and the
application of the estimated net proceeds therefrom. See "Use of Proceeds"
and "Capitalization."
This Prospectus contains forward-looking statements relating to future events
or the future financial performance of the Company, including statements
contained in "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business." Prospective investors are cautioned that
such statements, which may be identified by words including "anticipates,"
"believes," "intends," "estimates," "expects," and similar expressions, are
only predictions or estimations and are subject to known and unknown risks and
uncertainties. In evaluating such statements, prospective investors should
consider the various factors identified in this Prospectus, including matters
set forth in "Risk Factors," which could cause actual events, performance or
results to differ materially from those indicated by such statements.
5
<PAGE>
RISK FACTORS
The securities offered hereby involve a high degree of risk. In addition to
other information in this Prospectus, the following risk factors should be
considered carefully in evaluating the Company and its business before
purchasing shares of Common Stock offered hereby.
DEPENDENCE ON VENDORS AND PRODUCT SUPPLY
The Company's future success is highly dependent on its relationships with
vendors. Sales of products from the Company's ten largest vendors accounted
for 73.2% of net sales for fiscal 1996, and 76.5% of net sales for the six
months ended December 31, 1996. Sales of products from the Company's two
largest vendors, Symbol Technologies and IBM Corporation, accounted for 20.3%
and 9.4%, respectively, of net sales for fiscal 1996, and 17.9% and 14.2%,
respectively, of net sales for the six months ended December 31, 1996. From
time to time, the Company experiences shortages in availability of some
products from vendors. The Company's business is largely dependent upon the
terms provided by its vendors. The Company's vendor agreements generally
contain provisions for periodic renewals and for termination by the vendor
without cause and typically upon short notice. Some of the Company's vendor
agreements require minimum purchase amounts or the maintenance of a
representative assortment of the vendor's full line of products. Such contract
provisions could increase the Company's working capital requirements. Although
the Company believes its vendor relationships are good, there can be no
assurance that the Company's vendor relationships will continue as currently
in effect. The loss or deterioration of the Company's relationship with a
major vendor, the authorization by vendors of additional wholesale
distributors, or the failure by the Company to establish good relationships
with major new vendors could have a material adverse effect on the Company's
business, financial condition, and results of operations. See "Business--
Products and Vendors."
As is typical in its industry, the Company receives volume discounts and
certain credits for market development from most of its vendors. These volume
discounts directly affect the Company's gross profits. In addition, credits
for market development are typically used to offset a portion of the Company's
sales and marketing expenses. The Company is also dependent, in part, upon
vendor financing for working capital requirements. No assurance can be given
that vendor financing will continue to be available to the Company on
satisfactory terms and conditions, if at all. Any change in the availability
of these discounts or credits or the failure of the Company to obtain vendor
financing on satisfactory terms and conditions could have a material adverse
effect on the Company's business, financial condition, and results of
operations. See "Business--Products and Vendors."
COMPETITION
The markets in which the Company operates are highly competitive.
Competition is based primarily on factors such as price, product availability,
speed and accuracy of delivery, effectiveness of sales and marketing programs,
credit availability, ability to tailor specific solutions to customer needs,
quality and breadth of product lines and services, and availability of
technical and product information. The Company's competitors include regional
and national wholesale distributors, as well as hardware manufacturers
(including most of the Company's vendors) that sell directly to resellers and
to end-users. In addition, the Company competes with master resellers which
sell to franchisees, third-party dealers, and end-users. Certain of the
Company's current and potential competitors have significantly greater
financial, technical, marketing, and other resources than the Company and may
be able to respond more quickly to new or emerging technologies and changes in
customer requirements. Additional competition could result in price
reductions, reduced margins, and loss of market share by the Company. There
can be no assurance that the Company will be able to compete successfully
against current and future competitors or that future competitive pressures
will not materially and adversely affect its business, financial condition,
and results of operations. See "Business--Competition."
6
<PAGE>
MANAGING GROWTH; RISK OF ENTERING NEW MARKETS
The rapid growth of the Company's business has required it to make
significant additions in personnel and has increased its working capital
requirements. Such growth has resulted in new and increased responsibilities
for management and has placed significant strain upon the Company's
management, operating, financial, and technical resources. There can be no
assurance that this strain will not have a material adverse effect on the
Company's business, financial condition, and results of operations, nor can
there be any assurance that the Company will be able to attract or retain
competent personnel and improve its operational systems sufficiently to
support the expansion of its operations. The Company's business requires
significant levels of working capital to finance accounts receivable and
product inventory that is not financed by its vendors. The Company may in the
future require additional equity or debt financing to support its increased
working capital needs in connection with any expansion of its business. Such
financing may not be available on terms that are favorable to the Company, if
at all. Also crucial to the Company's success will be its ability to achieve
additional economies of scale in order to sustain its operating margins. There
can be no assurance that the Company will be able to obtain adequate working
capital or achieve such economies of scale, and the failure to do so could
have a material adverse effect on the Company's business, financial condition,
and results of operations.
The Company's growth strategy also anticipates the entry into new product
markets in which the Company has had no prior experience, such as its recent
entry into the telephony market. The Company's distribution agreement with
Lucent Technologies restricts its rights to sell certain telephony products
manufactured by Lucent's competitors, which could impair the Company's
competitive position in this market. The Company might also attempt to expand
its business by engaging in strategic acquisitions or investments in
complementary businesses. Expansion of the Company's existing product markets,
entry into new product markets, or growth by such acquisitions or investments
could divert the use of the Company's resources and systems, require
additional resources that might not be available, result in new or more
intense competition, require longer implementation times or greater start-up
expenditures than anticipated, or otherwise fail to achieve the desired
results in a timely fashion, if at all. There can be no assurance, therefore,
that the Company will be able to expand its existing markets, compete
successfully in any new product markets, or identify, complete, or integrate
successfully any acquisitions or investments. The Company's ability to manage
successfully its growth will require continued enhancement of its operational,
management, and financial resources and controls. The Company's failure to
manage effectively its growth could have a material adverse effect on the
Company's business, financial condition, and results of operations. See
"Business--Growth Strategy."
QUARTERLY FLUCTUATIONS IN NET SALES AND OPERATING RESULTS
Net sales and operating results may fluctuate quarterly as a result of
demand for the Company's products and services, the introduction of new
hardware and software technologies, the introduction of new services by the
Company and its competitors, changes in manufacturers' prices or price
protection policies, changes in freight rates, disruption of warehousing or
shipping channels, changes in the level of operating expenses, the timing of
major marketing or other service projects, product supply shortages, inventory
adjustments, changes in product mix, entry into new product markets, the
timing of acquisitions or investments, difficulty in maintaining margins, and
general competitive and economic conditions. In addition, a substantial
portion of the Company's net sales in each quarter results from orders booked
in such quarter. Accordingly, the Company believes that period-to-period
comparisons of its operating results should not be relied upon as an
indication of future performance. It is possible that in certain future
periods, the Company's operating results may be below the expectations of
public market analysts and investors. In such event, the market price of the
Common Stock would likely be materially and adversely affected. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Quarterly Results."
RISKS ASSOCIATED WITH INVENTORY MANAGEMENT
The Company's business, like that of other wholesale distributors, is
subject to the risk that the value of its inventory will be adversely affected
by price reductions by manufacturers or by technological changes affecting the
usefulness or desirability of its products inventory. It is the policy of most
manufacturers of specialty technology products to protect distributors such as
the Company from the loss in value of inventory due to technological change or
reductions in the manufacturers' prices. Under the terms of most of the
Company's agreements, vendors will generally credit the Company for inventory
losses resulting from the vendor's price
7
<PAGE>
reductions if the Company complies with certain conditions. In addition,
generally under such agreements, the Company has the right to return for
credit or exchange for other products a portion of its slow moving or obsolete
inventory items within designated periods of time. There can be no assurance
that, in every instance, the Company will be able to comply with all necessary
conditions or manage successfully such price protection or stock rotation
opportunities, if available. Also, a manufacturer which elects to terminate a
distribution agreement generally will repurchase its products carried in
inventory. These industry practices are sometimes not included in written
agreements and do not protect the Company in all cases from declines in
inventory value, excess inventory, or product obsolescence. There can be no
assurance that manufacturers will continue such practices or that the Company
will be able to manage successfully its existing and future inventories.
Historically, the Company has not experienced losses due to obsolete inventory
materially in excess of established inventory reserves. Significant declines
in inventory value in excess of established inventory reserves or dramatic
changes in prevailing technology could have a material adverse effect on the
Company's business, financial condition, and results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business--Products and Vendors."
The Company is IBM's wholesale distributor of the "SureOne" line of POS
products in the United States. At December 31, 1996, the Company had
approximately 5,300 SureOne units in inventory at a cost of approximately $10
million. For the quarter ended December 31, 1996, the Company averaged sales
of approximately 240 SureOne units per month. IBM recently approved a stock
rotation of 3,200 units which IBM has indicated it will redirect to
international markets. While the Company does not presently anticipate
material losses on its SureOne inventory, there can be no assurance that
losses or costs from similar inventory excesses will not occur in the future.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and Note 13 of Notes to Financial Statements.
DEPENDENCE ON SENIOR MANAGEMENT
The success of the Company is largely dependent on the skills, experience
and efforts of its senior management, particularly Steven H. Owings, Chief
Executive Officer, Michael L. Baur, President, and Jeffery A. Bryson, Chief
Financial Officer. The Company has entered into employment agreements with
each of Messrs. Owings, Baur, and Bryson, which expire on June 30, 1999. The
Company also has obtained "key person" insurance policies on the lives of Mr.
Owings and Mr. Baur, each in the amount of $1 million. The loss of services of
any of these named individuals could have a material adverse effect on the
Company's business, financial condition, and results of operations. See
"Management."
DEPENDENCE ON CENTRALIZED FUNCTIONS
The Company distributes products from a single warehouse located in Memphis,
Tennessee and manages its operations through a single information system based
in Greenville, South Carolina. Repair, replacement, or relocation of such
centralized functions could be costly or untimely. Although the Company has
business interruption insurance, an uninsurable loss from electrical or
telephone failure, fire or other casualty, or other disruption could have a
material adverse effect on the Company's business, financial condition, and
results of operations. The Company's use of a single warehouse also makes the
Company more vulnerable to dramatic changes in freight rates than a competitor
with multiple, geographically dispersed warehouse sites. Losses in excess of
insurance coverage, an uninsurable loss, or changes in freight rates could
have a material adverse effect on the Company's business, financial condition,
and results of operations. See "Business--Operations."
DEPENDENCE ON THIRD-PARTY SHIPPERS
The Company presently ships virtually all products from Memphis, Tennessee
by Federal Express ("FedEx") or United Parcel Service ("UPS"). Changes in
shipping terms, or the inability of these third-party shippers to perform
effectively, could have a material adverse effect on the Company's business,
financial condition, and results of operations. There can be no assurance that
the Company can maintain favorable shipping terms or replace such shipping
services on a timely or cost-effective basis. See "Business--Operations" and
"Certain Transactions."
8
<PAGE>
SIGNIFICANT FLEXIBILITY IN APPLYING NET PROCEEDS FROM OFFERING
The Company has not designated any specific use for a substantial portion of
the net proceeds from the sale of Common Stock offered by the Company hereby.
Accordingly, management will have significant flexibility in applying the net
proceeds from this offering. The Company's net income per share will be
diluted as a result of this offering, and failure to utilize effectively the
net proceeds of this offering within a reasonable period of time may delay the
Company's ability to compensate for such dilution through increased
profitability, if at all, which could have a material adverse effect on the
market price of the Common Stock. See "Use of Proceeds."
POSSIBLE VOLATILITY OF STOCK PRICE
The market price of the Common Stock may be subject to wide fluctuations in
response to quarterly variations in operating results, general market
movements, and other events or factors. In addition, in recent years the stock
markets in general, and technology-related stocks in particular, have
experienced price and volume fluctuations that often have been unrelated or
disproportionate to the operating performance of companies. These
fluctuations, as well as general economic and market conditions, may adversely
affect the market price of the Common Stock. See "Price Range of Common
Stock."
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have outstanding
5,247,986 shares of Common Stock (5,507,386 shares if the Underwriters' over-
allotment option is exercised in full). Of these outstanding shares, the
1,150,000 shares of Common Stock sold in the Company's initial public offering
in March 1994, the approximately 1,150,000 shares issued pursuant to the
subsequent redemption of warrants granted in the initial public offering and
the 2,000,000 shares offered hereby (2,300,000 shares if the Underwriters'
over-allotment option is exercised in full) will be freely tradeable without
restriction or further registration under the Securities Act of 1933, as
amended (the "Securities Act") other than by "affiliates" of the Company, as
that term is defined in Rule 144 under the Securities Act. The remaining
shares of Common Stock outstanding after completion of this offering were
issued in private transactions and are eligible for sale in the public markets
at prescribed times, subject to compliance with an exemption from the
registration requirements of the Securities Act, such as Rule 144 or Rule
144A. The Company and holders of 409,500 shares of Common Stock (including all
shares beneficially owned by the Company's officers and directors) have agreed
that they will not sell any shares of Common Stock for 90 days from the date
of this Prospectus without the prior written consent of Robertson, Stephens &
Company. The holders of certain unit purchase options, representing rights to
acquire 84,000 shares of Common Stock, are entitled to have their shares
registered at the expiration of such 90-day period. Also, holders of an
additional 385,000 shares of Common Stock have agreed to similar restrictions
for 60 days from the date of this Prospectus. Sales of a substantial number of
shares of the Common Stock in the public market following this offering could
adversely affect the prevailing market price of the Common Stock and could
impair the Company's ability to raise additional equity capital. See
"Management--Recent Option Grants" and "--Stock Option Plans," "Description of
Capital Stock," "Shares Eligible for Future Sale," and "Underwriting."
ANTI-TAKEOVER EFFECTS OF PREFERRED STOCK AND OTHER PROVISIONS
The Board of Directors has the authority to issue up to 3,000,000 shares of
Preferred Stock and to determine the price, rights, preferences, and
privileges of those shares without any further vote or action by the
shareholders. The rights of the holders of Common Stock will be subject to,
and may be adversely affected by, the rights of the holders of any shares of
Preferred Stock that may be issued in the future. The issuance of Preferred
Stock, while providing flexibility in connection with possible acquisitions
and other corporate purposes, could make it more difficult for a third party
to acquire a majority of the outstanding voting stock of the Company. The
Company has no present plans to issue shares of Preferred Stock. Issuance of
additional shares of Common Stock or Preferred Stock could also result in the
dilution of the voting power of the Common Stock purchased in this offering.
In addition, the Board of Directors is authorized by the Articles of
Incorporation to consider all relevant factors, including the effect on
employees, customers, vendors, and other constituencies, and the future value
of the Company as a going concern, in evaluating any proposed tender offer,
merger, sale of assets, or similar extraordinary transaction. Such authority
of the Board of Directors may tend to discourage attempts by third parties to
acquire the Company and may adversely affect the price that a potential
purchaser would be willing to pay for the Common Stock. See "Description of
Capital Stock."
9
<PAGE>
USE OF PROCEEDS
The net proceeds from the sale of 2,000,000 shares of Common Stock offered
by the Company hereby at an assumed public offering price of $18.50 per share
are estimated to be approximately $34.4 million ($38.6 million if the
Underwriters' over-allotment option is exercised in full). The Company
anticipates that the net proceeds will be used first to repay the Company's
outstanding bank debt, with the remaining proceeds used for general corporate
purposes, including working capital and possible strategic acquisitions or
investments in complementary businesses. The Company is not currently a party
to any agreements or understandings with respect to any such acquisitions or
investments. There can be no assurance that any acquisitions or investments
can be completed on terms favorable to the Company, if at all. See "Risk
Factors--Significant Flexibility in Applying Net Proceeds from Offering."
At December 31, 1996, the Company's bank debt balance was approximately $5.1
million bearing interest at a floating 30-day LIBOR rate, plus 2.00% to 2.65%,
depending upon the Company's debt-to-net worth ratio. At December 31, 1996,
the interest rate was 7.66%.
Pending the foregoing uses, the net proceeds will be invested in short-term,
investment grade securities, certificates of deposit, or direct or guaranteed
obligations of the U.S. government.
PRICE RANGE OF COMMON STOCK
The following table sets forth, for the periods indicated, the high and low
bid quotations on The Nasdaq SmallCap Market and the high and low closing
prices on The Nasdaq National Market. On October 11, 1995, the Common Stock
ceased trading on The Nasdaq SmallCap Market and commenced trading on The
Nasdaq National Market under the symbol "SCSC." The Nasdaq SmallCap Market
quotations reflect inter-dealer quotations, without adjustment for retail
work-ups, mark-downs, or commissions and may not necessarily represent actual
transactions.
<TABLE>
<CAPTION>
THE NASDAQ THE NASDAQ
NATIONAL MARKET SMALLCAP MARKET
-------------------- -----------------
HIGH LOW HIGH LOW
-------- ------- -------- --------
<S> <C> <C> <C> <C>
Fiscal 1995 $ 9 5/8 $ 7 3/4
First quarter...................... 9 3/8 8 1/4
Second quarter..................... 10 1/4 8 1/2
Third quarter...................... 9 7/8 8 5/8
Fourth quarter.....................
Fiscal 1996
First quarter...................... 13 1/4 9 1/4
Second quarter..................... $ 17 $ 11 12 1/2 11 1/4
Third quarter...................... 16 5/8 12 1/2
Fourth quarter..................... 15 1/2 13 1/4
Fiscal 1997
First quarter...................... 14 10 3/4
Second quarter..................... 16 12 3/4
Third quarter (through February 10,
1997)............................. 18 1/2 15 3/8
</TABLE>
On February 10, 1997, the closing price of the Common Stock on The Nasdaq
National Market was $18.50 per share. On February 10, 1997, there were 50
shareholders of record of Common Stock.
DIVIDEND POLICY
The Company has never declared or paid cash dividends on its Common Stock
and it is currently the intention of the Board of Directors not to pay cash
dividends in the foreseeable future. The Company plans to retain earnings, if
any, to finance its operations.
10
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at December
31, 1996, and as adjusted to reflect the receipt and application of the net
proceeds from the sale of the 2,000,000 shares of Common Stock offered by the
Company hereby at an assumed public offering price of $18.50 per share:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
--------------------
ACTUAL AS ADJUSTED
-------- -----------
(In thousands)
<S> <C> <C>
Long-term obligations..................................... $ 5,069 $ --
Shareholders' equity:
Preferred Stock, no par value; 3,000,000 shares
authorized;
none issued or outstanding.............................. -- --
Common Stock, no par value; 10,000,000 shares authorized;
3,247,986 shares issued and outstanding; and
5,247,986 shares issued and outstanding, as adjusted(1). 11,958 46,338
Retained earnings......................................... 4,694 4,694
-------- -------
Total shareholders' equity............................... 16,652 51,032
-------- -------
Total capitalization.................................... $ 21,721 $51,032
======== =======
</TABLE>
- --------
(1) Based on the number of shares outstanding at December 31, 1996. Excludes
(i) 444,117 shares of Common Stock issuable upon exercise of outstanding
options at a weighted average exercise price of $11.74 per share; (ii)
84,000 shares of Common Stock issuable upon exercise of outstanding unit
purchase options at a weighted average exercise price of $5.75 per share;
and (iii) 100,000 shares of Common Stock issuable upon exercise of
outstanding warrants at a weighted average exercise price of $2.00 per
share. See "Management--Stock Option Plans" and "Description of Capital
Stock--Warrants and Unit Purchase Options."
11
<PAGE>
SELECTED FINANCIAL DATA
The following table sets forth certain selected financial information data,
which should be read in conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and the financial statements
and related notes thereto included elsewhere herein. The following selected
financial data for the seven months ended June 30, 1993 and for each of the
years in the three-year period ended June 30, 1996 have been derived from the
financial statements of the Company audited by KPMG Peat Marwick LLP,
independent accountants. The audited financial statements of the Company for
the three-year period ended June 30, 1996 are included elsewhere herein. The
statements of operations data for the six months ended December 31, 1995 and
1996 and the balance sheet data at December 31, 1996 are unaudited but have
been prepared on the same basis as the audited financial statements and, in
the opinion of management, contain all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the results of
operations for such periods. The results of operations for the six months
ended December 31, 1996 are not necessarily indicative of results to be
expected for any future period or year.
<TABLE>
<CAPTION>
SIX MONTHS
FISCAL YEAR ENDED JUNE 30, ENDED DECEMBER 31,
--------------------------------- -------------------
1993(1) 1994 1995 1996 1995 1996
------- ------- ------- ------- --------- ---------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Net sales.............. $2,383 $16,089 $34,235 $55,670 $ 23,277 $ 42,110
Cost of goods sold..... 2,041 13,676 29,444 47,856 19,928 36,382
------ ------- ------- ------- --------- ---------
Gross profit........... 342 2,413 4,791 7,814 3,349 5,728
Selling, general and
administrative
expenses............... 578 1,718 3,128 4,955 2,217 3,557
Amortization of
intangibles............ 7 50 83 83 41 41
------ ------- ------- ------- --------- ---------
Total operating
expenses............ 585 1,768 3,211 5,038 2,258 3,598
------ ------- ------- ------- --------- ---------
Operating income
(loss)................. (243) 645 1,580 2,776 1,091 2,130
Gain from contract
termination, net....... -- -- 1,000 200 200 --
Other income (expense),
net(2)................. 5 (150) (72) 75 45 (169)
------ ------- ------- ------- --------- ---------
Total other income
(expense)........... 5 (150) 928 275 245 (169)
------ ------- ------- ------- --------- ---------
Income (loss) before
income taxes........... (238) 495 2,508 3,051 1,336 1,961
Income taxes........... 5 143 997 1,193 523 745
------ ------- ------- ------- --------- ---------
Net income (loss)(3)... $ (243) $ 352 $ 1,511 $ 1,858 $ 813 $ 1,216
====== ======= ======= ======= ========= =========
Net income (loss) per
share(3)............... $(0.31) $ 0.23 $ 0.50 $ 0.53 $ 0.23 $ 0.35
====== ======= ======= ======= ========= =========
Weighted average shares
outstanding............ 773 1,663 3,271 3,560 3,552 3,478
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30, AS OF
------------------------------ DECEMBER 31,
1993 1994 1995 1996 1996
------ ------- ------- ------- ------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital............... $ 216 $ 4,888 $ 6,530 $17,061 $19,332
Total assets.................. 2,017 6,740 13,939 28,742 37,987
Total bank debt............... 120 -- 1,200 3,779 5,069
Total shareholders' equity.... 212 4,751 6,396 15,413 16,652
</TABLE>
- --------
(1) Fiscal 1993 consisted of approximately seven months from the Company's
inception in December 1992.
(2) Includes net interest income (expense) and net other income (expense).
(3) Excluding the net effect of a one-time gain from a contract termination
payment by Gates/FA Distributing, Inc. and the net effect of an additional
warehouse relocation in May 1995, the Company's net income and net income
per share for fiscal 1995 and 1996 and for the six months ended December 31,
1995 would have been $911,000, $1,738,000 and $693,000, and $0.32, $0.50 and
$0.20, respectively.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis contains forward-looking statements
which involve risks and uncertainties. The Company's actual results could
differ materially from those anticipated in these forward-looking statements
as a result of certain factors, including those set forth under "Risk Factors"
and elsewhere in this Prospectus. This discussion and analysis should be read
in conjunction with "Selected Financial Data" and the Financial Statements and
the Notes thereto included elsewhere in this Prospectus.
OVERVIEW
The Company was incorporated in December 1992 as a joint venture with
Gates/FA Distributing, Inc. ("Gates"), a distributor of personal computer
products. The Company began as a distributor of Auto-ID products, including
bar code scanners and bar code label printers, but rapidly expanded into the
distribution of POS products, initially in April 1993 through the acquisition
of Alpha Data Systems ("Alpha Data"), a POS distributor. In July 1994, the
Company acquired MicroBiz Corp. ("MicroBiz"), another POS distributor. In
March 1994, the Company completed an initial public offering, and in March
1996, it purchased Gates' remaining interest in the Company.
From fiscal 1994 to fiscal 1996, net sales increased at a compound annual
rate of 86.0% to $55.7 million, while over the same period operating income
increased at a 107.5% compound annual rate to $2.8 million. Growth in net
sales has been principally driven by competitive product pricing, selective
expansion of its product line, intensive marketing efforts to the reseller
channel, and strategic acquisitions. Results for fiscal 1995 and 1996
benefitted significantly from expanded marketing efforts to recruit new
reseller customers and from the addition of significant new vendor
relationships. Net sales for fiscal 1995 were enhanced by the addition of
Epson America's receipt printers, Zebra Technologies' bar code label printers,
and Micro-Touch's POS touch screen monitors. In fiscal 1996, the Company
established Transition Marketing, a joint venture including Globelle
Corporation, a large international distributor of personal computer products.
The primary purpose of this joint venture is to enhance the Company's market
presence through the sponsorship of regional quarterly trade shows to showcase
Auto-ID and POS hardware and software solutions for reseller customers.
The Company's operating income growth has historically been driven by
increasing gross profit and disciplined control of operating expenses. The
Company's business model features a sophisticated information system,
streamlined management, and centralized distribution, enabling it to achieve
the economies of scale necessary for cost-effective order fulfillment. As the
Company's markets have grown, pricing pressures have been mitigated by
increased purchasing discounts earned through volume purchases from
manufacturers. From its inception, the Company has tightly managed its general
and administrative expenses by maintaining strong internal controls.
Historically, general and administrative expenses have decreased as a
percentage of net sales. However, this decline has been offset by higher
marketing costs, including the establishment of a business development team to
enhance POS market penetration, the organization of the Professional Services
Group to serve the needs of Auto-ID customers, and investments related to
Transition Marketing and its "Solutions USA" trade shows for the benefit of
its reseller customers.
The Company's operating results for fiscal 1995 and 1996 were impacted by:
(i) a one-time gain of $1.3 million (net of $100,000 of relocation expenses)
resulting from the September 1994 termination of warehousing operations
provided by Gates, which was recognized ratably over a one-year period ending
in August 1995; and (ii) $100,000 in additional relocation expenses related to
a subsequent move of the Company's warehouse to its present location in May
1995. The net effect of these transactions was to increase net income by
$600,000 in fiscal 1995 and by $120,000 in fiscal 1996. Excluding these
amounts, net income and net income per share for fiscal 1995 and 1996 would
have been $911,000 and $1.7 million and $0.32 and $0.50, respectively.
13
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain income and
expense items as a percentage of net sales:
<TABLE>
<CAPTION>
SIX MONTHS
FISCAL YEAR ENDED JUNE 30, ENDED DECEMBER 31,
---------------------------- --------------------
1994 1995 1996 1995 1996
-------- -------- -------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net sales.................. 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold......... 85.0 86.0 86.0 85.6 86.4
-------- -------- -------- --------- ---------
Gross profit............... 15.0 14.0 14.0 14.4 13.6
Selling, general and admin-
istrative expenses........ 10.7 9.2 8.9 9.5 8.4
Amortization of intangi-
bles...................... 0.3 0.2 0.1 0.2 0.1
-------- -------- -------- --------- ---------
Total operating expenses. 11.0 9.4 9.0 9.7 8.5
-------- -------- -------- --------- ---------
Operating income........... 4.0 4.6 5.0 4.7 5.1
Gain from contract termina-
tion, net................. -- 2.9 0.4 0.8 --
Other income (expense),
net....................... (0.9) (0.2) 0.1 0.2 (0.4)
-------- -------- -------- --------- ---------
Total other income (ex-
pense).................. (0.9) 2.7 0.5 1.0 (0.4)
-------- -------- -------- --------- ---------
Income (loss) before income
taxes..................... 3.1 7.3 5.5 5.7 4.7
Income taxes............... 0.9 2.9 2.2 2.2 1.8
-------- -------- -------- --------- ---------
Net income................. 2.2% 4.4% 3.3% 3.5% 2.9%
======== ======== ======== ========= =========
</TABLE>
COMPARISON OF SIX MONTHS ENDED DECEMBER 31, 1996 AND 1995
Net Sales. Net sales consist of sales of Auto-ID and POS products billed to
customers when shipped, net of sales discounts and returns. Net sales for the
six months ended December 31, 1996 increased by 80.9% to $42.1 million from
$23.3 million for the comparable prior year period. Growth in 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. Cost of sales is comprised of purchase costs, net of early
payment, volume discounts, and product freight. Gross profit as a percentage
of net sales is affected by several factors including the mix of high margin
and low margin products and the proportion of large orders on which the
Company extends volume discounts to resellers.
Gross profit for the six months ended December 31, 1996 increased by 71.0%
to $5.7 million from $3.3 million for the comparable prior year period. Gross
profit as a percentage of net sales for the six months ended December 31, 1996
was 13.6% as compared to 14.4% for the comparable prior year period. Gross
profit as a percentage of net sales decreased as a result of a greater mix of
lower margin products as well as volume discounts provided to resellers on
large orders.
Operating Expenses. Operating expenses include commissions paid to sales
representatives; compensation paid to marketing, technical, and administrative
personnel; the costs of marketing programs to reach resellers; telephone
expense; a provision for bad debt losses; costs associated with the
Professional Services Group; and amortization of intangibles. Fluctuations in
operating expenses as a percentage of net sales can result from the amount of
value-added services which accompany higher or lower gross margin sales;
planned expenditures by the Company for additional marketing programs and for
hiring additional technical support personnel; and general and administrative
efficiencies gained through higher sales volumes and accompanying economies of
scale.
Operating expenses for the six months ended December 31, 1996 increased by
59.3% to $3.6 million from $2.3 million for the comparable prior year period.
Operating expenses as a percentage of net sales were 8.5% for
14
<PAGE>
the six months ended December 31, 1996 as compared to 9.7% for the comparable
prior year period. The decrease in operating expenses as a percentage of net
sales for the six months ended December 31, 1996 resulted from efficiencies
gained through increased sales volumes.
Operating Income. Operating income for the six months ended December 31,
1996 increased by 95.2% to $2.1 million from $1.1 million for the comparable
prior year period, driven by higher net sales, as well as a reduction of
operating expenses as a percentage of net sales. Operating income as a
percentage of net sales increased to 5.1% from 4.7% for the comparable prior
year period.
Total Other Income (Expense). Total other income (expense) consists of
interest income (expense), net, and gain from contract termination, net of
expenses related to warehouse relocations. Net interest expense for the six
months ended December 31, 1996 was $144,000 as compared to $45,000 of net
interest income for the comparable prior year period. Higher net interest
expense resulted from the Company's use of its line of credit to fund higher
inventory levels. Interest income for the six months ended December 31, 1995
resulted from earnings on invested proceeds from Common Stock issued in
connection with warrant exercises through September 1995. The Company
recognized $200,000 as other income for the six months ended December 31, 1995
associated with the Gates contract termination. This amount constituted the
final portion of the gain from contract termination.
Income Taxes. For the six month periods ended December 31, 1996 and 1995,
the Company's effective tax rate was 38.0% and 39.1%, respectively.
Net Income. Net income for the six months ended December 31, 1996 increased
by 49.6% to $1.2 million from $813,000 for the comparable prior year period as
a result of increased operating income, offset by higher interest expense. Net
income as a percentage of net sales for the six months ended December 31, 1996
was 2.9% as compared to 3.5% for the comparable prior year period. Excluding
the effect of the Gates contract termination payment, net income for the six
months ended December 31, 1996 would have increased by 75.5% to $1.2 million,
or 2.9% of net sales, from $693,000, or 3.0% of net sales, for the comparable
prior year period.
COMPARISON OF FISCAL YEARS ENDED JUNE 30, 1996, 1995, AND 1994
Net Sales. Net sales increased by 62.6% to $55.7 million in fiscal 1996 from
$34.2 million in fiscal 1995, and by 112.8% from $16.1 million in 1994. Net
sales growth in each period resulted primarily from additions to the Company's
sales force, competitive product pricing, selective expansion of its product
line, and increased marketing efforts to the reseller channel.
