-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JtqGAITuR1KbAsx3aLZ0ETXi0BNHtSQ6/PsaYCfeVu9yuLjpsGhNfxlqVKsHf2eE yAX4BHfzh1vZ/t9tafSVGg== 0000950168-96-001793.txt : 19960925 0000950168-96-001793.hdr.sgml : 19960925 ACCESSION NUMBER: 0000950168-96-001793 CONFORMED SUBMISSION TYPE: 10KSB40 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960924 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SCANSOURCE INC CENTRAL INDEX KEY: 0000918965 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-COMPUTER & PERIPHERAL EQUIPMENT & SOFTWARE [5045] IRS NUMBER: 570965380 STATE OF INCORPORATION: SC FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10KSB40 SEC ACT: 1934 Act SEC FILE NUMBER: 000-26926 FILM NUMBER: 96633896 BUSINESS ADDRESS: STREET 1: 6 LOGUE COURT STE G CITY: GREENVILLE STATE: SC ZIP: 29615 BUSINESS PHONE: 8032882432 MAIL ADDRESS: STREET 1: 6 LOGUE COURT STE G CITY: GREENVILLE STATE: SC ZIP: 29615 10KSB40 1 SCANSOURCE, INC. 10-KSB ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------------- FORM 10-KSB -------------------- ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JUNE 30, 1996 COMMISSION FILE NUMBER: 1-12842 -------------------- SCANSOURCE, INC. (Name of small business issuer in its charter) SOUTH CAROLINA 57-0965380 (State of other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 6 LOGUE COURT, SUITE G GREENVILLE, SOUTH CAROLINA 29615 (Address of principal executive offices) (Zip Code) ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE: (864) 288-2432 -------------------- SECURITIES REGISTERED UNDER SECTION 12(B) OF THE EXCHANGE ACT: None. SECURITIES REGISTERED UNDER TO SECTION 12(G) OF THE EXCHANGE ACT: Common Stock, no par value Check whether the Registrant: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. |X| The Registrant's revenues for the year ended June 30, 1996, its most recent fiscal year, were $55,670,000. The aggregate market value of the voting stock of the Registrant held by non-affiliates of the Registrant at September 18, 1996 was $36,850,101, as computed by reference to the average bid and asked prices of such stock on such date. As of September 18, 1996, 3,245,986 shares of the Registrant's Common Stock, no par value, were outstanding. The Registrant had no other classes of common equity outstanding as of such date. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Annual Report to Shareholders for the fiscal year ended June 30, 1996 (Parts I and II) and portions of the Registrant's Proxy Statement to be furnished in connection with its 1996 Annual Meeting of Shareholders (Part III). =============================================================================== Exhibit Index begins on page 8. PART I ITEM 1. DESCRIPTION OF BUSINESS GENERAL ScanSOURCE Inc., ("ScanSource" or the "Company") is a national value-added distributor of automatic identification ("Auto ID") and point of sale ("POS") products. These products interface with computer systems used to automate the collection, processing and communication of information used in connection with retail sales and other commercial and industrial applications, including distribution, shipping, inventory control, materials handling and warehouse management. Auto ID products distributed by the Company include bar code scanners and printers, portable data collection terminals, keyboard wedges, magnetic stripe readers and other related equipment. POS products distributed by the Company include personal computer-based terminals, receipt printers, cash drawers, keyboards and related peripheral equipment used primarily in connection with the sale of goods and services in the retail market. PRODUCTS AND SYSTEMS INTEGRATION SERVICES The Company markets more than 5,000 products used in Auto ID and POS technology applications. The Company's principal product lines focus on Auto ID data collection equipment and systems based on bar code labeling and scanning technologies. Auto ID consists of the automatic entry of data into computers and data storage devices without the need for manual key strokes. Among the Auto ID products sold by the Company are bar code printers and labeling devices, contact wands, light pens, hand-held and fixed-mount laser scanners, portable data collection devices, keyboard wedges, and magnetic stripe readers. The Company's POS product lines focus on POS computer-based terminals, monitors, receipt printers, pole displays, cash drawers, keyboards, related peripheral equipment, and complete personal computer-based POS systems used by end-users primarily in retail sales applications. In addition to product sales, the Company offers its customers a broad range of technical services including pre-sale consulting on the selection and operation of equipment suitable for specific end-user applications, and toll-free technical support following the sale. VENDORS The Company markets Auto ID and POS products from 45 national vendors. These vendors include Advent, American Power Conversion, Cherry, Cognitive Solutions, DataCap Systems, Datamax, Eltron, Epson America, Hand Held Products, IBM, Ithaca Peripherals, Logic Controls, Mag-Tek, Metrologic, MicroTouch, MMF Cash Drawer, Monarch Marking Systems, Percon, PSC, Psion, Sato America, Spectra Physics, Strandware, Symbol Technologies, Unitech and Zebra Technologies. The Company generally enters into non-exclusive written distribution agreements with the vendors of substantially all of the products the Company distributes. These agreements typically provide the Company with stock rotation and price protection provisions that reduce in part ScanSOURCE's risk of loss due to slow moving inventory, vendor price reductions, product updates or obsolescence. Some of these agreements contain minimum purchase amounts in order to receive preferential prices. The agreements are generally terminable on 30 to 120 days' notice by either party. CUSTOMERS AND CUSTOMER SERVICES The Company's customer base currently consists of more than 4,000 active reseller accounts located nationwide. These customers consist primarily of value-added resellers but also include systems integrators and vertical software manufacturers that concentrate on the Auto ID and POS markets. The Company believes that its policy of not selling to end-users enhances customer loyalty and provides another means for ScanSOURCE to increase its market penetration among resellers. No single customer accounted for more than 5% of the Company's revenues during the fiscal year ended June 30, 1996. 2 Each of the Company's customers has a specifically assigned sales representative at the Company who develops a continuing relationship with that customer. Sales representatives continually update each customer's file with product, sales and other customer specific information in order to tailor the Company's services to better suit the customer's needs. The Company's staff of technical experts provides to both the customer base and the Company's sales force information regarding the technical characteristics of the ScanSOURCE product lines. These experts are available through toll-free telephone communication to directly aid the customer both before and after the sale. In addition, the Company's sales team receives substantial ongoing technical training through vendor programs and seminars which greatly enhances their ability to respond effectively to customer's technical inquiries and assist with their product selection. Using the Company's computerized inventory control system, the Company monitors inventory levels at its distribution facility, allowing ScanSOURCE to provide customers with accurate and current information on the availability of products. The system also tracks merchandise returns from customers and assists in forecasting product requirements and minimizing out-of-stock inventory positions. The Company's sales are made on the basis that the product meets the specifications set out by the manufacturer and that the benefits of the manufacturer's warranty are passed on to the customer. It remains the manufacturer's responsibility to correct any problems and ScanSOURCE bears no warranty obligation. Customers may return any defective merchandise purchased from the Company provided that ScanSOURCE is allowed to return the product to the vendor. SALES AND MARKETING The Company's sales force currently consists of a 27 person sales team located in the Company's executive offices and a regional office in Tustin, California. Each member of the Company's sales force receives comprehensive training with respect to the technical characteristics of the Company's products. An ongoing training program is supplemented by product seminars conducted by manufacturers' representatives and through the Company's weekly meeting among all product managers, technical staff and sales representatives during which relevant product and customer information is shared. Using the Company's computerized data base, sales representatives can immediately enter customer orders, obtain descriptive information regarding products, check inventory status, determine customer credit limits and obtain special pricing and promotion information. Upon placement of an order, the order is immediately transmitted electronically to the Company's staff at a central distribution facility where the ordered products are available for shipment. An invoice for the order is printed on the Company's invoice documentation and upon fulfillment of the order, the package is immediately shipped to the ordering reseller or to an end-user specified by the reseller. The Company's product managers are responsible for maintaining up-to-date knowledge about the latest technology, product life cycles and innovative new products. These managers provide training for the sales personnel and other support functions in the sales and technical areas. Product managers also communicate information about particular applications for specific customers to the rest of the sales force so that both the concept and the technical details can be applied across the group. In addition to maintaining contact with existing customers, the sales team solicits new business through its distribution three times each year to existing and potential customers a sales catalog containing product and price information and through its follow-up with prospects identified on data bases purchased from trade publications. Sales leads and referrals are also generated by on-going interaction with existing customers and vendors. The Company also conducts a comprehensive advertising and promotion program that includes exhibits at national and regional trade shows, Company-sponsored seminars and product demonstrations in regional areas, advertisements in trade publications that serve the Auto ID and POS industries, and direct mail campaigns to targeted reseller groups. The Company is able to recoup a substantial portion of its advertising and promotion spending through manufacturer-sponsored "cooperative advertising" programs. 