<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 5, 1997
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
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
(PRIMARY STANDARD (I.R.S. EMPLOYER
(STATE OR OTHER INDUSTRIAL IDENTIFICATION NO.)
JURISDICTION OF CLASSIFICATION CODE
INCORPORATION OR NUMBER)
ORGANIZATION)
6 LOGUE COURT, SUITE G
GREENVILLE, SOUTH CAROLINA 29615
(864) 288-2432
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
JEFFERY A. BRYSON
CHIEF FINANCIAL OFFICER
6 LOGUE COURT, SUITE G
GREENVILLE, SOUTH CAROLINA 29615
(864) 288-2432
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE OF AGENT FOR SERVICE)
---------------
COPIES TO:
G. MARCUS KNIGHT J. VAUGHAN CURTIS
NEXSEN PRUET JACOBS & POLLARD, LLP ALSTON & BIRD 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: [_]
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CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
PROPOSED
TITLE OF EACH CLASS OF AMOUNT MAXIMUM OFFERING PROPOSED MAXIMUM
SECURITIES TO BE PRICE PER AGGREGATE AMOUNT OF
TO BE REGISTERED REGISTERED(1) SHARE(2) OFFERING PRICE(2) REGISTRATION FEE
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, no par
value.................. 1,610,000 shares $17.00 $27,370,000 $8,294
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</TABLE>
(1) Includes 210,000 shares for which the Underwriters have an option to cover
over-allotments, if any.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) under the Securities Act of 1933.
---------------
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 5, 1997
[LOGO OF SCANSOURCE(R) APPEARS HERE]
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 4, 1997, the closing sale
price of the Common Stock as reported on The Nasdaq National Market was $16.875
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
Right hand side of page, vendor logos for: IBM, Metrologic, Zebra, Symbol,
Datamax, Cherry, Cognitive Solutions, Epson, MMF, PSC, Monarch, MicroTouch,
Intermec, Lucent Technologies, Eltron, Ithaca, Percon, StrandWare, Spectra-
Physics
Left margin with supporting text: "Serving Multiple Commercial and Industrial
Applications"
Picture(s) Caption Description of Picture
- ---------- ------- ----------------------
1 Inventory management Person at a lumberyard
2 Grocery Point-of-Sale Retail store cashier
3 Product identification Person scanning a product
4 Production control Laboratory scene
5 Retail Auto-ID Person with handheld computer at a retail
display rack
6 Retail Point-of-Sale Store cashier standing at countertop
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 4, 1997, the Company entered into a definitive agreement to
purchase substantially all of the assets of ProCom Supply Corporation
("ProCom"), a wholesale distributor of telephony products located in San Diego,
California (the "ProCom Acquisition"). The purchase price to be paid in the
ProCom Acquisition is expected to be approximately $1.8 million in cash, which
the Company will fund 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 currently
markets telephony products from Vodavi, Callware, Comdial and Panasonic. The
acquisition is subject to completion of customary conditions. No assurance can
be given that this acquisition will be consummated. The ProCom Acquisition and
this offering are independent of each other and the terms and consummation of
the offering are not conditioned upon consummation of the ProCom Acquisition.
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>
- --------
(1) Based on the number of shares outstanding at September 4, 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."
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 $36,448
Total assets............................................... 38,288 54,555
Total bank debt............................................ 5,391 --
Shareholders' equity....................................... 18,325 39,983
</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 $16.875 per share and the
application of the estimated net proceeds therefrom. Does not include 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 entered into a definitive agreement on September 4, 1997,
to acquire ProCom, subject to completion of customary conditions. 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 Company and holders of
435,866 shares of Common Stock (including all shares beneficially owned by the
Company's officers and directors) have agreed that they will not sell any
shares of Common Stock for 90 days from the date of this Prospectus without
the prior written consent of 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
certain unit purchase options, representing rights to acquire 84,000 shares of
Common Stock, are entitled to have their shares registered 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 $16.875 per share
are estimated to be approximately $21.7 million ($23.9 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 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 anticipates that its
bank debt balance will increase 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 4, 1997)......... 17 7/8 13 5/8
</TABLE>
On September 4, 1997, the closing price of the Common Stock on The Nasdaq
National Market was $16.875 per share. On September 4, 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 33,965
Retained earnings.................................... 6,018 6,018
------- -------
Total shareholders' equity......................... 18,325 39,983
------- -------
Total capitalization............................. $23,716 $39,983
======= =======
</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 $16.875 per share and the
application of the estimated net proceeds therefrom. Does not include 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 $4.0
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 entered into a definitive agreement to
acquire ProCom. 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
AWARDS
ANNUAL COMPENSATION ------------
---------------------- 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 87,000 109,527 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 10%
---- -------------------- ---------------- -------- ---------- 5% ---------
<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....... 20,734 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 4, 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 8.2 269,000 5.7
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(10)................... 16,000 * 16,000 *
Robert S. McLain, Jr.(11)............... 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 4, 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 the
33
<PAGE>
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.
(11) 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 4, 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. At August 31, 1997, 42,000 unit purchase options remained outstanding,
representing the right of the holders to acquire 84,000 shares of Common Stock
at a weighted average price of $5.75 per share. Neither the warrants nor the
unit purchase options provide any holders thereof with the voting rights of a
shareholder prior to valid exercise. See "Principal and Selling Shareholders."
CERTAIN PROVISIONS OF ARTICLES AND BYLAWS
Shareholders' rights and related matters are governed by the South Carolina
Business Corporation Act of 1988, as amended (the "South Carolina Code") and
the Company's Amended and Restated Articles of Incorporation (the "Articles")
and Bylaws.
Limitations of Liability and Indemnification. As permitted by the South
Carolina Code, the Company's Articles provide that a director of the Company
shall not be personally liable to the Company or any of its shareholders for
monetary damages for breach of fiduciary duty as a director, except for
liability: (i) for any breach of the director's duty of loyalty to the Company
or its shareholders; (ii) for acts or omissions not in good faith or which
involve gross negligence, intentional misconduct or a knowing violation of
law; (iii) for any unlawful distribution as set forth in the South Carolina
Code; or (iv) for any transaction from which the director derived an improper
personal benefit. While these provisions eliminate the right to recover
monetary damages from directors except in limited circumstances, rights to
seek injunctive or other non-monetary relief are not eliminated. In addition,
the Bylaws set forth certain indemnification provisions as a contractual right
of the Company's directors and officers, and permit indemnification of the
Company's employees and agents.
Anti-Takeover Effects of Certain Provisions. The South Carolina Code
contains provisions that may have the effect of delaying, deferring or
preventing a change in control of a company unless a company's articles of
incorporation expressly provide otherwise. The Articles provide that the
Company elects not to be governed by such provisions of the South Carolina
Code. However, the Articles expressly permit the Board of Directors, when
evaluating any proposed tender or exchange offer, any merger, consolidation or
sale of substantially all of the assets, or any similar extraordinary
transaction, to consider: (i) all relevant factors, including without
limitation the social, legal, and economic effects on the employees,
customers, suppliers and other constituencies of the Company and its
subsidiaries, on the communities and geographical areas in which the Company
and its subsidiaries operate or are located and on any of the business and
properties of the Company or any of its subsidiaries; and (ii) the
consideration being offered, not only in relation to the then current market
price for the Company's outstanding shares of capital stock, but also in
relation to the then current value of the Company in a freely negotiated
transaction and in relation to the Board of Directors' estimate of the future
value of the Company (including the unrealized value of its properties and
assets) as an independent going concern.
The foregoing provisions contained in the Articles as well as the right of
the Board of Directors to designate the features of and issue shares of
Preferred Stock without a shareholder vote may tend to discourage attempts by
third parties to acquire any substantial ownership position in the Common
Stock and may adversely effect the price that such a potential purchaser would
be willing to pay for the Common Stock.
Restrictions on Special Meetings. Under the Bylaws, special meetings of the
shareholders may be called only by the President, the Chairman of the Board, a
majority of the directors, or the holders of record of 10% or more of the
Company's outstanding shares of stock entitled to vote at such meeting. This
provision may impede a shareholder who wishes to require the Company to call a
special meeting of shareholders to consider any proposed corporate action.
Directors--Number, Vacancies, Removal, and Nomination. Under the Bylaws, the
Board of Directors determines the number of directors on the Board and fills
any newly created directorships or director vacancies, although directors
elected by the Board to fill vacancies may serve only until the next annual
meeting of shareholders at which directors are elected by the shareholders to
fill such vacancies. Directors may be removed
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 84,000 shares of Common Stock (the "Registrable Securities"), are
entitled to certain demand and piggyback registration rights. Holders of a
majority of the unit purchase option may require the Company to use its best
efforts to register all or a part of their Registrable Securities under the
Securities Act within 60 days of the holders' demand therefor. 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 4, 1997 (excluding shares offered hereby), have agreed with the
Underwriters not to sell or otherwise dispose of any shares of Common Stock
for a period of 90 days after the date of this Prospectus without the prior
written consent of 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, currently exercisable unit purchase options representing rights to
purchase 84,000 shares are outstanding, which the Company may be obligated to
register under the Securities Act under certain other 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 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>
[PHOTOGRAPHS]
<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 SCANSOURCE(R) APPEARS HERE]
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 Buonocoure
(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 and Schedule of
Materials Details incorporated by reference to Exhibit 10.22 to the
Registrant's Form S-1 filed with the Commission on January 23, 1997,
Registration No. 333-20231).
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>
- --------
* Filed herewith.
** 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.
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 5, 1997.
SCANSOURCE, INC.
By: /s/ Steven H. Owings
---------------------------------
Steven H. Owings
Chairman of the Board
and Chief Executive Officer
KNOW ALL MEN BY THESE PRESENCE, THAT EACH PERSON WHOSE SIGNATURE APPEARS
BELOW HEREBY CONSTITUTES AND APPOINTS STEVEN H. OWINGS, MICHAEL L. BAUR, AND
JEFFERY A. BRYSON, OR ANY ONE OF THEM, THEIR TRUE AND LAWFUL ATTORNEYS-IN-FACT
AND AGENTS, WITH FULL POWER OF SUBSTITUTION AND RE-SUBSTITUTION FOR THEM AND
IN THEIR NAME, PLACE AND STEAD, IN ANY AND ALL CAPACITIES TO SIGN ANY AND ALL
AMENDMENTS (INCLUDING POST-EFFECTIVE AMENDMENTS) TO THIS REGISTRATION
STATEMENT OR A REGISTRATION STATEMENT FILED PURSUANT TO RULE 462(B) OF THE
SECURITIES ACT OF 1933, AND TO FILE THE SAME WITH ALL EXHIBITS THERETO AND ANY
OTHER DOCUMENTS IN CONNECTION THEREWITH, WITH THE SECURITIES AND EXCHANGE
COMMISSION, GRANTING UNTO SAID ATTORNEYS-IN-FACT AND AGENTS FULL POWER AND
AUTHORITY TO DO AND PERFORM AND EVERY ACT AND THING REQUISITE AND NECESSARY TO
BE DONE IN AND ABOUT THE PREMISE, AS FULLY TO ALL INTENTS AND PURPOSES AS THEY
MIGHT OR COULD DO IN PERSON, HEREBY RATIFYING AND CONFIRMING ALL THE SAID
ATTORNEYS-IN-FACT AND AGENTS, OR THEIR SUBSTITUTE OR SUBSTITUTES, MAY LAWFULLY
DO OR CAUSE TO BE DONE BY VIRTUE HEREOF.
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 5, 1997
- ------------------------------------ Executive Officer, and
Steven H. Owings Director (principal
executive officer)
/s/ Jeffery A. Bryson Chief Financial Officer and September 5, 1997
- ------------------------------------ Treasurer (principal
Jeffery A. Bryson financial and accounting
officer)
/s/ Michael L. Baur President and Director September 5, 1997
- ------------------------------------
Michael L. Baur
/s/ Steven R. Fischer Director September 5, 1997
- ------------------------------------
Steven R. Fischer
/s/ James G. Foody Director September 5, 1997
- ------------------------------------
James G. Foody
</TABLE>
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 Buonocoure
(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 and Schedule of
Materials Details incorporated by reference to Exhibit 10.22 to the
Registrant's Form S-1 filed with the Commission on January 23, 1997,
Registration No. 333-20231).
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>
- --------
* Filed herewith.
** 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.
<PAGE>
EXHIBIT 1
SCANSOURCE, INC.
COMMON STOCK
------------------------
UNDERWRITING AGREEMENT
, 1997
---------
THE ROBINSON-HUMPHREY COMPANY, INC.
WILLIAM BLAIR & COMPANY, L.L.C.
As representatives of the several Underwriters
named in Schedule I hereto,
c/o The Robinson-Humphrey Company, Inc.
3333 Peachtree Road, N.E.
Atlanta, Georgia 30326
Ladies and Gentlemen:
ScanSource, Inc., a South Carolina corporation (the "Company") proposes,
subject to the terms and conditions stated herein, to issue and sell to the
Underwriters named in Schedule I hereto (the "Underwriters") an aggregate of
1,400,000 shares of common stock, no par value ("Common Stock"), of the Company
(the "Firm Shares"), and, at the election of the Underwriters, subject to the
terms and conditions stated herein, the Company and the shareholders of the
Company named in Schedule II hereto (the "Selling Shareholders") propose to sell
to the Underwriters up to 210,000 additional shares of Common Stock (the
"Optional Shares") (the Firm Shares and the Optional Shares that the
Underwriters elect to purchase pursuant to Section 2 hereof are collectively
called the "Shares"). In your capacity as representatives of the several
Underwriters, you are referred to herein as the "Representatives."
1. (a) REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
represents and warrants to, and agrees with, each of the Underwriters that:
(i) A registration statement on Form S-1 (File No. 333-_____) with
respect to the Shares, including a prospectus subject to completion, has
been prepared by the Company which conforms in all material respects with
the requirements of the Securities Act of 1933, as amended (the "Act"), and
the applicable rules and regulations (the "Rules and Regulations") of the
Securities and Exchange Commission (the "Commission") under the Act and has
been filed with the Commission; such amendments to such registration
statement, such amended prospectuses subject to completion and such
abbreviated registration statements pursuant to Rule 462(b) of the Rules
and Regulations as may have been required prior to the date hereof have
been similarly prepared and filed with the Commission; and the Company will
file such additional amendments to such registration statement, such
amended prospectuses subject to completion and such abbreviated
registration statements as may hereafter be required. Copies of such
registration statement and amendments, of each related prospectus subject
to completion (singularly called a "Preliminary Prospectus" and
collectively called the "Preliminary Prospectuses") and of any abbreviated
registration statement pursuant to Rule 462(b) of the Rules and Regulations
have been delivered to you.
