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-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Bdaw7kVK5ZvNKgE+BRZ21xRLmT1ujMVX1a8kNi5B/h3R8+fkuAr0AFrJid8MxZtf fpj779kaCopzCgpZVn8n+Q== 0001193125-08-227331.txt : 20081106 0001193125-08-227331.hdr.sgml : 20081106 20081106105037 ACCESSION NUMBER: 0001193125-08-227331 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20080930 FILED AS OF DATE: 20081106 DATE AS OF CHANGE: 20081106 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-26926 FILM NUMBER: 081165739 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-Q 1 d10q.htm FORM 10-Q FORM 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 for the Quarterly Period Ended September 30, 2008

LOGO

Commission File Number: 000-26926

ScanSource, Inc.

(Exact name of registrant as specified in its charter)

SOUTH CAROLINA

57-0965380

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

6 Logue Court

Greenville, South Carolina, 29615

(Address of principal executive offices)

(864) 288-2432

(Registrant’s telephone number, including area code)

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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer x Accelerated filer ¨

Non-accelerated filer ¨ (Do not check if a smaller reporting company) ¨ Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.


Class		Outstanding at October 31, 2008
Common Stock, no par value per share		26,408,245 shares

SCANSOURCE, INC.

INDEX TO FORM 10-Q

September 30, 2008


			Page #
PART I. FINANCIAL INFORMATION

	Item 1.	Financial Statements
		Condensed Consolidated Balance Sheets as of September 30, 2008 and June 30, 2008	4
		Condensed Consolidated Income Statements for the Quarters Ended September 30, 2008 and 2007	5
		Condensed Consolidated Statements of Shareholders’ Equity for the Quarter ended September 30, 2008	6
		Condensed Consolidated Statements of Cash Flows for the Quarters Ended September 30, 2008 and 2007	7
		Notes to Condensed Consolidated Financial Statements	8
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	22
	Item 4.	Controls and Procedures	23

PART II. OTHER INFORMATION
	Item 1.	Legal Proceedings	24
	Item 1A.	Risk Factors	24
	Item 6.	Exhibits	25

SIGNATURES			26

FORWARD-LOOKING STATEMENTS

The forward-looking statements included in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Quantitative and Qualitative Disclosures About Market Risk” “Legal Proceedings,” and “Risk Factors,” sections and elsewhere herein, which reflect our best judgment based on factors currently known, involve risks and uncertainties. Words such as “expects,” “anticipates,” “believes,” “intends,” “plans,” “hopes,” and variations of such words and similar expressions are intended to identify such forward-looking statements. Except as may be required by law, we expressly disclaim any obligation to update these forward-looking statements to reflect events or circumstances after the date of this Form 10-Q or to reflect the occurrence of unanticipated events. Actual results could differ materially from those anticipated in these forward-looking statements as a result of a number of factors including, but not limited to, the factors discussed in such sections and, in particular, those set forth in the cautionary statements included in “Risk Factors,” contained in our Annual Report on Form 10-K for the year ended June 30, 2008 and in this Form 10-Q. The forward-looking information we have provided in this Form 10-Q pursuant to the safe harbor established under the Private Securities Litigation Reform Act of 1995 should be evaluated in the context of these factors.

PART 1. FINANCIAL INFORMATION

Item 1.

Financial Statements

SCANSOURCE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(In thousands, except for share information)


	September 30, 2008		June 30, 2008 *
Assets
Current assets:
Cash and cash equivalents	$	16,208	$	15,224
Trade and notes receivable:
Trade, less allowance of $18,320 at September 30, 2008 and $17,244 at June 30, 2008		344,115		360,154
Other receivables		9,378		8,052
Inventories		283,960		280,077
Prepaid expenses and other assets		6,463		5,556
Deferred income taxes		11,746		11,428

Total current assets		671,870		680,491

Property and equipment, net		23,473		22,420
Goodwill		34,852		36,121
Other assets, including identifiable intangible assets		32,362		33,174

Total assets	$	762,557	$	772,206


Liabilities and Shareholders’ Equity
Current liabilities:
Current portion of long-term debt	$	—	$	—
Short-term borrowings		2,043		7,649
Trade accounts payable		279,399		265,284
Accrued expenses and other liabilities		27,480		34,337
Income taxes payable		8,221		4,585

Total current liabilities		317,143		311,855
Long-term debt		30,369		29,576
Borrowings under revolving credit facility		—		27,047
Other long-term liabilities		8,342		7,975

Total liabilities		355,854		376,453

Commitments and contingencies

Shareholders’ equity:
Preferred stock, no par value; 3,000,000 shares authorized, none issued		—		—
Common stock, no par value; 45,000,000 shares authorized, 26,406,245 and 26,349,520 shares issued and outstanding at September 30, 2008 and June 30, 2008, respectively		99,372		96,097
Retained earnings		302,564		290,134
Accumulated other comprehensive income		4,767		9,522

Total shareholders’ equity		406,703		395,753

Total liabilities and shareholders’ equity	$	762,557	$	772,206

*	Derived from audited consolidated financial statements

See Notes to Condensed Consolidated Financial Statements

SCANSOURCE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED INCOME STATEMENTS (UNAUDITED)

(In thousands, except per share data)


	Quarter ended September 30,
	2008			2007
Net sales	$	539,825		$	553,691
Cost of goods sold		484,323			495,567

Gross profit		55,502			58,124

Operating expenses:
Selling, general and administrative expenses		34,874			32,771

Operating income		20,628			25,353


Other expense (income):
Interest expense		579			2,125
Interest income		(351	)		(303	)
Other, net		277			(152	)

Other expense, net		505			1,670

Income before income taxes		20,123			23,683
Provision for income taxes		7,693			8,997