3 DISTRIBUTION All of the Company's warehousing, shipping and receiving functions are handled by Company employees working out of a central warehouse facility leased by the Company and located near the Federal Express distribution hub in Memphis, Tennessee. The Company believes that the use of a central distribution and shipping facility provides it with certain competitive advantages, including prompt order fulfillment and delivery, lower inventory requirements and improved inventory control, simplified purchasing and tracking, higher order fill rates and the flexibility to respond quickly to various customer needs, including offerings of new and additional products. Products are ordered by the Company pursuant to its contracts with various vendors and are shipped by the Company's vendors directly to the central distribution facility. The ownership and the risk of physical loss or destruction of these products remain with the Company. Customer orders are filled by the Company's staff at the distribution facility. All customer shipments are distributed nationwide from the central distribution facility using either overnight air express or ground delivery services. Through a direct on-line computer link to the distribution facility, the Company is able to continually monitor the status of product deliveries and customer shipments. COMPETITION The Auto ID and POS distribution industry is highly competitive. The Company's competitors include manufacturers, including some of the Company's own vendors who sell directly to the Company's customer base, and other, mostly regional, Auto ID and POS distributors. Competition in the Auto ID and POS distribution industry is based on several factors, including price, breadth, quality and availability of product lines, speed of product delivery, availability of financing and the level of technical support. Although certain of the Company's competitors sell various products from time to time at prices below those charged by the Company, the Company believes its aggressive product pricing and the substantial value-added services the Company provides to the reseller are its primary competitive advantages among other distributors. EMPLOYEES As of August 12, 1996, ScanSOURCE had 87 employees, none of whom was a member of an industry trade union or collective bargaining unit. ScanSOURCE considers its relations with its employees to be excellent. ITEM 2. DESCRIPTION OF PROPERTY. The Company leases approximately 13,000 square feet in Greenville, South Carolina for its principal executive and sales office. This lease expires in September 1998 and the aggregate annual rental payments are approximately $60,000. The Company leases approximately 600 square feet in Tustin, California for a sales office. This lease expires in October 1996 and the aggregate annual rental payments are approximately $8,900. The Company also leases approximately 1,800 square feet in Norcross, Georgia. This lease expires in January 1998 and the aggregate annual rental payments are approximately $21,000. ITEM 3. LEGAL PROCEEDINGS. None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS. None. 4 PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. Price Range of Common Stock on the inside back cover page of the Annual Report to Shareholders for the fiscal year ended June 30, 1996 is incorporated herein by reference. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Management's Discussion and Analysis of Financial Condition and Results of Operations on pages 2 through 5 of the Annual Report to Shareholders for the fiscal year ended June 30, 1996 is incorporated herein by reference. ITEM 7. FINANCIAL STATEMENTS. The financial statements included on pages 6 through 14 of the Annual Report to Shareholders for the fiscal year ended June 30, 1996 are incorporated herein by reference. ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III Information called for by PART III, (Items 9, 10, 11 and 12) of this Report on Form 10-KSB has been omitted as the Company intends to file with the Securities and Exchange Commission not later than 120 days after the close of its fiscal year ended June 30, 1996 a definitive Proxy Statement pursuant to Regulation 14A promulgated under the Securities Exchange Act of 1934. Such information will be set forth in such Proxy Statement and is incorporated herein by reference. ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT. Information called for by this Item is incorporated herein by reference as set forth above. ITEM 10. EXECUTIVE COMPENSATION. Information called for by this Item is incorporated herein by reference as set forth above. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. Information called for by this Item is incorporated herein by reference as set forth above. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Information called for by this Item is incorporated herein by reference as set forth above. 5 PART IV ITEM 13. EXHIBIT LIST AND REPORTS ON FORM 8-K. Unless otherwise indicated as being filed herewith, each of the Exhibits listed below is incorporated herein by reference to the Exhibit of the same number filed as part of the Company's Registration Statement on Form S-1 (File No. 33-75026A), as amended. (A) EXHIBITS Exhibit Number Exhibit 3.1 Amended and Restated Articles of Incorporation of the Company. 3.2 Bylaws of the Company. 4.1 Form of Common Stock Certificate. 4.2 Form of Warrant Certificate. 4.3 Form of Unit Purchase Option granted to GKN Securities Corp. 4.4 Warrant Agreement between Continental Stock Transfer & Trust Company and the Company. 10.7 Employment Agreement dated as of February 1, 1994 by and between the Company and Steven H. Owings. 10.8 Employment Agreement dated as of February 1, 1994 by and between the Company and Michael L. Baur. 10.9 Stock Option Agreement dated July 1, 1993 covering stock options issued to Michael L. Baur. 10.10 1993 Incentive Stock Option Plan of the Company and form of Stock Option Agreement. 10.11 1994 Stock Option Plan for Outside Directors of the Company and form of Stock Option Agreement. 10.12 Stock Warrant dated September 27, 1993 issued by the Company to Rev-Wood Merchant Partners. 10.13 Stock Option Agreement dated December 30, 1993 covering stock options issued to Irwin Lieber. 10.18 Warehouse Service Agreement dated April 18, 1995 by and between the Company and Technology Marketing Group, Inc. d/b/a Globelle. 10.19* Stock Option Agreement dated September 1, 1995 by and between Globelle, Inc., the Company and Dennis Gates. 10.20* Letter Agreement dated September 1, 1995 between the Company and Transition Marketing, Inc. 13* The Company's Annual Report to Shareholders for the fiscal year ending June 30, 1996. 24* Powers of Attorney. * Filed herewith. (B) REPORTS ON FORM 8-K: None. 6 SIGNATURES In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SCANSOURCE, INC. September 20, 1996 By: /s/ STEVEN H. OWINGS --------------------------------------------- Steven H. Owings Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE /s/ STEVEN H. OWINGS Chairman of the Board and Chief September 20, 1996 - ------------------------------- Steven H. Owings Executive Officer /s/ MICHAEL L. BAUR President and Director September 20, 1996 - ------------------------------- Michael L. Baur /s/ JEFFERY A. BRYSON Chief Financial Officer and Treasurer September 20, 1996 - ------------------------------- Jeffery A. Bryson (principal financial and accounting officer) * Director September 20, 1996 - -------------------------------- Steven R. Fischer * Director September 20, 1996 - ------------------------------- James G. Foody /s/ STEVEN H. OWINGS September 20, 1996 - ------------------------------- *By: Steven H. Owings (attorney-in-fact for each of the persons indicated)
7 EXHIBIT INDEX Unless otherwise indicated as being filed herewith, each of the Exhibits listed below is incorporated herein by reference to the Exhibit of the same number filed as part of the Company's Registration Statement on Form S-1 (File No. 33-75026A), as amended. Exhibit Number Exhibit 3.1 Amended and Restated Articles of Incorporation of the Company. 3.2 Bylaws of the Company. 4.1 Form of Common Stock Certificate. 4.2 Form of Warrant Certificate. 4.3 Form of Unit Purchase Option granted to GKN Securities Corp. 4.4 Warrant Agreement between Continental Stock Transfer & Trust Company and the Company. 10.7 Employment Agreement dated as of February 1, 1994 by and between the Company and Steven H. Owings. 10.8 Employment Agreement dated as of February 1, 1994 by and between the Company and Michael L. Baur. 10.9 Stock Option Agreement dated July 1, 1993 covering stock options issued to Michael L. Baur. 10.10 1993 Incentive Stock Option Plan of the Company and form of Stock Option Agreement. 10.11 1994 Stock Option Plan for Outside Directors of the Company and form of Stock Option Agreement. 10.12 Stock Warrant dated September 27, 1993 issued by the Company to Rev-Wood Merchant Partners. 10.13 Stock Option Agreement dated December 30, 1993 covering stock options issued to Irwin Lieber. 10.18 Warehouse Service Agreement dated April 18, 1995 by and between the Company and Technology Marketing Group, Inc. d/b/a Globelle. 10.19* Stock Option Agreement dated September 1, 1995 by and between Globelle, Inc., the Company and Dennis Gates. 10.20* Letter Agreement dated September 1, 1995 between the Company and Transition Marketing, Inc. 13* The Company's Annual Report to Shareholders for the fiscal year ending June 30, 1996. 24* Powers of Attorney. * Filed herewith. 8 EX-10 2 EXHIBIT 10.19 EXHIBIT 10.19 STOCK OPTION AGREEMENT THIS OPTION AGREEMENT (the "Option") made as of this 1st day of September, 1995 by and between GLOBELLE, INC. ("Globelle"), SCANSOURCE, INC. ("ScanSource") and DENNIS GATES ("Gates"). Gates is the owner of sixty-two percent (62%) of the shares of no par value common stock (the "Stock") of Transition Marketing, Inc. (the "Company"). Globelle and ScanSource are each the record owners of 19,000 shares of no par value common stock of the Company which is to be held in escrow. As consideration for their stock in the Company, Globelle and ScanSource each entered into letter agreements dated September ___, 1995 (the "Agreements") to purchase One Hundred Eighty Thousand and no/100 Dollars ($180,000.00) worth of marketing programs from the Company for the first year of the Company's existence (August 1, 1995 through July 31, 1996, "Year 1"). In connection with such Agreements, Gates wishes to afford each of ScanSource and Globelle the opportunity to purchase a portion of the Stock in 1996 and 1997 (the "Option Years"), provided that each ScanSource and Globelle abide by the terms and conditions of the Agreements in the first option year and purchase at least an additional $180,000.00 of marketing programs from the Company in the second option year (August 1, 1996 through July 31, 1997, "Year 2"). In consideration of the mutual agreements and other matters set forth herein, Gates, Globelle and ScanSource hereby agree as follows: A. OPTION TO PURCHASE 1. Grant of Option to Purchase and Purchase Price. Gates hereby grants to ScanSource and Globelle the right and option to purchase from Gates the Stock on the terms and conditions set forth hereinafter (the "Option"). This Option shall be adjusted to include any increase or decrease in the number of shares of the Stock resulting from any stock splits, stock dividends, reverse stock splits, or other issuance or redemption of shares by the Company. This Option shall only be exercisable by ScanSource and/or Globelle in the Option Years if ScanSource and/or Globelle have complied with the terms of the Agreements in Year 1 by purchasing at least $180,000.00 of marketing programs from the Company and purchase at least $180,000.00 of marketing programs from the Company in Year 2. If either ScanSource or Globelle, or both, do not purchase at least $180,000.00 of marketing programs in Year 1 such party shall lose its Option in Years 1 and 2. If ScanSource and/or Globelle does purchase at least $180,000.00 of marketing programs in Year 1 then it may exercise its Option in Year 1. If ScanSource and/or Globelle does purchase at least $180,000.00 of marketing programs in Year 2 then it may exercise its Option in Year 2. However, if only ScanSource and not Globelle, or Globelle and not ScanSource, does not purchase $180,000.00 of marketing programs from the Company in Year 1 or Year 2, the noncompliance with the conditions for the Option by one will not preclude the other from exercising its Option for that year. (a) During the month of August 1996, Globelle and ScanSource shall have the right to purchase between them, in a ratio established as provided in Section 1(c) below, 31,000 shares (or 1 the equal number of shares due to any adjustments required as discussed above) of the Stock for the purchase price of Five and 175/1000 Dollars ($5.175) per share ($160,425.00 