If the registration statement relating to the Shares has been declared
effective under the Act by the Commission, the Company will prepare and
promptly file with the Commission the information omitted from the
registration statement pursuant to Rule 430A(a) or, if The Robinson-
Humphrey Company, Inc., on behalf of the several Underwriters, shall agree
to the utilization of Rule 434 of the Rules and
<PAGE>
Regulations, the information required to be included in any term sheet
filed pursuant to Rule 434(b) or (c), as applicable, of the Rules and
Regulations pursuant to subparagraph (1), (4) or (7) of Rule 424(b) of the
Rules and Regulations or as part of a post-effective amendment to the
registration statement (including a final form of prospectus). If the
registration statement relating to the Shares has not been declared
effective under the Act by the Commission, the Company will prepare and
promptly file an amendment to the registration statement, including a final
form of prospectus, or, if The Robinson-Humphrey Company, Inc., on behalf
of the several Underwriters, shall agree to the utilization of Rule 434 of
the Rules and Regulations, the information required to be included in any
term sheet filed pursuant to Rule 434(b) or (c), as applicable, of the
Rules and Regulations. The term "Registration Statement" as used in this
Agreement shall mean such registration statement, including financial
statements, schedules and exhibits, in the form in which it became or
becomes, as the case may be, effective (including, if the Company omitted
information from the registration statement pursuant to Rule 430A(a) or
files a term sheet pursuant to Rule 434 of the Rules and Regulations, the
information deemed to be a part of the registration statement at the time
it became effective pursuant to Rule 430A(b) or Rule 434(d) of the Rules
and Regulations) and, in the event of any amendment thereto or the filing
of any abbreviated registration statement pursuant to Rule 462(b) of the
Rules and Regulations relating thereto after the effective date of such
registration statement, shall also mean (from and after the effectiveness
of such amendment or the filing of such abbreviated registration statement)
such registration statement as so amended, together with any such
abbreviated registration statement. The term "Prospectus" as used in this
Agreement shall mean the prospectus relating to the Shares as included in
such Registration Statement at the time it becomes effective (including, if
the Company omitted information from the Registration Statement pursuant to
Rule 430A(a) of the Rules and Regulations, the information deemed to be a
part of the Registration Statement at the time it became effective pursuant
to Rule 430A(b) of the Rules and Regulations); provided, however, that if
-------- -------
in reliance on Rule 434 of the Rules and Regulations and with the consent
of The Robinson-Humphrey Company, Inc., on behalf of the several
Underwriters, the Company shall have provided to the Underwriters a term
sheet pursuant to Rule 434(b) or (c), as applicable, prior to the time that
a confirmation is sent or given for purposes of Section 2(10)(a) of the
Act, the term "Prospectus" shall mean the "prospectus subject to
completion" (as defined in Rule 434(g) of the Rules and Regulations) last
provided to the Underwriters by the Company and circulated by the
Underwriters to all prospective purchasers of the Shares (including the
information deemed to be a part of the Registration Statement at the time
it became effective pursuant to Rule 434(d) of the Rules and Regulations).
Notwithstanding the foregoing, if any revised prospectus shall be provided
to the Underwriters by the Company for use in connection with the offering
of the Shares that differs from the prospectus referred to in the
immediately preceding sentence (whether or not such revised prospectus is
required to be filed with the Commission pursuant to Rule 424(b) of the
Rules and Regulations), the term "Prospectus" shall refer to such revised
prospectus from and after the time it is first provided to the Underwriters
for such use. If in reliance on Rule 434 of the Rules and Regulations and
with the consent of The Robinson-Humphrey Company, Inc., on behalf of the
several Underwriters, the Company shall have provided to the Underwriters a
term sheet pursuant to Rule 434(b) or (c), as applicable, prior to the time
that a confirmation is sent or given for purposes of Section 2(10)(a) of
the Act, the Prospectus and the term sheet, together, will not be
materially different from the prospectus in the Registration Statement.
(ii) The Commission has not issued any order preventing or suspending
the use of any Preliminary Prospectus or instituted proceedings for that
purpose, and each such Preliminary Prospectus has conformed in all material
respects to the requirements of the Act and the Rules and Regulations
pertaining to preliminary prospectuses and, as of its date, has not
included any untrue statement of a material fact or omitted to state a
material fact (except for such information as is permitted to be omitted
from a preliminary prospectus) necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading;
and at the time the Registration Statement became or becomes, as the case
may be,
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effective and at all times subsequent thereto up to and on the Time
of Delivery (hereinafter defined) and on any later date on which Optional
Shares are to be purchased, (i) the Registration Statement and the
Prospectus, and any amendments or supplements thereto, contained and will
contain all material information required to be included therein by the Act
and the Rules and Regulations and will in all material respects conform to
the requirements of the Act and the Rules and Regulations, (ii) the
Registration Statement, and any amendments or supplements thereto, did not
and will not include any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances under which they were
made, not misleading, and (iii) the Prospectus, and any amendments or
supplements thereto, did not and will not include any untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading; provided,
--------
however, that none of the representations and warranties contained in this
-------
subparagraph (ii) shall apply to information contained in or omitted from
the Registration Statement, the Preliminary Prospectus or the Prospectus,
or any amendment or supplement thereto, in reliance upon, and in conformity
with, written information relating to any Underwriter furnished to the
Company by such Underwriter specifically for use in the preparation
thereof.
(iii) The Company and its Subsidiary (as defined below) have been duly
incorporated and are validly existing as corporations in good standing
under the laws of their respective jurisdictions of incorporation with full
corporate power and authority to own, lease and operate their respective
properties and conduct their respective business as described in the
Prospectus; at the Time of Delivery, the Company will directly or
indirectly own all of the outstanding capital stock of its Subsidiary free
and clear of any pledge, lien, security interest, encumbrance, claim or
equitable interest, except as disclosed in the Prospectus; the Company and
its Subsidiary are duly qualified to do business as a foreign corporation
and are in good standing in each jurisdiction in which the ownership or
leasing of their respective properties or the conduct of their respective
business requires such qualification, except where the failure to be so
qualified or be in good standing would not have a material adverse effect
on the condition (financial or otherwise), earnings, operations, business
or business prospects of the Company and its Subsidiary considered as one
enterprise; no proceeding has been instituted in any such jurisdiction,
revoking, limiting or curtailing, or seeking to revoke, limit or curtail,
such power and authority or qualification, except any such proceeding which
would not have a material adverse effect on the condition (financial or
otherwise), earnings, operations, business or business prospects of the
Company and its Subsidiary considered as one enterprise; neither the
Company nor its Subsidiary is in violation of its respective charter or
bylaws or in default in the performance or observance of any material
obligation, agreement, covenant or condition contained in any material
bond, debenture, note or other evidence of indebtedness which has not
otherwise been waived, or in any material lease, contract, indenture,
mortgage, deed of trust, loan agreement, joint venture or other agreement
or instrument to which the Company or its Subsidiary is a party or by which
it or its Subsidiary or their respective properties may be bound which has
not otherwise been waived; and neither the Company nor its Subsidiary is in
material violation of any law, order, rule, regulation, writ, injunction,
judgment or decree of any court, government or governmental agency or body,
domestic or foreign, having jurisdiction over the Company or its Subsidiary
or over their respective properties of which it or they have knowledge. At
the Time of Delivery, the Company will not own or control, directly or
indirectly, any corporation, association or other entity or have any equity
interest in any other entity other than Transition Marketing, Inc. (the
"Subsidiary").
(iv) The Company has full legal right, power and authority to enter
into this Agreement and perform the transactions contemplated hereby. This
Agreement has been duly authorized, executed and delivered by the Company
and is a valid and binding agreement on the part of the Company,
enforceable in accordance with its terms, except as rights to
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indemnification or other remedies hereunder may be limited by applicable
law and except as the enforcement hereof may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other similar laws
relating to or affecting creditors' rights generally or by general
equitable principles; the performance of this Agreement and the
consummation of the transactions herein contemplated will not result in a
material breach or violation of any of the terms and provisions of, or
constitute a default under, (i) any material bond, debenture, note or other
evidence of indebtedness, or under any lease, contract, indenture,
mortgage, deed of trust, loan agreement, joint venture or other agreement
or instrument to which the Company or its Subsidiary is a party or by which
it or its Subsidiary or their respective properties may be bound, (ii) the
charter or bylaws of the Company or its Subsidiary, or (iii) any law,
order, rule, regulation, writ, injunction, judgment or decree of any court,
government or governmental agency or body, domestic or foreign, having
jurisdiction over the Company or its Subsidiary or over their respective
properties. No consent, approval, authorization or order of or
qualification with any court, government or governmental agency or body,
domestic or foreign, having jurisdiction over the Company or its Subsidiary
or over their respective properties is required for the execution and
delivery of this Agreement and the consummation by the Company or its
Subsidiary of the transactions herein contemplated, except such as may be
required under the Act, the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), or under state or other securities or Blue Sky laws,
all of which requirements have been satisfied in all material respects, and
except for any such foreign consents, approvals or authorizations the
failure of which to obtain would not have a material adverse effect on the
condition (financial or otherwise), earnings, operations, business or
business prospects of the Company and its Subsidiary considered as one
enterprise.
(v) There is not any pending or, to the best of the Company's
knowledge, threatened action, suit, claim or proceeding against the Company
or its Subsidiary or any of their respective officers or any of their
respective properties, assets or rights before any court, government or
governmental agency or body, domestic or foreign, having jurisdiction over
the Company or its Subsidiary or over their respective officers or
properties or otherwise which (i) might result in any material adverse
change in the condition (financial or otherwise), earnings, operations,
business or business prospects of the Company or its Subsidiary considered
as one enterprise or might materially and adversely affect their
properties, assets or rights, (ii) might prevent consummation of the
transactions contemplated hereby or (iii) is required to be disclosed in
the Registration Statement or the Prospectus and is not so disclosed; and
there are no agreements, contracts, leases or documents of the Company or
its Subsidiary of a character required to be described or referred to in
the Registration Statement or the Prospectus or to be filed as an exhibit
to the Registration Statement by the Act or the Rules and Regulations which
have not been accurately described in all material respects in the
Registration Statement or the Prospectus or filed as exhibits to the
Registration Statement.
(vi) All outstanding shares of capital stock of the Company (including
the Optional Shares) have been and on the Subsequent Time of Delivery (as
hereinafter defined), will be, duly authorized and validly issued and fully
paid and nonassessable, will have been offered, sold and issued in
compliance with all federal and state securities laws, will not have been
issued in violation of or subject to any preemptive rights or other rights
to subscribe for or purchase securities, and the authorized and outstanding
capital stock of the Company is as set forth in the Prospectus under the
caption "Capitalization" and conforms in all material respects to the
statements relating thereto contained in the Registration Statement and the
Prospectus (and such statements correctly state the substance of the
instruments defining the capitalization of the Company); the Firm Shares
and the Optional Shares have been and on the Subsequent Time of Delivery,
will be, duly authorized for issuance and sale to the Underwriters pursuant
to this Agreement and, when issued and delivered by the Company against
payment therefor in accordance with the terms of this Agreement, will be
duly and validly issued and fully
4
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paid and nonassessable; the Firm Shares and the Optional Shares which may
be sold by the Company will be sold free and clear of any pledge, lien,
security interest, encumbrance, claim or equitable interest; and no
preemptive right, co-sale right, registration right, right of first refusal
or other similar right of shareholders exists with respect to any of the
Firm Shares or Optional Shares or the issuance and sale thereof other than
those that have been expressly waived prior to the date hereof. No further
approval or authorization of any shareholder, the Board of Directors of the
Company or others is required for the issuance and sale or transfer of the
Shares except as may be required under the Act, the Exchange Act or under
state or other securities or Blue Sky laws. Except as disclosed in or
contemplated by the Prospectus and the financial statements of the Company,
and the related notes thereto included in the Prospectus, the Company does
not have outstanding any options to purchase, or any preemptive rights or
other rights to subscribe for or to purchase, any securities or obligations
convertible into, or any contracts or commitments to issue or sell, shares
of its capital stock or any such options, rights, convertible securities or
obligations. The description of the Company's stock option, stock bonus and
other stock plans or arrangements, and the options or other rights granted
and exercised thereunder, set forth in the Prospectus accurately and fairly
presents the information required to be shown with respect to such plans,
arrangements, options and rights.
(vii) KPMG Peat Marwick LLP, which has audited the financial
statements of the Company, together with the related notes, as of June 30,
1996 and 1997 and for each of the years in the three years ended June
30, 1997 filed with the Commission as a part of the Registration Statement,
which are included in the Prospectus, are independent accountants within
the meaning of the Act and the Rules and Regulations; the audited financial
statements of the Company, together with the related schedules and notes
forming part of the Registration Statement and the Prospectus, fairly
present in all material respects the financial position and the results of
operations of the Company at the respective dates and for the respective
periods to which they apply; and all audited financial statements of the
Company, together with the related notes filed with the Commission as part
of the Registration Statement, have been prepared in accordance with
generally accepted accounting principles consistently applied throughout
the periods involved except as may be otherwise stated therein. The
selected and summary financial and statistical data included in the
Registration Statement present fairly in all material respects the
information shown therein and have been compiled on a basis consistent with
the audited financial statements presented therein. No other financial
statements or schedules are required to be included in the Registration
Statement.
(viii) Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus and except as
disclosed or contemplated in the Prospectus, there has not been (i) any
material adverse change in the condition (financial or otherwise),
earnings, operations, business or business prospects of the Company and its
Subsidiary considered as one enterprise, (ii) any transaction that is
material to the Company and its Subsidiary considered as one enterprise,
incurred by the Company or its Subsidiary, except transactions entered into
in the ordinary course of business, (iii) any obligation, direct or
contingent, that is material to the Company and its Subsidiary considered
as one enterprise, incurred by the Company or its Subsidiary, except
obligations incurred in the ordinary course of business, (iv) any change in
the capital stock or outstanding indebtedness of the Company or its
Subsidiary that is material to the Company and its Subsidiary considered as
one enterprise, (v) any dividend or distribution of any kind declared, paid
or made on the capital stock of the Company or its Subsidiary or (vi) any
loss or damage (whether or not insured) to the property of the Company that
has been sustained or will have been sustained which has a material adverse
effect on the condition (financial or otherwise), earnings, operations,
business or business prospects of the Company and its Subsidiary considered
as one enterprise.