Net income	$	12,430		$	14,686


Per share data:
Net income per common share, basic	$	0.47		$	0.57

Weighted-average shares outstanding, basic		26,364			25,866

Net income per common share, diluted	$	0.47		$	0.56

Weighted-average shares outstanding, diluted		26,611			26,276

See Notes to Condensed Consolidated Financial Statements

SCANSOURCE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY (UNAUDITED)

(In thousands, except share data)


	Common Stock (Shares)	Common Stock (Amount)		Retained Earnings		Accumulated Other Comprehensive Income			Total
Balance at June 30, 2008	26,349,520	$	96,097	$	290,134	$	9,522		$	395,753

Comprehensive Income:
Net income	—		—		12,430		—			12,430
Unrealized loss on hedged transaction, net of tax of $55	—		—		—		(90	)		(90	)
Foreign currency translation adjustment	—		—		—		(4,665	)		(4,665	)

Total comprehensive income										7,675

Exercise of stock options	56,725		674		—		—			674
Share based compensation	—		979		—		—			979
Tax benefit of deductible compensation arising from exercise of stock options	—		1,622		—		—			1,622

Balance at September 30, 2008	26,406,245	$	99,372	$	302,564	$	4,767		$	406,703

See Notes to Condensed Consolidated Financial Statements

SCANSOURCE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)

(In thousands)


	Three months ended September 30,
	2008			2007
Cash flows from operating activities:
Net income	$	12,430		$	14,686
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation		1,110			1,074
Amortization of intangible assets		665			656
Allowance for accounts and notes receivable		1,769			2,067
Share-based compensation and restricted stock		979			929
Deferred income taxes		(472	)		(1,747	)
Excess tax benefits from share-based payment arrangements		(1,622	)		(155	)
Changes in operating assets and liabilities:
Trade and notes receivable		6,934			(20,719	)
Other receivables		1,899			(3,142	)
Inventories		(8,161	)		(19,433	)
Prepaid expenses and other assets		(997	)		5,886
Other noncurrent assets		(123	)		(907	)
Trade accounts payable		17,363			(4,999	)
Accrued expenses and other liabilities		(6,180	)		(3,624	)
Income taxes payable		5,402			5,324

Net cash provided by (used in) operating activities		30,996			(24,104	)


Cash flows used in investing activities:
Capital expenditures		(2,234	)		(2,594	)
Net proceeds from sale of property and equipment		612			—

Net cash used in investing activities		(1,622	)		(2,594	)


Cash flows from financing activities:
Decreases in short-term borrowings, net		(4,927	)		(960	)
(Payments) advances on revolving credit, net of expenses		(26,141	)		39,764
Exercise of stock options		674			129
Excess tax benefits from share-based payment arrangements		1,622			155
Proceeds from issuance of long-term debt		793			—
Repayment of long-term debt		—			(2,628	)

Net cash (used in) provided by financing activities		(27,979	)		36,460

Effect of exchange rate changes on cash and cash equivalents		(411	)		126

Increase in cash and cash equivalents		984			9,888
Cash and cash equivalents at beginning of period		15,224			1,864

Cash and cash equivalents at end of period	$	16,208		$	11,752

See Notes to Condensed Consolidated Financial Statements

SCANSOURCE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(1) Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of ScanSource, Inc. (the “Company”) have been prepared by the Company’s management in accordance with U.S. generally accepted accounting principles for interim financial information and applicable rules and regulations of the Securities Exchange Act of 1934, as amended. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for annual financial statements. The unaudited condensed consolidated financial statements included herein contain all adjustments (consisting of normal recurring adjustments) which are, in the opinion of management, necessary to present fairly the financial position as of September 30, 2008 and June 30, 2008, the results of operations for the quarters ended September 30, 2008 and 2007, and the statement of cash flows for the quarters ended September 30, 2008 and 2007. The results of operations for the quarters ended September 30, 2008 and 2007 are not necessarily indicative of the results to be expected for a full year. These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2008.

(2) Business Description

The Company is a leading wholesale distributor of specialty technology products, providing value-added distribution sales to resellers in the specialty technology markets. The Company has two geographic distribution segments: one serving North America from the Southaven, Mississippi distribution center, and an international segment currently serving Latin America (including Mexico) and Europe from distribution centers located in Florida and Mexico, and in Belgium, respectively. The North American distribution segment markets automatic identification and data capture (“AIDC”) and point-of-sale (“POS”) products through its ScanSource POS and Barcoding sales unit; voice, data and converged communications equipment through its Catalyst Telecom sales unit; video conferencing, telephony, and communications products through its ScanSource Communications unit; and electronic security products and wireless infrastructure products through its ScanSource Security Distribution unit. The international distribution segment markets AIDC, POS and communications products through its ScanSource Latin American and European sales units.

(3) Summary of Significant Accounting Policies

Except as described below, there have been no material changes to the Company’s significant accounting policies for the three month period ended September 30, 2008 from the information included in Note 2 of the Company’s Consolidated Financial Statements included in the Form 10-K for the fiscal year ended June 30, 2008. For a discussion of the Company’s significant accounting policies, please see the Company’s Annual Report filed in our Form 10-K for the fiscal year ended June 30, 2008.

Cash and Cash Equivalents

The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. Checks released but not yet cleared at the Company’s bank of $21.5 million and $25.9 million as of September 30, 2008 and June 30, 2008, respectively, are included in accounts payable.

Reclassifications

Certain prior year amounts have been reclassified to conform to the current year presentation in the accompanying condensed consolidated financial statements.

Recently Adopted Accounting Policies

Effective July 1, 2008, the first day of fiscal 2009, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, or (“SFAS 159”). SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value. The Company did not elect the fair value reporting option for any assets and liabilities not previously recorded at fair value.