total consideration). (b) During the month of August 1997, Globelle and ScanSource shall have the right to purchase between them, in a ratio established as provided in Section 1(c) below, Gate's remaining 31,000 shares (or the equal number of shares resulting due to any adjustments required as discussed above) of the Stock for the purchase price of Seven and 095/1000 Dollars ($7.095) per share ($219,945.00 total consideration). (c) Subject to the restrictions set forth above and pursuant to Sections 1(a) and (b), Globelle and ScanSource shall each be entitled to purchase a percentage of the 31,000 shares of the Stock available each year. The percentage of Stock which Globelle and ScanSource may purchase in each year shall be based upon the dollar value of marketing programs each purchases from the Company in that year, with the total of the two (2) percentages each year equaling one hundred percent (100%)(eg: If Globelle purchases $360,000.00 of marketing programs and ScanSource purchases $180,000.00 worth of marketing programs then Globelle will have the option to purchase 66.7% of the 31,000 shares and ScanSource will have the option to purchase 33.3% of the 31,000 shares.). (d) In the event either Globelle or ScanSource elects not to exercise its Option following Year 1, Year 2, or both; elects to only partially exercise such Option following Year 1, Year 2, or both; or does not comply with the conditions for the Option in either year thereby losing its right to exercise its Option in the relevant year, or both years, the other shall have a right of first refusal in the relevant year to purchase the Stock not purchased by the other. In the event a percentage of the 31,000 shares of the Stock available in either Year 1 or Year 2 is left unpurchased by Globelle or ScanSource because neither the Option nor a resulting right of first refusal is exercised, Gates shall retain the unpurchased portion of the Stock. 2. Exercise and Closing. This Option shall be exercisable upon receipt of written notice from each of Globelle and ScanSource addressed to Gates at the notice address set forth hereinbelow, such notices to be provided by the last day of August of each year in which the Option may be exercised. Closings of the purchases of the shares of the Stock as to which this Option may be exercised shall take place in a place or places agreed upon by Globelle and Gates and ScanSource and Gates on or before thirty (30) days following receipt by Gates of the written notices of intent to exercise the Option, or at a time thereafter as agreed to by the parties. The purchase price for the applicable year multiplied by the number of shares as to which the Option is exercised by each ScanSource and/or Globelle shall be paid in full to Gates at the time of each closing in cash (including check, bank draft, or money order payable to the order of Gates) or, in a manner as otherwise agreed upon by the parties. If the parties so agree, the closing of each purchase (if each Globelle and ScanSource exercises the Option) may occur at the same time and place. 3. Term. This Option shall expire on September 1, 1997 and shall only be exercisable by Globelle and ScanSource during the month of August for the years 1996 and 1997 (the "Option Term"). If either Globelle or ScanSource is sold or merged into another Corporation during the Option Term, the entity which acquires either or into which either merges, may exercise this Option during the Option Term. In the event either Globelle or ScanSource is dissolved and its assets thus distributed during the Option Term, this Option shall terminate. 2 B. MISCELLANEOUS 1. Transferability. The Option is not transferable or assignable, in whole or in part, by Globelle or ScanSource other than by a transfer resulting from the merger or complete sale of either. 2. Stock Restrictions. Globelle and ScanSource understand that at the time of the execution of this Option Agreement, the shares of the Stock issuable upon exercise of the Option have not been registered under the Securities Act of 1933, as amended (the "Act"), or under any state securities law, and that the Company currently does not intend to effect any such registration. Globelle and ScanSource agree that the shares of the Stock which Globelle or ScanSource may acquire by exercising the Option shall be purchased by Globelle and ScanSource for investment without a view to distribution within the meaning of the Act, and shall not be sold, transferred, assigned, pledged, or hypothecated unless such transfer has been registered under the Act and applicable state securities laws, or the transfer duly qualifies for an applicable exemption from the registration requirements of the Act and any applicable state securities laws. In any event, Globelle and ScanSource agree that the shares of the Stock which each may acquire by exercising the Option shall not be sold or otherwise disposed of in any manner which would constitute a violation of any applicable securities laws, whether federal or state. In addition, Globelle and ScanSource agree that (i) the certificates representing the shares of the Stock purchased under the Option may bear such restrictive legend or legends as the Company's legal counsel deems appropriate in order to assure compliance with applicable securities laws, (ii) the Company may refuse to register the transfer of the shares of the Stock purchased under the Option on the stock transfer records of the Company if such proposed transfer would, in the opinion of counsel satisfactory to the Company, constitute a violation of any applicable securities laws, and (iii) the Company may give related instructions to its transfer agent to stop registration of the transfer of the shares of Stock purchased under the Option. 3. Governing Law. This Agreement shall be governed and construed in accordance with the laws of the State of South Carolina. [Signatures on Next Page] 3 IN WITNESS WHEREOF, Gates, Globelle, and ScanSource have caused this Option to be duly executed as of the day and year first above written. /s/ Dennis Gates DENNIS GATES NOTICE ADDRESS: 851 Arlington Blvd. El Cerrito, CA 94530 GLOBELLE, INC. /s/ Robert Zakheim BY: Robert Zakheim ITS: President NOTICE ADDRESS: 6410 West Old Shakopee Rd. Minneapolis, MN 55438 SCANSOURCE, INC. /s/ Steven H. Owings BY: Steven H. Owings ITS: Chief Executive Officer NOTICE ADDRESS: 6 Logue Ct., Suite G Greenville, SC 29615 4 EX-10 3 EXHIBIT 10.20 EXHIBIT 10.20 September 1, 1995 Robert S. McLain, Jr. Transition Marketing, Inc. 6 Logue Court, Suite G Greenville, South Carolina 29615 Re: Agreement to Purchase Marketing Programs Dear Bobby, Pursuant to previous negotiations and discussions, this letter shall serve to set forth the terms of the oral agreement reached between ScanSource, Inc. ("ScanSource") and Transition Marketing, Inc. ("Transition") pursuant to which ScanSource shall purchase marketing programs from Transition in exchange for stock in Transition. 1. Purchase of Marketing Programs. ScanSource hereby agrees to purchase One Hundred and Eighty Thousand and no/100 Dollars ($180,000.00) worth of marketing programs from Transition by July 31, 1996, and by this agreement evidences an intent to use its best efforts to continue to purchase identical amounts of marketing programs annually. The $180,000.00 received by Transition by July 31, 1996, for the purchase of marketing programs shall be deemed the purchase price for 19,000 shares of stock in Transition to be owned by ScanSource as an initial shareholder of Transition. For the purposes of this agreement, marketing programs shall include, but not be limited to, telemarketing, outbound sales, and trade shows. Notwithstanding any provision to the contrary herein, if ScanSource purchases at least $120,000.00 of the marketing programs from Transition by July 31, 1996, it shall be deemed that ScanSource has purchased a prorated portion of the shares of stock in Transition. Such prorated portion shall be based on the percentage of marketing programs purchased divided by $180,000.00 (eg: If $135,000.00 worth of marketing programs are purchased then 3/4's or 14,250 shares shall be deemed to be purchased by ScanSource). 2. Escrow of Shares of Stock. As required by South Carolina Code ss. 33-6-210(e), as amended, the 19,000 shares of stock purchased by ScanSource for the consideration evidenced by this agreement shall be held in escrow until the earlier to occur of (a) August 1, 1996 or (b) completion of the obligation set forth hereinabove, by an escrow agent named in that certain Escrow Agreement of even date executed by and among the parties hereto and the escrow agent, such stock to be subject to the terms and conditions set forth in the Escrow Agreement. Robert S. McLain, Jr. September 1, 1995 Page 2 This agreement shall be governed by and construed in accordance with South Carolina law and shall be binding upon and inure to the benefit of any successors of each party hereto. If any provision hereof is held to be invalid or unenforceable, such invalidity or unenforceability shall not affect the validity or enforceability of any other provision hereof. Sincerely, /s/ Michael L. Baur President, ScanSource, Inc. On behalf of Transition Marketing, Inc., I, Robert S. McLain, Jr., its President, hereby acknowledge and agree to abide by the terms set forth hereinabove. Transition Marketing, Inc. /s/ Robert S. McLain, Jr. By: Robert S. McLain, Jr Its: President EX-24 4 EXHIBIT 24 EXHIBIT 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned, an officer and/or director of SCANSOURCE, INC., a South Carolina corporation (hereinafter referred to as the "Company"), does hereby constitute and appoint each of Steven H. Owings and Jeffery A. Bryson the undersigned's true and lawful attorney-in-fact and agent with full power to act with or without the undersigned, and with full power of substitution, to do any and all acts and things and to execute any and all instruments which said attorney-in-fact and agent may deem necessary or advisable to enable the Company to comply with the Securities Exchange Act of 1934, as amended (the "Act"), and any rules, regulations and requirements of the Securities and Exchange Commission (the "Commission") in respect thereof, in connection with the filing under the Act of the Company's Annual Report on Form 10-KSB for the Company's fiscal year ended June 30, 1996, including all amendments thereto (the "Form 10-KSB"), and including specifically, but without limiting the generality of the foregoing, the power and authority to sign for and on behalf of the undersigned the name of the undersigned as officer and/or director of the Company to the Form 10-KSB filed with the Commission and to any instrument or document filed as a part of, as an exhibit to, or in connection with said Form 10-KSB; and the undersigned does hereby ratify and confirm as his own act and deed all that said attorney-in-fact and agent shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has subscribed these presents, this 28th day of September, 1996. Signature: /s/ James G. Foody Print Name: James G. Foody EXHIBIT 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned, an officer and/or director of SCANSOURCE, INC., a South Carolina corporation (hereinafter referred to as the "Company"), does hereby constitute and appoint each of Steven H. Owings and Jeffery A. Bryson the undersigned's true and lawful attorney-in-fact and agent with full power to act with or without the undersigned, and with full power of substitution, to do any and all acts and things and to execute any and all instruments which said attorney-in-fact and agent may deem necessary or advisable to enable the Company to comply with the Securities Exchange Act of 1934, as amended (the "Act"), and any rules, regulations and requirements of the Securities and Exchange Commission (the "Commission") in respect thereof, in connection with the filing under the Act of the Company's Annual