Gross Profit. Gross profit increased by 63.1% to $7.8 million in fiscal 1996
from $4.8 million in fiscal 1995, and by 98.5% from $2.4 million in fiscal
1994. Gross profit as a percentage of net sales was 14.0% in fiscal 1996 and
1995, and 15.0% in fiscal 1994. This decrease in gross profit as a percentage
of net sales in fiscal 1995 was a result of a greater mix of lower margin
products as well as volume discounts provided to resellers on large orders.
Operating Expenses. Operating expenses increased by 56.9% to $5.0 million in
fiscal 1996 from $3.2 million in fiscal 1995, and by 81.6% from $1.8 million
in fiscal 1994. Operating expenses as a percentage of net sales declined to
9.0% in 1996, from 9.4% in 1995 and 11.0% in fiscal 1994. The decrease in
operating expenses as a percentage of net sales resulted from efficiencies
gained through increased sales volumes.
Operating Income. Operating income increased by 75.7% to $2.8 million in
fiscal 1996 from $1.6 million in fiscal 1995, and by 145.0% from $645,000 in
fiscal 1994, driven by higher net sales, as well as a reduction in operating
expenses as a percentage of net sales. Operating income as a percentage of net
sales increased to 5.0% in fiscal 1996, from 4.6% in fiscal 1995 and 4.0% in
fiscal 1994.
Total Other Income (Expense). Net interest income for fiscal 1996 was
$87,000 from earnings on the investment of proceeds from the issuance of
Common Stock pursuant to exercises of warrants through September 1995. Net
interest expense for fiscal 1995 decreased to $65,000 from $134,000 for fiscal
1994. This decrease resulted primarily from the application of proceeds 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.
15
<PAGE>
The Company recognized $200,000 in fiscal 1996 and $1.1 million in fiscal
1995 (net of $100,000 of warehouse relocation expenses) as other income
associated with the Gates contract termination. The Company incurred additional
warehouse relocation expenses of $100,000 in fiscal 1995 which is reflected in
the gain from contract termination, net.
Income Taxes. Income tax expense was $1.2 million, $997,000 and $143,000, in
fiscal 1996, 1995, and 1994, respectively, reflecting an effective tax rate of
39.1%, 39.8%, and 28.9%, respectively. These provisions are based upon the
Federal tax rate of 34.0% and reflect the impact of state taxes and credits for
net operating loss carry-forwards in fiscal 1994.
Net Income. Net income increased by 23.0% to $1.9 million in fiscal 1996 from
$1.5 million in fiscal 1995, and by 329.3% from $352,000 in fiscal 1994. Net
income as a percentage of net sales was 3.3% for fiscal 1996, 4.4% for fiscal
1995, and 2.2% for fiscal 1994. Without the effect of the Gates contract
termination payment and the additional May 1995 warehouse relocation, net
income for fiscal 1996 would have increased by 90.8% to $1.7 million, or 3.1%
of net sales, from $911,000, or 2.7% of net sales in fiscal 1995, and by 158.8%
from $352,000, or 2.2% of net sales in fiscal 1994.
QUARTERLY RESULTS
The following tables set forth certain unaudited quarterly financial data and
such data expressed as a percentage of net sales. The information has been
derived from unaudited financial statements that, in the opinion of management,
reflect all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of such quarterly information. The operating
results for any quarter are not necessarily indicative of the results to be
expected for any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------
SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1995 1995 1996 1996 1996 1996
--------- -------- -------- -------- --------- --------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Net sales............... $10,788 $12,489 $14,355 $18,038 $19,673 $22,437
Cost of goods sold...... 9,211 10,716 12,290 15,639 16,975 19,407
------- ------- ------- ------- ------- -------
Gross profit............ 1,577 1,773 2,065 2,399 2,698 3,030
Selling, general and ad-
ministrative expenses.. 1,053 1,164 1,270 1,468 1,668 1,889
Amortization of intangi-
bles................... 21 21 21 20 20 21
------- ------- ------- ------- ------- -------
Total operating ex-
penses............... 1,074 1,185 1,291 1,488 1,688 1,910
------- ------- ------- ------- ------- -------
Operating income ....... 503 588 774 911 1,010 1,120
Gain from contract ter-
mination, net.......... 200 -- -- -- -- --
Other income (expense),
net.................... (6) 51 30 -- (81) (88)
------- ------- ------- ------- ------- -------
Total other income
(expense)............ 194 51 30 -- (81) (88)
------- ------- ------- ------- ------- -------
Income before income
taxes.................. 697 639 804 911 929 1,032
Income taxes............ 274 249 315 355 353 392
------- ------- ------- ------- ------- -------
Net income ............. $ 423 $ 390 $ 489 $ 556 $ 576 $ 640
======= ======= ======= ======= ======= =======
Net income per share.... $ 0.13 $ 0.11 $ 0.13 $ 0.16 $ 0.17 $ 0.18
======= ======= ======= ======= ======= =======
Weighted average shares
outstanding............ 3,412 3,693 3,670 3,466 3,455 3,493
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------
SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1995 1995 1996 1996 1996 1996
--------- -------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Net sales............... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold...... 85.4 85.8 85.6 86.7 86.3 86.5
------- ------- ------- ------- ------- -------
Gross profit............ 14.6 14.2 14.4 13.3 13.7 13.5
Selling, general and ad-
ministrative expenses.. 9.8 9.3 8.8 8.1 8.5 8.4
Amortization of intangi-
bles................... 0.2 0.2 0.2 0.1 0.1 0.1
------- ------- ------- ------- ------- -------
Total operating ex-
penses............... 10.0 9.5 9.0 8.2 8.6 8.5
------- ------- ------- ------- ------- -------
Operating income ....... 4.6 4.7 5.4 5.1 5.1 5.0
Gain from contract ter-
mination, net.......... 1.9 -- -- -- -- --
Other income (expense),
net.................... (0.1) 0.4 0.2 -- (0.4) (0.4)
------- ------- ------- ------- ------- -------
Total other income
(expense)............ 1.8 0.4 0.2 -- (0.4) (0.4)
------- ------- ------- ------- ------- -------
Income before income
taxes.................. 6.4 5.1 5.6 5.1 4.7 4.6
Income taxes............ 2.5 2.0 2.2 2.0 1.8 1.7
------- ------- ------- ------- ------- -------
Net income ............. 3.9% 3.1% 3.4% 3.1% 2.9% 2.9%
======= ======= ======= ======= ======= =======
</TABLE>
16
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company financed its initial operating requirements and growth through
private financings totalling $500,000. In March 1994, the Company completed an
initial public offering of units consisting of Common Stock and warrants,
which provided the Company with net proceeds of approximately $4.6 million. In
September 1995, the Company also received net proceeds of approximately $6.3
million from Common Stock issued upon the exercise of warrants.
In October 1995, the Company entered into a revolving credit facility with
Branch Banking and Trust Company ("BB&T") which allowed for borrowings of up
to $8.0 million at an interest rate equal to the 30-day LIBOR rate plus 2.35%.
The borrowing base available under the line of credit was limited to 80% of
eligible accounts receivable and 40% of non-IBM inventory. A lien on accounts
receivable and inventory secured the line of credit. At June 30, 1996, the
interest rate on the line was 7.98%, the borrowing base exceeded $8.0 million,
and the outstanding balance was $3.8 million, leaving $4.2 million of credit
availability.
In November 1996, the Company renegotiated the BB&T line of credit to allow
borrowings of up to $15.0 million at an interest rate equal to the 30-day
LIBOR rate plus a rate varying from 2.00% to 2.65% tied to the Company's debt-
to-net worth ratio ranging from 1:1 to 2:1. This line of credit extends to
October 31, 1998. Other terms of the line of credit remain essentially the
same. At December 31, 1996, the interest rate on the line was 7.66%, and the
outstanding balance was $5.1 million, on a borrowing base of $12.2 million,
leaving $7.1 million of credit availability.
A lien on the Company's IBM accounts receivable and inventory secure its
trade payable to IBM Credit Corporation under an agreement for wholesale
financing signed in April 1996. This arrangement also grants IBM Credit a lien
on the Company's non-IBM accounts receivable and inventory which is
subordinated to the BB&T lien.
For the six months ended December 31, 1996, operating activities used cash
in the amount of $973,000. For this period, cash was used to fund a $1.3
million increase in receivables and a $7.6 million increase in inventory, net
of a corresponding $7.3 million increase in trade accounts payable. For fiscal
1996, net cash in the amount of $8.3 million was used in operating activities,
compared to $1.8 million for fiscal 1995. The increase in cash used in
operations was primarily the result of higher inventory and receivables, which
was partially offset by growth in trade payables to vendors. Cash used in
operating activities for fiscal 1995 would have been $2.5 million excluding
the receipt of $650,000 in September 1994 of the $1.4 million Gates agreed to
pay to the Company in connection with the contract termination. In March 1996,
the Company collected the remaining $750,000 from Gates.
For the six months ended December 31, 1996, investing activities consisted
of $340,000 of capital expenditures. Cash used in investing activities for
fiscal 1996 was $904,000 and included $659,000 for certain capital
expenditures and payments of $202,000 to MicroBiz in connection with the
acquisition. Cash used in investing activities for fiscal 1995 was $1.4
million and consisted of $669,000 for capital expenditures, and payments of
$120,000 to a former shareholder of Alpha Data and $629,000 to MicroBiz.
For the six months ended December 31, 1996, cash provided by financing
activities was $1.3 million, consisting of borrowings under the Company's line
of credit. Cash provided by financing activities for fiscal 1996 was $9.0
million, consisting of $2.6 million in net advances under the line of credit,
$6.8 million in net proceeds from the issuance of Common Stock pursuant to
exercises of warrants and a portion of a prior underwriter's unit purchase
options, and $552,000 in net proceeds from the issuance of Common Stock
pursuant to exercise of certain other options. A portion of these proceeds was
used in September 1995 to repay $1.2 million of indebtedness under the
Company's line of credit. In March 1996, the Company exercised its call option
to repurchase 250,000 shares of Common Stock from Gates for $875,000. Cash
provided by financing activities for fiscal 1995 was $1.3 million, consisting
of $1.2 million in borrowings under the line of credit and $134,000 in net
proceeds from the issuance of Common Stock pursuant to exercises of warrants
and a portion of a prior underwriter's unit purchase options.
17
<PAGE>
The Company believes that the net proceeds from this offering, together with
the existing bank line of credit, vendor financing, and cash flow from
operations, will be sufficient to meet its cash requirements for at least the
next 18 months.
BACKLOG
The Company does not consider backlog to be material to its business.
Virtually all orders are filled within 24 hours of receipt.
NEW ACCOUNTING STANDARDS
In October 1995, the Financial Accounting Standard Board issued SFAS No.
123, "Accounting for Stock-Based Compensation." SFAS No. 123 was effective for
fiscal years beginning after December 15, 1995, and requires 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.
18
<PAGE>
BUSINESS
GENERAL
The Company is a leading value-added wholesale distributor of specialty
technology products exclusively to resellers. The Company primarily
distributes Auto-ID and POS products which interface with computer systems
used to automate the collection, processing, and communication of information
for commercial and industrial applications, including retail sales,
distribution, shipping, inventory control, materials handling, and warehouse
management. The Company currently markets more than 7,700 products from over
40 hardware and software vendors from its central warehouse in Memphis,
Tennessee to approximately 5,900 reseller customers in the United States and
Canada.
The Company's vendors include most of the leading Auto-ID and POS
manufacturers, including Cherry Electrical, Cognitive Solutions, Datamax,
Eltron, Epson America, IBM, Intermec, Ithaca Peripherals, Metrologic, Micro-
Touch Systems, MMF Cash Drawer, Monarch Marking Systems, Percon, PSC, Spectra-
Physics, StrandWare, Symbol Technologies, and Zebra Technologies. In addition
to distributing Auto-ID and POS products, the Company recently entered into an
agreement with Lucent Technologies for the distribution of telephony products,
including PBXs, key systems, telephone handsets, cabling, and voice mail.
INDUSTRY OVERVIEW
The distribution channels for specialty technology products generally
consist of manufacturers, wholesale distributors, resellers, and end-users. In
recent years, these distribution channels have evolved through three stages:
(i) direct sales by manufacturers to end-users; (ii) single-tier distribution
in which manufacturers sell to resellers who, in turn, sell directly to end-
users; and (iii) two-tier, or wholesale distribution, in which manufacturers
sell to wholesale distributors who sell only to resellers who, in turn, sell
directly to end-users.
Currently, the wholesale distribution channel is highly fragmented,
comprised of several large national distributors and many smaller regional
distributors. Large national distributors are engaged primarily in
conventional order fulfillment and typically offer few value-added services,
while small regional distributors are limited in the scale and scope of their
operations and services.
As was the case with the PC industry in the 1980s, specialty technology
products have been evolving from proprietary single platform systems, whereby
a single manufacturer's products are used to create a system solution, to more
open-architecture systems, whereby a variety of manufacturers' products can be
configured together to create a system solution. As a technology moves towards
open-system solutions, it becomes easier for manufacturers to develop and
enter markets with components that are part of an overall system solution.
Competition among an expanding number of manufacturers has caused product
prices to decrease and product applications to expand, which has resulted in
an increasing number of resellers entering the market in order to support a
broader base of potential end-users. As the number of resellers and end-users
grows, competition among manufacturers and within the reseller channel has
intensified, resulting in a less orderly market structure. As a result of the
transition of specialty technology products to open-systems, both
manufacturers and resellers have become more dependent upon wholesale
distributors for the organization and maintenance of an efficient market
structure.
In addition, manufacturers which face declining product prices and rising
costs of direct sales increasingly rely upon value-added wholesale
distributors for outsourcing certain support functions, such as product
assortment, delivery, inventory management, technical assistance, and
marketing. At the same time, shortened product life cycles and the
introduction of new products and applications have caused resellers
increasingly to rely on wholesale distributors for various inventory
management, financing, technical support, and related functions. The Company
believes that as the reseller market grows and becomes more fragmented, and as
specialty technology products continue to transition to open systems, the
wholesale distribution channel will become increasingly more important.
19
<PAGE>
Auto-ID and POS products are examples of specialty technology products which
are transitioning from proprietary to open-systems architecture. Auto-ID
technology incorporates the capabilities for electronic recognition and data
processing without the need for manual input and consists of a wide range of
products, including 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. As Auto-ID technology
has become more pervasive, applications have evolved from traditional uses
such as inventory control, materials handling, distribution, shipping, and
warehouse management to more advanced applications such as medical research.
According to an industry study, the worldwide Auto-ID market is projected to
grow at a compound annual rate of 14% from approximately $2.2 billion in 1993
to approximately $5.6 billion in 2000.
POS technology consists of devices used for the capture, processing,
analysis, and dissemination of transaction data. POS product lines include
computer-based terminals, monitors, receipt printers, pole displays, cash
drawers, keyboards, peripheral equipment, and fully integrated processing
units used primarily in retail applications. According to an industry study,
the market in the U.S. for POS equipment was $2.6 billion in 1994. The same
study indicated that in 1994, approximately 40% of POS terminals were
distributed through indirect channels, including wholesale distributors,
dealers, and VARs.
In addition to Auto-ID and POS, the Company believes that other specialty
technologies, such as telephony (including PBXs, key systems, telephone
handsets, cabling, and voice mail), have similar market characteristics,
thereby making them attractive for wholesale distribution.
THE SCANSOURCE BUSINESS MODEL
The Company is a leading value-added wholesale distributor of specialty
technology products and services exclusively to the reseller channel and
believes that it has developed the scope of service capabilities and the scale
of operations that are critical to success in its core markets. The Company's
business model is based upon the following fundamental elements:
. Focus on Specialty Technology Products. The Company focuses on specialty
technology products in order to capitalize upon a growing reliance on value-
added wholesale distribution as these products transition to open-
architecture, scalable platforms.
. Exclusive Emphasis on Resellers. The Company does not compete with its
reseller customers for sales to end-users. This exclusive focus on resellers
generates loyalty among its customers, is an established distribution model
with which the majority of PC resellers are familiar, and promotes incremental
market growth by encouraging resellers to service a broad group of end-users
without the threat of competition from the wholesale channel.
. Commitment to Cost Leadership. The Company's flat organizational structure
permits it to respond rapidly to the needs of both its vendors and resellers
while maintaining tight control over its operating expenses. The Company
monitors its operating costs and intends to continue investing in its
information system and central warehouse as required, implementing incentive
programs for product managers to increase inventory turns, and leveraging
vendor relationships for pricing discounts and marketing allowances.
. Sophisticated Information System. The Company has made significant
investments in the development of a sophisticated information system. The
Company's information system is a scalable, multi-platform, real-time system
intended for simultaneous decentralized decision-making by sales and
purchasing professionals while permitting control of daily operating functions
by senior management.
. Central Warehouse. The Company distributes products from a single
warehouse in Memphis, Tennessee. The Company believes that central
distribution provides certain competitive advantages, including prompt order
fulfillment and delivery, lower inventory requirements, improved inventory
control, simplified purchasing and tracking, higher order-fill rates, and the
flexibility to respond quickly to various customer needs, such as systems
integration and drop shipments to end-users.
20
<PAGE>
GROWTH STRATEGY
The Company's growth strategy is to capitalize on the continuing shift of
specialty technology products toward wholesale distribution as well as the
continued expansion of certain specialty technology markets. Key elements
of the Company's growth strategy are as follows:
. Promote Entry of Additional Resellers in Core Markets. The Company educates
resellers on the opportunities in specialty technology markets, sponsors
programs aimed at recruiting new resellers, and facilitates the flow of sales
and marketing information, such as tracking sales leads. By offering a wide
array of products and services, including same-day order fulfillment, overnight
product delivery, financing, and technical support, the Company minimizes
barriers to entry and promotes development of the reseller channel.
. Expand Vendor Relationships. The Company presently offers more than 7,700
products from over 40 vendors and intends to continue broadening its product
assortment and base of vendors. Recently, the Company expanded its offerings of
radio-frequency equipment and pen-based hand-held devices and added the full
line of bar code scanning devices, printers, and radio-frequency portable
computers from Intermec Corporation, a leading Auto-ID manufacturer.
. Enhance Value-Added Service Capabilities. In addition to basic order
fulfillment offered by conventional wholesale distributors, the Company
provides a variety of value-added services benefitting both manufacturers and
resellers. These programs include pre-sale and post-sale technical support,
bundling of separate product assortments into solution kits, and contract
consulting and programming. The Company also intends to add new services in
response to the growing needs of its reseller customers. For example, the
Company recently established a Professional Services Group to assist resellers
with pen-based systems programming and radio-frequency data collection
applications.
. Enter Additional Specialty Technology Markets. The Company believes that
opportunities exist to apply its efficient, value-added distribution model to
additional specialty technology markets with characteristics similar to the
Auto-ID and POS markets. For example, the Company recently entered into an
agreement with Lucent Technologies for the distribution of computer telephony
products, such as PBXs, key systems, telephone handsets, cabling, and voice
mail.
. Pursue Selective Acquisitions. The Company intends to identify and pursue
strategic acquisitions or investments in complementary businesses. While the
Company continues to evaluate opportunities, it is not currently a party to any
agreements or understandings with respect to any such acquisitions or
investments.
21
<PAGE>
PRODUCTS AND VENDORS
The Company currently markets more than 7,700 products from over 40 hardware
and software vendors. The Company primarily distributes Auto-ID and POS
products which interface with computer systems used to automate the collection,
processing and communication of information for commercial and industrial
applications, including retail sales, distribution, shipping, inventory
control, materials handling, and warehouse management. The following table sets
forth the Company's principal Auto-ID and POS product categories and vendors:
[CHART APPEARS HERE]
<TABLE>
<CAPTION>
Credit
Bar Code Cash Auth. Customer
Printers Decoders Scanners Software Verifiers Drawers Products Displays
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Advent Corporation
American Power Conversion
Cherry Electrical
Cognitive Solutions, Inc. X
CoStar Corporation X
Datacap Systems, Inc. X
Datamax Corporation X X
Donner Media Incorporated
Eltron International, Inc. X X X
Epson America, Inc.
GrafTek X
Hand Held Products
IBM Corporation X X
IC Verify X
Informatics, Inc. X
Intermec Corporation X X X X
Ithaca Peripherals Incorporated
Linx Data Terminals, Inc. X
Logic Controls, Inc. X X
Metrologic Instrument X X
Micro-Touch Systems, Inc.
MMF Cash Drawer Company X
Monarch Marking Systems X X
Motorola Indala X
Opticon, Inc. X X
Percon, Inc. X X X
PSC Inc. X X
Psion, Incorporated X
SATO America, Inc. X X X
Spectra-Physics, Inc. X
StrandWare X
Symbol Technologies, Inc. X X X
Unitech America, Inc. X X
Zebra Technologies X X
<CAPTION>
Ribbons & Portable Data POS POS Receipt Radio Freq. Touch UPS Backup
Labels Collectors Computers Keyboards Printers Products Screens Systems
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Advent Corporation X
American Power Conversion X
Cherry Electrical X
Cognitive Solutions, Inc. X
CoStar Corporation
Datacap Systems, Inc.
Datamax Corporation
Donner Media Incorporated X
Eltron International, Inc.
Epson America, Inc. X X X
GrafTek
Hand Held Products X
IBM Corporation X X X X
IC Verify
Informatics, Inc.
Intermec Corporation X
Ithaca Peripherals Incorporated X
Linx Data Terminals, Inc.
Logic Controls, Inc. X
Metrologic Instrument
Micro-Touch Systems, Inc. X
MMF Cash Drawer Company
Monarch Marking Systems X
Motorola Indala X
Opticon, Inc.
Percon, Inc. X
PSC Inc.
Psion, Incorporated X
SATO America, Inc.
Spectra-Physics, Inc.
StrandWare
Symbol Technologies, Inc. X X
Unitech America, Inc. X X
Zebra Technologies X
</TABLE>
22
<PAGE>
In addition, the Company recently entered into an agreement with Lucent
Technologies for the distribution of telephony products, including PBXs, key
systems, telephone handsets, and voice mail.
The Company's merchandising director recruits vendors and manages important
aspects of its vendor relationships, such as purchasing arrangements,
cooperative marketing initiatives, vendor sales force relationships, product
training, and monitoring rebate programs and various contract terms and
conditions. The Company generally enters into non-exclusive distribution
agreements with vendors. These agreements typically provide the Company with
stock rotation and price protection provisions that may mitigate the risk of
loss from slow moving inventory, vendor price reductions, product updates or
obsolescence. Some of these distribution agreements contain minimum purchase
amounts in order to receive preferential prices. The distribution agreements
are generally terminable on 30 to 120 days' notice by either party.
CUSTOMERS
The Company's reseller customers currently include more than 5,900 active
accounts located in the U.S. and Canada. No single customer accounted for more
than five percent of the Company's net sales in fiscal 1996 or the six months
ended December 31, 1996. The Company segments its reseller customers into the
following four broad categories:
Auto-ID VARs. These resellers focus on selling Auto-ID products as a
tailored software or integrated hardware solution for end-users' existing
applications. Primary industries served by these resellers include
manufacturing, distribution, health care, and pharmaceuticals.
POS VARs. These resellers are comprised of: (i) former computer resellers
with comprehensive knowledge of networking; and (ii) former cash register
dealers who have entered the POS market in response to retailers' demand for
integrated, PC-based POS systems. Primary industries served by these resellers
include hospitality, convenience, grocery, and other retail markets.
Application VARs. These resellers incorporate various Auto-ID and POS
products as part of customized technology solutions for their end-users. These
resellers serve vertical markets, such as lumber yards or automotive parts
businesses, rather than broader horizontal applications, such as general
office automation. The Company's technical support, systems integration, and
Professional Services Group represent attractive "partnering" opportunities
with these resellers.
General or PC VARs. These resellers develop computer solutions for their
end-users' microcomputer needs. They typically have well-established
relationships with end-user MIS directors and are seeking additional revenue
and profit opportunities in related technology markets, such as Auto-ID or
POS.
SALES AND MARKETING
The Company's sales force is comprised of 30 inside sales representatives
located in South Carolina, California, and Georgia. In order to build strong
customer relationships, each active reseller is assigned to a sales
representative. Each sales representative negotiates pricing directly with his
assigned customers. The Company also employs several product managers who are
responsible for developing technical expertise within broad product markets,
evaluating competitive markets, and reviewing overall product and service
requirements of resellers. Each sales representative and product manager
receives comprehensive training with respect to the technical characteristics
of each vendor's products. This training is supplemented by quarterly product
seminars conducted by vendors' representatives and by weekly meetings among
all product managers, marketing and sales representatives.
The Company provides a range of marketing services which include:
cooperative advertising with vendors through trade publications and direct
mail; a product catalog which is published three times per year; periodic
newsletters; management of sales leads; trade shows with software companies
and vendors; direct mail; and sales promotions. In addition, the Company
organizes and operates its own "Solutions USA" trade show on a quarterly basis
to recruit prospective resellers and introduce new applications for the
specialty technology products it distributes. The Company frequently
customizes its marketing services for vendors and resellers.
In order to promote growth in the POS market, the Company recently
established a business development team focused on recruiting IBM "partners",
and has thus far signed 50 IBM independent software vendors in
23
<PAGE>
80 different geographic and vertical markets. The team has also recruited over
500 approved resellers for IBM-branded POS products.
VALUE-ADDED SERVICES
In addition to the basic order fulfillment and credit services that
conventional wholesale distributors typically provide to resellers, the
Company differentiates itself by providing an array of value-added services,
including the following:
Pre-Sale Technical Support. Technical support personnel assist the reseller
with systems configuration as the order is placed. Pre-sale support also
includes testing products to ensure their compatibility with other products
and applications.
Post-Sale Technical Support. Technical support personnel also assist sales
representatives and customers in diagnosing and solving technical,
configuration, or compatibility issues which may arise after sale. Technical
support personnel will, if necessary, serve as a liaison or advocate between
the manufacturer and the reseller.
Bundling of Separate Product Assortments into Solution Kits. Product
managers and technical support personnel work together to select specific
products that are compatible and continually develop "solution kits" or
bundles to better meet the reseller's needs.
Professional Services Group. With the growth of radio-frequency and pen-
based technology in the Auto-ID market, resellers need greater technical
expertise. As a result, the Company established the Professional Services
Group to assist resellers with pen-based programming and radio-frequency data
collection applications. This group offers needs-analysis, pre-sale equipment
configuration, sales assistance, site surveys, on-site installation, post-sale
maintenance, software programming (both utilities and applications), and
project management.
OPERATIONS
Information System
The Company's information system is a highly scalable, centralized
processing system capable of supporting numerous operational functions
including purchasing, receiving, order processing, shipping, inventory
management, and accounting. The overall on-line response time for the
Company's network of more than 100 user stations (terminals, printers,
personal computers, and hand-held terminals) is less than one-half second.
Sales representatives rely on the information system for on-line, real-time
information on product pricing, inventory availability, and order status. The
Company's warehouse operations use bar code technology for receiving and
shipping, and automated UPS and FedEx systems for freight processing and
shipment tracking, each of which is integrated with the Company's information
system. The customer service and technical support departments employ the
system for documentation and faster processing of customer product returns. To
ensure that adequate inventory levels are maintained, the Company's buyers
depend on the system's purchasing and receiving functions to track inventory
on a continual basis.
Integrated Order Entry
The order entry process begins with the entry by a sales representative of a
customer name, account number, or phone number. Based on this input, the
information system automatically displays the customer's name, address, credit
terms, financing arrangements, and preferred shipping method during each
subsequent inquiry. As an order is entered, key information is automatically
provided by the system, such as product description, price, availability, and
gross margin. The quantity of product required to fill the order is then
reserved at the central warehouse. The system automatically checks the
customer's credit status and the order is then released for processing, unless
credit limits are exceeded or the account contains past-due invoices, in which
case the order is placed on hold and immediately elevated for review by the
Company's credit management department.
Automated Purchasing
To monitor product inventory, the purchasing staff uses reports generated by
the information system, which provides product inventory levels, six months'
sales history, month-to-date, and year-to-date sales statistics by
24
<PAGE>
product. The Company's buyers carefully analyze current and future inventory
positions as well as profit potential. Buyers enter purchase orders into the
system, indicating the product number, the quantity to be ordered, and the
method of shipment.
Central Warehouse and Shipping
The Company's 81,000 square foot warehouse facility (of which it currently
occupies approximately 40,000 square feet) is located approximately four miles
from the FedEx hub facility in Memphis, Tennessee. The Company believes that
its centralized distribution creates several advantages, including: (i) a
reduced amount of "safety stock" inventory, which, in turn reduces the
Company's working capital borrowings; (ii) an increased turnover rate by
tighter control over inventory; (iii) maintenance of a consistent order-fill
rate; (iv) improved personnel productivity; (v) improved delivery time; (vi)
simplified purchasing and tracking; (vii) decreased demand for management
personnel; and (viii) flexibility to meet customer needs for systems
integration.
The Company's objective is to ship on the same day all orders received by
8:00 p.m. Eastern Time. Orders are processed in the central warehouse, where
bar code technology is utilized to minimize shipping errors. The Company also
has an automated package handling system used to send products from the
picking area to invoicing stations. Upon fulfillment of the order, the package
is immediately shipped to the reseller or "drop-shipped" to an end-user
specified by the reseller by FedEx or UPS overnight service. The Company
charges its customers local ground delivery rates for this service.
Credit Services
The Company offers 20-day credit terms for qualified resellers. The Company
believes this policy eliminates the customer's need to establish multiple
credit relationships with a large number of manufacturers. In addition, the
Company arranges floor planning and lease financing for its resellers through
a number of credit institutions.
COMPETITION
The markets in which the Company operates are highly competitive.
Competition is based primarily on factors such as price, product availability,
speed and accuracy of delivery, effectiveness of sales and marketing programs,
credit availability, ability to tailor specific solutions to customer needs,
quality and breadth of product lines and services, and availability of
technical and product information. The Company's competitors include regional
and national wholesale distributors, as well as hardware manufacturers
(including most of the Company's vendors) that sell directly to resellers and
to end-users. In addition, the Company competes with master resellers which
sell to franchisees, third-party dealers and end-users. Certain of the
Company's current and potential competitors have greater financial, technical,
marketing, and other resources than the Company and may be able to respond
more quickly to new or emerging technologies and changes in customer
requirements. Such competition could also result in price reductions, reduced
margins, and loss of market share by the Company.
FACILITIES
The Company leases approximately 25,000 square feet in Greenville, South
Carolina for its principal executive and sales office. The lease for about
half of this space expires in September 1998 and for the balance of this space
in September 2001. The Company's 81,000 square foot distribution center in
Memphis, Tennessee is leased through November 2000. Approximately 41,000
square feet of the distribution center is subleased on a month-to-month basis.
The Company also leases small offices in Tustin, California and Norcross,
Georgia. Management believes the Company's office and warehouse facilities are
adequate to support its current level of operations. See "Certain
Transactions."
EMPLOYEES
As of December 31, 1996, the Company had 101 employees, none of whom is a
member of an industry trade union or collective bargaining unit. The Company
considers employee relations to be good.
LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings it believes could have a
material adverse effect on its business, financial condition, or results of
operations.
25
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following sets forth certain information regarding the Company's
executive officers and directors:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Steven H. Owings......... 43 Chairman of the Board and Chief Executive Officer
Michael L. Baur.......... 39 President and Director
Jeffery A. Bryson........ 36 Chief Financial Officer and Treasurer
Steven R. Fischer(1)..... 51 Director
James G. Foody(1)........ 66 Director
</TABLE>
- --------
(1) Member of Audit Committee and Compensation Committee.
STEVEN H. OWINGS has served as Chairman of the Board of Directors and Chief
Executive Officer of the Company since its inception in December 1992. From
1991 to 1992, Mr. Owings served as Chairman of the Board, Chief Executive
Officer, and the sole shareholder of Argent Technologies, Inc. ("Argent"), a
personal computer manufacturer. From 1983 to 1991, Mr. Owings held various
positions with Gates/FA Distributing, Inc. and its predecessors, including
serving as President from December 1987 until December 1990, Chief Executive
Officer from December 1987 to December 1991, and Chairman of the Board of
Directors from December 1990 to December 1991. From December 1987 to September
1994, Mr. Owings served as a director of Gates. He is currently a director of
Globelle Corporation, an international distributor of personal computer
products.