(ix) Except as set forth in the Registration Statement and the
Prospectus, (i) the Company and its Subsidiary have good and marketable
title to all properties and assets
5
<PAGE>
described in the Registration Statement and the Prospectus as owned by
them, free and clear of any pledge, lien, security interest, encumbrance,
claim or equitable interest, other than such as would not have a material
adverse effect on the condition (financial or otherwise), earnings,
operations, business or business prospects of the Company and its
Subsidiary considered as one enterprise, (ii) the agreements to which the
Company or its Subsidiary is a party described in the Registration
Statement and the Prospectus are valid agreements, enforceable by the
Company and its Subsidiary (as applicable), except as the enforcement
thereof may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or affecting
creditors' rights generally or by general equitable principles and, to the
best of the Company's knowledge, the other contracting party or parties
thereto are not in material breach or material default under any of such
agreements, and (iii) the Company and its Subsidiary have valid and
enforceable leases for all properties described in the Registration
Statement and the Prospectus as leased by it, except as the enforcement
thereof may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or affecting
creditors' rights generally or by general equitable principles. Except as
set forth in the Registration Statement and the Prospectus, the Company and
its Subsidiary own or lease all such properties as are necessary to its
operations as now conducted or as now proposed to be conducted.
(x) The Company and its Subsidiary have filed all necessary foreign,
federal, state and local income and franchise tax returns (other than
franchise tax returns which the failure to file would not have a material
adverse effect on the condition (financial or otherwise), earnings,
operations, business or business prospects of the Company and its
Subsidiary considered as one enterprise) and have paid all taxes and
penalties shown thereon as due, and there is no tax deficiency that has
been or, to the best of the Company's knowledge, might be asserted against
the Company or its Subsidiary that might have a material adverse effect on
the condition (financial or otherwise), earnings, operations, business or
business prospects of the Company and its Subsidiary considered as one
enterprise; and all tax liabilities are adequately provided for on the
books of the Company and its Subsidiary.
(xi) The Company and its Subsidiary maintain insurance with insurers
of recognized financial responsibility of the types and in the amounts
generally deemed adequate for their respective businesses and consistent
with insurance coverage maintained by similar companies in similar
businesses, including, but not limited to, insurance covering real and
personal property owned or leased by the Company or its Subsidiary against
theft, damage, destruction, acts of vandalism, business interruption and
all other risks customarily insured against, all of which insurance is in
full force and effect; neither the Company nor the Subsidiary has been
refused any insurance coverage sought or applied for; and neither the
Company not its Subsidiary have any reason to believe that it will not be
able to renew its existing insurance coverage as and when such coverage
expires or to obtain similar coverage from similar insurers as may be
necessary to continue its business at a cost that would not materially and
adversely affect the condition (financial or otherwise), earnings,
operations, business or business prospects of the Company and its
Subsidiary considered as one enterprise.
(xii) To the best of the Company's knowledge, no labor disturbance by
the employees of the Company or its Subsidiary exists or is imminent; and
the Company is not aware of any existing or imminent labor disturbance by
the employees of any of its principal suppliers that might be expected to
result in a material adverse change in the condition (financial or
otherwise), earnings, operations, business or business prospects of the
Company and its Subsidiary considered as one enterprise. No collective
bargaining agreement exists with any of the Company's or the Subsidiary's
employees and, to the best of the Company's knowledge, no such agreements
are imminent.
6
<PAGE>
(xiii) The Company and its Subsidiary own or possess adequate rights
to use all patents, patent rights, inventions, trade secrets, know-how,
trademarks, service marks, trade names and copyrights which are necessary
to conduct their respective businesses as now conducted and as proposed to
be conducted as described in the Registration Statement and the Prospectus
in the U.S. and, to the Company's knowledge, outside the U.S.; the
expiration of any patents, patent rights, trade secrets, trademarks,
service marks, trade names or copyrights would not have a material adverse
effect on the condition (financial or otherwise), earnings, operations,
business or business prospects of the Company and its Subsidiary considered
as one enterprise; neither the Company nor its Subsidiary has received any
notice of, and has no knowledge of, any infringement of or conflict with
asserted rights of the Company or its Subsidiary by others with respect to
any patent, patent rights, inventions, trade secrets, know-how, trademarks,
service marks, trade names or copyrights; and neither the Company nor its
Subsidiary has received any notice of, and has no knowledge of, any
infringement of or conflict with asserted rights of others with respect to
any patent, patent rights, inventions, trade secrets, know-how, trademarks,
service marks, trade names or copyrights which, singly or in the aggregate,
if the subject of an unfavorable decision, ruling or finding, might have a
material adverse effect on the condition (financial or otherwise),
earnings, operations, business or business prospects of the Company and its
Subsidiary considered as one enterprise.
(xiv) Except as described in the Registration Statement and the
Prospectus, the Company and its Subsidiary have operated and currently
operate their respective business in conformity with all applicable laws,
rules and regulations of each jurisdiction in which they are conducting
business, except where the failure to be so in compliance would not have a
material adverse effect on the condition (financial or otherwise),
earnings, operations, business or business prospects of the Company and its
Subsidiary considered as one enterprise. The Company and its Subsidiary
have all licenses, certificates, authorizations, approvals, permits,
franchises, orders and consents from all state, federal and other
governmental or regulatory authorities (including foreign jurisdictions)
which are necessary to the conduct of their respective business, except
where the failure to be so in compliance would not have a material adverse
effect on the condition (financial or otherwise), earnings, operations,
business or business prospects of the Company and its Subsidiary considered
as one enterprise. All of such licenses, certificates, authorizations,
approvals, permits, franchises, orders and consents are valid and in full
force and effect. Except as described in the Registration Statement and the
Prospectus, the Company and its Subsidiary have fulfilled and performed,
and will fulfill and perform, all of their obligations with respect to, and
are operating in compliance with, all such licenses, certificates,
authorizations, approvals, permits, franchises, orders and consents and no
event has occurred which allows, or after notice or lapse of time would
allow, revocation or termination thereof or result in any impairment of the
rights of the holder thereof, except to the extent that any such
revocation, termination or impairment would not have a material adverse
effect on the condition (financial or otherwise), earnings, operations,
business or business prospects of the Company and its Subsidiary considered
as one enterprise. Except as set forth in the Registration Statement and
the Prospectus, no such licenses, certificates, authorizations, approvals,
permits, franchises, orders or consents contain any restrictions that have
or may have a material adverse effect on the condition (financial or
otherwise), results of operations, business or business prospects of the
Company and its Subsidiary considered as one enterprise. Neither the
Company nor its Subsidiary is aware of any existing or imminent matter the
occurrence of which would have a material adverse effect on the condition
(financial or otherwise), earnings, operations, business or business
prospects of the Company and its Subsidiary considered as one enterprise
other than as disclosed in the Registration Statement and the Prospectus.
(xv) The Common Stock is registered pursuant to Section 12(g) of the
Exchange Act and is listed on The Nasdaq National Market, and the Company
has taken no action designed to, or likely to have the effect of,
terminating the registration of the Common
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Stock under the Exchange Act or delisting the Common Stock from The Nasdaq
National Market, nor has the Company received any notification that the
Commission or the National Association of Securities Dealers, Inc. ("NASD")
is contemplating terminating such registration or listing.
(xvi) The Company has been advised concerning the Investment Company
Act of 1940, as amended (the "1940 Act"), and the rules and regulations
thereunder, and has in the past conducted, and intends in the future to
conduct, its affairs in such a manner as to ensure that it will not become
an "investment company" or a company "controlled" by an "investment
company" within the meaning of the 1940 Act and such rules and regulations.
(xvii) The Company has not distributed and will not distribute prior
to the later of (i) the First Time of Delivery (as hereinafter defined) or
the Subsequent Time of Delivery, as the case may be, and (ii) completion of
the distribution of the Shares, any offering material in connection with
the offering and sale of the Shares other than any Preliminary
Prospectuses, the Prospectus, the Registration Statement and other
materials, if any, permitted by the Act.
(xviii) Neither the Company not its Subsidiary has at any time during
the last five years (i) made any unlawful contribution to any candidate for
foreign office or failed to disclose fully any contribution in violation of
law, or (ii) made any payment to any federal or state governmental officer
or official, or other person charged with similar public or quasi-public
duties, other than payments required or permitted by the laws of the U.S.
or any jurisdiction thereof.
(xix) The Company has not taken and will not take, directly or
indirectly, any action designed to or that might reasonably be expected to
cause or result in stabilization or manipulation of the price of the Common
Stock to facilitate the sale or resale of the Shares.
(xx) Each officer and director of the Company, each Selling
Shareholder and any other person or entity shown on Schedule III hereto has
agreed in writing that such person will not, from the date that the
Registration Statement is declared effective by the Commission until the
expiration of the period shown on Schedule III hereto (the "Lock-up
Period"), offer to sell, contract to sell, or otherwise sell, dispose of,
loan, pledge or grant any rights with respect to (collectively, a
"Disposition") any shares of Common Stock, any options or warrants to
purchase any shares of Common Stock or any securities convertible into or
exchangeable for shares of Common Stock (collectively, "Securities") now
owned or hereafter acquired by such person, directly or indirectly, or with
respect to which such person has or hereafter acquires the power of
disposition, other than (i) as a bona fide gift or gifts, provided the
donee or donees thereof agree in writing to be bound by this restriction,
(ii) as a distribution to limited partners, shareholders or beneficiaries
of such person, provided that the distributees thereof agree in writing to
be bound by the terms of this restriction, (iii) if such person is an
individual, to a member or members of his or her immediate family or to a
trust the beneficiaries of which are exclusively such person and/or a
member or members of his or her immediate family, provided that each
transferee thereof agrees in writing to be bound by the terms of this
restriction, or (iv) with the prior written consent of The Robinson-
Humphrey Company, Inc.. The term "Disposition" shall not include such
person's exercise of a stock option or warrant issued or granted by the
Company or other securities granted by the Company and convertible or
exchangeable for Common Stock of the Company, but shall include any
subsequent offer to sell, contract to sell, sale, disposal of, loan, pledge
or grant of any rights with respect to the Shares of Common Stock, except
for any shares of Common Stock to be sold by such person pursuant to this
Agreement. The foregoing restriction has been expressly agreed to preclude
the holder of the Securities from engaging in any hedging or other
transaction which is designed to or reasonably expected to lead to or
result in a Disposition of Securities during the Lock-up Period, even if
such
8
<PAGE>
Securities would be disposed of by someone other than such holder. Such
prohibited hedging or other transactions would include, without limitation,
any short sale (whether or not against the box) or any purchase, sale or
grant of any right (including, without limitation, any put or call option)
with respect to any Securities or with respect to any security (other than
a broad-based market basket or index) that includes, relates to or derives
any significant part of its value from Securities. Furthermore, each such
person has also agreed and consented to the entry of stop transfer
instructions with the Company's transfer agent against the transfer of the
Securities held by such person except in compliance with the foregoing
restrictions. The Company has provided to counsel for the Underwriters a
complete and accurate list of all securityholders of record of the Company
and the number and type of securities held by each securityholder of
record. The Company has provided to counsel for the Underwriters true,
accurate and complete copies of all of the agreements pursuant to which its
officers, directors and shareholders have agreed to such or similar
restrictions (the "Lock-up Agreements") presently in effect or effected
hereby. The Company hereby represents and warrants that it will not release
any of its officers, directors or other shareholders from any Lock-up
Agreements currently existing or hereafter effected without the prior
written consent of The Robinson-Humphrey Company, Inc..
(xxi) Except as set forth in the Registration Statement and the
Prospectus, (i) the Company and its Subsidiary are in compliance with all
rules, laws and regulations relating to the use, treatment, storage and
disposal of toxic substances and protection of health or the environment
("Environmental Laws") which are applicable to their respective business
which, singly or in the aggregate, if the subject of an unfavorable
decision, ruling or finding, would have a material adverse effect on the
condition (financial or otherwise), earnings, operations, business or
business prospects of the Company and its Subsidiary considered as one
enterprise, (ii) neither the Company nor its Subsidiary has received notice
from any governmental authority or third party of an asserted claim under
Environmental Laws, which claim is required to be disclosed in the
Registration Statement and the Prospectus, (iii) neither the Company nor
its Subsidiary will, to the Company's knowledge, be required to make future
material capital expenditures to comply with Environmental Laws and (iv) to
the Company's knowledge, no property which is owned, leased or occupied by
the Company or its Subsidiary has been designated as a Superfund site
pursuant to the Comprehensive Response, Compensation, and Liability Act of
1980, as amended (42 U.S.C. (S) 9601, et seq.), or otherwise designated as
------
a contaminated site under applicable state or local law.
(xxii) The Company and its Subsidiary maintain systems of internal
accounting controls sufficient to provide reasonable assurances that (i)
transactions are executed in accordance with management's general or
specific authorizations, (ii) transactions are recorded as necessary to
permit preparation of financial statements in conformity with generally
accepted accounting principles and to maintain accountability for assets,
(iii) access to assets is permitted only in accordance with management's
general or specific authorization, and (iv) the recorded accountability for
assets is compared with existing assets at reasonable intervals and
appropriate action is taken with respect to any differences.
(xxiii) There are no outstanding loans, advances (except normal
advances for business expenses in the ordinary course of business) or
guarantees of indebtedness by the Company to or for the benefit of any of
the officers or directors of the Company or any of the members of the
families of any of them, except as required to be disclosed and are
disclosed in the Registration Statement and the Prospectus.
(xxiv) The Company has complied with any applicable provisions of
Section 517.075, Florida Statutes relating to doing business with the
Government of Cuba or with any person or affiliate located in Cuba.
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<PAGE>
(xxv) The Subsidiary of the Company is not prohibited, directly or
indirectly, from paying any dividends, from making any other distributions
on its capital stock, from repaying to the Company any loans or advances to
it or from transferring any of its property or assets to the Company,
except as disclosed in the Registration Statement and the Prospectus and
except for such limitations that may be contained in the corporate code of
the jurisdiction under which the Subsidiary is incorporated.
(xxvi) To the best of the Company's knowledge, other than David M.
Nussbaum's, Robert Gladstone's, Richard Gladstone's and Richard Buonocore's
relationships with GKN Securities Corp. (whose aggregate ownership
interests represent less than 5% of the Company's Common Stock), no
officer, director or 5% or more securityholder of the Company has an
"association" or "affiliation" with any member of the National Association
of Securities Dealers, Inc. ("NASD"), within the meaning of Article III,
Section 44 of the Rules of Fair Practice of the NASD. The Company does not
have an "association" or "affiliation" with any member of the NASD, within
the meaning of Article III, Section 44 of the Rules of Fair Practice of the
NASD.
(xxvii) The Company and its Subsidiary have previously disclosed and
delivered or made available to the Representatives prior to the date the
Registration Statement was declared effective copies of all pension,
retirement, profit-sharing, deferred compensation, stock option, employee
stock ownership, severance pay, vacation, bonus, or other incentive plan,
all other written employee programs, arrangements, or agreements, all
medical, vision, dental, or other health plans, all life insurance plans,
and all other employee benefit plans or fringe benefit plans, including,
without limitation, "employee benefit plans" as that term is defined in
Section 3(3) of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), adopted, maintained, sponsored in whole or in part, or
contributed to, by the Company or its Subsidiary for the benefit of
employees, retirees, dependents, spouses, directors, independent
contractors, or other beneficiaries and under which employees, retirees,
dependents, spouses, directors, independent contractors, or other
beneficiaries are eligible to participate (collectively, the "Company
Benefit Plans").
