<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 12, 1997
REGISTRATION NO. 333-34993
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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 (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL IDENTIFICATION NO.)
INCORPORATION OR CLASSIFICATION CODE
ORGANIZATION) NUMBER)
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 LLP
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 SEPTEMBER 12, 1997
[LOGO OF SCANSOURCE (R)]
1,400,000 SHARES
COMMON STOCK
-----------
All of the shares of Common Stock offered hereby are being offered by
ScanSource, Inc. (the "Company"). The Common Stock is quoted on The Nasdaq
National Market under the symbol "SCSC." On September 11, 1997, the closing
sale price of the Common Stock as reported on The Nasdaq National Market was
$17.25 per share. See "Price Range of Common Stock."
-----------
SEE "RISK FACTORS" BEGINNING ON PAGE 6 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
-----------
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.
<TABLE>
<CAPTION>
===============================================================================
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
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<S> <C> <C> <C>
Per Share............................. $ $ $
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Total(3).................................. $ $ $
===============================================================================
</TABLE>
(1) See "Underwriting" for a description of the indemnification arrangements
with the Underwriters.
(2) Before deducting estimated expenses of $550,000 payable by the Company.
(3) The Company and certain selling shareholders (the "Selling Shareholders")
have granted to the Underwriters a 30-day option to purchase up to 210,000
additional shares of Common Stock solely to cover over-allotments, if any.
If such option is exercised in full, the total Price to Public,
Underwriting Discount, Proceeds to Company, and Proceeds to Selling
Shareholders will be $ , $ , $ , and
$ , respectively. See "Principal and Selling Shareholders" and
"Underwriting."
-----------
The Common Stock is offered severally by the Underwriters named herein,
subject to prior sale, when, as, and if received and accepted by them, subject
to their right to reject orders, in whole or in part, and to certain other
conditions. It is expected that delivery of the certificates representing the
Common Stock will be made on or about , 1997.
THE ROBINSON-HUMPHREY COMPANY, INC. WILLIAM BLAIR & COMPANY
, 1997
<PAGE>
[INSIDE FRONT COVER GRAPHICS]
ScanSource logo with supporting text: "A leader in 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. Caption: "Leading Vendors."
Left margin with supporting text: "Serving Multiple Commercial and Industrial
Applications"
<TABLE>
<CAPTION>
PICTURE(S) CAPTION DESCRIPTION OF PICTURE
---------- ------- ----------------------
<C> <S> <C>
1 Inventory Person at a lumberyard
management
2 Grocery Point- Retail store cashier
of-Sale
3 Product Person scanning a product
identification
4 Retail Point- Store cashier standing at countertop
of-Sale
5 Production Laboratory scene
control
6 Retail Auto-ID Person with handheld computer at a retail display rack
</TABLE>
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING STABILIZING BIDS, SYNDICATE COVERING TRANSACTIONS AND THE IMPOSITION
OF PENALTY BIDS. FOR A DISCUSSION OF THESE ACTIVITIES, SEE "UNDERWRITING".
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS (IF ANY) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE
COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 103 OF
REGULATION M. SEE "UNDERWRITING".
2
<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 approximately
8,200 products from over 40 hardware and software vendors from its central
warehouse in Memphis, Tennessee to approximately 6,700 reseller customers in
the U.S. and Canada. From fiscal 1994 to fiscal 1997, the Company's net sales
increased at an 80.1% compound annual rate to $93.9 million, while operating
income increased at a 91.9% compound annual rate to $4.6 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 entered into an agreement
with Lucent Technologies, Inc. in February 1997 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.
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.
3
<PAGE>
RECENT DEVELOPMENTS
On September 12, 1997, the Company completed the purchase of substantially
all of the assets of ProCom Supply Corporation ("ProCom"), a wholesale
distributor of telephony products headquartered in San Diego, California (the
"ProCom Acquisition"). The consideration paid in the ProCom Acquisition was
approximately $1.8 million in cash, which the Company funded through borrowings
under the Company's line of credit. ProCom's net sales were $6.6 million in its
fiscal year ended December 31, 1996 and $3.7 million in the seven months ended
July 31, 1997. ProCom markets telephony products from Vodavi, Callware, Comdial
and Panasonic. See "Risk Factors--Risks of Potential Acquisitions."
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered by the Company........ 1,400,000 shares
Common Stock to be Outstanding after the
Offering.................................. 4,650,183 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>
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(1) Based on the number of shares outstanding at September 11, 1997. Excludes
(i) 465,583 shares of Common Stock issuable upon exercise of outstanding
options at a weighted average exercise price of $11.69 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."
4
<PAGE>
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
----------------------------------------
1993(1) 1994 1995 1996 1997
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net sales............................ $2,383 $16,089 $34,235 $55,670 $93,922
Gross profit......................... 342 2,413 4,791 7,814 12,561
Operating income (loss).............. (243) 645 1,580 2,776 4,560
Gain from contract termination, net.. -- -- 1,000 200 --
Net income (loss)(2)................. (243) 352 1,511 1,858 2,540
Fully diluted net income (loss) per
share(2)............................ $(0.31) $ 0.23 $ 0.50 $ 0.53 $ 0.73
Fully diluted weighted average shares
outstanding......................... 773 1,663 3,271 3,560 3,465
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30, 1997
-------------------
AS
ACTUAL ADJUSTED(3)
------- -----------
(UNAUDITED)
<S> <C> <C>
BALANCE SHEET DATA:
Working capital............................................ $20,181 $36,941
Total assets............................................... 38,288 55,048
Total bank debt............................................ 5,391 --
Shareholders' equity....................................... 18,325 40,476
</TABLE>
- --------
(1) Fiscal 1993 consisted of approximately seven months from the Company's
inception in December 1992.
(2) 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 would have been $911,000 and $1,738,000
and $0.32 and $0.50, respectively. See "Certain Transactions."
(3) Adjusted to reflect the sale of 1,400,000 shares of Common Stock by the
Company at an assumed public offering price of $17.25 per share and the
application of the estimated net proceeds therefrom. Does not reflect the
completion of the ProCom Acquisition. 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
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 75.4% and 73.2% of net sales for fiscal 1997 and fiscal 1996,
respectively. Sales of products from the Company's two largest vendors, Symbol
Technologies and IBM Corporation, accounted for 17.2% and 14.1%, respectively,
of net sales for fiscal 1997, and 20.3% and 9.4%, respectively, of net sales
for fiscal 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 little or 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. Expansion of the Company's
existing product markets or entry into new product markets 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 or compete successfully in any new product
markets. 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."
RISKS OF POTENTIAL ACQUISITIONS
The Company's growth strategy includes expanding its business through
strategic acquisitions and investments in complementary businesses. In this
regard, the Company recently completed the ProCom Acquisition. The Company has
not had significant acquisition or investment experience, and there can be no
assurance that the Company will be able to successfully identify additional
suitable acquisition or investment candidates, complete acquisitions, or
integrate acquired businesses into its operations. Acquisitions and
investments involve numerous risks, including difficulties in the assimilation
of the operations, services, products, vendor agreements, and personnel of the
acquired company, the diversion of management's attention and other resources
from other business concerns, entry into markets in which the Company has
little or no prior experience, and the potential loss of key employees,
customers, or contracts of the acquired company. Acquisitions and investments
could also conflict with restrictions in the Company's distribution agreements
with existing vendors, such as Lucent Technologies. The Company is unable to
predict whether or when any prospective acquisition or investment candidate
will become available or the likelihood that any acquisition or investment
will be completed or successfully integrated. The Company's failure to
successfully manage any potential acquisitions or investments in complementary
businesses 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
7
<PAGE>
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 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."
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, Chairman
and 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 $1.0 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 currently 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
8
<PAGE>
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 (whether as a result of mechanical failure, casualty loss, labor
stoppage, other disruption, or any other reason), 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."
RISKS ASSOCIATED WITH EXTENSIONS OF CREDIT
As a marketing enhancement, the Company offers unsecured and secured credit
terms for qualified resellers. Historically, the Company has not experienced
losses from write-offs materially in excess of established reserves. While the
Company evaluates resellers' qualifications for credit and monitors its
extensions of credit, defaults by resellers in timely repayment of these
extensions of credit could have a material adverse effect on the Company's
business, financial condition, or results of operations. See "Business--
Operations."
POTENTIAL "YEAR 2000" PROBLEMS
It is possible that the Company's currently installed computer systems,
software products or other business systems, or those of the Company's vendors
or resellers, working either alone or in conjunction with other software or
systems, will not accept input of, store, manipulate and output dates in the
years 1999, 2000 or thereafter without error or interruption (commonly known
as the "Year 2000" problem). The Company has conducted a review of its
business systems, including its computer systems, and is querying its vendors
and resellers as to their progress in identifying and addressing problems that
their computer systems may face in correctly processing date information as
the year 2000 approaches and is reached. However, there can be no assurance
that the Company will identify all such Year 2000 problems in its computer
systems or those of its vendors or resellers in advance of their occurrence or
that the Company will be able to successfully remedy any problems that are
discovered. The expenses of the Company's efforts to identify and address such
problems, or the expenses or liabilities to which the Company may become
subject as a result of such problems, could have a material adverse effect on
the Company's business, financial condition, and results of operations. In
addition, the purchasing patterns of existing and potential customers may be
affected by Year 2000 problems, which could cause fluctuations in the
Company's sales volumes. See "Business--Operations."
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
9
<PAGE>
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
4,650,183 shares of Common Stock (4,813,783 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,
approximately 31,000 shares issued pursuant to exercise of options which were
registered under a Form S-8 registration statement, 50,000 shares issued
pursuant to exercise of options which were registered under a Form S-3
registration statement, and the 1,400,000 shares offered hereby (1,610,000
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 holders of 435,866 shares
of Common Stock (including all shares beneficially owned by the Company's
officers and directors), and holders of unit purchase options representing
rights to acquire up to 84,000 shares of Common Stock 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 The Robinson-Humphrey Company,
Inc. 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. The
holders of unit purchase options representing rights to acquire up to 84,000
shares of Common Stock are entitled to have their shares registered at the
expiration of the 90-day lockup period under certain conditions. 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--Registration Rights," "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."
10
<PAGE>
USE OF PROCEEDS
The net proceeds from the sale of 1,400,000 shares of Common Stock offered
by the Company hereby at an assumed public offering price of $17.25 per share
are estimated to be approximately $22.2 million ($24.4 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 (including funding of the ProCom Acquisition), with the
remaining proceeds used for general corporate purposes, including working
capital and possible other strategic acquisitions or investments in
complementary businesses. The Company is not currently a party to any
agreements or understandings with respect to any acquisitions or investments
other than the recently completed ProCom Acquisition. 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 and--Risks of Potential
Acquisitions."