Report on Form 10-KSB for the Company's fiscal year ended June 30, 1996, including all amendments thereto (the "Form 10-KSB"), and including specifically, but without limiting the generality of the foregoing, the power and authority to sign for and on behalf of the undersigned the name of the undersigned as officer and/or director of the Company to the Form 10-KSB filed with the Commission and to any instrument or document filed as a part of, as an exhibit to, or in connection with said Form 10-KSB; and the undersigned does hereby ratify and confirm as his own act and deed all that said attorney-in-fact and agent shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has subscribed these presents, this 28th day of September, 1996. Signature: /s/ Steven R. Fischer Print Name: Steven R. Fischer EX-13 5 EXHIBIT 13 ScanSource 1996 ANNUAL REPORT Sales by Quarter Net Income by Quarter* charts appears here --- customer to fill in plot points. In millions In thousands *Excludes net non-recurring income Corporate Profile ScanSource is an international value-added distributor of automatic identification (Auto ID) and Point-of-Sale (POS) products. These products interface with computer systems used to automate the collection, processing and communication of information used in retail sales, distribution, shipping, (ScanSource logo appears here) inventory control, materials handling and warehouse management. Auto-ID products distributed by the Company include bar code scanners and printers, portable data collection terminals, keyboard wedges, magnetic stripe readers and other related equipment. POS products distributed by the Company include personal computer-based terminals, receipt printers, cash drawers, keyboards and related peripheral equipment used primarily in the retail market. The Company distributes its products only to resellers, many of whom concentrate on the Auto ID and POS markets. In addition to its broad product selection, the Company provides resellers with key value-added services, including same-day order fulfillment and next-day delivery at ground delivery rates, technical training, pre-sale and post-sale technical support, financing and competitive prices with additional discounts based on cumulative purchases across all product lines. ScanSource currently markets products from approximately 45 vendors. The Company's vendors include most of the leading Auto-ID and POS product manufacturers, such as Cherry, Cognitive Solutions, Datamax, Epson, Eltron, IBM, Ithaca Peripherals, MMF Cash Drawers, Metrologic, MicroTouch, Percon, PSC, Sato, Symbol and Zebra Technologies. The Company's principle executive office is located at 6 Logue Court, Suite G, Greenville, South Carolina 29615. (Photo of Mike Baur, President appears here) Dear Shareholder: I am pleased to report excellent results for ScanSource in fiscal year 1996. For the fourth year, we have increased sales significantly, attaining $55.7 million in 1996 compared to $34.2 million in 1995. Net income without non-recurring income rose substantially to $1,738,000 in 1996 compared to $911,000 in 1995. Earnings per share without non-recurring income increased to $0.50 per share from $0.32 in 1995. Our marketing efforts to recruit new customers intensified this year. We began a (Graphic appears here with face GBC/GLOBELLE & ScanSource Solutions USA Dallas) trade show called Solutions USA, that visits a different region of the country each quarter. Co-sponsored by PC-distributor GBC/GLOBELLE, Solutions USA allows prospective customers to learn about new technologies by attending one of the many seminars featuring ScanSource software partners and key hardware vendors. The trade show offers a forum to combine the products from Point-of-Sale (Photo of computer hardware appears here) software vendors with IBM's hardware. Solutions USA provided a vehicle to launch IBM's new SureOne Point-of-Sale System, targeted at small to medium size retailers. The software companies we are partnering with are focused on over 20 specific retail segments such as apparel, hardware, sporting goods and food service. By showcasing software and hardware solutions, we can make it easier for resellers to begin selling these products. As a result of these efforts, we have seen an increase in the number of active customers. We are gaining customers from the existing Auto-ID and POS channel and from computer resellers who are selling these products for the first time. The existing Auto-ID and POS resellers are pleased with our broad in-stock inventory, volume discounts, overnight delivery and flexible financing. These resellers are also very happy that we do not compete with them for end user business. In addition, the resellers who are new to Auto-ID and POS are utilizing our pre-sale consulting and technical services to take the "mystery" out of selling these products. As our customer base has grown, our sales and technical staff has increased to keep pace. We have added a sales team on the West Coast to better service those customers, and to offer late night ordering capability for our Eastern customers. In the Auto-ID industry, there are few off-the-shelf software solutions for resellers. As a (Drawing appears here ????) result, we have launched a Professional Services Group to assist resellers with designing and programming solutions. Technically sophisticated applications, using radio frequency (RF) and pen-based architectures, will require this type of software and hardware integration. We expect this level of expertise will encourage manufacturers to direct more business through the reseller channel. Operationally, we have expanded our warehousing facility in Memphis to accommodate our growth and have begun shipments to Canada in support of our IBM SureOne business. The computer software and hardware system we implemented last year has proven to be extremely reliable and flexible, and will handle our future growth. The successful year we had in 1996 is a result of strong relationships we have with our customers, suppliers and our employees. We take pride in our ability to grow existing partnerships while creating new ones at the same time. Thank you for your support as a shareholder and we look forward to reporting to you on our future success. Sincerely, Michael L. Baur President September 9, 1996 3 MANAGEMENT'S DISCUSSION AND ANALYSIS FOR YEAR-END JUNE 30, 1996 RESULTS OF OPERATIONS FISCAL 1996 COMPARED TO FISCAL 1995 NET SALES. Net sales for the fiscal year ended June 30, 1996 were $55,670,000 compared to sales of $34,235,000 for the prior fiscal year. Growth of net sales resulted primarily from additions to the Company's sales force, competitive product pricing, selective expansion of its product line, and increased marketing efforts to automatic identification (Auto ID) and point of sale (POS) resellers. GROSS PROFIT. Gross profit for the fiscal year ended June 30, 1996 was $7,813,000 compared to gross profit of $4,791,000 for the prior fiscal year. Gross profit as a percentage of sales for the fiscal years ended June 30, 1996 and 1995 was 14.0%. Fluctuations in gross profit as a percentage of sales can result from changes in the mix of sales of higher and lower-margin products and the volume discounts which accompany large customer orders. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses, including amortization, (SG&A) for the fiscal year ended June 30, 1996 were $5,037,000 compared to SG&A of $3,211,000 for the prior year. SG&A as a percentage of sales was 9.0% for the fiscal year ended June 30, 1996, compared to 9.4% for the prior year. The decrease in SG&A as a percentage of sales for the year ended June 30, 1996 is the result of efficiencies gained through higher sales volume and accompanying economies of scale. OPERATING INCOME. Operating income for the fiscal year ended June 30, 1996 increased to $2,776,000 from $1,581,000 for the same period in 1995, driven by the improvement in gross profit from increased sales as described above. INTEREST EXPENSE. Interest expense for the fiscal year ended June 30, 1996 decreased to $10,000 from $82,000 for the fiscal year ended June 30, 1995. Lower interest resulted from the Company's paying off its line of credit in August 1995 with proceeds from the issuance of stock from the exercise of stock purchase warrants. The Company's outstanding balance on its line of credit at June 30, 1996 occurred from draws within the last two weeks of the fiscal year. INTEREST INCOME. Interest income for the fiscal year ended June 30, 1996 was $97,000 resulting from earnings on invested proceeds from common stock issued in connection with warrant exercises through September 1995 as described in Liquidity and Capital Resources below. OTHER INCOME. In September 1994, Gates agreed to pay the Company $1.4 million in connection with a reduction in the term of Gates's non-compete obligation with the Company. The Company recognized the $1.4 million, net of $100,000 of related expenses, as other income ratably over the term of the non-compete period from September 1994 to August 1995. The Company recognized $1.1 million of the $1.3 million as other income at a rate of $110,000 per month during the year ended June 30, 1995, and recognized the remaining $200,000 for the year ended June 30, 1996. INCOME TAXES. Tax expense of $1,193,000 was provided at a 39% effective rate for the fiscal year ended June 30, 1996, and included state and federal taxes on the $200,000 of other income recognized from Gates described in the preceding paragraph. NET INCOME. The effect of improved operating income, lower interest expense, and higher interest income resulted in net income for the fiscal year ended June 30, 1996 of $1,858,000. FISCAL 1995 COMPARED TO FISCAL 1994 NET SALES. Net sales for the fiscal year ended June 30, 1995 were $34,235,000 compared to net sales of $16,089,000 for the prior fiscal year. Growth of net sales resulted primarily from additions to the Company's sales force, competitive product pricing, selective expansion of its product line, and increased marketing efforts to Auto ID and POS resellers. GROSS PROFIT. Gross profit for the fiscal year ended June 30, 1995 was $4,791,000 compared to gross profit of $2,413,000 for the prior fiscal year. Gross profit as a percentage of sales for the fiscal year ended June 30, 1995 was 14.0% compared to 15.0% for the prior fiscal year. The reduction in gross profit as a percentage of sales for the fiscal year ended June 30, 1995 was a result of sales of a higher number of lower-margin products. Generally these lower margin sales were accompanied by decreases in the overhead costs required to support the sales. