0001021408-01-507451.txt : 20011009 0001021408-01-507451.hdr.sgml : 20011009 ACCESSION NUMBER: 0001021408-01-507451 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20010928 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: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-26926 FILM NUMBER: 1747337 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 10-K 1 d10k.txt JUNE 30, 2001 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended June 30, 2001. [_] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from __________________ to ________________. Commission File Number: 1-12842 SCANSOURCE, INC. (Exact name of registrant as specified in its charter) South Carolina 57-0965380 (State or other jurisdiction (IRS Employer of incorporation or organization) Identification No.) 6 Logue Court Greenville, South Carolina 29615 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (864) 288-2432 Securities registered pursuant to Section 12(b) of the Act: None. Securities registered pursuant to Section 12(g) of the Act: Common Stock, no par value Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 [_] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not 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-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting stock of the Registrant held by non-affiliates of the Registrant at August 31, 2001 was $304,548,000, as computed by reference to the average closing prices of such stock on such date. As of September 24, 2001, 5,714,914 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, 2001 are incorporated by reference into Parts II of this Form 10-K, and portions of the Registrant's Proxy Statement to be furnished in connection with its 2001 Annual Meeting of Shareholders are incorporated by reference into Part III of this Form 10-K. PART I ITEM 1. Business. ScanSource Inc. ("ScanSource" or the "Company"), incorporated in 1992, is a leading value-added wholesale distributor of automatic data capture ("ADC"), point of sale ("POS") and business telephone products. The business consists of two reporting segments - value-added distribution and e-logistics/channel management. The traditional distribution business includes sales by both the ScanSource sales team (who sell ADP and POS equipment) and the Catalyst Telecom team who sell business telephones and computer telephony. The e-logistics business is called ChannelMax. See Note 8 to the consolidated financial statements of the Company for financial information concerning the Company's reporting segments and the geographic areas in which the Company operates. See Note 9 for information concerning the Company's acquisition of Pinacor, Inc. in May 2001. Value-Added Distribution Segment ScanSource Sales Unit The ScanSource sales team markets ADC and POS products which interface with computer systems used to automate the collection, processing and communication of information for commercial and industrial applications, including retail sales, distribution, shipping, inventory control, materials handling and warehouse management. The bar code family of products is referred to as automatic data capture because it includes all types of portable data collection terminals, wireless products and bar code label printers, in addition to scanners. POS products are those PC-based products that have replaced electronic cash registers in retail and hospitality environments. ScanSource vendors include most of the leading ADC and POS manufacturers, including Cherry Electrical, Citizen, Cognitive Solutions, Datamax, Epson America, Hand Held Products, IBM, Intemec, Ithaca Peripherals, Javelin, Metrologic, Micro-Touch Systems, MMF Cash Drawer, Monarch Marking Systems, NCR, PSC, StrandWare, Symbol Technologies, and Zebra Technologies. Catalyst Telecom Sales Unit The other distribution sales unit is called Catalyst Telecom, whose inside sales representatives sell business phone systems, including Avaya, Enterprise, Express and IP (internet protocol) products and computer telephony products from Intel/Dialogic. Catalyst Telecom offers its reseller customers a complete line of Avaya convergence products, including voice and data. Dialogic (part of Intel's communication strategy) offers products for call center applications, unified messaging, interactive voice response and voice portals. E-logistics Segment ChannelMax ChannelMax is the unit that provides real-time inventory availability and web catalog, order entry, order tracking and logistics for manufacturers and others in specialty technology markets. Currently ChannelMax has contracts to provide its logistics services for manufacturers, Avaya and Symbol, resellers such as Expanets, which is the largest nationwide phone reseller, and several phone sales agencies. ChannelMax also creates customized web storefronts that match the look and feel of a reseller's website, allowing resellers to offer online ordering and marketing to their customers. Products and Markets The Company currently markets approximately 18,000 products from over 50 hardware and software vendors from its central warehouse in Memphis, Tennessee to approximately 11,000 reseller customers. ADC technology incorporates the capabilities for electronic recognition and data processing without the need for manual input and consists of a wide range of products, including bar code printers and labeling devices, contact wands, light pens, hand-held and fixed-mount laser scanners, portable data collection devices, keyboard wedges, and magnetic stripe readers. As ADC technology has become more pervasive, applications have evolved from traditional uses such as inventory control, materials handling, distribution, shipping and warehouse management to more advanced applications such as medical research. POS technology consists of devices used for the capture, processing, analysis, and dissemination of transaction data. POS product lines include computer-based terminals, monitors, receipt printers, pole displays, cash drawers, keyboards, peripheral equipment and fully integrated processing units used 2 primarily in retail applications. Business telephone products include private branch exchanges (PBXs), key systems, telephone handsets and cabling and computer telephony components used in voice, fax, data, voice recognition, call center management and internet protocol (IP) telephony applications. Industry Overview The distribution channels for specialty technology products generally consist of manufacturers, wholesale distributors such as ScanSource, resellers and end-users. In recent years, these distribution channels have evolved through three stages: (i) direct sales by manufacturers to end-users; (ii) single-tier distribution in which manufacturers sell to resellers who, in turn, sell directly to end-users; and (iii) two-tier, or wholesale distribution, in which manufacturers sell to wholesale distributors, including ScanSource, who sell only to resellers who, in turn, sell directly to end-users. Currently, the wholesale distribution channel is highly fragmented and is comprised of several large national distributors and many smaller regional distributors. Large national distributors are engaged primarily in conventional order fulfillment and typically offer few value-added services, while small regional distributors are limited in the scale and scope of their operations and services. Competition among an expanding number of manufacturers has caused product prices to decrease and product applications to expand, which has resulted in an increasing number of resellers entering the market in order to support a broader base of potential end-users. As the number of resellers and end-users grows, competition among manufacturers and within the reseller channel has intensified, resulting in a less orderly market structure. As a result of the transition of specialty technology products to open-systems (whereby a variety of manufacturers' products can be configured together to create a system solution), both manufacturers and resellers have become more dependent upon wholesale distributors such as ScanSource for the organization and maintenance of an efficient market structure. In addition, manufacturers that face declining product prices and rising costs of direct sales increasingly rely upon value-added wholesale distributors to outsource certain support functions, such as product assortment, delivery, inventory management, technical assistance and marketing. At the same time, shortened product life cycles and the introduction of new products and applications have caused resellers increasingly to rely on wholesale distributors for various inventory management, financing, technical support and related functions. The Company believes that as the reseller market grows and becomes more fragmented, and as specialty technology products continue to transition to open systems, the wholesale distribution channel in which the Company operates will become increasingly more important. Vendors The Company's merchandising department recruits vendors and manages important aspects of its vendor relationships, such as purchasing arrangements, cooperative marketing initiatives, vendor sales force relationships, product training and the monitoring of rebate programs and various contract terms and conditions. The Company generally enters into non-exclusive distribution agreements with vendors. These agreements typically provide the Company with stock rotation and price protection provisions that may mitigate the risk of loss from slow moving inventory, vendor price reductions, product updates or obsolescence. Some of these distribution agreements contain minimum purchase requirements that the Company must meet in order to receive preferential prices. The distribution agreements are generally terminable on 30 to 120 days notice by either party. Customers The Company's reseller customers currently include approximately 11,000 active value-added reseller accounts ("VARs") located in the U.S. and Canada. The largest customer accounted for less than 5% of the total Company's net sales in fiscal 2001. The Company targets two types of reseller customers: Specialty Technology VARs. These resellers focus on selling specialty technology products as tailored software or integrated hardware solutions for their end-users' existing applications or incorporating specialty technology products into customized technology solutions for their end-users. Primary industries served by these resellers include manufacturing, distribution, health care, pharmaceuticals, hospitality, convenience, grocery and other retail markets. 3 General or PC VARs. These resellers develop computer solutions for their end-users' microcomputer needs. They typically have well-established relationships with end-user management information system directors and are seeking additional revenue and profit opportunities in related technology markets, such as ADC, POS or telephony. Sales and Electronic Commerce The Company's sales force is comprised of 82 inside sales representatives located in South Carolina, California, Georgia, Washington, New Jersey, Arizona and Canada. In order to build strong customer relationships, each active reseller is assigned to a sales representative. Each sales representative negotiates pricing directly with his assigned customers. The Company also employs several product managers who are responsible for developing technical expertise within broad product markets, evaluating competitive markets, and reviewing overall product and service requirements of resellers. Each sales representative and product manager receives comprehensive training with respect to the technical characteristics of each vendor's products. This training is supplemented by quarterly product seminars conducted by vendors' representatives and bi-weekly meetings among product managers, marketing and sales representatives. Increasingly, customers rely upon the Company's electronic ordering and information systems, in addition to its product catalogs and frequent mailings, as sources for product information, including availability and price. Through the Company's website, most customers can gain remote access to the Company's information systems to check real-time product availability, see their customized pricing and place orders. Customers can also follow the status of their orders and obtain UPS and FedEx package tracking numbers from this site. For the fourth quarter of fiscal 2001, approximately 25% of the Company's sales orders were entered electronically by customers. Marketing The Company provides a range of marketing services, including cooperative advertising with vendors through trade publications and direct mail, a product catalog which is published three times a year, periodic newsletters, management of sales leads, trade shows with software companies and vendors, direct mail and sales promotions. In addition, the Company organizes and operates its own "Empowerment Expo" seminars three times a year, teaming with top vendors to recruit prospective resellers and introduce new applications for the specialty technology products it distributes. The Company frequently customizes its marketing services for vendors and resellers. Value-Added Services In addition to the basic order fulfillment and credit services that conventional wholesale distributors typically provide to resellers, the Company differentiates itself by providing an array of value-added services, including the following: Pre-Sale Technical Support Technical support personnel assist the reseller with system configurations as the order is placed. Pre-sale support also includes testing products to ensure their compatibility with other products and applications. Post-Sale Technical Support Technical support personnel also assist sales representatives and customers in diagnosing and solving technical, configuration or compatibility issues which may arise after the sale. Technical support personnel will, if necessary, serve as liaisons or advocates between the manufacturers and the resellers. Shipping Options Product managers and technical support personnel work together to select specific products that are compatible and continually develop "solution kits" or bundles to better meet the reseller's needs. Resellers have come to trust the Company's shipping accuracy and reliability to the extent that many no longer hold their own inventory. For the fourth quarter of fiscal 2001, approximately 59% of sales orders were drop shipped directly to an end-user on behalf of a reseller. 4 Operations Information System The Company's information system is a highly scalable, centralized processing system capable of supporting numerous operational functions including purchasing, receiving, order processing, shipping, inventory management and accounting. Sales representatives rely on the information system for on-line, real-time information on product pricing, inventory availability and reservation, and order status. The Company's warehouse operations use bar code technology for receiving and shipping, and automated UPS and FedEx systems for freight processing and shipment tracking, each of which is integrated with the Company's information system. The customer service and technical support departments employ the system for documentation and faster processing of customer product returns. To ensure that adequate inventory levels are maintained, the Company's buyers depend on the system's purchasing and receiving functions to track inventory on a continual basis. Central Warehouse and Shipping The Company's 233,000 square foot warehouse facility, located approximately eight miles from the FedEx hub facility in Memphis, Tennessee, serves all of North America. The Company believes that its centralized distribution creates several advantages, including: (i) a reduced amount of "safety stock" inventory which, in turn, reduces the Company's working capital borrowings; (ii) an increased turnover rate through tighter controls over inventory; (iii) maintenance of a consistent order-fill rate; (iv) improved personnel productivity; (v) improved delivery time; (vi) simplified purchasing and tracking; (vii) decreased demand for management personnel; and (viii) flexibility to meet customer needs for systems integration. The Company's objective is to ship on the same day all orders received by 8:00 p.m. Eastern Time. Orders are currently processed in the central warehouse, where bar code technology is utilized to expedite shipments and minimize shipping errors. The Company also has an automated package handling system used to send products from the picking area to invoicing stations. Upon fulfillment of the order, the package is immediately shipped to the reseller or "drop-shipped" to an end-user specified by the reseller by FedEx or UPS. The Company charges its customers local ground delivery rates for this overnight service. Credit Services The Company routinely offers 20-day credit terms for qualified resellers. The Company believes this policy eliminates the customer's need to establish multiple credit relationships with a large number of manufacturers. Competition The markets in which the Company operates, as identified above, are highly competitive. Competition is based primarily on factors such as price, product availability, speed and accuracy of delivery, effectiveness of sales and marketing programs, credit availability, ability to tailor specific solutions to customer needs, quality and breadth of product lines and services, and availability of technical and product information. The Company's competitors include regional and national wholesale distributors, as well as hardware manufacturers (including most of the Company's vendors) that sell directly to resellers and to end-users. In addition, the Company competes with master resellers that sell to franchisees, third-party dealers and end-users. Certain of the Company's current and potential competitors have greater financial, technical, marketing and other resources than the Company and may be able to respond more quickly to new or emerging technologies and changes in customer requirements. Such competition could also result in price reductions, reduced margins and loss of market share by the Company. Employees As of August 10, 2001 the Company had 582 employees, none of whom was a member of an industry trade union or collective bargaining unit. The Company considers its employee relations to be good. Service Marks The Company conducts its business under the trademarks and service marks "ScanSource" and "Catalyst Telecom." The Company has been issued registrations for the marks "ScanSource" and "Catalyst Telecom" in the United States and Canada. The Company is also pursuing registrations of its trademark and service mark "ChannelMax" in the United States. The Company does not believe that its operations are dependent upon any of its trademarks or service marks. The Company also sells products and provides services under various trademarks, service marks and trade names to which reference is made in this report that are the property of 5 owners other than the Company. Such owners have reserved all rights with respect to their respective trademarks, service marks and trade names. Private Securities Litigation Reform Act of 1995 Certain of the statements contained in this PART I, Item 1 (Business) and, by reference, in PART II, Item 7 (Management's Discussion and Analysis of Financial Condition and Results of Operations) and Item 7A (Quantitative and Qualitative Disclosures About Market Risks) of this Annual Report on Form 10-K that are not historical facts are forward-looking statements subject to the safe harbor created by the Private Securities Litigation Reform Act of 1995. The Company cautions readers of this Annual Report on Form 10-K that a number of important factors could cause the Company's activities and/or actual results in fiscal 2002 and beyond to differ materially from those expressed in any such forward-looking statements. These factors include, without limitation, the Company's dependence on vendors, product supply, senior management, centralized functions, and third-party shippers, the Company's ability to compete successfully in a highly competitive market and manage significant additions in personnel and increases in working capital, the Company's entry into new product markets in which it has no prior experience, the Company's susceptibility to quarterly fluctuations in net sales and operations results, the Company's ability to manage successfully price protection or stock rotation opportunities associated with inventory value decreases, and other factors described in Exhibit 99.1 to this report and in other reports and documents filed by the Company with the Securities and Exchange Commission. ITEM 2. Properties. The Company owns a 70,000 square foot building in Greenville, South Carolina in which its principal executive and sales offices are located. The Company currently occupies over 60,000 square feet of that building for its own use, and leases the remainder of the building to third parties until additional space is required for its needs. The Company owns a 233,000 square foot distribution center in Memphis, Tennessee. The Company's 20,000 square foot warehouse in Toronto, Canada is no longer used, but is leased through January 2003. The Company also leases small sales offices of 5,400 square feet or less in each of Lake Forest, California; Norcross, Georgia; Cranford, New Jersey; Bellingham, Washington; St. Paul, Minnesota; Tempe, Arizona; and Vancouver and Toronto, Canada. Management believes the Company's office and warehouse facilities are adequate to support its operations at their current levels and for the foreseeable future. ITEM 3. Legal Proceedings. The Company or its subsidiaries are from time to time parties to lawsuits arising out of operations. Although there can be no assurance, based upon information known to the Company, the Company does not believe that any liability resulting from an adverse determination of such lawsuits would have a material adverse effect on the Company's financial condition or results of operations. ITEM 4. Submission of Matters to a Vote of Security Holders. None. ITEM 5. Market For Registrant's Common Equity and Related Stockholder Matters. The information called for by this Item is incorporated herein by reference to page 36 of the Registrant's Annual Report to Shareholders for the fiscal year ended June 30, 2001. ITEM 6. Selected Financial Data. The information called for by this Item is incorporated herein by reference to page 8 of the Registrant's Annual Report to Shareholders for the fiscal year ended June 30, 2001. 6 ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. The information called for by this Item is incorporated herein by reference to pages 9 through 15 of the Registrant's Annual Report to Shareholders for the fiscal year ended June 30, 2001. ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk. The information called for by this Item is incorporated herein by reference to page 15 of the Registrant's Annual Report to Shareholders for the fiscal year ended June 30, 2001. ITEM 8. Financial Statements and Supplementary Data. The financial statements listed in Item 14(a)(1) of this Form 10-K are incorporated herein by reference to pages 16 through 35 of the Registrant's Annual Report to Shareholders for the fiscal year ended June 30, 2001. The financial statement schedule listed in Item 14(a)(2) of this Form 10-K and related Independent Auditors' Reports are included in this report on pages F-1 through F-3. ITEM 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure. None. PART III Information called for by Part III (Items 10, 11, 12 and 13) of this report on Form 10-K 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, 2001 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 10. Directors and Executive Officers of the Registrant. The information required by this Item is incorporated herein by reference to the Proxy Statement for the Company's 2001 Annual Meeting of Shareholders. ITEM 11. Executive Compensation. The information required by this item is incorporated herein by reference to the Proxy Statement for the Company's 2001 Annual Meeting of Shareholders. ITEM 12. Security Ownership of Certain Beneficial Owners and Management. The information required by this item is incorporated herein by reference to the Proxy Statement for the Company's 2001 Annual Meeting of Shareholders. ITEM 13. Certain Relationships and Related Transactions. The information required by this item is incorporated herein by reference to the Proxy Statement for the Company's 2001 Annual Meeting of Shareholders. 7 PART IV ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. (a)(1) Consolidated Financial Statements: The following financial statements of ScanSource, Inc. and Independent Auditors' Reports are incorporated herein by reference from the Registrant's Annual Report to Shareholders for the fiscal year ended June 30, 2001: Consolidated Balance Sheets as of June 30, 2000 and 2001 Consolidated Statements of Income for the years ended June 30, 1999, 2000 and 2001 Consolidated Statements of Shareholders' Equity for the years ended June 30, 1999, 2000 and 2001 Consolidated Statements of Cash Flows for the years ended June 30, 1999, 2000 and 2001 Notes to Consolidated Financial Statements Independent Auditors' Reports (a)(2) Financial Statement Schedule: The following financial statement schedule of ScanSource, Inc. and related Independent Auditors' Reports for the years ended June 30, 1999, 2000 and 2001 are presented on pages F-1 through F-3. Schedule II - Valuation and Qualifying Accounts (a)(3) Exhibits: The Exhibits listed on the accompanying Index to Exhibits on pages E-1 to E- 2 are filed as part of this report. (b) Reports on Form 8-K. None. 8 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. September 26, 2001 SCANSOURCE, INC. By: /s/ MICHAEL L. BAUR ----------------------- Michael L. Baur 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 registrant and in the capacities and on the dates indicated.
Signature Title Date --------------------------------- ---------------------------------- ------------------- /s/ STEVEN H. OWINGS Chairman of the Board September 26, 2001 --------------------------------- Steven H. Owings /s/ MICHAEL L. BAUR President, Chief Executive Officer September 26, 2001 -------------------------------- and Director Michael L. Baur /s/ JEFFERY A. BRYSON Chief Financial Officer and September 26, 2001 ------------------------------ Treasurer (principal financial Jeffery A. Bryson and accounting officer) /s/ STEVEN R. FISCHER Director September 26, 2001 ------------------------------ Steven R. Fischer /s/ JAMES G. FOODY Director September 26, 2001 -------------------------------- James G. Foody /s/ JOHN P. REILLY Director September 26, 2001 ----------------------------------- John P. Reilly
9 INDEPENDENT AUDITORS' REPORT ---------------------------- The Board of Directors ScanSource, Inc.: We have audited the financial statements of ScanSource, Inc. and subsidiaries as of June 30, 2001 and for the year ended June 30, 2001, and have issued our report thereon dated August 13, 2001; such financial statements and report are included in your 2001 Annual Report to Stockholders and are incorporated herein by reference. Our audit also included the financial statement schedule of ScanSource, Inc. listed in Item 14(a)(2). This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audit. In our opinion, such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. Greenville, South Carolina /s/ Deloitte & Touche LLP August 13, 2001 F-1 INDEPENDENT AUDITORS' REPORT ---------------------------- The Board of Directors ScanSource, Inc.: Under the date of August 16, 2000 we reported on the consolidated balance sheets of ScanSource, Inc. and subsidiaries as of June 30, 2000, and the related consolidated statements of income, shareholders' equity and cash flows for each of the years in the two year period ended June 30, 2000, which are incorporated by reference. In connection with our audits of the aforementioned financial statements, we also audited the related accompanying financial statement schedule listed in Item 14(a)(2). The financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statement schedule based on our audits. In our opinion, such schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. Greenville, South Carolina /s/ KPMG LLP August 16, 2000 F-2 SCHEDULE II ----------- SCANSOURCE, INC. AND SUBSIDIARIES Valuation and Qualifying Accounts (In thousands)
Balance at Amounts Balance at Beginning Charged to End of Description of Year Bad Debt Expense Deduction Year ----------- ---------- ---------------- --------- ---- Allowance for doubtful accounts receivable: Year ended June 30, 1999 $ 2,045 3,582 (625) $5,002 ===== ===== ===== ====== Year ended June 30, 2000 $ 5,002 2,983 (2,521) $5,464 ===== ===== ======= ====== Year ended June 30, 2001 $ 5,464 2,746 (1,445) $6,765 ===== ===== ======= ======
F-3 INDEX TO EXHIBITS Exhibit ------- Number Description ------ ----------- 3.1 Amended and Restated Articles of Incorporation of the Registrant. (Incorporated by Reference to Exhibit 3.1 to Registrant's Form SB-2 filed with the Commission on February 7, 1994, Registration No. 33-75026-A). 3.2 Bylaws of the Registrant (Incorporated by Reference to Exhibit 3.2 to Registrant's Form SB-2 filed with the Commission on February 7, 1994, Registration No. 33-75026-A). 4.1 Form of Common Stock Certificate (Incorporated by Reference to Exhibit 4.1 to Registrant's Form SB-2 filed with the Commission on February 7, 1994, Registration No. 33-75026-A). 10.9 Stock Option Agreement dated July 1, 1993 covering stock options issued to Michael L. Baur. (Incorporated by Reference to Exhibit 10.9 to the Registrant's Form SB-2 filed with the Commission on February 7, 1994, Registration No. 33-75026-A). 10.10 1993 Incentive Stock Option Plan (As Amended) of the Registrant and Form of Stock Option Agreement (Incorporated by reference to Exhibit 10.10 to Registrant's Form S-1 filed with the Commission on January 23, 1997, Registration No. 333-20231). 10.11 1994 Stock Option Plan for Outside Directors of the Registrant and Form of Stock Option Agreement. (Incorporated by Reference to Exhibit 10.11 to the Registrant's Form SB-2 filed with the Commission on February 7, 1994, Registration No. 33-75026-A). 10.13 1997 Stock Incentive Plan, as amended, of the Registrant and Form of Stock Option Agreement. (Incorporated by reference to Exhibit 10.13 to the Registrant's Form 10-K for the fiscal year ended June 30, 1999.) 10.21 Software License Agreement dated April 18, 1995 between the Registrant and Technology Marketing Group, Inc. d/b/a Globelle, including letter agreement dated November 22, 1995 between the parties with respect to stock options. (Incorporated by reference to Exhibit 10.21 to the Registrant's registration statement on Form S-3 filed with the Commission on December 29, 1995, Registration No. 33-81043). 10.25 Agreement for Wholesale Financing (Security Agreement) dated April 8, 1996 between the Registrant and IBM Credit Corporation, including letter agreement dated April 17, 1996 between the parties. (Incorporated by Reference to Exhibit 10.25 to the Registrant's Form 10-K for the fiscal year ended June 30, 1998). 10.26 Intercreditor Agreement dated April 8, 1996 among the Registrant, IBM Credit Corporation, and Branch Banking and Trust Company. (Incorporated by reference to Exhibit 10.26 to the Registrant's Form S-1 filed with the Commission on January 23, 1997, Registration No. 333-20231). 10.27(a) Loan and Security Agreement dated November 25, 1996 between the Registrant and Branch Banking and Trust Company. (Incorporated by reference to Exhibit 10.27 to the Registrant's Form S-1 filed with the Commission on January 23, 1997, Registration No. 333-20231). 10.27(b) Loan Modification Agreement dated January 29, 1999 by and between the Registrant and Branch Banking and Trust Company, including Addendum to Promissory Note and Modification, Increase, Renewal and Restatement of Promissory Note. (Incorporated by reference to Exhibit 10.27(b) to the Registrant's Form 10-K for the fiscal year ended June 30, 1999). 10.28 Employment Agreement dated as of July 1, 1999 between the Registrant and Steven H. Owings. (Incorporated by reference to Exhibit 10.28 to the Registrant's Form 10-Q for the quarter ended September 30, 1999.) 10.29 Employment Agreement dated as of July 1, 1999 between the Registrant and Michael L. Baur. (Incorporated by reference to Exhibit 10.29 to the Registrant's Form 10-Q for the quarter ended September 30, 1999.) 10.30 Employment Agreement dated as of July 1, 1999 between the Registrant and Jeffery A. Bryson. (Incorporated by reference to Exhibit 10.30 to the Registrant's Form 10-Q for the quarter ended September 30, 1999.) E-1 10.32 Stock Option Agreement dated July 18, 1996 covering stock options granted to James G. Foody. (Incorporated by reference to Exhibit 10.32 to the Registrant's Form S-1 filed with the Commission on January 23, 1997, Registration No. 333-20231). 10.33 Stock Option Agreement dated December 3, 1996 covering stock options granted to Steven H. Owings. (Incorporated by reference to Exhibit 10.33 to the Registrant's Form S-1 filed with the Commission on January 23, 1997, Registration No. 333-20231). 10.34 Stock Option Agreement dated December 3, 1996 covering stock options granted to Michael L. Baur. (Incorporated by reference to Exhibit 10.34 to the Registrant's Form S-1 filed with the Commission on January 23, 1997, Registration No. 333-20231). 10.35 Distribution Agreement dated October 1, 1994 between the Registrant and Symbol Technologies, Inc. (Incorporated by Reference to Exhibit 10.35 to the Registrant's Form 10-K for the fiscal year ended June 30, 1998). 10.36 Distribution Agreement dated January 1, 1996 between the Registrant and IBM Corporation. (Incorporated by Reference to Exhibit 10.36 to the Registrant's Form 10-K for the fiscal year ended June 30, 1998). 10.37 Stock Option Agreement dated January 17, 1997 covering options granted to Steven H. Owings. (Incorporated by reference to Exhibit 10.37 to the Registrant's Form S-1 filed with the Commission on January 23, 1997, Registration No. 333-20231). 10.38 Stock Option Agreement dated January 17, 1997 covering options granted to Michael L. Baur. (Incorporated by reference to Exhibit 10.38 to the Registrant's Form S-1 filed with the Commission on January 23, 1997, Registration No. 333-20231). 10.39 Stock Option Agreement dated January 17, 1997 covering options granted to Jeffery A. Bryson. (Incorporated by reference to Exhibit 10.39 to the Registrant's Form S-1 filed with the Commission on January 23, 1997, Registration No. 333-20231). 10.40* Non-Employee Director Stock Option Plan and Form of Stock Option Agreement. 10.41 Amended and Restated Loan and Security Agreement dated November 10, 2000, effective as of September 30, 2000, by and among ScanSource, Inc., Branch Bank and Trust Company of South Carolina and 4100 Quest, L.L.C. (Incorporated by reference to Exhibit 10.1 to the Registrant's Form 10-Q for the quarter ended September 30, 2000). 10.42 Loan Agreement dated as of July 28, 2000, by and between Branch Banking and Trust Company of South Carolina, 4100 Quest, L.L.C., and ScanSource, Inc. (Incorporated by reference to Exhibit 10.2 to the Registrant's Form 10-Q for the quarter ended September 30, 2000). 10.43* Credit Agreement dated as of July 26, 2001 among ScanSource, Inc., a South Carolina corporation, the initial guarantors listed therein, the banks listed therein and Branch Banking and Trust Company of South Carolina, as Agent. 10.44* Amendment dated December 7, 2000 to Employment Agreement dated as of July 1, 1999 between the Registrant and Michael L. Baur. 13* Registrant's Annual Report to Shareholders for the Fiscal Year Ended June 30, 2001. 21* Subsidiaries of the Company 23.1* Consent of KPMG LLP 23.2* Consent of Deloitte & Touche LLP 99.1* Risk Factors (pursuant to safe harbor provided under Private Securities Litigation Reform Act of 1995). * Filed herewith E-2
EX-10.40 3 dex1040.txt STOCK OPTION PLAN Exhibit 10.40 ------------- SCANSOURCE, INC. NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN 1. Purpose. The purpose of the ScanSource, Inc. Non-Employee Director ------- Stock Option Plan (the "Plan") is to advance the interests of ScanSource, Inc. (the "Company") and its shareholders by encouraging ownership of the Company's common stock, no par value (the "Common Stock"), by non-employee directors of the Company, thereby giving such directors an increased incentive to devote their efforts to the success of the Company. 2. Administration. The Plan shall be administered by the Board of -------------- Directors of the Company. Subject to the provisions of the Plan, the Board of Directors shall have the power to interpret the Plan and prescribe such rules, regulations and procedures in connection with the operations of the Plan as it shall deem to be necessary and advisable for the administration of the Plan consistent with the purposes of the Plan. All questions of interpretation and application of the Plan, or as to stock options granted under the Plan, shall be subject to the determination of the Board of Directors, which shall be final and binding. Nothwithstanding the above, the selection of the Directors to whom stock options are to be granted, the timing of such grants, the number of shares subject to any stock option, the exercise price of any stock option, the periods during which any stock option may be exercised and the term of any stock option shall be as hereinafter provided, and the Board of Directors shall have no discretion as to such matters. 3. Eligibility. Except as otherwise provided in this paragraph 3, options ----------- under the Plan shall be granted in accordance with paragraph 5 to each member of the Company's Board of Directors who is not an employee of the Company or any of its subsidiaries ("Outside Director"), provided that shares of the Company's Common Stock remain available for grant hereunder in accordance with paragraph 4. In the event that a new Outside Director is appointed by the Board of Directors to fill a directorship position, the new Outside Director shall not be eligible for an option grant pursuant to the Plan until elected as a director of the Company. A person to whom an option is granted under the Plan shall be referred to hereinafter as a "Grantee". 4. Shares Subject to Plan. The shares subject to the Plan shall be ---------------------- authorized but unissued or reacquired shares of the Company's Common Stock. Subject to adjustment in accordance with the provisions of paragraph 6 of the Plan, the maximum number of shares of Common Stock for which options may be granted under the Plan shall be one hundred thousand (100,000), and the initial adoption of the Plan by the Board of Directors of the Company shall constitute a reservation of one-hundred thousand (100,000) authorized but unissued, or reacquired, shares of Common Stock for issuance only upon the exercise of options granted under the Plan. In the event that any outstanding option granted under the Plan for any reason expires or is terminated prior to the end of the period during which options may be granted under the Plan, the shares of Common Stock allocable to the unexercised portion of such option may again be subject in whole or in part to any option granted under the Plan. 5. Terms and Conditions of Options. Options granted to a Grantee pursuant ------------------------------- to the Plan shall be evidenced by a Stock Option Agreement in such form as shall comply with and be subject to the following terms and conditions: (a) Grant. As of the day following the annual meeting of the ----- Company's shareholders ("Annual Meeting") at which the Plan is approved by the Company's shareholders and the day following each subsequent Annual Meeting, each Outside Director who is serving in such capacity as of such date shall automatically and without further action by the Board of Directors be granted an option to purchase 5,000 shares of Common Stock, subject to adjustment pursuant to paragraph 6. If on the date following an Annual Meeting (and during the term of this Plan) there are not sufficient shares of Common Stock available under the Plan to grant each Outside Director an option to purchase the full amount of shares of Common Stock contemplated by the immediately preceding paragraph, then each Outside Director shall receive an option to purchase shares of Common Stock in an amount equal to the number of shares of Common Stock then available under the Plan divided by the number of Outside Directors as of the day following the applicable Annual Meeting. Fractional shares shall be ignored and not granted. If during the term of this Plan, additional shares of Common Stock become available for grant (e.g., because of the forfeiture or lapse of an option), each person who was an Outside Director on both the day following the Annual Meeting at which sufficient shares for full grants under the Plan were not available and the date the additional shares of Common Stock become available ("Continuing Outside Director") shall receive an additional option to purchase shares of Common Stock. The number of available shares shall be divided equally among the options granted to the Continuing Outside Directors. However, the aggregate number of shares of Common Stock subject to any Continuing Outside Director's new option and any prior option granted to the Continuing Outside Director on the day following the applicable Annual Meeting at which sufficient shares for full grants under the Plan were not available shall not exceed 5,000 shares of Common Stock (subject to adjustment pursuant to paragraph 6). If Outside Directors have not received the full amount of shares of Common Stock during two or more Annual Meetings, available options shall be granted beginning with the earliest Annual Meeting. (b) Option Price. The option price for each option granted under the ------------ Plan shall be the Fair Market Value (as defined below) of the shares of Common Stock subject to the option on the date of grant of the option. For purposes of the Plan, the "Fair Market Value" of the shares of Common Stock shall mean the closing "asked" price of the shares in the over-the-counter market on the day on which such value is to be determined or, if such "asked" price is not available, the last sales price on such day or, if no shares were traded on such day, on the next preceding day on which the shares were traded, as reported by the Nasdaq Stock Market or other national quotation service. If the shares are listed on a national securities exchange, "Fair Market Value" means the closing price of the shares on such national securities exchange on the day on which such value is to be determined or, if no shares were traded on such day, on the next preceding day on which shares were traded, as reported by National Quotation Bureau, Inc. or other national quotation service. If there is no public market for the Common Stock, "Fair Market Value" means the value determined by the employee directors of the Board of Directors of the Company to be the fair market value of the Common Stock. (c) Medium and Time of Payment. The option price shall be payable in -------------------------- full upon the exercise of an option in cash, by check, in shares of Common Stock already held by the Grantee, or any combination thereof. In the event that all or part of the option price is paid in shares of Common Stock, the value of such shares shall be equal to the Fair Market Value of such shares on the date of exercise of the option (determined as provided in paragraph 5(b) of the Plan), and the Grantee shall deliver to the Company a certificate or certificates representing such shares duly endorsed to the Company or accompanied by a duly-executed separate instrument of transfer satisfactory to the Board of Directors. (d) Term. Each option granted under the Plan shall, to the extent not ---- previously exercised, terminate and expire on the date ten (10) years after the date of grant of the option, unless earlier terminated as provided hereinafter in paragraph 5(g). (e) Exercisability. Beginning on the date six (6) months after the -------------- option is granted and continuing until the expiration or earlier termination of the option, the option may be exercised from time to time, in whole or in part. (f) Method of Exercise. All options granted under the Plan shall be ------------------ exercised by an irrevocable written notice directed to the Secretary of the Company at the Company's principal place of business. Such written notice shall specify the form of payment made by the Grantee or his successor as provided by paragraph 5(c) of the Plan and shall be accompanied by payment in full of the option price for the shares for which such option is being exercised. The Company shall make delivery of certificates representing the shares for which an option has been exercised within a reasonable period of time; provided, however, that if any law, regulation or agreement requires the Company to take any action with respect to the shares for which an option has been exercised before the issuance thereof, then the date of delivery of such shares shall be extended for the period necessary to take such action. Certificates representing shares for which options are exercised under the Plan may bear such restrictive legends as may be necessary or desirable in order to comply with applicable federal and state securities laws. Nothing contained in this Plan shall be construed to require the Company to register any shares of Common Stock underlying options granted under this Plan. (g) Effect of Termination of Directorship or Death. ---------------------------------------------- (i) Termination of Directorship. Upon termination of the --------------------------- directorship of any Grantee with the Company for any reason other than for cause, the option held by the Grantee under the Plan shall terminate one year following the date of the Grantee's termination or, if earlier, on the date of expiration of the option as provided by paragraph 5(d) of the Plan. If the Grantee exercises the option after termination of the Grantee's directorship, the Grantee may exercise the option only with respect to the shares which were otherwise exercisable on the termination date of the Grantee's directorship. Such exercise shall otherwise be subject to the terms and conditions of the Plan. If the Outside Director's membership on the Board of Directors is terminated for cause, all options granted to such Outside Director shall expire upon such termination. (ii) Death. In the event of the death of a Grantee, the Grantee's ----- personal representatives, heirs or legatees (the "Grantee's Successors") may exercise the options that were held by the Grantee on the date of the Grantee's death, to the extent then exercisable, upon proof satisfactory to the Company of their authority. The Grantee's Successors must exercise any such option within one year after the date of the Grantee's death and in any event prior to the date on which the option expires as provided by paragraph 5(e) of the Plan. Such exercise otherwise shall be subject to the terms and conditions of the Plan. (h) Nonassignability of Option Rights. No option shall be assignable --------------------------------- or transferable by the Grantee except by will, by the laws of descent and distribution or pursuant to a qualified domestic relations order as defined in Title I of ERISA and the Internal Revenue Code of 1986. During the lifetime of the Grantee, the option shall be exercisable only by the Grantee. (i) Rights as Shareholder. Neither the Grantee nor the Grantee's --------------------- Successors shall have rights as a shareholder of the Company with respect to shares of Common Stock covered by the Grantee's option until the Grantee or the Grantee's Successors become the holder of record of such shares. (j) No Options in Certain Cases. No options shall be granted except --------------------------- within a period of ten (10) years after the effective date of the Plan. 6. Adjustments. ----------- (a) The number of shares of Common Stock included in any annual grant to a Grantee of an option under the Plan shall be reduced on a share for share basis (but not less than zero) by the number of shares of Common Stock included in any stock options or warrants otherwise granted to such Grantee with respect to such Grantee's service on any committee of the Board of Directors of the Company for the year as to which the annual grant under the Plan is being made. Any shares forfeited pursuant to this paragraph 6(a) shall remain available for succeeding annual grants of options under the Plan. (b) If any change is made in the stock subject to the Plan or the stock subject to any option granted under the Plan (through merger, consolidation, reorganization, recapitalization, stock dividend, dividend in property other than cash, stock split, liquidating dividend, combination of shares, exchange of shares, change in corporate structure or otherwise), the Plan and outstanding options will be automatically and appropriately adjusted, including the maximum number of shares subject to the Plan and the number of shares and the price per share of stock subject to outstanding options. (c) In the event of: (1) a dissolution or liquidation of the Company; (2) a merger or consolidation in which the Company is not the surviving corporation; (3) a reverse merger in which the Company is the surviving corporation but the shares of the Company's common stock outstanding immediately preceding the merger are converted by virtue of the merger into other property, whether in the form of securities, cash other otherwise; or (4) any other capital reorganization in which more than fifty percent (50%) of the shares of the Company entitled to vote are exchanged, then any surviving corporation shall assume any options outstanding under the Plan or shall substitute similar options for those outstanding under the Plan. If there is no surviving corporation, all outstanding options shall continue in full force and effect. 7. Effective Date and Termination of Plan. -------------------------------------- (a) Effective Date. The Plan shall become effective as of the day the Plan is adopted by the shareholders of the Company. (b) Termination. The Plan shall terminate ten (10) years after its effective date, but the Board of Directors may terminate the Plan at any time prior to such date. Termination of the Plan shall not alter or impair any of the rights or obligations under any option theretofore granted under the Plan unless the Grantee shall so consent. 8. Application of Funds. The proceeds received by the Company from the -------------------- sale of shares of Common Stock pursuant to options granted under the Plan may be used for general corporate purposes. 9. No Obligation to Exercise Option. The granting of an option shall -------------------------------- impose no obligation upon the Grantee to accept such grant or to exercise such option. 