At June 30, 1997, the Company's bank debt balance was approximately $5.4
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 June 30, 1997, the
Company's effective interest rate was 7.84%. The Company recently increased
its bank debt balance by approximately $1.8 million to fund the ProCom
Acquisition.
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
mark-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 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............... 18 5/8 14
Fourth quarter.............. 15 13 1/2
Fiscal 1998
First quarter (through
September 11, 1997)........ 17 7/8 13 5/8
</TABLE>
On September 11, 1997, the closing price of the Common Stock on The Nasdaq
National Market was $17.25 per share. On September 11, 1997, there were 49
shareholders of record of Common Stock.
11
<PAGE>
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.
CAPITALIZATION
The following table sets forth the capitalization of the Company at June 30,
1997, and as adjusted to reflect the receipt and application of the net
proceeds from the sale of the shares of Common Stock offered by the Company
hereby:
<TABLE>
<CAPTION>
AS OF JUNE 30, 1997
----------------------
ACTUAL AS ADJUSTED(2)
------- --------------
(IN THOUSANDS)
<S> <C> <C>
Long-term obligations................................ $ 5,391 $ --
Shareholders' equity:
Preferred Stock, no par value; 3,000,000 shares
authorized;
none issued....................................... -- --
Common Stock, no par value; 10,000,000 shares
authorized;
3,249,183 shares issued and outstanding; and
4,649,183 shares issued and outstanding, as
adjusted(1)....................................... 12,307 34,458
Retained earnings.................................. 6,018 6,018
------- -------
Total shareholders' equity......................... 18,325 40,476
------- -------
Total capitalization............................. $23,716 $40,476
======= =======
</TABLE>
- --------
(1) Based on the number of shares outstanding at June 30, 1997. Excludes (i)
466,583 shares of Common Stock issuable upon exercise of outstanding
options at a weighted average exercise price of $11.66 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) Adjusted to reflect the sale of 1,400,000 shares of Common Stock by the
Company at an assumed public offering price of $17.25 per share and the
application of the estimated net proceeds therefrom. Does not reflect the
completion of the ProCom Acquisition. See "Use of Proceeds."
12
<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 four-year period ended June 30, 1997 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 as of
June 30, 1996 and 1997 and for each of the years in the three-year period
ended June 30, 1997 are included elsewhere herein.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
------------------------------------------
1993(1) 1994 1995 1996 1997
------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net sales......................... $2,383 $16,089 $34,235 $55,670 $93,922
Cost of goods sold................ 2,041 13,676 29,444 47,856 81,361
------ ------- ------- ------- -------
Gross profit...................... 342 2,413 4,791 7,814 12,561
Selling, general and
administrative expenses.......... 578 1,718 3,128 4,955 7,918
Amortization of intangibles....... 7 50 83 83 83
------ ------- ------- ------- -------
Total operating expenses........ 585 1,768 3,211 5,038 8,001
------ ------- ------- ------- -------
Operating income (loss)........... (243) 645 1,580 2,776 4,560
Gain from contract termination,
net.............................. -- -- 1,000 200 --
Other income (expense), net(2).... 5 (150) (72) 75 (464)
------ ------- ------- ------- -------
Total other income (expense).... 5 (150) 928 275 (464)
------ ------- ------- ------- -------
Income (loss) before income
taxes............................ (238) 495 2,508 3,051 4,096
Income taxes...................... 5 143 997 1,193 1,556
------ ------- ------- ------- -------
Net income (loss)(3).............. $ (243) $ 352 $ 1,511 $ 1,858 $ 2,540
====== ======= ======= ======= =======
Fully diluted net income (loss)
per share(3)..................... $(0.31) $ 0.23 $ 0.50 $ 0.53 $ 0.73
====== ======= ======= ======= =======
Fully diluted weighted average
shares outstanding............... 773 1,663 3,271 3,560 3,465
<CAPTION>
AS OF JUNE 30,
------------------------------------------
1993 1994 1995 1996 1997
------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital................... $ 216 $ 4,888 $ 6,530 $17,061 $20,181
Total assets...................... 2,017 6,740 13,939 28,742 38,288
Total bank debt................... 120 -- 1,200 3,779 5,391
Total shareholders' equity........ 212 4,751 6,396 15,413 18,325
</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 would have been $911,000 and $1,738,000
and $0.32 and $0.50, respectively.
13
<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, a POS distributor. In March 1994, the Company completed
an initial public offering of Common Stock. In July 1994, the Company acquired
MicroBiz Corp. ("MicroBiz"), another POS distributor, and in March 1996, it
purchased Gates' remaining interest in the Company. In addition to
distributing Auto-ID and POS products, the Company entered into an agreement
with Lucent Technologies, Inc. in February 1997 for the distribution of
telephony products, including PBXs, key systems, telephone handsets, cabling,
and voice mail.
From fiscal 1994 to fiscal 1997, net sales increased at a compound annual
rate of 80.1% to $93.9 million, while over the same period operating income
increased at a 91.9% compound annual rate to $4.6 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 have 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, Inc.
("Transition") to enhance the Company's market presence through the
sponsorship of regional quarterly trade shows to showcase specialty technology
hardware and software solutions for reseller customers. In fiscal 1997 the
Company began distributing Intermec's full line of bar code products, and
formed a new division called "Catalyst Telecom" to distribute business
telephony solutions to interconnect resellers.
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 and Catalyst Telecom.
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.
14
<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>
FISCAL YEAR ENDED JUNE 30,
----------------------------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Net sales................................. 100.0% 100.0% 100.0%
Cost of goods sold........................ 86.0 86.0 86.6
-------- -------- --------
Gross profit.............................. 14.0 14.0 13.4
Selling, general and administrative ex-
penses................................... 9.2 8.9 8.4
Amortization of intangibles............... 0.2 0.1 0.1
-------- -------- --------
Total operating expenses.............. 9.4 9.0 8.5
-------- -------- --------
Operating income.......................... 4.6 5.0 4.9
Gain from contract termination, net....... 2.9 0.4 --
Other income (expense), net............... (0.2) 0.1 (0.5)
-------- -------- --------
Total other income (expense).......... 2.7 0.5 (0.5)
-------- -------- --------
Income before income taxes................ 7.3 5.5 4.4
Income taxes.............................. 2.9 2.2 1.7
-------- -------- --------
Net income................................ 4.4% 3.3% 2.7%
======== ======== ========
</TABLE>
COMPARISON OF FISCAL YEARS ENDED JUNE 30, 1997, 1996, AND 1995
Net Sales. Net sales consist of sales of specialty technology products
billed to customers when shipped, net of sales discounts and returns. Net
sales increased by 68.7% to $93.9 million in fiscal 1997 from $55.7 million in
fiscal 1996, and by 62.6% from $34.2 million in fiscal 1995. 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 the reseller channel.
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 increased by 60.7%
to $12.6 million in fiscal 1997 from $7.8 million in fiscal 1996, and by 63.1%
from $4.8 million in fiscal 1995. Gross profit as a percentage of net sales
was 13.4% in fiscal 1997, 14.0% in fiscal 1996, and 14.0% in fiscal 1995. This
decrease in gross profit as a percentage of net sales in fiscal 1997 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 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 Catalyst Telecom; 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 increased by 58.8% to $8.0 million in fiscal 1997 from
$5.0 million in fiscal 1996, and by 56.9% from $3.2 million in fiscal 1995.
Operating expenses as a percentage of net sales declined to 8.5% in fiscal
1997, from 9.0% in fiscal 1996 and 9.4% in fiscal 1995. The decrease in
operating expenses as a percentage of net sales resulted from efficiencies
gained through increased sales volumes.
15
<PAGE>
Operating Income. Operating income increased by 64.3% to $4.6 million in
fiscal 1997 from $2.8 million in fiscal 1996, and by 75.7% from $1.6 million
in fiscal 1995, 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 was 4.9% in fiscal 1997, 5.0% in fiscal 1996 and 4.6%
in fiscal 1995.
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 was $380,000
for fiscal 1997 representing interest paid on borrowings under the Company's
line of credit. 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 1996.
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 $1.6 million, $1.2 million and $1.0
million, in fiscal 1997, 1996, and 1995, respectively, reflecting an effective
tax rate of 38.0%, 39.1%, and 39.8%, respectively.
Net Income. Net income increased by 36.7% to $2.5 million in fiscal 1997
from $1.9 million in fiscal 1996, and by 23.0% from $1.5 million in fiscal
1995. Net income as a percentage of net sales was 2.7% for fiscal 1997, 3.3%
for fiscal 1996, and 4.4% for fiscal 1995. 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.
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
---------------------------------------------------------------------------
FISCAL 1996 FISCAL 1997
------------------------------------ --------------------------------------
SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30,
1995 1995 1996 1996 1996 1996 1997 1997
--------- -------- -------- -------- --------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............... $10,788 $12,489 $14,355 $18,038 $19,673 $22,437 $23,644 $28,169
Cost of goods sold...... 9,211 10,716 12,290 15,639 16,975 19,407 20,470 24,510
------- ------- ------- ------- ------- ------- ------- -------
Gross profit............ 1,577 1,773 2,065 2,399 2,698 3,030 3,174 3,659
Selling, general and
administrative
expenses............... 1,053 1,164 1,270 1,468 1,668 1,889 2,000 2,362
Amortization of
intangibles............ 21 21 21 20 20 21 20 20
------- ------- ------- ------- ------- ------- ------- -------
Total operating
expenses............ 1,074 1,185 1,291 1,488 1,688 1,910 2,020 2,382
------- ------- ------- ------- ------- ------- ------- -------
Operating income........ 503 588 774 911 1,010 1,120 1,154 1,277
Gain from contract
termination, net....... 200 -- -- -- -- -- -- --
Other income (expense),
net.................... (6) 51 30 -- (81) (88) (164) (132)
------- ------- ------- ------- ------- ------- ------- -------
Total other income
(expense)........... 194 51 30 -- (81) (88) (164) (132)
------- ------- ------- ------- ------- ------- ------- -------
Income before income
taxes.................. 697 639 804 911 929 1,032 990 1,145
Income taxes............ 274 249 315 355 353 392 376 435
------- ------- ------- ------- ------- ------- ------- -------
Net income.............. $ 423 $ 390 $ 489 $ 556 $ 576 $ 640 $ 614 $ 710
======= ======= ======= ======= ======= ======= ======= =======
Fully diluted net income
per share.............. $ 0.13 $ 0.11 $ 0.13 $ 0.16 $ 0.17 $ 0.18 $ 0.18 $ 0.21
======= ======= ======= ======= ======= ======= ======= =======
Fully diluted weighted
avg. shares
outstanding............ 3,412 3,693 3,670 3,466 3,455 3,493 3,471 3,432
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------------------------
FISCAL 1996 FISCAL 1997
------------------------------------ ------------------------------------
SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30,
1995 1995 1996 1996 1996 1996 1997 1997
--------- -------- -------- -------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............... 100.0% 100.0% 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 86.6 87.0
----- ----- ----- ----- ----- ----- ----- -----
Gross profit............ 14.6 14.2 14.4 13.3 13.7 13.5 13.4 13.0
Selling, general and
administrative
expenses............... 9.8 9.3 8.8 8.1 8.5 8.4 8.4 8.4
Amortization of
intangibles............ 0.2 0.2 0.2 0.1 0.1 0.1 0.1 0.1
----- ----- ----- ----- ----- ----- ----- -----
Total operating
expenses............ 10.0 9.5 9.0 8.2 8.6 8.5 8.5 8.5
----- ----- ----- ----- ----- ----- ----- -----
Operating income........ 4.6 4.7 5.4 5.1 5.1 5.0 4.9 4.5
Gain from contract
termination, net....... 1.9 -- -- -- -- -- -- --
Other income (expense),
net.................... (0.1) 0.4 0.2 -- (0.4) (0.4) (0.7) (0.5)
----- ----- ----- ----- ----- ----- ----- -----
Total other income
(expense)........... 1.8 0.4 0.2 -- (0.4) (0.4) (0.7) (0.5)
----- ----- ----- ----- ----- ----- ----- -----
Income before income
taxes.................. 6.4 5.1 5.6 5.1 4.7 4.6 4.2 4.1
Income taxes............ 2.5 2.0 2.2 2.0 1.8 1.7 1.6 1.5
----- ----- ----- ----- ----- ----- ----- -----
Net income.............. 3.9% 3.1% 3.4% 3.1% 2.9% 2.9% 2.6% 2.5%
===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
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 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 June 30, 1997, the interest rate on the line was 7.84%, and the
outstanding balance was $5.4 million, on a borrowing base of $14.6 million,
leaving $9.2 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's lien.