MICHAEL L. BAUR has served as President of the Company since its inception
and as a director of the Company since December 1995. Prior to joining the
Company, from April 1991 to November 1992, Mr. Baur served in various
positions at Argent, including President and General Manager. In September
1989, Mr. Baur joined Gates as Product Manager and served as Merchandising
Director from February 1990 to March 1991.
JEFFERY A. BRYSON has served as Chief Financial Officer and Treasurer of the
Company since December 1993. Prior to joining the Company, from 1990 to 1993,
Mr. Bryson served as a senior manager with the accounting firm of KPMG Peat
Marwick LLP, where he was employed for more than seven years. Mr. Bryson is
also a certified public accountant.
STEVEN R. FISCHER has served as a director of the Company since December
1995. Mr. Fischer has served as Senior Vice President and Regional Manager of
Transamerica Business Credit Corporation since March 1992. From February 1981
to March 1992, Mr. Fischer served as Vice President and Regional Manager of
Citibank, N.A.
JAMES G. FOODY has served as a director of the Company since December 1995.
Mr. Foody has served as a business consultant in Greenville, South Carolina
since October 1990. Prior to that time, he served as a partner in the
accounting firm of Ernst & Young LLP.
The Board of Directors has set the size of the Board at five directors.
Because only four directors were elected at the Company's last annual meeting,
a vacancy exists which may be filled in the Board's discretion. Directors
serve until the next annual meeting of shareholders and until their successors
are elected. Except as otherwise set forth herein, executive officers serve at
the discretion of the Board of Directors. See "--Employment Agreements."
The Board of Directors has an Audit Committee and a Compensation Committee.
The functions of the Audit Committee include recommending to the Board the
retention of independent auditors, reviewing the scope of the annual audit
undertaken by the Company's independent auditors and the progress and results
of their work, and reviewing the financial statements of the Company and its
internal accounting and auditing procedures. The functions of the Compensation
Committee include reviewing and approving executive compensation policies and
practices, reviewing salaries and bonuses for certain officers of the Company,
administering the Company's employee stock option plans, and considering such
other matters as may from time to time be referred to the Compensation
Committee by the Board of Directors.
26
<PAGE>
Directors are reimbursed for expenses incurred in connection with the
performance of services as directors. In addition, directors who are not
otherwise compensated as officers of the Company receive a fee of $1,000 per
calendar quarter for their service on the Board of Directors and any committee
thereof and also receive automatic grants of stock options under the Company's
1994 Stock Option Plan for Outside Directors. See "--Stock Option Plans."
EXECUTIVE COMPENSATION
The following table sets forth the cash compensation paid or accrued to the
Company's Chief Executive Officer and its President (the "Named Executive
Officers") for fiscal 1996, 1995 and 1994. No other executive officer of the
Company earned compensation in excess of $100,000 for services provided to the
Company during such periods.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
--------------------- ------------
SECURITIES
FISCAL UNDERLYING
NAME YEAR SALARY BONUS OPTIONS
---- ------ ------- ------ ------------
<S> <C> <C> <C> <C>
Steven H. Owings.......................... 1996 $77,532 $ -- --
Chairman of the Board and 1995 72,000 -- --
Chief Executive Officer 1994 72,000 -- --
Michael L. Baur........................... 1996 87,000 46,554 --
President 1995 72,000 57,550 30,000
1994 72,000 15,007 30,000
</TABLE>
EMPLOYMENT AGREEMENTS
Effective January 1, 1997, and for a term extending through June 30, 1999,
the Company entered into employment agreements with each of Steven H. Owings,
Michael L. Baur, and Jeffery A. Bryson, pursuant to which Mr. Owings serves as
Chief Executive Officer, Mr. Baur serves as President, and Mr. Bryson serves
as Chief Financial Officer of the Company. These agreements provide for annual
salaries of $96,000, $87,000, and $60,000 for Messrs. Owings, Baur, and
Bryson, respectively, plus incentive bonuses based upon a percentage of the
Company's operating income. The agreements also include non-competition
provisions for two years following the expiration of the agreements or the
earlier termination of employment.
RECENT OPTION GRANTS
The Company did not grant any stock options to its Named Executive Officers
during fiscal 1996. Subsequently the Company granted the following options:
(i) in December 1996, Steven H. Owings was granted an incentive stock option
for 7,500 shares at an exercise price of $14.50 per share, subject to vesting
over a three-year period, and a non-qualified option for 30,000 shares at an
exercise price of $14.50 per share, which is immediately vested, and in
January 1997, he was granted a non-qualified option for 70,000 shares at an
exercise price of $16.50 per share, which is immediately vested; (ii) in July
1996, Michael L. Baur was granted an incentive stock option for 25,000 shares
at an exercise price of $11.25 per share, subject to vesting over a three-year
period, in December 1996, he was granted a non-qualified option for 16,000
shares at an exercise price of $14.50 per share, subject to vesting over a
three-year period, and in January 1997, he was granted a non-qualified option
for 10,000 shares at an exercise price of $16.50 per share, which is
immediately vested; and (iii) in July 1996, Jeffery A. Bryson was granted an
incentive stock option for 5,000 shares at an exercise price of $11.25 per
share, subject to vesting over a three-year period, in December 1996, he was
granted an incentive stock option for 7,500 shares at an exercise price of
$14.50 per share, subject to vesting over a three-year period, and in January
1997, he was granted a non-qualified option for 5,000 shares at an exercise
price of $16.50 per share, which is immediately vested.
FISCAL YEAR-END OPTION VALUES
The following table sets forth certain information with respect to
unexercised stock options held by the Named Executive Officers at June 30,
1996. No options were exercised by any Named Executive Officers during fiscal
1996.
27
<PAGE>
FISCAL 1996 YEAR-END
OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT FISCAL IN-THE-MONEY
YEAR END OPTIONS AT FISCAL YEAR END(1)
--------------------------------- -----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- -------------- ---------------- ------------- ---------------
<S> <C> <C> <C> <C>
Michael L. Baur......... 40,000 20,000 $ 427,709 $ 105,416
</TABLE>
- --------
(1) Based on a per share price of $14.00, the closing price of the Common
Stock as reported on The Nasdaq National Market on June 28, 1996, the last
trading day of the fiscal year.
STOCK OPTION PLANS
1993 Incentive Stock Option Plan
The Company adopted the 1993 Incentive Stock Option Plan in July 1993 and
amended the plan in December 1996 (the "1993 Employee Plan"). The Company has
reserved 280,000 shares of Common Stock for issuance pursuant to the 1993
Employee Plan. The plan authorizes the issuance of incentive stock options, as
defined in Section 422 of the Internal Revenue Code of 1986, as amended, to
eligible employees of the Company. The Compensation Committee currently
administers this plan. Future as well as present officers and employees who
are directors are eligible to participate in the plan, but directors who are
members of the Compensation Committee or who are not officers or employees of
the Company are not eligible for participation. No option may be granted under
the 1993 Employee Plan after June 2003. The Compensation Committee has
discretionary authority to determine the individuals to whom options will be
granted from among those individuals who are eligible, as well as the terms
of, and the number of shares of Common Stock subject to such options. The
exercise price of each incentive stock option under the plan shall not be less
than 100% of the fair market value of the Common Stock at the time of grant,
except in the case of a grant to an employee who owns more than 10% of the
voting power of the Company's voting stock, the exercise price shall be not
less than 110% of such fair market value. Options may be exercised in the
manner and at such times as may be fixed by the Compensation Committee, but
may not be exercisable after the tenth anniversary (fifth anniversary in the
case of a 10% shareholder) of the date of grant. Generally options shall
immediately terminate after ten years, to the extent not previously exercised.
Upon termination of employment, other than for cause, options may be exercised
during various periods not less than three months after the date of
termination. Options are not transferable during the lifetime of an option
holder. Shares issuable under any options that expire or terminate before
exercise become available again for issuance. The Company has registered
200,000 shares of Common Stock reserved for the 1993 Employee Plan under the
Securities Act and intends to register the remaining 80,000 shares reserved
under the plan upon completion of this offering.
At December 31, 1996, the Company had granted options under the 1993
Employee Plan for 216,584 shares of Common Stock, of which options for 196,617
shares remained unexercised. The Company has also from time to time granted
non-qualified options to officers and employees of the Company and its
affiliates for 202,000 shares in the aggregate. See "--Recent Option Grants."
1994 Stock Option Plan for Outside Directors
The Company adopted the 1994 Stock Option Plan for Outside Directors in
December 1993 (the "Outside Director Plan"). The Company has reserved 65,000
shares of Common Stock for issuance to Board members who are not employees of
the Company. Options for 5,000 shares of Common Stock under the Outside
Director Plan are automatically granted on the day following each annual
meeting of shareholders to each eligible director. The exercise price of all
such options is the fair market value of the Common Stock on the date of
grant. Options granted under the Outside Director Plan are exercisable
beginning six months after the date of grant and may be exercised only during
the period in which the option holder remains a director of the Company, and
for one year thereafter. The option price shall be payable in full upon
exercise in cash, by check, in shares of Common Stock already held by the
option holder, or in any combination thereof. Options may not be exercised
after the fifth anniversary of the date of grant. Generally, options shall
immediately terminate after five years, to the extent not previously
exercised. Shares issuable pursuant to options that expire or terminate prior
to exercise become available again for issuance. The Company has registered
65,000 shares of Common Stock for issuance under the Outside Director Plan
under the Securities Act.
28
<PAGE>
At December 31, 1996, options for the purchase of 30,000 shares of Common
Stock pursuant to the Outside Director Plan had been granted, of which no
options have been exercised. The Company has also from time to time in the
past granted non-qualified options and warrants to directors who are not
employees of the Company for 115,000 shares in the aggregate. The Company does
not presently anticipate granting any more options or warrants to such
directors except as permitted by the Outside Director Plan.
RETIREMENT PLAN
In October 1993, the Company established a defined contribution retirement
plan with a 401(k) feature (the "Retirement Plan") for all employees who meet
certain length of service and other eligibility requirements. Pursuant to the
Retirement Plan, employees may elect to reduce their current compensation by
up to the statutorily prescribed annual limit and have the amount of such
reduction contributed to the Retirement Plan. The Retirement Plan permits, but
does not require, additional matching contributions to the Retirement Plan by
the Company on behalf of all participants in the Retirement Plan. During
fiscal 1996, the Company provided a matching contribution equal to one-half of
each participant's contribution, up to a maximum matching contribution of $500
per participant. Participants' contributions to the Retirement Plan are
immediately vested, and the Company's contributions to the Retirement Plan are
vested over a period of three to seven years. Each participant has the right
to direct the investment of the participant's funds among certain designated
investment alternatives. The Retirement Plan is intended to qualify under
Sections 401(a) and (k) of the Internal Revenue Code 1986, as amended, so that
contributions by employees or by the Company and income earned on plan
contributions are not taxable to employees until withdrawn from the Retirement
Plan, and so that contributions by the Company, if any, will be deductible by
the Company when made.
29
<PAGE>
CERTAIN TRANSACTIONS
In June 1994, the Company loaned $40,000 to Michael L. Baur, President of
the Company, at 7.25% interest, with interest only payments for three years,
and the principal balance due in June 1997. During 1996, the Company modified
the loan to make additional advances of $43,000 to be repaid under the same
terms as the original note.
Steven H. Owings, Chairman of the Board and Chief Executive Officer of the
Company, joined the Board of Directors of Globelle Corporation ("Globelle"),
an international distributor of personal computer products, in July 1996.
Until August 1996, the Company paid approximately $12,000 per month to
Globelle pursuant to a warehouse service agreement. Subsequently, the Company
subleased warehouse space from Globelle for approximately $12,000 per month
through December 1996, at which time Globelle assigned its lease for the
warehouse space to the Company and the Company subleased approximately half of
such space on a month-to-month basis to Globelle for approximately $12,000 per
month. The Company also has a software license agreement with Globelle, and
has been informally assigned non-exclusive rights to use Globelle's contract
with FedEx. In July 1995, the Company and Globelle formed a joint venture
named Transition Marketing, Inc. ("Transition") to provide certain marketing
services, such as the Company's "Solutions USA" quarterly trade shows. The
Company owns 42%, Globelle 27%, and a private investor the remaining 31% of
Transition. The Company purchased $278,000 of marketing services from
Transition during fiscal 1996, and at June 30, 1996, had loaned Transition
$122,000 at a 9% interest rate, which was repaid by October 1996. Mr. Owings
is a member of the Board of Directors of Transition. Management believes that
the terms of such transactions with Globelle are no less favorable to the
Company than terms which could be negotiated with other unrelated parties.
Globelle and Transition regularly engage in such activities as a part of their
normal businesses.
Gates/Arrow Distributing, Inc. ("Gates") previously owned 250,000 shares of
Common Stock, or approximately 7.28% of the outstanding Common Stock, which
were acquired in December 1993 for $375,000. Under an agreement with Gates
(the "Services Agreement"), the Company obtained accounts payable,
warehousing, shipping and receiving, and limited management information system
services, for which it paid approximately $127,000 during fiscal 1994 and
$60,000 during fiscal 1995. The Company also received inventory financing from
Gates, for which it paid interest of approximately $180,000 in fiscal 1994 and
$10,000 in fiscal 1995. Under the September 1994 agreement terminating the
Services Agreement (the "Termination Agreement"), Gates was obligated to pay
the Company approximately $1.4 million. Under the Termination Agreement, the
Company had an option, exercisable until April 1996, to acquire all of the
Common Stock held by Gates for $3.50 per share, which was exercised in March
1996. Steven H. Owings is a former Chief Executive Officer of Gates, and until
September 1994, he was a director of Gates. Irwin Lieber and Eli Oxenhorn were
directors of the Company until December 1995, and until September 1994, they
were also directors of Gates. James G. Foody, a director of the Company since
December 1995, served as a director of Gates until September 1994. In
connection with the initial capitalization of the Company in December 1992,
the nine initial shareholders of the Company, including certain of the
Company's current directors, executed guarantees of a portion of the Company's
obligation to Gates under the Gates Agreement, for an aggregate guaranteed
amount of up to $250,000. These guarantees terminated in March 1994.
In 1994, the Board of Directors formally adopted a policy under which any
transaction between the Company and an affiliate of the Company is prohibited
unless the transaction is fair to the Company, does not violate applicable
law, is at rates and upon terms no less favorable to the Company than
available for arms'-length transactions of the same type with unrelated third
parties and is with an affiliate that regularly engages in such activity as
part of its business.
30
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock at February 10, 1997 of: (i) each person known
by the Company to beneficially own five percent or more of the Common Stock;
(ii) each director of the Company who beneficially owns Common Stock; (iii)
each executive officer who beneficially owns Common Stock; and (iv) all
directors and executive officers of the Company, as a group, and as adjusted
to reflect the sale of Common Stock offered hereby. Footnote (2) to the table
also sets forth certain information with respect to the beneficial ownership
of the Selling Stockholders, assuming the Underwriters exercise their over-
allotment option in full.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO OWNED AFTER
OFFERING(1) OFFERING(1)(2)
----------------------- -----------------------
NAME NUMBER PERCENTAGE NUMBER PERCENTAGE
---- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Richard Kaufman(3)............ 316,000 9.7% 316,000 6.0%
Steven H. Owings(2)(4)........ 316,100 9.5 316,100 5.9
Walter Scheuer(3)............. 269,000 8.3 269,000 5.1
Barry Rubenstein(5)(6)(7)..... 210,000 6.4 210,000 4.0
Wayne S. Reisner(3)........... 209,000 6.4 209,000 4.0
Dennis B. Gates(8)............ 190,000 5.8 190,000 3.6
Eli Oxenhorn(6)............... 190,000 5.8 190,000 3.6
Michael L. Baur(2)(9)......... 56,667 1.7 56,667 1.1
Jeffery A. Bryson(2)(10)...... 19,067 * 19,067 *
Steven R. Fischer(11)......... 11,000 * 11,000 *
James G. Foody(11)............ 12,000 * 12,000 *
All directors and executive
officers as a group (5
persons)(2).................. 414,834 12.1 414,834 7.6
</TABLE>
- --------
* Amount represents less than 1.0%.
(1) Applicable percentage of ownership at January 23, 1997, is based upon
3,247,986 shares of Common Stock outstanding. Applicable percentage of
ownership after completion of this offering is based upon 5,247,986 shares
of Common Stock outstanding. Beneficial ownership is determined in
accordance with the rules of the Securities and Exchange Commission and
includes voting and investment power with respect to shares shown as
beneficially owned. Shares of Common Stock subject to options or warrants
currently exercisable or exercisable within 60 days are deemed outstanding
for computing the shares and percentage ownership of the person holding
such options or warrants, but are not deemed outstanding for computing the
percentage ownership of any other person or entity. Except as otherwise
indicated, the persons or entities listed below has sole voting and
investment power with respect to all shares shown as beneficially owned by
them.
(2) If the Underwriters' exercise their over-allotment option in full: (i) Mr.
Owings will sell 14,200 shares and will beneficially own 301,900 shares,
or 5.4% of the Common Stock outstanding after this offering; (ii) Mr. Baur
will sell 20,000 shares and will beneficially own 36,667 shares, or less
than 1.0% of the Common Stock outstanding after this offering; (iii) Mr.
Bryson will sell 10,000 shares and will beneficially own 9,067 shares, or
less than 1.0% of the Common Stock outstanding after this offering; (iv)
Samuel M. Pringle and Kathrin R. Pringle, as co-trustees of the Pringle
Family Education Trust under agreement dated April 13, 1994, will sell
2,200 shares, and will beneficially own no shares of the Common Stock
outstanding after this offering; (v) John S. Ingles, Jr. and Susan P.
Ingles, as co-trustees of the Ingles Family Education Trust under
agreement dated April 13, 1994, will sell 2,200 shares, and will
beneficially own no shares of the Common Stock outstanding after this
offering; (vi) Brenda McCurry, an employee of the Company, will sell 7,000
shares, and will beneficially own 3,000 shares, or less than 1.0% of the
Common Stock outstanding after this offering; and (vii) all officers and
directors as a group (5 persons) will beneficially own 370,634 shares or
6.5% of the Common Stock outstanding after this offering.
(3) The business address for the named individual is 635 Madison Avenue, New
York, New York 10022. Schedules filed with the Securities and Exchange
Commission reflect: (i) Walter Scheuer, Richard Kaufman, and Wayne S.
Reisner as three of the trustees of certain trusts for the benefit of Mr.
Scheuer's children and grandchildren, which trusts hold an aggregate of
159,000 shares; (ii) Mr. Scheuer and Mr. Kaufman as executive officers of
two foundations holding an aggregate of 12,000 shares; (iii) Mr. Scheuer
as the general partner of a limited partnership holding 98,000 shares;
(iv) Mr. Kaufman and Mr. Reisner as two of the trustees of a trust for the
benefit of Mr. Scheuer and Mr. Scheuer's wife holding 50,000 shares; and
(v) Mr. Kaufman as one of the trustees of a trust for the benefit of Mr.
Scheuer's children holding 95,000 shares. While such schedules relate to
an aggregate of 414,000 shares of Common Stock, the aggregate beneficial
ownership reflected in the table for these individuals is greater than
such amounts because more than one individual may be deemed to be the
beneficial owner of the same securities. Each of Mr. Scheuer, Mr. Kaufman,
and Mr. Reisner disclaims beneficial ownership of all shares held by the
aforementioned entities.
(4) The business address for the named individual is 6 Logue Court, Suite G,
Greenville, South Carolina 29615. Includes 100,000 shares issuable
pursuant to currently exercisable non-qualified options granted by the
Company.
31
<PAGE>
(5) The business address for the named individual is 68 Wheatley Road,
Brookville, New York 11545.
(6) Includes 50,000 shares issuable pursuant to currently exercisable warrants
granted by the Company.
(7) Includes 100,000 shares owned by Woodland Partners, an investment
partnership of which Mr. Rubenstein and his wife are the sole general
partners; 40,000 shares held by Mr. Rubenstein's wife; and 20,000 shares
held by a limited partnership of which Mr. Rubenstein is a general partner.
(8) The business address for the named individual is 851 Arlington Boulevard,
El Cerrito, California 94530.
(9) Includes 41,667 shares issuable pursuant to currently exercisable options
granted by the Company.
(10) Includes 18,667 shares issuable pursuant to currently exercisable options
granted by the Company.
(11) Includes 10,000 shares issuable pursuant to currently exercisable options
granted by the Company.
32
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 10,000,000 shares of
Common Stock, no par value, and 3,000,000 shares of preferred stock, as to
which the Company's Board of Directors has the authority to designate a par
value (the "Preferred Stock"). As of February 10, 1997, 3,247,986 shares of
Common Stock were outstanding, held of record by 50 shareholders. After
completion of this offering, there will be 5,247,986 shares of Common Stock
outstanding (5,507,386 shares if the Underwriters' over-allotment option is
exercised in full). No shares of Preferred Stock are currently outstanding.
COMMON STOCK
Subject to the rights of the holders of any outstanding shares of Preferred
Stock, holders of Common Stock are entitled to receive ratably such dividends,
if any, as may be declared by the Board of Directors out of legally available
funds. In the event of the liquidation, dissolution or winding up of the
Company, holders of Common Stock are entitled to share equally and ratably,
based on the number of shares held, in the assets, if any, remaining after
payment of all of the Company's debts and liabilities and the liquidation
preference of any outstanding series of Preferred Stock granted a liquidation
preference upon its designation by the Board of Directors.
Holders of Common Stock are entitled to one vote per share for each share
held of record on any matter submitted to the holders of Common Stock for a
vote. Because holders of Common Stock do not have cumulative voting rights,
the holders of a majority of the shares of Common Stock represented at a
meeting can elect all of the directors. Holders of Common Stock do not have
preemptive or other rights to subscribe for or purchase any additional shares
of capital stock issued by the Company.
PREFERRED STOCK
The Company's authorized shares of Preferred Stock may be issued in one or
more series, and the Board of Directors is authorized, without further action
by the shareholders, to designate the rights, preferences, limitations and
restrictions of and upon shares of each series, including dividend, voting,
redemption and conversion rights. The Board of Directors also may designate
par value, preferences in liquidation and the number of shares constituting
any series. It is not possible to state the actual effect of the authorization
and issuance of any series of Preferred Stock upon the rights of holders of
Common Stock until the Board of Directors determines the specific terms,
rights, and preferences of a series of Preferred Stock. However, such effects
might include, among other things, restricting dividends on the Common Stock,
diluting the voting power of the Common Stock, or impairing liquidation rights
of such shares without further action by holders of the Common Stock. In
addition, under various circumstances, the issuance of Preferred Stock may
have the effect of facilitating, as well as impeding or discouraging, a
merger, tender offer, proxy contest, the assumption of control by a holder of
a large block of the Company's securities, or the removal of incumbent
management. Issuance of Preferred Stock could also adversely effect the market
price of the Common Stock. The Company has no present plan to issue any shares
of Preferred Stock.
WARRANTS AND UNIT PURCHASE OPTIONS
The Company issued warrants for the purchase of 50,000 shares of Common
Stock to each of Barry Rubenstein and Eli Oxenhorn, former directors, which
are currently exercisable at a price of $2.00 per share. These warrants are
non-transferable and expire in September 1998. The holders of these warrants
are not entitled to require the Company to register the underlying shares
under the Securities Act. In addition, in connection with the Company's
initial public offering in March 1994, the Company issued certain unit
purchase options to its former underwriter and certain affiliates thereof.
Each unit purchase option entitles the holder to purchase one share of Common
Stock and a warrant for one share of Common Stock for an option exercise price
of $6.00 per unit, pursuant to the conditions set forth in the related unit
purchase option agreement. Each warrant acquired by exercise of the unit
purchase option entitles the holder to purchase one share of Common Stock for
an exercise price of $5.50 per share. The unit purchase options expire in
March 1999. The unit purchase option agreement also provides the holders with
certain rights to require the Company to register the underlying shares under
the
33
<PAGE>
Securities Act. At December 31, 1996, 42,000 unit purchase options remained
outstanding, representing the right of the holders to acquire 84,000 shares of
Common Stock at a weighted average price of $5.75 per share. Neither the
warrants nor the unit purchase options provide any holders thereof with the
voting rights of a shareholder prior to valid exercise. See "Principal and
Selling Shareholders."
CERTAIN PROVISIONS OF ARTICLES AND BYLAWS
Shareholders' rights and related matters are governed by the South Carolina
Business Corporation Act of 1988, as amended (the "South Carolina Code") and
the Company's Amended and Restated Articles of Incorporation (the "Articles")
and Bylaws.
Limitations of Liability and Indemnification. As permitted by the South
Carolina Code, the Company's Articles provide that a director of the Company
shall not be personally liable to the Company or any of its shareholders for
monetary damages for breach of fiduciary duty as a director, except for
liability: (i) for any breach of the director's duty of loyalty to the Company
or its shareholders; (ii) for acts or omissions not in good faith or which
involve gross negligence, intentional misconduct or a knowing violation of
law; (iii) for any unlawful distribution as set forth in the South Carolina
Code; or (iv) for any transaction from which the director derived an improper
personal benefit. While these provisions eliminate the right to recover
monetary damages from directors except in limited circumstances, rights to
seek injunctive or other non-monetary relief are not eliminated. In addition,
the Bylaws set forth certain indemnification provisions as a contractual right
of the Company's directors and officers, and permit indemnification of the
Company's employees and agents.
Anti-Takeover Effects of Certain Provisions. The South Carolina Code
contains provisions that may have the effect of delaying, deferring or
preventing a change in control of a company unless a company's articles of
incorporation expressly provide otherwise. The Articles provide that the
Company elects not to be governed by such provisions of the South Carolina
Code. However, the Articles expressly permit the Board of Directors, when
evaluating any proposed tender or exchange offer, any merger, consolidation or
sale of substantially all of the assets, or any similar extraordinary
transaction, to consider: (i) all relevant factors, including without
limitation the social, legal, and economic effects on the employees,
customers, suppliers and other constituencies of the Company and its
subsidiaries, on the communities and geographical areas in which the Company
and its subsidiaries operate or are located and on any of the business and
properties of the Company or any of its subsidiaries; and (ii) the
consideration being offered, not only in relation to the then current market
price for the Company's outstanding shares of capital stock, but also in
relation to the then current value of the Company in a freely negotiated
transaction and in relation to the Board of Directors' estimate of the future
value of the Company (including the unrealized value of its properties and
assets) as an independent going concern.
The foregoing provisions contained in the Articles as well as the right of
the Board of Directors to designate the features of and issue shares of
Preferred Stock without a shareholder vote may tend to discourage attempts by
third parties to acquire any substantial ownership position in the Common
Stock and may adversely effect the price that such a potential purchaser would
be willing to pay for the Common Stock.
Restrictions on Special Meetings. Under the Bylaws, special meetings of the
shareholders may be called only by the President, the Chairman of the Board, a
majority of the directors, or the holders of record of 10% or more of the
Company's outstanding shares of stock entitled to vote at such meeting. This
provision may impede a shareholder who wishes to require the Company to call a
special meeting of shareholders to consider any proposed corporate action.
Directors--Number, Vacancies, Removal, and Nomination. Under the Bylaws, the
Board of Directors determines the number of directors on the Board and fills
any newly created directorships or director vacancies, although directors
elected by the Board to fill vacancies may serve only until the next annual
meeting of shareholders at which directors are elected by the shareholders to
fill such vacancies. Directors may be removed
34
<PAGE>
from office, with or without cause, by a vote of the holders of the majority
of the shares of the Company's voting stock or by a majority of the directors
for cause. Nominations for the election of directors may be made by the Board
of Directors or by any shareholder entitled to vote for the election of
directors, but a shareholder must submit written notice of such shareholder's
intent to make such nomination to the Secretary of the Company no later than
90 days before the annual meeting of shareholders, and such notice must
conform to the requirements of the Bylaws.
TRANSFER AGENT AND REGISTRAR
Continental Stock Transfer & Trust Company, New York, New York is the
transfer agent and registrar for the Common Stock.
REGISTRATION RIGHTS
The holders of unit purchase options, representing rights to acquire an
aggregate of 84,000 shares of Common Stock (the "Registrable Securities"), are
entitled to certain demand and piggyback registration rights. The Company has
committed to satisfy such demand rights by registering such Registrable
Securities under the Securities Act 90 days after the effective date of this
offering, and to cause such registration to remain effective for at least nine
months thereafter. In addition, if the Company otherwise proposes to register
any of its securities under the Securities Act for its own account, holders of
Registrable Securities may require the Company to include all or a portion of
their Registrable Securities in the Company's registration, provided, among
other conditions, that the managing underwriter of such offering does not
object or limit the number of Registrable Shares to be included. In general,
all fees, costs, and expenses of such registrations (other than underwriting
commissions and expenses of legal counsel representing such holders) will be
borne by the Company. The right of such holders to require piggyback
registration terminates in March 2001.
35
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have 5,247,986 shares of
Common Stock outstanding (5,507,386 shares if the Underwriters' over-allotment
option is exercised in full). Substantially all of these shares will be freely
tradeable without restriction under the Securities Act or may be sold
currently in accordance with an exemption under the Securities Act such as
Rule 144 or Rule 144A. In addition, shortly after completion of the offering,
the Company will have registered on Form S-8 a total of 662,000 shares of
Common Stock reserved for issuance under the Company's stock options or upon
the exercise of outstanding warrants, of which 29,967 shares have been issued
upon exercise of such options as of December 31, 1996. The remaining 632,033
shares, when and if issued, would be freely tradeable (unless acquired by an
affiliate of the Company, in which case they would be subject to volume and
other limitations under Rule 144). In addition, currently exercisable unit
purchase options representing rights to purchase 84,000 shares are
outstanding, which the Company has committed to register for resale 90 days
after the effective date of this offering and may be obligated to register
under the Securities Act under certain other conditions. See "Description of
Capital Stock--Registration Rights."
The Company, all directors and executive officers, and certain other
beneficial owners of an aggregate of 409,500 shares of Common Stock as of
December 31, 1996 (excluding shares offered hereby), have agreed with the
Underwriters not to sell or otherwise dispose of any shares of Common Stock
for a period of 90 days after the date of this Prospectus without the prior
written consent of Robertson, Stephens & Company. Also, beneficial holders of
an additional 385,000 shares of Common Stock as of December 31, 1996
(excluding shares offered hereby) have agreed to similar restrictions for a
period of 60 days after the date of this Prospectus. Upon expiration of these
lock-up periods, such shares will be eligible for immediate sale, subject in
certain cases to volume and other limitations under Rule 144. See
"Underwriting."
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned Restricted Shares for
at least two years, including a person who may be deemed an affiliate of the
Company, is entitled to sell, within any three-month period, a number of
shares of Common Stock that does not exceed the greater of one percent of the
then-outstanding shares of Common Stock (approximately 52,480 shares after
completion of this offering) or the average weekly reported trading volume of
the Common Stock during the four calendar weeks preceding such sale. Sales
under Rule 144 are subject to certain restrictions relating to manner of sale,
notice, and availability of current public information about the Company. In
addition, under Rule 144(k), a person who is not an affiliate and has not been
an affiliate at any time during the 90 days preceding a sale, and who has
beneficially owned shares for at least three years, would be entitled to sell
such shares immediately following this offering without regard to the volume
limitations, manner of sale provisions or notice or other requirements of Rule
144. Rule 144A under the Securities Act permits the immediate sale by the
holders of restricted shares of all or a portion of their shares to certain
"qualified institutional buyers" as defined in Rule 144A.
Sales of substantial amounts of such shares in the public market, or the
perception that such sales might occur, could adversely affect the market
price of the Common Stock and could impair the Company's future ability to
raise capital through an offering of its equity securities. See "Risk
Factors--Shares Eligible for Future Sale."