10. Amendment. The Board of Directors of the Company by majority vote may --------- amend the Plan; provided, however, that without the approval of the shareholders of the Company, no such amendment shall change: (a) The maximum number of shares of Common Stock as to which options may be granted under the Plan (except by operation of the adjustment provisions of the Plan); or (b) The date on which the Plan will terminate as provided by paragraph 7(b) of the Plan; or (c) The number of shares of Common Stock subject to each option; or (d) The option price as provided under paragraph 5(b) of the Plan; or (e) The provisions of paragraph 3 of the Plan related to the determination of the Outside Directors to whom options may be granted. The provisions of the Plan determining (i) the persons eligible to receive grants of options, (ii) the timing of option grants, (iii) the number of shares subject to options, (iv) the exercise price of options, (v) the periods during which options are exercisable, and (vi) the dates on which options terminate, may not be amended more than once every six months other than to comport with changes in the Internal Revenue Code, the Employee Retirement Income Security Act of 1974, or the rules thereunder. Any amendment to the Plan shall not, without the written consent of the Grantee, affect such Grantee's rights under any option theretofore granted to such Grantee. SCANSOURCE, INC. NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN STOCK OPTION AGREEMENT Date of Grant: _____________, _____ THIS GRANT, dated as of the date of grant first stated above (the "Date of Grant"), is delivered by ScanSource, Inc., a South Carolina corporation ("ScanSource"), to ________________________ (the "Grantee"), who is a non-employee director of ScanSource. WHEREAS, the Board of Directors of ScanSource (the "Board") has adopted, subject to shareholder approval, the ScanSource, Inc. Non-Employee Director Stock Option Plan (the "Plan"); and WHEREAS, the Plan provides for the automatic annual grant of stock options by ScanSource to non-employee directors of ScanSource to purchase shares of the common stock, no par value, of ScanSource (the "Stock"), in accordance with the terms and provisions thereof; and WHEREAS, ScanSource considers the Grantee to be a person who is eligible for a grant of stock options under the Plan. NOW, THEREFORE, the parties hereto, intending to be legally bound hereby, agree as follows: 1. Grant of Option. Subject to the terms and conditions hereinafter set forth, ScanSource hereby grants to the Grantee, as of the Date of Grant, an option to purchase up to 5,000 shares of Stock at a price of $_______ per share, being the fair market value per share of such Stock as determined pursuant to the Plan. Such option is hereinafter referred to as the "Option" and the shares of Stock purchasable upon exercise of the Option are hereinafter sometimes referred to as the "Option Shares." The number of Option Shares subject to this Option may be adjusted pursuant to paragraph 6 of the Plan. 2. Exercise. Subject to such further limitations as are provided herein, six (6) months after the Date of Grant, the Option may be exercised from time to time, in whole or in part. 3. Termination of Option. (a) The Option and all rights hereunder with respect thereto, to the extent such rights shall not have been exercised, shall expire and become null and void after the expiration of ten (10) years from the Date of Grant, unless earlier terminated as provided herein (the "Expiration Date"). (b) Upon the occurrence of the termination of Grantee's position as a director of ScanSource for any reason other than for cause, the Option shall terminate one (1) year following the date of such termination or, if earlier, on the date of expiration of the Option as provided by paragraph 3(a) hereof. If the Grantee exercises the Option after termination of the Grantee's directorship, the Grantee may exercise the Option only with respect to the Option Shares which were otherwise exercisable on the termination date of the Grantee's directorship. Such exercise shall otherwise be subject to the terms and conditions of the Plan. If the Grantee's membership on the Board of Directors is terminated for cause, all Options granted to Grantee shall expire upon such termination. (c) In the event of the death of Grantee, the Grantee's personal representatives, heirs or legatees (the "Grantee's Successors") may exercise the Options that were held by the Grantee on the date of the Grantee's death, to the extent then exercisable, upon proof satisfactory to ScanSource of their authority. The Grantee's Successors must exercise the Option within one (1) year after the date of the Grantee's death and in any event prior to the date on which the Option expires as provided by paragraph 3(a) hereof. Such exercise otherwise shall be subject to the terms and conditions of the Plan. 4. Exercise of Options. (a) The option price shall be payable in full upon the exercise of an Option in cash (U.S. funds), by check, in shares of Stock already held by the Grantee, or any combination thereof. In the event that all or part of the option price is paid in shares of Stock, the value of such shares shall be equal to the Fair Market Value of such shares on the date of exercise of the option (determined as provided in paragraph 5(b) of the Plan), and the Grantee shall deliver to ScanSource a certificate or certificates representing such shares duly endorsed to ScanSource or accompanied by a duly-executed separate instrument of transfer satisfactory to the Board. (b) The Option shall be exercised by an irrevocable written notice directed to the Secretary of ScanSource at ScanSource's principal place of business. Such written notice shall specify the form of payment made by the Grantee or his successor as provided by paragraph 4(a) hereof and shall be accompanied by payment in full of the option price for the Option Shares for which the Option is being exercised. ScanSource shall make delivery of certificates representing the Option Shares for which the Option has been exercised within a reasonable period of time; provided, however, that if any law, regulation or agreement requires ScanSource to take any action with respect to the Option Shares for which the Option has been exercised before the issuance thereof, then the date of delivery of such Option Shares shall be extended for the period necessary to take such action. Certificates representing Option Shares for which the Option is exercised under the Plan may bear such restrictive legends as may be necessary or desirable in order to comply with applicable federal and state securities laws. Nothing contained in this Option shall be construed to require ScanSource to register any Option Shares granted under the Plan. (c) If the Grantee fails to pay for any of the Option Shares specified in such notice or fails to accept delivery thereof, the Grantee's right to purchase such Option Shares may be terminated by ScanSource. 5. No Rights as Shareholders. Neither the Grantee nor any personal representative shall be, or shall have any of the rights and privileges of, a shareholder of ScanSource with respect to any shares of Stock purchasable or issuable upon the exercise of the Option, in whole or in part, prior to the date of exercise of the Option. 6. Non-Transferability of Option. During the Grantee's lifetime, the Option hereunder shall be exercisable only by the Grantee or any guardian or legal representative of the Grantee, and the Option shall not be transferable except, in case of the death of the Grantee, by will or the laws of descent and distribution or pursuant to a qualified domestic relations order as defined by the Internal Revenue Code of 1986, as amended, or Title I of the Employee Retirement Income Security Act, or the Rules thereunder, nor shall the Option be subject to attachment, execution or other similar process. In the event of (a) any attempt by the Grantee to alienate, assign, pledge, hypothecate or otherwise dispose of the Option, except as provided for herein, or (b) the levy of any attachment, execution or similar process upon the rights or interest hereby conferred, ScanSource may terminate the Option by notice to the Grantee and it shall thereupon become null and void. 7. Notice. Any notice to ScanSource provided for in this instrument shall be addressed to it in care of its Secretary at its executive offices at 6 Logue Court, Suite G, Greenville, South Carolina 29615, or such other address as shall be provided to Grantee by ScanSource and any notice to the Grantee shall be addressed to the Grantee at the current address shown on the records of ScanSource. Any notice shall be deemed to be duly given if and when properly addressed and posted by registered or certified mail, postage prepaid. 8. Incorporation of Plan by Reference. The Option is granted pursuant to the terms of the Plan, the terms of which are incorporated herein by reference, and the Option shall in all respects be interpreted in accordance with the Plan. The Board of Directors shall interpret and construe the Plan and this instrument, and its interpretations and determinations shall be conclusive and binding on the parties hereto and any other person claiming an interest hereunder, with respect to any issue arising hereunder or thereunder. 9. Governing Law. The validity, construction, interpretation and effect of this instrument shall exclusively be governed by and determined in accordance with the law of the State of South Carolina, except to the extent preempted by federal law, which shall to such extent govern. IN WITNESS WHEREOF, ScanSource has caused its duly authorized officer to execute this Stock Option Agreement, and the Grantee has placed his or her signature hereon, effective as of the Date of Grant. SCANSOURCE, INC. By: Its: ACCEPTED AND AGREED TO: By: Grantee EX-10.43 4 dex1043.txt CREDIT AGREEMENT Exhibit 10.43 ------------- CREDIT AGREEMENT dated as of July 26, 2001 among SCANSOURCE, INC., a South Carolina corporation, The Initial Guarantors Listed Herein, The Banks Listed Herein and BRANCH BANKING AND TRUST COMPANY OF SOUTH CAROLINA, as Agent CREDIT AGREEMENT AGREEMENT dated as of July 26, 2001 among SCANSOURCE, INC., 4100 QUEST, LLC, CHANNELMAX, INC., the BANKS listed on the signature pages hereof and BRANCH BANKING AND TRUST COMPANY OF SOUTH CAROLINA, as Agent. The parties hereto agree as follows: ARTICLE I DEFINITIONS SECTION 1.01. Definitions. The terms as defined in this Section 1.01 ----------- shall, for all purposes of this Agreement and any amendment hereto (except as otherwise expressly provided or unless the context otherwise requires), have the meanings set forth herein: "Account Debtor" shall mean the person who is obligated on any of the Accounts Receivable Collateral or otherwise is obligated as a purchaser or lessee of any of the Inventory Collateral. "Accounts Receivable Collateral" shall mean all obligations of every kind at any time owing to the Borrower or any Guarantor howsoever evidenced or incurred, including, without limitation, all accounts, instruments, contract rights, chattel paper (whether tangible or electronic) and general intangibles, all returned or repossessed goods and all books, records, computer tapes, programs and ledger books arising therefrom or relating thereto, whether now owned or hereafter acquired or arising and all proceeds of the foregoing. "ACL Agreement" means any credit line sweep services agreement now or hereafter entered into between the Agent and Borrower and all amendments and modifications thereto. "Acquisition" means the acquisition of (i) a controlling equity interest in another Person (including the purchase of an option, warrant or convertible or similar type security to acquire such a controlling interest at the time it becomes exercisable by the holder thereof), whether by purchase of such equity interest or upon exercise of an option or warrant for, or conversion of securities into, such equity interest, or (ii) assets of another Person which constitute all or any material part of the assets of such Person or of a line or lines of business conducted by such Person. "Adjusted Consolidated Debt" means at any date the sum of: (1) all Debt of the Borrower and its Consolidated Subsidiaries, and (2) all obligations (absolute or contingent, including without limitation all accounts payable and vendor financing arrangements) of the Borrower and its Consolidated Subsidiaries to any Person for Debt incurred or assumed for the purpose of financing all or any part of the cost of acquiring inventory where on such date either: (i) the amount outstanding under such Debt is accruing interest as of such date; or (ii) as of such date the holder of such Debt has a security interest in such inventory acquired with the proceeds of such Debt or the accounts receivable arising from such inventory. "Adjusted Monthly Libor Index" has the meaning set forth in Section 2.06(c). "Advance" shall mean an advance made to the Borrower under this Agreement pursuant to Article II. An Advance is a "Prime Rate Advance" if such Advance is part of a Prime Rate Loan or a "Euro-Dollar Advance" if such Advance is part of a Euro-Dollar Loan. "Affiliate" of any Person means (i) any other Person which directly, or indirectly through one or more intermediaries, controls such Person, (ii) any other Person which directly, or indirectly through one or more intermediaries, is controlled by or is under common control with such Person, or (iii) any other Person of which such Person owns, directly or indirectly, 20% or more of the common stock or equivalent equity interests. As used herein, the term "control" means possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of a Person, whether through the ownership of voting securities, by contract or otherwise. "Agent" means Branch Banking and Trust Company of South Carolina, in its capacity as agent for the Banks and the Issuing Bank hereunder, and its successors and permitted assigns in such capacity. "Agent's Letter Agreement" means that certain letter agreement, dated as of June 12, 2001, between the Borrower and the Agent relating to the structure of the Loan, and certain fees from time to time payable by the Borrower to the Agent, together with all amendments and modifications thereto. If there is any conflict between the provisions of this Agreement and the provisions of the Agent's Letter Agreement, the provisions of this Agreement will control. "Agreement" means this Credit Agreement, together with all amendments and supplements hereto. "Anniversary Date" means July 26, 2002 and each anniversary of the Closing Date thereafter. "Applicable Margin" has the meaning set forth in Section 2.06(a). "Assignee" has the meaning set forth in Section 9.07(c). "Assignment and Acceptance" means an Assignment and Acceptance executed in accordance with Section 9.07(c) in the form attached hereto as Exhibit J. "Assignment of Claims Acts" shall mean The Assignment of Claims Act of 1940, as may be amended from time to time, and any Federal, State, county or municipal statute, regulation, ordinance, constitution or charter, now or hereafter existing, similar in effect thereto, as determined by the Agent in its sole discretion. "Authority" has the meaning set forth in Section 8.02. "Bank" means each bank listed on the signature pages hereof as having a Commitment and the Swing Line Lender, and their respective successors and assigns; provided, that unless the context otherwise requires, each reference herein to the Banks shall be deemed to include any Conduit Lender. 2 "BB&T" means Branch Banking and Trust Company of South Carolina, and its successors. "Borrower" means ScanSource, Inc., a South Carolina corporation, and its successors and permitted assigns. "Borrowing" means a borrowing hereunder consisting of Advances made to the Borrower at the same time by the Banks pursuant to Article II. "Borrowing Base" shall mean, based on the most recent Borrowing Base Certification Report which as of the date of a determination of the Borrowing Base has been received by the Agent, the sum of (i) an amount equal to 85% (or such lesser percentage as shall be mutually agreed upon by the Agent and Borrower from time to time) of the face dollar amount of Eligible Accounts as at the date of determination; and (ii) an amount equal to the lesser of: (A) 50% (or such lesser percentage as shall be mutually agreed upon by the Agent and Borrower from time to time) of the dollar amount of the Eligible Inventory, valued at the lower of its cost or market value (as determined by the Agent in its sole discretion), as at the date of determination; or (B) the Inventory Advance Limit, as of the date of determination. The Agent shall also be entitled to hold and subtract any reserve against the Borrowing Base it deems reasonably necessary as security for payment of the Notes, the obligations of the Guarantors under Article X of this Agreement, and the obligations of the Borrower under the Letter of Credit Agreements. "Borrowing Base Certification Report" means a report in the form attached hereto as Exhibit E, and otherwise satisfactory to the Agent, certified by the chief financial officer or other authorized officer of the Borrower regarding the Inventory Collateral and the Accounts Receivable Collateral of the Borrower. "Capital Expenditures" means for any period the sum of all capital expenditures incurred during such period by the Borrower and its Consolidated Subsidiaries, as determined in accordance with GAAP. "Capital Stock" means any nonredeemable capital stock of the Borrower or any Consolidated Subsidiary (to the extent issued to a Person other than the Borrower), whether common or preferred. "CERCLA" means the Comprehensive Environmental Response Compensation and Liability Act, 42 U.S.C. (S)9601 et seq. and its implementing regulations and amendments. "CERCLIS" means the Comprehensive Environmental Response Compensation and Liability Information System established pursuant to CERCLA. "Change of Law" shall have the meaning set forth in Section 8.02. "Closing Certificate" has the meaning set forth in Section 3.01(e). "Closing Date" means July 26, 2001. 3 "Code" means the Internal Revenue Code of 1986, as amended, or any successor Federal tax code. Any reference to any provision of the Code shall also be deemed to be a reference to any successor provision or provisions thereof. "Collateral" shall have the meaning set forth in the Security Agreement. "Collateral Documents" means, collectively, the Pledge Agreement and the Security Agreement. "Collateral Locations" shall mean the Executive Offices and those additional locations set forth and described on Schedule 1.01 - Collateral Locations, under the heading "Collateral Locations." "Collateral Reserve Account" shall mean a non-interest bearing, demand deposit account which the Borrower and Guarantors may be required to open and maintain with the Agent for the benefit of the Secured Parties pursuant to the requirements of Section 2.14. "Commitment" means, with respect to each Bank, (i) the amount set forth opposite the name of such Bank on the signature pages hereof, or (ii) as to any Bank which enters into an Assignment and Acceptance (whether as transferor Bank or as Assignee thereunder), the amount of such Bank's Commitment after giving effect to such Assignment and Acceptance, or (iii) as to any Bank which agrees to increase its Commitment pursuant to Section 2.01(b) and (c), the amount of such Bank's Commitment after giving effect to such increase, in each case as such amount may be reduced from time to time pursuant to Sections 2.08 and 2.09. "Compliance Certificate" has the meaning set forth in Section 5.01(c). "Conduit Lender" shall mean any special purpose corporation organized -------------- and administered by any Bank for the purpose of making Advances otherwise required to be made by such Bank and designated by such Bank in a written instrument provided to the Agent; provided, that the designation by any Bank of -------- a Conduit Lender shall not relieve the designating Bank of any of its obligations to fund an Advance under this Agreement if, for any reason, its Conduit Lender fails to fund any such Advance, and the designating Bank (and not the Conduit Lender) shall have the sole right and responsibility to deliver all consents, approvals and waivers required or requested under this Agreement with respect to its Conduit Lender, and provided, further, that no Conduit Lender -------- ------- shall (a) be entitled to receive any greater amount pursuant to Article VIII than the designating Bank would have been entitled to receive in respect of the extensions of credit made by such Conduit Lender or (b) be deemed to have any Commitment. "Consolidated EBITDA" shall be determined as of the end of each Fiscal Quarter and shall mean EBITDA, of the Borrower and its Consolidated Subsidiaries, for the Fiscal Quarter then ending and the immediately preceding three Fiscal Quarters, all as determined in accordance with GAAP. "Consolidated Fixed Charges" for any period means the sum of (i) Consolidated Interest Expense for such period, (ii) all payments of principal in respect of Debt (excluding principal payments made with respect to any revolving line of credit) of the Borrower or any of its Consolidated Subsidiaries for such period, and (iii) all payment obligations of the Borrower 4 and its Consolidated Subsidiaries for such period under all operating leases and rental agreements. "Consolidated Interest Expense" for any period means interest, whether expensed or capitalized, in respect of Debt of the Borrower or any of its Consolidated Subsidiaries outstanding during such period. "Consolidated Net Income" means, for any period, the Net Income of the Borrower and its Consolidated Subsidiaries determined on a consolidated basis, but excluding (i) extraordinary items and (ii) any equity interests of the Borrower or any Subsidiary of the Borrower in the unremitted earnings of any Person that is not a Subsidiary of the Borrower. "Consolidated Subsidiary" means at any date any Subsidiary or other entity the accounts of which, in accordance with GAAP, would be consolidated with those of the Borrower in its consolidated and consolidating financial statements as of such date. "Consolidated Tangible Net Worth" means, at any time, Stockholders' Equity, less the sum of the value, as set forth or reflected on the most recent consolidated balance sheet of the Borrower and its Consolidated Subsidiaries, prepared in accordance with GAAP, of (A) Any surplus resulting from any write-up of assets subsequent to March 31, 2001; (B) All assets which would be treated as intangible assets for balance sheet presentation purposes under GAAP, including without limitation goodwill (whether representing the excess of cost over book value of assets acquired, or otherwise), trademarks, tradenames, copyrights, patents and technologies, and unamortized debt discount and expense. (C) To the extent not included in (B) of this definition, any amount at which shares of capital stock of the Borrower appear as an asset on the balance sheet of the Borrower and its Consolidated Subsidiaries; (D) Loans or advances to stockholders, directors, officers or employees; and (E) To the extent not included in (B) of this definition, deferred expenses. "Consolidated Total Assets" means, at any time, the total assets of the Borrower and its Consolidated Subsidiaries, determined on a consolidated basis, as set forth or reflected on the most recent consolidated balance sheet of the Borrower and its Consolidated Subsidiaries, prepared in accordance with GAAP. "Controlled Group" means all members of a controlled group of corporations and all trades or businesses (whether or not incorporated) under common control which, together with the Borrower, are treated as a single employer under Section 414 of the Code. "Cost of Acquisition" means, with respect to any Acquisition, as at the date of entering into any agreement therefor, the sum of the following --- (without duplication): (i) the 5 value of the capital stock, warrants or options to acquire capital stock of Borrower or any Subsidiary to be transferred in connection therewith, (ii) the amount of any cash and fair market value of other property (excluding property described in clause (i) and the unpaid principal amount of any debt instrument) given as consideration, (iii) the amount (determined by using the face amount or the amount payable at maturity, whichever is greater) of any Debt incurred, assumed or acquired by the Borrower or any Subsidiary in connection with such Acquisition, (iv) all additional purchase price amounts in the form of earnouts and other contingent obligations that should be recorded on the financial statements of the Borrower and its Subsidiaries in accordance with GAAP, (v) all amounts paid in respect of covenants not to compete, consulting agreements that should be recorded on financial statements of the Borrower and its Subsidiaries in accordance with GAAP, and other affiliated contracts in connection with such Acquisition, (vi) the aggregate fair market value of all other consideration given by the Borrower or any Subsidiary in connection with such Acquisition, and (vii) out of pocket transaction costs for the services and expenses of attorneys, accountants and other consultants incurred in effecting such transaction, and other similar transaction costs so incurred. For purposes of determining the Cost of Acquisition for any transaction, (A) the capital stock of the Borrower shall be valued (I) in the case of capital stock that is then designated as a national market system security by the National Association of Securities Dealers, Inc. ("NASDAQ") or is listed on a national securities exchange, the average of the last reported bid and ask quotations or the last prices reported thereon, and (II) with respect to any other shares of capital stock, as determined by the Board of Directors of the Borrower and, if requested by the Agent, determined to be a reasonable valuation by the independent public accountants referred to in Section 5.01(a), (B) the capital stock of any Subsidiary shall be valued as determined by the Board of Directors of such Subsidiary and, if requested by the Agent, determined to be a reasonable valuation by the independent public accountants referred to in Section 5.01(a), and (C) with respect to any Acquisition accomplished pursuant to the exercise of options or warrants or the conversion of securities, the Cost of Acquisition shall include both the cost of acquiring such option, warrant or convertible security as well as the cost of exercise or conversion. "Debt" of any Person means at any date, without duplication, (i) all obligations of such Person for borrowed money, (ii) all obligations of such Person evidenced by bonds, debentures, notes or other similar instruments, (iii) all obligations of such Person to pay the deferred purchase price of property or services, except trade accounts payable arising in the ordinary course of business, (iv) all obligations of such Person as lessee under capital leases, (v) all obligations of such Person to reimburse any bank or other Person in respect of amounts payable under a banker's acceptance, (vi) all Redeemable Preferred Stock of such Person (in the event such Person is a corporation), (vii) all obligations (absolute or contingent) of such Person to reimburse any bank or other Person in respect of amounts which are available to be drawn or have been drawn under a letter of credit or similar instrument, (viii) all Debt of others secured by a Lien on any asset of such Person, whether or not such Debt is assumed by such Person, (ix) all Debt of others Guaranteed by such Person, (x) all obligations of such Person with respect to interest rate protection agreements, foreign currency exchange agreements or other hedging agreements (valued as the termination value thereof computed in accordance with a method approved by the International Swap Dealers Association and agreed to by such Person in the applicable hedging agreement, if any); and (xi) the principal portion of all obligations of such Person under any synthetic lease, tax retention operating lease, off-balance sheet loan or similar 6 off-balance sheet financing product where such transaction is considered borrowed money indebtedness for tax purposes but is classified as an operating lease under GAAP. "Default" means any condition or event which constitutes an Event of Default or which with the giving of notice or lapse of time or both would, unless cured or waived in writing, become an Event of Default. "Default Rate" means, with respect to the Loan or any Swing Line Advance, on any day, the sum of 2% plus the then highest interest rate (including the Applicable Margin) which may be applicable to the Loan or any Swing Line Advance hereunder (irrespective of whether any such type of Loan is actually outstanding hereunder). "Depreciation and Amortization" means for any period an amount equal to the sum of all depreciation and amortization expenses of the Borrower and its Consolidated Subsidiaries for such period, as determined in accordance with GAAP. "Dividends" means for any period the sum of all dividends paid or declared during such period in respect of any Capital Stock and Redeemable Preferred Stock (other than dividends paid or payable in the form of additional Capital Stock). "Dollars" or "$" means dollars in lawful currency of the United States of America. "Domestic Business Day" means any day except a Saturday, Sunday or other day on which commercial banks in South Carolina are authorized or required by law to close. "Domestic Subsidiary" means any Subsidiary which is organized under the laws of any state or territory of the United States of America. "EBITDA" means and includes, for any Fiscal Quarter for which the amount thereof is to be determined, the sum of (i) Consolidated Net Income for such period; (ii) Consolidated Interest Expense for such period; (iii) franchise taxes (if applicable), income taxes and other taxes measured by income or profits in respect of the Borrower and its Consolidated Subsidiaries for such period, but only to the extent such taxes were deducted in computing Consolidated Net Income for such period; and (iv) Depreciation and Amortization for such period, all determined on a consolidated basis in accordance with GAAP. "Eligible Accounts" means those Receivables of the Borrower included in the Accounts Receivable Collateral, each of which meets the following requirements: (i) such Receivable arose in the ordinary course of such Borrower's business; (ii) the right to payment is actually owing to a Borrower by such Borrower's Account Debtors and has been fully earned by completed performance and, if goods are involved, the goods have been shipped by such Borrower; (iii) the Receivable includes only that portion thereof not subject to any offset, defense, counterclaim, credit, allowance or adjustment; (iv) such Borrower's title to such Receivable is absolute and is subject to no prior assignment, claim, lien or security interest; (v) the full amount reflected on such Borrower's books and on any invoice or statement delivered to the Agent related to such Receivable is owing to such Borrower and no partial payment has been made thereon; (vi) (1) such Receivable is due and payable not more than 60 days from the original invoice date; (2) no more than 90 days (or such other period as Agent may by written 7 notice to Borrower approve) have elapsed from the invoice date; and (3) the Receivable is otherwise consistent with the standard terms offered by the Borrower to its customers on the Closing Date; (vii) such Receivable did not arise out of a contract or purchase order containing provisions prohibiting assignment thereof or the creation of a security interest therein, and such Borrower has received no note, trade acceptance, draft or other instrument with respect to such Receivable or in payment thereof; (viii) such Borrower has received no notice of the death of the Account Debtor or of the dissolution, termination of existence, insolvency, bankruptcy, appointment of receiver for any part of the property of, or assignment for the benefit of creditors made by, the Account Debtor; (ix) such Receivable is not payable by an Account Debtor affiliated with the Borrower or any Subsidiary of the Borrower or with any shareholder, director, or officer of the Borrower or any Subsidiary of the Borrower, as determined by the Agent in its sole discretion; (x) such Receivable is not payable by any Account Debtor located outside the United States, unless such Receivable is payable in the full amount of the face value of such Receivable in United States dollars and is supported by an irrevocable letter of credit in form and substance acceptable to the Agent, in its sole discretion, and issued by a bank satisfactory to the Agent, in its sole discretion (and, if requested by the Agent, such letter of credit or the proceeds thereof, as the Agent in its sole discretion, shall require, have been assigned to the Agent); (xi) such Receivable is not payable by the United States of America or any political subdivision or agency thereof, unless the Agent, Banks and the Borrower have complied with the Assignment of Claims Act with respect to such Receivable (including, without limitation, the execution and delivery of a notice of assignment); (xii) the Account Debtor for such Receivable is not located in the State of New Jersey unless the Borrower has filed a Notice of Business Activities Report with the New Jersey Division of Taxation for the then current year; (xiii) such Receivable is not payable by any Account Debtor having 50% or more in face value of its then existing accounts with the Borrower ineligible hereunder; (xiv) such Receivable is not payable by any Account Debtor whose total accounts, in face amount, with the Borrower exceed 15% or more of the total aggregate amount of the Eligible Receivables, but only to the extent of such excess; (xv) the Receivable has not otherwise been excluded by the Agent, which it reserves the right to do in its sole discretion; (xvi) such Receivable is not, at the discretion of Agent, deemed doubtful for collection or whatever reason; (xvii) such Receivable is not a contra account; (xviii) such Receivable is not an account in dispute for any reason; (xix) such Receivable does not represent a commission or expense receivable; and (xx) such Receivable does not represent a retainage associated with a receivable. No presumption shall exist that a Receivable once classified by the Agent as an "Eligible Receivable" shall continue to be so classified. "Eligible Inventory" means that portion of the Inventory Collateral consisting of finished goods (excluding any and all raw materials and work in process) in the possession and control of a Borrower which meets the following requirements: (i) such Inventory Collateral is in first class order, condition and repair and is in good and saleable condition and is subject to internal control and management procedures conducted by Borrower and satisfactory to the Agent in its sole discretion; (ii) such Inventory Collateral has been held by the Borrower for sale or lease less than six (6) months without being sold and/or leased and is otherwise not obsolete; (iii) such Inventory Collateral does not violate any law and meets all standards imposed by any governmental agency, or department or division thereof, having regulatory authority over such Inventory Collateral, its use and/or sale; (iv) such Inventory Collateral has not been consigned to any Person; (v) such Inventory Collateral is owned by the Borrower and is subject to the Agent's perfected security interest and to no other liens or security interests and is located at the 8 Collateral Locations; (vi) such Inventory Collateral does not bear, incorporate or is otherwise subject to any trademark, patent or copyright which is not owned by the Borrower, unless such trademark, patent or copyright is licensed to the Borrower on terms and conditions satisfactory to the Agent; (vii) except as described in (viii), such Inventory Collateral is stored and/or housed at a location owned, leased, or otherwise controlled by Borrower in the United States; (viii) no warehouse receipt has been issued with respect to such Inventory Collateral unless the warehouseman issuing such warehouse receipt is satisfactory to the Agent in its sole discretion, the Agent has received and reviewed such warehouse receipt, and such warehouse receipt has been transferred or assigned to the Agent in a manner satisfactory to the Agent; (ix) such Inventory Collateral does not cause and/or present unusual danger to the health and/or safety of individuals and/or the environment; and (x) such Inventory Collateral is otherwise deemed eligible by Agent in its sole discretion. In furtherance and not in limitation of the foregoing, in no event shall Eligible Inventory include: (i) inventory located in Canada, Mexico or otherwise outside the United States of America; (ii) inventory purchased pursuant to a fulfillment agreement; (iii) inventory in which Textron Financial Corporation, IBM Credit Corporation or any other Person holds a security interest that is not subordinate to the Agent's security interest; and (iv) any inventory of any Subsidiary or Affiliate of the Borrower. No presumption shall exist that Inventory Collateral once classified by the Agent as "Eligible Inventory" shall continue to be so classified. "Environmental Authority" means any foreign, federal, state, local or regional government that exercises any form of jurisdiction or authority under any Environmental Requirement. "Environmental Authorizations" means all licenses, permits, orders, approvals, notices, registrations or other legal prerequisites for conducting the business of a Loan Party or any Subsidiary of a Loan Party required by any Environmental Requirement. "Environmental Judgments and Orders" means all judgments, decrees or orders arising from or in any way associated with any Environmental Requirements, whether or not entered upon consent or written agreements with an Environmental Authority or other entity arising from or in any way associated with any Environmental Requirement, whether or not incorporated in a judgment, decree or order. "Environmental Laws" means any and all federal, state, local and foreign statutes, laws, regulations, ordinances, rules, judgments, orders, decrees, permits, concessions, grants, franchises, licenses, agreements or other governmental restrictions relating to the environment or to emissions, discharges or releases of pollutants, contaminants, petroleum or petroleum products, chemicals or industrial, toxic or hazardous substances or wastes into the environment, including, without limitation, ambient air, surface water, groundwater or land, or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of pollutants, contaminants, petroleum or petroleum products, chemicals or industrial, toxic or hazardous substances or wastes or the clean-up or other remediation thereof. "Environmental Liabilities" means any liabilities, whether accrued, contingent or otherwise, arising from and in any way associated with any Environmental Requirements. 9 "Environmental Notices" means notice from any Environmental Authority or by any other person or entity, of possible or alleged noncompliance with or liability under any Environmental Requirement, including without limitation any complaints, citations, demands or requests from any Environmental Authority or from any other person or entity for correction of any violation of any Environmental Requirement or any investigations concerning any violation of any Environmental Requirement. "Environmental Proceedings" means any judicial or administrative proceedings arising from or in any way associated with any Environmental Requirement. "Environmental Releases" means releases as defined in CERCLA or under any applicable state or local environmental law or regulation. "Environmental Requirements" means any legal requirement relating to health, safety or the environment and applicable to a Loan Party, any Subsidiary of a Loan Party or the Properties, including but not limited to any such requirement under CERCLA or similar state legislation and all federal, state and local laws, ordinances, regulations, orders, writs, decrees and common law. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time, or any successor law. Any reference to any provision of ERISA shall also be deemed to be a reference to any successor provision or provisions thereof. "Euro-Dollar Business Day" means any Domestic Business Day on which dealings in Dollar deposits are carried out in the London interbank market. "Euro-Dollar Loan" means the Loan during Interest Periods when the Loan bears or is to bear interest at a rate based upon the London Interbank Offered Rate. "Euro-Dollar Reserve Percentage" has the meaning set forth in Section 2.06. "Event of Default" has the meaning set forth in Section 6.01. "Executive Offices" shall mean with respect to a Borrower or a Guarantor, the address and location corresponding to such Borrower's or Guarantor's name set forth on Schedule 1.01 - Collateral Locations under the heading "Executive Offices." "Federal Funds Rate" means, for any day, the rate per annum (rounded upward, if necessary, to the next higher 1/100th of 1%) equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published by the Federal Reserve Bank of New York on the Domestic Business Day next succeeding such day, provided that (i) if the day for which such rate is to be determined is not a Domestic Business Day, the Federal Funds Rate for such day shall be such rate on such transactions on the next preceding Domestic Business Day as so published on the next succeeding Domestic Business Day, and (ii) if such rate is not so published for any day, the Federal Funds Rate for such day shall be the average rate charged to BB&T on such day on such transactions as determined by the Agent. 10 "Financing" shall mean (i) any transaction or series of transactions for the incurrence by a Loan Party of any Debt or for the establishment of a commitment to make advances which would constitute Debt of a Loan Party, which Debt is not by its terms subordinate and junior to other Debt of a Loan Party, (ii) an obligation incurred in a transaction or series of transactions in which assets of a Loan Party are sold and leased back, or (iii) a sale of accounts or other receivables or any interest therein, other than a sale or transfer of accounts or receivables attendant to a sale permitted hereunder of an operating division. "Fiscal Month" means any fiscal month of the Borrower. "Fiscal Quarter" means any fiscal quarter of the Borrower. "Fiscal Year" means any fiscal year of the Borrower. "Fixed Charge Coverage Ratio" shall be determined as of the end of each Fiscal Quarter and shall mean the ratio of: (A)(i) Consolidated EBITDA for the period of four consecutive Fiscal Quarters most recently ended on or prior to such date, plus all obligations of the Borrower or any of its Consolidated Subsidiaries as lessee under operating leases, for the period of four consecutive Fiscal Quarters most recently ended on or prior to such date, less (ii) the sum of the aggregate cash taxes on income (and franchise taxes, if applicable) paid by the Borrower and its Consolidated Subsidiaries during such period of four consecutive Fiscal Quarters most recently ended on or prior to such date, all Dividends paid or declared by the Borrower and its Consolidated Subsidiaries during such period, plus Capital Expenditures during such period, to (B) Consolidated Fixed Charges for the period of four consecutive fiscal quarters most recently ended on or prior to such date. "Foreign Subsidiary" means any Subsidiary which is not a Domestic Subsidiary. "GAAP" means generally accepted accounting principles applied on a basis consistent with those which, in accordance with Section 1.02, are to be used in making the calculations for purposes of determining compliance with the terms of this Agreement. "Guarantee" by any Person means any obligation, contingent or otherwise, of such Person directly or indirectly guaranteeing any Debt or other obligation of any other Person and, without limiting the generality of the foregoing, any obligation, direct or indirect, contingent or otherwise, of such Person (i) to secure, purchase or pay (or advance or supply funds for the purchase or payment of) such Debt or other obligation (whether arising by virtue of partnership arrangements, by agreement to keep-well, to purchase assets, goods, securities or services, to provide collateral security, to take-or-pay, or to maintain financial statement conditions or otherwise) or (ii) entered into for the purpose of assuring in any other manner the obligee of such Debt or other obligation of the payment thereof or to protect such obligee against loss in respect thereof (in whole or in part), provided that the term Guarantee shall -------- not include endorsements for collection or deposit in the ordinary course of business. The term "Guarantee" used as a verb has a corresponding meaning. "Guaranteed Obligations" means any and all liabilities, indebtedness and obligations of any and every kind and nature, heretofore, now or hereafter owing, arising, due or payable from the Borrower to the Banks (including, without limitation, the Swing Line Lender), 11 the Issuing Bank, the Agent, or any of them, arising under or evidenced by this Agreement, the Notes, the Letter of Credit Agreements, the Collateral Documents or any other Loan Document. "Guarantors" shall mean collectively: (a) the Initial Guarantors; and (b) all Material Subsidiaries acquired, formed or otherwise in existence after the Closing Date. "Hazardous Materials" includes, without limitation, (a) solid or hazardous waste, as defined in the Resource Conservation and Recovery Act of 1980, 42 U.S.C. (S)6901 et seq. and its implementing regulations and amendments, or in any applicable state or local law or regulation, (b) any "hazardous substance", "pollutant" or "contaminant", as defined in CERCLA, or in any applicable state or local law or regulation, (c) gasoline, or any other petroleum product or by-product, including crude oil or any fraction thereof, (d) toxic substances, as defined in the Toxic Substances Control Act of 1976, or in any applicable state or local law or regulation and (e) insecticides, fungicides, or rodenticides, as defined in the Federal Insecticide, Fungicide, and Rodenticide Act of 1975, or in any applicable state or local law or regulation, as each such Act, statute or regulation may be amended from time to time. "IBM Intercreditor Agreement" shall mean that certain Intercreditor Agreement dated July 26, 2001 by and between the Agent and IBM Credit Corporation, either as originally executed or as it may be from time to time supplemented, modified, amended, renewed or extended, as the context shall require. "Initial Guarantors" shall mean collectively (i) 4100 Quest, LLC, a South Carolina limited liability company; and (ii) Channelmax, Inc., a South Carolina corporation. "Intercreditor Agreement" means the Intercreditor Agreement of even date herewith by and between the Agent, the Banks, the Issuing Bank and the IR Bank, either as originally executed or as it may be from time to time supplemented, modified, amended, renewed or extended, as the context shall require. "Interest Payment Date" shall mean the first day of each month. "Interest Period" means a calendar month; provided that: (a) the initial Interest Period shall mean the period commencing on the Closing Date and ending on July 31, 2001, provided that the London Interbank Offered Rate shall be determined as if such Interest Period commenced on July 1, 2001; and (b) the last Interest Period under this Agreement shall end on the Termination Date. "Inventory Advance Limit" shall mean, as of any date, fifty percent (50%) of the aggregate amount of the Commitments on such date. "Inventory Collateral" shall mean all inventory of the Borrower and Guarantors, or in which the Borrower or Guarantor has rights, whether now owned or hereafter acquired, wherever located, including, without limitation, all goods of the Borrower and Guarantors held for sale or lease or furnished or to be furnished under contracts of service, all goods held for display or demonstration, goods on lease or consignment, returned and repossessed goods, all raw materials, work-in-process, finished goods and supplies used or consumed in the business of the Borrower or any Guarantor, together with all documents, documents of title, dock warrants, 12 dock receipts, warehouse receipts, intellectual property, bills of lading or orders for the delivery of all, or any portion, of the foregoing. "Investment" means any investment in any Person, whether by means of purchase or acquisition of obligations or securities of such Person, capital contribution to such Person, loan or advance to such Person, making of a time deposit with such Person, Guarantee or assumption of any obligation of such Person or otherwise. "IR Agreement" means that certain ISDA Master Agreement dated as of July 26, 2001, by and between the Borrower and the IR Bank, together with all schedules thereto, as amended from time to time, and all confirmations entered into, as amended, from time to time. "IR Bank" means Branch Banking and Trust Company, in its capacity as a party to the IR Agreement. "Issuing Bank" shall mean BB&T. "Lending Office" means, as to each Bank, its office located at its address set forth on the signature pages hereof (or identified on the signature pages hereof as its Lending Office) or such other office as such Bank may hereafter designate as its Lending Office by notice to the Borrower and the Agent. "Letter of Credit" means the letters of credit issued by the Issuing Bank pursuant to Section 2.03(a) and "Letter of Credit" means any one of such Letters of Credit, as any of such letters of credit may be extended, renewed, replaced or amended from time to time. "Letter of Credit Advance" means an advance made by the Issuing Bank pursuant to Section 2.03(c). "Letter of Credit Agreement" means any agreement entered into by the Borrower and the Issuing Bank pursuant to which a Letter of Credit is issued, as amended, modified or restated from time to time. "Letter of Credit Commitment" means, with respect to each Bank, (i) the amount designated as the Letter of Credit Commitment set forth opposite the name of such Bank on the signature pages hereof, or (ii) as to any Bank which enters into an Assignment and Acceptance (whether as transferor Bank or as Assignee thereunder), the amount of such Bank's Letter of Credit Commitment after giving effect to such Assignment and Acceptance, in each case as such amount may be reduced from time to time pursuant to Sections 2.08 and 2.09. "Lien" means, with respect to any asset, any mortgage, deed to secure debt, deed of trust, lien, pledge, charge, security interest, security title, preferential arrangement which has the practical effect of constituting a security interest or encumbrance, servitude or encumbrance of any kind in respect of such asset to secure or assure payment of a Debt or a Guarantee, whether by consensual agreement or by operation of statute or other law, or by any agreement, contingent or otherwise, to provide any of the foregoing. For the purposes of this Agreement, the Borrower or any Subsidiary shall be deemed to own subject to a Lien any asset which it has 13 acquired or holds subject to the interest of a vendor or lessor under any conditional sale agreement, capital lease or other title retention agreement relating to such asset. "Loan" means the aggregate outstanding Advances made by the Banks to the Borrower under this Agreement. The Loan shall at all times be a Euro-Dollar Loan, unless such Loan is to be a Prime Rate Loan pursuant to Article VIII herein. "Loan Documents" means this Agreement, the Notes, the Collateral Documents, the Letter of Credit Agreements, the Letters of Credit, any other document evidencing, relating to or securing the Loan, the Swing Line Advances or the Letters of Credit, and any other document or instrument delivered from time to time in connection with this Agreement, the Notes, the Letter of Credit Agreements, the Swing Line Advances, the Letters of Credit, the Collateral Documents or the Loan, as such documents and instruments may be amended or supplemented from time to time. "Loan Parties" means collectively the Borrower and each Guarantor that is now or hereafter a party to any of the Loan Documents. "London Interbank Offered Rate" has the meaning set forth in Section 2.06(c). "Margin Stock" means "margin stock" as defined in Regulations T, U or X of the Board of Governors of the Federal Reserve System, as in effect from time to time, together with all official rulings and interpretations issued thereunder. "Material Adverse Effect" means, with respect to any event, act, condition or occurrence of whatever nature (including any adverse determination in any litigation, arbitration, or governmental investigation or proceeding), whether singly or in conjunction with any other event or events, act or acts, condition or conditions, occurrence or occurrences, whether or not related, a material adverse change in, or a material adverse effect upon, any of (a) the financial condition, operations, business, properties or prospects of the Borrower or any of its Consolidated Subsidiaries, (b) the rights and remedies of the Agent or the Banks under the Loan Documents, or the ability of the Borrower or any other Loan Party to perform its obligations under the Loan Documents to which it is a party, as applicable, or (c) the legality, validity or enforceability of any Loan Document. "Material Subsidiary" means collectively: (i) each Domestic Subsidiary which at any date accounts for (or in the case of a recently formed or acquired Domestic Subsidiary would so account for on a pro forma historical basis) at least: (A) 5% of Consolidated Total Assets as measured as at the end of the then most recently ended Fiscal Year, or (B) 5% of Consolidated Net Income (before taxes) for either of the two most recently ended Fiscal Years; and (ii) each Domestic Subsidiary that is a member of the Material Subsidiary Group. As used herein, "Material Subsidiary Group" as at any date means one or more Domestic Subsidiaries (determined in accordance with this definition) which account for (or in the case of a recently formed or acquired Domestic Subsidiary would so account for on a pro forma historical basis), when combined with the Borrower, at least (A) 90% of Consolidated Total Assets as measured as at the end of the then most recently ended Fiscal Year or (B) 90% of Consolidated Net Income (before taxes) for either of the two most recently ended Fiscal Years. A Domestic Subsidiary shall be a "Material Subsidiary" if such Domestic Subsidiary is included in any of the following 14 groups: (1) the Domestic Subsidiaries (determined in accordance with the terms of the following sentence) accounting for the Consolidated Total Assets measured under part (A) of the preceding sentence, but not the Consolidated Net Income measured under part (B) of the preceding sentence; or (2) the Domestic Subsidiaries (determined in accordance with the terms of the following sentence) accounting for the Consolidated Net Income measured under part (B) of the preceding sentence, but not the Consolidated Total Assets measured under part (A) of the preceding sentence; or (3) the Domestic Subsidiaries (determined in accordance with the terms of the following sentence) accounting for the Consolidated Net Income measured under part (B) of the preceding sentence and the Consolidated Total Assets measured under part (A) of the preceding sentence. The determination of the Domestic Subsidiaries comprising the Material Subsidiary Group as of any date shall be made on the basis of a group (selected by the Borrower) consisting of the smallest number of Domestic Subsidiaries necessary to satisfy groups (1), (2) or (3), as the case may be, above. "Multiemployer Plan" shall have the meaning set forth in Section 4001(a)(3) of ERISA. "Net Income" means, as applied to any Person for any period, the aggregate amount of net income of such Person, after taxes, for such period, as determined in accordance with GAAP. "Net Proceeds of Capital Stock/Conversion of Debt" means any and all proceeds (whether cash or non-cash) or other consideration received by the Borrower or a Consolidated Subsidiary in respect of the issuance of Capital Stock (including, without limitation, the aggregate amount of any and all Debt converted into Capital Stock), after deducting therefrom all reasonable and customary costs and expenses incurred by the Borrower or such Consolidated Subsidiary directly in connection with the issuance of such Capital Stock. "Notes" means the Swing Line Note and the promissory notes of the Borrower, substantially in the form of Exhibit A hereto, evidencing the obligation of the Borrower to repay the Advances, together with all amendments, consolidations, modifications, renewals and supplements thereto and "Note" means any one of such Notes. "Notice of Borrowing" has the meaning set forth in Section 2.02. "Obligations" means the collective reference to all indebtedness, obligations and liabilities to the Agent, the Issuing Bank, the Swing Line Lender and the Banks, existing on the date of this Agreement or arising thereafter, direct or indirect, joint or several, absolute or contingent, matured or unmatured, liquidated or unliquidated, secured or unsecured, arising by contract, operation of law or otherwise, of the Loan Parties under this Agreement, the Letter of Credit Agreement or any other Loan Document; provided that in no event shall term "Obligations" include (i) the loan evidenced by that certain $7,350,000 promissory note dated July 28, 2000 made by 4100 Quest, LLC and payable to BB&T; and (ii) the loan evidenced by that certain $506,000 promissory note dated January 8, 2001 made by ScanSource, Inc. and payable to BB&T. "Officer's Certificate" has the meaning set forth in Section 3.01(f). 