Operating activities for fiscal 1997 used cash in the amount of $185,000.
For this period, cash was used to fund a $4.1 million increase in receivables
and a $3.2 million increase in inventory, net of a corresponding $5.1 million
increase in trade accounts payable. In April 1997, the Company returned $4.1
million of inventory to
17
<PAGE>
IBM under a stock rotation which reduced the Company's inventory and related
trade accounts payable. For fiscal 1996, net cash in the amount of $8.3
million was used in operating activities, primarily as the result of higher
levels of inventory and receivables.
Investing activities for fiscal 1997 used cash in the amount of $1.1 million
for capital expenditures. Cash used in investing activities for fiscal 1996
was $904,000 and included $659,000 for capital expenditures and payments of
$202,000 to MicroBiz in connection with its acquisition by the Company.
Cash provided by financing activities for fiscal 1997 was $1.3 million,
consisting primarily of borrowings of $1.6 million under the Company's line of
credit offset by deferred offering costs of $390,000. 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 option, 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 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.
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 STANDARD
In February 1997, the Financial Accounting Standards Board issued Financial
Accounting Standards No. 128, "Earnings Per Share." Statement No. 128 is
effective for financial statements issued for interim and annual periods
ending after December 31, 1997, and establishes standards for computing and
presenting earnings per share ("EPS"). Early adoption of Statement No. 128 is
not permitted. Once adopted, Statement No. 128 requires previously reported
EPS data to be restated to reflect its provisions. Statement No. 128
simplifies the standards for computing EPS previously found in APB Opinion No.
15, "Earnings Per Share", and then makes them comparable to international EPS
standards. It replaces the presentation of primary EPS with the presentation
of basic EPS and requires dual presentation of basic and fully diluted EPS on
the face of the income statement and a reconciliation of the numerator and
denominator of the basic EPS computation to the numerator and denominator of
the fully diluted EPS computation. The Company will adopt Statement No. 128 in
fiscal 1998, which is not expected to have a negative impact on previously
reported EPS data.
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 approximately 8,200 products from
over 40 hardware and software vendors from its central warehouse in Memphis,
Tennessee to approximately 6,700 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 entered into an
agreement with Lucent Technologies in February 1997 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 currently 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 approximately
8,200 products from over 40 vendors and intends to continue broadening its
product assortment and base of vendors. In fiscal 1997, 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 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 entered
into an agreement with Lucent Technologies in February 1997 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.
For example, the Company recently completed the ProCom Acquisition. See
"Prospectus Summary--Recent Developments." While the Company continues to
evaluate opportunities, it is not currently a party to any other agreements
or understandings with respect to any such acquisitions or investments.
21
<PAGE>
PRODUCTS AND VENDORS
The Company currently markets approximately 8,200 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:
<TABLE>
<CAPTION>
Bar Code Cash Credit Auth. Customer Ribbons &
Printers Decoders Scanners Software Verifiers Drawers Products Displays Labels
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Advent Corporation X
- ------------------------------------------------------------------------------------------------------------------------------------
American Power Conversion
- ------------------------------------------------------------------------------------------------------------------------------------
Cherry Electrical
- ------------------------------------------------------------------------------------------------------------------------------------
Cognitive Solutions, Inc. X X
- ------------------------------------------------------------------------------------------------------------------------------------
CoStar Corporation X
- ------------------------------------------------------------------------------------------------------------------------------------
Datacap Systems, Inc. X
- ------------------------------------------------------------------------------------------------------------------------------------
Datamax Corporation X X
- ------------------------------------------------------------------------------------------------------------------------------------
Donner Media Incorporated X
- ------------------------------------------------------------------------------------------------------------------------------------
Eltron International, Inc. X X X
- ------------------------------------------------------------------------------------------------------------------------------------
Epson America, Inc. X
- ------------------------------------------------------------------------------------------------------------------------------------
GrafTek X
- ------------------------------------------------------------------------------------------------------------------------------------
Hand Held Products
- ------------------------------------------------------------------------------------------------------------------------------------
IBM Corporation X X
- ------------------------------------------------------------------------------------------------------------------------------------
IC Verify X
- ------------------------------------------------------------------------------------------------------------------------------------
Informatics, Inc. X
- ------------------------------------------------------------------------------------------------------------------------------------
Intermec Corporation X 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 X
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Portable Data POS POS Receipt Radio Freq. Touch UPS Backup
Collectors Computers Keyboards Printers Products Screens Systems
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Advent Corporation
- ------------------------------------------------------------------------------------------------------------------------------------
American Power Conversion X
- ------------------------------------------------------------------------------------------------------------------------------------
Cherry Electrical X
- ------------------------------------------------------------------------------------------------------------------------------------
Cognitive Solutions, Inc.
- ------------------------------------------------------------------------------------------------------------------------------------
CoStar Corporation
- ------------------------------------------------------------------------------------------------------------------------------------
Datacap Systems, Inc.
- ------------------------------------------------------------------------------------------------------------------------------------
Datamax Corporation
- ------------------------------------------------------------------------------------------------------------------------------------
Donner Media Incorporated
- ------------------------------------------------------------------------------------------------------------------------------------
Eltron International, Inc.
- ------------------------------------------------------------------------------------------------------------------------------------
Epson America, Inc. X X
- ------------------------------------------------------------------------------------------------------------------------------------
GrafTek
- ------------------------------------------------------------------------------------------------------------------------------------
Hand Held Products X
- ------------------------------------------------------------------------------------------------------------------------------------
IBM Corporation X X X X
- ------------------------------------------------------------------------------------------------------------------------------------
IC Verify
- ------------------------------------------------------------------------------------------------------------------------------------
Informatics, Inc.
- ------------------------------------------------------------------------------------------------------------------------------------
Intermec Corporation
- ------------------------------------------------------------------------------------------------------------------------------------
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 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
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
22
<PAGE>
In addition, the Company entered into an agreement with Lucent Technologies
in February 1997 for the distribution of telephony products, including PBXs,
key systems, telephone handsets, and voice mail. The Company anticipates
adding additional telephony product lines (Vodavi, Callware, Comdial and
Panasonic) as the result of completion of the ProCom Acquisition. See
"Prospectus Summary--Recent Developments."
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 approximately 6,700
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 1997. The
Company segments its significant 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 37 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. Sales representatives negotiate pricing directly with their
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
23
<PAGE>
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 established a
business development team focused on recruiting IBM "partners", and has thus
far signed 98 IBM independent software vendors in 80 different geographic and
vertical markets. The team has also recruited over 630 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. The Company's Professional Services Group
assists resellers with pen-based programming and radio-frequency data
collection applications, areas in which resellers need greater technical
expertise. 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 130 user stations (terminals, printers,
personal computers, and hand-held terminals) is less than one-half second. The
Company has recently converted to a UNIX-based system to further enhance its
information system capabilities. See "Risk Factors--Potential "Year 2000"
Problems."
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 FedEx and UPS 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.
24
<PAGE>
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 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. In connection with plans to
expand its markets in Canada, the Company is considering development of a
Canadian warehouse in order to centralize intra-Canadian distribution and
realize savings on importation duties and related costs. 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 currently 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.
See "Risk Factors--Dependence on Centralized Functions."
Credit Services
The Company routinely 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. See "Risk Factors--Risks
Associated with Extensions of Credit."
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
25
<PAGE>
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. See "Risk Factors--
Competition."
SERVICE MARKS
The Company conducts its business under the trademark and service mark
"ScanSource." The Company has been issued registrations for the mark
"ScanSource" in the United States and Canada. The Company is also pursuing
registrations of its trademarks and service marks "Catalyst" and "Catalyst
Telecom" in the United States and Canada. The Company does not believe that
its operations are dependent upon any of its trademarks or service marks. 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.
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. 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.
EMPLOYEES
As of August 31, 1997, the Company had 131 employees, none of whom was a
member of an industry trade union or collective bargaining unit. The Company
considers its 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.
26
<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.......... 44 Chairman of the Board and Chief Executive Officer
Michael L. Bauer.......... 40 President and Director
Jeffery A. Bryson......... 37 Chief Financial Officer and Treasurer
Robert S. McLain, Jr...... 37 Vice President of Marketing
Steven R. Fischer(1)...... 52 Director
James G. Foody(1)......... 67 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., a personal
computer manufacturer. From 1983 to 1991, Mr. Owings held various positions
with Gates 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. From July 1996 until April 1997, he was 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.
ROBERT S. MCLAIN, JR. has served as the Company's Vice President of
Marketing since September 1997. Prior to joining the Company, from July 1995
to September 1997, Mr. McLain served as President of Transition. From July
1993 to June 1995, Mr. McLain was Director of Marketing with Gates, and from
July 1991 to June 1993 he was a senior account executive with a broadcasting
firm in Greenville, South Carolina.
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 at 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."
27
<PAGE>
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.