The Company and its Subsidiary have maintained all Company Benefit
Plans (including filing all reports and returns required to be filed with
respect thereto) in accordance with their terms and in compliance with the
applicable terms of ERISA, the Internal Revenue Code of 1986, as amended
(the "Internal Revenue Code"), and any other applicable Federal and State
laws the breach or violation of which would have, individually or in the
aggregate, a material adverse effect on the condition (financial or
otherwise), earnings, operations, business or business prospects of the
Company and its Subsidiary considered as one enterprise. Each Company
Benefit Plan which is intended to be qualified under Section 401(a) of the
Internal Revenue Code has either received a favorable determination letter
from the Internal Revenue Service or such a letter has been timely
requested, and has at all times been maintained in accordance with Section
401 of the Internal Revenue Code, except where any failure to so maintain
such Company Benefit Plan would not have, individually or in the aggregate,
a material adverse effect on the condition (financial or otherwise),
earnings, operations, business or business prospects of the Company.
Neither the Company nor its Subsidiary has engaged in a transaction with
respect to any Company Benefit Plan that, assuming the taxable period of
such transaction expired as of the date hereof, would subject the Company
or its Subsidiary to a tax or penalty imposed by either Section 4975 of the
Internal Revenue Code or Section 502(i) of ERISA in amounts which are
reasonably likely to have, individually or in the aggregate, a material
adverse effect on the condition (financial or otherwise), earnings,
operations, business or business prospects of the Company and its
Subsidiary considered as one enterprise.
Neither the Company nor its Subsidiary is obligated to provide post-
retirement medical benefits or any other unfunded post-retirement welfare
benefits (except COBRA continuation coverage required to be provided by
ERISA Section 601), which
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obligations would have, individually or in the aggregate, a material
adverse effect on the condition (financial or otherwise), earnings,
operations, business or business prospects of the Company and its
Subsidiary considered as one enterprise. Neither the Company, its
Subsidiary nor any member of a group of trades or businesses under common
control (as defined in ERISA Sections 4001(a)(14) and 4001(b)(1)) with the
Company or its Subsidiary have at any time within the last six years
sponsored, contributed to or been obligated under Title I or IV of ERISA to
contribute to a "defined benefit plan" (as defined in ERISA Section 3(35)).
Within the last six years, neither the Company, its Subsidiary nor any
member of a group of trades or businesses under common control (as defined
in ERISA Sections 4001(a)(14) and 4001(b)(1)) with Company or its
Subsidiary have had an "obligation to contribute" (as defined in ERISA
Section 4212) to a "multiemployer plan" (as defined in ERISA Sections
4001(a)(3) and 3(37)(A)).
(b) REPRESENTATIONS AND WARRANTIES OF THE SELLING SHAREHOLDERS. In the
event that the Underwriters exercise the election to purchase Optional Shares,
each Selling Shareholder, severally and not jointly, represents and warrants to,
and agrees with, each of the several Underwriters and the Company that:
(i) Such Selling Shareholder (i) to the extent it or he currently owns
any Shares, now has and on the First Time of Delivery will have, and (ii)
on the Subsequent Time of Delivery, will have valid marketable title to the
Shares to be sold by such Selling Shareholder, free and clear of any
pledge, lien, security interest, encumbrance, claim or equitable interest
other than pursuant to this Agreement; and upon delivery of such Shares
hereunder and payment of the purchase price as herein contemplated, each of
the Underwriters will obtain valid marketable title to the Shares purchased
by it from such Selling Shareholder, free and clear of any pledge, lien,
security interest pertaining to such Selling Shareholder or such Selling
Shareholder's property, encumbrance, claim or equitable interest, including
any liability for estate or inheritance taxes, or any liability to or
claims of any creditor, devisee, legatee or beneficiary of such Selling
Shareholder.
(ii) Such Selling Shareholder has duly authorized (if applicable),
executed and delivered, in the form heretofore furnished to the
Representatives, an irrevocable Power of Attorney (the "Power of Attorney")
appointing Steven H. Owings, Michael L. Baur and Jeffery A. Bryson as
attorneys-in-fact (collectively, the "Attorneys" and individually, an
"Attorney") and a Custody Agreement with Continental Stock Transfer & Trust
Company, New York, New York, as custodian (the "Custodian"); each of the
Power of Attorney and the Custody Agreement constitutes a valid and binding
agreement on the part of such Selling Shareholder, enforceable in
accordance with its terms, except as the enforcement thereof may be limited
by applicable bankruptcy, insolvency, reorganization, moratorium or other
similar laws relating to or affecting creditors' rights generally or by
general equitable principles; and each of such Selling Shareholder's
Attorneys, acting alone, is authorized to execute and deliver this
Agreement and the certificate referred to in Section 7(h) hereof on behalf
of such Selling Shareholder, to determine the purchase price to be paid by
the several Underwriters to such Selling Shareholder as provided in Section
2 hereof, to authorize the delivery of the Optional Shares to be sold by
such Selling Shareholder under this Agreement and to duly endorse (in blank
or otherwise) the certificate or certificates representing such Shares, a
notice of exercise or a stock power or powers with respect thereto, to
accept payment therefor, and otherwise to act on behalf of such Selling
Shareholder in connection with this Agreement.
(iii) All consents, approvals, authorizations and orders required for
the execution and delivery by such Selling Shareholder of the Power of
Attorney and the Custody Agreement, the execution and delivery by or on
behalf of such Selling Shareholder of this Agreement and the sale and
delivery of the Optional Shares to be sold by such Selling
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<PAGE>
Shareholder under this Agreement (other than, at the time of the execution
hereof (if the Registration Statement has not yet been declared effective
by the Commission), the issuance of the order of the Commission declaring
the Registration Statement effective and such consents, approvals,
authorizations or orders as may be necessary under state or other
securities or Blue Sky laws) have been obtained and are in full force and
effect; such Selling Shareholder, if other than a natural person, has been
duly organized and is validly existing in good standing under the laws of
the jurisdiction of its organization as the type of entity that it purports
to be; and such Selling Shareholder has full legal right, power and
authority to enter into and perform its obligations under this Agreement
and such Power of Attorney and Custody Agreement, and to sell, assign,
transfer and deliver the Shares to be sold by such Selling Shareholder
under this Agreement.
(iv) Such Selling Shareholder will not, during the Lock-up Period,
effect the Disposition of any shares of Common Stock, any options or
warrants to purchase any shares of Common Stock or any securities
convertible into or exchangeable for shares of Common Stock (collectively,
"Securities") now owned or hereafter acquired by such Selling Shareholder,
directly or indirectly, or with respect to which such Selling Shareholder
has or hereafter acquires the power of disposition, other than (i) as a
bona fide gift or gifts, provided the donee or donees thereof agree in
writing to be bound by this restriction, (ii) as a distribution to limited
partners, shareholders or beneficiaries of such Selling Shareholder,
provided that the distributees thereof agree in writing to be bound by the
terms of this restriction, (iii) if such person is an individual, to a
member or members of his or her immediate family or to a trust the
beneficiaries of which are exclusively such person and/or a member or
members of his or her immediate family, provided that each transferee
thereof agrees in writing to be bound by the terms of this restriction, or
(iv) with the prior written consent of The Robinson-Humphrey Company, Inc..
The foregoing restriction is expressly agreed to preclude the holder of the
Securities from engaging in any hedging or other transaction which is
designed to or reasonably expected to lead to or result in a Disposition of
Securities during the Lock-up Period, even if such Securities would be
disposed of by someone other than the Selling Shareholder. Such prohibited
hedging or other transactions would include, without limitation, any short
sale (whether or not against the box) or any purchase, sale or grant of any
right (including, without limitation, any put or call option) with respect
to any Securities or with respect to any security (other than a broad-based
market basket or index) that includes, relates to or derives any
significant part of its value from Securities. Such Selling Shareholder
also agrees and consents to the entry of stop transfer instructions with
the Company's transfer agent against the transfer of the securities held by
such Selling Shareholder except in compliance with the foregoing
restrictions.
(v) Except with respect to 25,000 Shares issuable upon the exercise of
outstanding options, for which a notice of exercise will be placed in
custody by certain Selling Shareholders, certificates in negotiable form
representing all Shares to be sold by such Selling Shareholder under this
Agreement, together with a stock power or powers duly endorsed in blank by
such Selling Shareholder, have been placed in custody with the Custodian
for the purpose of effecting delivery hereunder.
(vi) This Agreement has been duly authorized by such Selling
Shareholder that is not a natural person and has been duly executed and
delivered by or on behalf of such Selling Shareholder and is a valid and
binding agreement of such Selling Shareholder, enforceable in accordance
with its terms, except as rights to indemnification hereunder may be
limited by applicable law and except as the enforcement hereof may be
limited by bankruptcy, insolvency, reorganization, moratorium or other
similar laws relating to or affecting creditors' rights generally or by
general equitable principles; and the performance of this Agreement and the
consummation of the transactions herein contemplated will not result in a
material breach or violation of any of the terms and provisions of or
constitute a default under any material bond, debenture, note or other
evidence of indebtedness, or under any material lease, contract, indenture,
mortgage, deed of trust, loan agreement, joint venture or other agreement
or
12
<PAGE>
instrument to which such Selling Shareholder is a party or by which such
Selling Shareholder, or any Optional Shares to be sold by such Selling
Shareholder hereunder, may be bound or, to the best of such Selling
Shareholder's knowledge, result in any violation of any law, order, rule,
regulation, writ, injunction, judgment or decree of any court, government
or governmental agency or body, domestic or foreign, having jurisdiction
over such Selling Shareholder or over the properties of such Selling
Shareholder, or, if such Selling Shareholder is other than a natural
person, result in any violation of any provisions of the charter, bylaws or
other organizational documents of such Selling Shareholder.
(vii) Such Selling Shareholder has not taken and will not take,
directly or indirectly, any action designed to or that might reasonably be
expected to cause or result in stabilization or manipulation of the price
of the Common Stock to facilitate the sale or resale of the Shares.
(viii) Such Selling Shareholder has not distributed and will not
distribute any prospectus or other offering material in connection with the
offering and sale of the Shares.
(ix) All information furnished by or on behalf of such Selling
Shareholder relating to such Selling Shareholder and the Optional Shares
that is contained in the representations and warranties of such Selling
Shareholder in such Selling Shareholder's Power of Attorney or set forth in
the Registration Statement or the Prospectus is, and at the time the
Registration Statement became or becomes, as the case may be, effective and
at all times subsequent thereto up to and on the First Time of Delivery and
on the Subsequent Time of Delivery, was or will be, true, correct and
complete in all material respects, and does not, and at the time the
Registration Statement became or becomes, as the case may be, effective and
at all times subsequent thereto up to and on the Time of Delivery
(hereinafter defined) ,and on any later date on which Optional Shares are
to be purchased, will not, contain any untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary
to make such information, in light of the circumstances under which they
were made, not misleading.
(x) Such Selling Shareholder will review the Prospectus and will
comply with all agreements and satisfy all conditions on its part to be
complied with or satisfied pursuant to this Agreement on or prior to the
Time of Delivery, or the Subsequent Time of Delivery, as the case may be,
and will advise one of its Attorneys and The Robinson-Humphrey Company,
Inc. prior to the First Time of Delivery or such later date on which
Optional Shares are to be purchased, as the case may be, if any statement
to be made on behalf of such Selling Shareholder in the certificate
contemplated by Section 7(h) hereof would be inaccurate if made as of the
First Time of Delivery or the Subsequent Time of Delivery as the case may
be.
(xi) Such Selling Shareholder does not have, or has waived prior to
the date hereof, any preemptive right, co-sale right or right of first
refusal or other similar right to purchase any of the Shares that are to be
sold by the Company or any of the other Selling Shareholders to the
Underwriters pursuant to this Agreement; such Selling Shareholder does not
have, or has waived prior to the date hereof, any registration right or
other similar right to participate in the offering made by the Prospectus,
other than such rights of participation as have been satisfied by the
participation of such Selling Shareholder in the transactions to which this
Agreement relates in accordance with the terms of this Agreement; and such
Selling Shareholder does not own any warrants, options or similar rights to
acquire, and does not have any right or arrangement to acquire, any capital
stock, rights, warrants, options or other securities from the Company,
other than those described in the Registration Statement and the
Prospectus.
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<PAGE>
(xii) Such Selling Shareholder is not aware that any of the
representations and warranties of the Company set forth in Section 1(a) of
this Agreement is untrue or inaccurate in any material respect.
In order to document the Underwriters' compliance with the reporting and
withholding provisions of the Internal Revenue Code of 1986, as amended, with
respect to the transactions herein contemplated, each of the Selling
Shareholders agrees to deliver to you prior to or at the First Time of Delivery
a properly completed and executed U.S. Treasury Department Form W-9 (or other
applicable form or statement specified by Treasury Department regulations in
lieu thereof).
2. PURCHASE AND SALE OF SHARES. Subject to the terms and conditions
herein set forth, (a) the Company agrees to sell to each of the Underwriters,
and each of the Underwriters agrees, severally and not jointly, to purchase from
the Company, at a purchase price of $ per share, the number of Firm Shares
------
(to be adjusted by you so as to eliminate fractional shares) determined by
multiplying the aggregate number of Firm Shares to be sold by the Company by a
fraction, the numerator of which is the aggregate number of Firm Shares to be
purchased by such Underwriter as set forth opposite the name of such Underwriter
in Schedule I hereto, and the denominator of which is the aggregate number of
Firm Shares to be purchased by the Underwriters from the Company hereunder and
(b) in the event that the Underwriters shall exercise the election to purchase
Optional Shares as provided below, the Company and the Selling Shareholders
agree to sell to each of the Underwriters, severally and not jointly, and each
of the Underwriters agrees, severally and not jointly, to purchase from the
Company and the Selling Shareholders, at the purchase price per share set forth
in clause (a) of this Section 2, that portion of the number of Optional Shares
as to be sold by the Selling Shareholders as set forth opposite their respective
names in Schedule II hereto as to which such election shall have been exercised
(to be adjusted by you so as to eliminate fractional shares) determined by
multiplying such number of Optional Shares by a fraction, the numerator of which
is the maximum number of Optional Shares that such Underwriter is entitled to
purchase as set forth opposite the name of such Underwriter in Schedule I hereto
and the denominator of which is the maximum number of the Optional Shares that
all of the Underwriters are entitled to purchase hereunder. In the event that
the Underwriters shall exercise the election to purchase Optional Shares in
part, the Underwriters shall purchase (i) first, the Optional Shares to be sold
by the Selling Shareholders until all such Optional Shares have been sold,
(which if partially exercised will be purchased from the Selling Shareholders on
a pro rata basis rounded to the nearest whole share), and (ii) second, the
Optional Shares to be sold by the Company until all such Optional Shares have
been sold.