15 "Operating Profits" means, as applied to any Person for any period, the operating income of such Person for such period, as determined in accordance with GAAP. "Participant" has the meaning set forth in Section 9.07(b). "PBGC" means the Pension Benefit Guaranty Corporation or any entity succeeding to any or all of its functions under ERISA. "Person" means an individual, a corporation, a limited liability company, a partnership (including without limitation, a joint venture), an unincorporated association, a trust or any other entity or organization, including, but not limited to, a government or political subdivision or an agency or instrumentality thereof. "Pinacor Acquisition" means the purchase of substantially all the assets of the CTI division of Pinacor, Inc., a subsidiary of MicroAge, Inc. "Plan" means at any time an employee pension benefit plan which is covered by Title IV of ERISA or subject to the minimum funding standards under Section 412 of the Code and is either (i) maintained by a member of the Controlled Group for employees of any member of the Controlled Group or (ii) maintained pursuant to a collective bargaining agreement or any other arrangement under which more than one employer makes contributions and to which a member of the Controlled Group is then making or accruing an obligation to make contributions or has within the preceding 5 plan years made contributions. "Pledge Agreement" means that certain Pledge Agreement, executed by the Pledgors for the benefit of the Agent, as agent for the Secured Parties, in accordance with Section 5.26. "Pledgors" means the pledgor(s) under the Pledge Agreement, either collectively or individually, as the context shall require. "Prime Rate" refers to that interest rate so denominated and set by BB&T from time to time as an interest rate basis for borrowings. The Prime Rate is but one of several interest rate bases used by BB&T. BB&T lends at interest rates above and below the Prime Rate. "Prime Rate Loan" means the Loan during Interest Periods when the Loan bears or is to bear interest at a rate based upon the Prime Rate. "Project Sabre Acquisition" shall mean the purchase of substantially all the assets of a company disclosed prior to the Closing Date in writing by the Borrower to the Agent and Banks. "Properties" means all real property owned, leased or otherwise used or occupied by a Loan Party or any Subsidiary of a Loan Party, wherever located. "Pro Rata Share" of any amount means, with respect to any Bank at any time, the product of such amount times a fraction the numerator of which is the amount of such Bank's Commitment at such time and the denominator of which is the aggregate amount of the Commitments of all of the Banks at such time. 16 "Quarterly Payment Date" means March 31, June 30, September 30 and December 31 of each year. "Rate Determination Date" has the meaning set forth in Section 2.06(a). "Receivables" shall have the meaning assigned to the term "Accounts" in the Security Agreement. "Redeemable Preferred Stock" of any Person means any preferred stock issued by such Person which is at any time prior to the Termination Date either (i) mandatorily redeemable (by sinking fund or similar payments or otherwise) or (ii) redeemable at the option of the holder thereof. "Reported Net Income" means, for any period, the Net Income of the Borrower and its Consolidated Subsidiaries determined on a consolidated basis. "Required Banks" means at any time Banks having at least 75% of the aggregate amount of the Commitments or, if the Commitments are no longer in effect, Banks holding at least 75% of the aggregate outstanding principal amount of the Notes, Letter of Credit Advances and Undrawn Amounts. "Restricted Payment" means (i) any dividend or other distribution on any shares of the Borrower's capital stock (except dividends payable solely in shares of its capital stock) or (ii) any payment on account of the purchase, redemption, retirement or acquisition of (a) any shares of the Borrower's capital stock (except shares acquired upon the conversion thereof into other shares of its capital stock) or (b) any option, warrant or other right to acquire shares of the Borrower's capital stock. "Secured Parties" shall have the meaning set forth in the Security Agreement. "Security Agreement" means that certain General Security Agreement dated of even date herewith, by and between the Borrower and Guarantors for the benefit of the Agent, as agent for the Secured Parties. "Stockholders' Equity" means, at any time, the shareholders' equity of the Borrower and its Consolidated Subsidiaries, as set forth or reflected on the most recent consolidated balance sheet of the Borrower and its Consolidated Subsidiaries prepared in accordance with GAAP, but excluding any Redeemable --- --------- Preferred Stock of the Borrower or any of its Consolidated Subsidiaries. Shareholders' equity generally would include, but not be limited to (i) the par or stated value of all outstanding Capital Stock, (ii) capital surplus, (iii) retained earnings, and (iv) various deductions such as (A) purchases of treasury stock, (B) valuation allowances, (C) receivables due from an employee stock ownership plan, (D) employee stock ownership plan debt guarantees, and (E) translation adjustments for foreign currency transactions. "Subsidiary" means any corporation or other entity of which securities or other ownership interests having ordinary voting power to elect a majority of the board of directors or 17 other persons performing similar functions are at the time directly or indirectly owned by the Borrower. "Swing Line Advance" means an advance made by the Swing Line Lender pursuant to Section 2.15 hereof. "Swing Line Lender" means BB&T. "Swing Line Note" means the promissory note of the Borrower, substantially in the form of Exhibit M hereto, evidencing the obligation of the Borrower to repay the Swing Line Advance, together with all amendments, consolidations, modifications, renewals and supplements thereto. "Taxes" has the meaning set forth in Section 2.12(c). "Termination Date" means September 30, 2003. "Textron Intercreditor Agreement" shall mean that certain Intercreditor Agreement dated July 26, 2001, by and between the Agent and Textron Financial Corporation, either as originally executed or as it may be from time to time supplemented, modified, amended, renewed or extended, as the context shall require. "Third Parties" means all lessees, sublessees, licensees and other users of the Properties, excluding those users of the Properties in the ordinary course of the Borrower's business and on a temporary basis. "Total Unused Commitments" means at any date, an amount equal to: (A) the aggregate amount of the Commitments of all of the Banks at such time, less (B) the sum of: (i) the aggregate outstanding principal amount of the Advances of all of the Banks at such time; (ii) the aggregate outstanding principal amount of all Letter of Credit Advances; (iii) the aggregate outstanding principal amount of all Swing Line Advances; and (iv) the aggregate Undrawn Amounts. "Transferee" has the meaning set forth in Section 9.07(d). "UCC Recording Office" means those certain locations and recording offices set forth on Schedule 1.01 - Collateral Locations, under the heading "UCC Recording Office". "Undrawn Amount" means, with respect to any Letter of Credit, at any time, the maximum amount available to be drawn under such Letter of Credit at such time and "Undrawn Amounts" means, at any time, the sum of all Undrawn Amounts at such time. "Unused Commitment" means at any date, with respect to any Bank, an amount equal to its Commitment less the sum of: (i) aggregate outstanding principal amount of its Advances (excluding Swing Line Advances); (ii) such Bank's Pro Rata Share of the aggregate outstanding principal amount of all Letter of Credit Advances; and (iii) such Bank's Pro Rata Share of the Undrawn Amounts. 18 "Wholly Owned Subsidiary" means any Subsidiary all of the shares of capital stock or other ownership interests of which (except directors' qualifying shares) are at the time directly or indirectly owned by the Borrower. SECTION 1.02. Accounting Terms and Determinations. Unless otherwise ----------------------------------- specified herein, all terms of an accounting character used herein shall be interpreted, all accounting determinations hereunder shall be made, and all financial statements required to be delivered hereunder shall be prepared in accordance with GAAP, applied on a basis consistent (except for changes concurred in by the Borrower's independent public accountants or otherwise required by a change in GAAP) with the most recent audited consolidated financial statements of the Borrower and its Consolidated Subsidiaries delivered to the Banks, unless with respect to any such change concurred in by the Borrower's independent public accountants or required by GAAP, in determining compliance with any of the provisions of this Agreement or any of the other Loan Documents: (i) the Borrower shall have objected to determining such compliance on such basis at the time of delivery of such financial statements, or (ii) the Required Banks shall so object in writing within 30 days after the delivery of such financial statements, in either of which events such calculations shall be made on a basis consistent with those used in the preparation of the latest financial statements as to which such objection shall not have been made (which, if objection is made in respect of the first financial statements delivered under Section 5.01 hereof, shall mean the financial statements referred to in Section 4.04). SECTION 1.03. Use of Defined Terms. All terms defined in this -------------------- Agreement shall have the same meanings when used in any of the other Loan Documents, unless otherwise defined therein or unless the context shall otherwise require. SECTION 1.04. Terminology. All personal pronouns used in this ----------- Agreement, whether used in the masculine, feminine or neuter gender, shall include all other genders; the singular shall include the plural and the plural shall include the singular. Titles of Articles and Sections in this Agreement are for convenience only, and neither limit nor amplify the provisions of this Agreement. SECTION 1.05. References. Unless otherwise indicated, references in ---------- this Agreement to "Articles", "Exhibits", "Schedules", and "Sections" are references to articles, exhibits, schedules and sections hereof. ARTICLE II THE CREDITS SECTION 2.01. Commitments to Make Advances. (a) Each Bank severally ---------------------------- agrees, on the terms and conditions set forth herein, to make Advances to the Borrower from time to time before the Termination Date; provided that, -------- immediately after each such Advance is made, the aggregate outstanding principal amount of Advances by such Bank together with such Bank's Pro Rata Share of the aggregate outstanding principal amount of all Letter of Credit Advances, Swing Line Advances and Undrawn Amounts shall not exceed the amount of its Commitment, provided further that the aggregate principal amount of all Advances, together -------- ------- with the aggregate principal amount of all Letter of Credit Advances, Swing Line Advances and Undrawn Amounts, shall not exceed the lesser of: (a) the aggregate amount of the Commitments 19 of all of the Banks at such time, and (b) the Borrowing Base. Except as otherwise provided in an ACL Agreement, each Borrowing under this Section shall be in an aggregate principal amount of $1,000,000 or any larger multiple of $500,000 (except that any such Borrowing may be in the aggregate amount of the Unused Commitments less the amount of any outstanding Swing Line Advances) and shall be made from the several Banks ratably in proportion to their respective Commitments. Within the foregoing limits, the Borrower may borrow under this Section, repay or, to the extent permitted by Section 2.10, prepay Advances and reborrow under this Section at any time before the Termination Date. (b) Subject to the terms and conditions set forth herein, the Borrower shall have the right, at any time from the Closing Date until the Termination Date, to increase the total Commitments by an amount up to $5,000,000 (for a total Commitment, assuming no reductions, of $85,000,000) in the aggregate. The following terms and conditions shall apply to any such increase: (i) any such increase shall be obtained from existing Banks or from other banks or other financial institutions, in each case in accordance with the terms set forth below, (ii) the Commitment of any Bank may not be increased without the prior written consent of such Bank, (iii) any increase in the aggregate Commitments shall be in a minimum principal amount of $5,000,000, (iv) the Loan Parties and Banks shall execute an acknowledgement in form and content satisfactory to the Agent to reflect the revised Commitments, (the Banks do hereby agree to execute such acknowledgement unless the acknowledgement purports to increase the Commitment of a Bank without such Bank's consent), (v) the Borrower shall execute such Notes as are necessary to reflect the increase in the Commitments, (vi) if any Advances are outstanding at the time of any such increase, the Borrower shall make such payments and adjustments on the Advances (including payment of any break-funding amount owing under Section 8.05) as necessary to give effect to the revised commitment percentages and outstandings of the Banks, and (vii) the conditions set forth in Section 3.02 shall be true and correct. The amount of any increase in the Commitments hereunder shall be offered first to the existing Banks, and in the event the additional commitments which existing Banks are willing to take shall exceed the amount requested by the Borrower, such excess shall be allocated in proportion to the commitments of such existing Banks willing to take additional commitments. If the amount of the additional commitments requested by the Borrower shall exceed the additional commitments which the existing Banks are willing to take, then the Borrower may invite other banks and financial institutions reasonably acceptable to the Agent to join this Agreement as Banks hereunder for the portion of commitments not taken by existing Banks, provided that such other banks and financial -------- institutions shall enter into such joinder agreements to give effect thereto as the Agent and the Borrower may reasonably request. (c) Upon written request of the Borrower, which shall be made in writing and delivered to the Agent on a Domestic Business Day after the Borrower's exercise of the rights provided in Section 2.01(b) and no fewer than 45 days prior to the proposed effective date, the Banks and the Agent in their sole and absolute discretion may (but shall not be obligated to) increase the total Commitments in an aggregate amount not to exceed $15,000,000. The terms of any increase in the total Commitments shall be independently negotiated among the Borrower, the Banks and the Agent at the time of the Borrower's request, provided that the terms of the extension may be the same as those in effect -------- prior to any increase should the Borrower, the Banks and the Agent so agree; provided, further, that should the terms of the increase be other than those in -------- ------- effect prior to the increase, then the Loan Documents shall be amended to the extent 20 necessary to incorporate any such different terms. In the event that a Bank chooses to increase the total Commitments, notice shall be given by such Bank to the Borrower and the Agent at least 15 days prior to the effective date proposed by the Borrower; provided that the total Commitments shall not be -------- increased with respect to any of the Banks (regardless of whether any relevant Bank has delivered a favorable increase notice) unless all of the Banks have delivered favorable increase notices and are willing to increase the total Commitments. SECTION 2.02. Method of Borrowing Advances. (a) Except as otherwise ---------------------------- provided in an ACL Agreement and Section 2.15 in the case of Swing Line Advances, the Borrower shall give the Agent notice in the form attached hereto as Exhibit B (a "Notice of Borrowing") prior to 11:00 A.M. (Greenville, South Carolina time) on the Domestic Business Day of each Borrowing, specifying: (i) the date of such Borrowing; and (ii) the aggregate amount of such Borrowing. (b) Except as provided in Section 2.02(d) of this Agreement, upon receipt of a Notice of Borrowing, the Agent shall promptly notify each Bank of the contents thereof and of such Bank's ratable share of such Borrowing and such Notice of Borrowing shall not thereafter be revocable by the Borrower. (c) Except as provided in Section 2.02(d) of this Agreement, not later than 1:00 P.M. (Winston-Salem, North Carolina time) on the date of each Borrowing, each Bank shall (except as provided in subsection (d) of this Section) make available its ratable share of such Borrowing, in Federal or other funds immediately available in Winston-Salem, North Carolina, to the Agent at its address referred to in or specified pursuant to Section 9.01. Unless the Agent determines that any applicable condition specified in Article III has not been satisfied, the Agent will make the funds so received from the Banks available to the Borrower at the Agent's address in Greenville, South Carolina not later than 2:00 p.m. (Greenville, South Carolina time). Unless the Agent receives notice from a Bank, at the Agent's address referred to in Section 9.01, no later than 4:00 P.M. (local time at such address) on the Domestic Business Day before the date of a Borrowing stating that such Bank will not make an Advance in connection with such Borrowing, the Agent shall be entitled to assume that such Bank will make an Advance in connection with such Borrowing and, in reliance on such assumption, the Agent may (but shall not be obligated to) make available such Bank's ratable share of such Borrowing to the Borrower for the account of such Bank. If the Agent makes such Bank's ratable share available to the Borrower and such Bank does not in fact make its ratable share of such Borrowing available on such date, the Agent shall be entitled to recover such Bank's ratable share from such Bank or the Borrower (and for such purpose shall be entitled to charge such amount to any account of the Borrower maintained with the Agent), together with interest thereon for each day during the period from the date of such Borrowing until such sum shall be paid in full at a rate per annum equal to the rate set forth in Section 2.06 for each such day during such period, provided that any such payment by the Borrower of such Bank's ratable -------- share and interest thereon shall be without prejudice to any rights that the Borrower may have against such Bank. If such Bank shall repay to the Agent such corresponding amount, such amount so repaid shall constitute such Bank's Advance included in such Borrowing for purposes of this Agreement. 21 (d) At the Agent's option and to facilitate the efficient administration of this Agreement, the Agent shall be entitled to make settlements and adjustments on a weekly basis provided that: (1) all Borrowings, Advances and all payments of principal with respect to such Borrowings and Advances shall be shared by the Banks ratably in proportion to their Commitments and in accordance with this Agreement; and (2) all funds advanced by the Agent under this Agreement and all funds received by the Agent under this Agreement shall be made or received, as the case may be, by the Agent, as agent on behalf of the Banks and shall not constitute separate loans or advances made by the Agent. Unless the Agent receives notice from a Bank, at the Agent's address referred to in Section 9.01, no later than 4:00 P.M. (local time at such address) on the Domestic Business Day before the date of a Borrowing stating that such Bank will not make an Advance in connection with such Borrowing, the Agent may assume that each Bank will make an Advance in connection with each Borrowing and, in reliance on such assumption, the Agent may make available such Bank's ratable share of such Borrowing to the Borrower for the account of such Bank. No later than 11:00 A.M. (Winston-Salem, North Carolina time) on Friday of each week the Agent shall advise each Bank of its ratable share of the Borrowings and payments made or received by the Agent for the period ending on the immediately preceding Wednesday. No later than 2:00 P.M. (Winston-Salem, North Carolina time) on such Friday the Agent and Banks shall effect payments (and credits) so that all Borrowings, Advances and payments with respect to the Borrowings and Letters of Credit are shared by the Banks ratably; provided, however, at any time, upon the request of the Agent, each Bank shall, make its ratable share of any Borrowing available to the Agent on demand but in no event later than one Domestic Business Day following the Agent's demand; and (2) the Agent shall be entitled to recover such Bank's ratable share of each Borrowing from such Bank, together with interest thereon for each day during the period from the date of any such demand until such sum shall be paid in full at a rate per annum equal to the rate set forth in Section 2.06. Each Bank's obligation under this Section 2.02(d) shall be absolute and unconditional and shall not be affected by any circumstance, including, without limitation: (i) any setoff, counterclaim, recoupment, defense or other right which such Bank or any other Person may have against the Agent requesting such adjustment or payment or any other Person for any reason whatsoever; (ii) the occurrence or continuance of a Default or an Event of Default or the termination of the Commitment; (iii) any adverse change in the condition (financial or otherwise) of the Borrower, any Guarantor or any other Person; (iv) any breach of this Agreement or any of the other Loan Documents by the Borrower, any Guarantor or any other Bank; or (v) any other circumstance, happening or event whatsoever whether or not similar to any of the foregoing. SECTION 2.03 Letters of Credit. ----------------- (a) The Issuing Bank may, from time to time upon request of the Borrower, in its sole discretion issue Letters of Credit for the account of the Borrower, subject to satisfaction of the conditions referenced in Section 3.03. (b) Each Letter of Credit shall be subject to the provisions of this Agreement and to the provisions set forth in the Letter of Credit Agreement executed by the Borrower in connection with the issuance of such Letter of Credit. The Borrower agrees to promptly perform and comply with the terms and conditions of each Letter of Credit Agreement. 22 (c) The payment by the Issuing Bank of a draft drawn under any Letter of Credit shall constitute for all purposes of this Agreement a Letter of Credit Advance in the amount of such draft. Upon written demand by the Issuing Bank, with a copy to the Agent, each Bank shall purchase from the Issuing Bank, and the Issuing Bank shall sell to each Bank, a participation interest in such Letter of Credit Advance equal to such Bank's Pro Rata Share of such Letter of Credit Advance as of the date of such purchase, by making available to the Agent for the account of the Issuing Bank, in Federal or other funds immediately available an amount equal to such Bank's Pro Rata Share of the outstanding principal amount of such Letter of Credit Advance. Promptly after receipt thereof, the Agent shall transfer such funds to the Issuing Bank. The Borrower hereby agrees to each such sale and purchase of participation interests in Letter of Credit Advances outstanding from time to time. Each Bank agrees to purchase its participation interest in an outstanding Letter of Credit Advance on (i) the Domestic Business Day on which demand therefor is made by the Issuing Bank, provided notice of such demand is given not later than 1:00 P.M. (Winston-Salem, North Carolina time) on such Domestic Business Day or (ii) the first Domestic Business Day next succeeding the date of such demand if notice of such demand is given after 1:00 P.M. (Winston-Salem, North Carolina time) on any Domestic Business Day. The Issuing Bank makes no representation or warranty and assumes no responsibility with respect to any sale and purchase of a participation interest in any Letter of Credit Advance. If and to the extent that any Bank shall not have so made the amount available to the Agent in connection with its purchase of a participation interest in any Letter of Credit Advance, such Bank agrees to pay to the Agent forthwith on demand such amount together with interest thereon, for each day from the date of demand by the Issuing Bank, until the date such amount is paid to the Agent, at the Federal Funds Rate for the account of the Issuing Bank. (d) The obligation of each Bank to purchase a participation interest in any Letter of Credit Advance pursuant to Section 2.03(c) shall be unconditional and shall not be affected by the existence of any Default, the failure to satisfy any condition set forth in Section 3.1, 3.2 or 3.3 or the termination of the Commitments (whether by the Borrower pursuant to Section 2.8 or by the Agent pursuant to Section 6.1 or otherwise). (e) The Issuing Bank shall furnish (A) to the Agent and each Bank on the tenth Domestic Business Day of each April, July, October and January, a written report summarizing the issuance and expiration dates of Letters of Credit issued during the preceding calendar quarter and (B) to the Agent and each Bank upon request a written report setting forth the aggregate Undrawn Amounts. (f) The failure of any Bank to purchase a participation interest in any Letter of Credit Advance shall not relieve any other Bank of its obligation hereunder to purchase its participation interest in any Letter of Credit Advance on such date, but no Bank shall be responsible for the failure of any other Bank to so purchase a participation interest on such date. (g) The Borrower shall pay to the Agent for the account of each Bank that has purchased a participation interest in a Letter of Credit Advance on the earlier of demand and the Termination Date the outstanding principal amount of such Letter of Credit Advance. The Agent will promptly distribute to each Bank its ratable share of any payment of principal of or interest on any Letter of Credit Advance received by the Agent; provided, however, that in the event that 23 such payment received by the Agent is required to be returned, such Bank will return to the Agent any portion thereof previously distributed by the Agent to it. (h) The Issuing Bank will notify the Borrower and the Agent promptly of the presentment for payment of any Letter of Credit, together with notice of the date such payment shall be made, and the Agent promptly will notify the Banks of such matters. SECTION 2.04. Notes. (a) The Advances of each Bank shall be evidenced ----- by a single Note payable to the order of such Bank for the account of its Lending Office in an amount equal to the original principal amount of such Bank's Commitment. (b) The Swing Line Advances made by the Swing Line Lender to the Borrower shall be evidenced by a single Swing Line Note payable to the order of the Swing Line Lender. (c) Upon receipt of each Bank's Note pursuant to Section 3.01, the Agent shall deliver such Note to such Bank. Each Bank shall record, and prior to any transfer of its Note shall endorse on the schedule forming a part thereof appropriate notations to evidence, the date, amount and maturity of, and effective interest rate for, each Advance made by it, the date and amount of each payment of principal made by the Borrower with respect thereto and such schedule shall constitute rebuttable presumptive evidence of the principal amount owing and unpaid on such Bank's Note; provided that the failure of any -------- Bank to make, or any error in making, any such recordation or endorsement shall not affect the obligation of the Borrower hereunder or under the Note or the ability of any Bank to assign its Note. Each Bank is hereby irrevocably authorized by the Borrower so to endorse its Note and to attach to and make a part of any Note a continuation of any such schedule as and when required. SECTION 2.05. Maturity of Loans. Each Advance included in any ----------------- Borrowing shall mature, and the principal amount thereof shall be due and payable, subject to Section 6.01, on the Termination Date. SECTION 2.06. Interest Rates. (a) "Applicable Margin" shall be -------------- determined quarterly based upon the ratio of Adjusted Consolidated Debt (calculated as of the last day of each Fiscal Quarter) to Consolidated EBITDA (calculated as of the last day of each Fiscal Quarter for the Fiscal Quarter then ended and the immediately preceding three Fiscal Quarters), as follows: Ratio of Adjusted Consolidated Euro-Dollar Loans and Prime Debt to Consolidated EBITDA Letters of Credit Rate Loans --------------------------- ----------------- ---------- Greater than or equal to 3.75 2.50% -.25 Greater than or equal to 3.50 but less than 3.75 2.25% -.50 Greater than or equal to 3.25 but less than 3.50 2.00% -.75 24 Greater than or equal to 3.00 but less than 3.25 1.75% -1.00 Greater than or equal to 2.75 but less than 3.00 1.50% -1.25 Greater than or equal to 2.50 but less than 2.75 1.25% -1.50 Less than 2.50 1.00% -1.75 The Applicable Margin shall be effective as of the date (herein, the "Rate Determination Date") which is the first day of the first calendar month after the day the Agent receives the quarterly financial statements for the Fiscal Quarter which the foregoing ratio is being determined, and the Applicable Margin so determined shall remain effective from such Rate Determination Date until the date which is the first day of the first calendar month after the day the Agent receives the quarterly financial statements for the Fiscal Quarter in which such Rate Determination Date falls (which latter date shall be a new Rate Determination Date); provided that (i) for the period from and including the -------- Closing Date to but excluding the Rate Determination Date next following the Closing Date, the Applicable Margin shall be 2.00% for a Euro-Dollar Loan and Letters of Credit, (ii) in the case of any Applicable Margin determined for the fourth and final Fiscal Quarter of a Fiscal Year, such Applicable Margin shall be redetermined based upon the annual audited financial statements for the Fiscal Year ending on the last day of such final Fiscal Quarter, and if such Applicable Margin as so redetermined shall be different from the Applicable Margin for such date determined on the Rate Determination Date for such fourth Fiscal Quarter, such redetermined Applicable Margin shall be effective retroactive to the Rate Determination Date, and the Borrower, the Agent and the Banks, as applicable, shall within 10 days of such redetermination, make a payment (in the case of amounts owing by the Borrower to the Banks) or provide a credit applicable to future amounts payable by the Borrower hereunder (in the case of amounts owing by the Banks to the Borrower) equal to the difference between the interest and letter of credit fees actually paid under this Agreement and the interest and fees that would have been paid under this Agreement had the Applicable Margin as originally determined been equal to the Applicable Margin as redetermined, and (iii) if on any Rate Determination Date the Borrower shall have failed to deliver to the Bank the financial statements required to be delivered pursuant to Section 5.01(a) or Section 5.01(b) with respect to the Fiscal Year or Fiscal Quarter, as the case may be, most recently ended prior to such Rate Determination Date, then for the period beginning on such Rate Determination Date and ending on the earlier of (A) the date on which the Borrower shall deliver to the Bank the financial statements to be delivered pursuant to Section 5.01(b) with respect to such Fiscal Quarter or any subsequent Fiscal Quarter, or (B) the date on which the Borrower shall deliver to the Bank annual financial statements required to be delivered pursuant to Section 5.01(a) with respect to the Fiscal Year which includes such Fiscal Quarter or any subsequent Fiscal Year, the Loan shall bear interest at a rate per annum determined as if the ratio of Adjusted Consolidated Debt to Consolidated EBITDA was more than 3.75 at all times during such period; provided that at the election of the Required Banks, the principal amount of the Loans shall bear interest at the Default Rate. Any change in the Applicable Margin on any Rate Determination Date shall result in a corresponding change, effective on and as of such Rate Determination Date, in the interest 25 rate applicable to the Loan and in the fees applicable to each Letter of Credit outstanding on such Rate Determination Date; provided, that no Applicable Margin shall be decreased pursuant to this Section 2.06 if a Default is in existence on the Rate Determination Date. (b) During each Interest Period in which the Loan (excluding Swing Line Advances) is a Prime Rate Loan, such Prime Rate Loan shall bear interest on the outstanding principal amount thereof, for each day during the applicable Interest Period, at a rate per annum equal to the Prime Rate for such day plus the Applicable Margin for Prime Rate Loans. Any overdue principal of and, to the extent permitted by applicable law, overdue interest on any Prime Rate Loan shall bear interest, payable on demand, for each day until paid in full at a rate per annum equal to the Default Rate. (c) During each Interest Period in which the Loan is a Euro-Dollar Loan, such Euro-Dollar Loan shall bear interest on the outstanding principal amount thereof, for the Interest Period applicable thereto, at a rate per annum equal to the sum of: (1) the Applicable Margin for Euro-Dollar Loans, plus (2) the applicable Adjusted Monthly Libor Index for such Interest Period. Any overdue principal of and, to the extent permitted by applicable law, overdue interest on any Euro-Dollar Loan shall bear interest, payable on demand, for each day until paid in full at a rate per annum equal to the Default Rate. The "Adjusted Monthly Libor Index" applicable to any Interest Period means a rate per annum equal to the quotient obtained (rounded upward, if necessary, to the next higher 1/100th of 1%) by dividing (i) the applicable London Interbank Offered Rate for such Interest Period by (ii) 1.00 minus the Euro-Dollar Reserve Percentage. The "London Interbank Offered Rate" applicable to any Euro-Dollar Loan means for the Interest Period of such Euro-Dollar Loan the rate per annum determined on the basis of the rate for deposits in Dollars of amounts equal or comparable to the principal amount of such Euro-Dollar Loan offered for a term comparable to such Interest Period, which rate appears on the display designated as Page "3750" of the Telerate Service (or such other page as may replace page 3750 of that service or such other service or services as may be nominated by the British Banker's Association for the purpose of displaying London Interbank Offered Rates for U.S. dollar deposits) determined as of 11:00 a.m. London, England time, on the first day of such Interest Period or on the immediately preceding Euro-Dollar Business Day if the first day of such Interest Period is not a Euro-Dollar Business Day. "Euro-Dollar Reserve Percentage" means for any day that percentage (expressed as a decimal) which is in effect on such day, as prescribed by the Board of Governors of the Federal Reserve System (or any successor) for determining the maximum reserve requirement for a member bank of the Federal Reserve System in respect of "Eurocurrency liabilities" (or in respect of any other category of liabilities which includes deposits by reference to which the interest rate on such Euro-Dollar Loan is determined or any category of extensions of credit or other assets which includes loans by a non-United States office of any Bank to United States residents). The Adjusted Monthly Libor Index shall be adjusted automatically on and as of the effective date of any change in the Euro-Dollar Reserve Percentage. (d) The Loan (excluding the Swing Line Advances) shall at all times be a Euro-Dollar Loan unless the Loan is to be a Prime Rate Loan pursuant to Article VIII herein. 26 Interest shall be payable for each Interest Period on the Interest Payment Date immediately succeeding the last day of the Interest Period; provided that: (1) all accrued unpaid interest on the Loan shall be paid in full on the Termination Date; and (2) should the Commitment be terminated at any time prior to the Termination Date for any reason, any and all accrued unpaid interest shall be paid on the date of such termination. (e) Each Letter of Credit Advance shall bear interest on the outstanding principal amount thereof, payable on demand, for each day from the date such Letter of Credit Advance is made until paid in full at a rate per annum equal to the Default Rate. (f) The Agent shall determine each interest rate applicable to the Loan hereunder. The Agent shall give prompt notice to the Borrower and the Banks by telecopy of each rate of interest so determined, and its determination thereof shall be conclusive in the absence of manifest error. (g) After the occurrence and during the continuance of a Default, the principal amount of the Loans (and, to the extent permitted by applicable law, all accrued interest thereon) may, at the election of the Required Banks, bear interest at the Default Rate; provided, however, that automatically whether or not the Required Banks elect to do so, any overdue principal of and, to the extent permitted by law, overdue interest on the Loan shall bear interest payable on demand, for each day until paid at a rate per annum equal to the Default Rate. (h) Each Swing Line Advance shall bear interest on the outstanding principal amount thereof, for the Interest Period applicable thereto, at a rate per annum equal to the sum of: (1) the Applicable Margin for Euro-Dollar Loans, plus (2) the applicable Adjusted Monthly Libor Index for such Interest Period. Except as otherwise agreed upon by the Swing Line Lender and the Borrower, such interest shall be payable for each Interest Period on the Interest Payment Date immediately succeeding the last day of the Interest Period. Any overdue principal of and, to the extent permitted by applicable law, overdue interest on the Swing Line Advances may, at the election of the Swing Line Lender, bear interest, payable on demand, for each day until paid at a rate per annum equal to the Default Rate. SECTION 2.07. Fees. (a) The Borrower shall pay to the Agent for the ---- ratable account of each Bank a non-utilization fee equal to the product of: (i) the aggregate of the daily average amounts of such Bank's Unused Commitment, times (ii) a per annum percentage equal to the Applicable Non-Utilization Fee Rate. Such non-utilization fee shall accrue from and including the Closing Date to and including the Termination Date. Non-Utilization fees shall be payable quarterly in arrears on the first Quarterly Payment Date following each Non-Utilization Fee Determination Date and on the Termination Date; provided that should the Commitments be terminated at any time prior to the Termination Date for any reason, the entire accrued and unpaid fee shall be paid on the date of such termination. The "Applicable Non-Utilization Fee Rate" shall be determined quarterly based upon the ratio of Adjusted Consolidated Debt to Consolidated EBITDA (calculated as of the last day of each Fiscal Quarter) as follows: 27 Ratio of Adjusted Applicable Consolidated Debt Non-Utilization to Consolidated EBITDA Fee Rate ---------------------- ---------------- less than 2.50 .125% Greater than or equal to 2.50 but less than 2.75 .125% Greater than or equal to 2.75 but less than 3.00 .125% Greater than or equal to 3.00 but less than 3.25 .250% Greater than or equal to 3.25 but less than 3.50 .250% Greater than or equal to 3.50 but less than 3.75 .250% Greater than or equal to 3.75 .250% The Applicable Non-Utilization Fee Rate shall be determined effective as of the date (herein, the "Non-Utilization Fee Determination Date") which is the first day of the first calendar month after the day the Agent receives the quarterly financial statements for the Fiscal Quarter which the foregoing ratio is being determined, and the Applicable Non-Utilization Fee Rate so determined shall remain effective from such Non-Utilization Fee Determination Date until the date which is the first day of the first calendar month after the day the Agent receives the quarterly financial statements for the Fiscal Quarter in which such Non-Utilization Fee Determination Date falls (which latter date shall be a new Non-Utilization Fee Determination Date); provided that (i) for the period from -------- and including the Closing Date to but excluding the Non-Utilization Fee Determination Date next following the Closing Date, the Applicable Non-Utilization Fee Rate shall be 0.25%; (ii) in the case of any Applicable Non-Utilization Fee Rate determined for the fourth and final Fiscal Quarter of a Fiscal Year, the Applicable Non-Utilization Fee Rate shall be redetermined based upon the annual audited financial statements for the Fiscal Year ending on the last day of such final Fiscal Quarter, and if such Applicable Non-Utilization Fee Rate as so redetermined shall be different from the Applicable Non-Utilization Fee Rate for such date determined on the Non-Utilization Fee Determination Date for such fourth Fiscal Quarter, such redetermined Applicable Non-Utilization Fee Rate shall be effective retroactive to the Non-Utilization Fee Determination Date, and the Borrower, the Agent and the Banks, as applicable, shall within 10 days of such redetermination, make a payment (in the case of amounts owing by the Borrower to the Banks) or provide a credit applicable to future amounts payable by the Borrower hereunder (in the case of amounts owing by the Banks to the Borrower) equal to the difference between the non-utilization fees actually paid under this Agreement and the non-utilization fees that would have been paid under this Agreement had the Applicable Non-Utilization Fee Rate as originally determined been equal to the Applicable Non-Utilization Fee Rate as redetermined, and (iii) if on any Non-Utilization Fee Determination Date the Borrower shall have failed to deliver to the Banks the financial statements required to be delivered pursuant to Section 5.01(a) or Section 5.01(b) with respect to the Fiscal Year or Fiscal Quarter, as the case may be, most recently ended prior to such Non-Utilization Fee Determination Date, then for the period beginning on such Non-Utilization Fee Determination Date and ending on the earlier of (A) the date on which the Borrower shall deliver to the Banks the financial statements to be delivered pursuant to Section 5.01(b) with respect to such Fiscal Quarter or any subsequent Fiscal Quarter, and (B) the date on which the Borrower shall deliver to the Banks annual financial statements required to be delivered pursuant to Section 5.01(a) with respect to the Fiscal Year which includes such Fiscal Quarter or any subsequent Fiscal Year, the Applicable Non-Utilization Fee Rate shall be determined as if the ratio of Adjusted Consolidated Debt to 28 Consolidated EBITDA was more than 3.75 at all times during such period. Any change in the Applicable Non-Utilization Fee Rate on any Non-Utilization Fee Determination Date shall result in a corresponding change, effective on and as of such Non-Utilization Fee Determination Date, in the fees payable hereunder; provided, that no Applicable Non-Utilization Fee Rate shall be decreased pursuant to this Section 2.07 if a Default is in existence on the Non-Utilization Fee Determination Date. (b) The Borrower shall pay to the Agent for the ratable account of each Bank, with respect to each Letter of Credit, a per annum letter of credit fee (the "Letter of Credit Fee") equal to the product of: (i) the aggregate average daily Undrawn Amounts, times (ii) a per annum percentage equal to the greater of (i) 1.00% or (ii) one-half of the Applicable Margin for Letters of Credit (determined in accordance with Section 2.13 hereof). Such Letter of Credit Fees shall be payable in arrears for each Letter of Credit on each Quarterly Payment Date during the term of each respective Letter of Credit and on the termination thereof (whether at its stated expiry date or earlier). The "Applicable Margin" for Letters of Credit shall be as determined in Section 2.06(a). (c) The Borrower shall pay to the Agent for the account of the Issuing Bank a facing fee (the " Facing Fee") with respect to each Letter of Credit equal to the product of: (i) the face amount of such letter of credit, times (ii) one-eighth (1/8th) of one percent (0.125%). Such Facing Fee shall be due and payable on such date as may be agreed upon by the Issuing Bank and the Borrower. The Borrower shall pay to the Issuing Bank, for its own account, transfer fees, drawing fees, modification fees, extension fees and such other fees and charges as may be provided for in any Letter of Credit Agreement or otherwise charged by the Issuing Bank. No Bank shall be entitled to any portion of the Facing Fees or any other fees payable by the Borrower to the Issuing Bank pursuant to this Section 2.07(c). (d) The Borrower shall pay to the Agent, for the account and sole benefit of the Agent, such fees and other amounts at such times as set forth in the Agent's Letter Agreement. SECTION 2.08. Optional Termination or Reduction of Commitments. The ------------------------------------------------ Borrower may, upon at least 3 Domestic Business Days' irrevocable notice to the Agent, terminate at any time, or proportionately reduce from time to time by an aggregate amount of at least $1,000,000 or any larger multiple of $1,000,000, the Commitments; provided, however: (1) each termination or reduction, as the case may be, shall be permanent and irrevocable; (2) no such termination or reduction shall be in an amount greater than the Total Unused Commitments on the date of such termination or reduction; and (3) no such reduction pursuant to this Section 2.08 shall result in the aggregate Commitments of all of the Banks to be reduced to an amount less than $65,000,000, unless the Commitments are terminated in their entirety, in which case: (i) all accrued fees (as provided under Section 2.07) shall be payable on the effective date of such termination; and (ii) if such termination occurs on or before July 26, 2002, Borrower shall pay to the Agent for the ratable account of each Bank a termination fee equal to the product of: (a) 0.125%, times (b) the amount of such Bank's Commitment immediately prior to such termination; provided that the Borrower shall have no obligation to pay a termination fee: (1) to any Bank that has requested compensation under Section 8.03 or that has provided a notice under Section 8.02 resulting in the suspension of its obligations to make Euro-Dollar Loans; or (ii) to 29 any Bank if the Agent has provided a notice under Section 8.01 resulting in the suspension of the Banks' obligation to make Euro-Dollar Loans. SECTION 2.09. Mandatory Reduction and Termination of Commitments. The -------------------------------------------------- Commitments shall terminate on the Termination Date and any Advances, Swing Line Advances and if demand had not been earlier made Letter of Credit Advances then outstanding (together with accrued interest thereon) shall be due and payable on such date. SECTION 2.10. Optional Prepayments. (a) The Borrower may prepay the -------------------- Loan in whole at any time, or from time to time in part in amounts aggregating at least $1,000,000.00, or any larger multiple of $100,000, by paying the principal amount to be prepaid together with accrued interest thereon to the date of prepayment; provided, however, during any period that an ACL Agreement shall be applicable, prepayments by the Borrower shall be made in accordance with the terms of the ACL Agreement. Each such optional prepayment shall be applied first to repay or prepay Swing Line Advances outstanding on the date of such prepayment and then ratably to prepay ratably the Advances of the several Banks. (b) Upon receipt of a notice of prepayment pursuant to this Section, the Agent shall promptly notify each Bank of the contents thereof and of such Bank's ratable share of such prepayment and such notice shall not thereafter be revocable by the Borrower. SECTION 2.11. Mandatory Prepayments. (a) On each date on which the --------------------- Commitments are reduced or terminated pursuant to Section 2.08 or Section 2.09, the Borrower shall repay or prepay such principal amount of the outstanding Advances and Swing Line Advances, if any (together with interest accrued thereon and any amounts due under Section 8.05(a)), as may be necessary so that after such payment the aggregate unpaid principal amount of the Advances, together with the aggregate principal amount of all Swing Line Advances, Letter of Credit Advances and Undrawn Amounts does not exceed the aggregate amount of the Commitments as then reduced. Each such payment or prepayment shall be applied to repay or prepay first to Swing Line Advances outstanding on the date of such prepayment and then, ratably to the Advances of the several Banks. (b) In the event that: (1) the aggregate principal amount of all Advances, together with the aggregate principal amount of the Swing Line Advances, Letter of Credit Advances and Undrawn Amounts at any one time outstanding shall at any time exceed the Borrowing Base; or (2) the aggregate principal amount of all Advances, together with the aggregate principal amount of the Swing Line Advances, Letter of Credit Advances and Undrawn Amounts at any one time outstanding shall at any time exceed the aggregate amount of the Commitments of all of the Banks at such time, the Borrowers shall immediately repay so much of the Advances and Swing Line Advances as is necessary in order that: (1) the aggregate principal amount of the Advances thereafter outstanding, together with the aggregate principal amount of the Swing Line Advances, Letter of Credit Advances and Undrawn Amounts shall not exceed the Borrowing Base; and (2) the aggregate principal amount of the Advances thereafter outstanding, together with the aggregate principal amount of the Swing Line Advances, Letter of Credit Advances and Undrawn Amounts shall not exceed the aggregate amount of the Commitments of all of the Banks at such time. 30 SECTION 2.12. General Provisions as to Payments. (a) The Borrower --------------------------------- shall make each payment of principal of, and interest on, the Loan and of fees hereunder, not later than 11:00 A.M. (Greenville, South Carolina time) on the date when due, in Federal or other funds immediately available in Greenville, South Carolina, to the Agent at its address referred to in Section 9.01. Subject to the terms of Section 2.02(d), the Agent will promptly distribute to each Bank its ratable share of each such payment received by the Agent for the account of the Banks; provided that payments of interest shall be distributed by the Agent within three Domestic Business Days of the date such payment is received by the Agent for the account of the Banks. (b) Whenever any payment of principal of, or interest on, the Advances, Swing Line Advances or of fees shall be due on a day which is not a Domestic Business Day (including, without limitation, any payments pursuant to Sections 2.02(c) and 2.02(d)), the date for payment thereof shall be extended to the next succeeding Domestic Business Day. If the date for any payment of principal is extended by operation of law or otherwise, interest thereon shall be payable for such extended time. (c) All payments of principal, interest and fees and all other amounts to be made by the Borrower pursuant to this Agreement with respect to any Advance, Swing Line Advance or fee relating thereto shall be paid without deduction for, and free from, any tax, imposts, levies, duties, deductions, or withholdings of any nature now or at anytime hereafter imposed by any governmental authority or by any taxing authority thereof or therein excluding in the case of each Bank, taxes imposed on or measured by its net income, and franchise taxes imposed on it, by the jurisdiction under the laws of which such Bank is organized or any political subdivision thereof and, in the case of each Bank, taxes imposed on its income, and franchise taxes imposed on it, by the jurisdiction of such Bank's applicable Lending Office or any political subdivision thereof (all such non-excluded taxes, imposts, levies, duties, deductions or withholdings of any nature being "Taxes"). In the event that the Borrower is required by applicable law to make any such withholding or deduction of Taxes with respect to any Advance, Swing Line Advance or fee or other amount, the Borrower shall pay such deduction or withholding to the applicable taxing authority, shall promptly furnish to any Bank in respect of which such deduction or withholding is made all receipts and other documents evidencing such payment and shall pay to such Bank additional amounts as may be necessary in order that the amount received by such Bank after the required withholding or other payment shall equal the amount such Bank would have received had no such withholding or other payment been made. If no withholding or deduction of Taxes are payable in respect of any Advance, Swing Line Advance or fee relating thereto, the Borrower shall furnish any Bank, at such Bank's request, a certificate from each applicable taxing authority or an opinion of counsel acceptable to such Bank, in either case stating that such payments are exempt from or not subject to withholding or deduction of Taxes. If the Borrower fails to provide such original or certified copy of a receipt evidencing payment of Taxes or certificate(s) or opinion of counsel of exemption, the Borrower hereby agrees to compensate such Bank for, and indemnify them with respect to, the tax consequences of the Borrower's failure to provide evidence of tax payments or tax exemption. In the event any Bank receives a refund of any Taxes paid by the Borrower pursuant to this Section 2.12, it will pay to the Borrower the amount of such refund promptly upon receipt thereof; provided, however, if at any time -------- ------- thereafter it is required to return such refund, the Borrower shall promptly repay to it the amount of such refund. 