Effective July 1, 2008, the first day of fiscal 2009, the Company adopted the provisions of SFAS No. 157, Fair Value Measurements, or (“SFAS 157”) for financial assets and liabilities, as well as any other assets and liabilities that are carried at fair value on a recurring basis in financial statements. SFAS 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. SFAS 157 applies under other accounting

pronouncements in which the Financial Accounting Standards Board (“FASB”) has previously concluded that fair value is the relevant measurement attribute. Accordingly, SFAS 157 does not require any new fair value measurements. The impact of adoption of SFAS 157 is discussed in Note 8 – Fair Value of Financial Instruments. The Company applied the provisions of Financial Staff Positions Nos. 157-1 and 157-2, which partially deferred the effective date of SFAS 157 for certain non-financial assets and liabilities and removed certain leasing transactions from its scope. The deferred non-financial assets and liabilities include items such as goodwill and non-amortizable intangibles. The Company is required to adopt SFAS 157 for non-financial assets and liabilities in the first quarter of fiscal 2010. The Company’s management is still evaluating the impact on the Company’s Consolidated Financial Statements.

Accounting Standards Recently Issued

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133, or (“SFAS 161”). This new standard requires enhanced disclosures for derivative instruments, including those used in hedging activities. It is effective for fiscal years and interim periods beginning after November 15, 2008, and will be applicable to the Company in the third quarter of fiscal 2009. The Company is currently evaluating the potential impact, if any, of the adoption of SFAS 161 on its Consolidated Financial Statements.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements-an amendment of Accounting Research Bulletin No. 51, or (“SFAS 160”). SFAS 160 establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent’s ownership interest and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. SFAS 160 also establishes disclosure requirements that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS 160 is effective as of the beginning of an entity’s fiscal year that begins after December 15, 2008, and will be adopted by the Company in the first quarter of fiscal 2010. The Company is currently evaluating the potential impact, if any, of the adoption of SFAS 160 on the Company’s Consolidated Financial Statements.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations, or (“SFAS 141R”). SFAS 141R establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree and the goodwill acquired. SFAS 141R also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. SFAS 141R is effective as of the beginning of an entity’s fiscal year that begins after December 15, 2008, and will be adopted by the Company in the first quarter of fiscal 2010. Early adoption is prohibited.

(4) Earnings Per Share

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.


	Net Income		Shares	Per Share Amount
	(in thousands, except per share data)
Quarter ended September 30, 2008:
Income per common share, basic	$	12,430	26,364	$	0.47

Effect of dilutive stock options		—	247

Income per common share, diluted	$	12,430	26,611	$	0.47

Quarter ended September 30, 2007:
Income per common share, basic	$	14,686	25,866	$	0.57

Effect of dilutive stock options		—	410

Income per common share, diluted	$	14,686	26,276	$	0.56

For the quarters ended September 30, 2008 and 2007, there were 910,237 and 707,000 weighted average shares, respectively, excluded from the computation of diluted earnings per share because their effect would have been anti-dilutive.

(5) Goodwill and Acquisitions

The changes in the carrying amount of goodwill for the quarter ended September 30, 2008, by operating segment, are as follows:


	*(in thousands)*
	North American Distribution Segment		International Distribution Segment			Total
Balance as of June 30, 2008	$	20,081	$	16,040		$	36,121
Goodwill acquired		—		—			—
Fluctuations in foreign currencies		—		(1,269	)		(1,269	)

Balance as of September 30, 2008	$	20,081	$	14,771		$	34,852

There was no acquisition activity during the quarter ended September 30, 2008. Included within other assets described in the balance sheet are net identifiable intangible assets of $18.7 million and $19.6 million at September 30, 2008 and June 30, 2008, respectively. These amounts relate primarily to customer relationships, non-compete agreements, and trade names associated with prior period acquisitions. The decrease in this amount from the prior period relates to amortization expense and to a lesser extent, foreign exchange losses.

(6) Short Term Borrowings and Long Term Debt

Short Term Borrowings

The Company has a €6.0 million secured revolving credit facility which bears interest at the 30 day Euro Interbank Offered Rate (“EURIBOR”) plus a spread of 0.50 per annum. The effective interest rate at September 30, 2008 and June 30, 2008 was 5.5% and 4.97%, respectively. This facility is secured by the assets of our European operations and is guaranteed by ScanSource, Inc.

Revolving Line of Credit

On September 28, 2007, the Company entered into a $250 million multi-currency revolving credit facility with a syndicate of banks that matures on September 28, 2012. This revolving credit facility has a $50 million accordion feature that allows the Company to increase the availability to $300 million subject to obtaining commitments for the incremental capacity from existing or new lenders. The new facility is guaranteed by the Company and certain of its subsidiaries and is secured by substantially all of the domestic assets of the Company and its domestic subsidiaries. The facility bears interest at a rate equal to a spread over the applicable London Interbank Offered Rate (“LIBOR”) prime rate, as chosen by the Company. This spread is dependent on the Company’s ratio of funded debt to EBITDA (as defined in the credit facility) and ranges from 0.50% to 1.25% for LIBOR-based loans, and from 0.00% to 0.25% for prime rate-based loans. The spread in effect as of September 30, 2008 was 0.50% for LIBOR-based loans and 0.00% for prime rate-based loans. The agreement subjects the Company to certain financial covenants, including minimum fixed charge and leverage ratio covenants. The agreement also has certain restrictive covenants that, among other things, place limitations on the payment of cash dividends. The Company was in compliance with all covenants under the credit facility as of September 30, 2008. This facility also contains certain subjective acceleration clauses, which, upon occurrence of certain events, may cause amounts due under the agreement to become immediately due and payable. The Company has no indication that it is in default of any such clauses and therefore has classified its debt based on the dates regular payments are due.