The Company and the Selling Shareholders hereby grant to the Underwriters
the right to purchase, at their election in whole or in part from time to time,
up to 210,000 Optional Shares, at the purchase price per share set forth in
clause (a) in the paragraph above, for the sole purpose of covering over-
allotments in the sale of Firm Shares. Any such election to purchase Optional
Shares may be exercised by written notice from you to the Company, given from
time to time within a period of 30 calendar days after the date of this
Agreement and setting forth the aggregate number of Optional Shares to be
purchased and the date on which such Optional Shares are to be delivered, as
determined by you but in no event earlier than the First Time of Delivery (as
hereinafter defined) or, unless you and the Company otherwise agree in writing,
earlier than two or later than ten business days after the date of such notice.
In the event you elect to purchase all or a portion of the Optional Shares, the
Selling Shareholders agree to furnish or cause to be furnished to you the
certificates, letters and opinions, and to satisfy all conditions, set forth in
Section 7 hereof at each Subsequent Time of Delivery.
3. OFFERING BY THE UNDERWRITERS. Upon the authorization by you of the
release of the Shares, the several Underwriters propose to offer the Shares for
sale upon the terms and conditions disclosed in the Prospectus.
4. DELIVERY OF SHARES; CLOSING. Certificates in definitive form for the
Shares to be purchased by each Underwriter hereunder, and in such denominations
and registered in such names as
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<PAGE>
The Robinson-Humphrey Company, Inc. may request upon at least 48 hours' prior
notice to the Company, shall be delivered by or on behalf of the Company and the
Selling Shareholders to you for the account of such Underwriter against payment
by such Underwriter on its behalf of the purchase price therefor by wire
transfer or certified or official bank check or checks drawn on an Atlanta,
Georgia bank, payable to the order of the Company and the Custodian, as their
interests may appear, in same-day available funds. The closing of the sale and
purchase of the Shares shall be held at the offices of Alston & Bird LLP, One
Atlantic Center, 1201 West Peachtree Street, Atlanta, Georgia 30309-3424, or at
such other location as you, the Company and the Attorneys may agree upon, except
that physical delivery of such certificates shall be made at the office of The
Depository Trust Company, 55 Water Street, New York, New York 10041. The time
and date of such delivery and payment shall be, with respect to the Firm Shares,
at 10:00 a.m., Atlanta time, on the third (or if the Firm Shares are priced, as
contemplated by Rule 15c6-1(c) promulgated pursuant to the Exchange Act, after
4:30 p.m., Washington, D.C. time, the fourth) full business day after this
Agreement is executed or at such other time and date not less than the seventh
full business day thereafter as you and the Company may agree upon in writing,
and, with respect to the Optional Shares, at 10:00 a.m., Atlanta time, on the
date and at the location specified by you in the written notice given by you of
the Underwriters' election to purchase all or part of such Optional Shares, or
at such other time and date as you and the Attorneys may agree upon. Such time
and date for delivery of the Firm Shares is herein called the "First Time of
Delivery," such time and date for delivery of any Optional Shares, if not the
First Time of Delivery, is herein called a "Subsequent Time of Delivery," and
each such time and date for delivery is herein called a "Time of Delivery." The
Company will make such certificates available for checking and packaging at
least 24 hours prior to each Time of Delivery at the office of The Depository
Trust Company, 55 Water Street, New York, New York 10041 or at such other
location in New York, New York specified by you in writing at least 48 hours
prior to such Time of Delivery.
5. (A) COVENANTS OF THE COMPANY. The Company covenants and agrees with
each of the Underwriters:
(i) The Company will use its best efforts to cause the Registration
Statement and any amendment thereof, if not effective at the time and date
that this Agreement is executed and delivered by the parties hereto, to
become effective as promptly as possible; the Company will use its best
efforts to cause any abbreviated registration statement pursuant to Rule
462(b) of the Rules and Regulations as may be required subsequent to the
date the Registration Statement is declared effective to become effective
as promptly as possible; the Company will notify you, promptly after it
shall receive notice thereof, of the time when the Registration Statement,
any subsequent amendment to the Registration Statement or any abbreviated
registration statement has become effective or any supplement to the
Prospectus has been filed; if the Company omitted information from the
Registration Statement at the time it was originally declared effective in
reliance upon Rule 430A(a) of the Rules and Regulations, the Company will
provide evidence satisfactory to you that the Prospectus contains such
information and has been filed, within the time period prescribed, with the
Commission pursuant to subparagraph (1) or (4) of Rule 424(b) of the Rules
and Regulations or as part of a post-effective amendment to such
Registration Statement as originally declared effective which is declared
effective by the Commission; if the Company files a term sheet pursuant to
Rule 434 of the Rules and Regulations, the Company will provide evidence
satisfactory to you that the Prospectus and term sheet meeting the
requirements of Rule 434(b) or (c), as applicable, of the Rules and
Regulations, have been filed, within the time period prescribed, with the
Commission pursuant to subparagraph (7) of Rule 424(b) of the Rules and
Regulations; if for any reason the filing of the final form of Prospectus
is required under Rule 424(b)(3) of the Rules and Regulations, it will
provide evidence satisfactory to you that the Prospectus contains such
information and has been filed with the Commission within the time period
prescribed; it will notify you promptly of any request by the Commission
for the amending or supplementing of the Registration Statement or the
Prospectus or for additional information; promptly upon your request, it
will prepare and file
15
<PAGE>
with the Commission any amendments or supplements to the Registration
Statement or Prospectus which, in the reasonable opinion of counsel for the
several Underwriters ("Underwriters' Counsel"), may be necessary or
advisable in connection with the distribution of the Shares by the
Underwriters; it will promptly prepare and file with the Commission, and
promptly notify you of the filing of, any amendments or supplements to the
Registration Statement or Prospectus which may be necessary to correct any
statements or omissions, if, at any time when a prospectus relating to the
Shares is required to be delivered under the Act, any event shall have
occurred as a result of which the Prospectus or any other prospectus
relating to the Shares as then in effect would include any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading; in case any Underwriter is required to deliver a
prospectus nine months or more after the effective date of the Registration
Statement in connection with the sale of the Shares, it will prepare
promptly upon request, but at the expense of such Underwriter, such
amendment or amendments to the Registration Statement and such prospectus
or prospectuses as may be necessary to permit compliance with the
requirements of Section 10(a)(3) of the Act; and it will file no amendment
or supplement to the Registration Statement or Prospectus which shall not
previously have been submitted to you a reasonable time prior to the
proposed filing thereof or to which you shall reasonably object in writing,
subject, however, to compliance with the Act and the Rules and Regulations
and the provisions of this Agreement.
(ii) The Company will advise you, promptly after it shall receive
notice or obtain knowledge, of the issuance of any stop order by the
Commission suspending the effectiveness of the Registration Statement or of
the initiation or threat of any proceeding for that purpose; and it will
promptly use its best efforts to prevent the issuance of any stop order or
to obtain its withdrawal at the earliest possible moment if such stop order
should be issued.
(iii) The Company will use its best efforts to cooperate with you and
Underwriters' counsel in connection with your qualifying the Shares for
offering and sale under the securities laws of such jurisdictions as you
may designate and continuing such qualifications in effect for so long as
may be required for purposes of the distribution of the Shares, except that
the Company shall not be required in connection therewith or as a condition
thereof to qualify as a foreign corporation or to execute a general consent
to service of process in any jurisdiction in which it is not otherwise
required to be so qualified or to so execute a general consent to service
of process. In each jurisdiction in which the Shares shall have been
qualified as above provided, the Company will make and file such statements
and reports in each year as are or may be required by the laws of such
jurisdiction.
(iv) The Company will furnish to you, as soon as available, and, in
the case of the Prospectus and any term sheet or abbreviated term sheet
under Rule 434, in no event later than the first (1st) full business day
following the first day that Shares are traded, copies of the Registration
Statement (three of which will be signed and which will include all
exhibits), each Preliminary Prospectus and the Prospectus and any
amendments or supplements to such documents, including any prospectus
prepared to permit compliance with Section 10(a)(3) of the Act, all in such
quantities as you may from time to time reasonably request. Notwithstanding
the foregoing, if The Robinson-Humphrey Company, Inc., on behalf of the
several Underwriters, shall agree to the utilization of Rule 434 of the
Rules and Regulations, the Company shall provide to you copies of a
Preliminary Prospectus updated in all respects through the date specified
by you in such quantities as you may from time to time reasonably request.
(v) The Company will make generally available to its securityholders
as soon as practicable, but in any event not later than the 90th day
following the end of the fiscal quarter first occurring after the first
anniversary of the effective date of the Registration
16
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Statement, an earnings statement (which will be in reasonable detail but
need not be audited) complying with the provisions of Section 11(a) of the
Act and covering a 12-month period beginning after the effective date of
the Registration Statement.
(vi) During a period of five years after the date hereof and for so
long as the Company is a reporting company under the Exchange Act, the
Company will furnish to its shareholders as soon as practicable after the
end of each respective period, annual reports (including financial
statements audited by independent certified public accountants) and
unaudited quarterly reports of operations for each of the first three
quarters of the fiscal year, and will furnish to you and the other several
Underwriters hereunder, upon request (i) concurrently with furnishing such
reports to its shareholders, statements of operations of the Company for
each of the first three quarters in the form furnished to the Company's
shareholders, (ii) concurrently with furnishing to its shareholders, a
balance sheet of the Company as of the end of such fiscal year, together
with statements of operations, of shareholders' equity, and of cash flows
of the Company for such fiscal year, accompanied by a copy of the
certificate or report thereon of independent certified public accountants,
(iii) as soon as they are available, copies of all reports (financial or
other) mailed to shareholders, (iv) as soon as they are available, copies
of all reports and financial statements furnished to or filed with the
Commission, any securities exchange or the NASD, (v) every material press
release and every material news item or article in respect of the Company
or its affairs which was released or prepared by the Company, and (vi) any
additional information of a public nature concerning the Company, or its
respective businesses, which you may reasonably request. During such five-
year period, if the Company shall have active subsidiaries, the foregoing
financial statements shall be on a consolidated basis to the extent that
the accounts of the Company are consolidated, and shall be accompanied by
similar financial statements for any significant subsidiary which is not so
consolidated.
(vii) The Company will apply the net proceeds from the sale of the
Shares being sold by it in the manner set forth under the caption "Use of
Proceeds" in the Prospectus.
(viii) The Company will maintain a transfer agent and, if necessary
under the jurisdiction of incorporation of the Company, a registrar (which
may be the same entity as the transfer agent) for its Common Stock.
(ix) If the transactions contemplated hereby are not consummated by
reason of any failure, refusal or inability on the part of the Company to
perform any agreement on their respective parts to be performed hereunder
or to fulfill any condition of the Underwriters' obligations hereunder, or
if the Agreement is terminated pursuant to Section 10(a) hereof, the
Company will reimburse the several Underwriters for all out-of-pocket
expenses (including fees and disbursements of Underwriters' Counsel)
incurred by the Underwriters in investigating or preparing to market or
marketing the Shares.
(x) If at any time during the 90-day period after the Registration
Statement becomes effective, any rumor, publication or event relating to or
affecting the Company shall occur as a result of which in your opinion the
market price of the Common Stock has been or is likely to be materially
affected (regardless of whether such rumor, publication or event
necessitates a supplement to or amendment of the Prospectus), the Company
will, after written notice from you advising the Company to the effect set
forth above, forthwith prepare, consult with you concerning the substance
of and disseminate a press release or other public statement, reasonably
satisfactory to you, responding to or commenting on such rumor, publication
or event to the extent lawful.
(xi) During the Lock-up Period, the Company will not, without the
prior written consent of The Robinson-Humphrey Company, Inc., effect the
Disposition of, directly or
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indirectly, any Securities other than (i) the sale of the Firm Shares and
the Optional Shares hereunder, (ii) the Company's issuance of options or
Common Stock under the Company's 1993 Incentive Stock Option Plan or 1994
Stock Option Plan for Outside Directors (collectively, the "Option Plans"),
(iii) the issuance of Common Stock pursuant to the exercise of options,
warrants, and unit purchase options outstanding on the date hereof granted
to certain Selling Shareholders, and (iv) the issuance of Securities in
connection with the Company's acquisition of an ownership interest in
another business or entity; provided, however, that the Company may not
-------- -------
register such Securities under the Act or grant any registration rights
with respect to such Securities without the prior written consent of The
Robinson-Humphrey Company, Inc..
(xii) During a period of 90 days from the effective date of the
Registration Statement, the Company will not file a registration statement
registering shares under the Option Plans or any other employee benefit
plan, except for a registration statement on Form S-8 covering 182,000
shares of Common Stock subject to existing stock options and 80,000 shares
of Common Stock reserved for issuance under Option Plans.
(xiii) For so long as there are more than 300 shareholders of the
Common Stock, the Company shall use its best efforts to maintain the
listing of the Common Stock on The Nasdaq National Market for a period of
at least five years after the effective date of the Registration Statement.
(xiv) The Company and the Selling Shareholders shall use their best
efforts to do and perform all things required or necessary to be done and
performed under this Agreement by the Company or the Selling Shareholders
prior to the Time of Delivery or any later date on which Optional Shares
are to be purchased, as the case may be, and to satisfy all conditions
precedent to the delivery of the Shares.
(xv) The Company agrees to enforce (at its expense), for the benefit
of the Underwriters and at the request of The Robinson-Humphrey Company,
Inc., the Lock-up Agreements and not to waive any condition of any such
agreement without the prior written consent of The Robinson-Humphrey
Company, Inc.
6. EXPENSES. The Company will pay all costs and expenses (other than the
fees and disbursements of Underwriters' counsel and your out-of-pocket expenses
and costs, except as provided below or in Section 5(a)(ix) hereof) incident to
the performance of its obligations and the obligations of the Selling
Shareholders under this Agreement, whether or not the transactions contemplated
hereby are consummated or this Agreement is terminated pursuant to Section 10
hereof, including, without limitation, all costs and expenses incident to (i)
the reasonable fees, disbursements and expenses of the Company's counsel and
accountants in connection with the registration of the Shares under the Act and
all other expenses in connection with the preparation, printing and filing of
the Registration Statement (including all amendments thereto), any Preliminary
Prospectus, the Prospectus and, if applicable, any amendments and supplements
thereto, this Agreement and any blue sky memoranda; (ii) the delivery of copies
of the foregoing documents to the Underwriters; (iii) the filing fees of the
Commission and the NASD relating to the Shares; (iv) the preparation, issuance
and delivery to the Underwriters of any certificates evidencing the Shares,
including transfer agent's and registrar's fees; (v) the qualification of the
Shares for offering and sale under state securities and blue sky laws, including
filing fees and reasonable fees and disbursements of counsel for the
Underwriters relating thereto; (vi) any listing of the Shares on The Nasdaq
National Market and (vii) any reasonable expenses for travel, lodging and meals
incurred by the Company and any of its officers, directors and employees in
connection with any meetings with prospective investors in the Shares. It is
understood, however, that, except as provided in this Section 6 and Section 8
and Section 10 hereof, the Underwriters will pay all of their own costs and
expenses, including the fees of their counsel, stock transfer taxes on resale of
any of the Shares by them, and any advertising expenses relating to the offer
and sale of the Shares.