31 Without prejudice to the survival of any other agreement of the Borrower hereunder, the agreements and obligations of the Borrower contained in this Section 2.12 shall be applicable with respect to any Participant, Assignee or other Transferee, and any calculations required by such provisions (i) shall be made based upon the circumstances of such Participant, Assignee or other Transferee, and (ii) constitute a continuing agreement and shall survive the termination of this Agreement and the payment in full or cancellation of the Notes. SECTION 2.13. Computation of Interest and Fees. Interest on the Loans -------------------------------- shall be computed on the basis of a year of 360 days and paid for the actual number of days elapsed (including the first day but excluding the last day). Facility fees, letter of credit fees and any other fees (excluding Facing Fees) payable hereunder shall be computed on the basis of a year of 360 days and paid for the actual number of days elapsed (including the first day but excluding the last day). SECTION 2.14. Collateral Reserve Account. In accordance with and as -------------------------- more fully set forth in the Security Agreement: (1) the Borrower shall on the Closing Date, establish a lockbox satisfactory to Agent; and (2) the Borrower and each Guarantor shall upon the request of the Required Banks, establish and maintain with the Agent a Collateral Reserve Account. SECTION 2.15. Swing Line Advances. (a) The Borrower may prior to the ------------------- Termination Date, as set forth in this Section, request the Swing Line Lender to make, and the Swing Line Lender may in its sole and absolute discretion prior to the Termination Date make, Swing Line Advances to the Borrower, in an aggregate principal amount at any one time outstanding, not exceeding $10,000,000 (the "Swing Line Cap"), provided that: (1) the aggregate principal amount of all Swing Line Advances, together with the aggregate principal amount of all outstanding Advances, Undrawn Amounts and Letter of Credit Advances, at any one time outstanding shall not exceed the aggregate amount of the Commitments of all of the Banks at such time; and (2) the aggregate principal amount of all Swing Line Advances and Advances of the Swing Line Lender, together with the Swing Line Lender's Pro Rata Share of the aggregate outstanding principal amount of all Letter of Credit Advances and Undrawn Amounts will not exceed the amount of its Commitment. (b) Except as may otherwise be agreed upon by the Swing Line Lender and the Borrower, when the Borrower wishes to request a Swing Line Advance, it shall give the Agent notice substantially in the form of Exhibit L hereto (a "Swing Line Advance Request") so as to be received no later than 11:00 A.M. (Greenville, South Carolina time) on or before the date of the proposed Swing Line Advance proposed therein (or such other time and date as the Borrower and the Swing Line Lender may agree), specifying: (i) the proposed date of such Swing Line Advance, which shall be a Domestic Business Day (the "Borrowing Date"); and (ii) the aggregate amount of such Swing Line Advance, which shall be at least $50,000 (or in larger multiples of $10,000) but shall not cause the limits specified in Section 2.15(a) to be violated. 32 (c) The Swing Line Lender shall make the amount of such Swing Line Advance available to the Borrower on such date by depositing the same, in immediately available funds, in an account of the Borrower maintained with the Swing Line Lender. (d) Subject to the limitations contained in this Agreement, the Borrower may borrow under this Section 2.15, prepay and reborrow under this Section 2.15 at any time before the Termination Date. (e) At any time, upon the request of the Swing Line Lender, each Bank other than the Swing Line Lender shall, on the Domestic Business Day after such request is made, purchase a participating interest in Swing Line Advances in an amount equal to its ratable share (based upon its respective Commitment) of such Swing Line Advances. On such Domestic Business Day, each Bank will immediately transfer to the Swing Line Lender, in immediately available funds, the amount of its participation. Whenever, at any time after the Swing Line Lender has received from any such Bank its participating interest in a Swing Line Loan, the Agent receives any payment on account thereof, the Agent will distribute to such Bank its participating interest in such amount (appropriately adjusted, in the case of interest payments, to reflect the period of time during which such Bank's participating interest was outstanding and funded); provided, however, -------- ------- that in the event that such payment received by the Agent is required to be returned, such Bank will return to the Agent any portion thereof previously distributed by the Agent to it. Each Bank's obligation to purchase such participating interests shall be absolute and unconditional and shall not be affected by any circumstance, including, without limitation: (i) any set-off, counterclaim, recoupment, defense or other right which such Bank or any other Person may have against the Swing Line Lender requesting such purchase or any other Person for any reason whatsoever; (ii) the occurrence or continuance of a Default or an Event of Default or the termination of the Commitments; (iii) any adverse change in the condition (financial or otherwise) of the Borrower, any Guarantor or any other Person; (iv) any breach of this Agreement or any other Loan Documents by the Borrower, any Guarantor or any other Bank; or (v) any other circumstance, happening or event whatsoever, whether or not similar to any of the foregoing. (f) Notwithstanding anything contained in this Agreement to the contrary, the Swing Line facility contained in this Section 2.15 shall terminate immediately upon: (i) BB&T's removal or resignation as Agent; or (ii) termination of the Commitments (whether at maturity or otherwise). ARTICLE III CONDITIONS TO BORROWINGS SECTION 3.01. Conditions to First Borrowing. The obligation of each ----------------------------- Bank to make an Advance on the occasion of the first Borrowing is subject to the satisfaction of the conditions set forth in Section 3.02 and the following additional conditions: (a) receipt by the Agent from each of the parties hereto of a duly executed counterpart of this Agreement signed by such party; 33 (b) receipt by the Agent of a duly executed Note for the account of each lender complying with the provisions of Section 2.04; (c) receipt by the Agent of an opinion (together with any opinions of local counsel relied on therein) of Nexsen Pruet Jacobs & Pollard, LLC, counsel for the Borrower and Guarantors, dated as of the Closing Date, substantially in the form of Exhibit C hereto and covering such additional matters relating to the transactions contemplated hereby as the Agent or any Bank may reasonably request; (d) receipt by the Agent of an opinion of Womble Carlyle Sandridge & Rice, PLLC, special counsel for the Agent, dated as of the Closing Date, substantially in the form of Exhibit D hereto and covering such additional matters relating to the transactions contemplated hereby as the Agent may reasonably request; (e) receipt by the Agent of a certificate (the "Closing Certificate"), dated the date of the first Borrowing, substantially in the form of Exhibit G hereto, signed by a principal financial officer of each Loan Party, to the effect that (i) no Default has occurred and is continuing on the date of the first Borrowing and (ii) the representations and warranties of the Loan Parties contained in Article IV are true on and as of the date of the first Borrowing hereunder; (f) receipt by the Agent of all documents which the Agent or any Bank may reasonably request relating to the existence of each Loan Party, the authority for and the validity of this Agreement, the Notes and the other Loan Documents, and any other matters relevant hereto, all in form and substance satisfactory to the Agent, including without limitation a certificate of incumbency of each Loan Party (the "Officer's Certificate"), signed by the Secretary or an Assistant Secretary of the respective Loan Party, substantially in the form of Exhibit H hereto, certifying as to the names, true signatures and incumbency of the officer or officers of the respective Loan Party, authorized to execute and deliver the Loan Documents, and certified copies of the following items: (i) the Loan Party's Certificate of Incorporation or Articles of Organization, as the case may be, (ii) the Loan Party's Bylaws or Operating Agreement, as the case may be, (iii) a certificate of the Secretary of State of such Loan Party's State of organization as to the good standing of such Loan Party, and (iv) the action taken by the Board of Directors of the Loan Party authorizing the Loan Party's execution, delivery and performance of this Agreement, the Notes and the other Loan Documents to which the Loan Party is a party; (g) receipt by the Agent of a Notice of Borrowing; (h) the Security Agreement shall have been duly executed by the Borrower and Guarantors and shall have been delivered to the Agent and shall be in full force and effect and each document (including each Uniform Commercial Code financing statement) required by law or reasonably requested by the Agent to be filed, registered or recorded in order to create in favor of the Agent for the benefit of the Secured Parties a valid, legal and perfected first-priority security interest in and lien on the Collateral described in the Security Agreement shall have been delivered to the Agent; (i) the Agent shall have received the results of a search of the Uniform Commercial Code filings (or equivalent filings) made with respect to the Borrower and 34 Guarantors in the states (or other jurisdictions) in which the chief executive office of each such person is located, any offices of such persons in which records have been kept relating to Accounts Receivable Collateral and the other jurisdictions in which Uniform Commercial Code filings (or equivalent filings) are to be made pursuant to the preceding paragraph, together with copies of the financing statements (or similar documents) disclosed by such search, and accompanied by evidence satisfactory to the Agent that the Liens indicated in any such financing statement (or similar document) have been released or subordinated to the satisfaction of Agent; (j) receipt by the Agent of a Borrowing Base Certification Report, dated as of the last day of the calendar month immediately preceding the Closing Date; (k) receipt by the Agent and approval by the Banks of the insurance required under this Agreement; (l) receipt by the Agent of a fully executed: (1) IBM Intercreditor Agreement, in form and content satisfactory to the Agent; and (2) Textron Intercreditor Agreement in form and content satisfactory to the Agent; (m) the Intercreditor Agreement duly executed by the Borrower, the Agent, the IR Bank, the Banks and the Issuing Bank; and (n) such other documents or items as the Agent, the Banks or their counsel may reasonably request. SECTION 3.02. Conditions to All Borrowings. The obligation of each ---------------------------- Bank to make an Advance on the occasion of each Borrowing (including, without limitation, the obligation of the Swing Line Lender to make a Swing Line Advance) is subject to the satisfaction of the following conditions: (a) receipt by the Agent of Notice of Borrowing as required by Section 2.02 (or in the case of a Swing Line Advance, compliance with Section 2.15); (b) the fact that, immediately before and after such Borrowing, no Default shall have occurred and be continuing; (c) the fact that the representations and warranties of the Loan Parties contained in Article IV of this Agreement shall be true, on and as of the date of such Borrowing; and (d) the fact that, immediately after such Borrowing (i) the aggregate outstanding principal amount of the Advances of each Bank together with such Bank's Pro Rata Share of the aggregate outstanding principal amount of all Swing Line Advances, Letter of Credit Advances and Undrawn Amounts, will not exceed the amount of its Commitment and (ii) the aggregate outstanding principal amount of the Advances together with the aggregate outstanding principal amount of all Swing Line Advances, Letter of Credit Advances and Undrawn Amounts, will not exceed the lesser of: (A) the aggregate amount of the Commitments of all of the Banks as of such date; and (B) the Borrowing Base. 35 Each Borrowing hereunder shall be deemed to be a representation and warranty by the Loan Parties on the date of such Borrowing as to the truth and accuracy of the facts specified in clauses (b), (c) and (d) of this Section. SECTION 3.03 Conditions to Issuance of Letters of Credit. The ------------------------------------------- issuance by the Issuing Bank of each Letter of Credit shall be subject to satisfaction of the conditions set forth in the related Letter of Credit Agreement and satisfaction of the following conditions: (a) the fact that, immediately before and after the issuance of such Letter of Credit, no Default shall have occurred and be continuing; (b) the fact that the representations and warranties of the Loan Parties contained in Article IV of this Agreement shall be true, on and as of the date of issuance of such Letter of Credit; (c) the fact that, immediately after the issuance of such Letter of Credit: (i) the sum of (A) the entire outstanding principal amount of the Advances, (B) the aggregate outstanding principal amount of the Letter of Credit Advances, (C) the aggregate outstanding principal amount of Swing Line Advances, and (D) the aggregate Undrawn Amounts, will not exceed the lesser of: (1) the aggregate amount of the Commitments of all of the Banks at such time; and (2) the Borrowing Base; (d) the fact that immediately after the issuance of such Letter of Credit the sum of: (i) the aggregate outstanding principal amount of the Letter of Credit Advances, plus (ii) the aggregate Undrawn Amounts, will not exceed $10,000,000; and (e) no Letter of Credit shall have an expiry date or termination date on or after the earlier of: (1) the date twelve months after the date of the issuance of such Letter of Credit; or (2) the date two Domestic Business Days prior to the Termination Date. ARTICLE IV REPRESENTATIONS AND WARRANTIES The Loan Parties represent and warrant that: SECTION 4.01. Existence and Power. Each Loan Party is a corporation ------------------- or limited liability company duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation or organization, as the case may be, is duly qualified to transact business in every jurisdiction where, by the nature of its business, such qualification is necessary, and has all organizational powers and all governmental licenses, authorizations, consents and approvals required to carry on its business as now conducted. SECTION 4.02. Organizational and Governmental Authorization; No ------------------------------------------------- Contravention. The execution, delivery and performance by each Loan Party of ------------- this Agreement, the Notes, the Collateral Documents and the other Loan Documents (i) are within each Loan Party's organizational powers, (ii) have been duly authorized by all necessary organizational action, (iii) require no action by or in respect of, or filing with, any governmental body, agency or 36 official, (iv) do not contravene, or constitute a default under, any provision of applicable law or regulation or of the certificate of incorporation, articles of organization, operating agreement or by-laws of each Loan Party or of any agreement, judgment, injunction, order, decree or other instrument binding upon each Loan Party or any of its Subsidiaries, and (v) do not result in the creation or imposition of any Lien on any asset of the Loan Parties or any of their respective Subsidiaries. SECTION 4.03. Binding Effect. This Agreement constitutes a valid and -------------- binding agreement of the Loan Parties enforceable in accordance with its terms, and the Notes, the Collateral Documents and the other Loan Documents, when executed and delivered in accordance with this Agreement, will constitute valid and binding obligations of the Loan Parties enforceable in accordance with their respective terms, provided that the enforceability hereof and thereof is subject -------- in each case to general principles of equity and to bankruptcy, insolvency and similar laws affecting the enforcement of creditors' rights generally. SECTION 4.04. Financial Information. (a) The consolidated balance --------------------- sheet of the Borrower and its Consolidated Subsidiaries as of June 30, 2000 and the related consolidated statements of income, shareholders' equity and cash flows for the Fiscal Year then ended, reported on by KPMG, LLP, copies of which have been delivered to each of the Banks, and the unaudited consolidated financial statements of the Borrower for the interim period ended March 31, 2001, copies of which have been delivered to each of the Banks, fairly present, in conformity with GAAP, the consolidated financial position of the Borrower and its Consolidated Subsidiaries as of such dates and their consolidated results of operations and cash flows for such periods stated. (b) Since March 31, 2001 there has been no event, act, condition or occurrence having a Material Adverse Effect. SECTION 4.05. Litigation. There is no action, suit or proceeding ---------- pending, or to the knowledge of the Loan Parties threatened, against or affecting the Loan Parties or any of their respective Subsidiaries before any court or arbitrator or any governmental body, agency or official which could have a Material Adverse Effect or which in any manner draws into question the validity or enforceability of, or could impair the ability of the Loan Parties to perform their respective obligations under, this Agreement, the Notes, the Collateral Documents or any of the other Loan Documents. SECTION 4.06. Compliance with ERISA. (a) The Loan Parties and each --------------------- member of the Controlled Group have fulfilled their obligations under the minimum funding standards of ERISA and the Code with respect to each Plan and are in compliance in all material respects with the presently applicable provisions of ERISA and the Code, and have not incurred any liability to the PBGC or a Plan under Title IV of ERISA. (b) Neither the Loan Parties nor any member of the Controlled Group is or ever has been obligated to contribute to any Multiemployer Plan. SECTION 4.07. Taxes. There have been filed on behalf of the Loan ----- Parties and their respective Subsidiaries all Federal, state and local income, excise, property and other tax returns which are required to be filed by them and all taxes due pursuant to such returns or 37 pursuant to any assessment received by or on behalf of the Loan Parties or any Subsidiary have been paid. The charges, accruals and reserves on the books of the Loan Parties and their respective Subsidiaries in respect of taxes or other governmental charges are, in the opinion of the Loan Parties, adequate. United States income tax returns of the Loan Parties and their respective Subsidiaries have been examined and closed through the Fiscal Year ended June 30, 2000. SECTION 4.08. Subsidiaries. Each of the Loan Party's Subsidiaries is ------------ a corporation or limited liability company duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation or organization, as the case may be, is duly qualified to transact business in every jurisdiction where, by the nature of its business, such qualification is necessary, and has all organizational powers and all governmental licenses, authorizations, consents and approvals required to carry on its business as now conducted. No Loan Party has any Subsidiaries except those Subsidiaries listed on Schedule 4.08, which accurately sets forth each such Subsidiary's complete ------------- name and jurisdiction of incorporation. SECTION 4.09. Not an Investment Company. No Loan Party nor any ------------------------- Subsidiary of a Loan Party is an "investment company" within the meaning of the Investment Company Act of 1940, as amended. SECTION 4.10 Public Utility Holding Company Act. No Loan Party nor ---------------------------------- any Subsidiary of a Loan Party is a "holding company", or a "subsidiary company" of a "holding company", or an "affiliate" of a "holding company" or of a "subsidiary company" of a "holding company", as such terms are defined in the Public Utility Holding Company Act of 1935, as amended. SECTION 4.11. Ownership of Property; Liens. Each of the Loan Parties ---------------------------- and their respective Subsidiaries has title to its properties sufficient for the conduct of its business, and none of such property is subject to any Lien except as permitted in Section 5.11. SECTION 4.12. No Default. No Loan Party nor any of their respective ---------- Subsidiaries is in default under or with respect to any agreement, instrument or undertaking to which it is a party or by which it or any of its property is bound which could have or cause a Material Adverse Effect. No Default or Event of Default has occurred and is continuing. SECTION 4.13. Full Disclosure. All information heretofore furnished --------------- by any Loan Party to the Agent or any Bank for purposes of or in connection with this Agreement or any transaction contemplated hereby is, and all such information hereafter furnished by any Loan Party to the Agent or any Bank will be, true, accurate and complete in every material respect or based on reasonable estimates on the date as of which such information is stated or certified. Each Loan Party has disclosed to the Banks in writing any and all facts which could have or cause a Material Adverse Effect. SECTION 4.14. Environmental Matters. (a) No Loan Party nor any --------------------- Subsidiary of a Loan Party is subject to any Environmental Liability and no Loan Party nor any Subsidiary of a Loan Party has been designated as a potentially responsible party under CERCLA. None of the Properties has been identified on any current or proposed (i) National Priorities List under 40 C.F.R. (S)300, (ii) CERCLIS list or (iii) any list arising from a state statute similar to CERCLA. 38 (b) No Hazardous Materials have been or are being used, produced, manufactured, processed, treated, recycled, generated, stored, disposed of, managed or otherwise handled at, or shipped or transported to or from the Properties or are otherwise present at, on, in or under the Properties, or, to the best of the knowledge of the Loan Parties, at or from any adjacent site or facility, except for Hazardous Materials, such as cleaning solvents, pesticides and other materials used, produced, manufactured, processed, treated, recycled, generated, stored, disposed of, and managed or otherwise handled in minimal amounts in the ordinary course of business in compliance with all applicable Environmental Requirements. (c) The Loan Parties, and each of their respective Subsidiaries and Affiliates, has procured all Environmental Authorizations necessary for the conduct of its business, and is in compliance with all Environmental Requirements in connection with the operation of the Properties and the Loan Party's, and each of their respective Subsidiary's and Affiliate's, respective businesses. SECTION 4.15. Compliance with Laws. Each Loan Party and each -------------------- Subsidiary of a Loan Party is in compliance with all applicable laws, including, without limitation, all Environmental Laws. SECTION 4.16. Capital Stock. All Capital Stock, debentures, bonds, ------------- notes and all other securities of each Loan Party and their respective Subsidiaries presently issued and outstanding are validly and properly issued in accordance with all applicable laws, including, but not limited to, the "Blue Sky" laws of all applicable states and the federal securities laws. The issued shares of Capital Stock of the Loan Party's respective Wholly Owned Subsidiaries are owned by the Loan Parties free and clear of any Lien or adverse claim. At least a majority of the issued shares of capital stock of each of the other Subsidiaries of the Loan Parties (other than Wholly Owned Subsidiaries) is owned by the respective Loan Parties free and clear of any Lien or adverse claim. SECTION 4.17. Margin Stock. No Loan Party nor any of their respective ------------ Subsidiaries is engaged principally, or as one of its important activities, in the business of purchasing or carrying any Margin Stock, and no part of the proceeds of any Advance or Swing Line Advance will be used to purchase or carry any Margin Stock or to extend credit to others for the purpose of purchasing or carrying any Margin Stock, or be used for any purpose which violates, or which is inconsistent with, the provisions of Regulation X. SECTION 4.18. Insolvency. After giving effect to the execution and ---------- delivery of the Loan Documents and the making of the Advances and Swing Line Advances under this Agreement, no Loan Party will be "insolvent," within the meaning of such term as defined in ss. 101 of Title 11 of the United States Code or Section 2 of the Uniform Fraudulent Transfer Act, or any other applicable state law pertaining to fraudulent transfers, as each may be amended from time to time, or be unable to pay its debts generally as such debts become due, or have an unreasonably small capital to engage in any business or transaction, whether current or contemplated. SECTION 4.19. Security Documents. (a) Upon execution by the Pledgors, ------------------ the Pledge Agreement shall be effective to create in favor of the Agent, for the ratable benefit of the Secured Parties, a legal, valid and enforceable security interest in the Collateral (as defined in the 39 Pledge Agreement) and, when the Collateral is delivered to the Agent, the Pledge Agreement shall constitute a fully perfected first priority Lien on, and security interest in, all right, title and interest of the Pledgors thereunder in such Collateral and the proceeds thereof, in each case prior and superior in any right to any other Person. (b) The Security Agreement is effective to create in favor of the Agent, for the ratable benefit of the Secured Parties, a legal, valid and enforceable security interest in the Collateral (as defined in the Security Agreement) and, when financing statements in appropriate form are filed in the UCC Recording Office, the Security Agreement shall constitute a fully perfected Lien on, and security interest in, all right, title and interest of the Borrower and Guarantors in such Collateral and the proceeds thereof, in each case prior and superior in right to any other Person. SECTION 4.20. Labor Matters. There are no significant strikes, ------------- lockouts, slowdowns or other labor disputes against any Loan Party or any Subsidiary of any Loan Party pending or, to the knowledge of any Loan Party, threatened. The hours worked by and payment made to employees of the Loan Parties and each Subsidiary of any Loan Party have not been in violation of the Fair Labor Standards Act or any other applicable federal, state or foreign law dealing with such matters. SECTION 4.21. Patents, Trademarks, Etc. To the best of their ------------------------ knowledge, the Loan Parties and each Subsidiary of a Loan Party owns, or is licensed to use, all patents, trademarks, trade names, copyrights, technology, know-how and processes, service marks and rights with respect to the foregoing that are (a) used in or necessary for the conduct of their respective businesses as currently conducted and (b) material to the businesses, assets, operations, properties, prospects or condition (financial or otherwise) of the Loan Parties and their respective Subsidiaries taken as a whole. The use of such patents, trademarks, trade names, copyrights, technology, know-how, processes and rights with respect to the foregoing by the Loan Parties and their respective Subsidiaries, does not infringe on the rights of any Person. Schedule 4.21 sets forth all registered patents, trademarks and copyrights owned by, or licensed to, the Loan Parties. SECTION 4.22. Loans and Investments. No Loan Party nor any of their --------------------- respective Subsidiaries has made a loan, advance or Investment which is outstanding or existing on the Closing Date except as set forth on Schedule 4.22. ARTICLE V COVENANTS The Loan Parties agree, jointly and severally, that, so long as any Bank has any Commitment hereunder or any Letter of Credit is outstanding or any amount payable under any Note or Letter of Credit Advance remains unpaid: SECTION 5.01. Information. The Borrower will deliver to each of the ----------- Banks: (a) as soon as available and in any event within 90 days after the end of each Fiscal Year, a consolidated balance sheet of the Borrower and its Consolidated Subsidiaries as of 40 the end of such Fiscal Year and the related consolidated statements of income, shareholders' equity and cash flows for such Fiscal Year, setting forth in each case in comparative form the figures for the previous fiscal year, all certified by Deloitte & Touche, LLP or other independent public accountants of nationally recognized standing, with such certification to be free of exceptions and qualifications not acceptable to the Required Banks; (b) as soon as available and in any event within 45 days after the end of each of the four Fiscal Quarters of each Fiscal Year, a consolidated balance sheet of the Borrower and its Consolidated Subsidiaries as of the end of such Fiscal Quarter and the related statement of income and statement of cash flows for such Fiscal Quarter and for the portion of the Fiscal Year ended at the end of such Fiscal Quarter, setting forth in each case in comparative form the figures for the corresponding Fiscal Quarter and the corresponding portion of the previous Fiscal Year, all certified (subject to normal year-end adjustments) as to fairness of presentation, GAAP and consistency by the Chief Financial Officer of the Borrower; (c) simultaneously with the delivery of each set of financial statements referred to in clauses (a) and (b) above, a certificate, substantially in the form of Exhibit I (a "Compliance Certificate"), of the Chief Financial Officer of the Borrower (i) setting forth in reasonable detail the calculations required to establish whether the Borrower was in compliance with the requirements of Sections 5.03 through 5.11, inclusive, 5.14, 5.29 and 5.30 on the date of such financial statements, (ii) setting forth in reasonable detail the calculations establishing the identities of the Material Subsidiaries on the date of such financial statements, and (iii) stating whether any Default exists on the date of such certificate and, if any Default then exists, setting forth the details thereof and the action which the Loan Parties are taking or propose to take with respect thereto; (d) simultaneously with the delivery of each set of annual financial statements referred to in clause (a) above, a statement of the firm of independent public accountants which reported on such statements to the effect that nothing has come to their attention to cause them to believe that any Default existed on the date of such financial statements; (e) within 5 Domestic Business Days after the Borrower becomes aware of the occurrence of any Default, a certificate of the Chief Financial Officer of the Borrower setting forth the details thereof and the action which the Borrower is taking or proposes to take with respect thereto; (f) promptly upon the mailing thereof to the shareholders of the Borrower generally, copies of all financial statements, reports and proxy statements so mailed; (g) promptly upon the filing thereof, copies of all registration statements (other than the exhibits thereto and any registration statements on Form S-8 or its equivalent) and annual, quarterly or monthly reports which the Borrower shall have filed with the Securities and Exchange Commission; (h) if and when the Borrower or any member of the Controlled Group (i) gives or is required to give notice to the PBGC of any "reportable event" (as defined in Section 4043 of ERISA) with respect to any Plan which might constitute grounds for a termination of such Plan under Title IV of ERISA, or knows that the plan administrator of any Plan has given or is 41 required to give notice of any such reportable event, a copy of the notice of such reportable event given or required to be given to the PBGC; (ii) receives notice of complete or partial withdrawal liability under Title IV of ERISA, a copy of such notice; or (iii) receives notice from the PBGC under Title IV of ERISA of an intent to terminate or appoint a trustee to administer any Plan, a copy of such notice; (i) promptly after the Borrower knows of the commencement thereof, notice of any litigation, dispute or proceeding involving a claim against a Loan Party and/or any Subsidiary of a Loan Party for $500,000 or more in excess of amounts covered in full by applicable insurance; and (j) as soon as available and in any event by the 10th Domestic Business Day of each Fiscal Quarter, an aging of payables, showing the age of such payables, identifying the Persons who are the creditors for such payables (specifying the amount and age of the payables, owing to each such creditor) and containing such other information and accompanied by such supporting documents as the Agent, in its sole discretion may from time to time prescribe, dated as of the last day of such period the statements in which, in each instance, shall be certified as to truth and accuracy by the Chief Financial Officer or other authorized officer of the Borrower and each Guarantor; (k) as soon as available and in any event by the 10th Domestic Business Day of each Fiscal Quarter, an aging of Receivables, showing the age of such Receivables, identifying the Persons who are the account debtors for such Receivables (specifying the amount and age of the Receivables owing from each such Account Debtor) and containing such other information and accompanied by such supporting documents as the Agent, in its sole discretion may from time to time reasonably prescribe, dated as of the last day of such period the statements in which, in each instance, shall be certified as to truth and accuracy by the Chief Financial Officer or other authorized officer of the Borrower and each Guarantor; (l) as soon as available and in any event by the 10th Domestic Business Day of each succeeding month, a Borrowing Base Certification Report, in form and content reasonably satisfactory to the Agent, dated as of the last day of the immediately preceding month, the statements which, in each instance, shall be certified as to truth and accuracy by the Chief Financial Officer or other authorized officer of the Borrower and each Guarantor; (m) from time to time such additional information regarding the financial position or business of the Borrower and its Subsidiaries as the Agent, at the request of any Bank, may reasonably request. SECTION 5.02. Inspection of Property, Books and Records. The Borrower ----------------------------------------- will (i) keep, and will cause each Subsidiary to keep, proper books of record and account in which full, true and correct entries in conformity with GAAP shall be made of all dealings and transactions in relation to its business and activities; (ii) permit, and will cause each Subsidiary of the Borrower and Guarantors to permit, with reasonable prior notice which notice shall not be required in the case of an emergency, the Agent or its designee, at the expense of the Borrower and Guarantors, to perform periodic field audits and investigations of the Borrower, the Guarantors and the Collateral, from time to time, provided that the field examinations at the Borrower's headquarters in Greenville, South Carolina shall be no less frequent than once each 42 fiscal quarter and the field examinations at the Borrower's distribution and warehouse facility in Memphis, Tennessee shall be no less frequent than once each fiscal year; and (iii) permit, and will cause each Subsidiary to permit, representatives of any Bank at such Bank's expense prior to the occurrence of an Event of Default and at the Borrower's expense after the occurrence of an Event of Default to visit and inspect any of their respective properties, to examine and make abstracts from any of their respective books and records and to discuss their respective affairs, finances and accounts with their respective officers, employees and independent public accountants. The Borrower agrees to cooperate and assist in such visits and inspections, in each case at such reasonable times and as often as may reasonably be desired. SECTION 5.03. Ratio of Adjusted Consolidated Debt to Consolidated --------------------------------------------------- EBITDA. At the end of each Fiscal Quarter, commencing with the Fiscal Quarter ------ ending June 30, 2001, the ratio of Adjusted Consolidated Debt to Consolidated EBITDA for the Fiscal Quarter then ending and the immediately preceding three Fiscal Quarters will not at any time exceed 4.25 to 1.00. SECTION 5.04. Acquisitions. No Loan Party nor any Subsidiary of a ------------ Loan Party shall enter into any agreement, contract, binding commitment or other arrangement providing for any Acquisition, or take any action to solicit the tender of securities or proxies in respect thereof in order to effect any Acquisition, unless (i) the Person to be (or whose assets are to be) acquired does not oppose such Acquisition and the line or lines of business of the Person to be acquired are substantially the same as or related to one or more line or lines of business conducted by the Borrower, (ii) no Default or Event of Default shall have occurred and be continuing either immediately prior to or immediately after giving effect to such Acquisition and the Borrower shall have furnished to the Agent (A) pro forma historical financial statements as of the end of the most recently completed Fiscal Year of the Borrower and most recent interim Fiscal Quarter, if applicable giving effect to such Acquisition and (B) a certificate in the form of Exhibit I prepared on a historical pro forma basis as of the most recent date for which financial statements have been furnished pursuant to Section 5.01 giving effect to such Acquisition, which certificate shall demonstrate that no Default of Event or Default would exist immediately after giving effect thereto, (iii) the Person acquired shall be a Subsidiary, or be merged into the Borrower or a Wholly Owned Subsidiary, immediately upon consummation of the Acquisition (or if assets are being acquired, the acquiror shall be the Borrower or a Subsidiary of the Borrower), and (iv) after giving effect to such Acquisition (excluding the Project Sabre Acquisition and the Pinacor Acquisition): (A) the aggregate Costs of Acquisition incurred by any Loan Party or any Subsidiary of a Loan Party in any single transaction or in a series of related transactions shall not exceed $20,000,000; (B) the aggregate Costs of Acquisition incurred by the Loan Parties and all Subsidiaries of the Loan Parties shall not exceed $30,000,000 in the aggregate; and (3) the aggregate amount (determined by using the face amount or the amount payable at maturity, whichever is greater) of any Debt incurred, assumed or acquired by the Loan Parties and all Subsidiaries of the Loan Parties in connection with any Acquisition, together with the amount of any cash and the fair market value of any other property (excluding property described in clause (i) of the definition of Cost of Acquisition and the unpaid principal amount of any debt instrument) given as consideration in connection with such Acquisition shall not exceed $15,000,000 in the aggregate; provided, however, nothing contained in this Section 5.04 shall be construed to permit any Loan Party or Subsidiary of a Loan Party to issue, assume, create, incur or suffer to exist any Debt except as permitted under Section 5.29. 43 SECTION 5.05. Minimum Consolidated Tangible Net Worth. Consolidated --------------------------------------- Tangible Net Worth will at no time be less than $77,000,000 plus the sum of (i) 50% of the cumulative Reported Net Income of the Borrower and its Consolidated Subsidiaries during any period after March 31, 2001 (taken as one accounting period), calculated quarterly but excluding from such calculations of Reported Net Income for purposes of this clause (i) any quarter in which the Consolidated Net Income of the Borrower and its Consolidated Subsidiaries is negative, and (ii) 100% of the cumulative Net Proceeds of Capital Stock/Conversion of Debt received during any period after March 31, 2001, calculated quarterly. SECTION 5.06. Restricted Payments. The Borrower will not declare or ------------------- make any Restricted Payment during any Fiscal Year. SECTION 5.07. Fixed Charge Coverage. At the end of each Fiscal --------------------- Quarter, commencing with the Fiscal Quarter ending June 30, 2001, the Fixed Charge Coverage Ratio shall not be less than 2.75 to 1.00: SECTION 5.08. Capital Expenditures. Capital Expenditures will not -------------------- exceed in the aggregate in any Fiscal Year the sum of $10,000,000; provided that after giving effect to the incurrence of any Capital Expenditures permitted by this Section, no Default shall have occurred and be continuing (with the effect that amounts not incurred in any Fiscal Year may not be carried forward to a subsequent period). SECTION 5.09. Loans or Advances. No Loan Party nor any Subsidiary of ----------------- a Loan Party shall make loans or advances to any Person except: (i) loans or advances to employees of a Loan Party or an Affiliate of a Loan Party that do not exceed Five Hundred Thousand and No/100 Dollars ($500,000) in the aggregate outstanding made in the ordinary course of business and consistently with practices existing on December 31, 2000; (ii) deposits required by government agencies or public utilities; (iii) loans or advances to the Borrower or any Guarantor that is a Consolidated Subsidiary; (iv) Loans and Advances outstanding on the Closing Date and set forth on Schedule 4-22; and (v) loans or advances not otherwise permitted under this Section 5.09, which when aggregated with the total Investments made under Section 5.10(vii) do not exceed Two Million Five Hundred Thousand Dollars ($2,500,000) in the aggregate outstanding; provided that after giving effect to the making of any loans, advances or deposits permitted by clause (i), (ii), (iii), (iv) or (v) of this Section, no Default shall have occurred and be continuing. SECTION 5.10. Investments. No Loan Party nor any Subsidiary of a Loan ----------- Party shall make Investments in any Person except as permitted by Section 5.09 and except Investments in (i) direct obligations of the United States Government maturing within one year, (ii) certificates of deposit issued by a commercial bank whose credit is satisfactory to the Agent, (iii) commercial paper rated A-1 or the equivalent thereof by Standard & Poor's Corporation or P-1 or the equivalent thereof by Moody's Investors Service, Inc. and in either case maturing within 6 months after the date of acquisition, (iv) tender bonds the payment of the principal of and interest on which is fully supported by a letter of credit issued by a United States bank whose long-term certificates of deposit are rated at least AA or the equivalent thereof by Standard & Poor's Corporation and Aa or the equivalent thereof by Moody's Investors Service, Inc., (v) Investments by the Borrower in a Guarantor that is a Consolidated Subsidiary made in the ordinary course of business and consistently with practices existing on December 31, 2000, (vi) Investments existing on the Closing Date and set forth on Schedule 4.22; and (vii) Investments 44 not otherwise permitted under this Section 5.10, made in the ordinary course of business and consistently with practices existing on December 31, 2000, which when aggregated with the aggregate outstanding loans and advances made under Section 5.09(v) do not exceed $2,500,000. SECTION 5.11. Negative Pledge. No Loan Party nor any Subsidiary of a --------------- Loan Party will create, assume or suffer to exist any Lien on any asset now owned or hereafter acquired by it, except: (a) Liens existing on the date of this Agreement encumbering assets other than Collateral securing Debt outstanding on the date of this Agreement in an aggregate principal amount not exceeding $135,000,000, all of which are set forth on Schedule 5.11; (b) Liens for taxes, assessments or similar charges, incurred in the ordinary course of business that are not yet due and payable or that are being contested in good faith and with due diligence by appropriate proceedings; (c) any Lien on any asset (other than Collateral) securing Debt incurred or assumed for the purpose of financing all or any part of the cost of acquiring such asset and permitted under Section 5.29(c), provided that such -------- Lien attaches to such asset concurrently with the acquisition thereof; (d) pledges or deposits made in the ordinary course of business to secure payment of workers' compensation, or to participate in any fund in connection with workers' compensation, unemployment insurance, old-age pensions or other social security programs; (e) Liens of mechanics, materialmen, warehousemen, carriers or other like liens, securing obligations incurred in the ordinary course of business that are not yet due and payable; (f) good faith pledges or deposits made in the ordinary course of business to secure performance of bids, tenders, contracts (other than for the repayment of borrowed money) or leases, not in excess of twenty percent (20%) of the aggregate amount due thereunder, or to secure statutory obligations, or surety, appeal, indemnity, performance or other similar bonds required in the ordinary course of business; (g) any Lien arising out of the refinancing, extension, renewal or refunding of any Debt secured by any Lien permitted by any of the foregoing clauses of this Section, provided that (i) such Debt is not secured by any additional assets, and (ii) the amount of such Debt secured by any such Lien is not increased; (h) encumbrances consisting of zoning restrictions, easements or other restrictions on the use of real property, none of which materially impairs the use of such property by Borrower in the operation of its business, and none of which is violated in any material respect by existing or proposed restrictions on land use; (i) any Lien on Margin Stock; and 45 (j) Liens securing the Agent and the Banks created or arising under the Loan Documents. Notwithstanding anything contained in this Section 5.11 to the contrary, no Loan Party or any Subsidiary of a Loan Party will create, assume or suffer to exist any Lien on the Collateral. SECTION 5.12. Maintenance of Existence. Each Loan Party shall, and ------------------------ shall cause each Subsidiary of a Loan Party to, maintain its organizational existence and carry on its business in substantially the same manner and in substantially the same fields as such business is now carried on and maintained; provided that: (A) a Subsidiary of a Loan Party may be dissolved with the Agent's prior written consent if: (1) such Subsidiary is not a Loan Party; (2) the total assets of such Subsidiary are less than $50,000; and (3) the total assets of all Subsidiaries dissolved after the Closing Date (excluding Lucent Technologies Business Product Fulfillment Center LLC) are less than $100,000 in the aggregate; and (B) the Borrower may dissolve Lucent Technologies Business Product Fulfillment Center, LLC, on or before December 31, 2001 in accordance with applicable law so long as such dissolution does not otherwise result in a Default or Event of Default. SECTION 5.13. Dissolution. No Loan Party nor any Subsidiary of a Loan ----------- Party shall suffer or permit dissolution or liquidation either in whole or in part or redeem or retire any shares of its own stock or that of any Subsidiary of a Loan Party, except: (1) through corporate reorganization to the extent permitted by Section 5.14; and (2) Restricted Payments permitted by Section 5.06. SECTION 5.14. Consolidations, Mergers and Sales of Assets. No Loan ------------------------------------------- Party will, nor will it permit any Subsidiary of a Loan Party to, consolidate or merge with or into, or sell, lease or otherwise transfer all or any substantial part of its assets to, any other Person, or discontinue or eliminate any business line or segment, provided that (a) a Loan Party may merge with another -------- Person if (i) such Person was organized under the laws of the United States of America or one of its states, (ii) the Loan Party is the corporation surviving such merger, (iii) immediately after giving effect to such merger, no Default shall have occurred and be continuing, and (iv) if the Borrower merges with another Loan Party, the Borrower is the corporation surviving such merger, (b) Subsidiaries of a Loan Party (excluding Loan Parties) may merge with one another, (c) a Loan Party may sell Inventory in the ordinary course of business and for fair value, (d) the Borrower shall be permitted to transfer its ownership interest in 4100 Quest, LLC to ChannelMax, Inc. on or before December 31, 2001; and (e) the foregoing limitation on the sale, lease or other transfer of assets and on the discontinuation or elimination of a business line or segment shall not prohibit a transfer of assets or the discontinuance or elimination of a business line or segment (in a single transaction or in a series of related transactions) unless the aggregate assets to be so transferred or utilized in a business line or segment to be so discontinued, when combined with all other assets transferred (excluding assets transferred under Section 5.14(c)), and all other assets utilized in all other business lines or segments discontinued after the Closing Date constitute more than $2,500,000 in the aggregate. SECTION 5.15. Use of Proceeds. No portion of the proceeds of the Loan --------------- will be used by the Borrower or any Subsidiary (i) in connection with, either directly or indirectly, any tender offer for, or other acquisition of, stock of any corporation with a view towards obtaining control of such other corporation, (ii) directly or indirectly, for the purpose, whether immediate, 46 incidental or ultimate, of purchasing or carrying any Margin Stock, or (iii) for any purpose in violation of any applicable law or regulation. Except as otherwise provided herein, the proceeds of the Loan shall be used for general corporate purposes and working capital. SECTION 5.16. Compliance with Laws; Payment of Taxes. Each Loan Party -------------------------------------- will, and will cause each Subsidiary of a Loan Party and each member of the Controlled Group to, comply with applicable laws (including but not limited to ERISA), regulations and similar requirements of governmental authorities (including but not limited to PBGC), except where the necessity of such compliance is being contested in good faith through appropriate proceedings diligently pursued. Each Loan Party will, and will cause each Subsidiary of a Loan Party to, pay promptly when due all taxes, assessments, governmental charges, claims for labor, supplies, rent and other obligations which, if unpaid, might become a lien against the property of a Loan Party or any Subsidiary of a Loan Party, except liabilities being contested in good faith by appropriate proceedings diligently pursued and against which, if requested by the Agent, the Borrower shall have set up reserves in accordance with GAAP. SECTION 5.17. Insurance. Each Loan Party will maintain, and will --------- cause each Subsidiary of a Loan Party to maintain (either in the name of such Loan Party or in such Subsidiary's own name), with financially sound and reputable insurance companies, insurance on all its Property in at least such amounts and against at least such risks as are usually insured against in the same general area by companies of established repute engaged in the same or similar business. SECTION 5.18. Change in Fiscal Year. Each Loan Party will not change --------------------- its Fiscal Year without the consent of the Required Banks. SECTION 5.19. Maintenance of Property. Each Loan Party shall, and ----------------------- shall cause each Subsidiary of a Loan Party to, maintain all of its properties and assets in good condition, repair and working order, ordinary wear and tear excepted. SECTION 5.20. Environmental Notices. Each Loan Party shall furnish to --------------------- the Banks and the Agent prompt written notice of all Environmental Liabilities, pending, threatened or anticipated Environmental Proceedings, Environmental Notices, Environmental Judgments and Orders, and Environmental Releases at, on, in, under or in any way affecting the Properties or any adjacent property, and all facts, events, or conditions that could lead to any of the foregoing. SECTION 5.21. Environmental Matters. No Loan Party or any Subsidiary --------------------- of a Loan Party will, nor will any Loan Party permit any Third Party to, use, produce, manufacture, process, treat, recycle, generate, store, dispose of, manage at, or otherwise handle or ship or transport to or from the Properties any Hazardous Materials except for Hazardous Materials such as cleaning solvents, pesticides and other similar materials used, produced, manufactured, processed, treated, recycled, generated, stored, disposed, managed or otherwise handled in minimal amounts in the ordinary course of business in compliance with all applicable Environmental Requirements. 47 SECTION 5.22. Collateral. With respect to the Collateral, each ---------- Borrower and Guarantor hereby represents, warrants and covenants to the Agent and each of the Banks as set forth in Section 5.22.1 through 5.22.14, inclusive. 