There were no outstanding borrowings on this facility as of September 30, 2008, leaving $250 million available for additional borrowings. The effective weighted average interest rate for the Company’s revolving line of credit facility as of June 30, 2008 was 4.55%.

Long-Term Debt


	*(in thousands)*
	September 30, 2008		June 30, 2008
Industrial Development Revenue Bond, monthly payments of interest only, 3.33% variable interest rate at September 30, 2008 and maturing in fiscal 2033	$	5,369	$	4,576
Unsecured note payable to a bank, monthly payments of interest only, 3.12% variable interest rate at September 30, 2008 and maturing in fiscal 2013		25,000		25,000

		30,369		29,576
Less current portion		—		—

Long-term portion	$	30,369	$	29,576

On August 1, 2007, the Company entered into an agreement with the State of Mississippi in order to provide financing for the acquisition and installation of certain equipment to be utilized at the Company’s new Southaven, Mississippi distribution facility, through the issuance of an industrial development revenue bond. The bond matures on September 1, 2032 and accrues interest at the 30-day LIBOR rate plus a spread of 0.85%. The terms of the bond allow for payment of interest only for the first 10 years of the agreement, and then, starting on September 1, 2018 through 2032, principal and interest payments are due until the maturity date or the redemption of the bond. The Company receives advances on this bond on an as-needed basis to pay the ongoing costs of the project, not to exceed $6 million. As of September 30, 2008, the Company was in compliance with all covenants under this bond.

On January 2, 2008, the Company entered into a $25 million promissory note with a financial institution. This note payable accrues interest on the unpaid balance at a rate per annum equal to the 30-day LIBOR plus 0.65% and matures on September 28, 2012. The terms of the note payable allow for payments to be due and payable in consecutive monthly payment terms of accrued interest only, commencing on January 31, 2008, and continuing on the last day of each month thereafter until the principal balance is fully re-paid. In any event, all principal and accrued interest will be due and payable on September 28, 2012. This note may be prepaid in whole or in part at any time without penalty. Under the terms of this agreement, the Company has agreed not to encumber its headquarters’ property, except as permitted by the lender. As of September 30, 2008, the Company was in compliance with all covenants under this note payable.

(7) Derivatives and Hedging Activities

The Company utilizes certain financial instruments to manage risk, including foreign currency and interest rate exposures that exist as part of its ongoing business operations.

Cash Flow Hedges

On January 4, 2008, the Company entered into an interest rate swap with a notional amount of $25 million. The Company designated this interest rate swap as a cash flow hedge of our exposure to the variability in future cash flows attributable to interest payments of 30-day LIBOR plus a fixed spread of 0.65% due on the $25 million promissory note payable discussed in Note 6. Under the terms of the swap, the Company pays a fixed rate of 3.65% plus a fixed spread of 0.65% on the $25 million notional amount and receives payments from a counterparty based on the 30-day LIBOR plus a fixed spread of 0.65% for a term ending on September 28, 2011. Interest rate differentials paid or received under the swap agreement are recognized as adjustments to interest expense. To the extent the swap is effective in offsetting the variability of the hedged cash flows, changes in the fair value of the swap are not included in current earnings but are reported as other comprehensive income (loss). The fair value of the swap was immaterial as of September 30, 2008.

The components of the cash flow hedge included in accumulated other comprehensive income in the Condensed Consolidated Statement of Shareholders’ Equity for the quarters ended September 30, 2008 and 2007, are as follows:


	*(in thousands)*
	Quarters Ended
	September 30, 2008			September 30, 2007
Net interest expense recognized as a result of interest rate swap	$	(75	)	$	—
Unrealized loss in fair value of interest swap rates		(15	)		—

Net decrease in accumulated other comprehensive income, net of tax		(90	)		—

Other Forward Contracts

The Company enters into forward contracts to manage its foreign currency risk related to certain assets and liabilities denominated in currencies other than the relevant functional currency. These forward contracts generally mature monthly and the notional amounts are adjusted periodically to reflect changes in net asset or liability balances. Since these contracts are not designated as hedges, the gains or losses on these forward contracts are recorded as other income or expense in our income statement and are used to mitigate the earnings impact of the gains and losses associated with these net assets or liabilities. At September 30, 2008, the Company had forward contracts not designated as hedges with a notional value of $58 million. The fair value of these contracts was a net asset of $1.5 million.

(8) Fair Value of Financial Instruments

The Company adopted SFAS 157 effective July 1, 2008 for financial assets and liabilities measured on a recurring basis. SFAS 157 applies to all financial assets and financial liabilities that are being measured and reported on a fair value basis. There was no impact from the adoption of SFAS 157 on the Condensed Consolidated Financial Statements. SFAS 157 establishes a framework for measuring fair value and expands disclosure about fair value measurements. The Company’s financial assets and liabilities measured at fair value are required to be grouped in one of three levels. The levels prioritize the inputs used to measure the fair value of the assets or liabilities. These levels are:

•

Level 1 – Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

•

Level 2 – Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability;

•

Level 3 – Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e. supported by little or no market activity).

The following table summarizes the valuation of the Company’s short-term investments and financial instruments by the above SFAS 157 categories as of September 30, 2008:


	Total		Quoted prices in active markets (Level 1)	Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
Deferred compensation plan investments (1)	5,836		5,836	—		—
Derivative instruments (2)
Forward foreign currency exchange contracts	1,473		—	1,473		—
Interest rate swap liability	(38	)	—	(38	)	—
Long-term accounts receivable	4,303		—	4,303		—

Total	11,574		5,836	5,738		—

(1)	These investments are held in a rabbi trust and include mutual funds and cash equivalents for payment of certain non-qualified benefits for certain retired, terminated and active employees.