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, President, and Chief Financial Officer (the
"Named Executive Officers") for fiscal 1997, 1996 and 1995. 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............................ 1997 $96,000 $16,225 107,500
Chairman of the Board and 1996 77,532 -- --
Chief Executive Officer 1995 72,000 -- --
Michael L. Baur............................. 1997 87,000 109,327 51,000
President 1996 87,000 46,554 --
1995 72,000 57,550 30,000
Jeffery A. Bryson........................... 1997 60,000 73,434 17,500
Chief Financial Officer and 1996 60,000 16,580 --
Treasurer 1995 60,000 11,096 8,000
</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.
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<PAGE>
RECENT OPTION GRANTS
The following table sets forth the stock options granted to the Named
Executive Officers during fiscal 1997:
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE VALUE
AT ASSUMED ANNUAL
RATES OF STOCK
PERCENT OF TOTAL PRICE APPRECIATION
NUMBER OF SECURITIES OPTIONS GRANTED FOR OPTION TERM
UNDERLYING OPTIONS TO EMPLOYEES IN EXERCISE EXPIRATION ------------------
NAME GRANTED LAST FISCAL YEAR PRICE DATE 5% 10%
---- -------------------- ---------------- -------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
STEVEN H. OWINGS
Incentive Stock
Option................ 7,500 2.9 $14.50 12/06 $ 68,400 $ 173,325
Non-Qualified Option... 30,000 11.7 $14.50 12/06 273,600 693,300
Non-Qualified Option... 70,000 27.4 $16.50 1/07 726,600 1,841,000
MICHAEL L. BAUR
Incentive Stock
Option................ 25,000 9.8 $11.25 7/06 177,000 448,250
Non-Qualified Option... 16,000 6.3 $14.50 12/06 145,920 369,760
Non-Qualified Option... 10,000 3.9 $16.50 1/07 103,800 263,000
JEFFERY A. BRYSON
Incentive Stock
Option................ 5,000 2.0 $11.25 7/06 35,400 89,650
Incentive Stock
Option................ 7,500 2.9 $14.50 12/06 68,400 173,325
Non-Qualified Option... 5,000 2.0 $16.50 1/07 51,900 131,500
</TABLE>
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,
1997. No options granted by the Company were exercised by any Named Executive
Officers during fiscal 1997.
FISCAL 1997 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>
Steven H. Owings........ 100,000 7,500 $ -- $ --
Michael L. Baur......... 50,000 51,000 370,473 137,652
Jeffery A. Bryson....... 20,334 15,166 147,349 31,776
</TABLE>
- --------
(1) Based on a per share price of $14.375, the closing price of the Common
Stock as reported on The Nasdaq National Market on June 30, 1997, 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
29
<PAGE>
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 not be 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 June 30, 1997, the Company had granted options under the 1993 Employee
Plan for 216,584 shares of Common Stock, of which options for 194,583 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.
At June 30, 1997, 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
30
<PAGE>
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.
31
<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 and 1997 the Company
renegotiated the loan to include additional advances of $43,000 and $100,000,
respectively, and extended the term of the note to June 2000. The loan bears
interest at 8.5% and is secured by a pledge of 15,000 shares of Common Stock
owned by Mr. Baur. The highest principal balance on the loan during fiscal
1997 was $183,000, which is also the current principal balance. If the
Underwriters' over-allotment option is exercised, Mr. Baur intends to use a
portion of the net proceeds from the sale of his shares of Common Stock in
this offering to repay in full his loan from the Company. See "Principal and
Selling Shareholders".
Steven H. Owings, Chairman of the Board and Chief Executive Officer of the
Company, was a member of the Board of Directors of Globelle Corporation
("Globelle"), an international distributor of personal computer products, from
July 1996 until April 1997 when he resigned. Through 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 January 1997, 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 from January to March
1997. The Company also has a software license agreement with Globelle. Prior
to opening its own account with FedEx in June 1997, the Company utilized
Globelle's FedEx shipping contract. In July 1995 the Company and Globelle
formed Transition as a joint venture to provide certain marketing services,
such as the Company's "Solutions USA" quarterly trade shows. In July 1997,
Transition repurchased Globelle's ownership interest, as a result of which the
Company now owns 58% and Dennis B. Gates the remaining 42% of Transition. The
Company intends to exercise its option to acquire Mr. Gates' 42% interest in
Transition for a price not to exceed $220,100. The Company purchased $123,000
of marketing services from Transition during fiscal 1997. Mr. Owings is a
member of the Board of Directors of Transition. Management believes that the
terms of such transactions with Globelle and Transition 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 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 $60,000 during fiscal 1995. The Company also received inventory
financing from Gates, for which it paid interest of approximately $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 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.
32
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock at September 11, 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 Shareholders, assuming the Underwriters exercise their over-
allotment option in full.
<TABLE>
<CAPTION>
SHARES SHARES
BENEFICIALLY BENEFICIALLY
OWNED PRIOR TO OWNED AFTER
OFFERING(1) OFFERING(1)(2)
------------------ ------------------
NAME NUMBER PERCENTAGE NUMBER PERCENTAGE
- ---- ------- ---------- ------- ----------
<S> <C> <C> <C> <C>
Steven H. Owings(2)(3).................. 312,300 9.3% 312,300 6.6%
Richard Kaufman(4)...................... 287,000 8.8 287,000 6.2
Walter Scheuer(4)....................... 269,000 8.3 269,000 5.8
Barry Rubenstein(5)..................... 210,000 6.4 210,000 4.5
Wayne S. Reisner(4)..................... 209,000 6.4 209,000 4.5
Dennis B. Gates(6)...................... 190,000 5.8 190,000 4.1
Eli Oxenhorn(7)......................... 190,000 5.8 190,000 4.0
Michael L. Baur(2)(8)................... 65,000 2.0 65,000 1.4
Jeffery A. Bryson(2)(9)................. 20,734 * 20,734 *
James G. Foody(10)...................... 17,500 * 17,500 *
Steven R. Fischer(11)................... 16,000 * 16,000 *
Robert S. McLain, Jr.(12)............... 8,883 * 8,883 *
All directors and executive officers as
a group (6 persons)(2)................. 444,217 12.8 444,217 9.0
</TABLE>
- --------
* Amount represents less than 1.0%
(1) Applicable percentage of ownership at September 11, 1997, is based upon
3,250,183 shares of Common Stock outstanding. Applicable percentage of
ownership after completion of this offering is based upon 4,650,183
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 have
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 20,000 shares and will beneficially own 292,300
shares, or 5.9% of the Common Stock outstanding after this offering; (ii)
Mr. Baur will sell 30,000 shares and will beneficially own 35,000 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 10,734
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 3,333 shares, or less than 1.0%
of the Common Stock outstanding after this offering; and (vii) all
officers and directors as a group (6 persons) will beneficially own
384,217 shares, or 7.7% of the Common Stock outstanding after this
offering.
(3) 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. Does not include 7,500 shares issuable pursuant to options
granted by the Company which are not currently exercisable.
(4) 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
33
<PAGE>
the benefit of Mr. Scheuer's children holding 66,000 shares. While such
schedules relate to an aggregate of 385,000 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.
(5) The business address for the named individual is 68 Wheatley Road,
Brookville, New York 11545. Includes 50,000 shares issuable pursuant to
currently exercisable warrants granted by the Company; 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.
(6) The business address for the named individual is 851 Arlington Boulevard,
El Cerrito, California 94530.
(7) The business address for the named individual is 56 Intervale, Roslyn, New
York 11576. Includes 50,000 shares issuable pursuant to currently
exercisable warrants granted by the Company.
(8) Includes 50,000 shares issuable pursuant to currently exercisable options
granted by the Company. Includes 15,000 shares pledged to secure a loan
from the Company. Does not include 51,000 shares issuable pursuant to
options granted by the Company which are not currently exercisable.
(9) Includes 20,334 shares issuable pursuant to currently exercisable options
granted by the Company. Does not include 15,166 shares issuable pursuant
to options granted by the Company which are not currently exercisable.
(10) Includes 15,000 shares issuable pursuant to currently exercisable options
granted by the Company and 500 shares held in the estate of Mr. Foody's
wife, for which he is the personal representative.
(11) Includes 15,000 shares issuable pursuant to currently exercisable options
granted by the Company.
(12) Includes 8,333 shares issuable pursuant to currently exercisable options
granted by the Company.
34
<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 September 11, 1997, 3,250,183 shares of
Common Stock were outstanding, held of record by 49 shareholders. After
completion of this offering, there will be 4,650,183 shares of Common Stock
outstanding (4,813,783 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
35
<PAGE>
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 Securities
Act and to convert the unit purchase options into shares and warrants based
upon a formula indexed to the market price of the Common Stock. At August 31,
1997, 42,000 unit purchase options remained outstanding, representing the
right of the holders to acquire up to 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
36
<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 up to 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, if requested
by the holders, by registering such Registrable Securities under the
Securities Act 90 days after the effective date of the 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 demand and piggyback registration rights of such holders
terminate in March 1999 and March 2001, respectively.
37
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have outstanding
4,650,183 shares of Common Stock (4,813,783 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,
approximately 31,000 shares issued pursuant to exercise of options which were
registered under a Form S-8 registration statement, 50,000 shares issued
pursuant to exercise of options which were registered under a Form S-3
registration statement, and the 1,400,000 shares offered hereby (1,610,000
shares if the Underwriters' over-allotment option is exercised in full) will
be freely tradeable without restriction or further registration under the
Securities Act 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.
In addition, at June 30, 1997, options and warrants to purchase an aggregate
of 650,583 shares of Common Stock were outstanding, of which options and
warrants for 466,166 shares were currently exercisable. See "Management--
Recent Option Grants" and "--Stock Option Plans."
The Company, all directors and executive officers, and certain other
beneficial owners of an aggregate of 435,866 shares of Common Stock as of
September 11, 1997 (excluding shares offered hereby), and holders of unit
purchase options representing rights to acquire up to 84,000 shares of Common
Stock, 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 The Robinson-Humphrey Company,
Inc. Also, beneficial holders of an additional 385,000 shares of Common Stock
as of September 4, 1997 (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. In addition, the holders of unit purchase options
representing rights to purchase up to 84,000 shares are entitled to have their
shares registered at the exiration of the 90-day lockup period under certain
conditions. See "Underwriting" and "Description of Capital Stock--Registration
Rights."
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 one year, 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 46,502 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 two 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."
38
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below, for whom The Robinson-Humphrey Company, Inc. and
William Blair & Company, L.L.C. are acting as representatives (collectively,
the "Representatives"), have severally agreed to purchase from the Company,
and the Company has agreed to sell to the Underwriters, the number of shares
of Common Stock set forth opposite their respective names.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
------------ ---------
<S> <C>
The Robinson-Humphrey Company, Inc.................................
William Blair & Company, L.L.C.....................................