5.22.1 Sale of Collateral. No Borrower or Guarantor will sell, ------------------ lease, exchange, or otherwise dispose of any of the Collateral without the prior written consent of the Agent; provided, however Inventory Collateral may be sold in the ordinary course of business for cash or on open account or on terms of payment ordinarily extended to its customers. Upon the sale, exchange or other disposition of the Inventory Collateral, the security interest and lien created and provided for herein, without break in continuity and without further formality or act, shall continue in and attach to any proceeds thereof, including, without limitation, accounts, contract rights, shipping documents, documents of title, bills of lading, warehouse receipts, dock warrants, dock receipts and cash or non-cash proceeds, and in the event of any unauthorized sale, shall continue in the Inventory Collateral itself. 5.22.2 Accounts. All existing and future Accounts included in the -------- Collateral are or will be bona fide existing obligations created by the sale and delivery of merchandise or the rendering of services to customers and arose or will arise in the ordinary course of business; and that such Accounts are not and will not be subject to defense, set-off or counterclaim which in the aggregate would materially impair the value of such Accounts as collateral for the Obligations (as defined in the Security Agreement). Neither the Borrower nor any Guarantor will, without the Agent's prior written consent, grant any extension of the time of payment of any of the Accounts, compromise, compound or settle the same for less than the full amount thereof, release, wholly or partly, any person liable for the payment thereof or allow any credit or discount whatsoever thereon, other than extensions, credits, discounts, compromises or settlements granted or made in the ordinary course of business or otherwise in accordance with prudent and reasonable business practices. 5.22.3 Good Title; No Existing Encumbrances. The Borrower and ------------------------------------ Guarantors own the Collateral free and clear of any prior Lien, and no financing statements or other evidences of the grant of a security interest respecting the Collateral exist on the public records. 5.22.4 Right to Grant Security Interest; No Further Encumbrances. --------------------------------------------------------- The Borrower and Guarantors have the right to grant a security interest in the Collateral. The Borrower and Guarantors will pay all taxes and other charges against the Collateral (including, without limitation, property, use and sales taxes), and neither the Borrower nor any Guarantor will use the Collateral illegally or allow the Collateral to be encumbered except for the security interest in favor of the Agent granted herein. 5.22.5 Location of Collateral. The Borrower and Guarantors hereby ---------------------- represent and warrant to the Agent and the Banks that, as of the date hereof, the Collateral is situated only at one or more of the Collateral Locations and the Borrower and Guarantors covenant with the Agent not to locate the Collateral at any location other than a Collateral Location without at least 30 days prior written notice to the Agent. The Executive Office of each Loan Party is such Loan Party's chief executive office (if such Loan Party has 48 more than one place of business) or place of business (if such Loan Party has one place of business). In addition, to the extent the Borrower or Guarantors should warehouse any of the Inventory Collateral at any time hereafter, the Borrower and Guarantors acknowledge and agree that such warehousing may be conducted only by warehousemen who have been pre-approved by the Agent and who, in any event, shall issue non-negotiable warehouse receipts in the Agent's name to evidence any such warehousing of goods constituting Inventory Collateral. If the Borrower or Guarantors consign any of the Inventory Collateral, it will comply with the Uniform Commercial Code of any state where such Inventory Collateral is located with respect thereto, and shall file, cause the filing and does hereby authorize the Agent to file in the appropriate public office or offices UCC-1 financing statements showing such Borrower or Guarantor, as the case may be, as consignor and the Agent as assignee of consignor, and will furnish copies thereof to the Agent. If any of the Inventory Collateral or any records concerning the Collateral are at any time to be located on premises leased by the Borrower or a Guarantor or on premises owned by the Borrower or a Guarantor subject to a mortgage or other lien, such Borrower or Guarantor shall so notify the Agent and shall if requested by the Agent obtain and deliver or cause to be delivered to the Agent, prior to delivery of any Inventory Collateral or records concerning the Collateral to said premises, an agreement, in form and substance satisfactory to the Agent, waiving the landlord's or mortgagee's or lienholder's right to enforce any claim against the Borrower or Guarantor, as the case may be, for monies due under the landlord's lien, mortgage or other lien by levy or distraint or other similar proceedings against the Inventory Collateral or records concerning the Collateral and assuring the Agent's ability to have access to the Inventory Collateral and records concerning the Collateral in order to exercise its right hereunder to take possession thereof. 5.22.6 Collateral Status. The Borrowers and Guarantors will promptly ----------------- notify the Agent if there is any adverse change in the status of the Collateral that materially impairs its value or collectibility, or if any defenses, set-offs or counterclaims are asserted by Account Debtors which in the aggregate materially impair the value or collectibility of the Accounts. 5.22.7 Delivery of Certain Collateral. The Borrowers and Guarantors ------------------------------ have delivered all agreements, letters of credit, promissory notes, instruments, certificates of deposit, chattel paper or anything else, the physical possession of which is necessary in order for the Agent, on behalf of the Secured Parties, to perfect or preserve the priority of its security interest therein. 5.22.8 Purchase of Collateral. Neither the Borrower nor any Guarantor ---------------------- has purchased any of the Collateral in a bulk transfer or in a transaction which was outside the ordinary course of the business of the seller to the Borrower or such Guarantor. 5.22.9 Possession of Franchises, Licenses, Etc. The Borrower, the --------------------------------------- Guarantors and the Subsidiaries of the Borrower and Guarantors possess all franchises, certificates, licenses, permits and other authorizations from governmental political subdivisions or regulatory authorities, and all patents, trademarks, service marks, trade names, copyrights, licenses and other rights, free from burdensome restrictions, that are necessary for the 49 ownership, maintenance and operation of any of their respective property and assets, and neither the Borrower, any Guarantor nor any of their respective Subsidiaries are in violation of any term or condition thereof. Schedule 4.21 sets forth an accurate and complete description of all copyrights, patents, trademarks and other intellectual property of the Borrower and Guarantors. 5.22.10 Records Respecting Collateral. The Borrower and Guarantors ----------------------------- shall keep complete and accurate books and records and make all necessary entries thereon to reflect the transactions and facts giving rise to the Collateral and payments, credit and adjustments applicable thereto. All books and records of the Borrower and Guarantors with respect to the Collateral will be kept at the Executive Offices (as they may be changed pursuant to Section 5.22.5) and will not be removed from such address without the prior written consent of the Agent. 5.22.11 Further Assurances. The Borrower and each Guarantor shall duly ------------------ execute and/or deliver (or cause to be duly executed and/or delivered) to the Agent and Secured Parties any instrument, invoice, document, document of title, dock warrant, dock receipt, warehouse receipt, bill of lading, order, financing statement, assignment, waiver, consent or other writing which may be reasonably necessary to the Agent or any Secured Parties to carry out the terms of this Agreement and any of the other Loan Documents and to perfect its security interest in and facilitate the collection of the Collateral, the proceeds thereof, and any other property at any time constituting security to the Secured Parties. The Borrower and each Guarantor shall perform or cause to be performed such acts as the Agent or any Secured Party may request to establish and maintain for the Agent and the Secured Parties a valid and perfected security interest in and security title to the Collateral, free and clear of any Liens other than in favor of the Agent and the Secured Parties. 5.22.12 Maintenance of Insurance. In addition to and cumulative with ------------------------ any other requirements herein imposed on the Borrower and Guarantors with respect to insurance, the Borrower, Guarantors and the Subsidiaries of the Borrower and Guarantors shall maintain insurance with insurance companies satisfactory to the Agent on such of their respective properties and assets, in such amounts and against such risks as is customarily maintained by similar businesses operating in the same vicinity, but in any event to include public liability, worker's compensation, business interruption, malicious mischief, errors and omissions, loss, damage, flood, windstorm, fire, theft, extended coverage and product liability insurance in amounts satisfactory to the Agent, which insurance shall not be cancellable or altered (or the coverage thereunder reduced or restricted) by the Borrower, Guarantor or any Subsidiary of the Borrower and Guarantors, unless with the prior written consent of the Agent, or by the insurer of the Borrower and Guarantors, unless with at least 30 days advance written notice to the Agent thereof. The Borrower and Guarantors shall deliver to the Agent on the Closing Date and at such other times as the Agent may request, a detailed list of such insurance then in effect stating the names of the insurance companies, the amounts and rates of insurance, the date of expiration thereof, the properties and risks covered thereby and the insured with respect thereto, and, within 30 days after notice in writing from the Agent, obtain such additional insurance as the Agent, at the request of the Required Banks, may reasonably request. 50 The Borrower and Guarantors will pay all premiums on the insurance referred to herein as and when they become due and shall do all things necessary to maintain the insurance in effect. The Agent may act as the agent of the Borrower and Guarantors in adjusting or compromising any loss under any such insurance policy and in collecting and receiving the proceeds from any such policy. In the event of any loss under any such policy of insurance, the insurer named therein is hereby authorized and directed by the Borrower and Guarantors to make payment for such loss to the Agent, for the benefit of the Secured Parties, as their interests may appear, rather than to the Borrower and Guarantors and the Agent jointly. If the Borrower or any Guarantor shall default in its obligation hereunder to insure the Collateral in a manner satisfactory to the Agent, then the Agent shall have the right (but not the obligation) to procure such insurance and to charge the costs of same to the Borrower and Guarantors, which costs shall be added to and become a part of the unpaid principal amount of the Obligations (as defined in the Security Agreement), shall bear interest at the Default Rate or the highest contract rate permitted by applicable law whichever is less; such interest shall be payable on demand by the Agent and shall be secured by the Collateral. The proceeds of all such insurance, if any loss should occur, may be applied by the Agent to the payment of the Obligations (as defined in the Security Agreement) or to the replacement of any of the Collateral damaged or destroyed, as the Agent may elect or direct in its sole discretion. The Borrower and each Guarantor hereby appoints (which appointment constitutes a power coupled with an interest and is irrevocable as long as any of the Obligations (as defined in the Security Agreement) remain outstanding) Agent as its lawful attorney-in-fact with full authority to make, adjust, settle claims under and/or cancel such insurance and to endorse the name of the Borrower or any Guarantor on any instruments or drafts issued by or upon any insurance companies. 5.22.13 Change of Chief Executive Office. The Borrower and Guarantors -------------------------------- hereby understand and agree that if, at any time hereafter, the Borrower or Guarantor elects to move its Executive Office, or if the Borrower or Guarantor elects to change its name, identity, any trade name used to identify it in the conduct of its business or in the ownership of its properties, or its structure to other than as existing on the date hereof, the Borrower and Guarantors will notify the Agent in writing at least 30 days prior thereto. 5.22.14 Waivers. With respect to each of the Collateral Locations, the ------- Borrower and Guarantors will obtain such waivers of lien, estoppel certificates or subordination agreements as the Required Banks may reasonably require to insure the priority of its security interest in that portion of the Collateral situated at such locations. 5.22.15 Name and Jurisdiction of Organization. The exact legal name of ------------------------------------- the Borrower and each Guarantor and the state of incorporation or organization for the Borrower and each Guarantor is as set forth below: ScanSource, Inc. South Carolina 4100 Quest, LLC South Carolina Channelmax, Inc. South Carolina SECTION 5.23. Environmental Release. Each Loan Party agrees that upon --------------------- the occurrence of an Environmental Release at or on any of the Properties it will act immediately to 51 investigate the extent of, and to take appropriate remedial action to eliminate, such Environmental Release, whether or not ordered or otherwise directed to do so by any Environmental Authority. SECTION 5.24 Additional Covenants, Etc. In the event that at any time -------------------------- this Agreement is in effect or any Note remains unpaid any Loan Party shall enter into any agreement, guarantee, indenture or other instrument governing, relating to, providing for commitments to advance or guaranteeing any Financing or to amend any terms and conditions applicable to any Financing, which agreement, guarantee, indenture or other instrument includes covenants, warranties, representations, defaults or events of default (or any other type of restriction which would have the practical effect of any of the foregoing, including, without limitation, any "put" or mandatory prepayment of such debt) or other terms or conditions not substantially as, or in addition to those, provided in this Agreement or any other Loan Document, or more favorable to the lender or other counterparty thereunder than those provided in this Agreement or any other Loan Document, the Loan Party shall promptly so notify the Agent and the Banks. Thereupon, if the Agent shall request by written notice to the Loan Party (after a determination has been made by the Required Banks that any of the above referenced documents or instruments contain any provisions which either individually or in the aggregate are more favorable than one of the provisions set forth herein), the Loan Parties, the Agent and the Banks shall enter into an amendment to this Agreement providing for substantially the same such covenants, warranties, representations, defaults or events of default or other terms or conditions as those provided for in such agreement, guarantee, indenture or other instrument, to the extent required and as may be selected by the Agent, such amendment to remain in effect, unless otherwise specified in writing by the Agent, for the entire duration of the stated term to maturity of such Financing (to and including the date to which the same may be extended at the option of the Loan Party), notwithstanding that such Financing might be earlier terminated by prepayment, refinancing, acceleration or otherwise, provided that if any such -------- agreement, guarantee, indenture or other instrument shall be modified, supplemented, amended or restated so as to modify, amend or eliminate from such agreement, guarantee, indenture or other instrument any such covenant, warranty, representation, default or event of default or other term or condition so made a part of this Agreement, then unless required by the Agent pursuant to this Section, such modification, supplement or amendment shall not operate to modify, amend or eliminate such covenant, warranty, representation, default or event of default or other term or condition as so made a part of this Agreement. SECTION 5.25. Transactions with Affiliates. No Loan Party nor any ---------------------------- Subsidiary of a Loan Party shall enter into, or be a party to, any transaction with any Affiliate of a Loan Party or such Subsidiary (which Affiliate is not a Loan Party or a Subsidiary of a Loan Party), except as permitted by law and in the ordinary course of business and pursuant to reasonable terms which are fully disclosed to the Agent and the Banks, consented to in writing by the Required Banks, and are no less favorable to the Loan Party or such Subsidiary than would be obtained in a comparable arm's length transaction with a Person which is not an Affiliate. SECTION 5.26 Material Subsidiaries. (a) The Loan Parties shall cause --------------------- any Person which becomes a Material Subsidiary after the Closing Date to become a party to, and agree to be bound by the terms of, this Agreement and the Security Agreement pursuant to a Joinder Agreement, in the form attached hereto as Exhibit F satisfactory to the Agent in all 52 respects and executed and delivered to the Agent within ten (10) Domestic Business Days after the day on which such Person became a Material Subsidiary. The Borrower shall also cause the items specified in Section 3.01(c), (f), (h), (i) and (n) to be delivered to the Agent concurrently with the instrument referred to above, modified appropriately to refer to such instrument and such Material Subsidiary. (b) The Borrower shall, and shall cause any Subsidiary (the "Pledgor Subsidiary") to, pledge the lesser of 65% or the entire interest owned by the Borrower and such Pledgor Subsidiary, of the shares of Capital Stock or equivalent equity interests in any Person which becomes a Material Foreign Subsidiary after the Closing Date pursuant to a pledge agreement in the form attached hereto as Exhibit K executed and delivered by the Borrower or such Pledgor Subsidiary to the Agent within ten (10) Domestic Business Days after the day on which such Person became a Material Foreign Subsidiary and shall deliver to the Agent such shares of capital stock together with stock powers executed in blank. The Borrower shall also cause the items specified in Section 3.01(c), (f) and (n) to be delivered to the Agent concurrently with the pledge agreement referred to above, modified appropriately to refer to such pledge agreement, Pledgor and such Material Foreign Subsidiary. As used herein, "Material Foreign Subsidiary" means a Foreign Subsidiary which accounts for (or in the case of a recently formed or acquired Foreign Subsidiary would so account for on a pro forma historical basis) at least 2% of Consolidated Net Income or has total assets of at least $100,000. The Borrower and the Guarantors acknowledge and agree that the Agent and Banks may at any one time after the Closing Date request the Borrower to obtain (and the Borrower shall deliver to the Agent within 30 calendar days of such request) a legal opinion in form and content reasonably satisfactory to Agent from counsel licensed in Canada and Mexico confirming that the Pledge Agreement constitutes a valid, enforceable and perfected first priority security interest in and lien upon the Collateral (as defined in the Pledge Agreement) under the applicable laws of Canada and Mexico. (c) Once any Subsidiary becomes a Material Subsidiary and therefore becomes a party to this Agreement in accordance with Section 5.26(a) or any shares of capital stock of a Material Foreign Subsidiary are pledged to the Agent in accordance with Section 5.26(b), such Subsidiary (including, without limitation, all Initial Guarantors) thereafter shall remain a party to this Agreement and the shares of capital stock in such Material Foreign Subsidiary (including, without limitation, all initial Material Foreign Subsidiaries) shall remain subject to the pledge to the Agent, as the case may be, even if: (i) such Material Subsidiary ceases to be a Material Subsidiary; or (ii) such Foreign Subsidiary ceases to be a Material Foreign Subsidiary; provided that if a Material Subsidiary or Material Foreign Subsidiary ceases to be a Subsidiary of the Borrower as a result of the Borrower's transfer or sale of one hundred percent (100%) of the capital stock of such Subsidiary in accordance with and to the extent permitted by the terms of Section 5.14, the Agent and the Banks agree to release such Subsidiary from the Guaranty and release the shares of capital stock of such Subsidiary from the Pledge Agreement. (d) The Borrower and Guarantors acknowledge that ScanSource Properties, LLC is not an Initial Guarantor because the Borrower has advised the Agent and Banks that ScanSource Properties, LLC is party to an agreement that prohibits ScanSource Properties, LLC from being a Guarantor (the "Restrictive Provision"). The Borrower and Guarantors shall immediately notify the Agent if there is any modification, expiration or termination of the 53 Restrictive Provision. The Borrower and Guarantors shall cause ScanSource Properties, LLC to become a party to, and agree to be bound by the terms of, this Agreement and the Security Agreement pursuant to a Joinder Agreement, in the form attached hereto as Exhibit F satisfactory to the Agent in all respects and executed and delivered to the Agent within ten (10) Domestic Business Days after the day on which there is any modification, expiration or termination of the Restrictive Provision which would allow ScanSource Properties, LLC to execute such documentation. The Borrower shall also cause the items specified in Section 3.01(c), (f), (h), (i) and (n) to be delivered to the Agent concurrently with the instruments referred to above, modified appropriately to refer to such instrument and ScanSource Properties, LLC. SECTION 5.27. No Restrictive Agreement. No Loan Party will, nor will ------------------------ any Loan Party permit any of its Subsidiaries to, enter into, after the date of this Agreement, any indenture, agreement, instrument or other arrangement that, directly or indirectly, prohibits or restrains, or has the effect of prohibiting or restraining, or imposes materially adverse conditions upon, any of the following by the Loan Party or any such Subsidiary: the incurrence or payment of Debt, the granting of Liens, the declaration or payment of Restricted Payments or other distributions in respect of Capital Stock of the Loan Party or any Subsidiary, the making of loans, advances or Investments or the sale, assignment, transfer or other disposition of property, real, personal or mixed, tangible. SECTION 5.28. Partnerships and Joint Ventures. No Loan Party shall ------------------------------- become a general partner in any general or limited partnership or joint venture. SECTION 5.29. Additional Debt. No Loan Party or Subsidiary of a Loan --------------- Party shall directly or indirectly issue, assume, create, incur or suffer to exist any Debt or the equivalent (including obligations under Capital Leases), except for: (a) the Debt owed to the Banks, Swing Line Lender and Issuing Bank; (b) the Debt existing and outstanding on the Closing Date described on Schedule 5.29; (c) Debt incurred and owing to Textron Financial Corporation and IBM Credit Corporation for the purpose of financing all or any part of the cost of acquiring inventory from such Person; and (d) Debt not otherwise permitted under this Section 5.29, the aggregate outstanding principal amount of which shall not, at any time, exceed $5,000,000.00. SECTION 5.30. Operating Leases. No Loan Party nor any Subsidiary of a ---------------- Loan Party shall create, assume or suffer to exist any operating lease except operating leases which: (1) are entered into in the ordinary course of business, and (2) the aggregate indebtedness, liabilities and obligations of the Loan Parties under all such operating leases during any period of four (4) consecutive Fiscal Quarters shall at no time exceed $750,000. ARTICLE VI DEFAULTS SECTION 6.01. Events of Default. If one or more of the following ----------------- events ("Events of Default") shall have occurred and be continuing: (a) the Borrower shall fail to pay when due any principal of the Loan (including, without limitation, any Advance or Swing Line Advance) or shall fail to pay any 54 interest on the Loan (including, without limitation, any Advance or Swing Line Advance) within five Domestic Business Days after such interest shall become due, or any Loan Party shall fail to pay any fee or other amount payable hereunder within five Domestic Business Days after such fee or other amount becomes due; or (b) any Loan Party shall fail to observe or perform any covenant contained in Sections 5.02(ii), 5.03 to 5.15, inclusive, or Section 5.18, 5.29 or 5.30; or (c) any Loan Party shall fail to observe or perform any covenant or agreement contained or incorporated by reference in this Agreement (other than those covered by clause (a) or (b) above or clauses (n) or (o) or (p) or (q) or (r) below) for thirty days after the earlier of (i) the first day on which any Loan Party has knowledge of such failure or (ii) written notice thereof has been given to the Borrower by the Agent at the request of any Bank; or (d) any representation, warranty, certification or statement made or deemed made by the Loan Parties in Article IV of this Agreement or in any financial statement, material certificate or other material document delivered pursuant to this Agreement shall prove to have been incorrect or misleading in any material respect when made (or deemed made); or (e) any Loan Party or any Subsidiary of a Loan Party shall fail to make any payment in respect of Debt (other than the Notes) when due or within any applicable grace period; or (f) any event or condition shall occur which results in the acceleration of the maturity of Debt outstanding of any Loan Party or any Subsidiary of a Loan Party or the mandatory prepayment or purchase of such Debt by any Loan Party (or its designee) or such Subsidiary of a Loan Party (or its designee) prior to the scheduled maturity thereof, or enables (or, with the giving of notice or lapse of time or both, would enable) the holders of such Debt or any Person acting on such holders' behalf to accelerate the maturity thereof or require the mandatory prepayment or purchase thereof prior to the scheduled maturity thereof, without regard to whether such holders or other Person shall have exercised or waived their right to do so; or (g) any Loan Party or any Subsidiary of a Loan Party shall commence a voluntary case or other proceeding seeking liquidation, reorganization or other relief with respect to itself or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, or shall consent to any such relief or to the appointment of or taking possession by any such official in an involuntary case or other proceeding commenced against it, or shall make a general assignment for the benefit of creditors, or shall fail generally, or shall admit in writing its inability, to pay its debts as they become due, or shall take any corporate action to authorize any of the foregoing; or (h) an involuntary case or other proceeding shall be commenced against any Loan Party or any Subsidiary of a Loan Party seeking liquidation, reorganization or other relief with respect to it or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, and such involuntary case or other 55 proceeding shall remain undismissed and unstayed for a period of 60 days; or an order for relief shall be entered against any Loan Party or any Subsidiary of a Loan Party under the federal bankruptcy laws as now or hereafter in effect; or (i) any Loan Party or any member of the Controlled Group shall fail to pay when due any material amount which it shall have become liable to pay to the PBGC or to a Plan under Title IV of ERISA; or notice of intent to terminate a Plan or Plans shall be filed under Title IV of ERISA by any Loan Party, any member of the Controlled Group, any plan administrator or any combination of the foregoing; or the PBGC shall institute proceedings under Title IV of ERISA to terminate or to cause a trustee to be appointed to administer any such Plan or Plans or a proceeding shall be instituted by a fiduciary of any such Plan or Plans to enforce Section 515 or 4219(c)(5) of ERISA and such proceeding shall not have been dismissed within 30 days thereafter; or a condition shall exist by reason of which the PBGC would be entitled to obtain a decree adjudicating that any such Plan or Plans must be terminated; or (j) one or more judgments or orders for the payment of money in an aggregate amount in excess of $500,000 shall be rendered against any Loan Party or any Subsidiary of a Loan Party and such judgment or order shall continue unsatisfied and unstayed for a period of 30 days; or (k) a federal tax lien shall be filed against any Loan Party or any Subsidiary of a Loan Party under Section 6323 of the Code or a lien of the PBGC shall be filed against any Loan Party or any Subsidiary of a Loan Party under Section 4068 of ERISA and in either case such lien shall remain undischarged for a period of 25 days after the date of filing; or (l) (i) any Person or two or more Persons acting in concert shall have acquired beneficial ownership (within the meaning of Rule 13d-3 of the Securities and Exchange Commission under the Securities Exchange Act of 1934) of 20% or more of the outstanding shares of the voting stock of the Borrower; or (ii) as of any date a majority of the Board of Directors of the Borrower consists of individuals who were not either (A) directors of the Borrower as of the corresponding date of the previous year, (B) selected or nominated to become directors by the Board of Directors of the Borrower of which a majority consisted of individuals described in clause (A), or (C) selected or nominated to become directors by the Board of Directors of the Borrower of which a majority consisted of individuals described in clause (A) and individuals described in clause (B); or (m) there shall have occurred uninsured damage to, or loss, theft or destruction of, any part of the Collateral; or (n) a default or event of default shall occur and be continuing under any of the Collateral Documents or Letter of Credit Agreements or any Borrower, Pledgor Subsidiary or Guarantor shall fail to observe or perform any obligation to be observed or performed by it under any Collateral Document or Letter of Credit Agreements, and such default, event of default or failure to perform or observe any obligation continues beyond any applicable cure or grace period provided in such Collateral Document or Letter of Credit Agreement; or (o) a default or event of default shall occur and be continuing under the IBM Intercreditor Agreement, or a Loan Party or any Subsidiary of a Loan Party shall fail to observe 56 or perform any obligation to be observed or performed by it under the IBM Intercreditor Agreement, or the IBM Intercreditor Agreement shall be terminated without the prior written consent of the Agent; or (p) a default or event of default shall occur and be continuing under the Textron Intercreditor Agreement, or a Loan Party or any Subsidiary of a Loan Party shall fail to observe or perform any obligation to be observed or performed by it under the Textron Intercreditor Agreement, or the Textron Intercreditor Agreement shall be terminated without the prior written consent of the Agent; or (q) a default or event of default shall occur and be continuing under the IR Agreement or any Loan Party shall fail to observe or perform any obligation to be observed or performed by it under the IR Agreement or the IR Agreement is terminated without the prior written consent of the IR Bank; or (r) (i) any of the Guarantors shall fail to pay when due any Guaranteed Obligations or shall fail to pay any fee or other amount payable hereunder when due; or (ii) any Guarantor shall disaffirm or deny its obligations under Article X; or (s) (i) if the Borrower at any time fails to own (directly or indirectly, through Wholly Owned Subsidiaries) 100% of the outstanding shares of the voting stock (in the case of a corporation ) or membership interests (in the case of a limited liability company) (or equivalent equity interests) of each Subsidiary of the Borrower (other than Channelmax, Inc. and 4100 Quest, LLC); or (ii) if the Borrower at any time fails to own (directly or indirectly through Wholly Owned Subsidiaries) 80% of the outstanding shares of voting stock of Channelmax, Inc. or 80% of the membership interests of 4100 Quest, LLC; or (t) the occurrence of any event, act or condition which the Required Banks determine either does or has a reasonable probability of causing a Material Adverse Effect. then, and in every such event, the Agent shall (i) if requested by the Required Banks, by notice to the Borrower terminate the Commitments and they shall thereupon terminate, (ii) if requested by the Swing Line Lender, by notice to the Borrower terminate the Swing Line facility set forth in Section 2.15, (iii) if requested by the Required Banks, by notice to the Issuing Bank, instruct the Issuing Bank to declare an Event of Default under the Letter of Credit Agreements, and (iv) if requested by the Required Banks, by notice to the Borrower declare the Notes (together with accrued interest thereon) and all other amounts payable hereunder and under the other Loan Documents to be, and the Notes (together with all accrued interest thereon) and all other amounts payable hereunder and under the other Loan Documents shall thereupon become, immediately due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Loan Parties; provided that -------- if any Event of Default specified in clause (g) or (h) above occurs with respect to any Loan Party, without any notice to any Loan Party or any other act by the Agent or the Banks, the Commitments and the Swing Line facility set forth in Section 2.15 shall thereupon automatically terminate and the Notes (together with accrued interest thereon) and all other amounts payable hereunder and under the other Loan Documents shall automatically become immediately due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Loan Parties. Notwithstanding 57 the foregoing, the Agent shall have available to it all other remedies at law or equity, and shall exercise any one or all of them at the request of the Required Banks. Notwithstanding the foregoing, the Agent shall have available to it all rights and remedies provided under the Loan Documents (including, without limitation, the Collateral Documents) and in addition thereto, all other rights and remedies at law or equity, and the Agent shall exercise any one or all of them at the request of the Required Banks. SECTION 6.02. Notice of Default. The Agent shall give notice to the ----------------- Borrower of any Default under Section 6.01(c) promptly upon being requested to do so by any Bank and shall thereupon notify all the Banks thereof. SECTION 6.03 Cash Cover. If any Event of Default shall have occurred ---------- and be continuing, the Borrower shall, if requested by the Agent, pay to the Agent, for the benefit of the Banks an amount in immediately available funds (which funds shall be held as collateral pursuant to arrangements satisfactory to the Agent) equal to the aggregate Undrawn Amounts, provided that, if any Event of Default specified in clause (g) or (h) above occurs, the Borrower shall be obligated to pay such amount to the Agent forthwith without any notice to the Borrower or any other act by the Agent. SECTION 6.04. Allocation of Proceeds. If an Event of Default has ---------------------- occurred and not been waived, and the maturity of the Notes has been accelerated pursuant to Article VI hereof, all payments received by the Agent hereunder, in respect of any principal of or interest on the Obligations or any other amounts payable by the Borrower or any other Loan Party hereunder, shall be applied by the Agent in the following order: (a) the reasonable expenses incurred in connection with retaking, holding, preserving, processing, maintaining or preparing for sale, lease or other disposition of, any Collateral, including reasonable attorney's fees and legal expenses pertaining thereto; (b) amounts due to the Banks, Agent and the Issuing Bank pursuant to Sections 2.7(a), 2.7(b), 2.7(c), 2.7(d) and 9.03(a); (c) payments of interest on Advances, Swing Line Advances and Letter of Credit Advances, to be applied for the ratable benefit of the Banks (with amounts payable in respect of Swing Line Advances being included in such calculation and paid to the Swing Line Lender); (d) payments of principal of Advances, Swing Line Advances and Letter of Credit Advances, to be applied for the ratable benefit of the Banks (with amounts payable in respect of Swing Line Advances being included in such calculation and paid to the Swing Line Lender); (e) payments of cash amounts to the Agent in respect of outstanding Letters of Credit pursuant to Section 6.03; (f) amounts due to the Issuing Bank, the Agent and the Banks pursuant to Sections 7.05 and 9.03(b) and (c); 58 (g) payments of all other amounts due under any of the Loan Documents, if any, to be applied for the ratable benefit of the Secured Parties; (h) any surplus remaining after application as provided for herein, to the Borrower or otherwise as may be required by applicable law. ARTICLE VII THE AGENT SECTION 7.01. Appointment, Powers and Immunities. Each Bank hereby ---------------------------------- irrevocably appoints and authorizes the Agent to act as its agent hereunder and under the other Loan Documents (including, without limitation, the Intercreditor Agreement) with such powers as are specifically delegated to the Agent by the terms hereof and thereof, together with such other powers as are reasonably incidental thereto. The Agent: (a) shall have no duties or responsibilities except as expressly set forth in this Agreement and the other Loan Documents, and shall not by reason of this Agreement or any other Loan Document be a trustee for any Bank; (b) shall not be responsible to the Banks for any recitals, statements, representations or warranties contained in this Agreement or any other Loan Document, or in any certificate or other document referred to or provided for in, or received by any Bank under, this Agreement or any other Loan Document, or for the validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement or any other Loan Document or any other document referred to or provided for herein or therein or for any failure by any Loan Party to perform any of its obligations hereunder or thereunder; (c) shall not be required to initiate or conduct any litigation or collection proceedings hereunder or under any other Loan Document except to the extent requested by the Required Banks, and then only on terms and conditions satisfactory to the Agent, and (d) shall not be responsible for any action taken or omitted to be taken by it hereunder or under any other Loan Document or any other document or instrument referred to or provided for herein or therein or in connection herewith or therewith, except for its own gross negligence or willful misconduct. The Agent may employ agents and attorneys-in-fact and shall not be responsible for the negligence or misconduct of any such agents or attorneys-in-fact selected by it with reasonable care. The provisions of this Article VII are solely for the benefit of the Agent and the Banks, and no Loan Party shall have any rights as a third party beneficiary of any of the provisions hereof. In performing its functions and duties under this Agreement and under the other Loan Documents, the Agent shall act solely as agent of the Banks and does not assume and shall not be deemed to have assumed any obligation towards or relationship of agency or trust with or for the Loan Parties. The duties of the Agent shall be ministerial and administrative in nature, and the Agent shall not have by reason of this Agreement or any other Loan Document a fiduciary relationship in respect of any Bank. SECTION 7.02. Reliance by Agent. The Agent shall be entitled to rely ----------------- upon any certification, notice or other communication (including any thereof by telephone, telefax, telegram or cable) believed by it to be genuine and correct and to have been signed or sent by or on behalf of the proper Person or Persons, and upon advice and statements of legal counsel, independent accountants or other experts selected by the Agent. As to any matters not expressly provided for by this Agreement or any other Loan Document, the Agent shall in all cases be fully 59 protected in acting, or in refraining from acting, hereunder and thereunder in accordance with instructions signed by the Required Banks, and such instructions of the Required Banks in any action taken or failure to act pursuant thereto shall be binding on all of the Banks. SECTION 7.03. Defaults. The Agent shall not be deemed to have -------- knowledge of the occurrence of a Default or an Event of Default (other than the non-payment of principal of or interest on the Loans) unless the Agent has received notice from a Bank or the Borrower specifying such Default or Event of Default and stating that such notice is a "Notice of Default". In the event that the Agent receives such a notice of the occurrence of a Default or an Event of Default, the Agent shall give prompt notice thereof to the Banks. The Agent shall give each Bank prompt notice of each non-payment of principal of or interest on the Loan, whether or not it has received any notice of the occurrence of such non-payment. The Agent shall (subject to Section 9.05) take such action with respect to such Default or Event of Default as shall be directed by the Required Banks, provided that, unless and until the Agent shall have received such directions, the Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Default or Event of Default as it shall deem advisable in the best interests of the Banks. SECTION 7.04. Rights of Agent and its Affiliates as a Bank. With -------------------------------------------- respect to any Advance made and any Letter of Credit issued by BB&T or an Affiliate of BB&T, such Affiliate and BB&T in their capacity as a Bank hereunder shall have the same rights and powers hereunder as any other Bank and may exercise the same as though it were not an Affiliate of BB&T (or in BB&T's case, acting as the Agent), and the term "Bank" or "Banks" shall, unless the context otherwise indicates, include such Affiliate of BB&T or BB&T in its individual capacity. Such Affiliate and BB&T may (without having to account therefor to any Bank) accept deposits from, lend money to and generally engage in any kind of banking, trust or other business with any Loan Party (and any of the Affiliates of any Loan Party) as if they were not an Affiliate of the Agent or the Agent, respectively; and such Affiliate and BB&T may accept fees and other consideration from any Loan Party (in addition to any agency fees and arrangement fees heretofore agreed to between the Borrower and BB&T) for services in connection with this Agreement or any other Loan Document or otherwise without having to account for the same to the Banks. SECTION 7.05. Indemnification. Each Bank severally agrees to indemnify --------------- the Agent, to the extent the Agent shall not have been reimbursed by the Borrower, ratably in accordance with its Commitment, for any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses (including, without limitation, counsel fees and disbursements) or disbursements of any kind and nature whatsoever which may be imposed on, incurred by or asserted against the Agent in any way relating to or arising out of this Agreement or any other Loan Document or any other documents contemplated by or referred to herein or therein or the transactions contemplated hereby or thereby (excluding, unless an Event of Default has occurred and is continuing, the normal administrative costs and expenses incident to the performance of its agency duties hereunder) or the enforcement of any of the terms hereof or thereof or any such other documents; provided, however, that no Bank shall be -------- ------- liable for any of the foregoing to the extent they arise from the gross negligence or willful misconduct of the Agent. If any indemnity furnished to the Agent for any purpose shall, in the opinion of the Agent, be insufficient or become impaired, the Agent may call for additional indemnity and 60 cease, or not commence, to do the acts indemnified against until such additional indemnity is furnished. SECTION 7.06. CONSEQUENTIAL DAMAGES. THE AGENT SHALL NOT BE --------------------- RESPONSIBLE OR LIABLE TO ANY BANK, THE BORROWER OR ANY OTHER PERSON OR ENTITY FOR ANY PUNITIVE, EXEMPLARY OR CONSEQUENTIAL DAMAGES WHICH MAY BE ALLEGED AS A RESULT OF THIS AGREEMENT, THE OTHER LOAN DOCUMENTS, OR ANY OF THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY. SECTION 7.07. Payee of Note Treated as Owner. The Agent may deem and ------------------------------ treat the payee of any Note as the owner thereof for all purposes hereof unless and until a written notice of the assignment or transfer thereof shall have been filed with the Agent and the provisions of Section 9.07(c) have been satisfied. Any requests, authority or consent of any Person who at the time of making such request or giving such authority or consent is the holder of any Note shall be conclusive and binding on any subsequent holder, transferee or assignee of that Note or of any Note or Notes issued in exchange therefor or replacement thereof. SECTION 7.08. Non-Reliance on Agent and Other Banks. Each Bank agrees ------------------------------------- that it has, independently and without reliance on the Agent or any other Bank, and based on such documents and information as it has deemed appropriate, made its own credit analysis of the Loan Parties and decision to enter into this Agreement and that it will, independently and without reliance upon the Agent or any other Bank, and based on such documents and information as it shall deem appropriate at the time, continue to make its own analysis and decisions in taking or not taking action under this Agreement or any of the other Loan Documents. The Agent shall not be required to keep itself (or any Bank) informed as to the performance or observance by the Loan Parties of this Agreement or any of the other Loan Documents or any other document referred to or provided for herein or therein or to inspect the properties or books of the Borrower or any other Person. Except for notices, reports and other documents and information expressly required to be furnished to the Banks by the Agent hereunder or under the other Loan Documents, the Agent shall not have any duty or responsibility to provide any Bank with any credit or other information concerning the affairs, financial condition or business of the Loan Parties or any other Person (or any of their Affiliates) which may come into the possession of the Agent. SECTION 7.09. Failure to Act. Except for action expressly required of -------------- the Agent hereunder or under the other Loan Documents, the Agent shall in all cases be fully justified in failing or refusing to act hereunder and thereunder unless it shall receive further assurances to its satisfaction by the Banks of their indemnification obligations under Section 7.05 against any and all liability and expense which may be incurred by the Agent by reason of taking, continuing to take, or failing to take any such action. SECTION 7.10. Resignation or Removal of Agent. Subject to the ------------------------------- appointment and acceptance of a successor Agent as provided below, the Agent may resign at any time by giving notice thereof to the Banks and the Borrower and the Agent may be removed at any time with or without cause by the Required Banks. Upon any such resignation or removal, the Required Banks shall have the right to appoint a successor Agent. If no successor Agent shall have been so appointed by the Required Banks and shall have accepted such appointment within 61 30 days after the retiring Agent's notice of resignation or the Required Banks' removal of the retiring Agent, then the retiring Agent may, on behalf of the Banks, appoint a successor Agent. Any successor Agent shall be a bank which has a combined capital and surplus of at least $500,000,000. Upon the acceptance of any appointment as Agent hereunder by a successor Agent, such successor Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Agent, and the retiring Agent shall be discharged from its duties and obligations hereunder. After any retiring Agent's resignation or removal hereunder as Agent, the provisions of this Article VII shall continue in effect for its benefit in respect of any actions taken or omitted to be taken by it while it was acting as the Agent hereunder. ARTICLE VIII CHANGE IN CIRCUMSTANCES; COMPENSATION SECTION 8.01. Basis for Determining Interest Rate Inadequate or ------------------------------------------------- Unfair. If on or prior to the first day of any Interest Period: ------ (a) the Agent determines that deposits in Dollars (in the applicable amounts) are not being offered in the relevant market for such Interest Period, or (b) the Required Banks advise the Agent that the London Interbank Offered Rate as determined by the Agent will not adequately and fairly reflect the cost to such Banks of funding the Advances for such Interest Period, the Agent shall forthwith give notice thereof to the Borrower and the Banks, whereupon until the Agent notifies the Borrower that the circumstances giving rise to such suspension no longer exist, the obligations of the Banks to make Euro-Dollar Loans shall be suspended. Unless the Borrower notifies the Agent at least 2 Domestic Business Days before the date of any Borrowing for which a Notice of Borrowing has previously been given that it elects not to borrow on such date, such Borrowing shall instead be made as a Prime Rate Borrowing. SECTION 8.02. Illegality. If, after the date hereof, the adoption of ---------- any applicable law, rule or regulation, or any change in any existing or future law, rule or regulation, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof (any such authority, bank or agency being referred to as an "Authority" and any such event being referred to as a "Change of Law"), or compliance by any Bank (or its Lending Office) with any request or directive (whether or not having the force of law) of any Authority shall make it unlawful or impossible for any Bank (or its Lending Office) to make, maintain or fund its Euro-Dollar Loan and such Bank shall so notify the Agent, the Agent shall forthwith give notice thereof to the other Banks and the Borrower, whereupon until such Bank notifies the Borrower and the Agent that the circumstances giving rise to such suspension no longer exist, the obligation of such Bank to make its portion of the Euro-Dollar Loan shall be suspended. Before giving any notice to the Agent pursuant to this Section, such Bank shall designate a different Lending Office if such designation will avoid the need for giving such notice and will not, in the judgment of such Bank, be otherwise disadvantageous to such Bank. If such Bank shall determine that it may not lawfully continue to maintain and fund any of its portion of the outstanding Euro-Dollar Loan to 62 maturity and shall so specify in such notice, the Borrower shall immediately prepay in full the then outstanding principal amount of the Euro-Dollar Loan of such Bank, together with accrued interest thereon and any amount due such Bank pursuant to Section 8.05(a). Concurrently with prepaying such Euro-Dollar Loan, the Borrower shall borrow a Prime Rate Loan in an equal principal amount from such Bank (on which interest and principal shall be payable contemporaneously with the related Euro-Dollar Loans of the other Banks), and such Bank shall make such a Prime Rate Loan. SECTION 8.03. Increased Cost and Reduced Return. (a) If after the date --------------------------------- hereof, a Change of Law or compliance by any Bank (or its Lending Office) with any request or directive (whether or not having the force of law) of any Authority: (i) shall subject any Bank (or its Lending Office) to any tax, duty or other charge with respect to its Euro-Dollar Loan, its Notes or its obligation to make a Euro-Dollar Loan, or shall change the basis of taxation of payments to any Bank (or its Lending Office) of the principal of or interest on its Euro-Dollar Loan or any other amounts due under this Agreement in respect of its Euro-Dollar Loan or its obligation to make a Euro-Dollar Loan (except for changes in the rate of tax on the overall net income of such Bank or its Lending Office imposed by the jurisdiction in which such Bank's principal executive office or Lending Office is located); or (ii) shall impose, modify or deem applicable any reserve, special deposit or similar requirement (including, without limitation, any such requirement imposed by the Board of Governors of the Federal Reserve System, but excluding any such requirement included in an applicable Euro-Dollar Reserve Percentage) against assets of, deposits with or for the account of, or credit extended by, any Bank (or its Lending Office); or (iii) shall impose on any Bank (or its Lending Office) or on the United States market for certificates of deposit or the London interbank market any other condition affecting its Euro-Dollar Loan, its Notes or its obligation to make a Euro-Dollar Loan; and the result of any of the foregoing is to increase the cost to such Bank (or its Lending Office) of making or maintaining any Euro-Dollar Loan, or to reduce the amount of any sum received or receivable by such Bank (or its Lending Office) under this Agreement or under its Notes with respect thereto, by an amount deemed by such Bank, in its reasonable discretion, to be material, then, within 15 days after demand by such Bank (with a copy to the