36
<PAGE>
UNDERWRITING
The Underwriters named below (the "Underwriters"), acting through their
representatives, Robertson, Stephens & Company LLC, The Robinson-Humphrey
Company, Inc. and William Blair & Company, L.L.C. (the "Representatives"),
have severally agreed with the Company, subject to the terms and conditions of
the Underwriting Agreement, to purchase from the Company the respective number
of shares of Common Stock set forth opposite their names below:
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
----------- ----------------
<S> <C>
Robertson, Stephens & Company LLC..........................
The Robinson-Humphrey Company, Inc.........................
William Blair & Company, L.L.C.............................
---------
Total.................................................. 2,000,000
=========
</TABLE>
The nature of the Underwriters' obligation under the Underwriting Agreement
is such that all shares of Common Stock being offered, excluding shares
covered by the over-allotment option granted to the Underwriters, must be
purchased if any shares of Common Stock are purchased.
The Representatives have advised the Company that the Underwriters propose
to offer the shares of Common Stock to the public at the offering price set
forth on the cover page of this Prospectus and to certain dealers at such
price less a concession of not more than $ per share, of which $ may be
reallowed to other dealers. After completion of this offering, the public
offering price, concession and reallowance to dealers may be reduced by the
Representatives. No such reduction will change the amount of proceeds to be
received by the Company as set forth on the cover page of this Prospectus.
The Underwriters have been granted an option, exercisable during the 30-day
period after the date of this Prospectus, to purchase (i) first, up to an
aggregate of 55,600 additional shares of Common Stock from the Selling
Shareholders (which if partially exercised will be purchased from the Selling
Shareholders on a pro rata basis), and (ii) second, up to an aggregate of
244,400 additional shares of Common Stock from the Company, all at the same
price per share that the Company will receive for the 2,000,000 shares that
the Underwriters have agreed to purchase. To the extent that the Underwriters
exercise such option, each of the Underwriters will have made a firm
commitment to purchase approximately the same percentage of such additional
shares that the number of shares of Common Stock to be purchased by it shown
in the above table represents as a percentage of the 2,000,000 shares offered
hereby. If purchased, such additional shares will be sold by the Underwriters
on the same terms as those on which the 2,000,000 shares are being sold.
The Underwriting Agreement contains covenants of indemnity among the
Underwriters and the Company against certain civil liabilities, including
liabilities under the Securities Act.
Pursuant to the terms of lock-up agreements, holders of approximately
409,500 shares of the Common Stock have agreed with the Representatives that,
except for 55,600 shares that will be sold by the Selling Shareholders if the
Underwriters' over-allotment option is exercised in full, until 90 days after
the date of this Prospectus, subject to certain limited exceptions, they will
not sell or otherwise dispose of shares of Common Stock, or other securities
of the Company, without the prior written consent of Robertson, Stephens &
Company. Also, holders of an additional 385,000 shares of the Common Stock
have agreed to similar restrictions until 60 days after the date of this
Prospectus.
The Underwriters do not intend to confirm sales to any accounts over which
they exercise discretionary authority.
The rules of the Commission generally prohibit the Underwriters and other
members of the selling group from making a market in the Common Stock during
the "cooling off" period immediately preceding the commencement of sales in
the offering. The Commission has, however, adopted an exemption from these
rules
37
<PAGE>
that permits passive market making under certain conditions. These rules permit
an Underwriter or other member of the selling group to continue to make a
market in the Common Stock subject to the conditions, among others, that its
bid not exceed the highest bid by a market maker not connected with the
offering and that its net purchases on any one trading day not exceed
prescribed limits. Pursuant to these exemptions, certain Underwriters and other
members of the selling group intend to engage in passive market making in the
Common Stock during the cooling off period.
LEGAL MATTERS
Certain legal matters in connection with the validity of the issuance of the
shares offered hereby will be passed upon for the Company by Nexsen Pruet
Jacobs & Pollard, LLP, Columbia, South Carolina. As of February 10, 1997,
certain attorneys with Nexsen Pruet Jacobs & Pollard, LLP held 7,700 shares of
Common Stock. Certain legal matters in connection with the offering will be
passed upon for the Underwriters by Alston & Bird, Atlanta, Georgia.
EXPERTS
The financial statements of the Company as of June 30, 1995 and 1996, and for
each of the years in the three-year period ended June 30, 1996, have been
included herein and in the registration statements in reliance upon the report
of KPMG Peat Marwick LLP, independent certified public accountants, appearing
elsewhere herein, and upon the authority of said firm as experts in accounting
and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement (the "Registration Statement," which
term shall include all amendments thereto) under the Securities Act of 1933, as
amended (the "Act"), with respect to the securities offered hereby. This
Prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits thereto, certain portions having been
omitted in accordance with the rules and regulations of the Commission. For
further information with respect to the Company, the securities offered by this
Prospectus and such omitted information, reference is made to the Registration
Statement, including any and all exhibits and amendments thereto. Statements
contained in this Prospectus concerning the provisions of any document filed as
an exhibit are of necessity brief descriptions thereof and are not necessarily
complete, and in each instance reference is made to the copy of the document
filed as an exhibit to the Registration Statement, each such statement being
qualified in its entirety by this reference.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended, and in accordance therewith the Company files
reports, proxy statements and other information with the Commission. Such
reports, proxy statements and other information may be inspected and copied at
the public reference facilities maintained by the Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the
Commission's regional offices located at Northwest Atrium Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661 and 7 World Trade Center,
New York, New York 10048. Copies of such material, including the Registration
Statement, can be obtained from the Public Reference Section of the Commission,
Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates. The Commission also maintains a Web site that contains
reports, proxy statements, and other information regarding registrants, such as
the Company, that file electronically with the Commission. The Commission's Web
site address is http://www.sec.gov.
38
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report............................................. F-2
Balance Sheets as of June 30, 1995 and 1996 and December 31, 1996
(unaudited)............................................................. F-3
Statements of Income for the fiscal years ended June 30, 1994, 1995 and
1996 and the six-month
periods ended December 31, 1995 and 1996 (unaudited).................... F-5
Statements of Shareholders' Equity for the fiscal years ended June 30,
1994, 1995 and 1996 and
the six-month period ended December 31, 1996 (unaudited)................ F-6
Statements of Cash Flows for the fiscal years ended June 30, 1994, 1995
and 1996 and the six-month periods ended December 31, 1995 and 1996
(unaudited)............................................................. F-7
Notes to Financial Statements............................................ F-8
</TABLE>
F-1
<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 audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, 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
F-2
<PAGE>
SCANSOURCE, INC.
BALANCE SHEETS
JUNE 30, 1995 AND 1996 AND DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
--------------- ------------
1995 1996 1996
------- ------ -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets
Cash............................................ $ 187 -- --
Receivables:
Trade, less allowance for doubtful accounts of
$317, $527 and $733 at June 30, 1995 and 1996
and December 31, 1996, respectively........... 3,950 7,463 8,909
Other.......................................... 235 531 367
------- ------ -----------
4,185 7,994 9,276
Inventories..................................... 6,306 17,538 25,169
Prepaid expenses and other...................... 49 52 126
Due from Gates/FA............................... 750 -- --
Deferred tax asset.............................. 637 1,001 1,001
------- ------ -----------
Total current assets......................... 12,114 26,585 35,572
------- ------ -----------
Property and equipment:
Furniture and equipment......................... 701 1,261 1,593
Leasehold improvements.......................... 186 286 294
------- ------ -----------
887 1,547 1,887
Less accumulated depreciation................... (125) (363) (533)
------- ------ -----------
762 1,184 1,354
Intangible assets, net........................... 953 871 830
Note from officer................................ 40 83 83
Cost of pending warrant redemption 47 -- --
Other assets..................................... 23 19 148
------- ------ -----------
Total assets................................. $13,939 28,742 37,987
======= ====== ===========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
SCANSOURCE, INC.
BALANCE SHEETS (CONTINUED)
JUNE 30, 1995 AND 1996 AND DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
--------------- ------------
1995 1996 1996
------- ------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Liabilities and
---------------
Shareholders' Equity
--------------------
Current liabilities:
Trade accounts payable.... $ 3,377 8,287 15,602
Accrued compensation cost. 93 97 143
Accrued expenses and other
liabilities............... 404 600 495
Income tax payable........ 1,308 540 --
Deferred gain............. 200 -- --
Other..................... 202 -- --
------- ------ -----------
Total current
liabilities............. 5,584 9,524 16,240
------- ------ -----------
Deferred tax liability..... 9 26 26
Borrowings under line of
credit..................... 1,200 3,779 5,069
------- ------ -----------
Total liabilities....... 6,793 13,329 21,335
------- ------ -----------
Common stock subject to
put/call option............ 750 -- --
------- ------ -----------
Shareholders' equity:
Preferred stock, no par
value; 3,000,000 shares
authorized, none issued
and outstanding.......... -- -- --
Common stock, no par
value; 10,000,000 shares
authorized; 2,175,130,
3,235,186 and 3,247,986
issued and outstanding at
June 30, 1995 and 1996
and December 31, 1996,
respectively............. 5,526 11,935 11,958
Less common stock subject
to put/call option,
250,000 shares at $3.00
per share................ (750) -- --
------- ------ -----------
4,776 11,935 11,958
Retained earnings......... 1,620 3,478 4,694
------- ------ -----------
Total shareholders'
equity.................. 6,396 15,413 16,652
Commitments................
------- ------ -----------
Total liabilities and
shareholders' equity.... $13,939 28,742 37,987
======= ====== ===========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
SCANSOURCE, INC.
STATEMENTS OF INCOME
FOR THE FISCAL YEARS ENDED JUNE 30, 1994, 1995 AND 1996
AND THE SIX-MONTH PERIODS ENDED DECEMBER 31, 1995 AND 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX-MONTH
PERIODS ENDED
FISCAL YEARS ENDED JUNE 30, DECEMBER 31,
-------------------------------------------
1994 1995 1996 1995 1996
--------- --------- --------------- ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales......................... $ 16,089 34,235 55,670 23,277 42,110
Cost of goods sold................ 13,676 29,444 47,856 19,928 36,382
--------- -------- -------- ------ ------
Gross profit.................. 2,413 4,791 7,814 3,349 5,728
Selling, general and
administrative expenses........... 1,718 3,128 4,955 2,217 3,557
Amortization of intangibles....... 50 83 83 41 41
--------- -------- -------- ------ ------
Total operating expenses...... 1,768 3,211 5,038 2,258 3,598
--------- -------- -------- ------ ------
Operating income.............. 645 1,580 2,776 1,091 2,130
Other income (expense):
Gain from contract termination,
net............................. -- 1,000 200 200 --
Other income (expense), net..... (150) (72) 75 45 (169)
--------- -------- -------- ------ ------
Total other income (expense).. (150) 928 275 245 (169)
--------- -------- -------- ------ ------
Income before income taxes.... 495 2,508 3,051 1,336 1,961
Income taxes...................... 143 997 1,193 523 745
--------- -------- -------- ------ ------
Net income.................... $ 352 1,511 1,858 813 1,216
========= ======== ======== ====== ======
Per share data:
Primary
Net income.................... $ .25 .50 .53 .23 .35
========= ======== ======== ====== ======
Weighted average shares
outstanding................... 1,506 3,271 3,556 3,544 3,469
========= ======== ======== ====== ======
Fully diluted
Net income.................... $ .23 .50 .53 .23 .35
========= ======== ======== ====== ======
Weighted average shares
outstanding................... 1,663 3,271 3,560 3,552 3,478
========= ======== ======== ====== ======
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
SCANSOURCE, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE FISCAL YEARS ENDED JUNE 30, 1994, 1995 AND 1996
AND THE SIX-MONTH PERIOD ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK
SUBJECT TO RETAINED
PREFERRED COMMON PUT/CALL EARNINGS
STOCK STOCK OPTION (DEFICIT) TOTAL
--------- ------ ------------ --------- ------
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1993...... $ -- 455 -- (243) 212
Issuance of stock due to
exercise of option........... -- 375 -- -- 375
Issuance of stock in initial
public offering.............. -- 4,562 -- -- 4,562
Issuance of put/call option
on 250,000 shares............ -- -- (750) -- (750)
Net income................... -- -- -- 352 352
----- ------ ---- ----- ------
Balance at June 30, 1994...... -- 5,392 (750) 109 4,751
Issuance of stock pursuant to
the exercise of warrants and
the unit purchase option.... -- 134 -- -- 134
Net income................... -- -- -- 1,511 1,511
----- ------ ---- ----- ------
Balance at June 30, 1995...... -- 5,526 (750) 1,620 6,396
Issuance of stock pursuant to
the exercise of warrants and
the unit purchase price
option, net of offering
costs....................... -- 6,732 -- -- 6,732
Issue of stock due to
exercise of stock options.... -- 552 -- -- 552
Exercise of call option...... -- -- 750 -- 750
Purchase of shares owned by
Gates/FA..................... -- (875) -- -- (875)
Net income................... -- -- -- 1,858 1,858
----- ------ ---- ----- ------
Balance at June 30, 1996...... -- 11,935 -- 3,478 15,413
Issuance of stock due to
exercise of options
(unaudited)................. -- 23 -- -- 23
Net income (unaudited)....... -- -- -- 1,216 1,216
----- ------ ---- ----- ------
Balance at December 31, 1996
(unaudited)................... $ -- 11,958 -- 4,694 16,652
===== ====== ==== ===== ======
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
SCANSOURCE, INC.
STATEMENTS OF CASH FLOWS
FOR THE FISCAL YEARS ENDED JUNE 30, 1994, 1995 AND 1996
AND THE SIX-MONTH PERIODS ENDED DECEMBER 31, 1995 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX-MONTH
PERIOD ENDED
FISCAL YEARS ENDED JUNE 30, DECEMBER 31,
----------------------------- --------------
1994 1995 1996 1995 1996
--------- --------- --------- ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income..................... $ 352 1,511 1,858 813 1,216
Adjustments to reconcile net
income to net cash used in
operating activities:
Depreciation.................. 35 79 238 103 170
Amortization of intangible
assets........................ 50 83 83 41 41
Deferred income taxes, net.... (156) (477) (347) -- --
Deferred gain................. -- 200 (200) (200) --
Other, net.................... -- (3) -- -- --
Changes in operating assets
and liabilities:
Receivables.................. (1,485) (1,710) (3,810) (1,017) (1,282)
Inventories.................. (10) (6,037) (11,232) (3,648) (7,631)
Prepaid expenses and other... (48) 4 (3) (13) (74)
Due from Gates/FA............ -- (750) 750 -- --
Deposit with Gates/FA........ (1,266) 1,266 -- -- --
Net assets acquired and held
for liquidation.............. 115 -- -- -- --
Trade accounts payable....... (599) 2,685 4,909 181 7,315
Accrued compensation......... (16) 54 5 (10) 46
Accrued expenses and other
liabilities.................. 31 238 196 (60) (105)
Income tax payable........... 273 1,036 (769) (1,103) (540)
Other noncurrent assets...... (3) (5) 4 4 (129)
-------- -------- --------- ------ ------
Net cash used in operating
activities.................. (2,727) (1,826) (8,318) (4,909) (973)
-------- -------- --------- ------ ------
Cash flows from investing
activities:
Capital expenditures, net...... (103) (669) (659) (338) (340)
Advances to officer under note. (40) -- (43) -- --
Repayments of amount due to
former Alpha Data shareholder.. (250) (120) -- -- --
Purchase of MicroBiz........... -- (531) -- -- --
Payments to MicroBiz........... -- (98) (202) (68) --
-------- -------- --------- ------ ------
Net cash used in investing
activities.................. (393) (1,418) (904) (406) (340)
-------- -------- --------- ------ ------
Cash flows from financing
activities:
Cash proceeds from initial
public offering................ 4,562 -- -- -- --
Cash proceeds from exercise of
stock options.................. 375 -- 552 69 23
Cash proceeds from exercise of
warrants and the unit purchase
option, net of offering costs. -- 134 6,779 6,732 --
Repurchase of shares from
Gates/FA....................... -- -- (875) -- --
Advances from line of credit,
net............................ -- 1,200 2,579 (1,200) 1,290
Cost of pending warrant
redemption..................... -- (47) -- 47 --
-------- -------- --------- ------ ------
Net cash provided by
financing activities........ 4,937 1,287 9,035 5,648 1,313
-------- -------- --------- ------ ------
Increase (decrease) in cash. 1,817 (1,957) (187) 333 --
Cash at beginning of period..... 327 2,144 187 187 --
-------- -------- --------- ------ ------
Cash at end of period........... $ 2,144 187 -- 520 --
======== ======== ========= ====== ======
Supplemental information:
Interest paid.................. $ 170 439 15 14 144
======== ======== ========= ====== ======
Income taxes paid.............. $ 26 76 2,309 1,069 1,285
======== ======== ========= ====== ======
Supplemental non-cash
information:
Note issued in connection with
the purchase of MicroBiz...... $ -- 300 -- -- --
======== ======== ========= ====== ======
</TABLE>
See accompanying notes to financial statements.
F-7
<PAGE>
SCANSOURCE, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1995 AND 1996, AND DECEMBER 31, 1996
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Nature of Business
ScanSource, Inc. ("Company") is a leading distributor of specialty
technology products, principally including Automatic Identification and Point
of Sale equipment. The Company is a South Carolina corporation and its fiscal
year end is June 30.
The balance sheet as of December 31, 1996 and the statements of income and
cash flows for the six-month periods ended December 31, 1995 and 1996 and the
statement of shareholders' equity for the six-month period ended December 31,
1996 have been prepared by management and are unaudited. However, in the
opinion of management, all adjustments (consisting of normal recurring
adjustments), necessary for the fair presentation of the unaudited
information, have been included.
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.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is computed using
the straight-line method over the following estimated useful lives, whereas
leasehold improvements are amortized over the shorter of the lease term or the
estimated useful life:
Leasehold improvements 4-8 years
Furniture and equipment 3-5 years
Maintenance, repairs and minor renewals are charged to expense as incurred.
Additions, major renewals and betterments to property and equipment are
capitalized. Realization of carrying value is assessed periodically.
Cash Management System
Under the Company's cash management system, disbursements cleared by the
bank are reimbursed on a daily basis from the line of credit. As a result,
checks issued but not yet presented to the bank are not considered reductions
of cash or accounts payable. Included in accounts payable are $763,000 and
$1,978,000 at June 30, 1996 and December 31, 1996, respectively, for which
checks are outstanding.
F-8
<PAGE>
SCANSOURCE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Inangible Assets
Intangible assets consist primarily of goodwill which is amortized on a
straight-line basis over 15 years. Accumulated amortization was $141,000,
$223,000 and $264,000 at June 30, 1995 and 1996 and December 31, 1996,
respectively. The Company evaluates the recoverability of goodwill and reviews
the amortization periods on an annual basis. Recoverability is measured on the
basis of anticipated undiscounted cash flows from operations. At June 30, 1995
and 1996 and December 31, 1996, no impairment was indicated.
Vendor Programs
Funds received from vendors for price protection, product rebates, marketing
or training programs are recorded net of direct costs as adjustments to
product costs, or a reduction of selling, general and administrative expenses
according to the nature of the program.
The Company does not provide warranty coverage of its product sales.
However, to maintain customer relations, the Company facilitates vendor
warranty policies by accepting for exchange, with the Company's prior
approval, most defective products within 30 days of invoicing. Defective
products received by the Company are subsequently returned to the vendor for
credit or replacement.
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".
F-9
<PAGE>
SCANSOURCE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 carrying amount of borrowings under the bank credit agreement
approximates fair value because interest rates on these instruments
approximate current market interest rates.
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.
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
goods sold. 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.
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).
F-10
<PAGE>
SCANSOURCE, INC.
NOTES TO FINANCIAL STATMENTS (CONTINUED)
(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 $1,266,000 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 non-compete 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 $1,000,000 (net of additional
moving costs of $100,000 in Note 2(d)) as other income. 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. 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.
(d) In May 1995 the Company rented space in a third-party facility in
Memphis, Tennessee, and began performing its product handling and management
information services (MIS) internally. The Company incurred approximately
$100,000 of expense to move its inventory to the new facility. In June 1996 a
Company officer and director was elected to the Board of Directors of the
third party. For the fiscal year ended June 30, 1996 the Company paid
approximately $144,000 to this 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 unrelated parties.
F-11
<PAGE>
SCANSOURCE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(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 $300,000 based upon sales performance
was paid during the years ended June 30, 1995 and 1996. The purchase included
certain customer lists and distribution contracts and MicroBiz agreeing not to
compete for a period of 42 months. The Company also paid $231,000 for
MicroBiz' equipment inventory. 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 non-cancellable
operating leases which expire through 1999. Future minimum rentals are as
follows: $83,000, $15,000 and $6,000 for the years ended June 30, 1997, 1998
and 1999, respectively. Rent expense was approximately $33,000, $73,000, and
$74,000 for the years ended June 30, 1994, 1995 and 1996, and $38,000 and
$37,000 for the six months ended December 31, 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 invested $119,000 in
Transition in September 1996 to increase its ownership to 42% at December 31,
1996. The investment in Transition is accounted for under the equity method.
The Company purchased $278,000 of marketing services from Transition for the
year ended June 30, 1996 and $85,000 and $89,000 for the six months ended
December 31, 1995 and 1996 and had loaned, at a 9% interest rate, $122,000 to
Transition at June 30, 1996 which was repaid in October 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 unrelated parties.
F-12
<PAGE>
SCANSOURCE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(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
----------------------- -----------------------
SHARES EXERCISE PRICE SHARES EXERCISE 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 and warrants to officers,
directors, former directors and employees of Transition, including options
issued under the directors' stock option plan, which reserved 65,000 shares of
common stock for issuance to non-employee directors. These options vest over
varying periods up to three years. The options are generally exercisable over
10 years, and options are not to be granted at less than fair market value of
the underlying shares at the date of grant.
Following is a summary of activity of all options and warrants not included
in the employee plan shown above:
<TABLE>
<CAPTION>
1995 1996
---------------------- -----------------------
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------- -------------- ------- --------------
<S> <C> <C> <C> <C>
Stock options and warrants
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>
F-13
<PAGE>
SCANSOURCE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(7) INCOME TAXES
Income tax expense (benefit) consists of:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
---------- -------- ---------
<S> <C> <C> <C>
June 30, 1994:
Federal......................................... $ 251,000 (134,000) 117,000
State and local................................. 48,000 (22,000) 26,000
---------- -------- ---------
$ 299,000 (156,000) 143,000
========== ======== =========
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 taxes for the six months ended December 31, 1995 and 1996 were
provided at the estimated rates of approximately 39% and 38%, respectively.
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>
FISCAL YEARS ENDED JUNE 30,
------------------------------
1994 1995 1996
--------- -------------------
<S> <C> <C> <C>
Computed "expected" tax expense................. $ 169,000 853,000 1,037,000
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........ (96,000) -- --
Additional provision for income taxes.......... 50,000 68,000 84,000
State and local income taxes, net of Federal
income tax expense............................ 17,000 73,000 68,000
Other.......................................... 3,000 3,000 4,000
--------- -------- ----------
$143,000 997,000 1,193,000
========= ======== ==========
</TABLE>
F-14
<PAGE>
SCANSOURCE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(7) INCOME TAXES (CONTINUED)
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>
JUNE 30,
-------------------
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.
(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 and the six months ended December 31, 1995 and 1996,
the Company provided a matching contribution of $6,000, $8,000 and $18,000,
respectively, and $3,000 and $10,000, 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.
F-15
<PAGE>
SCANSOURCE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(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
In 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 of which exceeded $8 million, leaving approximately $4,221,000
available at June 30, 1996. The revolving credit facility is secured by
accounts receivable and inventory. The agreement contained certain financial
covenants including minimum net worth and current ratio requirements and a
maximum debt to tangible net worth ratio. The Company was either in compliance
with the various covenants or had obtained waivers of non-compliance at June
30, 1996. See note 13.
On April 8, 1996, the Company signed an agreement for wholesale financing
with IBM Credit Corporation (ICC), collateralized by IBM inventory. The
Company had accounts payable of $3,501,000 and $7,645,000 to ICC at June 30,
1996 and December 31, 1996. See note 13.
(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 units were outstanding on the UPO at
June 30, 1995 and 42,000 units were outstanding at June 30, 1996 and December
31, 1996, respectively.
On September 19, 1995, the Company redeemed 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 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 shares was increased
by the number of shares issuable upon 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 shares was reduced by the number of shares that are assumed to have
been purchased with the proceeds from the exercise of the warrants or UPO.
Such 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.
F-16
<PAGE>
SCANSOURCE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(12) EARNINGS PER SHARE (CONTINUED)
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 is $.15 for the year ended
June 30, 1994 and was computed as if the initial public offering of units had
occurred on the first day of fiscal 1994. Supplemental weighted average shares
are 3,229,000 and were computed as if the warrants and the UPO were 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 for the year ended June 30, 1994 is $478,000 and was computed as
described in the previous paragraph.
(13) SUBSEQUENT EVENTS (UNAUDITED)
In November 1996, the Company renegotiated the line of credit to allow
borrowings up to $15 million for a period extending to October 31, 1998 under
similar terms and conditions as the previous agreement. The Company's interest
rate is the 30-day LIBOR rate plus a rate varying from 2.00% to 2.65% tied to
the Company's debt-to-net worth ratio ranging from 1:1 to 2:1. At December 31,
1996, the interest rate was 7.66%, and the outstanding balance on the line of
credit was $5,069,000 on a loan base of $12,173,000, leaving $7,104,000
available.
In November 1996, the Company negotiated a stock rotation with IBM, whereby
$6.5 million of inventory will be returned to IBM beginning as early as
February 5, 1997. This stock rotation will result in reductions to inventory
and the related payable to IBM Credit Corporation.
In December 1996, the Company's shareholders approved an increase in the
number of shares reserved under the Company's employee stock option plan to
280,000 shares.
F-17
<PAGE>
[INSIDE BACK COVER GRAPHICS]
ScanSource logo in upper right corner
Left margin box with supporting text: "Comprehensive Marketing Capabilities,
Trade Publications, Direct Mail, Product Catalog, Newsletters, Lead Management,
Trade Shows, Sales Promotions"
Picture(s) Caption Description of Picture
- ---------- ------- ----------------------
1 & 2 Advertising in An example gatefold ad with ScanSource logo
cooperation with and seven featured vendors
venders
3 National industry ScanSource booth at a convention center
trade shows trade show
4 Product catalogs Cover of ScanSource's most recent catalog
(3 times per year)
5 Sales promotion Symbol Technologies "super bowl ticket stub"
6 & 7 Advertising in Covers of two industry periodicals
trade magazines
8 ScanSource A Solutions USA logo
organizes and
operates its
own quarterly
trade shows
<PAGE>
[LOGO OF SCAN SOURCE APPEARS HERE]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The expenses (other than underwriting discounts and commissions) in
connection with the issuance and distribution of the securities being
registered, all of which will be paid by the Registrant, are as follows:
<TABLE>
<S> <C>
SEC Registration Fee............................................... $ 11,675
NASD Filing Fee.................................................... 4,353
Nasdaq NMS Listing Fee............................................. 17,500
Printing and Engraving Expenses.................................... 115,000*
Legal Fees and Expenses............................................ 90,000*
Accounting Fees and Expenses....................................... 50,000*
Blue Sky Fees and Expenses......................................... 10,000*
Transfer Agent and Registrar Fees and Expenses..................... 12,000*
Miscellaneous Expenses............................................. 89,472*
--------
Total.............................................................. $400,000
========
</TABLE>
- --------
Estimated*
ITEM 14.INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Except as hereinafter set forth, there is no statute, charter provision,
bylaw, contract or other arrangement under which any controlling person,
director or officer of the Registrant is insured or indemnified in any manner
against liability which such person may incur in such person's capacity as
such.
Section 33-8-500 et seq. of the South Carolina Business Corporation Act of
1988, as amended (the "South Carolina Act"), provides the Registrant with
broad powers and authority to indemnify its directors and officers and to
purchase and maintain insurance for such purposes and mandates the
indemnification of the Registrant's directors under certain circumstances. The
Registrant's Bylaws also provide the Registrant with the power and authority
to the fullest extent legally permissible under the South Carolina Act to
indemnify its directors and officers, persons serving at the request of the
Registrant or for its benefit as directors or officers of another corporation
and persons serving as the Registrant's employees, representatives or agents
in certain circumstances. Pursuant to such authority and Bylaws provisions,
the Registrant may advance expenses or purchase insurance against certain
liabilities that may be incurred by it and its officers and directors.
Reference is also made to the discussion in the Prospectus under the caption
"Description of Capital Stock--Certain Provisions of Articles and Bylaws."
The Registrant's Amended and Restated Articles of Incorporation contain a
provision which eliminates, to the fullest extent permitted by law, director
liability for monetary damages for breaches of the fiduciary duty of care or
other duties as a director.
ITEM 15.RECENT SALES OF UNREGISTERED SECURITIES.
During the period since the incorporation of the Registrant in December
1992, the securities identified below were issued by the Registrant without
registration under the Securities Act. On December 10, 1992, shortly following
its incorporation, the Registrant issued shares of common stock and preferred
stock to the following shareholders for cash consideration of $1.00 per share
of preferred stock and $0.01 per share of common stock, plus the execution by
each of the undersigned (except Datascan Corporation) of a guarantee of a
portion of the Registrant's obligation to Gates/Arrow Distributing, Inc.
(formerly Gates/FA Distributing, Inc.) ("Gates").
II-1
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF SHARES NUMBER OF SHARES
SHAREHOLDER OF COMMON STOCK OF PREFERRED STOCK
- ----------- ---------------- ------------------
<S> <C> <C>
Datascan Corporation........................ 50,000 --
Dennis Gates................................ -- 90,000
Carl Krezdorn............................... -- 16,667
Irwin Lieber................................ -- 50,000
Steven H. Owings............................ 200,000 100,000
Eli Oxenhorn................................ -- 100,000
Steve Roberson.............................. -- 16,666
Janet K. Rollins............................ -- 10,000
Ronald A. Seitz............................. -- 16,667
Woodland Partners........................... -- 100,000
</TABLE>
All of the shares listed above were issued pursuant to the exemption from
registration contained in Section 4(2) of the Securities Act of 1933, as
amended (the "Securities Act"). In August 1993, the Registrant repurchased the
50,000 shares of its common stock held by Datascan Corporation for $2.00 per
share.
In December 1992, in connection with its engagement of Gates to provide
various product handling, systems integration, credit line and accounts
payable functions, the Registrant issued to Gates options to purchase 250,000
shares of the Registrant's common stock at an exercise price of $1.50 per
share. In December 1993, Gates exercised such option and acquired 250,000
shares of the Registrant's common stock for an aggregate purchase price of
$375,000. Such options and the shares issued upon their exercise were issued
pursuant to the exemption from registration contained in Section 4(2) of the
Securities Act. In March 1996, the Registrant repurchased the 250,000 shares
of its common stock held by Gates for $3.50 per share.
In April 1993, the Registrant issued 52,630 shares of its common stock to
Michael T. Hill in connection with the acquisition by the Registrant of the
assets of Alpha Data Systems, Inc. All of such shares were issued pursuant to
the exemption from registration contained in Section 4(2) of the Securities
Act.
In September 1993, in connection with services rendered and to be rendered
in connection with participation on the Strategic Planning Committee of the
Board of Directors of the Registrant, the Registrant authorized the issuance
of warrants to purchase 50,000 shares of the Registrant's common stock at an
exercise price of $2.00 per share to each of Barry Rubenstein and Eli
Oxenhorn. At the direction of Mr. Rubenstein and Mr. Oxenhorn, such warrants
to purchase an aggregate of 100,000 shares of common stock were issued to Rev-
Wood Merchant Partners, a general partnership of which Mr. Rubenstein and Mr.
Oxenhorn are the sole general partners. Subsequently, such warrants were
reissued as warrants for 50,000 shares to each of Mr. Rubenstein and Mr.
Oxenhorn on the same terms. Such warrants were issued and reissued pursuant to
the exemption from registration contained in 4(2) of the Securities Act, and
all shares under such warrants were registered on Form S-8 filed March 21,
1996.