(2)	See Note 7, “Derivatives and Hedging Activities”.

(9) Segment Information

The Company is a leading distributor of specialty technology products, providing value-added distribution sales to resellers in the specialty technology markets. The Company has two reporting segments, based on geographic location. The measure of segment profit is operating income, and the accounting policies of the segments are the same as those described in Note 2 of the Company’s Annual Report filed on Form 10-K for the fiscal year ended June 30, 2008.

North American Distribution

North American Distribution offers products for sale in four primary categories: (i) AIDC and POS equipment sold by the ScanSource POS and Barcoding sales unit, (ii) voice, data and converged communications equipment sold by the Catalyst Telecom sales unit, (iii) video conferencing, telephony, and communications products sold by the ScanSource Communications unit, (iv) electronic security products and wireless infrastructure products through the ScanSource Security Distribution sales unit. These products are sold to more than 14,000 resellers and integrators of technology products that are geographically disbursed over the United States and Canada in a pattern that mirrors population concentration. No single account represented more than 7% of the Company’s consolidated net sales for the quarters ended September 30, 2008 and 2007, respectively.

International Distribution

The international distribution segment sells to two geographic areas, Latin America (including Mexico) and Europe, and offers AIDC and POS equipment as well as communications products to more than 6,000 resellers and integrators of technology products. This segment began during fiscal 2002 with the Company’s purchase of a majority interest in Netpoint and the start-up of the Company’s European operations. During fiscal 2008, the Company expanded its communications business internationally with the acquisition of MTV Telecom, a UK-based distributor of voice and data solutions. Of this segment’s customers, no single account represented more than 2% of the Company’s consolidated net sales during the quarters ended September 30, 2008 and 2007, respectively.

Inter-segment sales consist primarily of sales by the North American distribution segment to the international distribution segment. All inter-segment revenues and profits have been eliminated in the accompanying Condensed Consolidated Financial Statements.

Selected financial information of each business segment is presented below:


	*(in thousands)*
	Quarter ended September 30,
	2008			2007
Sales:
North American distribution	$	453,299		$	471,972
International distribution		94,860			89,964
Less intersegment sales		(8,334	)		(8,245	)

	$	539,825		$	553,691

Depreciation and amortization:
North American distribution	$	1,438		$	1,536
International distribution		337			194

	$	1,775		$	1,730

Operating income:
North American distribution	$	17,725		$	22,114
International distribution		2,903			3,239

	$	20,628		$	25,353

Capital expenditures:
North American distribution	$	2,122		$	2,475
International distribution		112			119

	$	2,234		$	2,594


	September 30, 2008			June 30, 2008
Assets:
North American distribution	$	695,988		$	671,434
International distribution		66,569			100,772

	$	762,557		$	772,206

(10) Commitments and Contingencies

On January 24, 2008, the Company announced that it had received written notice from the SEC advising it that the SEC’s investigation concerning the Company’s historical stock option grant practices had been completed and that no enforcement action was recommended.

On March 10, 2008 the Company filed a motion to dismiss consolidated shareholder derivative lawsuits. The original lawsuit was filed on November 21, 2006 by a purported stockholder in the United States District Court for the District of South Carolina in Greenville, South Carolina against certain current and former officers and directors of the Company and against the Company, as a nominal defendant, asserting causes of action based on alleged violations of securities laws (including alleged violations of Section 10(b), 14(a), and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 of the SEC) and other common law claims including, breach of fiduciary duty, aiding and abetting and unjust enrichment relating to allegations concerning certain of the Company’s prior stock option grants. The lawsuit seeks relief in the form of an accounting, rescission, unspecified money damages, disgorgement, attorneys’ fees, fees and expenses and other relief.

On March 25, 2008, the Court confirmed the prior appointment of the plaintiff as lead plaintiff and the consolidation of subsequent actions that related to the same facts. This order effected a consolidation of a second derivative lawsuit that had been filed on April 11, 2007 and was a substantially similar derivative lawsuit to the first action.

The Company’s ongoing costs to defend the derivative litigation are being paid by its insurance carrier. On November 27, 2006 and April 13, 2007, the Company provided notice to its insurance carrier of these actions. The Company’s insurance carrier, subject to a reservation of rights, provided a preliminary position on the coverage of these derivative claims in which the carrier indicated that these lawsuit allegations appear to constitute a claim within coverage of the Company’s insurance policy. The carrier continues to assess coverage of these matters.

The Company and 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 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.

(11) Income Taxes

Effective July 1, 2007, the beginning of fiscal year 2008, the Company adopted the provisions of FIN 48, which clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109, Accounting for Income Taxes and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

As of September 30, 2008 and June 30, 2008, the Company had approximately $2.1 million and $2.0 million of total gross unrecognized tax benefits including interest, respectively. Of this total, approximately $1.8 million and $1.7 million, respectively, represent the amount of unrecognized tax benefits that are permanent in nature and, if recognized, would affect the annual effective tax rate. The Company does not believe that the total amount of unrecognized tax benefits will significantly increase or decrease within twelve months of the date of this report.

The Company conducts business globally and, as a result, one or more of its subsidiaries files income tax returns in the U.S. federal, various state, local and foreign jurisdictions. In the normal course of business, the Company is subject to examination by taxing authorities in countries in which it operates. With few exceptions, the Company is no longer subject to state and local, or non-U.S. income tax examinations by tax authorities for the years before 2005.

The Company’s continuing practice is to recognize interest and penalties related to income tax matters in income tax expense. As of September 30, 2008, the Company had approximately $0.8 million accrued for interest and penalties, of which less than $0.1 million was a current period expense.

The Company’s effective tax rate differs from the federal statutory rate of 35% primarily as a result of state income taxes.