Agent), the Borrower shall pay to such Bank such additional amount or amounts as will reasonably compensate such Bank for such increased cost or reduction. (b) If any Bank shall have determined that after the date hereof the adoption of any applicable law, rule or regulation regarding capital adequacy, or any change in any existing or future law, rule or regulation, or any change in the interpretation or administration thereof, or compliance by any Bank (or its Lending Office) with any request or directive regarding capital adequacy (whether or not having the force of law) of any Authority, has or would have the effect of reducing the rate of return on such Bank's capital as a consequence of its obligations 63 hereunder to a level below that which such Bank could have achieved but for such adoption, change or compliance (taking into consideration such Bank's policies with respect to capital adequacy) by an amount deemed by such Bank, in its reasonable discretion, to be material, then from time to time, within 15 days after demand by such Bank, the Borrower shall pay to such Bank such additional amount or amounts as will reasonably compensate such Bank for such reduction. (c) Each Bank will promptly notify the Borrower and the Agent of any event of which it has knowledge, occurring after the date hereof, which will entitle such Bank to compensation pursuant to this Section and will designate a different Lending Office if such designation will avoid the need for, or reduce the amount of, such compensation and will not, in the judgment of such Bank, be otherwise disadvantageous to such Bank. A certificate of any Bank claiming compensation under this Section and setting forth the additional amount or amounts to be paid to it hereunder shall be conclusive in the absence of manifest error. In determining such amount, such Bank may use any reasonable averaging and attribution methods. (d) The provisions of this Section 8.03 shall be applicable with respect to any Participant, Assignee or other Transferee, and any calculations required by such provisions shall be made based upon the circumstances of such Participant, Assignee or other Transferee. SECTION 8.04. Prime Rate Loans Substituted for Affected Euro-Dollar ----------------------------------------------------- Loans. If (i) the obligation of any Bank to make or maintain a Euro-Dollar Loan ----- has been suspended pursuant to Section 8.02 or (ii) any Bank has demanded compensation under Section 8.03, and the Borrower shall, by at least 5 Euro-Dollar Business Days' prior notice to such Bank through the Agent, have elected that the provisions of this Section shall apply to such Bank, then, unless and until such Bank notifies the Borrower that the circumstances giving rise to such suspension or demand for compensation no longer apply: (a) all Advances which would otherwise be made by such Bank as part of a Euro-Dollar Loan shall be made instead as a Prime Rate Loan, and (b) after its portion of the Euro-Dollar Loan has been repaid, all payments of principal which would otherwise be applied to repay such Euro-Dollar Loan shall be applied to repay its Prime Rate Loan instead. In the event that the Borrower shall elect that the provisions of this Section shall apply to any Bank, the Borrower shall remain liable for, and shall pay to such Bank as provided herein, all amounts due such Bank under Section 8.03 in respect of the period preceding the date of conversion of such Bank's portion of the Loan resulting from the Borrower's election. SECTION 8.05. Compensation. Upon the request of any Bank, delivered to ------------ the Borrower and the Agent, the Borrower shall pay to such Bank such amount or amounts as shall compensate such Bank for any loss, cost or expense incurred by such Bank as a result of: (a) any payment or prepayment (pursuant to Section 2.09, Section 2.10, Section 8.02 or otherwise) of a Euro-Dollar Loan on a date other than the last day of an Interest Period for such Euro-Dollar Loan; 64 (b) any failure by the Borrower to prepay a Euro-Dollar Loan on the date for such prepayment specified in the relevant notice of prepayment hereunder; or (c) any failure by the Borrower to borrow a Euro-Dollar Loan on the date for the Borrowing specified in the applicable Notice of Borrowing delivered pursuant to Section 2.02. such compensation to include, without limitation, an amount equal to the excess, if any, of (x) the amount of interest which would have accrued on the amount so paid or prepaid or not prepaid or borrowed for the period from the date of such payment, prepayment or failure to prepay or borrow to the last day of the then current Interest Period for such Euro-Dollar Loan (or, in the case of a failure to prepay or borrow, the Interest Period for such Euro-Dollar Loan which would have commenced on the date of such failure to prepay or borrow) at the applicable rate of interest for such Euro-Dollar Loan provided for herein over (y) the amount of interest (as reasonably determined by such Bank) such Bank would have paid on deposits in Dollars of comparable amounts having terms comparable to such period placed with it by leading banks in the London interbank market. ARTICLE IX MISCELLANEOUS SECTION 9.01. Notices. All notices, requests and other communications ------- to any party hereunder shall be in writing (including facsimile transmission or similar writing) and shall be given to such party at its address or telecopy number set forth on the signature pages hereof or such other address or telecopy number as such party may hereafter specify for the purpose by notice to each other party. Each such notice, request or other communication shall be effective (i) if given by telecopier, when such telecopy is transmitted to the telecopy number specified in this Section and the telecopy machine used by the sender provides a written confirmation that such telecopy has been so transmitted or receipt of such telecopy transmission is otherwise confirmed, (ii) if given by mail, 72 hours after such communication is deposited in the mails with first class postage prepaid, addressed as aforesaid, and (iii) if given by any other means, when delivered at the address specified in this Section; provided that -------- notices to the Agent under Article II or Article VIII shall not be effective until received. SECTION 9.02. No Waivers. No failure or delay by the Agent or any Bank ---------- in exercising any right, power or privilege hereunder or under any Note or other Loan Document shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein provided shall be cumulative and not exclusive of any rights or remedies provided by law. SECTION 9.03. Expenses; Documentary Taxes; Indemnification. (a) The -------------------------------------------- Loan Parties shall, jointly and severally, pay (i) all expenses of the Agent, including fees and disbursements of the Agent in connection with any field audits and investigations and fees and disbursements of special counsel for the Agent, in connection with the preparation of this Agreement and the other Loan Documents, any waiver or consent hereunder or thereunder or any amendment hereof or thereof or any Default or alleged Default hereunder or thereunder and (ii) if 65 a Default occurs, all out-of-pocket expenses incurred by the Agent or any Bank, including fees and disbursements of counsel, in connection with such Default and collection and other enforcement proceedings resulting therefrom, including out-of-pocket expenses incurred in enforcing this Agreement and the other Loan Documents. (b) The Loan Parties shall, jointly and severally, indemnify the Agent and each Bank against any transfer taxes, documentary taxes, assessments or charges made by any Authority by reason of the execution and delivery of this Agreement or the other Loan Documents. (c) The Loan Parties shall, jointly and severally, indemnify the Agent, the Banks and each Affiliate thereof and their respective directors, officers, employees and agents from, and hold each of them harmless against, any and all losses, liabilities, claims or damages to which any of them may become subject, insofar as such losses, liabilities, claims or damages arise out of or result from any actual or proposed use by the Borrower of the proceeds of any extension of credit by any Bank hereunder or breach by any Loan Party of this Agreement or any other Loan Document or from investigation, litigation (including, without limitation, any actions taken by the Agent or any of the Banks to enforce this Agreement or any of the other Loan Documents) or other proceeding (including, without limitation, any threatened investigation or proceeding) relating to the foregoing, and the Loan Parties shall reimburse the Agent and each Bank, and each Affiliate thereof and their respective directors, officers, employees and agents, upon demand for any expenses (including, without limitation, legal fees) incurred in connection with any such investigation or proceeding; but excluding any such losses, liabilities, claims, damages or expenses incurred by reason of the gross negligence or willful misconduct of the Person to be indemnified. SECTION 9.04. Setoffs; Sharing of Set-Offs. (a) Each Loan Party hereby ---------------------------- grants to each Bank, as security for the full and punctual payment and performance of the obligations of each Loan Party under this Agreement and the other Loan Documents, a continuing lien on and security interest in all deposits and other sums credited by or due from such Bank to such Loan Party or subject to withdrawal by such Loan Party; and regardless of the adequacy of any collateral or other means of obtaining repayment of such obligations, each Bank may at any time upon or after the occurrence of any Event of Default, and without notice to any Loan Party, set off the whole or any portion or portions of any or all such deposits and other sums against such obligations, whether or not any other Person or Persons could also withdraw money therefrom. (b) Each Bank agrees that if it shall, by exercising any right of set-off or counterclaim or otherwise, receive payment of a proportion of the aggregate amount of principal and interest owing with respect to the Letter of Credit Advances and Notes held by it which is greater than the proportion received by any other Bank in respect of the aggregate amount of all Letter of Credit Advances and principal and interest owing with respect to the Notes held by such other Bank, the Bank receiving such proportionately greater payment shall purchase such participations in the Letter of Credit Advances and Notes held by the other Banks owing to such other Banks, and/or such other adjustments shall be made, as may be required so that all such payments of principal and interest with respect to the Letter of Credit Advances and Notes held by the Banks owing to such other Banks shall be shared by the Banks pro rata; provided -------- that (i) nothing in this Section shall impair the right of any Bank to exercise any right of set-off or 66 counterclaim it may have and to apply the amount subject to such exercise to the payment of indebtedness of the Loan Parties other than its indebtedness under the Letter of Credit Advances and Notes, provided that any such rights of a Bank are subject to the terms and conditions of the Intercreditor Agreement, and (ii) if all or any portion of such payment received by the purchasing Bank is thereafter recovered from such purchasing Bank, such purchase from each other Bank shall be rescinded and such other Bank shall repay to the purchasing Bank the purchase price of such participation to the extent of such recovery together with an amount equal to such other Bank's ratable share (according to the proportion of (x) the amount of such other Bank's required repayment to (y) the total amount so recovered from the purchasing Bank) of any interest or other amount paid or payable by the purchasing Bank in respect of the total amount so recovered. The Loan Parties agree, to the fullest extent they may effectively do so under applicable law, that any holder of a participation in the Letter of Credit Advances or Notes, whether or not acquired pursuant to the foregoing arrangements, may exercise rights of set-off or counterclaim and other rights with respect to such participation as fully as if such holder of a participation were a direct creditor of the Loan Parties in the amount of such participation. SECTION 9.05. Amendments and Waivers. (a) Any provision of this ---------------------- Agreement, the Notes or any other Loan Documents (excluding the Intercreditor Agreement which may be amended as provided therein) may be amended or waived if, but only if, such amendment or waiver is in writing and is signed by the Borrower and the Required Banks (and, if the rights or duties of the Agent are affected thereby, by the Agent); provided that no such amendment or waiver -------- shall, unless signed by all the Banks, (i) change the Commitment of any Bank or subject any Bank to any additional obligation, (ii) change the principal of or decrease the rate of interest on any Advance or decrease any fees (excluding Facing Fees and other fees payable solely to the Issuing Bank for its own account) hereunder, (iii) change the date fixed for any payment of principal of or interest on any Advance or any fees (excluding Facing Fees and other fees payable solely to the Issuing Bank for its own account) hereunder, (iv) change the amount of principal, decrease the amount of interest or decrease the amount of fees (excluding Facing Fees and other fees payable solely to the Issuing Bank for its own account) due on any date fixed for the payment thereof, (v) except as a result of Sections 2.01(b) or (c), change the percentage of the Commitments or of the aggregate unpaid principal amount of the Notes, or the percentage of Banks, which shall be required for the Banks or any of them to take any action under this Section or any other provision of this Agreement, (vi) change the manner of application of any payments made under this Agreement or the other Loan Documents, (vii) release or substitute all or substantially all of the Collateral held as security for the Obligations, (viii) increase the advance rate set forth in the definition of "Borrowing Base", (ix) change or modify the definition of "Required Banks," or (x) release any guaranty (other than a release pursuant to Section 5.26(c)) given to support payment of the Guaranteed Obligations and provided further that: (I) no amendment or waiver shall, unless signed by the Swing Line Lender, (A) modify or amend Section 2.15; or (B) change in any manner, any term or condition applicable to the Swing Line Advances; and (II) no amendment or waiver shall, unless signed by the Issuing Bank, (A) modify or amend Section 2.03; or (B) change in any manner, any term or condition applicable to the Letters of Credit or the Letter of Credit Agreements. The amount of Facing Fees and other fees payable solely to the Issuing Bank for its own account may be amended, from time to time, by the Borrower and the Issuing Bank without the approval of any of the Banks. 67 (b) No Loan Party will solicit, request or negotiate for or with respect to any proposed waiver or amendment of any of the provisions of this Agreement unless each Bank shall be informed thereof by the Borrower and shall be afforded an opportunity of considering the same and shall be supplied by the Borrower with sufficient information to enable it to make an informed decision with respect thereto. Executed or true and correct copies of any waiver or consent effected pursuant to the provisions of this Agreement shall be delivered by the Borrower to each Bank forthwith following the date on which the same shall have been executed and delivered by the requisite percentage of Banks. No Loan Party will, directly or indirectly, pay or cause to be paid any remuneration, whether by way of supplemental or additional interest, fee or otherwise, to any Bank (in its capacity as such) as consideration for or as an inducement to the entering into by such Bank of any waiver or amendment of any of the terms and provisions of this Agreement unless such remuneration is concurrently paid, on the same terms, ratably to all such Banks. SECTION 9.06. Margin Stock Collateral. Each of the Banks represents to ----------------------- the Agent and each of the other Banks that it in good faith is not, directly or indirectly (by negative pledge or otherwise), relying upon any Margin Stock as collateral in the extension or maintenance of the credit provided for in this Agreement. SECTION 9.07. Successors and Assigns. (a) The provisions of this ---------------------- Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns; provided that no Loan Party may assign or otherwise transfer any of its rights under this Agreement. (b) Any Bank, other than a Conduit Lender, may at any time sell to one or more Persons (each a "Participant") participating interests in any Advance owing to such Bank, any Note held by such Bank, any Commitment hereunder or any other interest of such Bank hereunder. In the event of any such sale by a Bank of a participating interest to a Participant, such Bank's obligations under this Agreement shall remain unchanged, such Bank shall remain solely responsible for the performance thereof, such Bank shall remain the holder of any such Note for all purposes under this Agreement, and the Borrower and the Agent shall continue to deal solely and directly with such Bank in connection with such Bank's rights and obligations under this Agreement. In no event shall a Bank that sells a participation be obligated to the Participant to take or refrain from taking any action hereunder except that such Bank may agree that it will not (except as provided below), without the consent of the Participant, agree to (i) the change of any date fixed for the payment of principal of or interest on the related Advance or Advances, (ii) the change of the amount of any principal, interest or fees due on any date fixed for the payment thereof with respect to the related Advance or Advances, (iii) the change of the principal of the related Advance or Advances, (iv) any change in the rate at which either interest is payable thereon or (if the Participant is entitled to any part thereof) any fee is payable hereunder from the rate at which the Participant is entitled to receive interest or any fee (as the case may be) in respect of such participation, (v) the release or substitution of all or any substantial part of the collateral (if any) held as security for the Obligations, or (vi) the release of any guaranty (other than a release pursuant to Section 5.26(c)) given to support payment of the Guaranteed Obligations. Each Bank selling a participating interest in any Advance, Note, Commitment or other interest under this Agreement shall, within 10 Domestic Business Days of such sale, provide the Borrower and the Agent with written notification stating that such sale has 68 occurred and identifying the Participant and the interest purchased by such Participant; provided, that a Bank shall not be required to provide written notification of a participation sold to an Affiliate of a Bank. The Loan Parties agree that each Participant shall be entitled to the benefits of Article VIII with respect to its participation in Loans outstanding from time to time. (c) Any Bank, other than a Conduit Lender, may at any time assign to one or more banks or financial institutions (each an "Assignee") all, or a proportionate part of all, of its rights and obligations under this Agreement, the Notes and the other Loan Documents, and such Assignee shall assume all such rights and obligations, pursuant to an Assignment and Acceptance in the form attached hereto as Exhibit J, executed by such Assignee, such transferor Bank and the Agent (and, in the case of: (i) an Assignee that is not then a Bank or an Affiliate of a Bank; and (ii) an assignment not made during the existence of a Default or an Event of Default, by the Borrower); provided that (i) no interest may be sold by a Bank pursuant to this paragraph (c) unless the Assignee shall agree to assume ratably equivalent portions of the transferor Bank's Commitment, (ii) the amount of the Commitment of the assigning Bank being assigned pursuant to such assignment (determined as of the effective date of the assignment) shall be equal to $5,000,000 (or any larger multiple of $1,000,000) (except that any such assignment may be in the full amount of the assigning Bank's Commitment), (iii) no interest may be sold by a Bank pursuant to this paragraph (c) to any Assignee that is not then a Bank or an Affiliate of a Bank without the consent of the Borrower, which consent shall not be unreasonably withheld, provided that the Borrower's consent shall not be necessary with respect to any assignment made during the existence of a Default or an Event of Default; (iv) a Bank may not have more than two Assignees that are not then Banks at any one time, (v) no interest may be sold by a Bank pursuant to this paragraph (c) to any Assignee that is not then a Bank or an Affiliate of a Bank, without the consent of the Agent, which consent shall not be unreasonably withheld, provided, that although the Agent's consent may not be necessary with respect to an Assignee that is then a Bank or an Affiliate of a Bank, no such assignment shall be effective until the conditions set forth in the following sentence are satisfied; and (vi) no interest may be sold by a Bank to an Assignee that is not a party to the Intercreditor Agreement; and (vii) no interest in a Letter of Credit Commitment may be sold by a Bank pursuant to this paragraph (c) to any Assignee that is not then a Bank or an Affiliate of a Bank, without the consent of the Issuing Bank, which consent may be withheld by the Issuing Bank in its sole and absolute discretion. Upon (A) execution of the Assignment and Acceptance by such transferor Bank, such Assignee, the Agent and (if applicable) the Borrower, (B) delivery of an executed copy of the Assignment and Acceptance to the Borrower and the Agent, (C) payment by such Assignee to such transferor Bank of an amount equal to the purchase price agreed between such transferor Bank and such Assignee, (D) delivery of an executed amendment to the Intercreditor Agreement adding the Assignee as a party thereto, and (E) payment by the assigning Bank of a processing and recordation fee of $3,500 to the Agent if the Assignee is not a Bank or Affiliate of a Bank and $1,000 if the Assignee is a Bank or Affiliate of a Bank, such Assignee shall for all purposes be a Bank party to this Agreement and shall have all the rights and obligations of a Bank under this Agreement to the same extent as if it were an original party hereto with a Commitment as set forth in such instrument of assumption, and the transferor Bank shall be released from its obligations hereunder to a corresponding extent, and no further consent or action by the Borrower, the Banks or the Agent shall be required. Upon the consummation of any transfer to an Assignee pursuant to this paragraph (c), the transferor Bank, the Agent and the Borrower shall make appropriate arrangements so that, if required, a new Note is issued to each of such Assignee and such transferor Bank. 69 Notwithstanding the foregoing, any Conduit Lender may assign at any time to its designating Bank hereunder without the consent of the Borrower or the Agent any or all of the Advances it may have funded hereunder and pursuant to its designation agreement and without regard to the limitations set forth in the first sentence of this subsection 9.07(c). (d) Subject to the provisions of Section 9.08, the Loan Parties authorize each Bank to disclose to any Participant, Assignee or other transferee (each a "Transferee") and any prospective Transferee any and all financial and other information in such Bank's possession concerning the Loan Parties which has been delivered to such Bank by the Loan Parties pursuant to this Agreement or which has been delivered to such Bank by the Loan Parties in connection with such Bank's credit evaluation prior to entering into this Agreement. (e) No Transferee shall be entitled to receive any greater payment under Section 8.03 than the transferor Bank would have been entitled to receive with respect to the rights transferred, unless such transfer is made with the Borrower's prior written consent or by reason of the provisions of Section 8.02 or 8.03 requiring such Bank to designate a different Lending Office under certain circumstances or at a time when the circumstances giving rise to such greater payment did not exist. (f) Anything in this Section 9.07 to the contrary notwithstanding, any Bank may assign and pledge all or any portion of the Loan and/or obligations owing to it to any Federal Reserve Bank or the United States Treasury as collateral security pursuant to Regulation A of the Board of Governors of the Federal Reserve System and Operating Circular issued by such Federal Reserve Bank, provided that any payment in respect of such assigned Loan and/or obligations made by the Borrower to the assigning and/or pledging Bank in accordance with the terms of this Agreement shall satisfy the Borrower's obligations hereunder in respect of such assigned Loan and/or obligations to the extent of such payment. No such assignment shall release the assigning and/or pledging Bank from its obligations hereunder. SECTION 9.08. Confidentiality. Each Bank agrees to exercise its best --------------- efforts to keep any information delivered or made available by the Loan Parties to it which is clearly indicated to be confidential information, confidential from anyone other than persons employed or retained by such Bank who are or are expected to become engaged in evaluating, approving, structuring or administering the Loan; provided, however, that nothing herein shall prevent any -------- ------- Bank from disclosing such information (i) to any other Bank, (ii) upon the order of any court or administrative agency, (iii) upon the request or demand of any regulatory agency or authority having jurisdiction over such Bank, (iv) which has been publicly disclosed, (v) to the extent reasonably required in connection with any litigation to which the Agent, any Bank or their respective Affiliates may be a party, (vi) to the extent reasonably required in connection with the exercise of any remedy hereunder, (vii) to such Bank's legal counsel and independent auditors and (viii) to any actual or proposed Participant, Assignee or other Transferee of all or part of its rights hereunder which has agreed in writing to be bound by the provisions of this Section 9.08. SECTION 9.09. Representation by Banks. Each Bank hereby represents ----------------------- that it is a commercial lender or financial institution which makes loans in the ordinary course of its business and that it will make its Advances hereunder for its own account in the ordinary course of such business; provided, however, -------- ------- that, subject to Section 9.07, the disposition of the Note or Notes held by that Bank shall at all times be within its exclusive control. 70 SECTION 9.10. Obligations Several. The obligations of each Bank ------------------- hereunder are several, and no Bank shall be responsible for the obligations or commitment of any other Bank hereunder. Nothing contained in this Agreement and no action taken by the Banks pursuant hereto shall be deemed to constitute the Banks to be a partnership, an association, a joint venture or any other kind of entity. The amounts payable at any time hereunder to each Bank shall be a separate and independent debt, and subject to the terms of the Intercreditor Agreement, each Bank shall be entitled to protect and enforce its rights arising out of this Agreement or any other Loan Document and it shall not be necessary for any other Bank to be joined as an additional party in any proceeding for such purpose. SECTION 9.11. Survival of Certain Obligations. Sections 8.03(a), ------------------------------- 8.03(b), 8.05 and 9.03, and the obligations of the Loan Parties thereunder, shall survive, and shall continue to be enforceable notwithstanding, the termination of this Agreement, the Swing Line facility described in Section 2.15 and the Commitments and the payment in full of the principal of and interest on all Advances and Swing Line Advances. SECTION 9.12. South Carolina Law. This Agreement and each Note shall ------------------ be construed in accordance with and governed by the law of the State of South Carolina. SECTION 9.13. Severability. In case any one or more of the provisions ------------ contained in this Agreement, the Notes or any of the other Loan Documents should be invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein and therein shall not in any way be affected or impaired thereby and shall be enforced to the greatest extent permitted by law. SECTION 9.14. Interest. In no event shall the amount of interest due -------- or payable hereunder or under the Notes exceed the maximum rate of interest allowed by applicable law, and in the event any such payment is inadvertently made to any Bank by the Borrower or inadvertently received by any Bank, then such excess sum shall be credited as a payment of principal, unless the Borrower shall notify such Bank in writing that it elects to have such excess sum returned forthwith. It is the express intent hereof that the Borrower not pay and the Banks not receive, directly or indirectly in any manner whatsoever, interest in excess of that which may legally be paid by the Borrower under applicable law. SECTION 9.15. Interpretation. No provision of this Agreement or any of -------------- the other Loan Documents shall be construed against or interpreted to the disadvantage of any party hereto by any court or other governmental or judicial authority by reason of such party having or being deemed to have structured or dictated such provision. SECTION 9.16. Consent to Jurisdiction. The Loan Parties (a) and each ----------------------- of the Banks and the Agent irrevocably waives, to the fullest extent permitted by law, any and all right to trial by jury in any legal proceeding arising out of this Agreement, any of the other Loan Documents, or any of the transactions contemplated hereby or thereby, (b) submit to personal jurisdiction in the State of South Carolina, the courts thereof and the United States District Courts sitting therein, for the enforcement of this Agreement, the Notes and the other Loan Documents, (c) waives any and all personal rights under the law of any jurisdiction to object on any basis (including, without limitation, inconvenience of forum) to jurisdiction or venue within the State of South Carolina for the purpose of litigation to enforce this Agreement, the Notes or 71 the other Loan Documents, and (d) agrees that service of process may be made upon it in the manner prescribed in Section 9.01 for the giving of notice to the Borrower. Nothing herein contained, however, shall prevent the Agent from bringing any action or exercising any rights against any security and against the Loan Parties personally, and against any assets of the Loan Parties, within any other state or jurisdiction. SECTION 9.17. Counterparts. This Agreement may be signed in any ------------ number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. SECTION 9.18. Intercreditor Agreement. The Banks, Agent, IR Bank and ----------------------- Issuing Bank have entered into an Intercreditor Agreement dated of even date herewith governing the rights and responsibilities of the Agent to the Banks, IR Bank and Issuing Bank and certain obligations of the Agent. The Borrowers and Guarantors acknowledge and agree that they are not a third-party beneficiary of any provisions of the Intercreditor Agreement and are not entitled to rely thereon or enforce any provisions thereof. The Borrowers and Guarantors also acknowledge that the Intercreditor Agreement may be amended by the Banks, IR Bank and Issuing Bank without notice to or approval by the Borrowers and Guarantors. ARTICLE X GUARANTY SECTION 10.01. Unconditional Guaranty. Each Guarantor hereby ---------------------- irrevocably, unconditionally and jointly and severally guarantees, each as a primary obligor and not merely as a surety, to the Agent, the Issuing Bank and the Banks (including, without limitation, the Swing Line Lender) the due and punctual payment of the principal of and the premium, if any, and interest on the Guaranteed Obligations and any and all other amounts due under or pursuant to the Loan Documents, when and as the same shall become due and payable (whether at stated maturity or by optional or mandatory prepayment or by declaration, redemption or otherwise) in accordance with the terms of the Loan Documents. The Guarantors' guaranty under this Section is an absolute, present and continuing guarantee of payment and not of collectibility, and is in no way conditional or contingent upon any attempt to collect from the Borrower, any of the Guarantors or any other guarantor of the Guaranteed Obligations (or any portion thereof) or upon any other action, occurrence or circumstances whatsoever. In the event that the Borrower or any Guarantor shall fail so to pay any such principal, premium, interest or other amount to the Agent, the Issuing Bank or a Bank, the Guarantors will pay the same forthwith, without demand, presentment, protest or notice of any kind (all of which are waived by the Guarantors to the fullest extent permitted by law), in lawful money of the United States, at the place for payment specified in Loan Documents or specified by such Agent in writing, to such Agent. The Guarantors further agree, promptly after demand, to pay to the Agent, the Issuing Bank and Banks the costs and expenses incurred by such Agent, Issuing Bank or Bank in connection with enforcing the rights of such Agent, Issuing Bank, and Banks against the Borrower and any or all of the Guarantors (whether in a bankruptcy proceeding or otherwise) following any default in payment of any of the Guarantied Obligations or the obligations of the Guarantors hereunder, including, without limitation, the fees and expenses of counsel to the Agent, Issuing Bank and such Banks. 72 SECTION 10.02. Obligations Absolute. The obligations of the Guarantors -------------------- hereunder are and shall be absolute and unconditional, irrespective of the validity, regularity or enforceability of this Agreement, any of the Guaranteed Obligations or any of the Loan Documents, shall not be subject to any counterclaim, set-off, deduction or defense based upon any claim any of the Guarantors may have against the Borrower, any other Guarantor or the Agent, Issuing Bank or any Bank hereunder or otherwise, and shall remain in full force and effect without regard to, and shall not be released, discharged or in any way affected by, to the fullest extent permitted by law, any circumstance or condition whatsoever (whether or not any of the Guarantors shall have any knowledge or notice thereof), including, without limitation: (a) any amendment or modification of or supplement to any of the Loan Documents or any other instrument referred to herein or therein, or any assignment or transfer of any thereof or of any interest therein, or any furnishing or acceptance of additional security for any of the Guaranteed Obligations; (b) any waiver, consent or extension under any Loan Document or any such other instrument, or any indulgence or other action or inaction under or in respect of, or any extensions or renewals of, any Loan Document, any such other instrument or any Guaranteed Obligation; (c) any failure, omission or delay on the part of the Agent to enforce, assert or exercise any right, power or remedy conferred on or available to the Agent, the Issuing Bank or any Bank against the Borrower or any Guarantor, any Subsidiary of the Borrower or any Subsidiary of any Guarantor; (d) any bankruptcy, insolvency, readjustment, composition, liquidation or similar proceeding with respect to the Borrower, any Guarantor, any Subsidiary of the Borrower or any Subsidiary of any Guarantor or any property of the Borrower, any Guarantor or any such Subsidiary or any unavailability of assets against which the Guaranteed Obligations, or any of them, may be enforced; (e) any merger or consolidation of the Borrower, any Subsidiary of the Borrower or any Guarantor or any of the Guarantors into or with any other Person or any sale, lease or transfer of any or all of the assets of any of the Guarantors, the Borrower or any Subsidiary of the Borrower or any Guarantor to any Person; (f) any failure on the part of the Borrower, any Guarantor or any Subsidiary of the Borrower or any Guarantor for any reason to comply with or perform any of the terms of any agreement with any of the Guarantors; (g) any exercise or non-exercise by the Agent, the Issuing Bank or any Bank, of any right, remedy, power or privilege under or in respect of any of the Loan Documents or the Guaranteed Obligations, including, without limitation, under this Section; (h) any default, failure or delay, willful or otherwise, in the performance or payment of any of the Guaranteed Obligations; (i) any furnishing or acceptance of security, or any release, substitution or exchange thereof, for any of the Guaranteed Obligations; 73 (j) any failure to give notice to any of the Guarantors of the occurrence of any breach or violation of, or any event of default or any default under or with respect to, any of the Loan Documents or the Guaranteed Obligations; (k) any partial prepayment, or any assignment or transfer, of any of the Guaranteed Obligations; or (l) any other circumstance (other than indefeasible payment in full) which might otherwise constitute a legal or equitable discharge or defense of a guarantor or which might in any manner or to any extent vary the risk of such Guarantor. The Guarantors covenant that their respective obligations hereunder will not be discharged except by complete performance of the obligations contained in the Loan Documents and this Agreement and the final and indefeasible payment in full of the Guaranteed Obligations. The Guarantors unconditionally waive, to the fullest extent permitted by law (A) notice of any of the matters referred to in this Section, (B) any and all rights which any of the Guarantors may now or hereafter have arising under, and any right to claim a discharge of the Guarantor's obligations hereunder by reason of the failure or refusal by the Agent, the Issuing Bank, or any Bank to take any action pursuant to any statute permitting a Guarantor to request that the Agent or any Bank attempt to collect the Guaranteed Obligations from the Borrower, any of the Guarantors or any other guarantor, (C) all notices which may be required by statute, rule of law or otherwise to preserve any of the rights of the Agent, the Issuing Bank or any Bank against the Guarantors, including, without limitation, presentment to or demand of payment from the Borrower, any of the Subsidiaries of the Borrower or any Guarantor, or any of the other Guarantors with respect to any Loan Document or this agreement, notice of acceptance of the Guarantors' guarantee hereunder and/or notice to the Borrower, any of the Subsidiaries of the Borrower or any Guarantor, or any Guarantor of default or protest for nonpayment or dishonor, (D) any diligence in collection from or protection of or realization upon all or any portion of the Guaranteed Obligations or any security therefor, any liability hereunder, or any party primarily or secondarily liable for all or any portion of the Guaranteed Obligations, and (E) any duty or obligation of the Agent, the Issuing Bank or any Bank to proceed to collect all or any portion of the Guaranteed Obligations from, or to commence an action against, the Borrower, any Guarantor or any other Person, or to resort to any security or to any balance of any deposit account or credit on the books of the Agent, the Issuing Bank or any Bank in favor of the Borrower, any Guarantor or any other Person, despite any notice or request of any of the Guarantors to do so. SECTION 10.03. Continuing Obligations; Reinstatement. The obligations ------------------------------------- of the Guarantors under this Article X are continuing obligations and shall --------- continue in full force and effect until such time as all of the Guaranteed Obligations (and any renewals and extensions thereof) shall have been finally and indefeasibly paid and satisfied in full. The obligations of the Guarantors under this Article X shall continue to be effective or be automatically --------- reinstated, as the case may be, if any payment made by the Borrower, any Guarantor or any Subsidiary of the Borrower or any Guarantor on, under or in respect of any of the Guaranteed Obligations is rescinded or must otherwise be restored or returned by the recipient upon the insolvency, bankruptcy, dissolution, liquidation or reorganization of the Borrower, any Guarantor or any such Subsidiary, or upon or as a result of the appointment of a custodian, receiver, trustee or other 74 officer with similar powers with respect to the Borrower, any Guarantor or any such Subsidiary or any substantial part of the property of the Borrower, any Guarantor or any such Subsidiary, or otherwise, all as though such payment had not been made. If an event permitting the acceleration of all or any portion of the Guaranteed Obligations shall at any time have occurred and be continuing, and such acceleration shall at such time be stayed, enjoined or otherwise prevented for any reason, including without limitation because of the pendency of a case or proceeding relating to the Borrower, any Guarantor or any Subsidiary of the Borrower or any Guarantor under any bankruptcy or insolvency law, for purposes of this Article X and the obligations of the Guarantors hereunder, such Guaranteed Obligations shall be deemed to have been accelerated with the same effect as if such Guaranteed Obligations had been accelerated in accordance with the terms of the applicable Loan Documents or of this Agreement. SECTION 10.04. Additional Security, Etc. The Guarantors authorize the ------------------------ Agent on behalf of the Issuing Bank and Banks without notice to or demand on the Guarantors and without affecting their liability hereunder, from time to time (a) to obtain additional or substitute endorsers or guarantors; (b) to exercise or refrain from exercising any rights against, and grant indulgences to, the Borrower, any Subsidiary of the Borrower or any Guarantor, any other Guarantor or others; and (c) to apply any sums, by whomsoever paid or however realized, to the payment of the principal of, premium, if any, and interest on, and other obligations consisting of, the Guaranteed Obligations. The Guarantors waive any right to require the Agent, the Issuing Bank or any Bank to proceed against any additional or substitute endorsers or guarantors or the Borrower or any of their Subsidiaries or any other Person or to pursue any other remedy available to the Agent, the Issuing Bank or any such Bank. SECTION 10.05. Information Concerning the Borrowers. The Guarantors ------------------------------------ assume all responsibility for being and keeping themselves informed of the financial condition and assets of the Borrower, the other Guarantors and their respective Subsidiaries, and of all other circumstances bearing upon the risk of nonpayment of the Guaranteed Obligations and the nature, scope and extent of the risks which the Guarantors assume and insure hereunder, and agree that neither the Agent, the Issuing Bank nor any Bank shall have any duty to advise the Guarantors of information known to the Agent, the Issuing Bank or any such Bank regarding or in any manner relevant to any of such circumstances or risks. SECTION 10.06. Guarantors' Subordination. The Guarantors hereby ------------------------- absolutely subordinate, both in right of payment and in time of payment, any present and future indebtedness of the Borrower or any Subsidiary of the Borrower or any Guarantor to any or all of the Guarantors to the indebtedness of the Borrower or any such Subsidiary to the Issuing Bank or the Banks (or any of them), provided that the Guarantors may receive scheduled payments of principal, premium (if any) and interest in respect of such present or future indebtedness so long as there is no Event of Default then in existence. SECTION 10.07. Waiver of Subrogation. Notwithstanding anything herein --------------------- to the contrary, the Guarantors hereby waive any right of subrogation (under contract, Section 509 of the Bankruptcy Code or otherwise) or any other right of indemnity, reimbursement or contribution and hereby waive any right to enforce any remedy that the Agent, the Issuing Bank or any Bank now has or may hereafter have against the Borrower, any Guarantor or any endorser or any other guarantor of all or any part of the Guaranteed Obligations, and the Guarantors 75 hereby waive any benefit of, and any right to participate in, any security or collateral given to the Agent, the Issuing Bank or any Bank to secure payment or performance of the Guaranteed Obligations or any other liability of the Borrower to the Agent, the Issuing Bank or any Bank. The waiver contained in this Section shall continue and survive the termination of this Agreement and the final and indefeasible payment in full of the Guaranteed Obligations. SECTION 10.08. Enforcement. In the event that the Guarantors shall ----------- fail forthwith to pay upon demand of the Agent, the Issuing Bank or any Bank any amounts due pursuant to this Article X or to perform or comply with or to cause --------- performance or compliance with any other obligation of the Guarantors under this Agreement, the Agent, the Issuing Bank and any Bank shall be entitled and empowered to institute any action or proceeding at law or in equity for the collection of the sums so due and unpaid or for the performance of or compliance with such terms, and may prosecute any such action or proceeding to judgment or final decree and may enforce such judgment or final decree against the Guarantors and collect in the manner provided by law out of the property of the Guarantors, wherever situated, any monies adjudged or decreed to be payable. The obligations of the Guarantors under this Agreement are continuing obligations and a fresh cause of action shall arise in respect of each default hereunder. SECTION 10.09. Miscellaneous. Except as may otherwise be expressly ------------- agreed upon in writing, the liability of the Guarantors under this Article X shall neither affect nor be affected by any prior or subsequent guaranty by the Guarantors of any other indebtedness to the Agent, the Issuing Bank or the Banks. Notwithstanding anything in this Article X to the contrary, the maximum liability of each Guarantor hereunder shall in no event exceed the maximum amount which could be paid out by such Guarantor without rendering such Guarantor's obligations under this Article X, in whole or in part, void or voidable under applicable law, including, without limitation, (i) the Bankruptcy Code of 1978, as amended, and (ii) any applicable state or federal law relative to fraudulent conveyances. [The remainder of this page intentionally left blank.] 