In January 1994, the Registrant issued one share of its common stock in
exchange for each share of its preferred stock still held of record by each of
the persons to whom shares of such preferred stock were originally issued in
December 1992 as listed above. Such shares of common stock were issued in
exchange for such shares of preferred stock pursuant to the exemption from
registration contained in Section 3(a)(9) of the Securities Act.
II-2
<PAGE>
ITEM 16(A). EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <C> <S>
1 - Form of Underwriting Agreement.
3.1 - Amended and Restated Articles of Incorporation of the Registrant.
(Incorporated by Reference to Exhibit 3.1 to Registrant's Form SB-
2 filed with the Commission on February 7, 1994, Registration No.
33-75026-A).
3.2 - Bylaws of the Registrant (Incorporated by Reference to Exhibit 3.2
to Registrant's Form SB-2 filed with the Commission on February 7,
1994, Registration No. 33-75026-A).
4.1 - Form of Common Stock Certificate (Incorporated by Reference to
Exhibit 4.1 to Registrant's Form SB-2 filed with the Commission on
February 7, 1994, Registration No. 33-75026-A).
5* - Opinion of Nexsen Pruet Jacobs & Pollard, LLP.
10.9 - Stock Option Agreement dated July 1, 1993 covering stock options
issued to Michael L. Baur. (Incorporated by Reference to Exhibit
10.9 to the Registrant's Form SB-2 filed with the Commission on
February 7, 1994, Registration No. 33-75026-A).
10.10* - 1993 Incentive Stock Option Plan (As Amended) of the Registrant
and Form of Stock Option Agreement.
10.11 - 1994 Stock Option Plan for Outside Directors of the Registrant and
Form of Stock Option Agreement. (Incorporated by Reference to
Exhibit 10.11 to the Registrant's Form SB-2 filed with the
Commission on February 7, 1994, Registration No. 33-75026-A).
10.13 - Stock Option Agreement dated December 30, 1993 covering stock
options issued to Irwin Lieber. (Incorporated by Reference to
Exhibit 10.13 to the Registrant's Form SB-2 filed with the
Commission on February 7, 1994, Registration No. 33-75026-A).
10.18 - Agreement to Terminate Distribution Services dated June 24, 1994
between the Registrant and Gates/FA Distributing, Inc.
(Incorporated by Reference to Exhibit 99.1 to Registrant's Form 8-
K filed with the Commission on June 6, 1994).
10.19 - Stock Option Agreement dated September 1, 1995 between Globelle,
Inc., the Registrant, and Dennis Gates. (Incorporated by reference
to Exhibit 10.19 to the Registrant's Form 10-KSB for the fiscal
year ended June 30, 1996).
10.20 - Letter agreement dated September 1, 1995 between the Registrant
and Transition Marketing, Inc. (Incorporated by reference to
Exhibit 10.20 to the Registrant's Form 10-KSB for the fiscal year
ended June 30, 1996).
10.21 - Software License Agreement dated April 18, 1995 between the
Registrant and Technology Marketing Group, Inc. d/b/a Globelle,
including letter agreement dated November 22, 1995 between the
parties with respect to stock options. (Incorporated by reference
to Exhibit 10.21 to the Registrant's registration statement on
Form S-3 filed with the Commission on December 29, 1995,
Registration No. 33-81043).
10.22 - Schedule of Material Details of Unit Purchase Option Agreements
dated March 18, 1994, between the Registrant and each of David M.
Nussbaum, Robert Gladstone, Roger Gladstone, and Richard
Buonocoure, including form of letter agreement dated February 7,
1997 between the parties (Form of Unit Purchase Option Agreement
incorporated by reference to Exhibit 4.3 to the Registrant's Form
SB-2 filed with the Commission on March 2, 1994, Registration No.
33-75026-A).
10.23* - Stock Warrant dated November 29, 1995 from the Registrant to Eli
Oxenhorn.
10.24* - Stock Warrant dated November 29, 1995 from the Registrant to Barry
Rubenstein.
10.25** - Agreement for Wholesale Financing (Security Agreement) dated April
8, 1996 between the Registrant and IBM Credit Corporation,
including letter agreement dated April 17, 1996 between the
parties.
10.26* - Intercreditor Agreement dated April 8, 1996 among the Registrant,
IBM Credit Corporation, and Branch Banking and Trust Company.
10.27* - Loan and Security Agreement dated November 25, 1996 between the
Registrant and Branch Banking and Trust Company.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <C> <S>
10.28* - Employment Agreement dated as of January 1, 1997 between the
Registrant and Steven H. Owings.
10.29* - Employment Agreement dated as of January 1, 1997 between the
Registrant and Michael L. Baur.
10.30* - Employment Agreement dated as of January 1, 1997 between the
Registrant and Jeffery A. Bryson.
10.31* - Stock Option Agreement dated July 18, 1996 covering stock options
granted to Steven R. Fischer.
10.32* - Stock Option Agreement dated July 18, 1996 covering stock options
granted to James G. Foody.
10.33* - Stock Option Agreement dated December 3, 1996 covering stock
options granted to Steven H. Owings.
10.34* - Stock Option Agreement dated December 3, 1996 covering stock
options granted to Michael L. Baur.
10.35** - Distribution Agreement dated October 1, 1994 between the
Registrant and Symbol Technologies, Inc.
10.36** - Distribution Agreement dated January 1, 1996 between the
Registrant and IBM Corporation.
10.37* - Stock Option Agreement dated January 17, 1997 covering options
granted to Steven H. Owings.
10.38* - Stock Option Agreement dated January 17, 1997 covering options
granted to Michael L. Baur.
10.39* - Stock Option Agreement dated January 17, 1997 covering options
granted to Jeffery A. Bryson.
11* - Statement Re: Computation of Per Share Earnings.
23.1 - Consent of KPMG Peat Marwick LLP.
23.2* - Consent of Nexsen Pruet Jacobs & Pollard, LLP (included in their
opinion filed as Exhibit 5).
27* - Financial Data Schedule.
</TABLE>
- --------
* Previously filed.
** Previously filed. Confidential Treatment pursuant to 17 CFR (S)(S) 200.80,
200.83 and 230.406 and 5 USC (S) 502 has been requested regarding certain
portions of the indicated Exhibit, which portions have been filed separately
with the Commission.
ITEM 16(B).
FINANCIAL STATEMENTS SCHEDULES.
Not Applicable.
ITEM 17.
UNDERTAKINGS.
(a) Insofar as indemnification for liabilities under the Securities Act may
be permitted to directors, officers and controlling persons of the Registrant
pursuant to the provisions described under Item 24 above, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
(b) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4), or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For purposes of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment to Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of
Greenville, State of South Carolina, on February 12, 1997.
SCANSOURCE, INC.
By: /s/ Steven H. Owings
---------------------------------
STEVEN H. OWINGS
CHAIRMAN OF THE BOARD AND CHIEF
EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates stated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<S> <C> <C>
/s/ Steven H. Owings Chairman of the February 12, 1997
- ------------------------------------- Board, Chief
STEVEN H. OWINGS Executive Officer,
and Director
(principal
executive officer)
/s/ Jeffery A. Bryson Chief Financial February 12, 1997
- ------------------------------------- Officer and
JEFFERY A. BRYSON Treasurer
(principal
financial and
accounting officer)
* President and February 12, 1997
- ------------------------------------- Director
MICHAEL L. BAUR
* Director February 12, 1997
- -------------------------------------
STEVEN R. FISCHER
* Director February 12, 1997
- -------------------------------------
JAMES G. FOODY
/s/ Steven H. Owings February 12, 1997
- -------------------------------------
* BY: STEVEN H. OWINGS
(AS ATTORNEY-IN-FACT FOR EACH OF THE
PERSONS INDICATED)
</TABLE>
II-5
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <C> <S> <C>
1 - Form of Underwriting Agreement.
3.1 - Amended and Restated Articles of Incorporation of the
Registrant. (Incorporated by Reference to Exhibit 3.1 to
Registrant's Form SB-2 filed with the Commission on February
7, 1994, Registration No. 33-75026-A).
3.2 - Bylaws of the Registrant (Incorporated by Reference to
Exhibit 3.2 to Registrant's Form SB-2 filed with the
Commission on February 7, 1994, Registration No. 33-75026-
A).
4.1 - Form of Common Stock Certificate (Incorporated by Reference
to Exhibit 4.1 to Registrant's Form SB-2 filed with the
Commission on February 7, 1994, Registration No. 33-75026-
A).
5* - Opinion of Nexsen Pruet Jacobs & Pollard, LLP.
10.9 - Stock Option Agreement dated July 1, 1993 covering stock
options issued to Michael L. Baur. (Incorporated by
Reference to Exhibit 10.9 to the Registrant's Form SB-2
filed with the Commission on February 7, 1994, Registration
No. 33-75026-A).
10.10* - 1993 Incentive Stock Option Plan (As Amended) of the
Registrant and Form of Stock Option Agreement.
10.11 - 1994 Stock Option Plan for Outside Directors of the
Registrant and Form of Stock Option Agreement. (Incorporated
by Reference to Exhibit 10.11 to the Registrant's Form SB-2
filed with the Commission on February 7, 1994, Registration
No. 33-75026-A).
10.13 - Stock Option Agreement dated December 30, 1993 covering
stock options issued to Irwin Lieber. (Incorporated by
Reference to Exhibit 10.13 to the Registrant's Form SB-2
filed with the Commission on February 7, 1994, Registration
No. 33-75026-A).
10.18 - Agreement to Terminate Distribution Services dated June 24,
1994 between the Registrant and Gates/FA Distributing, Inc.
(Incorporated by Reference to Exhibit 99.1 to Registrant's
Form 8-K filed with the Commission on June 6, 1994).
10.19 - Stock Option Agreement dated September 1, 1995 between
Globelle Corporation, the Registrant, and Dennis Gates.
(Incorporated by reference to Exhibit 10.19 to the
Registrant's Form 10-KSB for the fiscal year ended June 30,
1996).
10.20 - Letter agreement dated September 1, 1995 between the
Registrant and Transition Marketing, Inc. (Incorporated by
reference to Exhibit 10.20 to the Registrant's Form 10-KSB
for the fiscal year ended June 30, 1996).
10.21 - Software License Agreement dated April 18, 1995 between the
Registrant and Technology Marketing Group, Inc. d/b/a
Globelle, including letter agreement dated November 22, 1995
between the parties with respect to stock options.
(Incorporated by reference to Exhibit 10.21 to the
Registrant's registration statement on Form S-3 filed with
the Commission on December 29, 1995, Registration No. 33-
81043).
10.22 - Schedule of Material Details of Unit Purchase Option
Agreements dated March 18, 1994, between the Registrant and
each of David M. Nussbaum, Robert Gladstone, Roger
Gladstone, and Richard Buonocoure, including form of letter
agreement dated February 7, 1997 between the parties (Form
of Unit Purchase Option Agreement incorporated by reference
to Exhibit 4.3 to the Registrant's Form SB-2 filed with the
Commission on March 2, 1994, Registration No. 33-75026-A).
10.23* - Stock Warrant dated November 29, 1995 from the Registrant to
Eli Oxenhorn.
10.24* - Stock Warrant dated November 29, 1995 from the Registrant to
Barry Rubenstein.
10.25** - Agreement for Wholesale Financing (Security Agreement) dated
April 8, 1996 between the Registrant and IBM Credit
Corporation, including letter agreement dated April 17, 1996
between the parties.
10.26* - Intercreditor Agreement dated April 8, 1996 among the
Registrant, IBM Credit Corporation, and Branch Banking and
Trust Company.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
10.27* - Loan and Security Agreement dated November 25, 1996 between
the Registrant and Branch Banking and Trust Company.
10.28* - Employment Agreement dated as of January 1, 1997 between the
Registrant and Steven H. Owings.
10.29* - Employment Agreement dated as of January 1, 1997 between the
Registrant and Michael L. Baur.
10.30* - Employment Agreement dated as of January 1, 1997 between the
Registrant and Jeffery A. Bryson.
10.31* - Stock Option Agreement dated July 18, 1996 covering stock
options granted to Steven R. Fischer.
10.32* - Stock Option Agreement dated July 18, 1996 covering stock
options granted to James G. Foody.
10.33* - Stock Option Agreement dated December 3, 1996 covering stock
options granted to Steven H. Owings.
10.34* - Stock Option Agreement dated December 3, 1996 covering stock
options granted to Michael L. Baur.
10.35** - Distribution Agreement dated October 1, 1994 between the
Registrant and Symbol Technologies, Inc.
10.36** - Distribution Agreement dated January 1, 1996 between the
Registrant and IBM Corporation.
10.37* - Stock Option Agreement dated January 17, 1997 covering
options granted to Steven H. Owings.
10.38* - Stock Option Agreement dated January 17, 1997 covering
options granted to Michael L. Baur.
10.39* - Stock Option Agreement dated January 17, 1997 covering
options granted to Jeffrey A. Bryson.
11* - Statement Re: Computation of Per Share Earnings.
23.1 - Consent of KPMG Peat Marwick LLP.
23.2* - Consent of Nexsen Pruet Jacobs & Pollard, LLP (included in
their opinion filed as Exhibit 5).
27* - Financial Data Schedule.
</TABLE>
- --------
* Previously filed.
** Previously filed. Confidential Treatment pursuant to 17 CFR (S)(S) 200.80,
200.83 and 230.406 and 5 USC (S) 502 has been requested regarding certain
portions of the indicated Exhibit, which portions have been filed separately
with the Commission.
<PAGE>
EXHIBIT 1
---------
FORM OF UNDERWRITING
AGREEMENT
<PAGE>
EXHIBIT 1
2,000,000 SHARES/1/
SCANSOURCE, INC.
COMMON STOCK
UNDERWRITING AGREEMENT
----------------------
, 1997
----------
ROBERTSON, STEPHENS & COMPANY LLC
THE ROBINSON-HUMPHREY COMPANY, INC.
WILLIAM BLAIR & COMPANY, L.L.C.
As Representatives of the several Underwriters
c/o Robertson, Stephens & Company LLC
555 California Street
Suite 2600
San Francisco, California 94104
Ladies/Gentlemen:
ScanSource, Inc., a South Carolina corporation (the "Company"), and certain
shareholders of the Company named in Schedule B hereto (hereafter called the
"Selling Shareholders") address you as the Representatives of each of the
persons, firms and corporations listed in Schedule A hereto (herein collectively
called the "Underwriters") and hereby confirm their respective agreements with
the several Underwriters as follows:
1. Description of Shares. The Company proposes to issue and sell
---------------------
2,000,000 shares of its authorized and unissued Common Stock, no par value per
share (the "Firm Shares), to the several Underwriters. The Company and the
Selling Shareholders also propose to grant, severally and not jointly, to the
Underwriters an option to purchase up to 300,000 additional shares of the
Company's Common Stock, no par value per share (the "Option Shares"), as
provided in Section 7 hereof. As used in this Agreement, the term "Shares"
shall include the Firm Shares and the Option Shares. All shares of Common Stock,
no par value per share, of the Company to be outstanding after giving effect to
the sales contemplated hereby, including the Shares, are hereinafter referred to
as "Common Stock."
2. Representations, Warranties and Agreements of the Company and the
-----------------------------------------------------------------
Selling Shareholders.
--------------------
I. The Company represents and warrants to and agrees with each
Underwriter that:
(a) A registration statement on Form S-1 (File No. 333-20231) with
respect to the Shares, including a prospectus subject to completion, has been
prepared by the Company which conforms in all material respects with the
requirements of the Securities Act of 1933, as amended (the "Act"), and the
applicable rules and regulations (the "Rules and Regulations") of the Securities
and Exchange Commission (the "Commission") under the Act and has been filed with
the Commission; such amendments to such registration statement, such amended
- --------------------
/1/ Plus an option to purchase up to 300,000 additional shares from the Company
and certain shareholders of the Company to cover over-allotments.
<PAGE>
prospectuses subject to completion and such abbreviated registration statements
pursuant to Rule 462(b) of the Rules and Regulations as may have been required
prior to the date hereof have been similarly prepared and filed with the
Commission; and the Company will file such additional amendments to such
registration statement, such amended prospectuses subject to completion and such
abbreviated registration statements as may hereafter be required. Copies of
such registration statement and amendments, of each related prospectus subject
to completion (the "Preliminary Prospectuses") and of any abbreviated
registration statement pursuant to Rule 462(b) of the Rules and Regulations have
been delivered to you.
If the registration statement relating to the Shares has been declared
effective under the Act by the Commission, the Company will prepare and promptly
file with the Commission the information omitted from the registration statement
pursuant to Rule 430A(a) or, if Robertson, Stephens & Company LLC, on behalf of
the several Underwriters, shall agree to the utilization of Rule 434 of the
Rules and Regulations, the information required to be included in any term sheet
filed pursuant to Rule 434(b) or (c), as applicable, of the Rules and
Regulations pursuant to subparagraph (1), (4) or (7) of Rule 424(b) of the Rules
and Regulations or as part of a post-effective amendment to the registration
statement (including a final form of prospectus). If the registration statement
relating to the Shares has not been declared effective under the Act by the
Commission, the Company will prepare and promptly file an amendment to the
registration statement, including a final form of prospectus, or, if Robertson,
Stephens & Company LLC, on behalf of the several Underwriters, shall agree to
the utilization of Rule 434 of the Rules and Regulations, the information
required to be included in any term sheet filed pursuant to Rule 434(b) or (c),
as applicable, of the Rules and Regulations. The term "Registration Statement"
as used in this Agreement shall mean such registration statement, including
financial statements, schedules and exhibits, in the form in which it became or
becomes, as the case may be, effective (including, if the Company omitted
information from the registration statement pursuant to Rule 430A(a) or files a
term sheet pursuant to Rule 434 of the Rules and Regulations, the information
deemed to be a part of the registration statement at the time it became
effective pursuant to Rule 430A(b) or Rule 434(d) of the Rules and Regulations)
and, in the event of any amendment thereto or the filing of any abbreviated
registration statement pursuant to Rule 462(b) of the Rules and Regulations
relating thereto after the effective date of such registration statement, shall
also mean (from and after the effectiveness of such amendment or the filing of
such abbreviated registration statement) such registration statement as so
amended, together with any such abbreviated registration statement. The term
"Prospectus" as used in this Agreement shall mean the prospectus relating to the
Shares as included in such Registration Statement at the time it becomes
effective (including, if the Company omitted information from the Registration
Statement pursuant to Rule 430A(a) of the Rules and Regulations, the information
deemed to be a part of the Registration Statement at the time it became
effective pursuant to Rule 430A(b) of the Rules and Regulations); provided,
--------
however, that if in reliance on Rule 434 of the Rules and Regulations and with
- -------
the consent of Robertson, Stephens & Company LLC, on behalf of the several
Underwriters, the Company shall have provided to the Underwriters a term sheet
pursuant to Rule 434(b) or (c), as applicable, prior to the time that a
confirmation is sent or given for purposes of Section 2(10)(a) of the Act, the
term "Prospectus" shall mean the "prospectus subject to completion" (as defined
in Rule 434(g) of the Rules and Regulations) last provided to the Underwriters
by the Company and circulated by the Underwriters to all prospective purchasers
of the Shares (including the information deemed to be a part of the Registration
Statement at the time it became effective pursuant to Rule 434(d) of the Rules
and Regulations). Notwithstanding the foregoing, if any revised prospectus
shall be provided to the Underwriters by the Company for use in connection with
the offering of the Shares that differs from the prospectus referred to in the
immediately preceding sentence (whether or not such revised prospectus is
required to be filed with the Commission pursuant to Rule 424(b) of the Rules
and Regulations), the term "Prospectus" shall refer to such revised prospectus
from and after the time it is first provided to the Underwriters for such use.
If in reliance on Rule 434 of the Rules and Regulations and with the consent of
Robertson, Stephens & Company LLC, on behalf of the several Underwriters, the
Company shall have provided to the Underwriters a term sheet pursuant to Rule
434(b) or (c), as applicable, prior to the time that a confirmation is sent or
given for purposes of Section 2(10)(a) of the Act, the Prospectus and the term
sheet, together, will not be materially different from the prospectus in the
Registration Statement.
-2-
<PAGE>
(b) The Commission has not issued any order preventing or suspending
the use of any Preliminary Prospectus or instituted proceedings for that
purpose, and each such Preliminary Prospectus has conformed in all material
respects to the requirements of the Act and the Rules and Regulations pertaining
to preliminary prospectuses and, as of its date, has not included any untrue
statement of a material fact or omitted to state a material fact (except for
such information as is permitted to be omitted from a preliminary prospectus)
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading; and at the time the Registration
Statement became or becomes, as the case may be, effective and at all times
subsequent thereto up to and on the Closing Date (hereinafter defined) and on
any later date on which Option Shares are to be purchased, (i) the Registration
Statement and the Prospectus, and any amendments or supplements thereto,
contained and will contain all material information required to be included
therein by the Act and the Rules and Regulations and will in all material
respects conform to the requirements of the Act and the Rules and Regulations,
(ii) the Registration Statement, and any amendments or supplements thereto, did
not and will not include any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading, and (iii) the Prospectus, and any amendments or supplements
thereto, did not and will not include any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to make
the statements therein, in the light of the circumstances under which they were
made, not misleading; provided, however, that none of the representations and
-------- --------
warranties contained in this subparagraph (b) shall apply to information
contained in or omitted from the Registration Statement or the Prospectus, or
any amendment or supplement thereto, in reliance upon, and in conformity with,
written information relating to any Underwriter furnished to the Company by such
Underwriter specifically for use in the preparation thereof.
(c) The Company has been duly incorporated and is validly existing as
a corporation in good standing under the laws of the jurisdiction of its
incorporation with full corporate power and authority to own, lease and operate
its properties and conduct its business as described in the Prospectus; the
Company is duly qualified to do business as a foreign corporation and is in good
standing in each jurisdiction in which the ownership or leasing of its
properties or the conduct of its business requires such qualification, except
where the failure to be so qualified or be in good standing would not have a
material adverse effect on the condition (financial or otherwise), earnings,
operations, business or business prospects of the Company; no proceeding has
been instituted in any such jurisdiction, revoking, limiting or curtailing, or
seeking to revoke, limit or curtail, such power and authority or qualification,
except any such proceeding which would not have a material adverse effect on the
condition (financial or otherwise), earnings, operations, business or business
prospects of the Company; the Company is not in violation of its respective
charter or bylaws or in default in the performance or observance of any material
obligation, agreement, covenant or condition contained in any material bond,
debenture, note or other evidence of indebtedness which has not otherwise been
waived, or in any material lease, contract, indenture, mortgage, deed of trust,
loan agreement, joint venture or other agreement or instrument to which the
Company is a party or by which it or its properties may be bound which has not
otherwise been waived; and the Company is not in material violation of any law,
order, rule, regulation, writ, injunction, judgment or decree of any court,
government or governmental agency or body, domestic or foreign, having
jurisdiction over the Company or over its properties of which it or they have
knowledge. The Company does not have any subsidiaries. The Company does not
control, directly or indirectly, or own, directly or indirectly, any shares of
stock or any other equity interest of any corporation, partnership or limited
liability company, except for the Company's ownership interest in Transition
Marketing, Inc., a South Carolina corporation. For purposes of this Agreement,
the term "subsidiary" includes any corporation, partnership, limited liability
company or other entity in which the Company presently has a controlling
ownership interest.
(d) The Company has full legal right, power and authority to enter
into this Agreement and perform the transactions contemplated hereby. This
Agreement has been duly authorized, executed and delivered by the Company and is
a valid and binding agreement on the part of the Company, enforceable in
accordance with its terms, except as rights to indemnification or other remedies
-3-
<PAGE>
hereunder may be limited by applicable law and except as the enforcement hereof
may be limited by applicable bankruptcy, insolvency, reorganization, moratorium
or other similar laws relating to or affecting creditors' rights generally or by
general equitable principles; the performance of this Agreement and the
consummation of the transactions herein contemplated will not result in a
material breach or violation of any of the terms and provisions of, or
constitute a default under, (i) any material bond, debenture, note or other
evidence of indebtedness, or under any lease, contract, indenture, mortgage,
deed of trust, loan agreement, joint venture or other agreement or instrument to
which the Company is a party or by which it or its properties may be bound, (ii)
the charter or bylaws of the Company, or (iii) any law, order, rule, regulation,
writ, injunction, judgment or decree of any court, government or governmental
agency or body, domestic or foreign, having jurisdiction over the Company or
over its properties. No consent, approval, authorization or order of or
qualification with any court, government or governmental agency or body,
domestic or foreign, having jurisdiction over the Company or over its properties
is required for the execution and delivery of this Agreement and the
consummation by the Company of the transactions herein contemplated, except such
as may be required under the Act, the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), or under state or other securities or Blue Sky
laws, all of which requirements have been satisfied in all material respects,
and except for any such foreign consents, approvals or authorizations the
failure of which to obtain would not have a material adverse effect on the
condition (financial or otherwise), earnings, operations, business or business
prospects of the Company.
(e) There is not any pending or, to the best of the Company's
knowledge, threatened action, suit, claim or proceeding against the Company or
any of its officers or any of its properties, assets or rights before any court,
government or governmental agency or body, domestic or foreign, having
jurisdiction over the Company or over its officers or properties or otherwise
which (i) might result in any material adverse change in the condition
(financial or otherwise), earnings, operations, business or business prospects
of the Company or might materially and adversely affect its properties, assets
or rights, (ii) might prevent consummation of the transactions contemplated
hereby or (iii) is required to be disclosed in the Registration Statement or the
Prospectus and is not so disclosed; and there are no agreements, contracts,
leases or documents of the Company of a character required to be described or
referred to in the Registration Statement or the Prospectus or to be filed as an
exhibit to the Registration Statement by the Act or the Rules and Regulations
which have not been accurately described in all material respects in the
Registration Statement or the Prospectus or filed as exhibits to the
Registration Statement.
(f) All outstanding shares of capital stock of the Company (including
the Option Shares) have been and on any later date on which Option Shares are
purchased, will be, duly authorized and validly issued and fully paid and
nonassessable, will have been offered, sold and issued in compliance with all
federal and state securities laws, will not have been issued in violation of or
subject to any preemptive rights or other rights to subscribe for or purchase
securities, and the authorized and outstanding capital stock of the Company is
as set forth in the Prospectus under the caption "Capitalization" and conforms
in all material respects to the statements relating thereto contained in the
Registration Statement and the Prospectus (and such statements correctly state
the substance of the instruments defining the capitalization of the Company);
the Firm Shares and the Option Shares have been and on any later date on which
Option Shares are purchased, will be, duly authorized for issuance and sale to
the Underwriters pursuant to this Agreement and, when issued and delivered by
the Company against payment therefor in accordance with the terms of this
Agreement, will be duly and validly issued and fully paid and nonassessable, and
will be sold free and clear of any pledge, lien, security interest, encumbrance,
claim or equitable interest; and no preemptive right, co-sale right,
registration right, right of first refusal or other similar right of
shareholders exists with respect to any of the Firm Shares or Option Shares or
the issuance and sale thereof other than those that have been expressly waived
prior to the date hereof. No further approval or authorization of any
shareholder, the Board of Directors of the Company or others is required for the
issuance and sale or transfer of the Shares except as may be required under the
Act, the Exchange Act or under state or other securities or Blue Sky laws.
Except as disclosed in or contemplated by the Prospectus and the financial
statements of the Company, and the related notes thereto included in the
Prospectus, the Company does not have outstanding any options to purchase, or
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any preemptive rights or other rights to subscribe for or to purchase, any
securities or obligations convertible into, or any contracts or commitments to
issue or sell, shares of its capital stock or any such options, rights,
convertible securities or obligations. The description of the Company's stock
option, stock bonus and other stock plans or arrangements, and the options or
other rights granted and exercised thereunder, set forth in the Prospectus
accurately and fairly presents the information required to be shown with respect
to such plans, arrangements, options and rights.
(g) KPMG Peat Marwick LLP, which has audited the financial statements
of the Company, together with the related notes, as of June 30, 1995 and 1996
and for each of the years in the three (3) years ended June 30, 1996 filed with
the Commission as a part of the Registration Statement, which are included in
the Prospectus, are independent accountants within the meaning of the Act and
the Rules and Regulations; the audited financial statements of the Company,
together with the related schedules and notes forming part of the Registration
Statement and the Prospectus, fairly present in all material respects the
financial position and the results of operations of the Company at the
respective dates and for the respective periods to which they apply; and all
audited financial statements of the Company, together with the related notes
filed with the Commission as part of the Registration Statement, have been
prepared in accordance with generally accepted accounting principles
consistently applied throughout the periods involved except as may be otherwise
stated therein. The selected and summary financial and statistical data
included in the Registration Statement present fairly in all material respects
the information shown therein and have been compiled on a basis consistent with
the audited financial statements presented therein. No other financial
statements or schedules are required to be included in the Registration
Statement.
(h) Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus and except as disclosed
or contemplated in the Prospectus, there has not been (i) any material adverse
change in the condition (financial or otherwise), earnings, operations, business
or business prospects of the Company, (ii) any transaction that is material to
the Company, incurred by the Company, except transactions entered into in the
ordinary course of business, (iii) any obligation, direct or contingent, that is
material to the Company, incurred by the Company, except obligations incurred in
the ordinary course of business, (iv) any change in the capital stock or
outstanding indebtedness of the Company that is material to the Company, (v) any
dividend or distribution of any kind declared, paid or made on the capital stock
of the Company or (vi) any loss or damage (whether or not insured) to the
property of the Company that has been sustained or will have been sustained
which has a material adverse effect on the condition (financial or otherwise),
earnings, operations, business or business prospects of the Company.
(i) Except as set forth in the Registration Statement and the
Prospectus, (i) the Company has good and marketable title to all properties and
assets described in the Registration Statement and the Prospectus as owned by
it, free and clear of any pledge, lien, security interest, encumbrance, claim or
equitable interest, other than such as would not have a material adverse effect
on the condition (financial or otherwise), earnings, operations, business or
business prospects of the Company, (ii) the agreements to which the Company is a
party described in the Registration Statement and the Prospectus are valid
agreements, enforceable by the Company (as applicable), except as the
enforcement thereof may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or affecting
creditors' rights generally or by general equitable principles and, to the best
of the Company's knowledge, the other contracting party or parties thereto are
not in material breach or material default under any of such agreements, and
(iii) the Company has valid and enforceable leases for all properties described
in the Registration Statement and the Prospectus as leased by it, except as the
enforcement thereof may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or affecting
creditors' rights generally or by general equitable principles. Except as set
forth in the Registration Statement and the Prospectus, the Company owns or
leases all such properties as are necessary to its operations as now conducted
or as now proposed to be conducted.
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<PAGE>
(j) The Company has filed all necessary foreign, federal, state and
local income and franchise tax returns (other than franchise tax returns which
the failure to file would not have a material adverse effect on the condition
(financial or otherwise), earnings, operations, business or business prospects
of the Company and have paid all taxes and penalties shown thereon as due, and
there is no tax deficiency that has been or, to the best of the Company's
knowledge, might be asserted against the Company that might have a material
adverse effect on the condition (financial or otherwise), earnings, operations,
business or business prospects of the Company; and all tax liabilities are
adequately provided for on the books of the Company.
(k) The Company maintains insurance with insurers of recognized
financial responsibility of the types and in the amounts generally deemed
adequate for their respective businesses and consistent with insurance coverage
maintained by similar companies in similar businesses, including, but not
limited to, insurance covering real and personal property owned or leased by the
Company against theft, damage, destruction, acts of vandalism, business
interruption and all other risks customarily insured against, all of which
insurance is in full force and effect; the Company has not been refused any
insurance coverage sought or applied for; and the Company does not have any
reason to believe that it will not be able to renew its existing insurance
coverage as and when such coverage expires or to obtain similar coverage from
similar insurers as may be necessary to continue its business at a cost that
would not materially and adversely affect the condition (financial or
otherwise), earnings, operations, business or business prospects of the Company.
(l) To the best of the Company's knowledge, no labor disturbance by
the employees of the Company exists or is imminent; and the Company is not aware
of any existing or imminent labor disturbance by the employees of any of its
principal suppliers that might be expected to result in a material adverse
change in the condition (financial or otherwise), earnings, operations, business
or business prospects of the Company. No collective bargaining agreement exists
with any of the Company's employees and, to the best of the Company's
knowledge, no such agreement is imminent.