(12) Subsequent Events

On October 10, 2008, in response to the uncertainty in credit markets worldwide, the Company borrowed $75 million on our revolving line of credit. These funds are being held in a federally insured cash account, as the sole purpose of this borrowing is to ensure that the Company has access to sufficient working capital to meet the needs of our customers and vendors in the unlikely event that the credit markets and related financial systems would deteriorate further.

On October 28, 2008, the Company settled its legal claim against a former service provider resulting in a $3.5 million Company recovery. Under the terms of the settlement agreement dated November 4, 2008 such amount is to be received in the next thirty days.

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Results of Operations

Net Sales

The following table summarizes our net sales results (net of inter-segment sales) for the quarters ended September 30, 2008 and 2007, respectively:


*(in thousands)*	Quarter ended September 30,				$ Change			% Change
	2008		2007		$ Change			% Change
North American distribution	$	444,965	$	463,727	$	(18,762	)	-4.0	%
International distribution		94,860		89,964		4,896		5.4	%

Net sales	$	539,825	$	553,691	$	(13,866	)	-2.5	%

Consolidated net sales for the quarter ended September 30, 2008 decreased approximately $14 million, or 2.5%, to $540 million in comparison to the prior period quarter of $554 million.

North American Distribution

North American distribution sales include sales to technology resellers in the United States and Canada from our Southaven, Mississippi distribution center. In a competitive environment, net sales for this segment decreased 4.0% to $444.9 million for the quarter ended September 30, 2008, compared to $463.7 million in the comparative prior year period.

The Company’s POS, Barcoding, and Security sales increased 4.4% in comparison to the prior year quarter. While the Company continues to add new products and attract resellers who were previously buying directly from manufacturers or other distributors, the overall uncertainty of economic conditions across North America continues to challenge our business in these sales units.

The Company has two North American sales units that sell communications products to our customers – the Catalyst Telecom sales unit and the ScanSource Communications sales unit. The combined sales of these units were 11% lower in the current quarter versus the prior year quarter. As expected, Catalyst Telecom sales for the quarter were adversely impacted by program changes implemented by our key vendor in this sales unit. This revenue shortfall was somewhat offset by sales growth in other product lines within this sales unit. ScanSource Communications experienced strong year over year results from its audio and video product categories.

International Distribution

The international distribution segment includes sales to Latin America (including Mexico) and Europe from the ScanSource POS and Barcoding and ScanSource Communications sales units. Sales for the overall international segment increased by $4.9 million, or 5.4% compared to the prior year quarter. However, on a constant exchange rate basis, sales actually decreased 1%. This weakness is reflective of a more competitive environment across most regions of Europe, which is largely attributable to the general state of the economy.

Gross Profit

The following tables summarize the Company’s gross profit for the quarters ended September 30, 2008 and 2007, respectively:


	Quarter ended September 30,									% of Sales September 30,
*(in thousands)*	2008		2007		$ Change			% Change		2008		2007
North American distribution	$	43,653	$	47,765	$	(4,112	)	-8.6	%	9.8	%	10.3	%
International distribution		11,849		10,359		1,490		14.4	%	12.5	%	11.5	%

Gross profit	$	55,502	$	58,124	$	(2,622	)	-4.5	%	10.3	%	10.5	%

North American Distribution

Gross profit for the North American distribution segment decreased 8.6%, or $4.1 million, for the quarter ended September 30, 2008, as compared to the prior year quarter. The decrease in gross profit is primarily the result of lower sales volume in our Catalyst Telecom sales unit, as previously discussed. Gross profit as a percentage of net sales for the North American distribution segment also decreased to 9.8% in the current quarter from 10.3% in the comparative quarter. This decrease is largely attributable to a less favorable product mix in combination with lower program achievement levels on certain vendor programs in a more competitive market.

International Distribution

In our international distribution segment, gross profit increased by 14.4% or $1.5 million for the quarter ended September 30, 2008, as compared to the prior year quarter. This increase was primarily due to the acquisition of MTV Telecom and a more favorable product and customer mix. Gross profit of this segment, expressed as a percentage of net sales, is typically greater than the North American distribution segment. In the current quarter, this percentage increased to 12.5%, as compared to 11.5% in the comparative quarter. This increase is attributable to the acquisition of MTV Telecom, whose products have slightly higher margins than the POS and Barcoding product categories, and a more favorable product and customer mix, both of which were somewhat offset by competitive pricing pressure.

Operating Expenses

The following table summarizes our operating expenses for the quarters ended September 30, 2008 and 2007, respectively:


	Quarter ended September 30,				$ Change		% Change		% of Sales September 30,
*(in thousands)*	2008		2007		$ Change		% Change		2008		2007
Operating expenses	$	34,874	$	32,771	$	2,103	6.4	%	6.5	%	5.9	%

Total operating expenses were $34.9 million for the quarter ended September 30, 2008, a 6.4% increase over prior period operating expenses of $32.8 million. Nearly half of this increase is attributable to the operating expenditures associated with MTV Telecom which was acquired in April 2008. These expenditures did not exist in the prior year, comparative period. The Company also incurred approximately $0.5 million of incremental expenditures associated with the operation of our new North American distribution facility located in Southaven, Mississippi.

Operating expenses as a percentage of sales increased to 6.5% the current year quarter, compared to 5.9% in the prior year comparative period. This increase is due to higher operating expenses and lower sales experienced in the current quarter versus the prior year quarter as the Company continues to invest in our communications and security businesses.