76 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed, under seal, by their respective authorized officers as of the day and year first above written. SCANSOURCE, INC. By: ___________________________________(SEAL) Title: 6 Logue Court, Suite G Greenville, South Carolina 29615 Attention: Jeff Bryson Telecopy number: 864-288-6193 Telephone number: 864-286-4305 4100 QUEST, LLC By: ScanSource, Inc., its sole member By: _______________________________(SEAL) Title: 6 Logue Court, Suite G Greenville, South Carolina 29615 Attention: Jeff Bryson Telecopy number: 864-288-6193 Telephone number: 864-286-4305 CHANNELMAX, INC. By: ___________________________________(SEAL) Title: 6 Logue Court, Suite G Greenville, South Carolina 29615 Attention: Jeff Bryson Telecopy number: 864-288-6193 Telephone number: 864-286-4305 77 COMMITMENTS BRANCH BANKING AND TRUST COMPANY OF ----------- SOUTH CAROLINA, as Agent, Issuing Bank and as a Bank $50,000,000 (Letter of Credit Commitment: $6,250,000) By: __________________________________ (SEAL) Title: Lending Office -------------- Branch Banking and Trust Company of South Carolina P. O. Box 408 301 North Main Street (29602) Greenville, South Carolina 29602-0408 Attention: Harry Jeffcoat Telecopy number: (864) 282-3319 Telephone number: (864) 282-3314 with a copy to Christopher E. Leon, Esq. Womble Carlyle Sandridge & Rice, PLLC P.O. Drawer 84 200 West Second Street (27101) Winston-Salem, North Carolina 27102 Telecopy: (336) 726-6932 Telephone: (336) 721-3518 78 $10,000,000 FIFTH THIRD BANK (Letter of Credit Commitment: $1,250,000) By: ___________________________ (SEAL) Title: Lending Office -------------- Fifth Third Bank 38 Fountain Square Plaza MD10904K Cincinnati, Ohio 45263 Attention: Jennifer E. Schwartz Telecopy number: (513) 744-5845 Telephone number: (513) 744-7167 79 $10,000,000 FIRST TENNESSEE BANK NATIONAL ASSOCIATION (Letter of Credit Commitment: $1,250,000) By: ______________________________ (SEAL) Title: Lending Office -------------- First Tennessee Bank National Association Metropolitan Division 165 Madison Avenue, 10th Floor P. O. Box 84 (38101) Memphis, Tennessee 38103 Attention: Phillip E. Stevenson Telecopy number: (901) 523-4235 Telephone number: (901) 523-4245 80 $10,000,000 HIBERNIA NATIONAL BANK (Letter of Credit Commitment: $1,250,000) By: ___________________________ (SEAL) Title: Lending Office -------------- Hibernia National Bank U.S. Corporate Division 313 Carondelet Street, 12th Floor New Orleans, Louisiana 70130 Attention: Matthew H. Breaux Telecopy number: (504) 533-5344 Telephone number: (504) 533-3909 TOTAL COMMITMENTS: $80,000,000.00 81 EX-10.44 5 dex1044.txt EMPLOYMENT AGREEMENT Exhibit 10.44 ------------- December 7, 2000 Mr. Michael L. Baur ScanSource, Inc. 6 Logue Ct. Greenville, SC 29615 Dear Mike: This letter will amend the Employment Agreement between you and ScanSource, Inc. dated July 1, 1999 to reflect the change in your Base Salary from $125,000 to $175,000 per year. Effective January 1, 2001, Paragraph 3.A. of the Agreement titled "Base Salary", is hereby amended to read as follows: 3. Compensation. As compensation for the services to be rendered by ------------ Employee for Employer under this Agreement, Employee shall be compensated on the following basis: A. Base Salary. An annual Base Salary of One Hundred ----------- Seventy-five Thousand and No/100 ($175,000.00) Dollars, plus any raises or other compensation approved by the Board of Directors of Employer, payable in pay periods as determined by Employer, but in no event less frequently than monthly. Except as herein expressly modified and amended, the terms and conditions of the Agreement shall continue in full force and effect without change. Please signify your agreement to this amendment by signing below. For ScanSource: Agreed to by Michael L. Baur: -------------------------- ---------------------------------- Signature Signature -------------------------- Name and Title EX-13 6 dex13.txt ANNUAL REPORT TO SHAREHOLDERS Exhibit 13 ---------- 2001 ANNUAL REPORT empowerment (em*pow'*er*ment) n. an energizing force that enables others to succeed [LOGO] ScanSource We're on a mission. The mission is a simple one, and it's the same one that we made the founding principle of our company back in 1992. The mission is empowerment. At ScanSource, Inc. we're committed to empowering our technology solution provider customers to achieve new levels of success in specialty technology markets like automatic data collection (ADC), point-of-sale (POS) and voice, data and converged communications through programs and services that are second to none. We're committed to empowering our vendor partners by expanding the indirect sales channel to reach a greater number of customers on their behalf and by getting their products to market more efficiently. We're committed to empowering our shareholders by always working diligently to strengthen shareholder value. We're committed to empowering our employees by providing them with unlimited opportunities to build lasting, successful careers. And it is that commitment to empowerment that defines us, that drives us, that makes us who we are. As the leading international value-added distributor of specialty technology products like automatic data collection, point-of-sale and converged communications, ScanSource, Inc. offers over 18,000 products from more than 50 of the industry's best-of-breed manufacturers. It's no secret that automatic data collection, point-of-sale and voice, data and converged communications technologies are some of the technology industry's fastest growing. These revolutionary products are helping companies around the globe become more efficient and more productive, which ultimately drives down the overall cost of doing business. And because these innovations offer profitable new opportunities for solution providers, it is our focused and single-minded goal to empower them to enter and thrive in these markets. The company includes two sales units - ScanSource and Catalyst Telecom - as well as an independently managed business unit, ChannelMax. The ScanSource sales unit provides ADC and POS products such as bar code scanners and thermal bar code printers, mobile data collection terminals, wireless 802.11 networks, computer-based point-of-sale terminals, receipt printers, cash drawers, keyboards and related peripherals. The Catalyst Telecom sales unit offers voice, data and converged communications products like key, hybrid and PBX phone systems, voicemail, fax-on-demand, interactive voice response, unified messaging, videoconferencing and other solutions. ChannelMax is an independently managed business unit that provides logistics and fulfillment services to specialty technology manufacturers from its 240,000-square-foot distribution center in Memphis, Tennessee. ChannelMax's web-based logistics solution is designed to improve delivery lead-times and order fill-rates for manufacturers while allowing them to focus less on filling orders and more on developing new technology and products. Further, it also offers solution providers the opportunity to become e-enabled for the future through Black Arrow. This offering creates customized web storefronts specifically designed for solution providers of specialty technology, allowing them to quickly and inexpensively offer online ordering to their end user customers, as well as conduct web-based marketing and more. [GRAPHIC of building appears here] ScanSource's headquarters and principal sales office is located in Greenville, South Carolina. The company also has satellite sales offices in Georgia, California, Washington, New Jersey, New York, Arizona, Canada and Mexico, each serviced by a state-of-the-art, 240,000-square-foot distribution center that is centrally located in Memphis, Tennessee. At ScanSource and Catalyst Telecom, there's one mission: empowerment. And no matter what happens in the years ahead, that mission will remain at the core of who we are. [GRAPHIC of man at computer appears here] ScanSource's Custom Solution Configuration Team is located in a 25,000-square-foot, state-of-the-art facility housed inside our Memphis distribution center. [GRAPHIC of man in in front of group appears here] The Education Opportunities program provides ScanSource and Catalyst Telecom customers with the training they need to succeed in an ever-changing marketplace. Empowering Solution Providers We're dedicated to making it easy for our customers to succeed and prosper in the fast-growing specialty technology markets. In fact, our commitment to empowering solution providers is what drives us to always seek new ways to help our customers achieve growth and profitability. We call it esp. While we can't predict the future, our commitment to esp means we'll work to anticipate our customers' needs and develop world-class solutions to meet them. By taking advantage of our empowering resources and tools, our customers have more time to focus on what they do best - closing sales and building business. Our complete lineup of empowerment tools includes: Online Configuration Tools Our convenient, Web-based "configurators" for scanners, POS, wireless, mobile computing, printers and networking help solution providers build complete systems quickly, allowing them to spend more time building business and closing deals. Best of all, these tools are available 24/7. Custom Solution Configuration ScanSource and Catalyst Telecom's Custom Solution Configuration Team provides assistance with product staging, operating system loading, custom software loading and configuration, final assembly and integration, testing and burning-in, complete rollout services and more. Our 25,000-square-foot, ISO 9002-certified solution configuration facility is staffed by manufacturer-trained technicians and is strategically located inside ScanSource's Memphis distribution center to allow for speed and efficiency in shipping the total solutions requested by our customers. [GRAPHIC of esp logo appears here] Online Ordering Our complete catalog of more than 16,000 products from more than 50 top manufacturers is available 24/7. Our online ordering system also allows solution providers to check the real-time availability of our entire product inventory, see customer-specific pricing, track their shipments and more. Education Opportunities Our Education Opportunities program offers a complete curriculum of business-, technology- and human resources-related training designed specifically for specialty technology solution providers and offered via on-site learning, webinars, and self-paced programs. Our Empowerment Expo educational road show series makes stops in 12 major cities each year and is designed to recruit new solution providers to the industry and to build valuable relationships with our vendor partners and customers. Lead Generation Tools ScanSource and Catalyst Telecom's Lead Generation Tools offer customized direct mail pieces, custom catalogs, fax flyers, telemarketing, e-mail blasts, press releases, specialty items, event planning services and other marketing materials to help solution providers spread the word about their solutions and services. Web Storefront Solutions Through our partnership with Black Arrow, we provide e-commerce storefronts specifically designed for specialty technology solution providers, allowing them to sell the complete ScanSource/Catalyst Telecom catalog, as well as their company's software, services and more, over the Internet. These custom storefronts can be created in just a few days and complement the look and feel of the solution provider's existing website. Power PartnersTM ScanSource's Power PartnersTM program offers a higher level of service and support to qualifying solution providers, including an "Instant Access" technical support 800 number, flexible return policies, inclusion in our nationwide leads program, special product pricing, discounts on our empowerment tools and more. [GRAPHIC of Black Arrow Screenshot appears here] ScanSource's partnership with Black Arrow allows us to provide our customers with web storefront solutions that make it easy for them to create a convenient online sales channel. partnership- (pa'art*ner*ship) the act of two or more entities aligning their respective forces to more efficiently achieve success partnership [LOGOS of multiple companies appear here] The people behind the power. [GRAPHIC of Distribution Center appears here] The ScanSource Distribution Center is staffed by more than 150 professionals who work to ensure that we make good on our promise of delivering high-quality technology solutions quickly. teamwork-(teem*werk) an interdependent passion and trust that allows groups of people to efficiently reach a common goal ScanSource has consistently enjoyed strong growth since its inception in 1992. There are a number of factors that have contributed to that track record of success, but one of the most important is our dynamic, motivated team of employees. From the very beginning, we've made it a priority to encourage independence and decision-making among all of our employees. And our commitment to fostering an atmosphere of creativity, possibility, imagination and opportunity has resulted in a vibrant corporate culture that is uniquely our own. Newcomers to ScanSource and Catalyst Telecom are often impressed not just by the entrepreneurial, energetic atmosphere here, but also by how important the concept of teamwork is to our company. Indeed, our employees relish the challenge of leadership while working within a team. The departments within our company don't just work together - they depend on each other, forming powerful partnerships that are dedicated to success. The bottom-line? All of our relationships are built on trust. Our employees believe in one another, which inspires our customers, vendor partners and shareholders to place their trust in us. We wouldn't have it any other way. [GRAPHIC of man on telephone appears here] Our Business Development Specialists are committed to assisting solution providers in identifying new sales opportunities, closing deals and working more closely with our manufacturer partners. [GRAPHIC of woman at desk appears here] The Credit Department is made up of a dedicated team whose mission is to help our customers access the resources they need to conduct business efficiently. The strength of those relationships has been the driving force behind a large part of our success -- success that has regularly led to national recognition for our company. ScanSource was named one of the nation's 100 "Hot Growth Companies" by BusinessWeek magazine in June 2001, and was for the second consecutive year listed on that magazine's "InfoTech 200" list of the country's leading technology companies. In August 2001, ScanSource was named to Fortune's "100 Fastest Growing Companies in America" list, also for the second year in a row. In recent years, the company has also been included on similar rankings from Forbes and Deloitte & Touche. And we have consistently been awarded "Distributor of the Year" honors from the leading manufacturers in our industry. Through it all, the one constant has been our dedicated team of people - the people behind the power. [GRAPHIC of women and children appears here] The ScanSource Charitable Foundation is governed entirely by ScanSource, Inc. employees and is designed to apply donations of time and resources directly to local families and schools in need. [GRAPHIC of two women in Customer Service Department appear here] When our customers need assistance on a variety of questions and challenges, ScanSource's Customer Service Department stands ready to serve them. We've built a reputation for attracting enthusiastic, out-of-the-box thinkers to our company. And while it is precisely that brand of thinking that has helped us surge ahead, our employees also find time to devote their creative energies to more than just business. The ScanSource Charitable Foundation is operated entirely by ScanSource, Catalyst Telecom and ChannelMax employees and is funded solely by employees, our vendor partners and the company. Throughout the year, the Foundation works to assist local families and schools in need through donations of both financial aid and of time, labor and resources. At ScanSource and Catalyst Telecom, our growth has been founded upon a belief system, a shared vision and a relentless dedication to our core values: o We believe in honesty and integrity in everything we do o We believe each employee's opinion counts and deserves respect o We highly value our customers and vendors and are committed to meeting their needs quickly and fairly o We protect our company resources to benefit those who depend on us, such as our employees and shareholders o We encourage innovation and creativity from every employee, in every department o We are committed to helping those less fortunate in our communities by giving our time, talents and resources To Our Shareholders: "The past year was one of the most significant in the history of our company." [PHOTO of Mike Baur] Mike Baur President and Chief Executive Officer The past year was one of the most significant in the history of our company. While changing economic forces posed new challenges for companies large and small, ScanSource, Inc. once again demonstrated the brand of steady, consistent growth that our shareholders, vendor partners and others have come to expect from us. Our determined, focused commitment to empowering our solution provider customers and vendor partners for new success in the specialty technology marketplace - and our continued dedication to strengthening shareholder value - led us to seek out new and exciting opportunities for growth, and resulted in another strong year for ScanSource and Catalyst Telecom. In Fiscal Year 2001, we recorded large gains in sales for the ninth consecutive year, earning $631 million in revenue as compared to $497 million for the year ended on June 30, 2000. Further, net income rose 20 percent to $16.5 million as compared to $13.8 million for the previous year. And earnings per share increased 16 percent to $2.69 per share, moving up from $2.31 per share in Fiscal Year 2000. We vigorously pursued new customers, new markets and new avenues for growth in 2001. ScanSource acquired Positive ID Wholesale, a leading distributor of automatic data collection (ADC) and point-of-sale (POS) equipment. This move, finalized in July, further entrenched our ScanSource sales unit as the largest and strongest distributor of its kind in North America, and provided us with new opportunities to expand our sales to more customers. The acquisition also resulted in the addition of experienced employees in sales, technical support and professional services to our team, deepening our talent pool and strengthening the resources we provide to our customers. Of further significance, ScanSource signed a distribution agreement with NCR, giving us a partnership with a world leader in point-of-sale solutions and adding one of the most recognizable brands in the industry to our product lineup. In addition to broadening our product line, the agreement also exposed our company to a number of new customers and reinforced our position as the market's source for the highest quality POS and ADC equipment. We look forward to a prosperous relationship with NCR and to the continued success of longstanding partnerships with manufacturers such as Symbol Technologies, IBM Retail Solutions, Zebra Technologies and Intermec Technologies. In May, ScanSource, Inc. purchased the voice, data and converged communications unit of distributor Pinacor and merged it with our telephony sales unit, Catalyst Telecom. The addition expanded the Catalyst Telecom sales team and enhanced our efforts to further build upon our sales growth in the voice and data marketplace with Avaya. Indeed, the Catalyst sales unit continued to experience robust growth in this market throughout the past year, a fact that is evidenced by our selection as the sole distributor of Intel's groundbreaking new Converged Communications Platform - a standards-based, application-ready platform that allows solution providers to consolidate many communication applications from multiple vendors onto a single system. Our ChannelMax business unit turned in a solid performance during the past year, offering an end-to-end Web-based inventory and distribution service for manufacturers and solution providers that is built to drive costs out of the supply chain and bring new efficiency to the channel. Of particular note, ChannelMax formed an agreement to begin providing logistics and e-fulfillment services for Expanets, the nation's largest mid-market networked communications solution provider, which added to the services it already provides for leading technology manufacturers. We brought a renewed focus and energy to our mission of empowering solution providers in 2001 by expanding the complete lineup of tools and services we provide to customers. We call this offering of tools esp, and it's how we empower our customers to succeed and thrive in the specialty technology marketplace. Over the past few months, we have enhanced such services as our Online Configuration and Lead Generation Tools, making it easier for solution providers to build complete systems on the Internet and to access marketing services that can help them reach new customers. Our Education Opportunities program offers technology- and business-related training that is designed exclusively to meet the needs of our customer base and to help them prepare for the challenges of the future. And our Web Storefront Solutions allow solution providers to quickly develop cost-efficient web storefronts, where they can offer the entire ScanSource/Catalyst Telecom product lineup online. We also offer Custom System Integration, Online Ordering, the Power Partners program and much more in our ongoing effort to empower solution providers for growth. On a similar note, ScanSource and Catalyst Telecom each debuted powerful new Web sites this year that include added functionality and a variety of new features. The sites serve as our headquarters on the World Wide Web and are designed to provide new convenience to our customers, making it easier than ever for them to efficiently get the information they need about anything relating to the technology we offer. We also organized a Solutions Engineering Team using resources from our Wireless Business Development Team and our Professional Services Group. This team of business and technical experts provide assistance and support on a variety of technology opportunities for our customers, helping solution providers identify new opportunities and expand their sales to include other types of technology. As in recent years, our continued growth has drawn national attention. Our stock was recently named to the reconstituted Russell 2000 Index - one of the most widely recognized stock indices for small-cap companies. The ranking is based solely on market capitalization and is used by the financial community as a benchmark for investment consideration. ScanSource was also named one of the nation's "100 Hot Growth Companies" by BusinessWeek magazine based on sales and earnings growth and other factors, as well as to that magazine's "InfoTech 100" ranking of the country's top performers in the information technology sector. The BusinessWeek listings follow the similar recognition our company has received in recent years from Fortune, Forbes, Deloitte&Touche and others. As we look to the future, we do so with an eye toward efficiently delivering these innovative products and solutions to customers throughout the world. We recently opened a sales office for our ADC and POS business in Mexico City and have already begun an aggressive effort to attract customers there while continuing to utilize our existing, state-of-the-art 240,000-square-foot Memphis distribution center to quickly fulfill customer orders in Mexico. Further, we are developing strategic plans with the support of our key vendors to expand our business across Latin America and Europe during 2002. While economic conditions may come and go, one thing that will never change is our steadfast commitment to empowering our solution provider customers and vendor partners, and to strengthening shareholder value. That is the mission that defines us, and it is that banner that we will carry into the future. These are truly exciting times for ScanSource, Inc. I hope you'll join me in looking forward to the years ahead with excitement and anticipation. Sincerely, /s/ Mike L. Baur vision-(vizh'*en) 1. ability to vividly perceive way to future success 2. keen insight [CHART appears here] Earnings per Share 1994 1995 1996 1997 1998 1999 2000 2001 $.23 $.50 $.90 $.75 $.95 $1.32 $2.31 $2.69 FISCAL YEAR ENDED JUNE 30 [CHART appears here] Net Sales 1994 1995 1996 1997 1998 1999 2000 2001 $16 $34 $56 $100 $183 $298 $497 $631 FISCAL YEAR ENDED JUNE 30 ($ IN MILLIONS) [CHART appears here] Operating Income 1994 1995 1996 1997 1998 1999 2000 2001 $.6 $1.6 $2.8 $4.8 $7.7 $12.2 $22.9 $28.8 FISCAL YEAR ENDED JUNE 30 ($ IN MILLIONS) Selected Financial Data The selected financial data below should be read in conjunction with "Management's Discussion and Analysis" and the Company's consolidated financial statements and related notes thereto included elsewhere in this annual report. The following statement of income data and balance sheet data was derived from the Company's consolidated financial statements. The Company's consolidated financial statements for the year ended June 30, 2001 have been audited by Deloitte & Touche LLP. The Company's consolidated financial statements for the years ended June 30, 2000, 1999, 1998, and 1997 have been audited by KPMG LLP.
Fiscal Year Ended June 30, ----------------------------------------------- 1997 1998 1999 2000 2001 ------- -------- -------- -------- -------- (In thousands, except per share data) Statement of Income Data: Net sales.................... $99,839 $182,795 $297,717 $497,421 $630,744 Cost of goods sold........... 86,024 159,410 263,941 443,716 556,919 ------- -------- -------- -------- -------- Gross profit............... 13,815 23,385 33,776 53,705 73,825 Selling, general and administrative expenses..... 8,940 15,620 21,410 30,685 44,857 Amortization of intangibles.. 81 113 137 147 170 ------- -------- -------- -------- -------- Total operating expenses... 9,021 15,733 21,547 30,832 45,027 ------- -------- -------- -------- -------- Operating income............. 4,794 7,652 12,229 22,873 28,798 Interest income (expense), net......................... (380) 160 103 (639) (2,034) Other income (expense), net.. (85) (305) (470) -- (207) ------- -------- -------- -------- -------- Total other income (expense)................. (465) (145) (367) (639) (2,241) ------- -------- -------- -------- -------- Income before income taxes... 4,329 7,507 11,862 22,234 26,557 Provision for income taxes... 1,556 2,736 4,392 8,449 10,093 ------- -------- -------- -------- -------- Net income................. $ 2,773 $ 4,771 $ 7,470 $ 13,785 $ 16,464 ======= ======== ======== ======== ======== Basic net income per share... $ 0.80 $ 0.99 $ 1.37 $ 2.48 $ 2.90 ======= ======== ======== ======== ======== Basic weighted average shares outstanding................. 3,481 4,833 5,460 5,556 5,683 ======= ======== ======== ======== ======== Diluted net income per share....................... $ 0.75 $ 0.95 $ 1.32 $ 2.31 $ 2.69 ======= ======== ======== ======== ======== Diluted weighted average shares outstanding.......... 3,704 5,035 5,661 5,969 6,124 ======= ======== ======== ======== ======== As of June 30, ----------------------------------------------- 1997 1998 1999 2000 2001 ------- -------- -------- -------- -------- (In thousands) Balance Sheet Data: Working capital.............. $20,496 $ 48,154 $ 51,160 $ 80,544 $ 95,802 Total assets................. 40,268 72,112 125,727 205,880 287,171 Total long-term obligations (including current portion).................... 5,391 6,580 1,697 26,592 26,414 Total shareholders' equity... 18,650 49,781 58,702 74,466 93,362
8 Management's Discussion and Analysis The following discussion and analysis contains forward-looking statements which involve risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors. This discussion and analysis should be read in conjunction with "Selected Financial Data" and the Financial Statements and the Notes thereto included elsewhere in this Annual Report. Overview ScanSource, Inc. is a leading distributor of specialty technology products, providing both value-added distribution sales to technology resellers and Internet-based fulfillment to manufacturers and others in specialty technology markets. The Company markets automatic data capture (ADC) and point-of-sale (POS) products through its ScanSource sales unit and business telephone equipment through its Catalyst Telecom sales team. The Company's ChannelMax unit provides logistics for customers who enter orders primarily over the web. The Company was incorporated in December 1992, is headquartered in Greenville, South Carolina and serves North America from a single, centrally located distribution center located near the FedEx hub in Memphis, Tennessee. The single warehouse and strong management information system form the cornerstone of the Company's cost-driven operational strategy which has caused operating income to grow at an average annual growth rate of 56.6% over the past five years, while sales have grown at an average annual rate of 58.5% to $630.7 million over the same period. Distribution Segment. The Company's distribution segment sells products exclusively to technology resellers and integrators in markets which are large and growing. Key ADC vendors include Symbol, Intermec and Zebra, and some leading POS lines include IBM, NCR and Epson. Avaya Communication is the Company's premier business telephone partner, while Intel/Dialogic supplies key components for the computer and telephone convergence market. Growth in net sales has been principally driven by intensive marketing efforts to recruit new reseller customers, competitive product pricing, selective expansion of the Company's product line, and strategic acquisitions. In January 2001, the ScanSource sales team signed a contract giving it exclusive rights to distribute NCR's full line of POS products. In May 2001, the Company purchased the operating assets of the business phone division of Pinacor, Inc., one of two competitors who sold Avaya voice products. This unit was merged into the Catalyst Telecom sales team, allowing them to expand sales to former Pinacor customers from a new western sales office in Tempe, Arizona. E-Logistics Segment. The e-logistics business segment, called ChannelMax, provides real-time inventory availability and web catalog, order entry, order tracking and logistics for companies in the ADC and business phone markets. This unit also creates customized web storefronts that integrate with a reseller's website, allowing resellers to offer on-line ordering and marketing to their customers. Revenue in this unit has grown primarily as its key accounts, Symbol, Avaya and Expanets, have expanded the number of orders they want to have fulfilled by the ChannelMax team. Cost Control/ Profitability. The Company's operating income growth has been driven by increasing gross profit and disciplined control of operating expenses. The Company's business strategy features a scalable information system, streamlined management, and centralized distribution, enabling it to achieve the economies of scale necessary for cost-effective order fulfillment. From its inception, the Company has tightly managed its general and administrative expenses by maintaining strong cost 9 Management's Discussion and Analysis controls. While these cost control initiatives have helped control costs, this has been partially offset by costs associated with new initiatives including investments in new markets such as telephones and electronic commerce, expansion into a new geographic market in Canada, increased marketing costs to recruit resellers, and enhancements of employee benefit plans to retain employees. Results of Operations The following table sets forth for the periods indicated certain income and expense items as a percentage of net sales:
Fiscal Year Ended June 30, ---------------------------- 1999 2000 2001 -------- -------- -------- Net sales........................................ 100.0% 100.0% 100.0% Cost of goods sold............................... 88.7 89.2 88.3 -------- -------- -------- Gross profit.................................... 11.3 10.8 11.7 Selling, general and administrative expenses..... 7.2 6.2 7.1 Amortization of intangibles...................... 0.0 0.0 0.0 -------- -------- -------- Total operating expenses........................ 7.2 6.2 7.1 -------- -------- -------- Operating income................................. 4.1 4.6 4.6 Interest expense, net............................ (0.1) (0.1) (0.4) Other expense, net............................... 0.0 0.0 0.0 -------- -------- -------- Total other expense............................. (0.1) (0.1) (0.4) -------- -------- -------- Income before income taxes....................... 4.0 4.5 4.2 Provision for income taxes....................... 1.5 1.7 1.6 -------- -------- -------- Net income...................................... 2.5 2.8 2.6 ======== ======== ========
Comparison of Fiscal Years Ended June 30, 2001, 2000 and 1999 Net Sales. Net sales increased by 26.8% to $630.7 million in fiscal 2001 from $497.4 million in fiscal 2000, and increased by 67.1% in fiscal 2000 from $297.7 million in fiscal 1999. The Company is organized into two business segments. Sales through value-added distribution increased 24.4% to $562.2 million in 2001, from $452.1 million in 2000, and rose by 66.3% in 2000 from $271.9 million in 1999. E-logistics sales (net of intersegment sales) increased 51.2% to $68.5 million in 2001 from $45.3 million in 2000, and increased by 75.6% in 2000 from $25.8 million in 1999. Sales in Canada have been less than 5.0% of the Company's total sales in each year presented. Growth in net sales resulted primarily from additions to the Company's sales force, competitive product pricing, selective expansion of its product line, increased marketing efforts to specialty technology resellers, and the acquisition of Pinacor, Inc. in May 2001. Gross Profit. Cost of sales is comprised of purchase costs and freight, net of early payment and volume discounts. Gross profit increased by 37% to $73.8 million in fiscal 2001 from $53.7 million in fiscal 2000, and increased by 59% in fiscal 2000 from $33.8 million in fiscal 1999. Gross profit as a percentage of net sales was 11.7% in fiscal 2001, 10.8 % in fiscal 2000, and 11.3% in fiscal 1999. Gross margins from value-added distribution were 12.1%, 10.8% and 11.7% for the years ended June 30, 2001, 2000 and 1999, respectively. The variation in gross profit as a percentage of net sales was a result of a change in the mix of sales between lower- and higher-margin products and volume 10 Management's Discussion and Analysis discounts provided to resellers on large orders. Gross margins for e-logistics (net of intersegment profits) were 8.6% in 2001, 10.6% in 2000, and 7.3% in 1999. E-logistics gross margins varied based upon the mix of customers served in each of the three years and was higher in 2000 due to a higher mix of fee- based programs relative to lower gross-margin product sales programs. Operating Expenses. Operating expenses increased by 46.1% to $45.0 million in fiscal 2001 from $30.8 million in fiscal 2000, and increased by 43.1% in fiscal 2000 from $21.5 million in fiscal 1999. Operating expenses as a percentage of net sales increased to 7.1% in fiscal 2001, from 6.2% in fiscal 2000, following a decrease from 7.2% in fiscal 1999. The increase in operating expenses as a percentage of sales in 2001 resulted from increased marketing costs to reach resellers, a profit sharing contribution to enhance the Company's 401k plan benefit, a donation to charity, and higher depreciation expense due to the November 1999 purchase of a new distribution center and its subsequent furnishing and expansion. The decrease in 2000 operating expenses as a percentage of net sales resulted from efficiencies gained through increased sales volumes. Operating Income. For reasons discussed above, operating income increased by 26% to $28.8 million in fiscal 2001 from $22.9 million in fiscal 2000, and increased by 87.0% in fiscal 2000 from $12.2 million in fiscal 1999, driven by the improvement in gross profit as described above. Operating income as a percentage of net sales was 4.6% in fiscal 2001, 4.6 % in fiscal 2000, and 4.1% in fiscal 1999. Total Other Income (Expense). Other income (expense) consists principally of net interest expense and other expense. Net interest expense in 2001 included interest of $2,853,000 paid on the Company's line of credit and long- term debt, offset by interest income of $819,000 principally collected from customers. The substantial increase in interest expense in 2001 resulted from interest incurred on two new notes payable to bank, aggregating a principal balance of $7.7 million at June 30, 2001, and interest incurred on additional borrowings on the Company's line of credit to finance the Company's additional working capital requirements. Other expense, net, of $207,000 in 2001, consisted of a loss on an equity investment and minority interest on the Company's majority-owned subsidiary. Other income (expense) in fiscal 2000 consisted primarily of $855,000 of interest paid on the Company's line of credit, offset by $216,000 of interest income. Other income (expense) in fiscal 1999 consisted primarily of $470,000 of warehouse closing costs and interest income of $302,000, offset by $199,000 of interest expense. Provision for Income Taxes. Income tax expense was $10.1 million, $8.4 million, and $4.4 million, in fiscal 2001, 2000 and 1999, respectively, reflecting an effective tax rate of 38.0%, 38.0% and 37.0%, respectively. Net Income. For reasons discussed above, net income increased by 19.4% to $16.5 million in fiscal 2001 from $13.8 million in fiscal 2000, and increased by 84.5% in fiscal 2000 from $7.5 million in fiscal 1999. Net income as a percentage of net sales was 2.6% for fiscal 2001, 2.8% for fiscal 2000 and 2.5% for fiscal 1999. 11 Management's Discussion and Analysis Quarterly Results The following tables set forth certain unaudited quarterly financial data and such data expressed as a percentage of net sales. The information has been derived from unaudited financial statements that, in the opinion of management, reflect all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of such quarterly information. The operating results for any quarter are not necessarily indicative of the results to be expected for any future period.
Three Months Ended -------------------------------------------------------------------------------- Fiscal 2000 Fiscal 2001 --------------------------------------- --------------------------------------- Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, 1999 1999 2000 2000 2000 2000 2001 2001 --------- -------- -------- -------- --------- -------- -------- -------- Net sales............... $ 113,179 $113.922 $120,391 $149,929 $ 156,286 $146,187 $155,237 $173,034 Cost of goods sold...... 102,159 100,707 107,021 133,829 139,366 128,918 135,240 153,395 --------- -------- -------- -------- --------- -------- -------- -------- Gross profit........... 11,020 13,215 13,370 16,100 16,920 17,269 19,997 19,639 Selling, general and administrative expenses............... 6,681 8,411 8,040 7,552 10,233 10,436 12,387 11,801 Amortization of intangibles............ 34 34 34 46 46 46 32 46 --------- -------- -------- -------- --------- -------- -------- -------- Total operating expenses.............. 6,715 8,445 8,074 7,598 10,279 10,482 12,419 11,847 --------- -------- -------- -------- --------- -------- -------- -------- Operating income........ 4,305 4,770 5,296 8,502 6,641 6,787 7,578 7,792 Interest income (expense), net......... 98 (146) (272) (331) (475) (483) (798) (278) Other income (expense), net.................... 7 8 (2) (--) (--) 40 (--) (247) --------- -------- -------- -------- --------- -------- -------- -------- Total other income (expense)............. 105 (138) (274) (331) (475) (443) (798) (525) --------- -------- -------- -------- --------- -------- -------- -------- Income before income taxes.................. 4,410 4,632 5,022 8,171 6,166 6,344 6,780 7,267 Income taxes............ 1,676 1,760 1,909 3,104 2,343 2,411 2,575 2,764 --------- -------- -------- -------- --------- -------- -------- -------- Net income............. $ 2,734 $ 2,872 $ 3,113 $ 5,067 $ 3,823 $ 3,933 $ 4,205 $ 4,503 --------- -------- -------- -------- --------- -------- -------- -------- Basic net income per share.................. $ 0.50 $ 0.52 $ 0.56 $ 0.90 $ 0.68 $ 0.69 $ 0.74 $ 0.79 ========= ======== ======== ======== ========= ======== ======== ======== Basic weighted average shares outstanding..... 5,512 5,531 5,577 5,604 5,648 5,693 5,703 5,709 ========= ======== ======== ======== ========= ======== ======== ======== Diluted net income per share.................. $ 0.47 $ 0.48 $ 0.51 $ 0.85 $ 0.62 $ 0.64 $ 0.69 $ 0.73 ========= ======== ======== ======== ========= ======== ======== ======== Diluted weighted average shares outstanding..... 5,850 5,994 6,057 5,975 6,139 6,154 6,060 6,144 ========= ======== ======== ======== ========= ======== ======== ======== Three Months Ended -------------------------------------------------------------------------------- Fiscal 2000 Fiscal 2001 --------------------------------------- --------------------------------------- Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, 1999 1999 2000 2000 2000 2000 2001 2001 --------- -------- -------- -------- --------- -------- -------- -------- Net sales............... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Cost of goods sold...... 90.3 88.4 88.9 89.3 89.2 88.2 87.1 88.7 --------- -------- -------- -------- --------- -------- -------- -------- Gross profit........... 9.7 11.6 11.1 10.7 10.8 11.8 12.9 11.4 Selling, general and administrative expenses............... 5.9 7.4 6.7 5.0 6.5 7.1 8.0 6.8 Amortization of intangibles............ 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 --------- -------- -------- -------- --------- -------- -------- -------- Total operating expenses.............. 5.9 7.4 6.7 5.0 6.6 7.2 8.0 6.8 --------- -------- -------- -------- --------- -------- -------- -------- Operating income........ 3.8 4.2 4.4 5.7 4.2 4.6 4.9 4.5 Interest income (expense), net......... 0.1 (0.1) (0.2) (0.2) (0.3) (0.3) (0.5) (0.2) Other income (expense), net.................... -- -- -- -- -- -- -- (0.1) --------- -------- -------- -------- --------- -------- -------- -------- Total other income (expense)............. 0.1 (0.1) (0.2) (0.2) (0.3) (0.3) (0.5) (0.3) --------- -------- -------- -------- --------- -------- -------- -------- Income before income taxes.................. 3.9 4.1 4.2 5.5 3.9 4.3 4.4 4.2 Provision for income taxes.................. 1.5 1.6 1.6 2.1 1.5 1.6 1.7 1.6 --------- -------- -------- -------- --------- -------- -------- -------- Net income............. 2.4 2.5 2.6 3.4 2.4 2.7 2.7 2.6 ========= ======== ======== ======== ========= ======== ======== ========
12 Management's Discussion and Analysis Liquidity and Capital Resources The Company's primary sources of liquidity are cash provided by operating activities, borrowings under the Company's revolving credit facility, and, from time to time, proceeds from the exercise of stock options. Effective July 2001, the Company has a new line of credit agreement with its bank group which extends to September 2003 with a borrowing limit of the lesser of (i) $80 million ($50 million under the agreement in place at June 30, 2001) or (ii) the total of 85% of eligible accounts receivable plus 50% of eligible inventory. The facility bears interest at the 30 day LIBOR rate of interest plus a rate varying from 1.00% to 2.50% tied to the Company's funded debt to earnings before interest, taxes, depreciation and amortization ratio ranging from 2.5:1 to 4.25:1 (from 1.25% to 2.50% tied to the Company's debt to net worth ratio ranging from .75:1 to 2.75:1 under the agreement in place at June 30, 2001). Borrowings under the revolving credit facility are collateralized by accounts receivable and eligible inventory. The agreement contains certain financial covenants including minimum net worth, capital expenditure limits and a maximum of debt to tangible net worth ratio, and the payment of cash dividends is prohibited. The effective interest rate at June 30, 2001 was 6.04% and the outstanding balance on the line of credit was $17.1 million, leaving $32.9 million available for additional borrowings at June 30, 2001. Cash provided by operating activities was $19.6 million in 2001, principally resulting from the Company's net income, a $59.2 million increase in trade payables, offset by a $12.8 million increase in trade receivables, and a $43.9 million increase in inventories. Cash used in operating activities was $23.5 million in 2000, principally resulting from the Company's net income, a $38.9 million increase in trade payables, offset by a $21.2 million increase in trade receivables, and a $51.4 million increase in inventories. Cash provided by operating activities was $21.5 million in 1999, principally resulting from the Company's net income, a $45.7 million increase in trade payables, offset by a $11.0 million increase in trade receivables, and $18.8 million increase in inventories. Cash used in investing activities for fiscal 2001 of $24.9 million, included $17.3 million for the acquisition of Pinacor, a phone distributor, and $7.6 million for capital expenditures. In fiscal 2000, cash was used in investing activities primarily for $6.6 million of capital expenditures and a $7.0 million building purchase. In fiscal 1999, cash was used in investing activities primarily for $2.1 million of capital expenditures. Cash provided by financing activities for fiscal 2001 was $1.3 million, primarily from the closing of a real estate loan for $7.8 million and proceeds from stock option exercises of $1.5 million, offset by net payments on the line of credit of $7.8 million. In fiscal 2000, cash provided by financing activities was $26.5 million, primarily from $24.9 million of advances on the Company's line of credit and proceeds from stock option exercises of $1.6 million. In fiscal 1999, cash used in financing activities was $4.2 million, primarily from net payments of $4.9 million on the line of credit, offset by $0.7 million of proceeds from stock option exercises. The Company believes that it has sufficient liquidity to meet its forecasted cash requirements for at least the next year. 13 Management's Discussion and Analysis Backlog The Company does not consider backlogs to be material to its business. Virtually all orders are filled within 24 hours of receipt. Recent Accounting Pronouncements Effective July 1, 2000, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS No. 138. SFAS No. 133 establishes accounting and reporting standards for derivative financial instruments, including certain derivative instruments embedded in other contracts and hedging activities. The adoption of SFAS No. 133 had no effect on the Company's financial position or results of operations. In July 2001, the Financial Accounting Standards Board ("FASB") approved two new accounting standards related to the accounting for business combinations, and goodwill and other intangible assets. The standards, SFAS No. 141 and 142, (i) immediately prohibit the use of the pooling-of-interests method of accounting for business combinations which were not initiated prior to June 30, 2001, (ii) require that goodwill not be amortized in any circumstance, and (iii) require that goodwill be tested for impairment annually or when events or circumstances occur between annual tests indicating that goodwill for a reporting unit might be impaired. SFAS No. 142 takes effect for the Company's fiscal year beginning July 1, 2002. However, the Company is considering early adoption of SFAS No. 142, permitted by the standard, on July 1, 2001. Upon adoption, the Company will be required to cease amortization of its remaining unamortized goodwill balance and will be required to perform an impairment test based on a fair value concept of its existing goodwill (the Company currently assesses recoverability of goodwill based on estimated undiscounted future cash flows). The Company has not completed an analysis of the potential impact, if any, of the impairment test of goodwill upon adoption of SFAS No. 142; however, amortization of existing goodwill, which was approximately $137,000, $147,000 and $170,000 for the years ended June 30, 1999, 2000 and 2001, respectively, will cease upon adoption. Impact of Inflation The Company has not been adversely affected by inflation as technological advances and competition within specialty technology markets has generally caused prices of the products sold by the Company to decline. Management believes that any price increases could be passed on to its customers, as prices charged by the Company are not set by long-term contracts. Forward Looking Statements Certain of the statements contained in this annual report to shareholders as well as in the Company's other filings with the Securities and Exchange Commission that are not historical facts are forward-looking statements subject to the safe harbor created by the Private Securities Litigation Reform Act of 1995. The Company cautions readers of this report that a number of important factors could cause the Company's activities and/or actual results in fiscal 2002 and beyond to differ materially from those expressed in any such forward-looking statements. These factors include, without limitation, the Company's dependence on vendors, product supply, senior management, centralized functions, and third-party shippers, the Company's ability to compete successfully in a highly 14 Management's Discussion and Analysis competitive market and manage significant additions in personnel and increases in working capital, the Company's entry into new products markets in which it has no prior experience, the Company's susceptibility to quarterly fluctuations in net sales and results of operations, the Company's ability to manage successfully price protection or stock rotation opportunities associated with inventory value decreases, and other factors described in Exhibit 99.1 to the Annual Report on Form 10-K, into which portions of this annual report to shareholders are incorporated by reference, and other reports and documents filed by the Company with the Securities and Exchange Commission. Quantitative and Qualitative Disclosures About Market Risks The Company's principal exposure to changes in financial market conditions in the normal course of its business is a result of its selective use of bank debt and, to a much lesser extent, transacting business in Canadian currency in connection with its Canadian operations. The Company is exposed to changes in interest rates primarily as a result of its borrowing activities, which includes a revolving credit facility with a bank used to maintain liquidity and fund the Company's business operations. The nature and amount of the Company's debt may vary as a result of future business requirements, market conditions and other factors. The definitive extent of the Company's interest rate risk is not quantifiable or predictable because of the variability of future interest rates and business financing requirements, but the Company does not believe such risk is material. A hypothetical 100 basis point increase or decrease in interest rates on borrowings on the Company's revolving line of credit would have resulted in an approximate $333,000 increase or decrease in fiscal 2001 pre-tax income. The Company does not currently use derivative instruments to adjust the Company's interest rate risk profile. The Company is minimally exposed to changes in foreign exchange rates in connection with its Canadian operations. It is the Company's policy to enter into foreign currency transactions only to the extent considered necessary to support its Canadian operations. The amount of the Company's cash deposits denominated in Canadian currency has not been, and is not expected to be, material. Furthermore, the Company has no capital expenditure or other purchase commitments denominated in any foreign currency. The Company does not utilize forward exchange contracts, currency options or other traditional hedging vehicles to adjust the Company's foreign exchange rate risk profile. The Company does not enter into foreign currency transactions for speculative purposes. Foreign currency gains and losses are included in selling, general and administrative expenses. The Company does not utilize financial instruments for trading or other speculative purposes, nor does it utilize leveraged financial instruments. On the basis of the fair value of the Company's market sensitive instruments at June 30, 2001, the Company does not consider the potential near-term losses in future earnings, fair values and cash flows from reasonably possible near-term changes in interest rates and exchange rates to be material. 15 SCANSOURCE, INC. AND SUBSIDIARIES Consolidated Balance Sheets June 30, 2000 and 2001
Assets 2000 2001 ------ -------- -------- (Amounts in thousands) Current assets: Cash..................................................... $ 4,612 $ 594 -------- -------- Receivables: Trade, less allowance for doubtful accounts of $5,464 and $6,765 at June 30, 2000 and 2001, respectively.... 66,983 86,917 Other.................................................. 3,060 8,118 -------- -------- 70,043 95,035 Inventories.............................................. 101,654 157,468 Prepaid expenses and other assets........................ 451 640 Deferred income taxes.................................... 8,632 9,904 -------- -------- Total current assets................................. 185,392 263,641 -------- -------- Property and equipment: Land..................................................... 1,485 1,485 Building and improvements................................ 12,135 13,493 Furniture, fixtures and equipment........................ 9,953 16,025 -------- -------- 23,573 31,003 Less accumulated depreciation............................ (5,183) (9,257) -------- -------- 18,390 21,746 Intangible assets, net..................................... 1,635 1,277 Other assets............................................... 463 507 -------- -------- Total assets......................................... $205,880 $287,171 ======== ========
Liabilities and Shareholders' Equity ------------------------------------ Current liabilities: Current portion of long-term debt............................... $ 26 $ 444 Trade accounts payable.......................................... 98,627 157,847 Accrued expenses and other liabilities.......................... 5,083 9,548 Income taxes payable............................................ 1,112 -- -------- -------- Total current liabilities................................... 104,848 167,839 -------- -------- Borrowings under revolving credit facility........................ 24,919 17,104 Long-term debt.................................................... 1,647 8,866 -------- -------- Total liabilities........................................... 131,414 193,809 -------- -------- Commitments and contingencies Shareholders' equity: Preferred stock, no par value; 3,000,000 shares authorized, none issued......................................................... -- -- Common stock, no par value; 10,000,000 shares authorized; 5,610,875 and 5,711,414 shares issued and outstanding at June 30, 2000 and 2001, respectively................................ 42,140 44,572 Retained earnings............................................... 32,326 48,790 -------- -------- Total shareholders' equity.................................. 74,466 93,362 -------- -------- Total liabilities and shareholders' equity.................. $205,880 $287,171 ======== ========
See accompanying notes to consolidated financial statements. 16 SCANSOURCE, INC. AND SUBSIDIARIES Consolidated Statements of Income Years ended June 30, 1999, 2000 and 2001
1999 2000 2001 -------- -------- -------- (Amounts in thousands, except per share data) Net sales........................................ $297,717 $497,421 $630,744 Cost of goods sold............................... 263,941 443,716 556,919 -------- -------- -------- Gross profit................................. 33,776 53,705 73,825 Selling, general and administrative expenses..... 21,410 30,685 44,857 Amortization of intangibles...................... 137 147 170 -------- -------- -------- Total operating expenses..................... 21,547 30,832 45,027 -------- -------- -------- Operating income............................. 12,229 22,873 28,798 Other expense (income): Interest expense............................... 199 855 2,853 Interest income................................ (302) (216) (819) Other expense.................................. 470 -- 207 -------- -------- -------- Other expense, net........................... 367 639 2,241 -------- -------- -------- Income before income taxes................... 11,862 22,234 26,557 Provision for income taxes....................... 4,392 8,449 10,093 -------- -------- -------- Net income................................... $ 7,470 $ 13,785 $ 16,464 ======== ======== ======== Per share data: Basic: Earnings per share........................... $ 1.37 $ 2.48 $ 2.90 ======== ======== ======== Weighted-average shares outstanding.......... 5,460 5,556 5,683 ======== ======== ======== Diluted: Earnings per share........................... $ 1.32 $ 2.31 $ 2.69 ======== ======== ======== Weighted-average shares outstanding.......... 5,661 5,969 6,124 ======== ======== ========
See accompanying notes to consolidated financial statements. 17 SCANSOURCE, INC. AND SUBSIDIARIES Consolidated Statements of Shareholders' Equity Years ended June 30, 1999, 2000 and 2001
Common Common Stock Stock Retained (Shares) (Amount) Earnings Total --------- ------- -------- ------- (Amounts in thousands, except share data) Balance at June 30, 1998................... 5,353,310 $38,710 $11,071 $49,781 Issuance of stock due to exercise of options, net............................ 150,202 663 -- 663 Tax benefit of deductible compensation arising from exercise of stock options.. -- 788 -- 788 Net income............................... -- -- 7,470 7,470 --------- ------- ------- ------- Balance at June 30, 1999................... 5,503,512 40,161 18,541 58,702 Issuance of stock due to exercise of options, net............................ 107,363 1,505 -- 1,505 Tax benefit of deductible compensation arising from exercise of stock options.. -- 474 -- 474 Net income............................... -- -- 13,785 13,785 --------- ------- ------- ------- Balance at June 30, 2000................... 5,610,875 42,140 32,326 74,466 Issuance of stock due to exercise of options, net............................ 100,539 1,466 -- 1,466 Tax benefit of deductible compensation arising from exercise of stock options.. -- 966 -- 966 Net income............................... -- -- 16,464 16,464 --------- ------- ------- ------- Balance at June 30, 2001................... 5,711,414 $44,572 $48,790 $93,362 ========= ======= ======= =======
See accompanying notes to consolidated financial statements. 18 SCANSOURCE, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows Years ended June 30, 1999, 2000 and 2001
1999 2000 2001 -------- -------- -------- (Amounts in thousands) Cash flows from operating activities: Net income..................................... $ 7,470 $ 13,785 $ 16,464 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation................................. 1,119 2,531 4,264 Amortization of intangible assets............ 137 147 170 Provision for doubtful accounts.............. (3,582) (2,983) (2,570) Deferred income tax benefit.................. (2,770) (3,649) (1,191) Tax benefit of stock option exercise......... 788 474 966 Changes in operating assets and liabilities: Trade receivables.......................... (10,994) (21,226) (12,766) Other receivables.......................... (919) (617) (4,330) Inventories................................ (18,838) (51,372) (43,872) Prepaid expenses and other assets.......... (196) 13 (189) Trade accounts payable..................... 45,699 38,899 59,220 Accrued expenses and other liabilities..... 2,701 634 4,465 Income taxes payable....................... 1,131 (19) (1,112) Other noncurrent assets.................... (251) (159) 62 -------- -------- -------- Net cash provided by (used in) operating activities.............................. 21,495 (23,542) 19,581 -------- -------- -------- Cash flows from investing activities: Capital expenditures........................... (2,081) (6,588) (7,619) Purchase of building........................... -- (6,990) -- Cash paid for business acquisitions............ -- -- (17,268) -------- -------- -------- Net cash used in investing activities.... (2,081) (13,578) (24,887) -------- -------- -------- Cash flows from financing activities: Advances (payments) on revolving credit, net... (4,861) 24,919 (7,815) Exercise of stock options...................... 663 1,555 1,466 Proceeds from long-term debt borrowings........ -- -- 7,856 Repayments of long-term debt borrowings........ (22) (24) (219) -------- -------- -------- Net cash provided by (used in) financing activities.............................. (4,220) 26,450 1,288 -------- -------- -------- Increase (decrease) in cash...................... 15,194 (10,670) (4,018) Cash at beginning of year........................ 88 15,282 4,612 -------- -------- -------- Cash at end of year.............................. $ 15,282 $ 4,612 $ 594 -------- -------- -------- Supplemental information: Interest paid.................................. $ 186 $ 1,009 $ 2,869 ======== ======== ======== Income taxes paid.............................. $ 3,261 $ 8,563 $ 11,605 ======== ======== ========