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7. CONDITIONS OF THE UNDERWRITERS' OBLIGATIONS. The obligations of the
Underwriters hereunder to purchase and pay for the Shares to be delivered at
each Time of Delivery shall be subject, in their discretion, to the accuracy of
the representations and warranties of the Company and the Selling Shareholders
contained herein as of the date hereof and as of such Time of Delivery, to the
accuracy of the statements of Company officers made pursuant to the provisions
hereof, to the performance by the Company and the Selling Shareholders of their
respective covenants and agreements hereunder, and to the following additional
conditions precedent:
(a) If the registration statement as amended to date has not become
effective prior to the execution of this Agreement, such registration statement
shall have been declared effective not later than 4:00 p.m., Atlanta time, on
the day following the date of this Agreement or such later date and/or time as
shall have been consented to by you in writing. The Prospectus and any
amendment or supplement thereto shall have been filed with the Commission
pursuant to Rule 424(b) within the applicable time period prescribed for such
filing and in accordance with Section 5(a) of this Agreement; no stop order
suspending the effectiveness of the Registration Statement or any part thereof
shall have been issued and no proceedings for that purpose shall have been
instituted, threatened or, to the knowledge of the Company and the
Representatives, contemplated by the Commission; and all requests for additional
information on the part of the Commission shall have been complied with to your
reasonable satisfaction.
(b) Alston & Bird LLP, counsel for the Underwriters, shall have furnished
to you such opinion or opinions, dated such Time of Delivery, with respect to
the incorporation of the Company, the validity of the Shares being delivered at
such Time of Delivery, the Registration Statement, the Prospectus, and other
related matters as you may reasonably request, and the Company shall have
furnished to such counsel such documents as they request for the purpose of
enabling them to pass upon such matters.
(c) You shall have received an opinion, dated as of the Time of Delivery,
of Nexsen Pruet Jacobs & Pollard, LLP, counsel for the Company, in form and
substance reasonably satisfactory to you and your counsel, subject to customary
assumptions and qualifications, substantially to the effect that:
(i) The Company and its Subsidiary have been duly incorporated and are
validly existing as corporations in good standing under the laws of their
respective jurisdictions of incorporation;
(ii) The Company and its Subsidiary have the corporate power and
authority to own, lease and operate their respective properties and to
conduct their respective business as described in the Prospectus;
(iii) The Company and its Subsidiary are duly qualified to do business
as foreign corporations and are in good standing in each jurisdiction, if
any, in which the ownership or leasing of their respective properties or
the conduct of their respective business requires such qualification,
except where the failure to be so qualified or be in good standing would
not have a material adverse effect on the condition (financial or
otherwise), earnings, operations or business of the Company and its
Subsidiary considered as one enterprise. To such counsel's knowledge, the
Company does not own or control, directly or indirectly, 50% or more of the
voting equity of any corporation, association or other entity other than
Transition Marketing, Inc.;
(iv) The authorized, issued and outstanding capital stock of the
Company is as set forth in the Prospectus under the caption
"Capitalization" as of the dates stated therein, the issued and outstanding
shares of capital stock of the Company (including the Optional Shares) have
been, and will be on any later date on which Optional Shares are purchased,
duly and validly issued and are fully paid and nonassessable, and, to such
counsel's knowledge, will
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not have been issued in violation of or subject to any preemptive right
arising by operation of law, or to such counsel's knowledge, any co-sale
right, registration right, right of first refusal or other similar right;
(v) All issued and outstanding shares of capital stock of the
Company's Subsidiary have been duly authorized and validly issued and are
fully paid and nonassessable, and, to such counsel's knowledge, have not
been issued in violation of or subject to any preemptive right arising by
operation of law, or to such counsel's knowledge, any co-sale right,
registration right, right of first refusal or other similar right and are
owned by the Company free and clear of any perfected pledge, lien, security
interest, encumbrance, claim or equitable interest;
(vi) The Firm Shares or the Optional Shares, as the case may be, to be
issued by the Company pursuant to the terms of this Agreement have been
duly authorized and, upon issuance and delivery against payment therefor in
accordance with the terms hereof, will be duly and validly issued and fully
paid and nonassessable, and will not have been issued in violation of or
subject to any preemptive right arising by operation of law, or to such
counsel's knowledge, any co-sale right, registration right, right of first
refusal or other similar right;
(vii) The Company has the corporate power and authority to enter into
this Agreement and to issue, sell and deliver to the Underwriters the
Shares to be issued and sold by it hereunder;
(viii) This Agreement has been duly authorized by all necessary
corporate action on the part of the Company and has been duly executed and
delivered by the Company and, assuming due authorization, execution and
delivery by you, is a valid and binding agreement of the Company,
enforceable in accordance with its terms, except insofar as indemnification
provisions or other remedies may be limited by applicable law and except as
enforceability may be limited by bankruptcy, insolvency, reorganization,
moratorium or similar laws relating to or affecting creditors' rights
generally, public policy or by general equitable principles;
(ix) The Registration Statement was declared effective under the Act
and, to such counsel's knowledge, no stop order suspending the
effectiveness of the Registration Statement has been issued and no
proceedings for that purpose have been instituted or are pending or
threatened under the Act;
(x) The Registration Statement and the Prospectus, and each amendment
or supplement thereto (other than the financial statements (including
supporting schedules) and financial data derived therefrom as to which such
counsel need express no opinion), as of the effective date of the
Registration Statement, complied as to form in all material respects with
the requirements of the Act and the applicable Rules and Regulations;
(xi) The information in the Prospectus under the caption "Description
of Capital Stock," to the extent that it constitutes matters of law or
legal conclusions, has been reviewed by such counsel and was, as of the
effective date of the Registration Statement, not inaccurate in any
material respect; and the form of certificates evidencing the Common Stock
and filed as an exhibit to the Registration Statement complies with the
requirements of South Carolina law;
(xii) The descriptions in the Registration Statement and the
Prospectus of statutes, legal and governmental proceedings, contracts and
other documents, insofar as such statements constitute a summary of
documents referred to therein or matters of law, as of the effective date
of the Registration Statement, were not inaccurate in any material respect
and fairly
20
<PAGE>
presented in all material respects the information required to be presented
by the Act and the applicable Rules and Regulations;
(xiii) To such counsel's knowledge, there are no agreements,
contracts, leases or documents to which the Company is a party of a
character required to be described or referred to in the Registration
Statement or Prospectus or to be filed as an exhibit to the Registration
Statement which are not described or referred to therein or filed as
required;
(xiv) The performance of this Agreement and the consummation of the
transactions herein contemplated (other than performance of the Company's
indemnification obligations hereunder and certain other remedial
provisions, concerning which no opinion need be expressed) will not (a)
result in any violation of the Company's or its Subsidiary's charter or
bylaws or (b) to such counsel's knowledge, result in a material breach or
violation of any of the terms and provisions of, or constitute a default
under, any material bond, debenture, note or other evidence of
indebtedness, or any lease, contract, indenture, mortgage, deed of trust,
loan agreement, joint venture or other agreement or instrument to which the
Company or its Subsidiary is a party or by which their respective
properties are bound, or any applicable statute, rule or regulation, or any
order, writ or decree of any court, government or governmental agency or
body having jurisdiction over the Company or its Subsidiary or over any of
their respective properties or operations;
(xv) No consent, approval, authorization or order of or qualification
with any court, government or governmental agency or body in the U.S.
having jurisdiction over the Company or its Subsidiary, or over any of
their respective properties or operations is necessary in connection with
the consummation by the Company of the transactions herein contemplated,
except such as have been obtained under the Act, the Exchange Act or such
as may be required under State or other securities or Blue Sky laws in
connection with the purchase and the distribution of the Shares by the
Underwriters;
(xvi) To such counsel's knowledge, there are no legal or governmental
proceedings pending or threatened against the Company or its Subsidiary of
a character required to be disclosed in the Registration Statement or the
Prospectus by the Act or the Rules and Regulations, other than those
described therein;
(xvii) To such counsel's knowledge, neither the Company nor its
Subsidiary is presently (a) in material violation of its respective charter
or bylaws, or (b) in material breach of any applicable statute, rule or
regulation or any order, writ or decree of any court or governmental agency
or body having jurisdiction over the Company or its Subsidiary, or over any
of their respective properties or operations;
(xviii) To such counsel's knowledge, except as set forth in the
Registration Statement and Prospectus, no holders of Common Stock or other
securities of the Company have registration rights with respect to
securities of the Company and, except as set forth in the Registration
Statement and Prospectus, all holders of securities of the Company having
rights known to such counsel for registration of such shares of Common
Stock or other securities, because of the filing of the Registration
Statement by the Company have, with respect to the offering contemplated
thereby, waived such rights or such rights have expired by reason of lapse
of time following notification of the Company's intent to file the
Registration Statement or have included securities in the Registration
Statement pursuant to the exercise of and in full satisfaction of such
rights;
(xix) The Company is not, nor will the Company become upon the sale of
the Shares and the application of the proceeds therefrom as described in
the Prospectus under the
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caption "Use of Proceeds," an "investment company" or a person controlled
by an "investment company" within the meaning of the 1940 Act;
(xx) Each Selling Shareholder which is not a natural person has full
right, power and authority to enter into and to perform its obligations
under the Power of Attorney and Custody Agreement to be executed and
delivered by it in connection with the transactions contemplated herein;
the Power of Attorney and Custody Agreement of each Selling Shareholder
that is not a natural person has been duly authorized by such Selling
Shareholder; the Power of Attorney and Custody Agreement of each Selling
Shareholder has been duly executed and delivered by or on behalf of such
Selling Shareholder; and the Power of Attorney and Custody Agreement of
each Selling Shareholder constitutes the valid and binding agreement of
such Selling Shareholder, enforceable in accordance with its terms, except
as the enforcement thereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or affecting
creditors' rights generally or by general equitable principles;
(xxi) Each of the Selling Shareholders has full right, power and
authority to enter into and to perform its obligations under this Agreement
and to sell, transfer, assign and deliver the Shares to be sold by such
Selling Shareholder hereunder;
(xxii) This Agreement has been duly authorized by each Selling
Shareholder that is not a natural person and has been duly executed and
delivered by or on behalf of each Selling Shareholder; and
(xxii) Upon the delivery of and payment for the Shares as contemplated
in this Agreement, each of the Underwriters will receive valid marketable
title to the Shares purchased by it from such Selling Shareholder, free and
clear of any perfected pledge, lien, security interest, encumbrance, claim
or equitable interest. In rendering such opinion, such counsel may assume
that the Underwriters purchased such shares in good faith and are without
notice of any defect in the title of the Shares being purchased from the
Selling Shareholders.
Counsel rendering the foregoing opinion may rely as to questions of law not
involving the laws of the U.S. or the State of South Carolina upon opinions of
local counsel, and as to questions of fact upon representations or certificates
of officers of the Company, the Selling Shareholders or officers of the Selling
Shareholders (when the Selling Shareholder is not a natural person), and of
government officials, in which case their opinion is to state that they are so
relying and that they have no knowledge or any material misstatement or
inaccuracy in any such opinion, representation or certificate. Copies of any
opinion, representation or certificate so relied upon shall be delivered to you,
as Representatives of the Underwriters, and to Underwriters' counsel.
(d) You shall have received from KPMG Peat Marwick LLP letters dated,
respectively, the date hereof and each Time of Delivery, in form and substance
satisfactory to you, stating that they are independent public accountants with
respect to the Company within the meaning of the Act and the applicable
published rules and regulations thereunder, and to the effect that:
(i) In their opinion, the financial statements audited by them and
included in the Registration Statement comply as to form in all material
respects with the applicable accounting requirements of the Act and the
published rules and regulations thereunder with respect to registration
statements on Form S-1;
(ii) The unaudited summary and selected financial information included
in the Preliminary Prospectus and the Prospectus under the captions
"Prospectus Summary" and "Selected Financial Data" agrees with the
corresponding amounts in the audited financial statements included in the
Prospectus or previously reported on by them;
(iii) On the basis of a reading of the latest available unaudited
financial statements of the Company, a reading of the minute books of the
Company, inquiries of officials of the Company responsible for financial
and accounting matters and other specified procedures, all of which have
been agreed to by the Representatives, nothing came to their attention that
caused them to believe that:
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(A) at a specified date not more than five days prior to the
date of delivery of such respective letter, there was any change in
the capital stock, decline in Shareholders' equity or increase in
long-term debt of the Company, or other items specified by the
Underwriters, in each case as compared with amounts shown in the
latest balance sheets included in the Prospectus, except in each case
for changes, decreases or increases which the Prospectus discloses
have occurred or may occur or which are described in such letters; and
(B) for the period from the closing date of the latest
statements of revenues and expenses included in the Prospectus to a
specified date not more than five days prior to the date of delivery
of such respective letter, there were any decreases in net service
revenue or net income of the Company, or other items specified by the
Underwriters, or any increases in any items specified by the
Underwriters, in each case as compared with the corresponding period
of the preceding year, except in each case for decreases which the
Prospectus discloses have occurred or may occur or which are described
in such letter.
(iv) They have carried out certain specified procedures, not
constituting an audit, with respect to certain amounts, percentages and
financial information specified by you which are derived from the general
accounting records of the Company, which appear in the Prospectus and have
compared and agreed such amounts, percentages and financial information
with the accounting records of the Company or to analyses and schedules
prepared by the Company from its detailed accounting records.
(e) Since the date of the latest audited financial statements included
in the Prospectus, neither the Company nor its Subsidiary shall have sustained
(i) any material loss or interference with their respective business from fire,
explosion, flood, hurricane or other calamity, whether or not covered by
insurance, or from any labor dispute or court or governmental action, order or
decree, otherwise than as disclosed in or contemplated by the Prospectus; or
(ii) any material adverse change, or any development involving a prospective
material adverse change (including without limitation a change in management or
control of the Company) in the condition (financial or otherwise) earnings,
operations, business or business prospects of the Company and its Subsidiary
considered as one enterprise, otherwise than as disclosed in or contemplated by
the Prospectus, the effect of which, in either such case, is in your reasonable
judgment so material and adverse as to make it impracticable or inadvisable to
proceed with the purchase, sale and delivery of the Shares being delivered at
such Time of Delivery as contemplated by the Registration Statement, as amended
as of the date hereof.