Operating Income

The following table summarizes our operating income for the quarters ended September 30, 2008 and 2007, respectively:


*(in thousands)*	Quarter ended September 30,									% of Sales September 30,
	2008		2007		$ Change			% Change		2008		2007
North American distribution	$	17,725	$	22,114	$	(4,389	)	-19.8	%	4.0	%	4.8	%
International distribution		2,903		3,239		(336	)	-10.4	%	3.1	%	3.6	%

Net sales	$	20,628	$	25,353	$	(4,725	)	-18.6	%	3.8	%	4.6	%

Operating income decreased 18.6% or $4.7 million for the quarter ended September 30, 2008 to $20.6 million. This decrease was primarily the result of lower sales volume and gross margins experienced in our North America operating segment, which could not offset the increase in operating expenditures over the prior year comparative period.

Total Other Expense (Income)

The following table summarizes our total other expense (income) for the quarters September 30, 2008 and 2007, respectively:


	Quarter ended September 30,											% of Sales September 30,
*(in thousands)*	2008			2007			$ Change			% Change		2008		2007
Interest expense	$	579		$	2,125		$	(1,546	)	-72.8	%	0.1	%	0.4	%
Interest income		(351	)		(303	)		(48	)	15.8	%	-0.1	%	-0.1	%
Net foreign exchange losses (gains)		327			(52	)		379		-728.8	%	0.1	%	0.0	%
Other, net		(50	)		(100	)		50		-50.0	%	0.0	%	0.0	%

Total other expense, net	$	505		$	1,670		$	(1,165	)	-69.8	%	0.1	%	0.3	%

Interest expense reflects interest paid on borrowings on the Company’s line of credit and long-term debt. Interest expense for the quarters ended September 30, 2008 and 2007 was $0.6 million and $2.1 million, respectively. The decrease in interest expense is the result of lower average debt balances experienced during the current quarter, as the Company repaid the outstanding balance on our revolving credit facility prior to September 30, 2008.

The Company generates interest income on longer-term interest bearing receivables, and to a lesser extent, interest earned on cash and cash-equivalent balances on hand.

Net foreign exchange gains and losses consist of foreign currency transactional and functional currency re-measurements, offset by net foreign currency exchange contract gains and losses. Foreign exchange losses and gains are generated as the result of fluctuations in the value of the Euro versus the British Pound, and to a lesser extent, the U.S. Dollar versus other currencies. However, in the current quarter, the Company generated a net foreign exchange loss primarily due to the strengthening of the U.S. Dollar against the Euro, the British Pound, and the Canadian Dollar. While the Company utilizes foreign exchange contracts and debt in non-functional currencies to hedge foreign currency exposure, our foreign exchange policy prohibits us from entering into speculative transactions.

Provision for Income Taxes

Income tax expense was $7.7 million and $9 million for the quarters ended September 30, 2008 and 2007, reflecting an effective income tax rate of 38.2% and 38.0%, respectively.

Net Income

The following table summarizes our net income for the quarters ended September 30, 2008 and 2007, respectively:


	Quarter ended September 30,									% of Sales September 30,
*(in thousands)*	2008		2007		$ Change			% Change		2008		2007
Net income	$	12,430	$	14,686	$	(2,256	)	-15.4	%	2.3	%	2.7	%

The decrease in net income for the current quarter is attributable to the changes in operations discussed above.

Liquidity and Capital Resources

The Company’s primary sources of liquidity are cash flow from operations, borrowings under the revolving credit facility, secured and unsecured borrowings, and borrowings under the subsidiary’s line of credit. The Company’s cash and cash equivalent balance totaled $16.2 million at September 30, 2008, compared to $15.2 million at June 30, 2008. The Company’s working capital decreased to $355 million at September 30, 2008 from $369 million at June 30, 2008. The $14 million decrease in working capital resulted primarily from lower trade receivables along with higher accounts payable balances between the two periods. There were no outstanding borrowings on the Company’s revolving credit facility as of September 30, 2008. On October 10, 2008, in response to the uncertainty in the credit markets worldwide, the Company borrowed $75 million on our revolving line of credit. These funds are being held in a federally insured cash account, as the sole purpose of this borrowing is to ensure that the Company has access to sufficient working capital to meet the needs of our customers and vendors in the unlikely event that the credit markets and related financial systems deteriorate further.

The number of days sales in receivables (DSO) was 57 at September 30, 2008, compared to 59 days at June 30, 2008. Improvement in DSO reflects a favorable change in business unit and geographic sales mix. In the current environment, we continue to monitor the health of our receivables portfolio.

During the quarter, we were diligent in our efforts to manage inventory levels and were successful in maintaining inventory turns at an annual rate of 6.9 times. This was consistent with inventory turns for the quarter ended June 30, 2008.

Cash provided by operating activities was approximately $31 million for the quarter ended September 30, 2008, compared to $24.1 million of cash used in operating activities for the quarter ended September 30, 2007. The significant shift in cash flow generation between these two periods is largely attributable to the trends in working capital balances over the respective quarters. In the quarter ended September 30, 2007, accounts receivable and inventory balances increased by a combined $43 million over the previous quarter ended June 30, 2007. These increases reflected stronger sales results for that quarter along with expectations of similar growth in the subsequent quarter. In the current quarter, however, the Company’s cash flow provided from operations reflects lower sales in the quarter combined with more effective management of inventory levels. Accordingly, trade receivable balances are $16 million lower than the previous quarter and inventory balances are not growing as fast as the prior year comparative quarter. Also in the current quarter, the Company’s trade accounts payable balances increased by $14 million, which also contributed to the increase in cash flow during the quarter. However, this increase is largely a function of the timing of payments and purchases at the end of the quarter.

Cash used in investing activities for the quarter ended September 30, 2008 was $1.6 million, compared to $2.6 million used in the comparative prior year quarter. In the current quarter, the Company had worldwide capital expenditures of $2.2 million which were offset by net proceeds received from the sale of a Company owned property in the United Kingdom. In the comparative prior year quarter, worldwide capital expenditures were $2.6 million.