---------
Total............................................................ 1,400,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters thereunder are subject to approval of certain legal matters by
counsel and to various other conditions. The nature of the Underwriters'
obligations is such that they are committed to purchase all shares of Common
Stock offered hereby (other than the shares subject to the Underwriters' over-
allotment option) if any are purchased.
The Underwriters propose to offer the shares of Common Stock directly to the
public at the public offering price set forth on the cover page of this
Prospectus and to certain dealers at such price less a concession not in
excess of $ per share. The Underwriters may allow, and such dealers may
reallow, a concession not in excess of $ per share in sales to certain
other dealers. After the shares of Common Stock are released for sale to the
public, the offering price and other selling terms may be changed.
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 71,400 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
138,600 additional shares of Common Stock from the Company, all at the same
price per share that the Company will receive for the 1,400,000 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 1,400,000 shares offered
hereby. If purchased, such additional shares will be sold by the Underwriters
on the same terms as those on which the 1,400,000 shares are being sold.
Pursuant to the terms of lock-up agreements, holders of approximately
435,866 shares of the Common Stock and holders of unit purchase options
representing rights to acquire up to 84,000 shares of Common Stock have agreed
with the Representatives that, except for 71,400 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 The Robinson-Humphrey Company, Inc. 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 Company and the Selling Shareholders have agreed to indemnify the
several Underwriters against certain liabilities, including liabilities under
the Securities Act.
The Underwriters do not intend to confirm sales to any accounts over which
they exercise discretionary authority.
39
<PAGE>
In connection with this offering, certain Underwriters and selling group
members (if any) or their respective affiliates who are qualified registered
market makers on The Nasdaq National Market may engage in passive market-
making transactions in the Common Stock on The Nasdaq National Market in
accordance with Rule 103 of Regulation M, during the one business day prior to
the pricing of the offering before the commencement of offers or sales of the
Common Stock. The passive market-making transactions must comply with
applicable volume and price limitations and be identified as such. In general,
a passive market maker must display its bid at a price not in excess of the
highest independent bid for the security; however, if all independent bids are
lowered below the passive market maker's bid, such bid must then be lowered
when certain purchase limits are exceeded.
Until the distribution of the Common Stock is completed, rules of the
Securities and Exchange Commission (the "Commission") may limit the ability of
the Underwriters to bid for and purchase shares of Common Stock. As an
exception to these rules, the Representatives are permitted to engage in
certain transactions that stabilize the price of the Common Stock. Such
transactions may consist of bids or purchases for the purpose of pegging,
fixing or maintaining the price of the Common Stock. If the Underwriters
create a short position in the Common Stock in connection with this offering
(i.e., if they sell more shares of the Common Stock than are set forth on the
cover page of this Prospectus), the Representatives may reduce the short
position by purchasing the Common Stock in the open market. The
Representatives may elect to reduce any short position by exercising all or
part of the over-allotment option described herein.
The Representatives also may impose a penalty bid on certain Underwriters
and selling group members. This means that if the Representatives purchase
shares of the Common Stock in the open market to reduce the Underwriters'
short position or to stabilize the price of the Common Stock, they may reclaim
the amount of the selling concession from the Underwriters and selling group
members who sold those shares as part of this offering. In general, purchases
of a security for the purpose of stabilization or to reduce a syndicate short
position could cause the price of the security to be higher than it might
otherwise be in the absence of such purchases. The imposition of a penalty bid
might have an effect on the price of a security to the extent that it were to
discourage resales of the security by purchasers in the offering.
Neither the Company nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the
transactions described above may have on the price of the Common Stock. In
addition, neither the Company nor any of the Underwriters makes any
representation that the Representatives will engage in such transactions or
that such transactions, once commenced, will not be discontinued without
notice.
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 August 31, 1997,
certain attorneys with Nexsen Pruet Jacobs & Pollard, LLP held 8,800 shares of
Common Stock. Certain legal matters in connection with the offering will be
passed upon for the Underwriters by Alston & Bird LLP, Atlanta, Georgia.
EXPERTS
The financial statements of the Company as of June 30, 1996 and 1997, and
for each of the years in the three-year period ended June 30, 1997, have been
included herein and in the registration statement 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.
40
<PAGE>
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, 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.
41
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report............................................. F-2
Balance Sheets as of June 30, 1996 and 1997.............................. F-3
Statements of Income for the years ended June 30, 1995, 1996 and 1997.... F-4
Statements of Shareholders' Equity for the years ended June 30, 1995,
1996 and 1997........................................................... F-5
Statements of Cash Flows for the years ended June 30, 1995, 1996 and
1997.................................................................... F-6
Notes to Financial Statements............................................ F-7
</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, 1996 and 1997 and the related statements of income, shareholders'
equity and cash flows for each of the years in the three-year period ended
June 30, 1997. 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, 1996 and 1997 and the results of its operations and its cash flows for
each of the years in the three-year period ended June 30, 1997, in conformity
with generally accepted accounting principles.
Greenville, South Carolina KPMG Peat Marwick LLP
August 1, 1997
F-2
<PAGE>
SCANSOURCE, INC.
BALANCE SHEETS
JUNE 30, 1996 AND 1997
<TABLE>
<CAPTION>
1996 1997
------- ------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets
Receivables:
Trade, less allowance for doubtful accounts of $527,000
and
$1,174,000 at June 30, 1996 and 1997, respectively....... $ 7,463 11,385
Other..................................................... 531 732
------- ------
7,994 12,117
Inventories................................................. 17,538 20,724
Prepaid expenses and other.................................. 52 300
Deferred tax asset.......................................... 1,001 1,565
------- ------
Total current assets.................................... 26,585 34,706
------- ------
Property and equipment:
Furniture and equipment..................................... 1,261 2,007
Leasehold improvements...................................... 286 609
------- ------
1,547 2,616
Less accumulated depreciation............................... (363) (736)
------- ------
1,184 1,880
Intangible assets, net........................................ 871 788
Deferred offering costs....................................... -- 390
Other assets.................................................. 102 524
------- ------
Total assets............................................ $28,742 38,288
======= ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable...................................... $ 8,287 13,397
Accrued compensation cost................................... 97 207
Accrued expenses and other liabilities...................... 600 664
Income tax payable.......................................... 540 257
------- ------
Total current liabilities............................... 9,524 14,525
------- ------
Deferred tax liability........................................ 26 47
Line of credit................................................ 3,779 5,391
------- ------
Total liabilities....................................... 13,329 19,963
------- ------
Shareholders' equity:
Preferred stock, no par value; 3,000,000 shares authorized,
none issued................................................ -- --
Common stock, no par value; 10,000,000 shares authorized;
3,235,183 and 3,249,183 shares issued and outstanding at
June 30, 1996 and 1997, respectively....................... 11,935 12,307
------- ------
11,935 12,307
Retained earnings........................................... 3,478 6,018
------- ------
Total shareholders' equity.............................. 15,413 18,325
Commitments ................................................
------- ------
Total liabilities and shareholders' equity.............. $28,742 38,288
======= ======
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
SCANSOURCE, INC.
STATEMENTS OF INCOME
YEARS ENDED JUNE 30, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
1995 1996 1997
------------- ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net sales........................... $ 34,235 55,670 93,922
Cost of goods sold.................. 29,444 47,856 81,361
------------- ------------ ------------
Gross profit.................... 4,791 7,814 12,561
Selling, general and administrative
expenses........................... 3,128 4,955 7,918
Amortization of intangibles......... 83 83 83
------------- ------------ ------------
Total operating expenses........ 3,211 5,038 8,001
------------- ------------ ------------
Operating income................ 1,580 2,776 4,560
Other income (expense):
Gain from contract termination,
net.............................. 1,000 200 --
Other income (expense), net....... (72) 75 (464)
------------- ------------ ------------
Total other income (expense).... 928 275 (464)
------------- ------------ ------------
Income before income taxes...... 2,508 3,051 4,096
Income taxes........................ 997 1,193 1,556
------------- ------------ ------------
Net income...................... $ 1,511 1,858 2,540
============= ============ ============
Per share data:
Primary
Net income...................... $ .50 .53 .73
============= ============ ============
Weighted average shares
outstanding.................... 3,271 3,556 3,460
============= ============ ============
Fully diluted
Net income...................... $ .50 .53 .73
============= ============ ============
Weighted average shares
outstanding.................... 3,271 3,560 3,465
============= ============ ============
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
SCANSOURCE, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
COMMON STOCK
SUBJECT TO
COMMON PUT/CALL RETAINED
STOCK OPTION EARNINGS TOTAL
------- ------------ -------- ------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
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.............................. 32 -- -- 32
Tax benefit from deductible
compensation arising from exercise of
stock options........................ 165 -- -- 165
Issuance of stock options............. 175 -- -- 175
Net income............................ -- -- 2,540 2,540
------- ---- ----- ------
Balance at June 30, 1997................ $12,307 -- 6,018 18,325
======= ==== ===== ======
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
SCANSOURCE, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
1995 1996 1997
------- ------- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income.......................................... $ 1,511 1,858 2,540
Adjustments to reconcile net income to net cash used
in operating activities:
Depreciation....................................... 79 238 373
Amortization of intangible assets.................. 83 83 83
Deferred income taxes, net......................... (477) (347) (543)
Deferred gain...................................... 200 (200) --
Other, net......................................... (3) -- --
Changes in operating assets and liabilities:
Receivables........................................ (1,710) (3,810) (4,123)
Inventories........................................ (6,037) (11,232) (3,186)
Prepaid expenses and other......................... 4 (3) (248)
Due from Gates/FA.................................. (750) 750 --
Deposit with Gates/FA.............................. 1,266 -- --
Trade accounts payable............................. 2,685 4,909 5,110
Accrued compensation............................... 54 5 110
Accrued expenses and other liabilities............. 238 196 64
Income tax payable................................. 1,036 (769) (118)
Other noncurrent assets............................ (5) 4 (247)
------- ------- ------
Net cash used in operating activities............. (1,826) (8,318) (185)
------- ------- ------
Cash flows from investing activities:
Capital expenditures, net........................... (669) (659) (1,069)
Advances to officer under note...................... -- (43) --
Repayments of amount due to former Alpha Data
shareholder........................................ (120) -- --
Purchase of MicroBiz................................ (531) -- --
Payments to MicroBiz................................ (98) (202) --
------- ------- ------
Net cash used in investing activities............. (1,418) (904) (1,069)
------- ------- ------
Cash flows from financing activities:
Cash proceeds from exercise of stock options, net... -- 552 32
Advances from line of credit, net................... 1,200 2,579 1,612
Payment of deferred offering costs.................. -- -- (390)
Cash proceeds from exercise of warrants and the unit
purchase option, net of offering costs............. 134 6,779 --
Repurchase of shares from Gates/FA.................. -- (875) --
Cost of pending warrant redemption.................. (47) -- --
------- ------- ------
Net cash provided by financing activities......... 1,287 9,035 1,254
------- ------- ------
Increase (decrease) in cash....................... (1,957) (187) --
Cash at beginning of year............................ 2,144 187 --
------- ------- ------
Cash at end of year.................................. $ 187 -- --
======= ======= ======
Supplemental information:
Interest paid....................................... $ 439 15 387
======= ======= ======
Income taxes paid................................... $ 76 2,309 1,762
======= ======= ======
Supplemental noncash information:
Note issued in connection with the purchase of
MicroBiz........................................... $ 300 -- --
======= ======= ======
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
SCANSOURCE, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1996 AND 1997
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Nature of Business
ScanSource, Inc. ("Company") is a leading distributor of specialty
technology products, including automatic identification, point of sale and
telephone equipment. The Company is a South Carolina corporation whose fiscal
year end is June 30.