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses, including amortization expense (SG&A), for the fiscal year ended June 30, 1995 were $3,211,000 compared to SG&A of $1,768,000 for the prior fiscal year. SG&A as a percentage of sales for the fiscal year ended June 30, 1995 was 9.4% compared to 11.0% for the prior fiscal year. Management believes that the improvement in SG&A as a percentage of sales was a result of efficiencies gained through increased sales volume and accompanying economies of scale. OPERATING INCOME. Operating income for the fiscal year ended June 30, 1995 increased to $1,581,000 from $645,000 for the prior fiscal year, driven by the improvement in both gross profit and SG&A expenses as described above. INTEREST EXPENSE. Interest expense for the fiscal year ended June 30, 1995 decreased to $82,000 from $180,000 for the prior fiscal year. This decrease resulted primarily from the Company's March 1994 initial public offering which allowed the Company to maintain adequate inventory while minimizing line of credit use and related interest charges throughout fiscal 1995. See "Liquidity and Capital Resources." OTHER INCOME. In September 1994, Gates agreed to pay the Company $1.4 million in connection with a reduction in the term of Gates' non-compete obligation with the Company and the termination of warehousing operations between Gates 4 MANAGEMENT'S DISCUSSION AND ANALYSIS FOR YEAR-END JUNE 30, 1996 and the Company. The Company is recognizing $1.3 million of such amount as other income ratably over the term of the non-compete period from September 1994 to August 1995, representing the $1.4 million payment due from Gates, net of $100,000 of expenses incurred by the Company to move its inventory and connect to a new computer system. For the year ended June 30, 1995, the Company had recognized $1.1 million of the $1.3 million as other income. See Note 2 of Notes to Financial Statements. INCOME TAXES. Tax expense of $997,000 was provided at a 40% effective rate for the year ended June 30, 1995, and included state and federal taxes on the $1.1 million of other income from Gates described in the preceding paragraph. NET INCOME. The effect of improved operating income, decreased interest expense, and higher other income resulted in net income for the fiscal year ended June 30, 1995 of $1,511,000. LIQUIDITY AND CAPITAL RESOURCES The Company financed its initial operating requirements and growth through private financings. In March 1994, the Company closed a public offering of common stock and common stock purchase warrants which provided the Company with approximately $4,560,000. The Company also received net proceeds of approximately $6,300,000 from common stock issued upon the exercise of stock purchase warrants prior to their redemption date of September 19, 1995. For the fiscal year ended June 30, 1996, net cash of $8,318,000 was used in operating activities, compared to $1,826,000 used in operating activities for the fiscal year ended June 30, 1995. Greater cash used in operations was primarily to fund higher inventory and receivables, offset by growth in trade payables to vendors. Cash used in operating activities for the fiscal year ended June 30, 1995 would have been $2,476,000 except that in September 1994, the Company received $650,000 of the $1.4 million Gates agreed to pay to the Company in connection with the termination of the operations agreement between the Company and Gates. Included in the terms of the agreement to terminate distribution services with Gates was the conditional right of Gates to put its 250,000 shares of the Company's common stock to the Company for $3.00 per share upon the earlier of April 18, 1996 or the expiration of the period for the Company's exercise of its option to purchase such shares at $3.50 per share. To ensure that the Company had sufficient liquidity to purchase the shares at that price, Gates negotiated to pay $650,000 in September 1994, and to hold back $750,000 of its $1.4 million contract termination payment. On March 19, 1996, the Company collected the $750,000 due from Gates concurrent with the Company's exercise of its call option to purchase the shares, described below. Cash used in investing activities for the fiscal year ended June 30, 1996 was $904,000 and included $659,000 for certain capital expenditures and payments of $202,000 to MicroBiz Corporation (MicroBiz). Cash used in investing activities for the fiscal year ended June 30, 1995 was $1,418,000 and consisted of $669,000 for capital expenditures, payments of $120,000 to a former shareholder of Alpha Data Systems, Inc., and $531,000 for the purchase of the equipment distribution business of MicroBiz. Cash provided by financing activities for the fiscal year ended June 30, 1996 was $9,035,000 and included net advances from the line of credit of $2,579,000, and net proceeds of $6,779,000 and $552,000 from the issuance of stock upon the exercise of stock purchase warrants and a portion of the underwriter's unit purchase option (UPO), and the exercise of stock options, respectively. A portion of these proceeds was used in September 1995 to repay the Company's line of credit for $1.2 million. In March 1996 the Company exercised its call option and repurchased 250,000 of its common shares from Gates for $875,000. Cash provided by financing activities for the fiscal year ended June 30, 1995 was $1,287,000 and consisted of borrowings on the line of credit for $1,200,000 and $134,000 from the sale of stock upon the exercise of stock purchase warrants and a portion of the UPO. In October 1995 the Company entered into a revolving credit facility with a bank whereby the Company can borrow up to $8 million, based upon 80% of eligible accounts receivable and 40% of non-IBM inventory at the 30-day LIBOR rate of interest, plus 2.35%. The line of credit extends to October 31, 1996, and is secured by accounts receivable and inventory. The line of credit contains certain financial covenants including minimum net worth and current ratio requirements, and a maximum debt to net worth ratio of 2.11 to 1. At June 30, 1996, the interest rate on the line of credit was 7.98%; the loan base exceeded $8 million; and the outstanding balance was $3.8 million, leaving $4.2 million available. The Company has a commitment from the bank, which the Company intends to exercise, to renew the line of credit for amounts up to $15 million to October 31, 1997 under terms similar to the existing agreement. In April 1996 the Company signed an agreement for wholesale financing with IBM Credit Corporation (ICC) whereby the Company has been extended interest-free, 75-day credit terms for all purchases of IBM product. The credit line is collateralized by IBM inventory, has a limit up to the value of IBM inventory held by the Company, and is currently capped at $7 million payable to ICC. The balance payable under this agreement was $3,501,000 at June 30, 1996. The Company's current ratios at June 30, 1996 and at June 30, 1995 were 2.79 and 2.17, respectively. ASSET MANAGEMENT The Company manages the inventory held at the central distribution facility by maintaining sufficient quantities to achieve high order fulfillment rates while at the same time maximizing turnover rates. Inventory fluctuates as the Company adds new product lines and when it authorizes large purchases from vendors to take advantage of attractive terms. To 5 MANAGEMENT'S DISCUSSION AND ANALYSIS FOR YEAR-END JUNE 30, 1996 reduce the risk of loss to the Company due to vendor price reductions and slow moving or obsolete inventory, contracts with most of the Company's vendors contain price protection and stock return privileges. In addition, certain vendor contracts provide that the vendor will repurchase such vendor's products upon termination of the Company's contract with the vendor. The Company attempts to control losses on credit sales by closely monitoring customers' creditworthiness through its online computer system which contains detailed information on each customer's payment history and other relevant information. Customers who qualify for credit terms are typically granted net 20-day payment terms. The Company also sells products on prepayment and cash on delivery terms. SEASONALITY AND OTHER FACTORS Due to the Company's lack of extended operating history, management has not been able to determine the specific effect, if any, of seasonal or other factors which may cause quarterly variability in operating results. Management believes, however, that factors that may influence quarterly variability include the overall growth in the Auto ID and POS industry and shifts in short-term demand for the Company's products due to a variety of factors, including the introduction of new products or updates of existing products. The Company believes that results of operations for a quarterly period may not be indicative of the results for any other quarter or for the full year. EFFECTS OF INFLATION Management believes that inflation has not had a material effect on the Company's operations. 6 BALANCE SHEETS
June 30 ScanSOURCE, Inc. 1995 1996 ASSETS Current assets Cash............................................................................................. $ 186,572 -- Receivables: Trade, less allowance for doubtful accounts of $316,910 at June 30, 1995 and $526,819 at June 30, 1996..................................................................................... 3,949,627 7,462,791 Other......................................................................................... 234,874 531,444 4,184,501 7,994,235 Inventories...................................................................................... 6,306,407 17,538,471 Prepaid expenses and other....................................................................... 49,249 51,898 Due from Gates/FA................................................................................ 750,000 -- Deferred tax asset............................................................................... 637,000 1,001,000 Total current assets........................................................................ 12,113,729 26,585,604 Property and equipment, at cost: Computer and phone equipment..................................................................... 379,339 740,700 Furniture and equipment.......................................................................... 321,661 519,987 Leasehold improvements........................................................................... 186,181 285,732 887,181 1,546,419 Less accumulated depreciation.................................................................... (125,097) (362,633) 762,084 1,183,786 Intangible assets, net of accumulated amortization of $140,560 at June 30, 1995 and $223,136 at June 30, 1996.................................................................................... 953,347 870,771 Note from officer.................................................................................. 40,000 83,000 Cost of pending warrant redemption................................................................. 47,151 -- Other assets....................................................................................... 23,071 19,332 Total assets................................................................................ $13,939,382 28,742,493 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Trade accounts payable........................................................................... $ 3,377,227 4,785,527 Payable to IBM Credit............................................................................ -- 3,501,437 Accrued compensation cost........................................................................ 92,496 96,978 Accrued expenses and other liabilities........................................................... 403,898 600,388 Income tax payable............................................................................... 1,308,196 539,646 Deferred gain.................................................................................... 200,000 -- Other............................................................................................ 201,861 -- Total current liabilities................................................................... 5,583,678 9,523,976 Deferred tax liability............................................................................. 9,000 26,000 Line of credit..................................................................................... 1,200,000 3,779,029 Total liabilities........................................................................... 6,792,678 13,329,005 Common stock subject to put/call option............................................................ 750,000 -- Shareholders' equity: Preferred stock, no par value; 3,000,000 shares authorized, none issued and outstanding.......... -- -- Common stock, no par value; 10,000,000 authorized; 2,175,130 and 3,235,186 issued and outstanding at June 30, 1995 and 1996, respectively....................................................... 5,526,316 11,935,424 Less common stock subject to put/call option, 250,000 common shares at $3.00 per share........... (750,000) -- 4,776,316 11,935,424 Retained earnings................................................................................ 1,620,388 3,478,064 Total shareholders' equity.................................................................. 6,396,704 15,413,488 Commitments Total liabilities and shareholders' equity.................................................. $13,939,382 28,742,493