(m) The Company owns or possesses adequate rights to use all patents,
patent rights, inventions, trade secrets, know-how, trademarks, service marks,
trade names and copyrights which are necessary to conduct its businesses as now
conducted and as proposed to be conducted as described in the Registration
Statement and the Prospectus in the U.S. and, to the Company's knowledge,
outside the U.S.; the expiration of any patents, patent rights, trade secrets,
trademarks, service marks, trade names or copyrights would not have a material
adverse effect on the condition (financial or otherwise), earnings, operations,
business or business prospects of the Company; the Company has not received any
notice of, and has no knowledge of, any infringement of or conflict with
asserted rights of the Company by others with respect to any patent, patent
rights, inventions, trade secrets, know-how, trademarks, service marks, trade
names or copyrights; and the Company has not received any notice of, and has no
knowledge of, any infringement of or conflict with asserted rights of others
with respect to any patent, patent rights, inventions, trade secrets, know-how,
trademarks, service marks, trade names or copyrights which, singly or in the
aggregate, if the subject of an unfavorable decision, ruling or finding, might
have a material adverse effect on the condition (financial or otherwise),
earnings, operations, business or business prospects of the Company.
(n) Except as described in the Registration Statement and the
Prospectus, the Company has operated and currently operate its business in
conformity with all applicable laws, rules and regulations of each jurisdiction
in which it is conducting business, except where the failure to be so in
compliance would not have a material adverse effect on the condition (financial
or otherwise), earnings, operations, business or business prospects of the
Company. The Company has all licenses, certificates, authorizations, approvals,
permits, franchises, orders and consents from all state, federal and other
governmental or regulatory authorities (including foreign jurisdictions) which
are necessary to the conduct of its business, except where the failure to be so
in compliance would not have a material adverse effect on the condition
(financial or otherwise), earnings, operations, business or business prospects
of the Company. All of such licenses, certificates, authorizations, approvals,
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<PAGE>
permits, franchises, orders and consents are valid and in full force and effect.
Except as described in the Registration Statement and the Prospectus, the
Company has fulfilled and performed, and will fulfill and perform, all of its
obligations with respect to, and is operating in compliance with, all such
licenses, certificates, authorizations, approvals, permits, franchises, orders
and consents and no event has occurred which allows, or after notice or lapse of
time would allow, revocation or termination thereof or result in any impairment
of the rights of the holder thereof, except to the extent that any such
revocation, termination or impairment would not have a material adverse effect
on the condition (financial or otherwise), earnings operations, business or
business prospects of the Company. Except as set forth in the Registration
Statement and the Prospectus, no such licenses, certificates, authorizations,
approvals, permits, franchises, orders or consents contain any restrictions that
have or may have a material adverse effect on the condition (financial or
otherwise), results of operations, business or business prospects of the
Company. The Company is not aware of any existing or imminent matter the
occurrence of which would have a material adverse effect on the condition
(financial or otherwise), earnings, operations, business or business prospects
of the Company other than as disclosed in the Registration Statement and the
Prospectus.
(o) The Common Stock is registered pursuant to Section 12(g) of the
Exchange Act and is listed on The Nasdaq National Market, and the Company has
taken no action designed to, or likely to have the effect of, terminating the
registration of the Common Stock under the Exchange Act or delisting the Common
Stock from The Nasdaq National Market, nor has the Company received any
notification that the Commission or the National Association of Securities
Dealers, Inc. ("NASD") is contemplating terminating such registration or
listing.
(p) The Company has been advised concerning the Investment Company Act
of 1940, as amended (the "1940 Act"), and the rules and regulations thereunder,
and has in the past conducted, and intends in the future to conduct, its affairs
in such a manner as to ensure that it will not become an "investment company" or
a company "controlled" by an "investment company" within the meaning of the 1940
Act and such rules and regulations.
(q) The Company has not distributed and will not distribute prior to
the later of (i) the Closing Date, or any date on which Option Shares are to be
purchased, as the case may be, and (ii) completion of the distribution of the
Shares, any offering material in connection with the offering and sale of the
Shares other than any Preliminary Prospectuses, the Prospectus, the Registration
Statement and other materials, if any, permitted by the Act.
(r) The Company has not at any time during the last five (5) years (i)
made any unlawful contribution to any candidate for foreign office or failed to
disclose fully any contribution in violation of law, or (ii) made any payment to
any federal or state governmental officer or official, or other person charged
with similar public or quasi-public duties, other than payments required or
permitted by the laws of the U.S. or any jurisdiction thereof.
(s) The Company has not taken and will not take, directly or
indirectly, any action designed to or that might reasonably be expected to cause
or result in stabilization or manipulation of the price of the Common Stock to
facilitate the sale or resale of the Shares.
(t) Each officer and director of the Company, each Selling Shareholder
and any other person or entity shown on Schedule C hereto has agreed in writing
that such person will not, from the date that the Registration Statement is
declared effective by the Commission until the expiration of the period shown on
Schedule C hereto (the "Lock-up Period"), offer to sell, contract to sell, or
otherwise sell, dispose of, loan, pledge or grant any rights with respect to
(collectively, a "Disposition") any shares of Common Stock, any options or
warrants to purchase any shares of Common Stock or any securities convertible
into or exchangeable for shares of Common Stock (collectively, "Securities") now
owned or hereafter acquired by such person, directly or indirectly, or with
respect to which such person has or hereafter acquires the power of disposition,
other than (i) as a bona fide gift or gifts, provided the donee or donees
thereof agree in writing to be bound by this restriction, (ii) as a distribution
to limited partners, shareholders or
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<PAGE>
beneficiaries of such person, provided that the distributees thereof agree in
writing to be bound by the terms of this restriction, (iii) if such person is an
individual, to a member or members of his or her immediate family or to a trust
the beneficiaries of which are exclusively such person and/or a member or
members of his or her immediate family, provided that each transferee thereof
agrees in writing to be bound by the terms of this restriction, or (iv) with the
prior written consent of Robertson, Stephens & Company LLC. The term
"Disposition" shall not include such person's exercise of a stock option or
warrant issued or granted by the Company or other securities granted by the
Company and convertible or exchangeable for Common Stock of the Company, but
shall include any subsequent offer to sell, contract to sell, sale, disposal of,
loan, pledge or grant of any rights with respect to the Shares of Common Stock,
except for any shares of Common Stock to be sold by such person pursuant to this
Agreement. The foregoing restriction has been expressly agreed to preclude the
holder of the Securities from engaging in any hedging or other transaction which
is designed to or reasonably expected to lead to or result in a Disposition of
Securities during the Lock-up Period, even if such Securities would be disposed
of by someone other than such holder. Such prohibited hedging or other
transactions would include, without limitation, any short sale (whether or not
against the box) or any purchase, sale or grant of any right (including, without
limitation, any put or call option) with respect to any Securities or with
respect to any security (other than a broad-based market basket or index) that
includes, relates to or derives any significant part of its value from
Securities. Furthermore, each such person has also agreed and consented to the
entry of stop transfer instructions with the Company's transfer agent against
the transfer of the Securities held by such person except in compliance with the
foregoing restrictions. The Company has provided to counsel for the
Underwriters a complete and accurate list of all securityholders of record of
the Company and the number and type of securities held by each securityholder of
record. The Company has provided to counsel for the Underwriters true, accurate
and complete copies of all of the agreements pursuant to which its officers,
directors and shareholders have agreed to such or similar restrictions (the
"Lock-up Agreements") presently in effect or effected hereby. The Company
hereby represents and warrants that it will not release any of its officers,
directors or other shareholders from any Lock-up Agreements currently existing
or hereafter effected without the prior written consent of Robertson, Stephens &
Company LLC.
(u) Except as set forth in the Registration Statement and the
Prospectus, (i) the Company is in compliance with all rules, laws and
regulations relating to the use, treatment, storage and disposal of toxic
substances and protection of health or the environment ("Environmental Laws")
which are applicable to its business which, singly or in the aggregate, if the
subject of an unfavorable decision, ruling or finding, would have a material
adverse effect on the condition (financial or otherwise), earnings, operations,
business or business prospects of the Company, (ii) the Company has received no
notice from any governmental authority or third party of an asserted claim under
Environmental Laws, which claim is required to be disclosed in the Registration
Statement and the Prospectus, (iii) the Company will not, to its knowledge, be
required to make future material capital expenditures to comply with
Environmental Laws and (iv) to the Company's knowledge, no property which is
owned, leased or occupied by the Company has been designated as a Superfund site
pursuant to the Comprehensive Response, Compensation, and Liability Act of 1980,
as amended (42 U.S.C. (S) 9601, et seq.), or otherwise designated as a
------
contaminated site under applicable state or local law.
(v) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurances that (i) transactions are executed
in accordance with management's general or specific authorizations, (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain accountability for assets, (iii) access to assets is permitted only in
accordance with management's general or specific authorization, and (iv) the
recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
(w) There are no outstanding loans, advances (except normal advances
for business expenses in the ordinary course of business) or guarantees of
indebtedness by the Company to or for the benefit of any of the officers or
directors of the Company or any of the members of the families of any of them,
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<PAGE>
except as required to be disclosed and are disclosed in the Registration
Statement and the Prospectus.
(x) The Company has complied with an applicable provisions of Section
517.075, Florida Statutes relating to doing business with the Government of Cuba
or with any person or affiliate located in Cuba.
(y) To the best of the Company's knowledge, other than David M.
Nussbaum's, Robert Gladstone's, Richard Gladstone's and Richard Buonocore's
relationships with GKN Securities Corp., no officer, director or 5% or more
securityholder of the Company has an "association" or "affiliation" with any
member of the National Association of Securities Dealers, Inc. ("NASD"), within
the meaning of Article III, Section 44 of the Rules of Fair Practice of the
NASD. The Company does not have an "association" or "affiliation" with any
member of the NASD, within the meaning of Article III, Section 44 of the Rules
of Fair Practice of the NASD.
(aa) The Company has previously disclosed and delivered or made
available to the Representatives prior to the date the Registration Statement
was declared effective copies of all pension, retirement, profit-sharing,
deferred compensation, stock option, employee stock ownership, severance pay,
vacation, bonus, or other incentive plan, all other written employee programs,
arrangements, or agreements, all medical, vision, dental, or other health plans,
all life insurance plans, and all other employee benefit plans or fringe benefit
plans, including, without limitation, "employee benefit plans" as that term is
defined in Section 3(3) of the Employee Retirement Income Security Act of 1974,
as amended ("ERISA"), adopted, maintained, sponsored in whole or in part, or
contributed to, by the Company for the benefit of employees, retirees,
dependents, spouses, directors, independent contractors, or other beneficiaries
and under which employees, retirees, dependents, spouses, directors, independent
contractors, or other beneficiaries are eligible to participate (collectively,
the "Company Benefit Plans").
The Company has maintained all Company Benefit Plans (including
filing all reports and returns required to be filed with respect thereto) in
accordance with their terms and in compliance with the applicable terms of
ERISA, the Internal Revenue Code of 1986, as amended (the "Internal Revenue
Code"), and any other applicable Federal and State laws the breach or violation
of which would have, individually or in the aggregate, a material adverse effect
on the condition (financial or otherwise), earnings, operations, business or
business prospects of the Company. Each Company Benefit Plan which is intended
to be qualified under Section 401(a) of the Internal Revenue Code has either
received a favorable determination letter from the Internal Revenue Service or
such a letter has been timely requested, and has at all times been maintained in
accordance with Section 401 of the Internal Revenue Code, except where any
failure to so maintain such Company Benefit Plan would not have, individually or
in the aggregate, a material adverse effect on the condition (financial or
otherwise), earnings, operations, business or business prospects of the Company.
The Company has not engaged in a transaction with respect to any Company Benefit
Plan that, assuming the taxable period of such transaction expired as of the
date hereof, would subject the Company to a tax or penalty imposed by either
Section 4975 of the Internal Revenue Code or Section 502(i) of ERISA in amounts
which are reasonably likely to have, individually or in the aggregate, a
material adverse effect on the condition (financial or otherwise), earnings,
operations, business or business prospects of the Company.
The Company is not obligated to provide post-retirement medical
benefits or any other unfunded post-retirement welfare benefits (except COBRA
continuation coverage required to be provided by ERISA Section 601), which
obligations would have, individually or in the aggregate, a material adverse
effect on the condition (financial or otherwise), earnings, operations, business
or business prospects of the Company. Neither the Company nor any member of a
group of trades or businesses under common control (as defined in ERISA Sections
4001(a)(14) and 4001(b)(1)) with the Company have at any time within the last
six years sponsored, contributed to or been obligated under Title I or IV of
ERISA to contribute to a "defined benefit plan" (as defined in ERISA Section
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3(35)). Within the last six years, neither the Company nor any member of a group
of trades or businesses under common control (as defined in ERISA Sections
4001(a)(14) and 4001(b)(1)) with Company have had an "obligation to contribute"
(as defined in ERISA Section 4212) to a "multiemployer plan" (as defined in
ERISA Sections 4001(a)(3) and 3(37)(A)).
II. If the Underwriters' over-allotment option is exercised as provided in
Section 7 hereof, each Selling Shareholder, severally and not jointly,
represents and warrants to and agrees, with respect to himself or itself alone,
with each Underwriter and the Company that:
(a) Such Selling Shareholder (i) to the extent it or he currently owns
any Shares, now has and on the Closing Date will have, and (ii) on any later
date on which Option Shares are purchased, will have valid marketable title to
the Shares to be sold by such Selling Shareholder, free and clear of any pledge,
lien, security interest, encumbrance, claim or equitable interest other than
pursuant to this Agreement; and upon delivery of such Shares hereunder and
payment of the purchase price as herein contemplated, each of the Underwriters
will obtain valid marketable title to the Shares purchased by it from such
Selling Shareholder, free and clear of any pledge, lien, security interest
pertaining to such Selling Shareholder or such Selling Shareholder's property,
encumbrance, claim or equitable interest, including any liability for estate or
inheritance taxes, or any liability to or claims of any creditor, devisee,
legatee or beneficiary of such Selling Shareholder.
(b) Such Selling Shareholder has duly authorized (if applicable),
executed and delivered, in the form heretofore furnished to the Representatives,
an irrevocable Power of Attorney (the "Power of Attorney") appointing Steven H.
Owings, Michael L. Baur and Jeffery A. Bryson as attorneys-in-fact
(collectively, the "Attorneys" and individually, an "Attorney") and a Custody
Agreement with Continental Stock Transfer & Trust Company, New York, New York,
as custodian (the "Custodian"); each of the Power of Attorney and the Custody
Agreement constitutes a valid and binding agreement on the part of such Selling
Shareholder, enforceable in accordance with its terms, except as the enforcement
thereof may be limited by applicable bankruptcy, insolvency, reorganization,
moratorium or other similar laws relating to or affecting creditors' rights
generally or by general equitable principles; and each of such Selling
Shareholder's Attorneys, acting alone, is authorized to execute and deliver this
Agreement and the certificate referred to in Section 6(h) hereof on behalf of
such Selling Shareholder, to determine the purchase price to be paid by the
several Underwriters to such Selling Shareholder as provided in Section 3
hereof, to authorize the delivery of the Option Shares to be sold by such
Selling Shareholder under this Agreement and to duly endorse (in blank or
otherwise) the certificate or certificates representing such Shares, a notice of
exercise or a stock power or powers with respect thereto, to accept payment
therefor, and otherwise to act on behalf of such Selling Shareholder in
connection with this Agreement.
(c) All consents, approvals, authorizations and orders required for
the execution and delivery by such Selling Shareholder of the Power of Attorney
and the Custody Agreement, the execution and delivery by or on behalf of such
Selling Shareholder of this Agreement and the sale and delivery of the Option
Shares to be sold by such Selling Shareholder under this Agreement (other than,
at the time of the execution hereof (if the Registration Statement has not yet
been declared effective by the Commission), the issuance of the order of the
Commission declaring the Registration Statement effective and such consents,
approvals, authorizations or orders as may be necessary under state or other
securities or Blue Sky laws) have been obtained and are in full force and
effect; such Selling Shareholder, if other than a natural person, has been duly
organized and is validly existing in good standing under the laws of the
jurisdiction of its organization as the type of entity that it purports to be;
and such Selling Shareholder has full legal right, power and authority to enter
into and perform its obligations under this Agreement and such Power of Attorney
and Custody Agreement, and to sell, assign, transfer and deliver the Shares to
be sold by such Selling Shareholder under this Agreement.
(d) Such Selling Shareholder will not, during the Lock-up Period,
effect the Disposition of any Securities now owned or hereafter acquired by such
Selling Shareholder, directly or indirectly, or with respect to which such
Selling Shareholder has or hereafter acquires the power of disposition, other
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<PAGE>
than (i) as a bona fide gift or gifts, provided the donee or donees thereof
agree in writing to be bound by this restriction, (ii) as a distribution to
limited partners, shareholders or beneficiaries of such Selling Shareholder,
provided that the distributees thereof agree in writing to be bound by the terms
of this restriction, (iii) if such person is an individual, to a member or
members of his or her immediate family or to a trust the beneficiaries of which
are exclusively such person and/or a member or members of his or her immediate
family, provided that each transferee thereof agrees in writing to be bound by
the terms of this restriction, or (iv) with the prior written consent of
Robertson, Stephens & Company LLC. The foregoing restriction is expressly
agreed to preclude the holder of the Securities from engaging in any hedging or
other transaction which is designed to or reasonably expected to lead to or
result in a Disposition of Securities during the Lock-up Period, even if such
Securities would be disposed of by someone other than the Selling Shareholder.
Such prohibited hedging or other transactions would include, without limitation,
any short sale (whether or not against the box) or any purchase, sale or grant
of any right (including, without limitation, any put or call option) with
respect to any Securities or with respect to any security (other than a broad-
based market basket or index) that includes, relates to or derives any
significant part of its value from Securities. Such Selling Shareholder also
agrees and consents to the entry of stop transfer instructions with the
Company's transfer agent against the transfer of the securities held by such
Selling Shareholder except in compliance with the foregoing restrictions.
(e) Except with respect to 15,000 Shares issuable upon the exercise of
outstanding options, for which a notice of exercise will be placed in custody by
the Selling Shareholders, certificates in negotiable form representing all
Shares to be sold by such Selling Shareholder under this Agreement, together
with a stock power or powers duly endorsed in blank by such Selling Shareholder,
have been placed in custody with the Custodian for the purpose of effecting
delivery hereunder.
(f) This Agreement has been duly authorized by each such Selling
Shareholder that is not a natural person and has been duly executed and
delivered by or on behalf of each Selling Shareholder and is a valid and binding
agreement of each Selling Shareholder, enforceable in accordance with its terms,
except as rights to indemnification hereunder may be limited by applicable law
and except as the enforcement hereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or affecting
creditors' rights generally or by general equitable principles; and the
performance of this Agreement and the consummation of the transactions herein
contemplated will not result in a material breach or violation of any of the
terms and provisions of or constitute a default under any material bond,
debenture, note or other evidence of indebtedness, or under any material lease,
contract, indenture, mortgage, deed of trust, loan agreement, joint venture or
other agreement or instrument to which each Selling Shareholder is a party or by
which each Selling Shareholder, or any Option Shares to be sold by each Selling
Shareholder hereunder, may be bound or, to the best of each Selling
Shareholder's knowledge, result in any violation of any law, order, rule,
regulation, writ, injunction, judgment or decree of any court, government or
governmental agency or body, domestic or foreign, having jurisdiction over each
Selling Shareholder or over the properties of each Selling Shareholder, or, if
each Selling Shareholder is other than a natural person, result in any violation
of any provisions of the charter, bylaws or other organizational documents of
each Selling Shareholder.
(g) Such Selling Shareholder has not taken and will not take, directly
or indirectly, any action designed to or that might reasonably be expected to
cause or result in stabilization or manipulation of the price of the Common
Stock to facilitate the sale or resale of the Shares.
(h) Such Selling Shareholder has not distributed and will not
distribute any prospectus or other offering material in connection with the
offering and sale of the Shares.
(i) All information furnished by or on behalf of such Selling
Shareholder relating to such Selling Shareholder and the Option Shares that is
contained in the representations and warranties of such Selling Shareholder in
such Selling Shareholder's Power of Attorney or set forth in the Registration
Statement or the Prospectus is, and at the time the Registration Statement
became or becomes, as the case may be, effective and at all times subsequent
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thereto up to and on the Closing Date, and on any later date on which Option
Shares are to be purchased, was or will be, true, correct and complete in all
material respects, and does not, and at the time the Registration Statement
became or becomes, as the case may be, effective and at all times subsequent
thereto up to and on the Closing Date (hereinafter defined) ,and on any later
date on which Option Shares are to be purchased, will not, contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make such information, in light of the
circumstances under which they were made, not misleading.
(j) Such Selling Shareholder will review the Prospectus and will
comply with all agreements and satisfy all conditions on its part to be complied
with or satisfied pursuant to this Agreement on or prior to the Closing Date, or
any later date on which Option Shares are to be purchased, as the case may be,
and will advise one of its Attorneys and Robertson, Stephens & Company LLC prior
to the Closing Date or such later date on which Option Shares are to be
purchased, as the case may be, if any statement to be made on behalf of such
Selling Shareholder in the certificate contemplated by Section 6(h) would be
inaccurate if made as of the Closing Date or such later date on which Option
Shares are to be purchased, as the case may be.
(k) Such Selling Shareholder does not have, or has waived prior to the
date hereof, any preemptive right, co-sale right or right of first refusal or
other similar right to purchase any of the Shares that are to be sold by the
Company or any of the other Selling Shareholders to the Underwriters pursuant to
this Agreement; such Selling Shareholder does not have, or has waived prior to
the date hereof, any registration right or other similar right to participate in
the offering made by the Prospectus, other than such rights of participation as
have been satisfied by the participation of such Selling Shareholder in the
transactions to which this Agreement relates in accordance with the terms of
this Agreement; and such Selling Shareholder does not own any warrants, options
or similar rights to acquire, and does not have any right or arrangement to
acquire, any capital stock, rights, warrants, options or other securities from
the Company, other than those described in the Registration Statement and the
Prospectus.
(l) Such Selling Shareholder is not aware that any of the
representations and warranties of the Company set forth in Section 2.I. above is
untrue or inaccurate in any material respect.
3. Purchase, Sale and Delivery of Shares. On the basis of the
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representations, warranties and agreements herein contained, but subject to the
terms and conditions herein set forth, the Company agrees to sell to the
Underwriters, and each Underwriter agrees, severally and not jointly, to
purchase from the Company at a purchase price of $____ per share, the respective
number of Firm Shares as hereinafter set forth. The obligation of each
Underwriter to the Company shall be to purchase from the Company that number of
Firm Shares which is set forth opposite the name of such Underwriter in Schedule
A hereto (subject to adjustment as provided in Section 10).
Delivery of definitive certificates for the Firm Shares to be
purchased by the Underwriters pursuant to this Section 3 shall be made against
payment of the purchase price therefor by the several Underwriters by certified
or official bank check or checks drawn in next-day funds, payable to the order
of the Company (and the Company agrees not to deposit any such check in the bank
on which it is drawn, and not to take any other action with the purpose or
effect of receiving immediately available funds, until the business day
following the date of its delivery to the Company, and, in the event of any
breach of the foregoing, the Company shall reimburse the Underwriters for the
interest lost and any other expenses borne by them by reason of such breach), at
the offices of Nexsen Pruet Jacobs & Pollard, LLP, First Union Building, 1441
Main Street, Suite 1500, Columbia, South Carolina 29201 (or at such other place
as may be agreed upon among the Representatives and the Company), at 7:00 A.M.,
San Francisco time (a) on the third (3rd) full business day following the first
day that Shares are traded, (b) if this Agreement is executed and delivered
after 1:30 P.M., San Francisco time, on the fourth (4th) full business day
following the day that this Agreement is executed and delivered, or (c) at such
other time and date not later than seven (7) full business days following the
first day that Shares are traded as the Representatives and the Company may
determine (or at such time and date to which payment and delivery shall have
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been postponed pursuant to Section 10 hereof), such time and date of payment and
delivery being herein called the "Closing Date;" provided, however, that if the
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Company has not made available to the Representatives copies of the Prospectus
within the time provided in Section 4(d) hereof, the Representatives may, in
their sole discretion, postpone the Closing Date until no later than two (2)
full business days following delivery of copies of the Prospectus to the
Representatives. The certificates for the Firm Shares to be so delivered will
be made available to you at such office or such other location including,
without limitation, in New York City, as you may reasonably request for checking
at least one (1) full business day prior to the Closing Date and will be in such
names and denominations as you may request, such request to be made at least two
(2) full business days prior to the Closing Date. If the Representatives so
elect, delivery of the Firm Shares may be made by credit through full fast
transfer to the accounts at The Depository Trust Company designated by the
Representatives.
It is understood that you, individually, and not as the
Representatives of the several Underwriters, may (but shall not be obligated to)
make payment of the purchase price on behalf of any Underwriter or Underwriters
whose check or checks shall not have been received by you prior to the Closing
Date for the Firm Shares to be purchased by such Underwriter or Underwriters.
Any such payment by you shall not relieve any such Underwriter or Underwriters
of any of its or their obligations hereunder.
After the Registration Statement becomes effective, the several
Underwriters intend to make a public offering (as such term is described in
Section 11 hereof) of the Firm Shares at a public offering price of $____ per
share.
The information set forth in the last paragraph on the front cover
page (insofar as such information relates to the Underwriters), on page 3
concerning stabilization and over-allotment by the Underwriters, and under the
caption "Underwriting" in any Preliminary Prospectus and in the Prospectus
constitutes the only information furnished by the Underwriters to the Company
for inclusion in any Preliminary Prospectus, the Prospectus or the Registration
Statement, and you, on behalf of the respective Underwriters, represent and
warrant to the Company and the Selling Shareholders that the statements made
therein do not include any untrue statement of a material fact or omit to state
a material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading.
4. Further Agreements of the Company. The Company agrees with the
---------------------------------
several Underwriters that:
(a) The Company will use its best efforts to cause the Registration
Statement and any amendment thereof, if not effective at the time and date that
this Agreement is executed and delivered by the parties hereto, to become
effective as promptly as possible; the Company will use its best efforts to
cause any abbreviated registration statement pursuant to Rule 462(b) of the
Rules and Regulations as may be required subsequent to the date the Registration
Statement is declared effective to become effective as promptly as possible; the
Company will notify you, promptly after it shall receive notice thereof, of the
time when the Registration Statement, any subsequent amendment to the
Registration Statement or any abbreviated registration statement has become
effective or any supplement to the Prospectus has been filed; if the Company
omitted information from the Registration Statement at the time it was
originally declared effective in reliance upon Rule 430A(a) of the Rules and
Regulations, the Company will provide evidence satisfactory to you that the
Prospectus contains such information and has been filed, within the time period
prescribed, with the Commission pursuant to subparagraph (1) or (4) of Rule
424(b) of the Rules and Regulations or as part of a post-effective amendment to
such Registration Statement as originally declared effective which is declared
effective by the Commission; if the Company files a term sheet pursuant to Rule
434 of the Rules and Regulations, the Company will provide evidence satisfactory
to you that the Prospectus and term sheet meeting the requirements of Rule
434(b) or (c), as applicable, of the Rules and Regulations, have been filed,
within the time period prescribed, with the Commission pursuant to subparagraph
(7) of Rule 424(b) of the Rules and Regulations; if for any reason the filing of
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the final form of Prospectus is required under Rule 424(b)(3) of the Rules and
Regulations, it will provide evidence satisfactory to you that the Prospectus
contains such information and has been filed with the Commission within the time
period prescribed; it will notify you promptly of any request by the Commission
for the amending or supplementing of the Registration Statement or the
Prospectus or for additional information; promptly upon your request, it will
prepare and file with the Commission any amendments or supplements to the
Registration Statement or Prospectus which, in the reasonable opinion of counsel
for the several Underwriters ("Underwriters' Counsel"), may be necessary or
advisable in connection with the distribution of the Shares by the Underwriters;
it will promptly prepare and file with the Commission, and promptly notify you
of the filing of, any amendments or supplements to the Registration Statement or
Prospectus which may be necessary to correct any statements or omissions, if, at
any time when a prospectus relating to the Shares is required to be delivered
under the Act, any event shall have occurred as a result of which the Prospectus
or any other prospectus relating to the Shares as then in effect would include
any untrue statement of a material fact or omit to state a material fact
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading; in case any Underwriter is required
to deliver a prospectus nine (9) months or more after the effective date of the
Registration Statement in connection with the sale of the Shares, it will
prepare promptly upon request, but at the expense of such Underwriter, such
amendment or amendments to the Registration Statement and such prospectus or
prospectuses as may be necessary to permit compliance with the requirements of
Section 10(a)(3) of the Act; and it will file no amendment or supplement to the
Registration Statement or Prospectus which shall not previously have been
submitted to you a reasonable time prior to the proposed filing thereof or to
which you shall reasonably object in writing, subject, however, to compliance
with the Act and the Rules and Regulations and the provisions of this Agreement.
(b) The Company will advise you, promptly after it shall receive
notice or obtain knowledge, of the issuance of any stop order by the Commission
suspending the effectiveness of the Registration Statement or of the initiation
or threat of any proceeding for that purpose; and it will promptly use its best
efforts to prevent the issuance of any stop order or to obtain its withdrawal at
the earliest possible moment if such stop order should be issued.
(c) The Company will use its best efforts to cooperate with you and
Underwriters' counsel in connection with your qualifying the Shares for offering
and sale under the securities laws of such jurisdictions as you may designate
and continuing such qualifications in effect for so long as may be required for
purposes of the distribution of the Shares, except that the Company shall not be
required in connection therewith or as a condition thereof to qualify as a
foreign corporation or to execute a general consent to service of process in any
jurisdiction in which it is not otherwise required to be so qualified or to so
execute a general consent to service of process. In each jurisdiction in which
the Shares shall have been qualified as above provided, the Company will make
and file such statements and reports in each year as are or may be required by
the laws of such jurisdiction.
(d) The Company will furnish to you, as soon as available, and, in the
case of the Prospectus and any term sheet or abbreviated term sheet under Rule
434, in no event later than the first (1st) full business day following the
first day that Shares are traded, copies of the Registration Statement (three of
which will be signed and which will include all exhibits), each Preliminary
Prospectus and the Prospectus and any amendments or supplements to such
documents, including any prospectus prepared to permit compliance with Section
10(a)(3) of the Act, all in such quantities as you may from time to time
reasonably request. Notwithstanding the foregoing, if Robertson, Stephens &
Company LLC, on behalf of the several Underwriters, shall agree to the
utilization of Rule 434 of the Rules and Regulations, the Company shall provide
to you copies of a Preliminary Prospectus updated in all respects through the
date specified by you in such quantities as you may from time to time reasonably
request.
(e) The Company will make generally available to its securityholders
as soon as practicable, but in any event not later than the ninetieth (90th) day
following the end of the fiscal quarter first occurring after the first
anniversary of the effective date of the Registration Statement, an earnings
statement (which will be in reasonable detail but need not be audited) complying
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with the provisions of Section 11(a) of the Act and covering a twelve (12) month
period beginning after the effective date of the Registration Statement.
(f) During a period of five (5) years after the date hereof and for so
long as the Company is a reporting company under the Exchange Act, the Company
will furnish to its shareholders as soon as practicable after the end of each
respective period, annual reports (including financial statements audited by
independent certified public accountants) and unaudited quarterly reports of
operations for each of the first three quarters of the fiscal year, and will
furnish to you and the other several Underwriters hereunder, upon request (i)
concurrently with furnishing such reports to its shareholders, statements of
operations of the Company for each of the first three (3) quarters in the form
furnished to the Company's shareholders, (ii) concurrently with furnishing to
its shareholders, a balance sheet of the Company as of the end of such fiscal
year, together with statements of operations, of shareholders' equity, and of
cash flows of the Company for such fiscal year, accompanied by a copy of the
certificate or report thereon of independent certified public accountants, (iii)
as soon as they are available, copies of all reports (financial or other) mailed
to shareholders, (iv) as soon as they are available, copies of all reports and
financial statements furnished to or filed with the Commission, any securities
exchange or the NASD, (v) every material press release and every material news
item or article in respect of the Company or its affairs which was released or
prepared by the Company, and (vi) any additional information of a public nature
concerning the Company, or its respective businesses, which you may reasonably
request. During such five (5) year period, if the Company shall have active
subsidiaries, the foregoing financial statements shall be on a consolidated
basis to the extent that the accounts of the Company are consolidated, and shall
be accompanied by similar financial statements for any significant subsidiary
which is not so consolidated.