Revenue Recognition
The Company records revenue when products are shipped.
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.
More than a majority of the Company's net revenues in 1995, 1996 and 1997
were received from the sale of products purchased from the Company's top ten
vendors.
Inventories
Inventories are stated at the lower of cost (first-in, first-out method) or
market.
Long-Lived Assets
Property and equipment are recorded at cost. Depreciation of furniture and
equipment is computed using the straight-line method over estimated useful
lives of 3-5 years. Leasehold improvements are amortized over the shorter of
the lease term or the estimated useful life. Maintenance, repairs and minor
renewals are charged to expense as incurred. Additions, major renewals and
betterments to property and equipment are capitalized.
Intangible assets consist primarily of goodwill which is amortized on a
straight-line basis over fifteen years. Accumulated amortization was $223,000
and $306,000 at June 30, 1996 and 1997, respectively.
The Company implemented the provisions of Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of," effective July 1, 1996. The Company
reviews its long-lived assets (property, plant and equipment, and related
goodwill that arose from business combinations accounted for under the
purchase method) for impairment whenever events or circumstances indicate that
the carrying amount of an asset may not be recoverable. If the sum of the
expected cash flows, undiscounted and without interest, is less than the
carrying amount of the asset, an impairment loss is recognized as the amount
by which the carrying amount of the asset exceeds its fair value. The adoption
of Statement No. 121 had no impact on the Company's financial position or
results of operations.
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
$966,000 at June 30, 1996 and 1997, respectively, for which checks are
outstanding.
F-7
<PAGE>
SCANSOURCE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
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 under the asset and liability method
whereby 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. 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.
Accounting for Stock-Based Compensation
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." Statement No. 123 is effective for fiscal years beginning after
December 15, 1995. SFAS No. 123 requires that an entity recognize in its
financial statements the costs (determined by a fair value based method)
related to its employee stock-based compensation plans, such as stock option
and stock purchase plans.
Alternatively, SFAS No. 123 also allows an entity to continue to apply the
provisions of APB Opinion No. 25 and provide pro forma net income and, if
earnings per share is presented, pro forma earnings per share disclosures for
employee stock options granted in fiscal years beginning after December 15,
1994 and future years as if the fair-value-based method defined in SFAS No.
123 had been applied. The Company has elected to continue to apply the
provisions of APB Opinion No. 25 and provide the pro forma disclosure
provisions of SFAS No. 123.
Fair Value of Financial Instruments
The Company values financial instruments as required by FASB Statement No.
107, "Disclosures About Fair Value of Financial Instruments".
The carrying value of financial instruments such as cash, accounts
receivable, and accounts payable and accrued liabilities approximated their
fair values, based upon the short maturities of these instruments.
The carrying amounts of debt issued pursuant to the bank credit agreement
approximates fair value because interest rates on these instruments
approximate current market interest rates.
F-8
<PAGE>
SCANSOURCE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Recent Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board issued Financial
Accounting Standards No. 128, "Earnings Per Share." Statement No. 128 is
effective for financial statements issued for interim and annual
periods ending after December 31, 1997, and establishes standards for
computing and presenting earnings per share (EPS). Early adoption of Statement
No. 128 is not permitted. Once adopted, Statement No. 128 requires previously
reported EPS data to be restated to reflect its provisions. Statement No. 128
simplifies the standards for computing EPS previously found in APB Opinion No.
15, "Earnings Per Share", and then makes them comparable to international EPS
standards. It replaces the presentation of primary EPS with the presentation
of basic EPS and requires dual presentation of basic and fully diluted EPS on
the face of the income statement and a reconciliation of the numerator and
denominator of the basic EPS computation to the numerator and denominator of
the fully diluted EPS computation. The Company will adopt Statement No. 128 in
fiscal 1998 and is not expected to have a negative impact on previously
reported EPS data.
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. For the year ended June 30, 1995,
approximately $5,700,000 of the Company's purchases were made through
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 which
it exercised in December 1993. These shares were repurchased by the
Company in March 1996.
(b) Under terms of an Agreement to Terminate Distribution Services,
Gates/FA agreed to a more limited covenant not to compete for a period
reduced from two years to one year from the termination of services to
the Company.
As compensation for reducing the noncompete term and ending the
operations agreement before its scheduled expiration, Gates/FA agreed to
pay the Company $1.4 million. Of this amount, $650,000 was received in
September 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(c)) as other income and provided $440,000 for related income
taxes. The remaining $200,000 of the amount was recognized as other income
in fiscal 1996, along with $80,000 of related income taxes.
F-9
<PAGE>
SCANSOURCE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(2) OPERATIONS AGREEMENTS--(CONTINUED)
Under terms of the termination agreement, the Company had an option to
call Gates/FA's shares of the Company's stock at $3.50 per share, which
it exercised in March 1996. To ensure that the Company had sufficient
liquidity to purchase the shares, Gates/FA had negotiated to hold back
$750,000 of its contract termination payment at the time of the contract
renegotiation. The Company collected this amount in March 1996 and used
it to pay $750,000 of the $875,000 call price of the repurchased shares.
(c) 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. For the fiscal years ended June 30, 1996 and 1997 the Company
paid approximately $144,000 and $117,000, respectively, to this third
party. In June 1996 a Company officer and director was elected to the
Board of Directors of the third party until his resignation in April
1997. Management believes the pricing of all transactions with the
third party is representative of arm's length costs, and is comparable
to terms which could be negotiated with others.
(3) ACQUISITION
In July 1994, the Company purchased the equipment distribution portion of
MicroBiz Corporation's business for $300,000 in cash and approximately
$300,000 to be paid over two years, based upon the sales performance of
certain former MicroBiz customers. The purchase included MicroBiz' equipment
inventory for $231,000, certain customer lists and distribution contracts, and
MicroBiz agreeing not to compete for a period of 42 months. The Company agreed
to provide up to $45,000 in certain marketing programs to MicroBiz, and after
costs of the transaction of $5,000, recorded goodwill for approximately
$650,000.
(4) LINE OF CREDIT
On October 26, 1995, the Company closed a line of credit agreement whereby
the Company could borrow up to $8,000,000, 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 effective interest rate was 7.79% at June 30, 1996 and the
outstanding balance on the line of credit was $3,779,000, on a loan base of
$8,000,000, leaving $4,221,000 available at June 30, 1996.
In November 1996, the Company closed a line of credit agreement with a bank
whereby the Company can borrow up to $15 million, based upon 80% of eligible
accounts receivable and 40% of non-IBM inventory at the 30 day LIBOR rate of
interest 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. The effective interest rate was
7.8375% at June 30, 1997 and the outstanding balance on the line of credit was
$5,391,000, on a loan base of $14,628,000, leaving $9,237,000 available at
June 30, 1997. The revolving credit facility is secured by accounts receivable
and non-IBM inventory. The agreement contains certain financial covenants
including minimum net worth and capital expenditure 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 noncompliance at June 30,
1997.
F-10
<PAGE>
SCANSOURCE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(5) SHAREHOLDERS' EQUITY, STOCK OPTIONS, WARRANTS AND EQUITY TRANSACTIONS
(a) Incentive Stock Option Plan
The Company has an incentive stock option plan which reserves 280,000 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 for the years ended
June 30, 1996 and 1997 is as follows:
<TABLE>
<CAPTION>
1996 1997
------------------------- -------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------- ---------------- ------- ----------------
<S> <C> <C> <C> <C>
Stock options outstanding:
Beginning of year........ 111,834 $ 6.73 95,167 $ 6.95
Granted.................. 3,500 12.50 103,750 12.73
Exercised................ (17,167) 4.23 (4,000) 7.15
Terminated............... (3,000) 8.00 (334) 8.00
------- -------
End of year.............. 95,167 6.95 194,583 10.04
------- -------
Exercisable, end of year... 42,000 $ 5.39 67,166 $ 6.04
======= =======
</TABLE>
The following table summarizes information about stock options outstanding
under the incentive stock option plan at June 30, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- --------------------------------------------- ----------------------------
WEIGHTED AVERAGE
RANGE OF NUMBER REMAINING NUMBER WEIGHTED AVERAGE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISABLE EXERCISE PRICE
- --------------- ----------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C>
$ 1.50-2.75 26,000 6.3 26,000 $ 2.06
8.00 11,333 7 7,333 8.00
8.88 50,000 8 32,667 8.88
10.75-12.50 58,000 9 1,166 12.50
14.50 49,250 9.5 -- --
------- ------
194,583 67,166
======= ======
</TABLE>
(b) Other Stock Options, Warrants and Equity Transactions
Under the directors' stock option plan, 65,000 shares of common stock have
been for issuance to non-employee directors, of which 20,000 and 30,000 were
outstanding at June 30, 1996 and 1997, respectively. The Company has issued
additional options and warrants to employees and former directors, of which
175,000 and 317,000 were outstanding at June 30, 1996 and 1997, respectively.
In May 1997, the Company issued options immediately exercisable to purchase
25,000 shares of common stock at the then current market price of $13.50 per
share, extending to December 2003, to third-parties, all of which were
outstanding at June 30, 1997. The Company recorded the transaction at the fair
value of $7.00 per share, or $175,000, computed using the Black Scholes
option-pricing model.