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 7 STATEMENTS OF INCOME For the years ended June 30, 1994, 1995 and 1996
ScanSOURCE, Inc. 1994 1995 1996 Net sales.............................................. $16,089,104 34,235,436 55,669,733 Cost of goods sold..................................... 13,676,344 29,444,000 47,856,416 Gross profit.................................... 2,412,760 4,791,436 7,813,317 Selling, general and administrative expenses........... 1,717,861 3,127,812 4,954,608 Amortization of intangibles............................ 50,311 83,076 82,576 Operating income................................ 644,588 1,580,548 2,776,133 Other income (expense): Interest income...................................... 45,422 16,627 97,096 Interest expense..................................... (179,692) (81,848) (9,763) Other income (expense), net.......................... (15,333) 993,128 187,210 Total other income (expense)..................... (149,603) 927,907 274,543 Income before income taxes...................... 494,985 2,508,455 3,050,676 Income taxes........................................... 142,800 997,000 1,193,000 Net income...................................... $ 352,185 1,511,455 1,857,676 Per share data: Primary Net income........................................ $ .25 .50 .53 Weighted average shares outstanding............... 1,505,581 3,271,158 3,556,329 Fully diluted Net income........................................ $ .23 .50 .53 Weighted average shares outstanding............... 1,662,603 3,271,158 3,560,361 Supplemental information as if initial public offering of stock had occurred at July 1, 1993: Proforma net income............................... $ 477,972 n/a N/A Earnings per share................................ $ .15 n/a N/A Weighted average shares outstanding............... 3,229,286 n/a N/A
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 8 STATEMENTS OF SHAREHOLDERS' EQUITY For the years ended June 30, 1994, 1995 and 1996
Common Stock Subject to Retained Preferred Common Put/ Earnings ScanSOURCE, Inc. Stock Stock Call Option (Deficit) Total Balance at June 30, 1993............................... $ -- 455,130 -- (243,252) 211,878 Issuance of stock due to exercise of option.......... -- 375,000 -- -- 375,000 Issuance of stock in initial public offering......... -- 4,562,436 -- -- 4,562,436 Issuance of put/call option on 250,000 shares........ -- -- (750,000) -- (750,000) Net income........................................... -- -- -- 352,185 352,185 Balance at June 30, 1994............................... -- 5,392,566 (750,000) 108,933 4,751,499 Issuance of stock pursuant to the exercise of warrants and the unit purchase option............. -- 133,750 -- -- 133,750 Net income........................................... -- -- -- 1,511,455 1,511,455 Balance at June 30, 1995............................... -- 5,526,316 (750,000) 1,620,388 6,396,704 Issuance of stock pursuant to the exercise of warrants and the unit purchase price option, net of offering costs................................. -- 6,732,295 -- -- 6,732,295 Issue of stock due to exercise of stock options...... -- 551,813 -- -- 551,813 Exercise of call option.............................. -- -- 750,000 -- 750,000 Purchase of shares owned by Gates/FA................. -- (875,000) -- -- (875,000) Net income........................................... -- -- -- 1,857,676 1,857,676 Balance at June 30, 1996............................... $ -- 11,935,424 -- 3,478,064 15,413,488
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 9 STATEMENTS OF CASH FLOWS For the years ended June 30, 1994, 1995 and 1996
1994 1995 1996 Cash flows from operating activities: Net income......................................................................... $ 352,185 1,511,455 1,857,676 Adjustments to reconcile net income to net cash used in operating activities: Depreciation.................................................................... 35,420 78,937 237,536 Amortization of intangible assets............................................... 50,311 83,076 82,576 Deferred income taxes, net...................................................... (155,900) (477,000) (347,000) Deferred gain................................................................... -- 200,000 (200,000) Other, net...................................................................... -- (3,014) -- Changes in operating assets and liabilities: Receivables................................................................... (1,485,020) (1,710,522) (3,809,734) Inventories................................................................... (10,046) (6,037,389) (11,232,064) Prepaid expenses and other.................................................... (47,508) 4,080 (2,649) Due from Gates/FA............................................................. -- (750,000) 750,000 Deposit with Gates/FA......................................................... (1,266,510) 1,266,510 -- Net assets acquired and held for liquidation.................................. 114,570 -- -- Trade accounts payable........................................................ (598,768) 2,685,206 1,408,300 Accounts payable to IBM....................................................... -- -- 3,501,437 Accrued compensation.......................................................... (16,533) 54,119 4,482 Accrued expenses and other liabilities........................................ 31,169 238,476 196,490 Income tax payable............................................................ 272,700 1,035,496 (768,550) Other noncurrent assets....................................................... (3,501) (5,733) 3,739 Net cash used in operating activities...................................... (2,727,431) (1,826,303) (8,317,761) Cash flows from investing activities: Capital expenditures, net.......................................................... (102,885) (668,638) (659,238) Advances to officer under note..................................................... (40,000) -- (43,000) Repayments of amount due to former Alpha Data shareholder.......................... (250,000) (120,000) -- Purchase of MicroBiz............................................................... -- (531,401) -- Payments to MicroBiz............................................................... -- (98,139) (201,861) Net cash used in investing activities...................................... (392,885) (1,418,178) (904,099) Cash flows from financing activities: Issuance of stock in initial public offering....................................... 4,562,436 -- -- Issuance of stock due to exercise of stock options................................. 375,000 -- 551,813 Issuance of stock pursuant to the exercise of warrants and the unit purchase option, net of offering costs................................................... -- 133,750 6,779,446 Repurchase of shares from Gates/FA................................................. -- -- (875,000) Advances from line of credit, net.................................................. -- 1,200,000 2,579,029 Cost of pending warrant redemption................................................. -- (47,151) -- Net cash provided by financing activities.................................. 4,937,436 1,286,599 9,035,288 Increase (decrease) in cash................................................ 1,817,120 (1,957,882) (186,572) Cash at beginning of year............................................................ 327,334 2,144,454 186,572 Cash at end of year.................................................................. $ 2,144,454 186,572 -- Supplemental information: Interest paid...................................................................... $ 170,000 439,000 15,000 Income taxes paid.................................................................. $ 26,000 76,000 2,309,000 Supplemental noncash information: Note issued in connection with the purchase of MicroBiz............................ $ -- 300,000 --
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 10 NOTES TO FINANCIAL STATEMENTS June 30, 1995 and 1996 ScanSOURCE, Inc. (1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION AND NATURE OF BUSINESS ScanSOURCE, Inc. ("Company") is an international value-added distributor of automatic identification and point of sale products. The Company is a South Carolina corporation whose fiscal year end is June 30. REVENUE RECOGNITION The Company records revenue when products are shipped from the warehouse, carried out under terms of the agreements described in note 2. CONCENTRATION OF CREDIT RISK Financial instruments which potentially expose the Company to concentrations of credit risk consist primarily of trade accounts receivable. The Company has not experienced significant losses related to receivables from individual customers or groups of customers in a particular industry or geographic area. As a result, management believes no additional credit risk beyond amounts provided for collection losses is inherent in the Company's accounts receivable. INVENTORIES Inventories are stated at the lower of cost (first-in, first-out method) or market. The Company first began holding its own inventory for resale on September 26, 1994. PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Amortization of leasehold improvements is provided for over the term of the related lease. Computer and phone equipment and furniture and equipment are depreciated over their estimated useful lives. The straight-line method is used for financial reporting purposes and an accelerated method is used, where applicable, for income tax purposes. INTANGIBLE ASSETS Intangible assets consist primarily of goodwill, which represents the excess of purchase price over fair value of net assets acquired. Goodwill is amortized on a straight-line basis over the expected periods to be benefited. The Company assesses the recoverability of this intangible asset by determining whether the amortization of the goodwill balance over its remaining life can be recovered through projected undiscounted future results. The amount of goodwill impairment, if any, is measured based on projected discounted future results using a discount rate reflecting the Company's average cost of funds. Goodwill related to the purchases of businesses is being amortized on the straight-line method over an expected 15 year life. The methodology that management used to project operations of the acquired businesses forward is based on the historical trend line of actual results. Management believes that projected future results based on this historical trend are the most likely scenario. MARKET DEVELOPMENT FUNDS In general, vendors provide various incentive programs to the Company. The funds received under these programs are determined based on purchases and/or sales of the vendor's product. The funds are earned by the performance of specific marketing programs or upon completion of predetermined objectives dictated by the vendor. Once earned, the funds are accounted for either as a reduction of selling, general and administrative expense or product cost, according to the nature of the program. INCOME TAXES The Company records income taxes in accordance with Statement of Financial Accounting Standards No. 109. Under the asset and liability method of Statement 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under Statement 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. RECENT ACCOUNTING PRONOUNCEMENTS In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS No. 123 will be effective for fiscal years beginning after December 15, 1995, and will require that the Company either recognize in its financial statements costs related to its employee stock-based compensation plans, such as stock option and stock purchase plans, or make pro forma disclosures of such costs in a footnote to the financial statements. The Company expects to continue to use the intrinsic value based method of Accounting Principles Board Opinion No. 25, as allowed under SFAS No. 123, to account for all of its employee stock-based compensation plans. Therefore, in its financial statements for fiscal 1997, the Company will make the required pro forma disclosures in a footnote to the financial statements. SFAS No. 123 is not expected to have a material effect on the Company's statements of income or financial position. FAIR VALUE OF FINANCIAL INSTRUMENTS The Company values financial instruments as required by FASB Statement No. 107, "Disclosures About Fair Value of Financial Instruments". 