(f) The Shares shall be listed on The Nasdaq National Market, subject
to notice of issuance.
(g) Subsequent to the date hereof there shall not have occurred any of
the following: (i) any suspension or limitation in trading in securities
generally on The Nasdaq National Market, or any setting of minimum prices for
trading on such exchange, or in the Common Stock by the Commission or the NASD
or The Nasdaq National Market; (ii) a moratorium on commercial banking
activities in New York declared by either federal or state authorities; (iii)
any outbreak or escalation of hostilities involving the U.S., declaration by the
U.S. of a national emergency or war or any other national or international
calamity or emergency if the effect of any such event specified in this clause
(iii) in your reasonable judgment makes it impracticable or inadvisable to
proceed with the purchase, sale and delivery of the Shares being delivered at
such Time of Delivery as contemplated by the Registration Statement, as amended
as of the date hereof.
(h) The Company shall have furnished to you at such Time of Delivery
certificates of officers of the Company and certificates of the Selling
Shareholders, satisfactory to you, as to the
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<PAGE>
accuracy of the representations and warranties of the Company and such Selling
Shareholders herein at and as of such Time of Delivery, as to the performance by
the Company and such Selling Shareholders of all of their respective obligations
hereunder to be performed at or prior to such Time of Delivery and as to such
other matters as you may reasonably request, and the Company shall have
furnished or caused to be furnished certificates as to the matters set forth in
subsections (a) and (f) of this Section 7, and as to such other matters as you
may reasonably request.
8. INDEMNIFICATION AND CONTRIBUTION. (a) The Company agrees to
indemnify and hold harmless each Underwriter against any losses, claims, damages
or liabilities, joint or several, to which such Underwriter may become subject
(including, without limitation, in its capacity as an Underwriter or as a
"qualified independent underwriter" within the meaning of Schedule E of the
Bylaws of the NASD), under the Act, the Exchange Act or otherwise, specifically
including, but not limited to, losses, claims, damages or liabilities in so far
as such losses, claims, damages or liabilities (or actions in respect thereof)
arise out of or are based upon (i) any breach of any representation, warranty,
agreement or covenant of the Company herein contained, (ii) any untrue statement
or alleged untrue statement of any material fact contained in the Registration
Statement or any amendment or supplement thereto, or the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading, or (iii) any untrue statement or alleged
untrue statement of any material fact contained in any Preliminary Prospectus or
the Prospectus or any amendment or supplement thereto, or the omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading; provided, however, that the Company
-------- -------
shall not be liable in any such case to the extent that any such loss, claim,
damage, liability or action arises out of or is based upon an untrue statement
or alleged untrue statement or omission or alleged omission made in the
Registration Statement, such Preliminary Prospectus, or the Prospectus, or any
such amendment or supplement thereto, in reliance upon, and in conformity with,
written information relating to any Underwriter furnished to the Company by such
Underwriter, directly or through you, specifically for use in the preparation
thereof and, provided further, that the indemnity agreement provided in this
-------- -------
Section 8(a) with respect to any Preliminary Prospectus shall not inure to the
benefit of any Underwriter from whom the person asserting any losses, claims,
damages, liabilities or actions based upon any untrue statement or alleged
untrue statement of material fact or omission or alleged omission to state
therein a material fact purchased Shares, if a copy of the Prospectus in which
such untrue statement or alleged untrue statement or omission or alleged
omission was corrected had not been sent or given to such person within the time
required by the Act and the Rules and Regulations, unless such failure is the
result of noncompliance by the Company with Section 5(a)(iv) hereof.
The indemnity agreement in this Section 8(a) shall extend upon the
same terms and conditions to, and shall inure to the benefit of, each person, if
any, who controls any Underwriter within the meaning of the Act or the Exchange
Act. This indemnity agreement shall be in addition to any liabilities which the
Company may otherwise have.
(b) In the event that the Underwriters exercise the election to
purchase Optional Shares, each Selling Shareholder, severally and not jointly,
agrees to indemnify and hold harmless each Underwriter against any losses,
claims, damages or liabilities, joint or several, to which such Underwriter may
become subject (including, without limitation, in its capacity as an Underwriter
or as a "qualified independent underwriter" within the meaning of Schedule E or
the Bylaws of the NASD) under the Act, the Exchange Act or otherwise,
specifically including, but not limited to, losses, claims, damages or
liabilities in so far as such losses, claims, damages or liabilities (or actions
in respect thereof) arise out of or are based upon (i) any breach of any
representation, warranty, agreement or covenant of such Selling Shareholder
herein contained, (ii) any untrue statement or alleged untrue statement of any
material fact contained in the Registration Statement or any amendment or
supplement thereto, or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading, or (iii) any
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untrue statement or alleged untrue statement of any material fact contained in
any Preliminary Prospectus or the Prospectus or any amendment or supplement
thereto, or the omission or alleged omission to state therein a material fact
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading, in the case of subparagraphs (ii)
and (iii) of this Section 8(b) to the extent, but only to the extent, that such
untrue statement or alleged untrue statement or omission or alleged omission was
made in reliance upon and in conformity with written information furnished to
the Company or such Underwriter by such Selling Shareholder, directly or through
such Selling Shareholder's representatives, specifically for use in the
preparation thereof, and agrees to reimburse each Underwriter for any legal or
other expenses reasonably incurred by it in connection with investigating or
defending any such loss, claim, damage, liability or action; provided, however
--------
that the indemnity agreement provided in this Section 8(b) with respect to any
Preliminary Prospectus shall not inure to the benefit of any Underwriter from
whom the person asserting any losses, claims, damages, liabilities or actions
based upon any untrue statement or alleged untrue statement of a material fact
or omission or alleged omission to state therein a material fact purchased
Shares, if a copy of the Prospectus in which such untrue statement or alleged
untrue statement or omission or alleged omission was corrected had not been sent
or given to such person within the time required by the Act and the Rules and
Regulations, unless such failure is the result of noncompliance by the Company
with Section 5(a)(iv) hereof.
The indemnity agreement in this Section 8(b) shall extend upon the
same terms and conditions to, and shall inure to the benefit of, each person, if
any, who controls any Underwriter within the meaning of the Act or the Exchange
Act. This indemnity agreement shall be in addition to any liabilities which
such Selling Shareholder may otherwise have.
(c) Each Underwriter, severally and not jointly, agrees to indemnify
and hold harmless the Company (and each Selling Shareholder in the event that
the Underwriters exercise the election to purchase Optional Shares), against any
losses, claims, damages or liabilities, joint or several, to which the Company
or such Selling Shareholder may become subject under the Act or otherwise,
specifically including, but not limited to, losses, claims, damages or
liabilities in so far as such losses, claims, damages or liabilities (or actions
in respect thereof) arise out of or are based upon (i) any breach of any
representation, warranty, agreement or covenant of such Underwriter herein
contained, (ii) any untrue statement or alleged untrue statement of any material
fact contained in the Registration Statement or any amendment or supplement
thereto, or the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which there were made, not misleading, and
(iii) any untrue statement or alleged untrue statement of any material fact
contained in any Preliminary Prospectus or the Prospectus or any amendment or
supplement thereto, or the omission or alleged omission to state therein a
material fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, in the case of
subparagraphs (ii) and (iii) of this Section 8(c) to the extent, but only to the
extent, that such untrue statement or alleged untrue statement or omission or
alleged omission was made in reliance upon and in conformity with written
information furnished to the Company by such Underwriter, directly or through
you, specifically for use in the preparation thereof, and agrees to reimburse
the Company and each such Selling Shareholder for any legal or other expenses
reasonably incurred by the Company and each such Selling Shareholder in
connection with investigating or defending any such loss, claim, damage,
liability or action.
The indemnity agreement in this Section 8(c) shall extend upon the
same terms and conditions to, and shall inure to the benefit of, each officer of
the Company who signed the Registration Statement and each director of the
Company (each Selling Shareholder in the event that the Underwriters exercise
the election to purchase Optional Shares), and each person, if any, who controls
the Company (or any Selling Shareholder in the event that the Underwriters
exercise the election to purchase Optional Shares), within the meaning of the
Act or the Exchange Act. This indemnity agreement shall be in addition to any
liabilities which each Underwriter may otherwise have.
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(d) Promptly after receipt by an indemnified party under this Section
8 of notice of the commencement of any action, such indemnified party shall, if
a claim in respect thereof is to be made against any indemnifying party under
this Section 8, notify the indemnifying party in writing of the commencement
thereof but the omission so to notify the indemnifying party will not relieve it
from any liability which it may have to any indemnified party otherwise than
under this Section 8. In case any such action is brought against any indemnified
party, and it notified the indemnifying party of the commencement thereof, the
indemnifying party will be entitled to participate therein and, to the extent
that it shall elect by written notice delivered to the indemnified party
promptly after receiving the aforesaid notice from such indemnified party, to
assume the defense thereof, with counsel reasonably satisfactory to such
indemnified party; provided, however, that if the defendants in any such action
--------
include both the indemnified party and the indemnifying party and the
indemnified party shall have received an opinion of counsel that there may be
legal defenses available to it and/or other indemnified parties which are
different from or additional to those available to the indemnifying party, the
indemnified party or parties shall have the right to select separate counsel to
assume such legal defenses and to otherwise participate in the defense of such
action on behalf of such indemnified party or parties. Upon receipt of notice
from the indemnifying party to such indemnified party of the indemnifying
party's election so to assume the defense of such action and approval by the
indemnified party of counsel, the indemnifying party will not be liable to such
indemnified party under this Section 8 for any legal or other expenses
subsequently incurred by such indemnified party in connection with the defense
thereof unless (i) the indemnified party shall have employed separate counsel in
accordance with the proviso to the next preceding sentence (it being understood,
however, that the indemnifying party shall not be liable for the expenses of
more than one separate counsel (together with the reasonable fees of appropriate
local counsel) approved by the indemnifying party representing all the
indemnified parties under Section 8(a), 8(b) or 8(c) hereof who are parties to
such action), (ii) the indemnifying party shall not have employed counsel
satisfactory to the indemnified party to represent the indemnified party within
a reasonable time after notice of commencement of the action or (iii) the
indemnifying party has authorized the employment of counsel for the indemnified
party at the expense of the indemnifying party. In no event shall any
indemnifying party be liable in respect of any amounts paid in settlement of any
action unless the indemnifying party shall have approved the terms of such
settlement; provided that such consent shall not be unreasonably withheld. No
--------
indemnifying party shall, without the prior written consent of the indemnified
party, effect any settlement of any pending or threatened proceeding in respect
of which any indemnified party is or could have been a party and indemnification
could have been sought hereunder by such indemnified party, unless such
settlement includes an unconditional release of such indemnified party from all
liability on all claims that are the subject matter of such proceeding.
(e) In order to provide for just and equitable contribution in any
action in which a claim for indemnification is made pursuant to this Section 8
but it is judicially determined (by the entry of a final judgment or decree by a
court of competent jurisdiction and the expiration of time to appeal or the
denial of the last right of appeal) that such indemnification may not be
enforced in such case notwithstanding the fact that this Section 8 provides for
indemnification in such case, all the parties hereto shall contribute to the
aggregate losses, claims, damages or liabilities to which they may be subject
(after contribution from others) in such proportion so that except as set forth
in Section 8(f) hereof, the Underwriters severally and not jointly are
responsible pro rata for the portion represented by the percentage that the
underwriting discount bears to the public offering price, and the Company and
the Selling Shareholders are responsible for the remaining portion, provided,
--------
however that (i) no Underwriter shall be required to contribute any amount in
- -------
excess of the amount by which the underwriting discount applicable to the Shares
purchased by such Underwriter exceeds the amount of damages which such
Underwriter has otherwise required to pay and (ii) no person guilty of a
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who is not guilty of such
fraudulent misrepresentation. The contribution agreement in this Section 8(e)
shall extend upon the same terms and conditions to, and shall inure to the
benefit of, each person, if any, who controls any Underwriter, the Company or
any Selling Shareholder within the meaning of the Act or the
26
<PAGE>
Exchange Act and each officer of the Company who signed the Registration
Statement and each director of the Company.
(f) In the event that the Underwriters exercise the election to
purchase Optional Shares, the liability of each Selling Shareholder under the
representations, warranties and agreements contained herein and under the
indemnity agreements contained in the provisions of this Section 8 shall be
limited to an amount equal to the public offering price of the Optional Shares
sold by such Selling Shareholder to the Underwriters minus the amount of the
underwriting discount paid thereon to the Underwriters by such Selling
Shareholder. The Company and such Selling Shareholders may agree, as among
themselves and without limiting the rights of the Underwriters under this
Agreement, as to the respective amounts of such liability for which they each
shall be responsible.
(g) The parties to this Agreement hereby acknowledge that they
are sophisticated business persons who were represented by counsel during the
negotiations regarding the provisions hereof including, without limitation, the
provisions of this Section 8, and are fully informed regarding said provisions.
They further acknowledge that the provisions of this Section 8 fairly allocate
the risks in light of the ability of the parties to investigate the Company and
its business in order to assure that adequate disclosure is made in the
Registration Statement and Prospectus as required by the Act and the Exchange
Act.
9. DEFAULT OF UNDERWRITERS. (a) If any Underwriter defaults in its
obligation to purchase Shares at a Time of Delivery, you may in your discretion
arrange for you or another party or other parties to purchase such Shares on the
terms contained herein. If within 36 hours after such default by any Underwriter
you do not arrange for the purchase of such Shares, the Company and the Selling
Shareholders shall be entitled to a further period of 36 hours within which to
procure another party or other parties satisfactory to you to purchase such
Shares on such terms. In the event that, within the respective prescribed
periods, you notify the Company and the Selling Shareholders that you have so
arranged for the purchase of such Shares, or the Company and the Selling
Shareholders notify you that they have so arranged for the purchase of such
Shares, you or the Company and the Selling Shareholders shall have the right to
postpone a Time of Delivery for a period of not more than seven days in order to
effect whatever changes may thereby be made necessary in the Registration
Statement or the Prospectus, or in any other documents or arrangements, and the
Company agrees to file promptly any amendments to the Registration Statement or
the Prospectus that in your opinion may thereby be made necessary. The cost of
preparing, printing and filing any such amendments shall be paid for by the
Underwriters. The term "Underwriter" as used in this Agreement shall include any
person substituted under this Section 9 with like effect as if such person had
originally been a party to this Agreement with respect to such Shares.