F-11
<PAGE>
SCANSOURCE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(5) SHAREHOLDERS' EQUITY, STOCK OPTIONS, WARRANTS AND EQUITY TRANSACTIONS--
(CONTINUED)
Following is a summary of activity for the years ended June 30, 1996 and
1997 of all options and warrants not included in the incentive stock option
plan shown above:
<TABLE>
<CAPTION>
1996 1997
------------------------- -------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------- ---------------- ------- ----------------
<S> <C> <C> <C> <C>
Stock options outstanding:
Beginning of year........ 205,000 $ 3.85 195,000 $ 4.24
Granted.................. 40,000 13.16 197,000 15.20
Exercised................ (50,000) 9.75 (10,000) 1.50
Terminated............... -- -- (10,000) 11.88
------- -------
End of year.............. 195,000 4.24 372,000 9.92
------- -------
Exercisable, end of year... 168,333 $ 4.05 315,000 $ 9.71
======= =======
</TABLE>
The following table summarizes information about all stock options and
warrants not included in the incentive stock option plan at June 30, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- --------------------------------------------- ----------------------------
WEIGHTED AVERAGE
RANGE OF NUMBER REMAINING NUMBER WEIGHTED AVERAGE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISABLE EXERCISE PRICE
- --------------- ----------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C>
$ 1.50-3.75 130,000 6.2 130,000 $ 2.05
8.63-11.88 25,000 8.2 10,000 9.37
13.50 25,000 2.8 25,000 13.50
14.13-16.50 192,000 9.5 150,000 15.71
------- -------
372,000 315,000
======= =======
</TABLE>
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. Each UPO entitles the holder to purchase one
share of common stock and a warrant for one share of common stock for an
additional $5.50 per warrant. The UPO became exercisable beginning March 18,
1995 and is to expire on March 18, 1999; 42,000 units were outstanding at June
30, 1996 and 1997, 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.
The Company has deferred the offering costs associated with a planned public
offering of its common stock that was postponed in March 1997. In June 1997,
the Company proceeded with its plans for a public offering of its common
stock, and as a result, the Company expects to file a registration statement
in September 1997.
F-12
<PAGE>
SCANSOURCE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(5) SHAREHOLDERS' EQUITY, STOCK OPTIONS, WARRANTS AND EQUITY TRANSACTIONS--
(CONTINUED)
(c) Fair Value and Pro Forma Information
The per share weighted-average fair value of stock options granted under the
incentive stock option plan during the years ended June 30, 1996 and 1997 was
$10.14 and $10.74 on the date of grant using the Black Scholes option-pricing
model with the following weighted-average assumptions: 1996--expected dividend
yield of 0%, volatility of 69.8%, risk-free interest rate of 6.73%, and an
expected life of 10 years; 1997--expected dividend yield 0%, expected
volatility of 76.8%, risk-free interest rate of 6.43%, and an expected life of
10 years.
The per share weighted-average fair value of all stock options and warrants
not included in the incentive stock plan granted during the years ended June
30, 1996 and 1997 was $10.54 and $13.20 on the date of grant using the Black
Scholes option-pricing model with the following weighted-average assumptions:
1996--expected dividend yield of 0%, expected volatility of 64.7%, risk-free
interest rate of 5.96%, and an expected life of 10 years; 1997--expected
dividend yield of 0%, expected volatility of 80.6%, risk-free interest rate of
6.35%, and an expected life of 10 years.
The Company applies APB Opinion No. 25 in accounting for its stock options
and accordingly, no compensation cost has been recognized for its stock
options in the financial statements. Had the Company determined compensation
cost based on the fair value at the grant date for stock options in its Plan
under SFAS No. 123, the Company's net income and earnings per share would have
been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1996 1997
----------- ---------
<S> <C> <C> <C>
Net income As reported $ 1,858,000 2,540,000
=========== =========
Pro forma $ 1,737,000 2,042,000
=========== =========
Earnings per share
Primary As reported $ .53 .73
=========== =========
Pro forma $ .49 .59
=========== =========
Fully diluted As reported $ .53 .73
=========== =========
Pro forma $ .49 .59
=========== =========
</TABLE>
Pro forma net income reflects only options granted during the years ended
June 30, 1996 and 1997. Therefore, the full impact of calculating compensation
cost for stock options under SFAS No. 123 is not reflected in net income
effected above because compensation cost is reflected over the options vesting
period of 3 years for options issued under the incentive stock option plan and
compensation cost for options granted prior to July 1, 1995 is not considered.
(6) RELATED PARTY TRANSACTIONS
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 in June 1997. During 1996 and
1997, the Company renegotiated the loan to include additional advances of
$43,000 and $100,000, respectively, and extended the term of the note to June
2000. The $183,000 loan at June 30, 1997 is included in other assets, bears
interest at $8.5% and is secured by 15,000 shares of the Company's common
stock owned by the officer.
F-13
<PAGE>
SCANSOURCE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(6) RELATED PARTY TRANSACTIONS--(CONTINUED)
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 June 30,
1997. The investment in Transition is accounted for under the equity method.
The Company purchased $278,000 and $123,000 of marketing services from
Transition for the years ended June 30, 1996 and 1997, respectively, and had
loaned $122,000 at a 9% interest rate 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 others.
(7) INCOME TAXES
Income tax expense (benefit) for the years ended June 30, 1995, 1996 and
1997 consists of:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
---------- -------- ---------
<S> <C> <C> <C>
1995:
Federal..................................... $1,314,000 (427,000) 887,000
State....................................... 160,000 (50,000) 110,000
---------- -------- ---------
$1,474,000 (477,000) 997,000
========== ======== =========
1996:
Federal..................................... $1,382,000 (292,000) 1,090,000
State....................................... 158,000 (55,000) 103,000
---------- -------- ---------
$1,540,000 (347,000) 1,193,000
========== ======== =========
1997:
Federal..................................... $1,874,000 (456,000) 1,418,000
State....................................... 225,000 (87,000) 138,000
---------- -------- ---------
$2,099,000 (543,000) 1,556,000
========== ======== =========
</TABLE>
Income tax expense differed from the amount computed by applying the Federal
income tax rate of 34% as a result of the following:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
----------------------------
1995 1996 1997
-------- --------- ---------
<S> <C> <C> <C>
Computed "expected" tax expense............... $853,000 1,037,000 1,393,000
Increase (decrease) in income taxes resulting
from:
Additional provision for income taxes....... 68,000 84,000 66,000
State and local income taxes, net of Federal
income tax expense......................... 73,000 68,000 91,000
Other....................................... 3,000 4,000 6,000
-------- --------- ---------
$997,000 1,193,000 1,556,000
======== ========= =========
</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,
--------------------
1996 1997
--------- ---------
<S> <C> <C>
Deferred tax assets:
Valuation and other reserves....................... $ 766,000 1,286,000
Inventory, principally due to differences in
capitalization.................................... 235,000 279,000
Intangibles, principally due to differences in
amortization...................................... 22,000 25,000
--------- ---------
1,023,000 1,590,000
Deferred tax liability:
Plant and equipment, principally due to differences
in depreciation................................... (48,000) (72,000)
--------- ---------
Net deferred tax asset........................... $ 975,000 1,518,000
========= =========
</TABLE>
For the years ended June 30, 1996 and 1997 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
temporary differences are deductible.
(8) OPERATING LEASES
The Company leases office space and a telephone system under noncancellable
operating leases which expire through February 2002. Future minimum rentals
are as follows: $329,000, $376,000, $343,000, $198,000 and $46,000 for the
years ended June 30, 1998 through June 30, 2002, respectively. Lease expense
was approximately $73,000, $74,000 and $233,000 for the years ended June 30,
1995, 1996 and 1997, respectively.
(9) 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, 1996 and 1997 the Company provided a matching contribution of $18,000 and
$25,000, 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.
F-15
<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"
<TABLE>
<CAPTION>
PICTURE(S) CAPTION DESCRIPTION OF PICTURE
- ---------- ------- ----------------------
<S> <C> <C>
1 & 2 Advertising in An example gatefold ad with ScanSource
cooperation with logo and seven featured vendors
venders
3 National industry trade ScanSource booth at a convention center
shows trade show
4 Product catalogs Cover of ScanSource's most recent
(3 times per year) catalog
5 Sales promotion Symbol Technologies "super bowl ticket
stub"
6 & 7 Advertising in trade Covers of two industry periodicals
magazines
8 ScanSource organizes A Solutions USA logo
and operates its own
quarterly trade shows
</TABLE>
<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 OF-
FERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS. ANY INFORMATION OR REPRE-
SENTATIONS NOT HEREIN CONTAINED, IF GIVEN OR MADE, MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY, ANY SELLING SHAREHOLDER, OR ANY UNDER-
WRITER. 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 JU-
RISDICTION WHERE SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DE-
LIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUM-
STANCES, 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 COR-
RECT AS OF ANY TIME AFTER THE DATE HEREOF.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 6
Use of Proceeds.......................................................... 11
Price Range of Common Stock.............................................. 11
Dividend Policy.......................................................... 12
Capitalization........................................................... 12
Selected Financial Data.................................................. 13
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 14
Business................................................................. 19
Management............................................................... 27
Certain Transactions..................................................... 32
Principal and Selling Shareholders....................................... 33
Description of Capital Stock............................................. 35
Shares Eligible for Future Sale.......................................... 38
Underwriting............................................................. 39
Legal Matters............................................................ 40
Experts.................................................................. 40
Additional Information................................................... 41
Index to Financial Statements............................................ F-1
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
1,400,000 SHARES
[LOGO OF SCANSCOURCE(R)]
COMMON STOCK
----------------
PROSPECTUS
----------------
THE ROBINSON-HUMPHREY COMPANY, INC.
WILLIAM BLAIR & COMPANY
, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<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...................................... $ 19,969(1)
NASD Filing Fee........................................... 7,590(1)
Nasdaq NMS Listing Fee.................................... 17,500(1)
Printing and Engraving Expenses........................... 135,000(1)(2)
Legal Fees and Expenses................................... 176,000(1)(2)
Accounting Fees and Expenses.............................. 60,000(1)(2)
Blue Sky Fees and Expenses................................ 500(1)(2)
Transfer Agent and Registrar Fees and Expenses............ 1,500(1)(2)
Miscellaneous Expenses.................................... 131,941(1)(2)
--------
Total..................................................... $550,000(1)(2)
========
</TABLE>
- --------
(1) Includes deferred offering costs aggregating approximately $390,000.
(2) 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.
In May 1997, the Registrant granted non-qualified stock options for 25,000
shares of its common stock to nine individuals in return for their provision
of consulting and other services related to the Registrant's formation of its
Catalyst Telecom division. Such options were granted, and the shares subject
thereto will be issued upon exercise, if any, pursuant to the exemption from
registration contained in Section 4(2) of the Securities Act.
II-1
<PAGE>
ITEM 16(A). EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<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 (Incorporated by reference to Exhibit
10.10 to Registrant's Form S-1 filed with the Commission on January
23, 1997, Registration No. 333-20231).
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. (Incorporate 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 Buonocore
together with a letter agreement dated September 9, 1997 (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. (Incorporated by reference to Exhibit 10.23 to the
Registrant's Form S-1 filed with the Commission on January 23, 1997,
Registration No. 333-20231).
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.24 --Stock Warrant dated November 29, 1995 from the Registrant to Barry
Rubenstein. (Incorporated by reference to Exhibit 10.24 to
Registrant's Form S-1 filed with the Commission on January 23, 1997,
Registration No. 333-20231).