See accompanying notes to consolidated financial statements. 19 SCANSOURCE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended June 30, 1999, 2000 and 2001 (1) Business Description and Summary of Significant Accounting Policies Business Description ScanSource, Inc. is a leading distributor of specialty technology products, providing both value-added distribution sales to technology resellers and Internet-based fulfillment to manufacturers and others in specialty technology markets. The Company markets automatic data capture and point-of-sale products through its ScanSource sales unit and business telephone equipment through its Catalyst Telecom sales team. The Company's ChannelMax unit provides logistics services for customers who enter orders primarily over the web. Consolidation Policy The consolidated financial statements include the accounts of ScanSource, Inc. ("Company") and its majority-owned subsidiaries. ScanSource currently owns 95% (see Note 4) of its e-logistics subsidiary, ChannelMax, whose minority interest is insignificant at June 30, 2001 and 2000. All significant intercompany accounts and transactions have been eliminated. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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. Significant financial statement estimates include the allowance for uncollectible accounts receivable and inventory reserves to reduce inventories to the lower of cost or market. Management determines the estimate of the allowance for uncollectible accounts considering a number of factors, including historical experience, aging of the accounts and the credit worthiness of its customers. Management determines the inventory reserves to reduce inventories to the lower of cost or market based principally on the effects of technological changes, quantities of goods on hand, and other factors. Management believes that its estimates provided in the financial statements, including those for the above-described items, are reasonable. However, actual results could differ from those estimates. Revenue Recognition Revenues are recognized for the sale of products upon shipment. The Company provides a reserve for estimated product returns and allowances. The Company also has arrangements in which it earns a service fee determined as a percentage of the value of products shipped on behalf of the manufacturer who retains the risk of ownership and credit loss. Such service fees earned by the Company are included in net sales. Shipping and Handling Costs Costs related to shipping and handling products sold to the Company's customers are charged to cost of goods sold as incurred. 20 SCANSOURCE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Years Ended June 30, 1999, 2000 and 2001 Advertising Costs The Company defers advertising related costs until the advertising is first run in trade or other publications or in the case of brochures, until the brochures are printed and available for distribution. Advertising costs, after vendor reimbursements under co-operative advertising agreements, were not significant in any of the three years ended June 30, 2001. Vendor Programs Funds received from vendors for price protection, product rebates, marketing or training programs are recorded net of direct costs as adjustments to product costs, or a reduction of selling, general and administrative expenses according to the nature of the program. The Company does not provide warranty coverage on its product sales. However, to maintain customer relations, the Company facilitates vendor warranty policies by accepting for exchange, with the Company's prior approval, most defective products within 30 days of invoicing. Inventories Inventories (consisting of automatic data capture, point-of-sale, business phone and computer telephony equipment) are stated at the lower of cost (first-in, first-out method) or market. Long-Lived Assets Property and equipment are recorded at cost. Depreciation is computed using the straight-line method over estimated useful lives of 2 to 5 years for furniture and equipment, 40 years for the building, and 15 years for building improvements. Leasehold improvements are amortized over the shorter of the lease term or the estimated useful life. Maintenance, repairs and minor renewals are charged to expense as incurred. Additions, major renewals and betterments to property and equipment are capitalized. Intangible assets consist primarily of goodwill, which is being amortized on a straight-line basis over 5 to 15 years. Accumulated amortization was $703,000 and $761,000 at June 30, 2000 and 2001, respectively. The Company reviews its long-lived assets for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. If the sum of the expected cash flows, undiscounted and without interest is less than the carrying amount of the asset, an impairment loss is recognized as the amount by which the carrying amount of the asset exceeds its fair value. No impairment has been recognized in the accompanying consolidated statements of income. Concentration of Credit Risk The Company sells its products generally on net 20-day terms to a large base of value-added resellers throughout North America. The Company performs ongoing credit evaluations of its customer's financial condition and generally does not require collateral. 21 SCANSOURCE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Years Ended June 30, 1999, 2000 and 2001 Income Taxes The Company records income taxes under the asset and liability method whereby deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Accounting for Stock-Based Compensation Statement of Financial Accounting Standards ("SFAS") No. 123 allows an entity to continue to apply the provisions of APB Opinion No. 25 and provide pro forma net income and pro forma earnings per share disclosures for employee stock options granted as if the fair-value-based method defined in SFAS No. 123 had been applied. The Company has elected to continue to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosures of SFAS No. 123. Fair Value of Financial Instruments The fair value of financial instruments is the amount at which the instrument could be exchanged in a current transaction between willing parties. The carrying values of financial instruments such as accounts receivable, accounts payable, accrued liabilities and borrowings under revolving credit facility (see Note 3) approximate fair values, based upon either short maturities or variable interest rates of these instruments. Comprehensive Income Comprehensive income is recognized as the change in equity during a period from transactions and other events and circumstances from non-owner sources. Comprehensive income was the same as net income in each of the three years ended June 30, 2001. Foreign Currency Foreign currency transaction gains and losses are included in selling, general and administrative expenses. Net currency transaction losses were less than $100,000 in each of the three years ended June 30, 2001. Translation gains and losses were insignificant in each of the three years ended June 30, 2001. Recent Accounting Pronouncements Effective July 1, 2000, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS No. 138. SFAS No. 133 establishes accounting and reporting standards for derivative financial instruments, including certain derivative instruments embedded in other contracts and hedging activities. The adoption of SFAS No. 133 had no effect on the Company's financial position or results of operations. 22 SCANSOURCE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Years Ended June 30, 1999, 2000 and 2001 In July 2001, the Financial Accounting Standards Board ("FASB") approved two new accounting standards related to the accounting for business combinations, and goodwill and other intangible assets. The standards, SFAS No. 141 and 142, (i) immediately prohibit the use of the pooling-of-interests method of accounting for business combinations which were not initiated prior to June 30, 2001, (ii) require that goodwill not be amortized in any circumstance, and (iii) require that goodwill be tested for impairment annually or when events or circumstances occur between annual tests indicating that goodwill for a reporting unit might be impaired. SFAS No. 142 takes effect for the Company's fiscal year beginning July 1, 2002. However, the Company is considering early adoption of SFAS No. 142, permitted by the standard on July 1, 2001. Upon adoption, the Company will be required to cease amortization of its remaining unamortized goodwill balance and will be required to perform an impairment test using a fair value concept of its existing goodwill (the Company currently assesses recoverability of goodwill based on estimated undiscounted future cash flows). The Company has not completed an analysis of the potential impact, if any, of the impairment test of goodwill upon adoption of SFAS No. 142; however, amortization of existing goodwill, which was approximately $137,000, $147,000 and $170,000 for the years ended June 30, 1999, 2000 and 2001, respectively, will cease upon adoption. Reclassifications Certain prior year amounts have been reclassified to conform with the current year presentation in the accompanying financial statements. (2) Revolving Credit Facility The Company has a line of credit agreement with a bank extending to September 2002 with a borrowing limit of the lesser of (i) $50 million or (ii) the total of 85% of eligible accounts receivable plus 50% of eligible inventory. The facility bears interest at the 30-day LIBOR rate of interest plus a rate varying from 1.25% to 2.50% tied to the Company's debt to net worth ratio ranging from .75:1 to 2.75:1. The revolving credit facility is collateralized by accounts receivable and eligible inventory. The agreement contains certain financial covenants, including minimum net worth, capital expenditure limits, a maximum debt to tangible net worth ratio, and the payment of cash dividends is prohibited. The effective interest rate at June 30, 2001 was 6.04% and the outstanding balance on the line of credit was $17.1 million, leaving $32.9 million available for additional borrowings at June 30, 2001. The Company was in compliance with the various covenants at June 30, 2001. See Note 11 for subsequent increases in available line of credit. 23 SCANSOURCE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Years Ended June 30, 1999, 2000 and 2001 (3) Long-term Debt Long-term debt consists of the following at June 30, 2000 and 2001:
June 30, June 30, 2000 2001 ---------- ---------- Note payable to a bank, secured by distribution center land and building (net book value of $6,747,000 at June 30, 2001); monthly payments of principal and interest of $65,000; 6.19% variable interest rate; maturing in 2005..................................... $ -- $7,168,000 Note payable to a bank, secured by office, land and building (net book value of $3,151,000 at June 30, 2001); monthly payments of principal and interest of $15,000; 9.19% fixed interest rate; maturing in 2006................................................. 1,673,000 1,646,000 Note payable to a bank, secured by motor coach (net book value of $513,000 at June 30, 2001); monthly payments of principal and interest of $7,000; 6.19% variable interest rate; maturing in 2006............. -- 496,000 ---------- ---------- 1,673,000 9,310,000 Less current portion.................................. 26,000 444,000 ---------- ---------- $1,647,000 $8,866,000 ========== ==========
The note payable secured by the distribution center contains certain financial covenants, including minimum net worth, capital expenditure limits, a maximum debt to tangible net worth ratio, and the payment of dividends is prohibited. The Company was in compliance with the various covenants at June 30, 2001. The fair value of long-term debt is estimated by discounting the scheduled payment streams to present value based on current rates for similar instruments and was approximately $1,717,000 and $9,501,000 at June 30, 2000 and 2001, respectively. Scheduled maturities of long-term debt at June 30, 2001 are as follows: 2002.............................................................. $ 444,000 2003.............................................................. 474,000 2004.............................................................. 505,000 2005.............................................................. 538,000 2006.............................................................. 5,879,000 Thereafter........................................................ 1,470,000 ---------- Total............................................................. $9,310,000 ==========
(4) Stock Options and Earnings Per Share (a) Stock Option Plans: . The 1993 Incentive Stock Option Plan reserved 280,000 shares of common stock for issuance to key employees. The plan provides for three-year vesting of the options at a rate of 33% 24 SCANSOURCE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Years Ended June 30, 1999, 2000 and 2001 annually. 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. . The Non-Employee Director Stock Option Plan reserved 100,000 shares of common stock for issuance to non-employee directors, and provides for vesting six months after grant date and an option term of 10 years. Options under this plan are automatically granted at fair market value for 5,000 shares of common stock per director on the day following the annual meeting of shareholders. . The amended 1997 Stock Incentive Plan reserved 600,000 shares of stock for issuance to officers, directors, employees, consultants or advisors to the Company. This plan provides for incentive stock options, nonqualified options, stock appreciation rights and restricted stock awards to be granted at exercise prices to be determined by the Compensation Committee of the Board of Directors. The term of each option is 10 years from the grant date. A summary of stock option activity for the years ended June 30, 1999, 2000 and 2001 is as follows:
Weighted- Weighted- Weighted- Average Average Average 1999 Exercise 2000 Exercise 2001 Exercise Shares Price Shares Price Shares Price -------- --------- -------- --------- -------- --------- Options outstanding: Beginning of year...... 731,483 $14.51 754,534 $14.70 823,208 $18.50 Granted................ 445,000 15.90 187,439 30.70 124,415 39.95 Exercised.............. (150,202) 4.61 (105,864) 13.16 (100,039) 14.66 Terminated............. (271,747) 17.43 (12,901) 16.40 (26,202) 18.57 -------- -------- -------- End of year............ 754,534 14.70 823,208 18.50 821,382 22.23 ======== ======== ======== Exercisable, end of year................... 358,117 $13.60 446,181 $15.18 527,594 $18.09 ======== ======== ========
The following table summarizes information about stock options outstanding under the plans at June 30, 2001:
Options Outstanding Options Exercisable ------------------------------------------------ --------------------------- Weighted- Average Weighted- Remaining Average Range of Number Contractual Number Exercise Exercise Prices Outstanding Life Exercisable Price --------------- ----------- ----------- ----------- --------- $8.63-15.38 274,653 5.77 years 231,727 $13.04 16.50-21.13 279,062 6.20 years 227,550 17.30 25.00-33.63 106,502 8.49 years 34,652 33.00 35.38-54.75 161,165 9.26 years 33,665 42.80 ------- ------- 821,382 527,594 ======= =======
25 SCANSOURCE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Years Ended June 30, 1999, 2000 and 2001 (b) Fair Value and Pro Forma Information The pro forma fair value of stock options granted by the Company has been estimated at the date of grant using the Black Scholes option-pricing model with the following weighted-average assumptions:
Weighted-Average Assumptions 1999 2000 2001 ---------------------------- -------- -------- -------- Risk-free interest rate...................... 4.8% 6.2% 5.3% Expected dividend yield...................... 0.0% 0.0% 0.0% Expected volatility factor................... 41.7% 62.8% 75.7% Expected life................................ 10 years 10 years 10 years Per Share Weighted-Average -------------------------- Pro forma fair value of stock options granted..................................... $ 9.65 $ 25.09 $ 31.98
The Company applies APB Opinion No. 25 in accounting for its stock options and, accordingly, no compensation cost has been recognized for its stock options in the financial statements. Had the Company determined compensation cost based on the fair value at the grant date for stock options in its Plan under SFAS No. 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below:
1999 2000 2001 ---------- ----------- ----------- Net income........... As Reported $7,470,000 $13,785,000 $16,464,000 ========== =========== =========== Pro forma $6,580,000 $11,883,000 $14,262,000 ========== =========== =========== Earnings per share: Basic............... As Reported $ 1.37 $ 2.48 $ 2.90 ========== =========== =========== Pro forma $ 1.21 $ 2.14 $ 2.51 ========== =========== =========== Diluted............. As Reported $ 1.32 $ 2.31 $ 2.69 ========== =========== =========== Pro forma $ 1.16 $ 1.99 $ 2.34 ========== =========== ===========
Pro forma net income reflects only options granted during the years ended June 30, 1999, 2000 and 2001. Therefore, the full impact of calculating compensation cost for stock options under SFAS No. 123 is not reflected in the net income above because compensation cost is reflected over the options' vesting period of 3 years for options issued under the incentive stock option plans. (c) Stock Options of Subsidiary The Company's majority-owned subsidiary, ChannelMax, has reserved 500,000 shares of ChannelMax common stock for issuance to its officers, directors, employees, consultants or advisors under the ChannelMax, Inc. 2000 Stock Option Plan. This plan provides for incentive stock options and nonqualified options to be granted at exercise prices to be determined by its Board of Directors or a Committee designated by its Board of Directors, though incentive stock options are not to be granted at less than the fair market value of the underlying shares at the date of grant. The term of each option will not be greater than 10 years from the grant date. 26 SCANSOURCE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Years Ended June 30, 1999, 2000 and 2001 A summary of stock option activity for the years ended June 30, 2000 and 2001 is as follows:
Weighted- Weighted- Average Average 2000 Exercise 2001 Exercise Shares Price Shares Price ------- --------- ------- --------- Options outstanding: Beginning of year........................ -- 117,000 $0.53 Granted.................................. 117,000 $0.53 234,250 $0.71 ------- ------- End of year.............................. 117,000 $0.53 351,250 $0.65 ======= ======= Exercisable, end of year................. -- 78,083 $0.71 ======= =======
If all of the ChannelMax, Inc. stock options outstanding at June 30, 2001 were exercised, the Company's ownership percentage in ChannelMax, Inc. would be reduced from 95% to approximately 77%. The proforma effect on net income and earnings per share, if these options had been accounted for under SFAS No. 123, would have been insignificant in 2000 and 2001. (d) Earnings Per Share Reconciliation Basic earnings per share are computed by dividing net income by the weighted-average number of common shares outstanding. Diluted earnings per share are computed by dividing net income by the weighted-average number of common and potential common shares outstanding.
Per Share Income Shares Amount ----------- --------- ------ 1999: Basic earnings per share...................... $ 7,470,000 5,460,000 $1.37 ===== Effect of dilutive stock options.............. -- 201,000 ----------- --------- Diluted earnings per share.................... $ 7,470,000 5,661,000 $1.32 =========== ========= ===== 2000: Basic earnings per share...................... $13,785,000 5,556,000 $2.48 ===== Effect of dilutive stock options.............. -- 413,000 ----------- --------- Diluted earnings per share.................... $13,785,000 5,969,000 $2.31 =========== ========= ===== 2001: Basic earnings per share...................... $16,464,000 5,683,000 $2.90 ===== Effect of dilutive stock options.............. -- 441,000 ----------- --------- Diluted earnings per share.................... $16,464,000 6,124,000 $2.69 =========== ========= =====
27 SCANSOURCE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Years Ended June 30, 1999, 2000 and 2001 (5) Income Taxes Income tax expense (benefit) attributable to income before income taxes consists of:
Current Deferred Total ----------- ----------- ----------- Year ended June 30, 1999: U.S. Federal......................... $ 6,298,000 $(2,406,000) $ 3,892,000 State and local...................... 864,000 (364,000) 500,000 ----------- ----------- ----------- $ 7,162,000 $(2,770,000) $ 4,392,000 =========== =========== =========== Year ended June 30, 2000: U.S. Federal......................... $10,661,000 $(3,169,000) $ 7,492,000 State and local...................... 1,437,000 (480,000) 957,000 ----------- ----------- ----------- $12,098,000 $(3,649,000) $ 8,449,000 =========== =========== =========== Year ended June 30, 2001: U.S. Federal......................... $ 9,906,000 $(1,047,000) $ 8,859,000 State and local...................... 1,378,000 (144,000) 1,234,000 ----------- ----------- ----------- $11,284,000 $(1,191,000) $10,093,000 =========== =========== ===========
A reconciliation of the U.S. Federal income tax expense statutory rate of 35% to the effective income tax expense is as follows:
1999 2000 2001 ---------- ---------- ----------- U.S. Federal income tax at statutory rate.................................. $4,152,000 $7,782,000 $ 9,295,000 Increase (decrease) in income taxes due to: State and local income taxes, net of Federal income tax benefit........... 325,000 622,000 802,000 Other................................. (85,000) 45,000 (4,000) ---------- ---------- ----------- $4,392,000 $8,449,000 $10,093,000 ========== ========== ===========
The tax effects of temporary differences that give rise to significant portions of the deferred tax asset at June 30, 2000 and 2001 are presented below:
2000 2001 ---------- ---------- Deferred tax assets derived from: Allowance for doubtful accounts.................... $2,171,000 $2,571,000 Reserve for inventories............................ 5,978,000 6,616,000 Nondeductible accrued expenses..................... 483,000 713,000 Timing of amortization deduction for intangible assets............................................ 95,000 35,000 Timing of depreciation deduction for plant and equipment......................................... 49,000 32,000 ---------- ---------- Net deferred tax asset........................... $8,776,000 $9,967,000 ========== ========== Current deferred tax asset........................... $8,632,000 $9,904,000 Non-current deferred tax asset (included in other assets)............................................. 144,000 63,000 ---------- ---------- $8,776,000 $9,967,000 ========== ==========
28 SCANSOURCE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Years Ended June 30, 1999, 2000 and 2001 As of June 30, 2000 and 2001, no valuation allowance has been provided. Management believes that a valuation allowance is not necessary based upon the level of historical taxable income and the projections for future taxable income over the periods during which the temporary differences are deductible. (6) Commitments and Contingencies The Company leases office space under noncancelable operating leases, which expire through June 2006. The Company also leases a portion of its building to third parties under noncancelable operating leases which expire through March 2004. Future minimum lease payments and rental income are as follows:
Rental Payments Income ---------- -------- June 30: 2002................................................... $ 441,000 $138,000 2003................................................... 340,000 67,000 2004................................................... 270,000 12,000 2005................................................... 157,000 -- 2006................................................... 11,000 -- ---------- -------- $1,219,000 $217,000 ========== ========
Lease expense was approximately $759,000, $724,000 and $835,000 for the years ended June 30, 1999, 2000 and 2001, respectively. Rental income was approximately $331,000, $263,000 and $303,000 for the years ended June 30, 1999, 2000 and 2001, respectively. Contractual obligations to purchase warehouse management and customer relationship management software amounted to approximately $818,000 at June 30, 2001. The Company owns an equity interest in a limited liability company for which it has guaranteed debt up to approximately $525,000. A majority of the Company's net revenues in 1999, 2000 and 2001 were received from the sale of products purchased from the Company's top ten vendors. The Company has entered into written distribution agreements with substantially all of its major vendors. While the Company's agreements with most of its vendors contain standard provisions for periodic renewals, these agreements generally permit termination by either party without cause upon 30 to 120 days notice. The Company or its subsidiaries are from time to time parties of lawsuits arising out of operations. Although there can be no assurance, based upon information known to the Company, the Company believes that any liability resulting from an adverse determination of such lawsuits would not have a material adverse effect on the Company's financial condition or results of operations. 29 SCANSOURCE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Years Ended June 30, 1999, 2000 and 2001 (7) Employee Benefit Plan The Company has a defined contribution plan under Section 401(k) of the Internal Revenue Code, which covers all employees meeting certain eligibility requirements. For the years ended June 30, 1999, 2000 and 2001, the Company provided a matching contribution of $160,000, $148,000 and $205,000, respectively, which was equal to one-half of each participant's contribution, up to a maximum matching contribution per participant of $800 for 1999, 2000 and 2001. The Company determines its matching contributions annually and can make discretionary contributions in addition to matching contributions. In fiscal 2001, the Company made a discretionary profit-sharing contribution of approximately $1.6 million to qualifying employees' 401(k) accounts in an amount equal to approximately 8% of their salary for fiscal 2001. Also in fiscal 2001, the Company provided for an additional discretionary contribution of approximately $800,000 to participant 401(k) accounts. Employer contributions are vested over a period of 3 to 5 years. (8) Segment Information The Company sells only in the United States and Canada. Its sales to Canada were $11,953,000, $19,489,000 and $16,129,000 for the three years ended June 30, 1999, 2000 and 2001, respectively. Prior to April 2000, the Company operated within a single reportable segment, value-added distribution. However, in the fourth quarter of fiscal 2000, the Company created its second business unit, an e-logistics unit called ChannelMax. The first reportable segment, valued-added distribution, offers approximately 18,000 products for sale in two primary categories: i) automatic data capture and point-of-sale equipment sold by the ScanSource sales team and ii) business telephones and computer telephony integration devices sold by the Catalyst Telecom sales team. These products are sold to more than 11,000 resellers and integrators of technology products, who are geographically disbursed over North America in a pattern that mirrors population concentration. Of its customers, no single account represented more than 5% of the Company's net sales in 2001 and its largest accounts receivable amount was 5.1% of total accounts receivable at June 30, 2001. The second reportable segment, e-logistics, provides real-time inventory availability and web catalog, order entry, order tracking and logistics for manufacturers and others in the automatic data capture and business telephone markets. This unit serves less than 15 customers, the largest of whom accounted for less than 5% of total Company sales at June 30, 2001 and 9.3% of total accounts receivable at June 30, 2001. Certain e-logistics sales are recognized on a net revenue recognition basis (see Note 1). Beginning in 2001, the Company evaluates segment performance based on operating income. Segment results for 1999 and 2000 have been restated to conform to the current-year presentation. Intersegment sales consist primarily of fees charged by the e-logistics segment to the value-added distribution segment. All intersegment revenues and profits are eliminated in the accompanying consolidated financial statements. 30 SCANSOURCE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Years Ended June 30, 1999, 2000 and 2001 Accounts receivable, a portion of inventories, and distribution center property and equipment can be identified by segment but cash, other current assets, other property and equipment and other noncurrent assets are not distinguishable between business segments. Operating results for each business unit are summarized below with historical data for 1999 and 2000 restated to conform to the new organizational structure:
1999 2000 2001 ------------ ------------ ------------ Sales: Value-added distribution......... $271,901,000 $452,072,000 $562,251,000 E-logistics...................... 29,215,000 53,143,000 77,213,000 Less intersegment sales.......... (3,399,000) (7,794,000) (8,720,000) ------------ ------------ ------------ $297,717,000 $497,421,000 $630,744,000 ============ ============ ============ Operating income: Value-added distribution......... $ 11,907,000 $ 20,595,000 $ 25,955,000 E-logistics...................... 322,000 2,278,000 2,843,000 ------------ ------------ ------------ $ 2,229,000 $ 22,873,000 $ 28,798,000 ============ ============ ============ Capital expenditures: E-logistics...................... $ -- $ 8,732,000 $ 3,210,000 Corporate........................ 2,081,000 4,846,000 4,409,000 ------------ ------------ ------------ $ 2,081,000 $ 13,578,000 $ 7,619,000 ============ ============ ============ Depreciation and amortization: E-logistics...................... $ -- $ 160,000 $ 934,000 Corporate........................ 1,256,000 2,518,000 3,500,000 ------------ ------------ ------------ $ 1,256,000 $ 2,678,000 $ 4,434,000 ============ ============ ============ Assets: Value-added distribution......... $ 93,056,000 $168,637,000 $202,032,000 E-logistics...................... 8,731,000 21,040,000 45,693,000 Corporate........................ 23,940,000 16,203,000 39,446,000 ------------ ------------ ------------ $125,727,000 $205,880,000 $287,171,000 ============ ============ ============
(9) Acquisition In May 2001, the Company's distribution segment purchased, at an auction conducted by the U.S. Bankruptcy Court, the operating assets of a business telephone distributor for approximately $17.3 million in cash. The acquisition was accounted for by the purchase method of accounting and, accordingly, the operating results have been included in the Company's consolidated results of operations from the date of acquisition. The purchase price was allocated to the fair value of net assets acquired, principally accounts receivable and inventories. The fair value of the accounts receivable and inventories acquired was based on preliminary estimates of amounts to be realized and may be revised if realization is different from the preliminary estimates. However, the ultimate determination of the fair value of the net assets acquired is not expected to have a significant effect on the Company's financial position or future results of operations. 31 SCANSOURCE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Years Ended June 30, 1999, 2000 and 2001 The following unaudited pro forma financial information shows the results of operations of the Company as though the acquisition had occurred as of July 1, 1999 or 2000, respectively. The unaudited pro forma financial information presented below does not purport to be indicative of the results of operations had the acquisition been consummated as of July 1, 1999 or July 1, 2000 or of the future results of operations of the combined businesses:
2000 2001 -------- -------- Amounts in thousands, except per share data (Unaudited) Net sales................................................. $606,782 $723,241 Net income................................................ $ 16,947 $ 18,387 Basic earnings per share.................................. $ 3.05 $ 3.24 Diluted earnings per share................................ $ 2.84 $ 3.00
(10) Related Party Transactions An officer of the Company is indebted to the Company under the terms of a secured loan to him, with an outstanding balance of approximately $231,000 and $333,000 at June 30, 2000 and 2001, respectively. The loan is included in other noncurrent assets in the accompanying consolidated balance sheets. The loan bears interest at 6.5%, with principal and interest due to be repaid in August 2002. (11) Subsequent Events In July 2001, the Company closed on a new line of credit with its bank group extending to September 2003 with a borrowing limit of $80 million with pricing tied to the Company's funded debt to earnings before interest, taxes, depreciation and amortization, under terms similar to the agreement in place at June 30, 2001. In July 2001, the Company's distribution segment purchased the operating assets of a distributor of automatic data capture products for approximately $15 million in cash. The acquisition will be accounted for by the purchase method of accounting and, accordingly, the operating results will be included in the Company's consolidated results of operations from the date of acquisition. The allocation of the purchase price to the fair value of net assets acquired has not been completed. However, preliminary estimates indicate that approximately $4 million of goodwill will result from the acquisition. 32 Independent Auditors' Report The Board of Directors ScanSource, Inc.: We have audited the accompanying consolidated balance sheet of ScanSource, Inc. and subsidiaries as of June 30, 2001, and the related consolidated statements of income, shareholders' equity, and cash flows for the year then ended. 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 audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of ScanSource, Inc. and subsidiaries as of June 30, 2001, and the results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America. DELOITTE & TOUCHE LLP Greenville, South Carolina August 13, 2001 33 Independent Auditors' Report The Board of Directors ScanSource, Inc.: We have audited the accompanying consolidated balance sheets of ScanSource, Inc. and subsidiaries as of June 30, 2000 and the related consolidated statements of income, shareholders' equity and cash flows for each of the years in the two-year period ended June 30, 2000. 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 auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of ScanSource, Inc. and subsidiaries as of June 30, 2000 and the results of their operations and their cash flows for each of the years in the two-year period ended June 30, 2000, in conformity with accounting principles generally accepted in the United States of America. KPMG LLP Greenville, South Carolina August 16, 2000 34 Management's Statement of Responsibility The management of ScanSource is responsible for the information contained in the financial statements and other parts of this report. The accompanying consolidated financial statements of ScanSource, Inc. and subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States of America. In preparing these statements, management has made judgments based upon available information. To ensure that this information will be as accurate and factual as possible, management has communicated to all appropriate employees the requirements for accurate recordkeeping and accounting. The Company maintains a system of internal accounting controls designed to provide reasonable assurances for the safeguarding of assets and the reliability of financial records. The system is subject to continuous review with appropriate management follow-up action. Management believes that through the careful selection of employees, the division of responsibilities and the application of formal policies and procedures, the Company has an effective and responsible system of internal accounting controls. The Company's independent accountants are responsible for conducting an audit of the Company's consolidated financial statements in accordance with auditing standards generally accepted in the United States of America and for expressing their opinion as to whether these consolidated financial statements present fairly, in all material respects, the financial position, results of operations and cash flows of the Company and its subsidiaries in conformity with accounting principles generally accepted in the United States of America. There is an Audit Committee of the Board of Directors composed of three nonemployee directors who meet regularly with management and the independent accountants to discuss specific accounting, reporting and internal control matters. The independent accountants have full and free access to the Audit Committee. 35 Price Range of Common Stock The Company's Common Stock is quoted on The Nasdaq National Market under the symbol "SCSC." The following table sets forth, for the periods indicated, the high and low closing prices of the Common Stock on The Nasdaq National Market.
High Low ------ ------ Fiscal Year 2000 First quarter.............................................. $31.38 $22.00 Second quarter............................................. 45.13 25.00 Third quarter.............................................. 48.00 34.88 Fourth quarter............................................. 38.88 26.25 Fiscal Year 2001 First quarter.............................................. 67.63 37.63 Second quarter............................................. 59.75 35.50 Third quarter.............................................. 40.98 30.94 Fourth quarter............................................. 58.25 28.06
On August 31, 2001, there were approximately 5,000 record and known beneficial holders of Common Stock. Dividend Policy The Company has never declared or paid cash dividends on its Common Stock. Under the terms of the Company's revolving credit facility, the payment of cash dividends is prohibited. 36 Board of Directors Steven H. Owings Chairman Michael L. Baur President & Chief Executive Officer Steven R. Fischer President Transamerica Business Capital Corporation James G. Foody Business Consultant John P. Reilly Managing Partner Keltic Financial Services LLC Management Team Steven H. Owings Chairman Michael L. Baur President and Chief Executive Officer R. Travis Collins Chief Executive Officer - ChannelMax John K. Black President - Catalyst Telecom Jeffery A. Bryson Chief Financial Officer and Treasurer Robert S. McLain, Jr. Vice President - Marketing Glen D. (Buck) Baker Vice President - Merchandising R. Scott Benbenek Vice President - Merchandising Farrar R. Pittman Vice President - Sales & Merchandising Sharon M. Huffman Vice President - Sales William T. Mauldin Vice President - Operations William D. Dueger Vice President - European Sales Gregory B. Dixon Chief Technology Officer Stock Listing The Company's Stock is traded on The Nasdaq National Market under the symbol SCSC. General Counsel Alston & Bird LLP Charlotte, North Carolina Transfer Agent First Union National Bank Charlotte, North Carolina Independent Accountants Deloitte & Touche 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 10K, contact our Investor Relations Department at (800) 944-2439, ext. 4375, or by e-mail at investor@scansource.com. Annual Meeting The annual meeting of shareholders of the Company will be held at 10:00 a.m. on December 6 at the GSP Airport Marriott, 1 Parkway East, Greenville, South Carolina. Corporate Headquarters Greenville, South Carolina 864-288-2432 Professional Services Group Norcross, Georgia 800-292-3631 Sales Offices Lake Forest, California 800-944-2432 Bellingham, Washington 800-830-2422 Cranford, New Jersey 908-931-1212 Richmond, British Columbia 604-303-9711 Buffalo, New York 800-944-2432 Tempe, Arizona 800-790-2029 Mexico City, Mexico 011-525-5406-111 [BACK COVER is graphic of empowerment continued from front cover]
EX-21 7 dex21.txt SUBSIDIARIES Exhibit 21 ---------- ScanSource, Inc. Schedule of Subsidiaries
State/Country Percentage of Voting Securities Name of Subsidiary of Incorporation Owned by Immediate Parent ------------------ ---------------- ------------------------- 4100 Quest, LLC South Carolina 100% ScanSource Properties, LLC South Carolina 100% ChannelMax, Inc. South Carolina 95% ScanSource Canada, Inc. British Columbia 100% ScanSource de Mexico S De RL De CV/1/ Mexico 100%
--------------- /1/ Operations commenced after June 30, 2001.
EX-23.1 8 dex231.txt CONSENT OF KPMG Exhibit 23.1 ------------ INDEPENDENT AUDITORS' CONSENT ----------------------------- The Board of Directors ScanSource, Inc.: We consent to the incorporation by reference in the registration statements on Form S-8 (No. 33-94640), (No. 333-25423), (No. 333-08884), (No. 333-49879), (No. 333-78281), (No. 333-88133), and (No. 333-36766) of our report dated August 16, 2000, relating to the consolidated balance sheets of ScanSource, Inc. and subsidiaries (the "Company") as of June 30, 2000, and the related consolidated statements of income, shareholder's equity, and cash flows for each of the years in the two-year period ended June 30, 2000, which report is incorporated by reference in the June 30, 2001, Annual Report on Form 10-K of the Company. /s/ KPMG LLP Greenville, South Carolina September 24, 2001 EX-23.2 9 dex232.txt DELOITTE AND TOUCHE Exhibit 23.2 ------------ INDEPENDENT AUDITORS' CONSENT ----------------------------- We consent to the incorporation by reference in the Registration Statements of ScanSource, Inc. and subsidiaries on Form S-8 (No. 33-94640), (No. 333-25423), (No. 333-08884), (No. 333-49879), (No. 333-78281), (No. 333-88133) and (No. 333-36766) of our reports dated August 13, 2001 appearing in and incorporated by reference in the Annual Report on Form 10-K of ScanSource, Inc. and subsidiaries for the year ended June 30, 2001. /s/ DELOITTE & TOUCHE LLP Greenville, South Carolina August 13, 2001 EX-99.1 10 dex991.txt CAUTIONARY STATEMENTS Exhibit 99.1 ------------ CAUTIONARY STATEMENTS (Pursuant to Safe Harbor under the Private Securities Litigation Reform Act of 1995) The Private Securities Litigation Reform Act of 1995 (as used in this Exhibit 99.1, the "Act") provides a "safe harbor" for forward-looking statements to encourage companies to provide prospective information about their companies, so long as those statements are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those discussed in the statement. The Company desires to take advantage of the "safe harbor" provisions of the Act. Certain information, particularly information regarding future economic performance, finances and management's plans and objectives, contained or incorporated by reference in this annual report on Form 10-K is forward-looking. In some cases, information regarding certain important factors that could cause actual results to differ materially from any such forward-looking statement appear together with such statement. The following factors, in addition to those set forth in the Form 10-K and other possible factors not listed, could also affect the Company's actual results and cause such results to differ materially from those expressed in forward-looking statements: Dependence on Vendors and Product Supply The Company's future success is highly dependent on its relationships with vendors. Sales of products from the Company's 10 largest vendors accounted for 84% of net sales for fiscal 2001. From time to time, the Company experiences shortages in availability of some products from vendors. The Company's business is largely dependent upon the terms provided by its vendors. The Company's vendor agreements generally contain provisions for periodic renewals and for termination by the vendor without cause and typically upon short notice. Some of the Company's vendor agreements require minimum purchase amounts or the maintenance of a representative assortment of the vendor's full line of products. Such contract provisions could increase the Company's working capital requirements. Although the Company believes its vendor relationships are good, there can be no assurance that the Company's vendor relationships will continue as currently in effect. The loss or deterioration of the Company's relationship with a major vendor, the authorization by vendors of additional wholesale distributors, or the failure by the Company to establish good relationships with major new vendors could have a material adverse effect on the Company's business, financial condition, and results of operations. As is typical in its industry, the Company receives volume discounts and certain credits for market development from most of its vendors. Any change in the availability of these discounts or credits or the failure of the Company to obtain vendor financing on satisfactory terms and conditions could have a material adverse effect on the Company's business, financial condition, and results of operations. Competition The markets in which the Company operates are highly competitive. Competition is based primarily on factors such as price, product availability, speed and accuracy of delivery, effectiveness of sales and marketing programs, credit availability, ability to tailor specific solutions to customer needs, quality and breadth of product lines and services, and availability of technical and product information. Certain of the Company's current and potential competitors have significantly greater financial, technical, marketing, and other resources than the Company and may be able to respond more quickly to new or emerging technologies and changes in customer requirements. Additional competition could result in price reductions, reduced margins, and loss of market share by the Company. There can be no assurance that the Company will be able to compete successfully against current and future competitors or that future competitive pressures will not materially and adversely affect its business, financial condition, and results of operations. Quarterly Fluctuations in Net Sales and Operating Results Net sales and operating results may fluctuate quarterly as a result of demand for the Company's products and services, the introduction of new hardware and software technologies, the introduction of new services by the Company and its competitors, changes in manufacturers' prices or price protection policies, changes in freight rates, disruption of warehousing or shipping channels, changes in the level of operating expenses, the timing of major marketing or other service projects, product supply shortages, inventory adjustments, changes in product mix, entry into new product markets, difficulty in maintaining margins, and general competitive and economic conditions. In addition, a substantial portion of the Company's net sales in each quarter results from orders booked in such quarter. Accordingly, the Company believes that period-to- period comparisons of its operating results should not be relied upon as an indication of future performance. Risks Associated with Inventory Management The Company's business, like that of other wholesale distributors, is subject to the risk that the value of its inventory will be adversely affected by price reductions by manufacturers or by technological changes affecting the usefulness or desirability of its products inventory. Under the terms of most of the Company's agreements and the policy of most manufacturers of specialty technology products, the Company has some price protection and stock rotation opportunities with respect to slow moving or obsolete inventory items. There can be no assurance, however, that, in every instance, the Company will be able to comply with all necessary conditions or manage successfully such price protection or stock rotation opportunities, if available. Also, these industry practices are sometimes not included in written agreements and do not protect the Company in all cases from declines in inventory value, excess inventory, or product obsolescence. There can be no assurance that manufacturers will continue such practices or that the Company will be able to manage successfully its existing and future inventories. Significant declines in inventory value in excess of established inventory reserves or dramatic changes in prevailing technology could have a material adverse effect on the Company's business, financial condition, and results of operations. Managing Growth; Risk of Entering New Markets The growth of the Company's business has required it to make additions in personnel and has increased its working capital requirements. Such growth has resulted in new and increased responsibilities for management and has placed a strain upon the Company's management, operating, financial, and technical resources. The Company may also in the future require additional equity or debt financing to support its increased working capital needs in connection with any expansion of its business. Such financing may not be available on terms that are favorable to the Company, if at all. Also crucial to the Company's success will be its ability to achieve additional economies of scale in order to sustain its operating margins. There can be no assurance that the Company will be able to attract or retain competent personnel and improve its operational status, obtain adequate working capital or achieve the needed economies of scale. The failure to do so could have a material adverse effect on the Company's business, financial condition, and results of operations. The Company's growth strategy continues to anticipate the entry into new product markets. Expansion of the Company's existing product markets or entry into new product markets could divert the use of the Company's resources and systems, require additional resources that might not be available, result in new or more intense competition, require longer implementation times or greater start-up expenditures than anticipated, or otherwise fail to achieve the desired results in a timely fashion, if at all. The Company's ability to manage successfully its growth will require continued enhancement of its operational, management and financial resources and controls. The Company's failure to manage effectively its growth could have a material adverse effect on the Company's business, financial condition and results of operations. Dependence on Centralized Functions The Company currently distributes products from a single warehouse located in Memphis, Tennessee and manages its operations through a single information system based in Greenville, South Carolina. Repair, replacement, or relocation of such centralized functions could be costly or untimely. Although the Company has business interruption insurance, an uninsurable loss from electrical or telephone failure, fire or other casualty, or other disruption could have a material adverse effect on the Company's business, financial condition, and results of operations. The Company's use of a single warehouse also makes the Company more vulnerable to dramatic changes in freight rates than a competitor with multiple, geographically dispersed warehouse sites. Losses in excess of insurance coverage, an uninsurable loss, or changes in freight rates could have a material adverse effect on the Company's business, financial condition, and results of operations. Dependence on Senior Management The success of the Company is largely dependent on the skills, experience and efforts of its senior management, particularly Steven H. Owings, Chairman, Michael L. Baur, Chief Executive Officer and President, and Jeffery A. Bryson, Chief Financial Officer. The Company has obtained a "key person" insurance policy on the life of Mr. Baur in the amount of $1.0 million. The loss of services of any of these named individuals could have a material adverse effect on the Company's business, financial condition, and results of operations. Dependence on Third-Party Shippers The Company presently ships the majority of its products from Memphis, Tennessee by FedEx or United Parcel Service. Changes in shipping terms, or the inability of these third-party shippers to perform effectively (whether as a result of mechanical failure, casualty loss, labor stoppage, other disruption, or any other reason), could have a material adverse effect on the Company's business, financial condition, and results of operations. There can be no assurance that the Company can maintain favorable shipping terms or replace such shipping services on a timely or cost-effective basis. Risks Associated with Extensions of Credit As a marketing enhancement, the Company offers unsecured and secured credit terms for qualified resellers. Historically, the Company has not experienced losses from write-offs materially in excess of established reserves. While the Company evaluates resellers' qualifications for credit and monitors its extensions of credit, defaults by resellers in timely repayment of these extensions of credit could have a material adverse effect on the Company's business, financial condition, or results of operations. Possible Volatility of Stock Price The market price of the Company's common stock may be subject to wide fluctuations in response to quarterly variations in operating results, general market movements, and other events or factors. In addition, in recent years the stock markets in general, and technology-related stocks in particular, have experienced price and volume fluctuations that often have been unrelated or disproportionate to the operating performance of companies. These fluctuations, as well as general economic and market conditions, may adversely affect the market price of the Company's common stock.