(g) The Company will apply the net proceeds from the sale of the
Shares being sold by it in the manner set forth under the caption "Use of
Proceeds" in the Prospectus.
(h) The Company will maintain a transfer agent and, if necessary under
the jurisdiction of incorporation of the Company, a registrar (which may be the
same entity as the transfer agent) for its Common Stock.
(i) If the transactions contemplated hereby are not consummated by
reason of any failure, refusal or inability on the part of the Company to
perform any agreement on their respective parts to be performed hereunder or to
fulfill any condition of the Underwriters' obligations hereunder, or if the
Company shall terminate this Agreement pursuant to Section 11 (a) hereof, or if
the Underwriters shall terminate this Agreement pursuant to Section 11 (b)(i),
the Company will reimburse the several Underwriters for all out-of-pocket
expenses (including fees and disbursements of Underwriters' Counsel) incurred by
the Underwriters in investigating or preparing to market or marketing the
Shares.
(j) If at any time during the ninety (90) day period after the
Registration Statement becomes effective, any rumor, publication or event
relating to or affecting the Company shall occur as a result of which in your
opinion the market price of the Common Stock has been or is likely to be
materially affected (regardless of whether such rumor, publication or event
necessitates a supplement to or amendment of the Prospectus), the Company will,
after written notice from you advising the Company to the effect set forth
above, forthwith prepare, consult with you concerning the substance of and
disseminate a press release or other public statement, reasonably satisfactory
to you, responding to or commenting on such rumor, publication or event to the
extent lawful.
(k) During the Lock-up Period, the Company will not, without the prior
written consent of Robertson Stephens & Company LLC, effect the Disposition of,
directly or indirectly, any Securities other than (i) the sale of the Firm
Shares and the Option Shares hereunder, (ii) the Company's issuance of options
or Common Stock under the Company's 1993 Incentive Stock Option Plan or 1994
Stock Option Plan for Outside Directors (collectively, the "Option Plans"),
(iii) the issuance of Common Stock pursuant to the exercise of options,
warrants, and unit purchase options outstanding on the date hereof granted to
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certain Selling Shareholders, and (iv) the issuance of Securities in connection
with the Company's acquisition of an ownership interest in another business or
entity; provided, however, that the Company may not register such Securities
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under the Act or grant any registration rights with respect to such Securities
without the prior written consent of Robertson, Stephens & Company LLC.
(l) During a period of ninety (90) days from the effective date of the
Registration Statement, the Company will not file a registration statement
registering shares under the Option Plans or any other employee benefit plan
except for a registration statement on Form S-8 covering ____ shares of Common
Stock subject to existing stock options and 80,000 shares of Common Stock
reserved for issuance under Option Plans.
(m) For so long as there are more than 300 shareholders of the Common
Stock, the Company shall use its best efforts to maintain the listing of the
Common Stock on The Nasdaq National Market for a period of at least five (5)
years after the effective date of the Registration Statement.
(n) The Company and the Selling Shareholders shall use their best
efforts to do and perform all things required or necessary to be done and
performed under this Agreement by the Company or the Selling Shareholders prior
to the Closing Date or any later date on which Option Shares are to be
purchased, as the case may be, and to satisfy all conditions precedent to the
delivery of the Shares.
(o) The Company agrees to enforce (at its expense), for the benefit of
the Underwriters and at the request of Robertson, Stephens & Company LLC, the
Lock-up Agreements and not to waive any condition of any such agreement without
the prior written consent of Robertson, Stephens & Company LLC.
5. Expenses.
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(a) The Company and the Selling Shareholders (if the Underwriters'
over-allotment option is exercised), agree with each Underwriter that:
(i) The Company will pay and bear all costs and expenses (other
than the fees and disbursements of Underwriters' counsel and your out-of-pocket
expenses and costs, except as provided below or in Section 4(i) hereof) in
connection with the preparation, printing and filing of the Registration
Statement (including financial statements, schedules and exhibits), Preliminary
Prospectuses, the Prospectus and any amendments or supplements thereto; the
printing of this Agreement, the Agreement Among Underwriters, the Selected
Dealer Agreement, the Blue Sky Memorandum, the Underwriters' Questionnaire and
Power of Attorney, and any instruments related to any of the foregoing; the
issuance and delivery of the Shares hereunder to the several Underwriters,
including transfer taxes, if any, the cost of all certificates representing the
Shares and transfer agents' and registrars' fees; the fees and disbursements of
counsel for the Company; all fees and other charges of the Company's independent
certified public accountants; the cost of furnishing to the several Underwriters
copies of the Registration Statement (including appropriate exhibits),
Preliminary Prospectus, the Prospectus, and any amendments or supplements to any
of the foregoing; NASD filing fees and the cost of qualifying the Shares under
the laws of such jurisdictions as you may designate (including filing fees and
fees and disbursements of Underwriters' Counsel in connection with such NASD
filings and Blue Sky qualifications, not to exceed $20,000); and all other
expenses directly incurred by the Company in connection with the performance of
its obligations hereunder. Any additional expenses incurred as a result of the
sale of the Shares by the Selling Shareholders will be borne collectively by the
Company and the Selling Shareholders. The provisions of this Section 5(a)(i) are
intended to relieve the Underwriters from the payment of the expenses and costs
which the Selling Shareholders and the Company hereby agree to pay, but shall
not affect any agreement which the Selling Shareholders and the Company may
make, or may have made, for the sharing of any of such expenses and costs. Such
agreements shall not impair the obligations of the Company and the Selling
Shareholders hereunder to the several Underwriters.
(ii) In addition to its other obligations under Section 8(a)
hereof, the Company agrees that, as an interim measure during the pendency of
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any claim, action, investigation, inquiry or other proceeding described in
Section 8(a) hereof, it will reimburse the Underwriters on a monthly basis for
all reasonable legal or other expenses actually incurred in connection with
investigating or defending any such claim, action, investigation, inquiry or
other proceeding, notwithstanding the absence of a judicial determination as to
the propriety and enforceability of the Company's obligation to reimburse the
Underwriters for such expenses and the possibility that such payments might
later be held to have been improper by a court of competent jurisdiction. To the
extent that any such interim reimbursement payment is so held to have been
improper, the Underwriters shall promptly return such payment to the Company
together with interest, compounded daily, determined on the basis of the prime
rate listed from time to time in The Wall Street Journal which represents the
base rate on corporate loans posted by a substantial majority of the nation's
thirty (30) largest banks (the "Prime Rate"). Any such interim reimbursement
payments which are not made to the Underwriters within thirty (30) days of a
request for reimbursement shall bear interest at the Prime Rate from the date of
such request.
(iii) In addition to their other obligations under Section 8(b)
hereof, each Selling Shareholder agrees that, as an interim measure during the
pendency of any claim, action, investigation, inquiry or other proceeding
described in Section 8(b) hereof relating to such Selling Shareholder, it will
reimburse the Underwriters on a monthly basis for all reasonable legal or other
expenses actually incurred in connection with investigating or defending any
such claim, action, investigation, inquiry or other proceeding, notwithstanding
the absence of a judicial determination as to the propriety and enforceability
of such Selling Shareholder's obligation to reimburse the Underwriters for such
expenses and the possibility that such payments might later be held to have been
improper by a court of competent jurisdiction. To the extent that any such
interim reimbursement payment is so held to have been improper, the Underwriters
shall promptly return such payment to the Selling Shareholders, together with
interest, compounded daily, determined on the basis of the Prime Rate. Any such
interim reimbursement payments which are not made to the Underwriters within
thirty (30) days of a request for reimbursement shall bear interest at the Prime
Rate from the date of such request.
(b) In addition to their other obligations under Section 8(c) hereof,
the Underwriters severally and not jointly agree that, as an interim measure
during the pendency of any claim, action, investigation, inquiry or other
proceeding described in Section 8(c) hereof, they will reimburse the Company and
each Selling Shareholder on a monthly basis for all reasonable legal or other
expenses actually incurred in connection with investigating or defending any
such claim, action, investigation, inquiry or other proceeding, notwithstanding
the absence of a judicial determination as to the propriety and enforceability
of the Underwriters' obligation to reimburse the Company and each such Selling
Shareholder for such expenses and the possibility that such payments might later
be held to have been improper by a court of competent jurisdiction. To the
extent that any such interim reimbursement payment is so held to have been
improper, the Company and each such Selling Shareholder shall promptly return
such payment to the Underwriters together with interest, compounded daily,
determined on the basis of the Prime Rate. Any such interim reimbursement
payments which are not made to the Company and each such Selling Shareholder
within thirty (30) days of a request for reimbursement shall bear interest at
the Prime Rate from the date of such request.
(c) It is agreed that any controversy arising out of the operation of
the interim reimbursement arrangements set forth in Sections 5(a)(ii), 5(a)(iii)
and 5(b) hereof, including the amounts of any requested reimbursement payments,
the method of determining such amounts and the basis on which such amounts shall
be apportioned among the reimbursing parties, shall be settled by arbitration
conducted under the provisions of the Constitution and Rules of the Board of
Governors of the New York Stock Exchange, Inc. or pursuant to the Code of
Arbitration Procedure of the NASD. Any such arbitration must be commenced by
service of a written demand for arbitration or a written notice of intention to
arbitrate, therein electing the arbitration tribunal. In the event the party
demanding arbitration does not make such designation of an arbitration tribunal
in such demand or notice, then the party responding to said demand or notice is
authorized to do so. Any such arbitration will be limited to the operation of
the interim reimbursement provisions contained in Sections 5(a)(ii), 5(a)(iii)
and 5(b) hereof and will not resolve the ultimate propriety or enforceability of
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the obligation to indemnify for expenses which is created by the provisions of
Sections 8(a), 8(b) and 8(c) hereof or the obligation to contribute to expenses
which is created by the provisions of Section 8(e) hereof.
6. Conditions of Underwriters' Obligations. The obligations of the
---------------------------------------
several Underwriters to purchase and pay for the Shares as provided herein shall
be subject to the accuracy, as of the date hereof and the Closing Date and any
later date on which Option Shares are to be purchased, as the case may be, of
the representations and warranties of the Company and the Selling Shareholders
herein, to the performance by the Company and the Selling Shareholders of their
respective obligations hereunder and to the following additional conditions:
(a) The Registration Statement shall have become effective not later
than 2:00 P.M., San Francisco time, on the date following the date of this
Agreement, or such later date as shall be consented to in writing by you; and no
stop order suspending the effectiveness thereof shall have been issued and no
proceedings for that purpose shall have been initiated or, to the knowledge of
the Company, any Selling Shareholder or any Underwriter, threatened by the
Commission, and any request of the Commission for additional information (to be
included in the Registration Statement or the Prospectus or otherwise) shall
have been complied with to the satisfaction of Underwriters' Counsel.
(b) All corporate proceedings and other legal matters in connection
with this Agreement, the form of Registration Statement and the Prospectus, and
the registration, authorization, issue, sale and delivery of the Shares, shall
have been reasonably satisfactory to Underwriters' Counsel, and such counsel
shall have been furnished with such papers and information as they may
reasonably have requested to enable them to pass upon the matters referred to in
this Section.
(c) Subsequent to the execution and delivery of this Agreement and
prior to the Closing Date, or any later date on which Option Shares are to be
purchased, as the case may be, there shall not have been any change in the
condition (financial or otherwise), earnings, operations, business or business
prospects of the Company from that set forth in the Registration Statement or
Prospectus, which, in your sole judgment, is material and adverse and that makes
it, in your sole judgment, impracticable or inadvisable to proceed with the
public offering of the Shares as contemplated by the Prospectus.
(d) You shall have received on the Closing Date and on any later date
on which Option Shares are to be purchased, as the case may be, the following
opinion of Nexsen Pruet Jacobs & Pollard, LLP, counsel for the Company, dated
the Closing Date or such later date on which Option Shares are to be purchased,
as the case may be, addressed to the Underwriters and with reproduced copies or
signed counterparts thereof for each of the Underwriters, subject to customary
assumptions and qualifications, substantially to the effect that:
(i) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation;
(ii) The Company has the corporate power and authority to own,
lease and operate its properties and to conduct its business as
described in the Prospectus;
(iii) The Company is duly qualified to do business as a foreign
corporation and is in good standing in each jurisdiction, if any, in
which the ownership or leasing of its properties or the conduct of its
business requires such qualification, except where the failure to be
so qualified or be in good standing would not have a material adverse
effect on the condition (financial or otherwise), earnings, operations
or business of the Company. To such counsel's knowledge, the Company
does not own or control, directly or indirectly, 50% of the voting
equity of any corporation, association or other entity;
(iv) The authorized, issued and outstanding capital stock of
the Company is as set forth in the Prospectus under the caption
"Capitalization" as of the dates stated therein, the issued and
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outstanding shares of capital stock of the Company (including the
Option Shares) have been, and will be on any later date on which
Option Shares are purchased, duly and validly issued and are fully
paid and nonassessable, and, to such counsel's knowledge, will not
have been issued in violation of or subject to any preemptive right
arising by operation of law, or to such counsel's knowledge, any co-
sale right, registration right, right of first refusal or other
similar right;
(v) The Firm Shares or the Option Shares, as the case may be,
to be issued by the Company pursuant to the terms of this Agreement
have been duly authorized and, upon issuance and delivery against
payment therefor in accordance with the terms hereof, will be duly and
validly issued and fully paid and nonassessable, and will not have
been issued in violation of or subject to any preemptive right, or to
such counsel's knowledge, any co-sale right, registration right, right
of first refusal or other similar right;
(vi) The Company has the corporate power and authority to
enter into this Agreement and to issue, sell and deliver to the
Underwriters the Shares to be issued and sold by it hereunder;
(vii) This Agreement has been duly authorized by all necessary
corporate action on the part of the Company and has been duly executed
and delivered by the Company and, assuming due authorization,
execution and delivery by you, is a valid and binding agreement of the
Company, enforceable in accordance with its terms, except insofar as
indemnification provisions or other remedies may be limited by
applicable law and except as enforceability may be limited by
bankruptcy, insolvency, reorganization, moratorium or similar laws
relating to or affecting creditors' rights generally, public policy or
by general equitable principles;
(viii) The Registration Statement was declared effective under
the Act and, to such counsel's knowledge, no stop order suspending the
effectiveness of the Registration Statement has been issued and no
proceedings for that purpose have been instituted or are pending or
threatened under the Act;
(ix) The Registration Statement and the Prospectus, and each
amendment or supplement thereto (other than the financial statements
(including supporting schedules) and financial data derived therefrom
as to which such counsel need express no opinion), as of the effective
date of the Registration Statement, complied as to form in all
material respects with the requirements of the Act and the applicable
Rules and Regulations;
(x) The information in the Prospectus under the caption
"Description of Capital Stock," to the extent that it constitutes
matters of law or legal conclusions, has been reviewed by such counsel
and was, as of the effective date of the Registration Statement, not
inaccurate in any material respect; and the form of certificates
evidencing the Common Stock and filed as an exhibit to the
Registration Statement complies with the requirements of South
Carolina law;
(xi) The descriptions in the Registration Statement and the
Prospectus of statutes, legal and governmental proceedings, contracts
and other documents, insofar as such statements constitute a summary
of documents referred to therein or matters of law, as of the
effective date of the Registration Statement, were not inaccurate in
any material respect and fairly presented in all material respects the
information required to be presented by the Act and the applicable
Rules and Regulations;
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<PAGE>
(xii) To such counsel's knowledge, there are no agreements,
contracts, leases or documents to which the Company is a party of a
character required to be described or referred to in the Registration
Statement or Prospectus or to be filed as an exhibit to the
Registration Statement which are not described or referred to therein
or filed as required;
(xiii) The performance of this Agreement and the consummation of
the transactions herein contemplated (other than performance of the
Company's indemnification obligations hereunder and certain other
remedial provisions, concerning which no opinion need be expressed)
will not (a) result in any violation of the Company's charter or
bylaws or (b) to such counsel's knowledge, result in a material breach
or violation of any of the terms and provisions of, or constitute a
default under, any material bond, debenture, note or other evidence of
indebtedness, or any lease, contract, indenture, mortgage, deed of
trust, loan agreement, joint venture or other agreement or instrument
to which the Company is a party or by which its respective properties
are bound, or any applicable statute, rule or regulation, or any
order, writ or decree of any court, government or governmental agency
or body having jurisdiction over the Company or over any of its
properties or operations;
(xiv) No consent, approval, authorization or order of or
qualification with any court, government or governmental agency or
body in the U.S. having jurisdiction over the Company, or over any of
its properties or operations is necessary in connection with the
consummation by the Company of the transactions herein contemplated,
except such as have been obtained under the Act, the Exchange Act or
such as may be required under State or other securities or Blue Sky
laws in connection with the purchase and the distribution of the
Shares by the Underwriters;
(xv) To such counsel's knowledge, there are no legal or
governmental proceedings pending or threatened against the Company of
a character required to be disclosed in the Registration Statement or
the Prospectus by the Act or the Rules and Regulations, other than
those described therein;
(xvi) To such counsel's knowledge, the Company is not presently
(a) in material violation of its respective charter or bylaws, or (b)
in material breach of any applicable statute, rule or regulation or
any order, writ or decree of any court or governmental agency or body
having jurisdiction over the Company, or over any of its properties or
operations;
(xvii) To such counsel's knowledge, except as set forth in the
Registration Statement and Prospectus, no holders of Common Stock or
other securities of the Company have registration rights with respect
to securities of the Company and, except as set forth in the
Registration Statement and Prospectus, all holders of securities of
the Company having rights known to such counsel for registration of
such shares of Common Stock or other securities, because of the filing
of the Registration Statement by the Company have, with respect to the
offering contemplated thereby, waived such rights or such rights have
expired by reason of lapse of time following notification of the
Company's intent to file the Registration Statement or have included
securities in the Registration Statement pursuant to the exercise of
and in full satisfaction of such rights;
(xviii) The Company is not, nor will the Company become upon the
sale of the Shares and the application of the proceeds therefrom as
described in the Prospectus under the caption "Use of Proceeds," an
"investment company" or a person controlled by an "investment company"
within the meaning of the 1940 Act;
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(xix) Each Selling Shareholder which is not a natural person
has full right, power and authority to enter into and to perform its
obligations under the Power of Attorney and Custody Agreement to be
executed and delivered by it in connection with the transactions
contemplated herein; the Power of Attorney and Custody Agreement of
each Selling Shareholder that is not a natural person has been duly
authorized by such Selling Shareholder; the Power of Attorney and
Custody Agreement of each Selling Shareholder has been duly executed
and delivered by or on behalf of such Selling Shareholder; and the
Power of Attorney and Custody Agreement of each Selling Shareholder
constitutes the valid and binding agreement of such Selling
Shareholder, enforceable in accordance with its terms, except as the
enforcement thereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or
affecting creditors' rights generally or by general equitable
principles;
(xx) Each of the Selling Shareholders has full right, power
and authority to enter into and to perform its obligations under this
Agreement and to sell, transfer, assign and deliver the Shares to be
sold by such Selling Shareholder hereunder;
(xxi) This Agreement has been duly authorized by each Selling
Shareholder that is not a natural person and has been duly executed
and delivered by or on behalf of each Selling Shareholder; and
(xxii) Upon the delivery of and payment for the Shares as
contemplated in this Agreement, each of the Underwriters will receive
valid marketable title to the Shares purchased by it from such Selling
Shareholder, free and clear of any pledge, lien, security interest,
encumbrance, claim or equitable interest. In rendering such opinion,
such counsel may assume that the Underwriters purchased such shares in
good faith and are without notice of any defect in the title of the
Shares being purchased from the Selling Shareholders.
In addition, such counsel shall state that such counsel has
participated in conferences with officials and other representatives of the
Company, the Representatives, Underwriters' Counsel and the independent
certified public accountants of the Company, at which such conferences the
contents of the Registration Statement and Prospectus and related matters were
discussed, and although they have not verified and do not assume responsibility
for the accuracy, completeness or fairness of the statements contained in the
Registration Statement or the Prospectus, nothing has come to the attention of
such counsel which leads them to believe that, at the time the Registration
Statement became effective and at all times subsequent thereto up to and on the
Closing Date and on any later date on which Option Shares are to be purchased,
the Registration Statement and any amendment or supplement thereto (other than
the financial statements including supporting schedules and other financial and
statistical information derived therefrom and all information provided by the
Underwriters as set forth in the last paragraph of Section 3 hereof, as to which
such counsel may, for purposes of the foregoing opinions, assume accuracy and
need express no opinion or comment) contained any untrue statement of a material
fact or omitted to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading, or at the Closing Date or any later date
on which the Option Shares are to be purchased, as the case may be, the
Registration Statement, the Prospectus, any amendment or supplement thereto
(except as aforesaid) contained any untrue statement of a material fact or
omitted to state a material fact necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading.
Counsel rendering the foregoing opinion may rely as to questions of
law not involving the laws of the U.S. or the State of South Carolina upon
opinions of local counsel, and as to questions of fact upon representations or
certificates of officers of the Company, the Selling Shareholders or officers of
the Selling Shareholders (when the Selling Shareholder is not a natural person),
and of government officials, in which case their opinion is to state that they
are so relying and that they have no knowledge of any material misstatement or
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inaccuracy in any such opinion, representation or certificate. Copies of any
opinion, representation or certificate so relied upon shall be delivered to you,
as Representatives of the Underwriters, and to Underwriters' Counsel.
(e) You shall have received on the Closing Date and on any later date
on which Option Shares are to be purchased, as the case may be, an opinion of
Alston & Bird, in form and substance reasonably satisfactory to you, with
respect to the sufficiency of all such corporate proceedings and other legal
matters relating to this Agreement and the transactions contemplated hereby as
you may reasonably require, and the Company shall have furnished to such counsel
such documents as they may have requested for the purpose of enabling them to
pass upon such matters.
(f) You shall have received on the Closing Date and on any later date
on which Option Shares are to be purchased, as the case may be, a letter from
KPMG Peat Marwick LLP addressed to the Company and the Underwriters, dated the
Closing Date or such later date on which Option Shares are to be purchased, as
the case may be, confirming that they are independent certified public
accountants with respect to the Company within the meaning of the Act and the
applicable published Rules and Regulations and based upon the procedures
described in such letter delivered to you concurrently with the execution of
this Agreement (herein called the "Original Letter"), but carried out to a date
not more than five (5) business days prior to the Closing Date or such later
date on which Option Shares are to be purchased, as the case may be, (i)
confirming, to the extent true, that the statements and conclusions set forth in
the Original Letter are accurate as of the Closing Date or such later date on
which Option Shares are to be purchased, as the case may be, and (ii) setting
forth any revisions and additions to the statements and conclusions set forth in
the Original Letter which are necessary to reflect any changes in the facts
described in the Original Letter since the date of such letter, or to reflect
the availability of more recent financial statements, data or information. The
letter shall not disclose any change in the condition (financial or otherwise),
earnings, operations, business or business prospects of the Company from that
set forth in the Registration Statement or Prospectus, which, in your judgment,
is material and adverse and that makes it, in your judgment, impracticable or
inadvisable to proceed with the public offering of the Shares as contemplated by
the Prospectus. The Original Letter from KPMG Peat Marwick LLP shall be
addressed to or for the use of the Underwriters in form and substance
satisfactory to the Underwriters and shall (i) represent, to the extent true,
that they are independent certified public accountants with respect to the
Company within the meaning of the Act and the applicable published Rules and
Regulations, (ii) set forth their opinion with respect to their examination of
the balance sheets of the Company as of June 30, 1995 and 1996 and related
statements of operations, shareholders' equity, and cash flows for each of the
years in the three (3) years ended June 30, 1996, (iii) state that KPMG Peat
Marwick LLP has performed the procedure set out in Statement on Auditing
Standards No. 71 ("SAS 71") for a review of interim financial information and
providing the report of KPMG Peat Marwick LLP as described in SAS 71 on the
financial statements for the six-month periods ended December 31, 1995 and 1996,
and (iv) address other matters agreed upon by KPMG Peat Marwick LLP and you. In
addition, you shall have received from KPMG Peat Marwick LLP a letter addressed
to the Company and made available to you for the use of the Underwriters stating
that their review of the Company's system of controls, to the extent they deemed
necessary in establishing the scope of their audit of the Company's financial
statements as of June 30, 1995 and 1996, did not disclose any weaknesses in
internal controls that they considered to be material weaknesses.
(g) You shall have received on the Closing Date and on any later date
on which Option Shares are to be purchased, as the case may be, a certificate of
the Company, dated the Closing Date or such later date on which Option Shares
are to be purchased, as the case may be, signed by the Chief Executive Officer
and Chief Financial Officer of the Company, to the effect that, and you shall be
reasonably satisfied that:
(i) The representations and warranties of the Company in this
Agreement are true and correct in all material respects, as if made on
and as of the Closing Date or any later date on which Option Shares
are to be purchased, as the case may be, and the Company has complied
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with all the agreements and satisfied all the conditions on its part
to be performed or satisfied at or prior to the Closing Date or any
later date on which Option Shares are to be purchased, as the case may
be;
(ii) No stop order suspending the effectiveness of the
Registration Statement has been issued and no proceedings for that
purpose have been instituted or are pending or threatened under the
Act;
(iii) When the Registration Statement became effective and at
all times subsequent thereto up to the delivery of such certificate,
the Registration Statement and the Prospectus, and any amendments or
supplements thereto, contained all material information required to be
included therein by the Act and the Rules and Regulations and in all
material respects conformed to the requirements of the Act and the
Rules and Regulations, the Registration Statement, and any amendment
or supplement thereto, did not and does not include any untrue
statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements therein,
under the circumstances under which they were made, not misleading,
the Prospectus, and any amendment or supplement thereto, did not and
does not include any untrue statement of a material fact or omit to
state a material fact necessary to make the statements therein, in the
light of the circumstances under which they were made, not misleading,
and, since the effective date of the Registration Statement, there has
occurred no event required to be set forth in an amended or
supplemented Prospectus which has not been so set forth;
(iv) Each Preliminary Prospectus, when filed with the
Commission and at all time subsequent thereto up to the delivery of
such certificate, conformed in all material respects to the
requirements of the Act and the Rules and Regulations as of its date,
has not included any untrue statement of material fact or omitted to
state a material fact necessary to make the statements therein, in the
light of the circumstances under which they were made, not misleading;
(v) Subsequent to the respective dates as of which
information is given in the Registration Statement and Prospectus, and
except as disclosed or contemplated in the Prospectus, there has not
been (a) any material adverse change in the condition (financial or
otherwise), earnings, operations, business or business prospects of
the Company, (b) any transaction that is material to the Company,
except transactions entered into in the ordinary course of business,
(c) any obligation, direct or contingent, that is material to the
Company, incurred by the Company, except obligations incurred in the
ordinary course of business, (d) any change in the capital stock or
outstanding indebtedness of the Company that is material to the
Company, (e) any dividend or distribution of any kind declared, paid
or made on the capital stock of the Company, or (f) any loss or damage
(whether or not insured) to the property of the Company which has been
sustained or will have been sustained which has a material adverse
effect on the condition (financial or otherwise), earnings,
operations, business or business prospects of the Company; and
(vi) The Firm Shares and Option Shares, if any, have been
approved for listing on The Nasdaq National Market.
(h) You shall be satisfied that, and you shall have received a
certificate, dated the Closing Date, or any later date on which Option Shares
are to be purchased, as the case may be, from the Attorneys for each Selling
Shareholder to the effect that, as of the Closing Date, or any later date on
which Option Shares are to be purchased, as the case may be, they have not been
informed that:
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(i) The representations and warranties made by such Selling
Shareholder herein are not true or correct in any material respect on
the Closing Date or on any later date on which Option Shares are to be
purchased, as the case may be; or
(ii) Such Selling Shareholder has not complied with any
obligation or satisfied any condition which is required to be
performed or satisfied on the part of such Selling Shareholder at or
prior to the Closing Date or any later date on which Option Shares are
to be purchased, as the case may be.
(i) The Company shall have obtained and delivered to you an agreement
from each officer and director of the Company, each other person listed on
Schedule C hereto that such person will not, during the Lock-up Period, effect
the Disposition of any Securities now owned or hereafter acquired by such
person, directly or indirectly, or with respect to which such person has or
hereafter acquires the power of disposition, other than (i) as a bona fide gift
or gifts, provided the donee or donees thereof agree in writing to be bound by
this restriction, (ii) as a distribution to limited partners, shareholders or
beneficiaries of such person, provided that the distributees thereof agree in
writing to be bound by the terms of this restriction, (iii) if such person is an
individual, to a member or members of his or her immediate family or to a trust
the beneficiaries of which are exclusively such person and/or a member or
members of his or her immediate family, provided that each transferee thereof
agrees in writing to be bound by the terms of this restriction, or (iv) with the
prior written consent of Robertson, Stephens & Company LLC. The foregoing
restriction shall have been expressly agreed to preclude the holder of the
Securities from engaging in any hedging or other transaction which is designed
to or reasonably expected to lead to or result in a Disposition of Securities
during the Lock-up Period, even if such Securities would be disposed of by
someone other than the such holder. Such prohibited hedging or other
transactions would include, without limitation, any short sale (whether or not
against the box) or any purchase, sale or grant of any right (including, without
limitation, any put or call option) with respect to any Securities or with
respect to any security (other than a broad-based market basket or index) that
includes, relates to or derives any significant part of its value from
Securities. Furthermore, such person will have also agreed and consented to the
entry of stop transfer instructions with the Company's transfer agent against
the transfer of the Securities held by such person except in compliance with
this restriction.
(j) The Company and the Selling Shareholders shall have furnished to
you such further certificates and documents as you shall reasonably request
(including certificates of officers of the Company, the Selling Shareholders or
officers of the Selling Shareholders (when the Selling Shareholder is not a
natural person) as to the accuracy of the representations and warranties of the
Company and the Selling Shareholders herein, as to the performance by the
Company and the Selling Shareholders of their respective obligations hereunder
and as to the other conditions concurrent and precedent to the obligations of
the Underwriters hereunder.
All such opinions, certificates, letters and documents will be in
compliance with the provisions hereof only if they are reasonably satisfactory
to Underwriters' Counsel. The Company and the Selling Shareholders will furnish
you with such number of conformed copies of such opinions, certificates, letters
and documents as you shall reasonably request.
7. Option Shares.
-------------
(a) On the basis of the representations, warranties and agreements
herein contained, but subject to the terms and conditions herein set forth, the
Company and the Selling Shareholders hereby grant to the several Underwriters,
severally and not jointly, for the purpose of covering over-allotments in
connection with the distribution and sale of the Firm Shares only, a non-
transferable option to purchase up to an aggregate of 300,000 Option Shares as
set forth on Schedule B hereto at the purchase price per share for the Firm
Shares set forth in Section 3 hereof. Such option may be exercised by the
Representatives on behalf of the several Underwriters on one (1) or more
occasions in whole or in part during the period of thirty (30) days after the
date on which the Firm Shares are initially offered to the public, by giving
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written notice to the Company. If such option is exercised by the
Representatives on behalf of the several Underwriters in part, the several
Underwriters shall purchase (i) first, the Option Shares to be sold by the
Selling Shareholders until all such Option Shares have been sold, (which if
partially exercised will be purchased from the Selling Shareholders on a pro
rata basis rounded to the nearest whole share), and (ii) second, the Option
Shares to be sold by the Company until all such Option Shares have been sold.