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.
(Incorporated by reference to Exhibit 10.25 to the Registrant's Form
S-1 filed with the Commission on January 23, 1997, Registration No.
333-20231).
10.26 --Intercreditor Agreement dated April 8, 1996 among the Registrant,
IBM Credit Corporation, and Branch Banking and Trust Company.
(Incorporated by reference to Exhibit 10.26 to the Registrant's Form
S-1 filed with the Commission on January 23, 1997, Registration No.
333-20231).
10.27 --Loan and Security Agreement dated November 25, 1996 between the
Registrant and Branch Banking and Trust Company. (Incorporated by
reference to Exhibit 10.27 to the Registrant's Form S-1 filed with
the Commission on January 23, 1997, Registration No. 333-20231).
10.28 --Employment Agreement dated as of January 1, 1997 between the
Registrant and Steven H. Owings. (Incorporated by reference to
Exhibit 10.28 to the Registrant's Form S-1 filed with the Commission
on January 23, 1997, Registration No. 333-20231).
10.29 --Employment Agreement dated as of January 1, 1997 between the
Registrant and Michael L. Baur. (Incorporated by reference to Exhibit
10.29 to the Registrant's Form S-1 filed with the Commission on
January 23, 1997, Registration No. 333-20231).
10.30 --Employment Agreement dated as of January 1, 1997 between the
Registrant and Jeffery A. Bryson. (Incorporated by reference to
Exhibit 10.30 to the Registrant's Form S-1 filed with the Commission
on January 23, 1997, Registration No. 333-20231).
10.31 --Stock Option Agreement dated July 18, 1996 covering stock options
granted to Steven R. Fisher. (Incorporated by reference to Exhibit
10.31 to the Registrant's Form S-1 filed with the Commission on
January 23, 1997, Registration No. 333-20231).
10.32 --Stock Option Agreement dated July 18, 1996 covering stock options
granted to James G. Foody. (Incorporated by reference to Exhibit
10.32 to the Registrant's Form S-1 filed with the Commission on
January 23, 1997, Registration No. 333-20231).
10.33 --Stock Option Agreement dated December 3, 1996 covering stock options
granted to Steven H. Owings. (Incorporated by reference to Exhibit
10.33 to the Registrant's Form S-1 filed with the Commission on
January 23, 1997, Registration No. 333-20231).
10.34 --Stock Option Agreement dated December 3, 1996 covering stock options
granted to Michael L. Baur. (Incorporated by reference to Exhibit
10.34 to the Registrant's Form S-1 filed with the Commission on
January 23, 1997, Registration No. 333-20231).
10.35** --Distribution Agreement dated October 1, 1994 between the Registrant
and Symbol Technologies, Inc. (Incorporated by reference to Exhibit
10.35 to the Registrant's Form S-1 filed with the Commission on
January 23, 1997, Registration No. 333-20231).
10.36** --Distribution Agreement dated January 1, 1996 between the Registrant
and IBM Corporation. (Incorporated by reference to Exhibit 10.36 to
the Registrant's Form S-1 filed with the Commission on January 23,
1997, Registration No. 333-20231).
10.37 --Stock Option Agreement dated January 17, 1997 covering options
granted to Steven H. Owings. (Incorporated by reference to Exhibit
10.37 to the Registrant's Form S-1 filed with the Commission on
January 23, 1997, Registration No. 333-20231).
10.38 --Stock Option Agreement dated January 17, 1997 covering options
granted to Michael L. Baur. (Incorporated by reference to Exhibit
10.38 to the Registrant's Form S-1 filed with the Commission on
January 23, 1997, Registration No. 333-20231).
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.39 --Stock Option Agreement dated January 17, 1997 covering options
granted to Jeffrey A. Bryson. (Incorporated by reference to Exhibit
10.39 to the Registrant's Form S-1 filed with the Commission on
January 23, 1997, Registration No. 333-20231).
11* --Statement re: Computation of Per Share Earnings--Primary.
11.1* --Statement re: Computation of Per Share Earnings--Fully Diluted.
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.
** Confidential treatment has been granted pursuant to 17 CFR (S)(S)
200.80(b)(4) and Rule 406 regarding certain portions of the indicated
Exhibit. The copy on file as an Exhibit omits the information subject to
the confidential treatment order. Such omitted information has been filed
separately with the Commission.
*** Filed herewith.
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 SEPTEMBER 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>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Steven H. Owings Chairman of the Board, Chief September 12, 1997
- ------------------------------------ Executive Officer, and
Steven H. Owings Director (principal
executive officer)
/s/ Jeffery A. Bryson Chief Financial Officer and September 12, 1997
- ------------------------------------ Treasurer (principal
Jeffery A. Bryson financial and accounting
officer)
* President and Director September 12, 1997
- ------------------------------------
Michael L. Baur
* Director September 12, 1997
- ------------------------------------
Steven R. Fischer
* Director September 12, 1997
- ------------------------------------
James G. Foody
</TABLE>
*By /s/ Steven H. Owings
----------------------------
Steven H. Owings
(as attorney-in-fact for
each of the persons indicated)
II-5
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<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 (Incorporated by reference to Exhibit
10.10 to Registrant's Form S-1 filed with the Commission on January
23, 1997, Registration No. 333-20231).
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. (Incorporate 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 Buonocore
together with a letter agreement dated September 9, 1997 (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. (Incorporated by reference to Exhibit 10.23 to the
Registrant's Form S-1 filed with the Commission on January 23, 1997,
Registration No. 333-20231).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.24 --Stock Warrant dated November 29, 1995 from the Registrant to Barry
Rubenstein. (Incorporated by reference to Exhibit 10.24 to
Registrant's Form S-1 filed with the Commission on January 23, 1997,
Registration No. 333-20231).
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.
(Incorporated by reference to Exhibit 10.25 to the Registrant's Form
S-1 filed with the Commission on January 23, 1997, Registration No.
333-20231).
10.26 --Intercreditor Agreement dated April 8, 1996 among the Registrant,
IBM Credit Corporation, and Branch Banking and Trust Company.
(Incorporated by reference to Exhibit 10.26 to the Registrant's Form
S-1 filed with the Commission on January 23, 1997, Registration No.
333-20231).
10.27 --Loan and Security Agreement dated November 25, 1996 between the
Registrant and Branch Banking and Trust Company. (Incorporated by
reference to Exhibit 10.27 to the Registrant's Form S-1 filed with
the Commission on January 23, 1997, Registration No. 333-20231).
10.28 --Employment Agreement dated as of January 1, 1997 between the
Registrant and Steven H. Owings. (Incorporated by reference to
Exhibit 10.28 to the Registrant's Form S-1 filed with the Commission
on January 23, 1997, Registration No. 333-20231).
10.29 --Employment Agreement dated as of January 1, 1997 between the
Registrant and Michael L. Baur. (Incorporated by reference to Exhibit
10.29 to the Registrant's Form S-1 filed with the Commission on
January 23, 1997, Registration No. 333-20231).
10.30 --Employment Agreement dated as of January 1, 1997 between the
Registrant and Jeffery A. Bryson. (Incorporated by reference to
Exhibit 10.30 to the Registrant's Form S-1 filed with the Commission
on January 23, 1997, Registration No. 333-20231).
10.31 --Stock Option Agreement dated July 18, 1996 covering stock options
granted to Steven R. Fisher. (Incorporated by reference to Exhibit
10.31 to the Registrant's Form S-1 filed with the Commission on
January 23, 1997, Registration No. 333-20231).
10.32 --Stock Option Agreement dated July 18, 1996 covering stock options
granted to James G. Foody. (Incorporated by reference to Exhibit
10.32 to the Registrant's Form S-1 filed with the Commission on
January 23, 1997, Registration No. 333-20231).
10.33 --Stock Option Agreement dated December 3, 1996 covering stock options
granted to Steven H. Owings. (Incorporated by reference to Exhibit
10.33 to the Registrant's Form S-1 filed with the Commission on
January 23, 1997, Registration No. 333-20231).
10.34 --Stock Option Agreement dated December 3, 1996 covering stock options
granted to Michael L. Baur. (Incorporated by reference to Exhibit
10.34 to the Registrant's Form S-1 filed with the Commission on
January 23, 1997, Registration No. 333-20231).
10.35** --Distribution Agreement dated October 1, 1994 between the Registrant
and Symbol Technologies, Inc. (Incorporated by reference to Exhibit
10.35 to the Registrant's Form S-1 filed with the Commission on
January 23, 1997, Registration No. 333-20231).
10.36** --Distribution Agreement dated January 1, 1996 between the Registrant
and IBM Corporation. (Incorporated by reference to Exhibit 10.36 to
the Registrant's Form S-1 filed with the Commission on January 23,
1997, Registration No. 333-20231).
10.37 --Stock Option Agreement dated January 17, 1997 covering options
granted to Steven H. Owings. (Incorporated by reference to Exhibit
10.37 to the Registrant's Form S-1 filed with the Commission on
January 23, 1997, Registration No. 333-20231).
10.38 --Stock Option Agreement dated January 17, 1997 covering options
granted to Michael L. Baur. (Incorporated by reference to Exhibit
10.38 to the Registrant's Form S-1 filed with the Commission on
January 23, 1997, Registration No. 333-20231).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.39 --Stock Option Agreement dated January 17, 1997 covering options
granted to Jeffrey A. Bryson. (Incorporated by reference to Exhibit
10.39 to the Registrant's Form S-1 filed with the Commission on
January 23, 1997, Registration No. 333-20231).
11* --Statement re: Computation of Per Share Earnings--Primary.
11.1* --Statement re: Computation of Per Share--Fully Diluted.
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 .
** Confidential treatment has been granted pursuant to 17 CFR (S)(S)
200.80(b)(4) and Rule 406 regarding certain portions of the indicated
Exhibit. The copy on file as an Exhibit omits the information subject to
the confidential treatment order. Such omitted information has been filed
separately with the Commission.
*** Filed herewith.
<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]
September 9, 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. 333-34993) 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. This letter
agreement supersedes the February 7, 1997 agreement among the parties related
to the subject matter hereof. If you have any questions, please call.
Sincerely yours,
SCANSOURCE, INC.
By: /s/ Jeffrey A. Bryson
------------------------------
Title: CFO and Treasurer
-----------------------
<PAGE>
David M. Nussbaum
September 9, 1997
Page 2
Agreed:
/s/ David M. Nussbaum
- ---------------------------------------
David M. Nussbaum
/s/ Robert Gladstone
- ---------------------------------------
Robert Gladstone
/s/ Roger Gladstone
- ---------------------------------------
Roger Gladstone
/s/ Richard Buonocore
- ---------------------------------------
Richard Buonocore
Date: September 11, 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.
KPMG Peat Marwick LLP
Greenville, South Carolina
September 12, 1997