11 NOTES TO FINANCIAL STATEMENTS June 30, 1995 and 1996 ScanSOURCE, Inc. At June 30, 1995 and 1996, the carrying value of financial instruments such as cash, accounts receivable, and accounts payable approximated their fair values, based upon the short maturities of these instruments. The fair value of the Company's long-term debt is estimated using discounted cash flow analysis, based on the Company's current incremental borrowing rates for similar types of borrowing arrangements. The carrying value of such instruments approximated their fair value at June 30, 1995 and 1996. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (2) OPERATIONS AGREEMENTS (a) From December 1992 to September 1994, the Company operated under an agreement with Gates/FA Distributing, Inc. ("Gates/FA"). An officer of Gates/FA was a director of the Company. The chief executive officer and several directors and shareholders of the Company were also directors and shareholders of Gates/FA. The following were additional provisions of the agreement with Gates/FA. (1) WAREHOUSING AND ADMINISTRATIVE SERVICES Under the agreement, Gates/FA provided accounts payable, warehousing, shipping and receiving, and limited management information system (MIS) services. The Company paid Gates/FA for these services as a percentage of the cost of all products shipped to the Company's customers, recorded as cost of sales. Payments to Gates/FA, which ended in September 1994, were approximately $127,000 and $60,000 for the years ended June 30, 1994 and 1995, respectively. For the years ended June 30, 1994 and 1995, approximately $12,300,000 and $5,700,000, respectively, of the Company's purchases were made through Gates/FA. (2) LINE OF CREDIT The Company paid Gates/FA monthly interest on working capital used by Gates/FA, which had title to inventory held on the Company's behalf. Approximately $180,000 and $10,000 of interest for the years ended June 30, 1994 and 1995, respectively, was paid to Gates/FA. In December 1992, Gates/FA agreed to a non-compete contract in the data collection or bar code industry, and in return, received an option to purchase 250,000 shares of the Company's common stock at $1.50 per share. On December 30, 1993, Gates/FA exercised this option and was a 11.5% shareholder of the Company at June 30, 1995. These shares were repurchased by the Company in March 1996. (See (b) below). (b) Under terms of an Agreement to Terminate Distribution Services with Gates/FA, the Company agreed to purchase the inventory held on its behalf by Gates/FA and assume sole responsibility for accounts payable to vendors for all future purchases related to such inventory. In connection with this transaction, a deposit with Gates/FA of $1,266,510 was applied to the purchase of inventory. Gates/FA also agreed to a more limited covenant not to compete for a period reduced from two years to one year from the termination of services to the Company. As compensation for reducing the noncompete term and ending the operations agreement before its scheduled expiration, Gates/FA agreed to pay the Company $1.4 million. Of this amount, $650,000 was received on September 26, 1994 and the remaining $750,000 was collected by April 1996 as described below. The Company recognized the $1.4 million as other income in the statement of operations ratably over the term of the noncompete agreement from September 1994 to August 1995, net of approximately $100,000 of expenses incurred by the Company to move its inventory and connect to a new computer system. For the year ended June 30, 1995, the Company recognized $1,100,000 as other income and provided $440,000 for related income taxes. The remaining $200,000 of the amount was shown as deferred gain at June 30, 1995 and was recognized as other income in fiscal 1996, along with $80,000 of related income taxes. Under terms of the termination agreement, Gates/FA had the conditional right to put its 250,000 shares of the Company's common stock for $3.00 per share to the Company. The Company had an option to call the shares at $3.50 per share, which it exercised on March 19, 1996. Gates/FA's put expired concurrently with the Company's exercise of its call option. To ensure that the Company had sufficient liquidity to purchase the shares, Gates/FA negotiated to hold back $750,000 of its contract termination payment at the time of the contract renegotiation. The Company collected this amount on March 19, 1996 and used it to pay $750,000 of the $875,000 call price of the repurchased shares. (c) From September 1994 to May 1995, the Company's warehousing and MIS services were provided under an agreement with a third party. Costs under this agreement were not materially higher as a percentage of sales than costs previously paid to Gates/FA. 12 NOTES TO FINANCIAL STATEMENTS CONTINUED ScanSOURCE, Inc. (d) In May 1995 the Company arranged for space in a third party facility in Memphis, Tennessee, and began performing its product handling and management information services (MIS) internally. For the fiscal year ended June 30, 1996 the Company paid approximately $144,000 to this third party; in June 1996 a Company officer and director was elected to the Board of Directors of the third party. Management believes the pricing of all transactions with the third party is representative of arm's length costs, and is comparable to terms which could be negotiated with others. (3) ACQUISITION In July 1994, the Company purchased the equipment distribution portion of MicroBiz Corporation's business for $300,000 in cash and approximately $300,000 to be paid over two years, based upon the sales performance of certain former MicroBiz customers. The purchase included MicroBiz' equipment inventory for $231,000, certain customer lists and distribution contracts, and MicroBiz agreeing not to compete for a period of 42 months. The Company agreed to provide up to $45,000 in certain marketing programs to MicroBiz, and after costs of the transaction of $5,000, recorded goodwill for approximately $650,000. (4) OPERATING LEASES The Company leases office space and a telephone system under noncancellable operating leases which expire through 1999. Future minimum rentals are as follows:
Year Ending June 30 1997........................................ $ 83,369 1998........................................ 74,838 1999........................................ 25,970 $184,177
Rent expense was approximately $33,000, $73,000, and $74,000 for the years ended June 30, 1994, 1995 and 1996, respectively. (5) RELATED PARTY TRANSACTIONS In December 1992 the Company's chief executive officer sold his ownership in Datascan Corporation ("Datascan"), a customer of the Company. The Company had sales of approximately $827,000 to Datascan during the year ended June 30, 1994. The Company had no sales to Datascan after June 30, 1994. In June 1994, the Company loaned an officer of the Company $40,000 to be repaid under terms of a note at 7.25% interest, in interest only payments for three years, with the principal balance due at June 9, 1997. During 1996 the Company modified the loan to include additional advances of $43,000 to be repaid under the same terms as the original note. In July 1995, the Company was granted 19% ownership of Transition Marketing (Transition), in exchange for the Company's commitment to use Transition as its contract provider of marketing services. The Company purchased $278,000 of marketing services from Transition for the year ended June 30, 1996 and had loaned, at a 9% interest rate, $122,208 to Transition at June 30, 1996. A Company officer and director is a member of the Board of Directors of Transition. Management believes the pricing of all transactions with Transition is representative of arm's length costs, and is comparable to terms which could be negotiated with others. (6) STOCK OPTIONS AND EQUITY TRANSACTIONS On July 1, 1993, the Company implemented an incentive stock option plan which reserved 200,000 shares of common stock for issuance to key employees. The plan provides for three-year vesting of the options at a rate of 33% per year. The options are exercisable over 10 years, and options are not to be granted at less than the fair market value of the underlying shares at the date of grant. A summary of activity in the incentive stock option plan through June 30, 1995 and 1996 is as follows:
1995 1996 Exercise EXERCISE Shares Price SHARES PRICE Stock options outstanding: Beginning of year............. 43,000 $ 1.50 - 4.50 111,834 $ 1.50 - 8.88 Granted........... 78,000 8.00 - 8.88 3,500 12.50 Exercised......... -- -- (17,167) 1.50 - 8.00 Terminated........ (9,166) 4.35 - 8.00 (3,000) 8.00 End of year....... 111,834 $ 1.50 - 8.88 95,167 $ 1.50 - 12.50 Exercisable, end of year.............. 13,834 42,000
The Company has issued additional options, including options issued under the directors' stock option plan, which reserved 65,000 shares of common stock for issuance to non-employee directors. 13 NOTES TO FINANCIAL STATEMENTS June 30, 1995 and 1996 ScanSOURCE, Inc. Following is a summary of activity of all options not included in the employee plan shown above:
1995 1996 Exercise EXERCISE Shares Price SHARES PRICE Stock options outstanding: Beginning of year........... 140,000 $ 1.50 - 3.75 205,000 $ 1.50 - 9.75 Granted......... 65,000 8.56 - 9.75 40,000 14.13 - 15.75 Exercised....... -- -- (50,000) 9.75 End of year..... 205,000 $ 1.50 - 9.75 195,000 $ 1.50 - 15.75 Exercisable...... 95,000 168,333
(7) INCOME TAXES Income tax expense (benefit) consists of:
Current Deferred Total June 30, 1994: Federal............ $ 250,700 $(133,900) $ 116,800 State and local.... 48,000 (22,000) 26,000 $ 298,700 $(155,900) $ 142,800 June 30, 1995: Federal............ $1,314,000 $(427,000) $ 887,000 State and local.... 160,000 (50,000) 110,000 $1,474,000 $(477,000) $ 997,000 June 30, 1996: Federal............ $1,382,000 $(292,000) $1,090,000 State and local.... 158,000 (55,000) 103,000 $1,540,000 $(347,000) $1,193,000
Income tax expense differed from the amount computed by applying the Federal income tax rate of 34% as a result of the following:
1994 1995 1996 Computed "expected" tax expense...................... $168,300 852,900 1,037,200 Increase (decrease) in income taxes resulting from: Change in beginning of the period balance of the valuation allowance for deferred tax assets allocated to income tax expense................... (95,600) -- -- Additional provision for income taxes.............. 50,000 68,200 84,200 State and local income taxes, net of Federal income tax expense................... 17,100 72,600 68,000 Other........................ 3,000 3,300 3,600 $142,800 997,000 1,193,000
The tax effects of temporary differences that give rise to significant portions of the deferred tax asset and deferred tax liability are presented below:
1995 1996 Deferred tax assets: Valuation and other reserves......... $573,000 766,000 Inventory, principally due to differences in capitalization..... 64,000 235,000 Intangibles, principally due to differences in amortization....... 18,000 22,000 Net deferred tax asset............ 655,000 1,023,000 Deferred tax liability: Plant and equipment, principally due to differences in depreciation.... (27,000) (48,000) Net deferred tax asset............ $628,000 975,000