(b) If, after giving effect to any arrangements for the purchase
of the Shares of a defaulting Underwriter or Underwriters by you and the Company
(and the Selling Shareholders in the event that the Underwriters exercise the
election to purchase Optional Shares) as provided in subsection (a) above, the
aggregate number of such Shares which remains unpurchased does not exceed one-
eleventh of the aggregate number of Shares to be purchased at such Time of
Delivery, then the Company and the Selling Shareholders shall have the right to
require each non-defaulting Underwriter to purchase the number of Shares which
such Underwriter agreed to purchase hereunder at such Time of Delivery and, in
addition, to require each non-defaulting Underwriter to purchase its pro rata
share (based on the number of Shares which such Underwriter agreed to purchase
hereunder) of the Shares of such defaulting Underwriter or Underwriters for
which such arrangements have not been made, but nothing herein shall relieve a
defaulting Underwriter from liability for its default.
10. TERMINATION. (a) This Agreement may be terminated with respect to
the Firm Shares or any Optional Shares in the sole discretion of the
Representatives by notice to the Company given prior to the First Time of
Delivery or any Subsequent Time of Delivery, respectively, in the event that (i)
any
27
<PAGE>
condition to the obligations of the Underwriters set forth in Section 7 hereof
has not been satisfied in all material respects, or (ii) the Company or the
Selling Shareholders shall have failed, refused or been unable to deliver the
Shares or to perform all obligations and satisfy all conditions on their
respective parts to be performed or satisfied hereunder at or prior to such Time
of Delivery, in either case other than by reason of a default by any of the
Underwriters. If this Agreement is terminated pursuant to this Section 10(a),
the Company will reimburse the Underwriters severally upon demand for all
out-of-pocket expenses (including reasonable counsel fees and disbursements)
that shall have been incurred by them in connection with the proposed purchase
and sale of the Shares. Neither the Company nor any Selling Shareholder shall in
any event be liable to any of the Underwriters for the loss of anticipated
profits from the transactions covered by this Agreement.
(b) If, after giving effect to any arrangements for the purchase
of the Shares of a defaulting Underwriter or Underwriters by you and the Company
and the Selling Shareholders as provided in Section 9(a), the aggregate number
of such Shares which remains unpurchased exceeds one-eleventh of the aggregate
number of Shares to be purchased at such Time of Delivery, or if the Company and
the Selling Shareholders shall not exercise the right described in Section 9(b)
to require non-defaulting Underwriters to purchase Shares of a defaulting
Underwriter or Underwriters, then this Agreement (or, with respect to a
Subsequent Time of Delivery, the obligations of the Underwriters to purchase and
of the Selling Shareholders to sell the Optional Shares) shall thereupon
terminate, without liability on the part of any non-defaulting Underwriter, the
Company or the Selling Shareholders, except for the expenses to be borne by the
Company, the Selling Shareholders and the Underwriters as provided in Section 6
hereof and the indemnity and contribution agreements in Section 8 hereof; but
nothing herein shall relieve a defaulting Underwriter from liability for its
default.
11. SURVIVAL. The respective indemnities, agreements, representations,
warranties and other statements of the Company, its officers, the Selling
Shareholders and the several Underwriters, as set forth in this Agreement or
made by or on behalf of them, respectively, pursuant to this Agreement, shall
remain in full force and effect, regardless of any investigation (or any
statement as to the results thereof) made by or on behalf of any Underwriter or
any controlling person referred to in Section 8(e) or the Company, any Selling
Shareholder or any officer or director or controlling person of the Company or
any Selling Shareholder referred to in Section 8(e), and shall survive delivery
of and payment for the Shares. The respective agreements, covenants,
indemnities and other statements set forth in Sections 6 and 8 hereof shall
remain in full force and effect, regardless of any termination or cancellation
of this Agreement.
12. NOTICES. All notices or communications hereunder, except as herein
otherwise specifically provided, shall be in writing and if sent to you shall be
mailed, delivered, telegraphed (and confirmed by letter) or telecopied (and
confirmed by letter) to you c/o The Robinson-Humphrey Company, Inc., 3333
Peachtree Road, N.E., telecopier number (404) 266-5965, Attention: Corporate
Finance Department; if sent to the Company, such notice shall be mailed,
delivered, telegraphed (and confirmed by letter) or telecopied (and confirmed by
letter) to ScanSource, Inc., 6 Logue Court, Suite G, Greenville, South Carolina
29615, telecopier number (864) 288-2432, Attention: Steven H. Owings, Chief
Executive Officer with a copy to G. Marcus Knight, at Nexsen Pruet Jacobs &
Pollard, LLP, First Union Building, 1441 Main Street, Suite 1500, Columbia,
South Carolina 29201, telecopier number (803) 253-8277; if sent to one or more
of the Selling Shareholders, such notice shall be sent mailed, delivered,
telegraphed (and confirmed by letter) or telecopied (and confirmed by letter) to
Steven H. Owings, Michael L. Baur and Jeffery A. Bryson, as Attorneys-in-Fact
for the Selling Shareholders, at ScanSource, Inc., 6 Logue Court, Suite G,
Greenville, South Carolina 29615, telecopier number (864) 288-2432.
13. REPRESENTATIVES. You will act for the several Underwriters in
connection with the transactions contemplated by this Agreement, and any action
under this Agreement taken by you jointly or by The Robinson-Humphrey Company,
Inc. will be binding upon all the Underwriters.
28
<PAGE>
14. BINDING EFFECT. This Agreement shall be binding upon, and inure
solely to the benefit of, the Underwriters, the Company and the Selling
Shareholders and to the extent provided in Sections 8 and 10 hereof, the
officers and directors and controlling persons referred to therein and their
respective heirs, executors, administrators, successors and assigns, and no
other person shall acquire or have any right under or by virtue of this
Agreement. No purchaser of any of the Shares from any Underwriter shall be
deemed a successor or assign by reason merely of such purchase.
15. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Georgia without giving effect to any
provisions regarding conflicts of laws.
16. COUNTERPARTS. This Agreement may be executed by any one or more of
the parties hereto in any number of counterparts, each of which shall be deemed
to be an original, but all such counterparts shall together constitute one and
the same instrument.
29
<PAGE>
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to us one of the counterparts hereof, and upon
the acceptance hereof by The Robinson-Humphrey Company, Inc., on behalf of each
of the Underwriters, this letter will constitute a binding agreement among the
Underwriters and the Company. It is understood that your acceptance of this
letter on behalf of each of the Underwriters is pursuant to the authority set
forth in the Master Agreement among Underwriters, a copy of which shall be
submitted to the Company for examination upon request, but without warranty on
your part as to the authority of the signers thereof.
Very truly yours,
SCANSOURCE, INC.
By:
----------------------------------
Name:
Title:
SELLING SHAREHOLDERS
By:
----------------------------------
Name:
Attorney-in-Fact for the Selling Shareholders named
in Schedule II hereto
The foregoing Agreement is hereby
confirmed and accepted as of the date first
written above at Atlanta, Georgia.
THE ROBINSON-HUMPHREY COMPANY, INC.
WILLIAM BLAIR & COMPANY, L.L.C.
By: The Robinson-Humphrey Company, Inc.
By:
-------------------------------------
(Authorized Representative)
On behalf of each of the Underwriters
30
<PAGE>
SCHEDULE I
<TABLE>
<CAPTION>
Number of
Optional Shares
Number of To Be
Firm Shares Purchased
To Be if Maximum
Underwriters Purchased Option Exercised
------------ ----------- ----------------
<S> <C> <C>
The Robinson-Humphrey Company, Inc.
William Blair & Company, L.L.C.
Total ----------------
1,400,000
================
</TABLE>
31
<PAGE>
SCHEDULE II
Number of Firm
Shares
To Be Sold
----------
ScanSource, Inc. 1,400,000
---------
Total 1,400,000
=========
Number of Optional
Shares
To Be Sold
----------
ScanSource, Inc. 138,600
Steven H. Owings 20,000
Pringle Family Education Trust 2,200
Samuel M. Pringle and Kathrin R. Pringle,
Co-trustees
Ingles Family Education Trust,
John S. Ingles, Jr. and Susan P. Ingles, 2,200
Co-trustees
Michael L. Baur 30,000
Jeffery A. Bryson 10,000
Brenda McCurry 7,000
----------
Total 210,000
==========
32
<PAGE>
SCHEDULE III
Lock-up List
------------
Lock-up Period*
---------------
Steven H. Owings 90
Barry Rubenstein 60
Dennis B. Gates 90
Eli Oxenhorn 60
Michael L. Baur 90
Jeffery A. Bryson 90
Steven R. Fischer 90
James G. Foody 90
Irwin Lieber 60
Buck Baker 90
Leah Gangloff 90
Greg Dixon 90
Andy Heyman 90
Cheri Jones 90
Brenda McCurry 90
Bobby McLain 90
Shelby Neal 90
Ed Solomon 90
Bob Thompson 90
Janet K. Rollins 90
Steve Roberson 90
______________________
* Number of days from the date that the Registration Statement is declared
effective by the Commission.
33
<PAGE>
EXHIBIT 5
NEXSEN PRUET JACOBS & POLLARD, LLP
1441 Main Street, Suite 1500
Columbia, South Carolina 29201
September 5, 1997
ScanSource, Inc.
6 Logue Court, Suite G
Greenville, South Carolina 29615
Re: Form S-1 Registration Statement
Gentlemen:
We have acted as counsel to ScanSource, Inc., a South Carolina corporation
(the "Company"), in connection with the registration of 1,400,000 shares
(1,610,000 shares if the underwriters' over- allotment option is exercised in
full) of common stock, no par value per share, of the Company (the "Common
Stock") pursuant to a registration statement on Form S-1 initially filed with
the Securities and Exchange Commission (the "Commission") on September 5, 1997
(the "Registration Statement").
We have examined and are familiar with the Articles of Incorporation and the
Bylaws of the Company, and have examined the originals, or copies certified or
otherwise identified to our satisfaction, of corporate records, including
minute books, of the Company. We have also examined the Registration Statement
and such statutes and other records, instruments and documents pertaining
hereto that we have deemed necessary to examine for the purposes of this
opinion. In our examination, we have assumed the completeness and authenticity
of any document submitted to us as an original, the completeness and
conformity to the originals of any document submitted to us as a copy, the
authenticity of the originals of such copies, the genuineness of all
signatures and the legal capacity and mental competence of natural persons.
On the basis of and in reliance upon the foregoing, we are of the opinion
that the Common Stock registered under the Registration Statement when duly
issued and delivered as described in the Registration Statement (in the form
declared effective by the Commission) and duly purchased and paid for, will be
legally issued, fully paid and nonassessable.
This opinion is being rendered to be effective as of the effective date of
the Registration Statement. We hereby consent to the filing of this opinion,
or copies thereof, as an exhibit to the Registration Statement and to the
statement made regarding our firm under the caption "Legal Matters" in the
prospectus included in the Registration Statement, but we do not thereby admit
that we are within the category of persons whose consent is required under the
provisions of the Securities Act of 1933, as amended, or the rules and
regulations promulgated by the Securities and Exchange Commission thereunder.
Very truly yours,
Nexsen Pruet Jacobs & Pollard, LLP
By: /s/ G. Marcus Knight
----------------------------------
G. Marcus Knight
<PAGE>
EXHIBIT 11
SCANSOURCE, INC.
COMPUTATION OF HISTORICAL EARNINGS PER SHARE--PRIMARY
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Income per share calculations:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
--------------------------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Net income...................................... $ 1,511 $ 1,858 $ 2,540
Interest on assumed warrant and UPO exercise
(1)............................................ 140 21 --
-------- -------- --------
1,651 1,879 2,540
Weighted average number of common and common
equivalent
shares are as follows:
Weighted average common shares outstanding.... 2,153 3,088 3,248
Shares issued from assumed exercise of options
and warrants (1)............................. 1,118 468 212
-------- -------- --------
Weighted average number of common and common
equivalent shares outstanding.................. 3,271 3,556 3,460
======== ======== ========
Per share data:
Net income.................................... $ 0.50 $ 0.53 $ 0.73
======== ======== ========
</TABLE>
- --------
(1) Amounts represent interest income related to the exercise of warrants and
UPO. Proceeds from assumed exercise of warrants and UPO were assumed to be
used first to repurchase outstanding shares (limited to 20% of total
shares outstanding) and the remainder to pay debt and be invested.
(2) Shares issued from assumed exercise of options, warrants and UPO include
the number of incremental shares which would result from applying the
treasury stock method for options, warrants and UPO. (APB 15, paragraph 38
and Staff Accounting Bulletin No. 83)
<PAGE>
EXHIBIT 11.1
SCANSOURCE, INC.
COMPUTATION OF HISTORICAL EARNINGS PER SHARE--FULLY DILUTED
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Income per share calculations:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
--------------------------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Net income...................................... $ 1,511 $ 1,858 $ 2,540
Interest on assumed warrant and UPO exercise
(1)............................................ 140 21 --
-------- -------- --------
1,651 1,879 2,540
Weighted average number of common and common
equivalent shares are as follows:
Weighted average common shares outstanding.... 2,153 3,088 3,248
Shares issued from assumed exercise of options
and warrants (1)............................. 1,118 472 217
-------- -------- --------
Weighted average number of common and common
equivalent shares outstanding.................. 3,271 3,560 3,465
======== ======== ========
Per share data:
Net income.................................... $ 0.50 $ 0.53 $ 0.73
======== ======== ========
</TABLE>
- --------
(1) Amounts represent interest income related to the exercise of warrants and
UPO. Proceeds from assumed exercise of warrants and UPO were assumed to be
used first to repurchase outstanding shares (limited to 20% of total
shares outstanding) and the remainder to pay debt and be invested.
(2) Shares issued from assumed exercise of options, warrants and UPO include
the number of incremental shares which would result from applying the
treasury stock method for options, warrants and UPO. (APB 15, paragraph 38
and Staff Accounting Bulletin No. 83)
<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.
/s/ KPMG Peat Marwick LLP
Greenville, South Carolina
September 5, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 12,117
<ALLOWANCES> 1,174
<INVENTORY> 20,724
<CURRENT-ASSETS> 34,706
<PP&E> 1,880
<DEPRECIATION> 736
<TOTAL-ASSETS> 38,288
<CURRENT-LIABILITIES> 14,525
<BONDS> 0
0
0
<COMMON> 12,307
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 38,288
<SALES> 93,922
<TOTAL-REVENUES> 93,922
<CGS> 81,361
<TOTAL-COSTS> 8,001
<OTHER-EXPENSES> 84
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 380
<INCOME-PRETAX> 4,096
<INCOME-TAX> 1,556
<INCOME-CONTINUING> 2,540
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,540
<EPS-PRIMARY> .73
<EPS-DILUTED> .73
</TABLE>