The number of Option Shares to be purchased by each Underwriter upon the
exercise of such option shall be the same proportion of the total number of
Option Shares to be purchased by the several Underwriters pursuant to the
exercise of such option as the number of Firm Shares purchased by such
Underwriter (set forth in Schedule A hereto) bears to the total number of Firm
Shares purchased by the several Underwriters (set forth in Schedule A hereto),
adjusted by the Representatives in such manner as to avoid fractional shares.
Delivery of definitive certificates for the Option Shares to be
purchased by the several Underwriters from the Company and the Selling
Shareholders pursuant to the exercise of the option granted by this Section 7
shall be made against payment of the purchase price therefor by the several
Underwriters by certified or official bank check or checks drawn in next-day
funds, payable to the order of the Company and each Selling Shareholder (and the
Company and each Selling Shareholder agree not to deposit any such check in the
bank on which it is drawn, and not to take any other action with the purpose or
effect of receiving immediately available funds, until the business day
following the date of its delivery to the Company and each Selling Shareholder).
In the event of any breach of the foregoing, the Company and each Selling
Shareholder shall reimburse the Underwriters for the interest lost and any other
expenses borne by them by reason of such breach. Such delivery and payment
shall take place at the offices of Nexsen Pruet Jacobs & Pollard, LLP, First
Union Building, 1441 Main Street, Suite 1500, Columbia, South Carolina 29201 or
at such other place as may be agreed upon among the Representatives, the Company
and the Selling Shareholders (i) on the Closing Date, if written notice of the
exercise of such option is received by the Company and the Selling Shareholders
at least two (2) full business days prior to the Closing Date, or (ii) on a date
which shall not be later than the third (3rd) full business day following the
date the Company and the Selling Shareholders receives written notice of the
exercise of such option, if such notice is received by the Company and the
Selling Shareholders less than two (2) full business days prior to the Closing
Date.
The certificates for the Option Shares to be so delivered will be made
available to you at such office or such other location including, without
limitation, in New York City, as you may reasonably request for checking at
least one (1) full business day prior to the date of payment and delivery and
will be in such names and denominations as you may request, such request to be
made at least two (2) full business days prior to such date of payment and
delivery. If the Representatives so elect, delivery of the Option Shares may be
made by credit through full fast transfer to the accounts at The Depository
Trust Company designated by the Representatives.
It is understood that you, individually, and not as the
Representatives of the several Underwriters, may (but shall not be obligated to)
make payment of the purchase price on behalf of any Underwriter or Underwriters
whose check or checks shall not have been received by you prior to the date of
payment and delivery for the Option Shares to be purchased by such Underwriter
or Underwriters. Any such payment by you shall not relieve any such Underwriter
or Underwriters of any of its or their obligations hereunder.
(b) Upon exercise of any option provided for in Section 7(a) hereof,
the obligations of the several Underwriters to purchase such Option Shares will
be subject (as of the date hereof and as of the date of payment and delivery for
such Option Shares) to the accuracy of and compliance with the representations,
warranties and agreements of the Company and the Selling Shareholders herein, to
the accuracy of the statements of the Company, the Selling Shareholders and
officers of the Company made pursuant to the provisions hereof, to the
performance by the Company and the Selling Shareholders of their respective
obligations hereunder, to the conditions set forth in Section 6 hereof, and to
the condition that all proceedings taken at or prior to the payment date in
connection with the sale and transfer of such Option Shares shall be reasonably
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satisfactory in form and substance to you and to Underwriters' Counsel, and you
shall have been furnished with all such documents, certificates and opinions as
you may reasonably request in order to evidence the accuracy and completeness of
any of the representations, warranties or statements, the performance of any of
the covenants or agreements of the Company and the Selling Shareholders or the
satisfaction of any of the conditions herein contained.
8. Indemnification and Contribution.
--------------------------------
(a) The Company agrees to indemnify and hold harmless each Underwriter
against any losses, claims, damages or liabilities, joint or several, to which
such Underwriter may become subject (including, without limitation, in its
capacity as an Underwriter or as a "qualified independent underwriter" within
the meaning of Schedule E of the Bylaws of the NASD), under the Act, the
Exchange Act or otherwise, specifically including, but not limited to, losses,
claims, damages or liabilities in so far as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon (i)
any breach of any representation, warranty, agreement or covenant of the Company
herein contained, (ii) any untrue statement or alleged untrue statement of any
material fact contained in the Registration Statement or any amendment or
supplement thereto, or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading, or (iii) any untrue statement or alleged untrue statement of any
material fact contained in any Preliminary Prospectus or the Prospectus or any
amendment or supplement thereto, or the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading; provided, however, that the Company shall not be liable in
-------- -------
any such case to the extent that any such loss, claim, damage, liability or
action arises out of or is based upon an untrue statement or alleged untrue
statement or omission or alleged omission made in the Registration Statement,
such Preliminary Prospectus, or the Prospectus, or any such amendment or
supplement thereto, in reliance upon, and in conformity with, written
information relating to any Underwriter furnished to the Company by such
Underwriter, directly or through you, specifically for use in the preparation
thereof and, provided further, that the indemnity agreement provided in this
-------- -------
Section 8(a) with respect to any Preliminary Prospectus shall not inure to the
benefit of any Underwriter from whom the person asserting any losses, claims,
damages, liabilities or actions based upon any untrue statement or alleged
untrue statement of material fact or omission or alleged omission to state
therein a material fact purchased Shares, if a copy of the Prospectus in which
such untrue statement or alleged untrue statement or omission or alleged
omission was corrected had not been sent or given to such person within the time
required by the Act and the Rules and Regulations, unless such failure is the
result of noncompliance by the Company with Section 4(d) hereof.
The indemnity agreement in this Section 8(a) shall extend upon the
same terms and conditions to, and shall inure to the benefit of, each person, if
any, who controls any Underwriter within the meaning of the Act or the Exchange
Act. This indemnity agreement shall be in addition to any liabilities which the
Company may otherwise have.
(b) If the Underwriters' over-allotment option is exercised, each
Selling Shareholder, severally and not jointly, agrees to indemnify and hold
harmless each Underwriter against any losses, claims, damages or liabilities,
joint or several, to which such Underwriter may become subject (including,
without limitation, in its capacity as an Underwriter or as a "qualified
independent underwriter" within the meaning of Schedule E or the Bylaws of the
NASD) under the Act, the Exchange Act or otherwise, specifically including, but
not limited to, losses, claims, damages or liabilities in so far as such losses,
claims, damages or liabilities (or actions in respect thereof) arise out of or
are based upon (i) any breach of any representation, warranty, agreement or
covenant of such Selling Shareholder herein contained, (ii) any untrue statement
or alleged untrue statement of any material fact contained in the Registration
Statement or any amendment or supplement thereto, or the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading, or (iii) any untrue statement or alleged
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untrue statement of any material fact contained in any Preliminary Prospectus or
the Prospectus or any amendment or supplement thereto, or the omission or
alleged omission to state therein a material fact necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, in the case of subparagraphs (ii) and (iii) of this
Section 8(b) to the extent, but only to the extent, that such untrue statement
or alleged untrue statement or omission or alleged omission was made in reliance
upon and in conformity with written information furnished to the Company or such
Underwriter by such Selling Shareholder, directly or through such Selling
Shareholder's representatives, specifically for use in the preparation thereof,
and agrees to reimburse each Underwriter for any legal or other expenses
reasonably incurred by it in connection with investigating or defending any such
loss, claim, damage, liability or action; provided, however that the indemnity
--------
agreement provided in this Section 8(b) with respect to any Preliminary
Prospectus shall not inure to the benefit of any Underwriter from whom the
person asserting any losses, claims, damages, liabilities or actions based upon
any untrue statement or alleged untrue statement of a material fact or omission
or alleged omission to state therein a material fact purchased Shares, if a copy
of the Prospectus in which such untrue statement or alleged untrue statement or
omission or alleged omission was corrected had not been sent or given to such
person within the time required by the Act and the Rules and Regulations, unless
such failure is the result of noncompliance by the Company with Section 4(d)
hereof.
The indemnity agreement in this Section 8(b) shall extend upon the
same terms and conditions to, and shall inure to the benefit of, each person, if
any, who controls any Underwriter within the meaning of the Act or the Exchange
Act. This indemnity agreement shall be in addition to any liabilities which
such Selling Shareholder may otherwise have.
(c) Each Underwriter, severally and not jointly, agrees to indemnify
and hold harmless the Company, and each Selling Shareholder (if the
Underwriters' over-allotment option is exercised), against any losses, claims,
damages or liabilities, joint or several, to which the Company or such Selling
Shareholder may become subject under the Act or otherwise, specifically
including, but not limited to, losses, claims, damages or liabilities in so far
as such losses, claims, damages or liabilities (or actions in respect thereof)
arise out of or are based upon (i) any breach of any representation, warranty,
agreement or covenant of such Underwriter herein contained, (ii) any untrue
statement or alleged untrue statement of any material fact contained in the
Registration Statement or any amendment or supplement thereto, or the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein in light of the
circumstances under which they were made, not misleading, and (iii) any untrue
statement or alleged untrue statement of any material fact contained in any
Preliminary Prospectus or the Prospectus or any amendment or supplement thereto,
or the omission or alleged omission to state therein a material fact necessary
to make the statements therein, in the light of the circumstances under which
they were made, not misleading, in the case of subparagraphs (ii) and (iii) of
this Section 8(c) to the extent, but only to the extent, that such untrue
statement or alleged untrue statement or omission or alleged omission was made
in reliance upon and in conformity with written information furnished to the
Company by such Underwriter, directly or through you, specifically for use in
the preparation thereof, and agrees to reimburse the Company and each such
Selling Shareholder for any legal or other expenses reasonably incurred by the
Company and each such Selling Shareholder in connection with investigating or
defending any such loss, claim, damage, liability or action.
The indemnity agreement in this Section 8(c) shall extend upon the
same terms and conditions to, and shall inure to the benefit of, each officer of
the Company who signed the Registration Statement and each director of the
Company, each Selling Shareholder (if the Underwriters' over-allotment option is
exercised), and each person, if any, who controls the Company or any Selling
Shareholder (if the Underwriters' over-allotment option is exercised), within
the meaning of the Act or the Exchange Act. This indemnity agreement shall be
in addition to any liabilities which each Underwriter may otherwise have.
(d) Promptly after receipt by an indemnified party under this Section
8 of notice of the commencement of any action, such indemnified party shall, if
a claim in respect thereof is to be made against any indemnifying party under
-27-
<PAGE>
this Section 8, notify the indemnifying party in writing of the commencement
thereof but the omission so to notify the indemnifying party will not relieve it
from any liability which it may have to any indemnified party otherwise than
under this Section 8. In case any such action is brought against any indemnified
party, and it notified the indemnifying party of the commencement thereof, the
indemnifying party will be entitled to participate therein and, to the extent
that it shall elect by written notice delivered to the indemnified party
promptly after receiving the aforesaid notice from such indemnified party, to
assume the defense thereof, with counsel reasonably satisfactory to such
indemnified party; provided, however, that if the defendants in any such action
--------
include both the indemnified party and the indemnifying party and the
indemnified party shall have received an opinion of counsel that there may be
legal defenses available to it and/or other indemnified parties which are
different from or additional to those available to the indemnifying party, the
indemnified party or parties shall have the right to select separate counsel to
assume such legal defenses and to otherwise participate in the defense of such
action on behalf of such indemnified party or parties. Upon receipt of notice
from the indemnifying party to such indemnified party of the indemnifying
party's election so to assume the defense of such action and approval by the
indemnified party of counsel, the indemnifying party will not be liable to such
indemnified party under this Section 8 for any legal or other expenses
subsequently incurred by such indemnified party in connection with the defense
thereof unless (i) the indemnified party shall have employed separate counsel in
accordance with the proviso to the next preceding sentence (it being understood,
however, that the indemnifying party shall not be liable for the expenses of
more than one separate counsel (together with the reasonable fees of appropriate
local counsel) approved by the indemnifying party representing all the
indemnified parties under Section 8(a), 8(b) or 8(c) hereof who are parties to
such action), (ii) the indemnifying party shall not have employed counsel
satisfactory to the indemnified party to represent the indemnified party within
a reasonable time after notice of commencement of the action or (iii) the
indemnifying party has authorized the employment of counsel for the indemnified
party at the expense of the indemnifying party. In no event shall any
indemnifying party be liable in respect of any amounts paid in settlement of any
action unless the indemnifying party shall have approved the terms of such
settlement; provided that such consent shall not be unreasonably withheld. No
--------
indemnifying party shall, without the prior written consent of the indemnified
party, effect any settlement of any pending or threatened proceeding in respect
of which any indemnified party is or could have been a party and indemnification
could have been sought hereunder by such indemnified party, unless such
settlement includes an unconditional release of such indemnified party from all
liability on all claims that are the subject matter of such proceeding.
(e) In order to provide for just and equitable contribution in any
action in which a claim for indemnification is made pursuant to this Section 8
but it is judicially determined (by the entry of a final judgment or decree by a
court of competent jurisdiction and the expiration of time to appeal or the
denial of the last right of appeal) that such indemnification may not be
enforced in such case notwithstanding the fact that this Section 8 provides for
indemnification in such case, all the parties hereto shall contribute to the
aggregate losses, claims, damages or liabilities to which they may be subject
(after contribution from others) in such proportion so that except as set forth
in Section 8(f) hereof, the Underwriters severally and not jointly are
responsible pro rata for the portion represented by the percentage that the
underwriting discount bears to the public offering price, and the Company and
the Selling Shareholders are responsible for the remaining portion, provided,
--------
however that (i) no Underwriter shall be required to contribute any amount in
- -------
excess of the amount by which the underwriting discount applicable to the Shares
purchased by such Underwriter exceeds the amount of damages which such
Underwriter has otherwise required to pay and (ii) no person guilty of a
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who is not guilty of such
fraudulent misrepresentation. The contribution agreement in this Section 8(e)
shall extend upon the same terms and conditions to, and shall inure to the
benefit of, each person, if any, who controls any Underwriter, the Company or
any Selling Shareholder within the meaning of the Act or the Exchange Act and
each officer of the Company who signed the Registration Statement and each
director of the Company.
-28-
<PAGE>
(f) The liability of each Selling Shareholder (if the Underwriters'
over-allotment option is exercised), under the representations, warranties and
agreements contained herein and under the indemnity agreements contained in the
provisions of this Section 8 shall be limited to an amount equal to the public
offering price of the Option Shares sold by such Selling Shareholder to the
Underwriters minus the amount of the underwriting discount paid thereon to the
Underwriters by such Selling Shareholder. The Company and such Selling
Shareholders may agree, as among themselves and without limiting the rights of
the Underwriters under this Agreement, as to the respective amounts of such
liability for which they each shall be responsible.
(g) The parties to this Agreement hereby acknowledge that they are
sophisticated business persons who were represented by counsel during the
negotiations regarding the provisions hereof including, without limitation, the
provisions of this Section 8, and are fully informed regarding said provisions.
They further acknowledge that the provisions of this Section 8 fairly allocate
the risks in light of the ability of the parties to investigate the Company and
its business in order to assure that adequate disclosure is made in the
Registration Statement and Prospectus as required by the Act and the Exchange
Act.
9. Representations, Warranties, Covenants and Agreements to Survive
----------------------------------------------------------------
Delivery. All representations, warranties, covenants and agreements of the
- --------
Company, the Selling Shareholders (if the Underwriters' over-allotment option is
exercised), and the Underwriters herein or in certificates delivered pursuant
hereto, and the indemnity and contribution agreements contained in Section 8
hereof shall remain operative and in full force and effect regardless of any
investigation made by or on behalf of any Underwriter or any person controlling
any Underwriter within the meaning of the Act or the Exchange Act, or by or on
behalf of the Company or any Selling Shareholder, or any of their officers,
directors or controlling persons within the meaning of the Act or the Exchange
Act, and shall survive the delivery of the Shares to the several Underwriters
hereunder or termination of this Agreement.
10. Substitution of Underwriters. If any Underwriter or Underwriters
----------------------------
shall fail to take up and pay for the number of Firm Shares agreed by such
Underwriter or Underwriters to be purchased hereunder upon tender of such Firm
Shares in accordance with the terms hereof, and if the aggregate number of Firm
Shares which such defaulting Underwriter or Underwriters so agreed but failed to
purchase does not exceed 10% of the Firm Shares, the remaining Underwriters
shall be obligated, severally in proportion to their respective commitments
hereunder, to take up and pay for the Firm Shares of such defaulting Underwriter
or Underwriters.
If any Underwriter or Underwriters so defaults and the aggregate
number of Firm Shares which such defaulting Underwriter or Underwriters agreed
but failed to take up and pay for exceeds 10% of the Firm Shares, the remaining
Underwriters shall have the right, but shall not be obligated, to take up and
pay for (in such proportions as may be agreed upon among them) the Firm Shares
which the defaulting Underwriter or Underwriters so agreed but failed to
purchase. If such remaining Underwriters do not, at the Closing Date, take up
and pay for the Firm Shares which the defaulting Underwriter or Underwriters so
agreed but failed to purchase, the Closing Date shall be postponed for twenty-
four (24) hours to allow the several Underwriters the privilege of substituting
within twenty-four (24) hours (including non-business hours) another underwriter
or underwriters (which may include any nondefaulting Underwriter) satisfactory
to the Company. If no such underwriter or underwriters shall have been
substituted as aforesaid by such postponed Closing Date, the Closing Date may,
at the option of the Company, be postponed for a further twenty-four (24) hours,
if necessary, to allow the Company the privilege of finding another underwriter
or underwriters, satisfactory to you, to purchase the Firm Shares which the
defaulting Underwriter or Underwriters so agreed but failed to purchase. If it
shall be arranged for the remaining Underwriters or substituted underwriter or
underwriters to take up the Firm Shares of the defaulting Underwriter or
Underwriters as provided in this Section 10, (i) the Company shall have the
right to postpone the time of delivery for a period of not more than seven (7)
full business days, in order to effect whatever changes may thereby be made
necessary in the Registration Statement or the Prospectus, or in any other
documents or arrangements, and the Company agrees promptly to file any
-29-
<PAGE>
amendments to the Registration Statement, supplements to the Prospectus or other
such documents which may thereby be made necessary, and (ii) the respective
number of Firm Shares to be purchased by the remaining Underwriters and
substituted underwriter or underwriters shall be taken as the basis of their
underwriting obligation. If the remaining Underwriters shall not take up and
pay for all such Firm Shares so agreed to be purchased by the defaulting
Underwriter or Underwriters or substitute another underwriter or underwriters as
aforesaid and the Company shall not find or shall not elect to seek another
underwriter or underwriters for such Firm Shares as aforesaid, then this
Agreement shall terminate.
In the event of any termination of this Agreement pursuant to the
preceding paragraph of this Section 10, neither the Company, nor any Selling
Shareholder (if the Underwriters' over-allotment option is exercised), shall be
liable to any Underwriter (except as provided in Sections 5 and 8 hereof) nor
shall any Underwriter (other than an Underwriter who shall have failed,
otherwise than for some reason permitted under this Agreement, to purchase the
number of Firm Shares agreed by such Underwriter to be purchased hereunder,
which Underwriter shall remain liable to the Company and the other Underwriters
for damages, if any, resulting from such default) be liable to the Company, or
any Selling Shareholder (if the Underwriters' over-allotment option is
exercised), (except to the extent provided in Sections 5 and 8 hereof).
The term "Underwriter" in this Agreement shall include any person
substituted for an Underwriter under this Section 10.
11. Effective Date of this Agreement and Termination.
------------------------------------------------
(a) This Agreement shall become effective at the earlier of (i) 6:30
A.M., San Francisco time, on the first (lst) full business day following the
effective date of the Registration Statement, or (ii) the time of the public
offering of any of the Shares by the Underwriters after the Registration
Statement becomes effective. The time of the public offering shall mean the
time of the release by you, for publication, of the first newspaper
advertisement relating to the Shares, or the time at which the Shares are first
generally offered by the Underwriters to the public by letter, telephone,
telegram or telecopy, whichever shall first occur. By giving notice as set
forth in Section 12 before the time this Agreement becomes effective, you, as
Representatives of the several Underwriters, or the Company, may prevent this
Agreement from becoming effective without liability of any party to any other
party, except as provided in Sections 4(i), 5 and 8 hereof.
(b) You, as Representatives of the several Underwriters, shall have
the right to terminate this Agreement by giving notice as hereinafter specified
at any time on or prior to the Closing Date or on or prior to any later date on
which Option Shares are to be purchased, as the case may be, (i) if the Company
or any Selling Shareholder shall have failed, refused or been unable to perform
any agreement on its part to be performed, or because any other condition of the
Underwriters' obligations hereunder required to be fulfilled is not fulfilled,
including, without limitation, any change in the condition (financial or
otherwise), earnings, operations, business or business prospects of the Company
from that set forth in the Registration Statement or the Prospectus, which, in
your sole judgment, is material and adverse, or (ii) if additional material
governmental restrictions, not in force and effect on the date hereof, shall
have been imposed upon trading in securities generally or minimum or maximum
prices shall have been generally established on the New York Stock Exchange or
on the American Stock Exchange or in the over the counter market by the NASD, or
trading in securities generally shall have been suspended on either such
exchange or in the over the counter market by the NASD, or if a banking
moratorium shall have been declared by federal, New York or California
authorities, or (iii) if the Company shall have sustained a loss by strike,
fire, flood, earthquake, accident or other calamity of such character as to
interfere materially with the conduct of the business and operations of the
Company regardless of whether or not such loss shall have been insured, or (iv)
if there shall have been a material adverse change in the general political or
economic conditions or financial markets as in the Representatives' reasonable
judgment makes it inadvisable or impracticable to proceed with the offering,
sale and delivery of the Shares, or (v) if there shall have been an outbreak or
escalation of
-30-
<PAGE>
hostilities or of any other insurrection or armed conflict or the declaration by
the U.S. of a national emergency which, in the reasonable opinion of the
Representatives, makes it impracticable or inadvisable to proceed with the
public offering of the Shares as contemplated by the Prospectus. In the event
of termination pursuant to subparagraph (i) above, the Company shall remain
obligated to pay costs and expenses pursuant to Sections 4(i), 5 and 8 hereof.
Any termination pursuant to any of subparagraphs (ii) through (v) above shall be
without liability of any party to any other party except as provided in Sections
5 and 8 hereof.
If you elect to prevent this Agreement from becoming effective or to
terminate this Agreement as provided in this Section 11, you shall promptly
notify the Company by telephone, telecopy or telegram, in each case confirmed by
letter. If the Company shall elect to prevent this Agreement from becoming
effective, the Company shall promptly notify you by telephone, telecopy or
telegram, in each case, confirmed by letter.
12. Notices. All notices or communications hereunder, except as herein
-------
otherwise specifically provided, shall be in writing and if sent to you shall be
mailed, delivered, telegraphed (and confirmed by letter) or telecopied (and
confirmed by letter) to you c/o Robertson, Stephens & Company LLC, 555
California Street, Suite 2600, San Francisco, California 94104, telecopier
number (415) 781-0278, Attention: General Counsel; if sent to the Company, such
notice shall be mailed, delivered, telegraphed (and confirmed by letter) or
telecopied (and confirmed by letter) to ScanSource, Inc., 6 Logue Court, Suite
G, Greenville, South Carolina 29615, telecopier number (864) 288-2432,
Attention: Steven H. Owings, Chief Executive Officer with a copy to G. Marcus
Knight, at Nexsen Pruet Jacobs & Pollard, LLP, First Union Building, 1441 Main
Street, Suite 1500, Columbia, South Carolina 29201, telecopier number (803) 253-
8277; if sent to one or more of the Selling Shareholders, such notice shall be
sent mailed, delivered, telegraphed (and confirmed by letter) or telecopied (and
confirmed by letter) to Steven H. Owings, Michael L. Baur and Jeffery A. Bryson,
as Attorneys-in-Fact for the Selling Shareholders, at ScanSource, Inc., 6 Logue
Court, Suite G, Greenville, South Carolina 29615, telecopier number (864) 288-
2432.
13. Parties. This Agreement shall inure to the benefit of and be binding
-------
upon the several Underwriters and the Company and the Selling Shareholders and
their respective executors, administrators, successors and assigns. Nothing
expressed or mentioned in this Agreement is intended or shall be construed to
give any person or entity, other than the parties hereto and their respective
executors, administrators, successors and assigns, and the controlling persons
within the meaning of the Act or the Exchange Act, officers and directors
referred to in Section 8 hereof, any legal or equitable right, remedy or claim
in respect of this Agreement or any provisions herein contained, this Agreement
and all conditions and provisions hereof being intended to be and being for the
sole and exclusive benefit of the parties hereto and their respective executors,
administrators, successors and assigns and said controlling persons and said
officers and directors, and for the benefit of no other person or entity. No
purchaser of any of the Shares from any Underwriter shall be construed a
successor or assign by reason merely of such purchase.
In all dealings with the Company and the Selling Shareholders under
this Agreement, you shall act on behalf of each of the several Underwriters, and
the Company and the Selling Shareholders shall be entitled to act and rely upon
any statement, request, notice or agreement made or given by you jointly or by
Robertson, Stephens & Company LLC on behalf of you.
14. Applicable Law. This Agreement shall be governed by, and construed in
--------------
accordance with, the laws of the State of California.
15. Counterparts. This Agreement may be signed in several counterparts,
------------
each of which will constitute an original.
-31-
<PAGE>
If the foregoing correctly sets forth the understanding among the
Company, the Selling Shareholders and the several Underwriters, please so
indicate in the space provided below for that purpose, whereupon this letter
shall constitute a binding agreement among the Company, the Selling Shareholders
and the several Underwriters.
Very truly yours,
SCANSOURCE, INC.
By:
---------------------------------------------
Title:
---------------------------------------
SELLING SHAREHOLDERS
By:
---------------------------------------------
Attorney-in-Fact for the Selling Shareholders
named in Schedule B hereto
Accepted as of the date first above written:
ROBERTSON, STEPHENS & COMPANY LLC
THE ROBINSON-HUMPHREY COMPANY, INC.
WILLIAM BLAIR & COMPANY, L.L.C.
On their behalf and on behalf of each of the
several Underwriters named in Schedule A hereto.
ROBERTSON, STEPHENS & COMPANY LLC
By: ROBERTSON, STEPHENS & COMPANY GROUP, L.L.C.
By:
---------------------------------------------
Authorized Signatory
-32-
<PAGE>
SCHEDULE A
Number of
Firm Shares
To Be
Underwriters Purchased
- ------------ -----------
Robertson, Stephens & Company LLC
The Robinson-Humphrey Company, Inc.
William Blair & Company, L.L.C.
-----------
Total 2,000,000
===========
<PAGE>
SCHEDULE B
NUMBER OF FIRM
SHARES
TO BE SOLD
--------------
ScanSource, Inc. 2,000,000
---------
Total 2,000,000
=========
NUMBER OF OPTION
SHARES
TO BE SOLD
----------------
ScanSource, Inc. 244,400
Steven H. Owings 14,200
Pringle Family Education Trust 2,200
Samuel M. Pringle and Kathrin R Pringle,
Co-trustees
Ingles Family Education Trust, 2,200
John S. Ingles, Jr. and Susan P. Ingles,
Co-trustees
Michael L. Baur 20,000
Jeffery A. Bryson 10,000
Brenda McCurry 7,000
-------
Total 300,000
=======
<PAGE>
SCHEDULE C
Lock-up List
------------
Lock-up Period*
--------------
Steven H. Owings 90
Barry Rubenstein 60
Dennis B. Gates 90
Eli Oxenhorn 60
Michael L. Baur 90
Jeffery A. Bryson 90
Steven R. Fischer 90
James G. Foody 90
Irwin Lieber 60
Buck Baker 90
Leah Gangoff 90
Greg Dixon 90
Andy Heyman 90
Cheri Jones 90
Brenda McCurry 90
Bobby McLain 90
Shelby Neal 90
Ed Solomon 90
Bob Thompson 90
David M. Nussbaum 90
Robert Gladstone 90
Roger Gladstone 90
Richard Buonocore 90
- ------------------
*Number of days from the date that the Registration Statement is declared
effective by the Commission.
<PAGE>
EXHIBIT 10.22
-------------
SCHEDULE OF MATERIAL DETAILS OF UNIT PURCHASE OPTION AGREEMENTS DATED MARCH 18,
1994, BETWEEN THE REGISTRANT AND EACH OF DAVID M. NUSSBAUM, ROBERT GLADSTONE,
ROGER GLADSTONE, AND RICHARD BUONOCOURE, INCLUDING LETTER AGREEMENT DATED
FEBRUARY 7, 1997 BETWEEN THE PARTIES (FORM OF UNIT PURCHASE OPTION AGREEMENT
INCORPORATED BY REFERENCE TO EXHIBIT 4.3 TO THE REGISTRANT'S FORM SB-2 FILED
WITH THE COMMISSION ON MARCH 2, 1994, REGISTRATION NO. 33-75026-A)
<PAGE>
EXHIBIT 10.22
-------------
SCHEDULE OF MATERIAL DETAILS
OF
OUTSTANDING UNIT PURCHASE OPTION AGREEMENTS
The Unit Purchase Option Agreements of the four option holders listed below are
identical to the form of agreement (Incorporated by reference to Exhibit 4.3 to
the Registrant's Form SB-2 filed with the Commission on March 2, 1994,
Registration No. 33-75026-A) in all material respects, except for the identity
of the option holder and the number of units subject to the agreement, as set
forth below:
<TABLE>
<CAPTION>
Option Holder Number of Units
------------- ---------------
<S> <C>
David M. Nussbaum 13,500
Robert Gladstone 13,500
Roger Gladstone 13,500
Richard Buonocore 1,500
</TABLE>
<PAGE>
[SCANSOURCE, INC. LETTERHEAD]
February 7, 1997
David M. Nussbaum
GKN Securities Corp.
61 Broad Way
New York, NY 10006
RE: ScanSource, Inc. (the "Company")/Unit Purchase Option Agreements Dated
March 18, 1994 (collectively the "UPOs") with David M. Nussbaum,
Robert Gladstone, Roger Gladstone, and Richard Buonocore (collectively
the "UPO Holders")
Dear David:
This letter confirms the Company's agreement with the UPO Holders to file
not later than the 60th day following the effective date of the Company's
pending S-1 Registration Statement (SEC Registration No. 333-20231) an S-3
Registration Statement covering the 84,000 shares subject to the outstanding
UPOs (the "UPO Shares") and exercise its best efforts to have such S-3
Registration Statement become effective on the 90th day following the effective
date of such S-1 Registration Statement, or as soon thereafter as is
practicable. Except as otherwise set forth in this letter, such S-3
registration shall be conducted as set forth in, and shall be subject to the
conditions of, the UPOs.
The Company will exercise its best efforts to cause such S-3 Registration
Statement to remain effective for a period of at least nine (9) consecutive
months after its effective date, to the extent set forth in the UPOs. The
effectiveness of such S-3 Registration Statement shall satisfy the UPO Holders'
demand registration rights under Section 5.1 of the UPOs. Should any of such
UPO Shares not be sold pursuant to the S-3 Registration Statement, the UPO
Holders' "piggy-back" registration rights shall remain effective for any
subsequent registration by the Company to the extent set forth in the UPOs.
The UPO Holders have agreed to provide the Company and its underwriters a
customary 90-day lock-up agreement, substantially in the form previously
provided to the UPO Holders.
To confirm this agreement, please have a copy of this letter signed in the
places indicated below and return a signed copy to the Company. If you have any
questions, please call.
Sincerely yours,
SCANSOURCE, INC.
By:
------------------------------
Title:
-----------------------
<PAGE>
David M. Nussbaum
February 7, 1997
Page 2
Agreed:
- ---------------------------------------
David M. Nussbaum
- ---------------------------------------
Robert Gladstone
- ---------------------------------------
Roger Gladstone
- ---------------------------------------
Richard Buonocore
Date: February , 1997
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
ScanSource, Inc.:
We consent to the use of our report included herein and to the references to
our firm under the headings "Selected Financial Data" and "Experts" in the
prospectus.
Greenville, South Carolina KPMG Peat Marwick LLP
February 11, 1997