For the years ended June 30, 1995 and 1996 no valuation allowance was provided. Management believes that a valuation allowance is not considered necessary based upon the level of historical taxable income and the projections for future taxable income over the periods during which the deferred tax assets are deductible. 14 NOTES TO FINANCIAL STATEMENTS CONTINUED ScanSOURCE, Inc. (8) EMPLOYEE BENEFIT PLAN Effective October 22, 1993, the Company established a defined contribution plan under Section 401(k) of the Internal Revenue Code. This plan covers all employees meeting certain eligibility requirements. For the years ended June 30, 1994, 1995 and 1996, the Company provided a matching contribution of $5,518, $7,719 and $17,474, respectively, which was equal to one-half of each participant's contribution, up to a maximum matching contribution of $500 per participant. The Company can change its matching contributions annually and can make discretionary contributions in addition to matching contributions. Employer contributions are vested over a period of 3 to 5 years. (9) SALES TO A SIGNIFICANT CUSTOMER Sales to a significant customer were approximately $1,730,000 for the year ended June 30, 1994. For the years ended June 30, 1995 and 1996 no single customer accounted for more than 5% of the Company's sales. (10) PUBLIC OFFERING OF COMMON STOCK On March 25, 1994, the Company closed its initial public offering of 1,150,000 units for $5 each; each unit consisted of one share of common stock and one redeemable common stock purchase warrant. The Company used the net proceeds from the offering of approximately $4,560,000 to pay its trade accounts payable to Gates/FA of approximately $1,660,000, to purchase its inventory from Gates/FA for approximately $1,300,000, and to fund the purchase of MicroBiz for approximately $531,000 (see note 3 above). The remainder of the net proceeds was invested in short-term certificates of deposit. (11) LINE OF CREDIT On October 26, 1995, the Company closed a line of credit agreement with a bank whereby the Company can borrow up to $8 million, based upon 80% of eligible accounts receivable and 40% of non-IBM inventory at the 30 day LIBOR rate of interest plus 2.35%; the LIBOR rate was 5.63% at June 30, 1996. The outstanding balance on the line of credit was approximately $3,779,000, on a loan base which exceeded $8 million, leaving approximately $4,221,000 available at June 30, 1996. The revolving credit facility extends to October 31, 1996 and is secured by accounts receivable and inventory. The agreement contains certain financial covenants including minimum net worth and current ratio requirements and a maximum debt to tangible net worth ratio of 2.11 to 1. The Company was either in compliance with the various covenants or had obtained waivers of noncompliance at June 30, 1996. The Company has a commitment from the bank, which it intends to exercise, to renew the line of credit under terms similar to its existing agreement for amounts up to $15 million to October 31, 1997. On April 8, 1996, the Company signed an agreement for wholesale financing with IBM Credit Corporation (ICC) whereby the Company has been extended interest-free, 75-day credit terms on all purchases of IBM products. The credit line is collateralized by IBM inventory, has a limit up to the value of IBM inventory held by the Company, and is currently capped at $7 million payable to ICC. (12) EARNINGS PER SHARE At June 30, 1995, warrants to acquire 1,130,000 shares of the Company's common stock at $5.50 per share were outstanding. The warrants were exercisable beginning March 18, 1995 and were to expire March 18, 1999. In connection with the Company's initial public offering of units, the Company sold a unit purchase option (UPO) for the right to purchase up to 100,000 units at $6 per unit. The UPO became exercisable beginning March 18, 1995 and was to expire on March 18, 1999; 80,000 and 42,000 units were outstanding on the UPO at June 30, 1995 and 1996, respectively. On September 19, 1995, the Company redeemed all of its then outstanding common stock purchase warrants. Prior to the redemption date, substantially all of the outstanding warrants were exercised, generating proceeds of $6.3 million net of estimated costs of approximately $100,000. Earnings per common share and common equivalent share (EPS) were computed by dividing net income by the weighted average number of shares of common stock and common stock equivalents outstanding. The number of common shares was increased by the number of shares issuable on the exercise of the warrants and the UPO when the market price of either the common stock or units, or both, exceed the exercise price of the warrants or the UPO, respectively. This increase in the number of common shares was reduced by the number of common shares that are assumed to have been purchased with the proceeds from the exercise of the warrants or UPO; those purchases were assumed to have been made at the average price of the common stock during that part of the year when the market price of the common stock or units exceeded the exercise price of the warrants or UPO. 15 NOTES TO FINANCIAL STATEMENTS June 30, 1995 and 1996 ScanSOURCE, Inc. For 1994 earnings per share calculations, the warrants were considered equivalents for 103 days of the year since the average market price of common stock and units was $8.58 and $12.42, respectively, through June 30, 1994, exceeding the exercise prices of both the warrant and the UPO. Proceeds from assumed exercise of the warrants and UPO were assumed to be used first to repurchase outstanding shares (limited to 20% of total shares outstanding) and the remainder to pay trade debt and be invested for the 103-day period. Net income was then adjusted for the after-tax effects of the interest expense savings and interest earned during those 103 days. Supplemental fully diluted earnings per share was computed as if the initial public offering of units had occurred on the first day of fiscal 1994. Warrants and the UPO were assumed exercised at the average market price of $8.58 and $12.42, respectively, and the proceeds assumed used as described in the preceding paragraph. Proforma net income was also computed as described in the previous paragraph for the year ended June 30, 1994. 16 INDEPENDENT AUDITORS' REPORT The Board of Directors ScanSOURCE, Inc. We have audited the accompanying balance sheets of ScanSOURCE, Inc. as of June 30, 1995 and 1996 and the related statements of income, shareholders' equity and cash flows for each of the years in the three-year period ended June 30, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of ScanSOURCE, Inc. at June 30, 1995 and 1996 and the results of its operations and its cash flows for each of the years in the three-year period ended June 30, 1996 in conformity with generally accepted accounting principles. Greenville, South Carolina KPMG Peat Marwick LLP August 16, 1996 17 PRICE RANGE OF COMMON STOCK The Company's Common Stock, which was first sold to the public on March 18, 1994, is quoted on the Nasdaq National Market under the symbol "SCSC." The following tables present the quarterly high and low bid quotations of the Common Stock in the over-the-counter market as quoted by Nasdaq. The Nasdaq quotations reflect the inter-dealer prices, without retail mark-ups, mark-downs or commissions and may not necessarily represent actual transactions.
NASDAQ HIGH Fiscal Year 1995 First Quarter............................................................................................... $ 9 5/8 Second Quarter.............................................................................................. $ 9 3/8 Third Quarter............................................................................................... $ 10 1/4 Fourth Quarter.............................................................................................. $ 9 7/8 Fiscal Year 1996 First Quarter............................................................................................... $ 13 1/4 Second Quarter.............................................................................................. $ 17 Third Quarter............................................................................................... $ 16 5/8 Fourth Quarter.............................................................................................. $ 15 1/2 LOW Fiscal Year 1995 First Quarter............................................................................................... $ 7 3/4 Second Quarter.............................................................................................. $ 8 1/4 Third Quarter............................................................................................... $ 8 1/2 Fourth Quarter.............................................................................................. $ 8 5/8 Fiscal Year 1996 First Quarter............................................................................................... $ 9 1/4 Second Quarter.............................................................................................. $ 11 Third Quarter............................................................................................... $ 12 1/2 Fourth Quarter.............................................................................................. $ 13 1/4
As of September 11, the Company had approximately 54 shareholders of record. Certain of these shareholders of record hold shares in nominee or street name for other beneficial owners. DIVIDEND POLICY The Company has never paid any cash dividends on its Common Stock and it is currently the intention of the Company not to pay cash dividends on its Common Stock in the foreseeable future. Management intends to reinvest earnings, if any, in the development and expansion of the Company's business. Any future declaration of cash dividends will be at the discretion of the Board of Directors and will depend upon the earnings, capital requirements and financial position of the Company, general economic conditions and other pertinent factors. 18 Board of Directors Steven H. Owings Chief Executive Officer ScanSource, Inc. Greenville, South Carolina Michael L. Baur President ScanSource, Inc. Greenville, South Carolina Steven R. Fischer Sr. Vice-President Transamerica Business Credit Corporation New York, New York James G. Foody Business Consultant Greenville, South Carolina Executive Officers Steven H. Owings Chief Executive Officer Michael L. Baur President Jeffery A. Bryson Chief Financial Officer and Treasurer Stock Listing The Company's Stock is traded on the Nasdaq National Market under the symbol SCSC. General Counsel Nexsen Pruet Jacobs & Pollard, LLP Greenville, South Carolina Transfer Agent Continental Stock Transfer and Trust Company New York, New York Independent Accountants KPMG Peat Marwick, LLP Greenville, South Carolina Shareholder Inquiries ScanSource, Inc., welcomes inquiries from its shareholders and other interested investors. For further information or a copy of SEC form 10KSB, contact our Investor Relations Department. (800) 944-2439, x375. Annual Meeting The annual meeting of shareholders of the Company will be held at 10:00 a.m. on Tuesday, December 3, 1996, at the Embassy Suites Hotel, 670 Verdae Boulevard, Greenville, South Carolina. Locations: Corporate Headquarters 6 Logue Court, Suite G Greenville, South Carolina 29615 800-944-2432 Professional Services Group 3850 Holcomb Bridge Road Spaulding Woods, Suite 430 Norcross, Georgia 30092 800-292-3631 West Coast Sales Office 1442 Irvine Boulevard, Suite 234 Tustin, California 92680 800-944-2432 Distribution Center 3655 Knight Road, Suite 6 Memphis, Tennessee 38118 -----END PRIVACY-ENHANCED MESSAGE-----