Cash used in financing activities was approximately $28 million for the quarter ended September 30, 2008 compared to cash provided of $36.5 million for the quarter ended September 30, 2007. The cash provided in the prior year quarter originated from the Company’s revolving line of credit and was used to finance the operating and investing activities of that quarter. In the current year, the $31 million of cash provided by operating activities was used to pay down the line of credit facility and our short term borrowing arrangement in Europe.

The Company has a revolving credit facility secured by the assets of its European operations and guaranteed by the Company. This facility was amended on May 14, 2008 to increase the borrowing limit to €6.0 million for the Company’s European operations. At September 30, 2008, the balance on this facility was €1.4 million or approximately $2 million. The effective interest rate on this facility was 5.5%.

On January 2, 2008, the Company entered into a $25 million promissory note with a financial institution. This note payable accrues interest on the unpaid balance at a rate per annum equal to the 30 day LIBOR plus 0.65% and matures on September 28, 2012. The terms of the note payable allow for payments to be due and payable in consecutive monthly payment terms of accrued interest only, commencing on January 31, 2008, and continuing on the last day of each month thereafter until fully paid. In any event, all principal and accrued interest will be due and payable on September 28, 2012. The note may be prepaid in whole or in part at any time without penalty. On January 4, 2008, the Company entered into an

interest rate swap with a notional amount of $25 million and designated this instrument as a cash flow hedge of our exposure to variability in future cash flows associated with this note payable. Under the terms of the swap, the Company pays a fixed rate of 3.65% plus a fixed spread of 0.65% on the $25 million notional amount and receives payments from a counterparty based on 30 day LIBOR plus a fixed spread of 0.65% for a term ending on September 28, 2011.

On September 28, 2007, the Company entered into a $250 million multi-currency revolving credit facility with a syndicate of banks that matures on September 28, 2012. This revolving credit facility has a $50 million accordion feature that allows the Company to increase the availability to $300 million subject to obtaining commitments for the incremental capacity from existing or new lenders. The new facility is guaranteed by the Company and certain of its subsidiaries and is secured by substantially all of the domestic assets of the Company and its domestic subsidiaries. The facility bears interest at a rate equal to a spread over the applicable LIBOR or prime rate, as chosen by the Company. This spread is dependent on the Company’s ratio of funded debt to EBITDA (as defined in the credit facility) and ranges from 0.50% to 1.25% for LIBOR-based loans, and from 0.00% to 0.25% for prime rate-based loans. The spread in effect as of September 30, 2008 was 0.50% for LIBOR-based loans and 0.00% for prime rate-based loans. This agreement subjects the Company to certain financial covenants, including minimum fixed charge and leverage ratio covenants. The Company was in compliance with all covenants under the credit facility as of September 30, 2008. The Company did not have any outstanding borrowings on this facility as of September 30, 2008. As a result, the Company had available the entire $250 million commitment for additional borrowings.

On August 1, 2007, the Company entered into an agreement with the State of Mississippi in order to provide financing for the acquisition and installation of certain equipment to be utilized at the Company’s Southaven, Mississippi distribution facility, through the issuance of an industrial development revenue bond. The bond matures on September 1, 2032 and accrues interest at the 30-day LIBOR rate plus a spread of 0.85%. The terms of the bond allows for payment of interest only for the first 10 years of the agreement, and then, starting on September 1, 2018 through 2032, principal and interest payments are due until the maturity date or the redemption of the bond. The Company receives advances on this loan on an as needed basis to pay the ongoing costs of the project, not to exceed $6 million. The outstanding balance on this facility was $5.4 million as of September 30, 2008, and the effective interest rate was 3.33%.

The Company believes that its existing sources of liquidity, including cash resources and cash provided by operating activities, supplemented as necessary with funds under the Company’s credit agreements, will provide sufficient resources to meet the Company’s present and future working capital and cash requirements for at least the next twelve months.

Accounting Standards Recently Issued

SFAS 141R also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. SFAS 141R is effective as of the beginning of an entity’s fiscal year that begins after December 15, 2008, and will be adopted by the Company in the first quarter of fiscal 2010. Early adoption is prohibited.

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.

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

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 transacting business in foreign currencies in connection with its foreign operations.

Interest Rate Risk

The Company is exposed to changes in interest rates primarily as a result of its borrowing activities, which include revolving credit facilities with a group of banks 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. A hypothetical 100 basis point increase or decrease in interest rates on borrowings on the Company’s revolving line of credit, variable rate long term debt and subsidiary line of credit for the quarter ended September 30, 2008 would have resulted in a less than $0.1 million increase or decrease, respectively, in pre-tax income.

To mitigate the risk of interest rate fluctuations associated with the Company’s variable rate long-term debt, the Company has implemented an interest rate risk management strategy that incorporates the use of an interest rate swap designated as a cash flow hedge to minimize the significant unplanned fluctuations in earnings caused by interest rate volatility. The Company’s use of derivative instruments has the potential to expose the Company to certain market risks including the possibility of (1) the Company’s hedging activities not being as effective as anticipated in reducing the volatility of the Company’s cash flows, (2) the counterparty not performing its obligations under the applicable hedging arrangement, (3) the hedging arrangement being imperfect or ineffective, or (4) the terms of the swap or associated debt may change. The Company seeks to lessen such risks by having established a policy to identify, control, and manage market risks which may arise from changes in interest rates, as well as limiting its counterparties to major financial institutions.

Foreign Currency Exchange Rate Risk

The Company is exposed to foreign currency risks that arise from its foreign operations in Canada, Mexico and Europe. These risks include the translation of local currency balances of foreign subsidiaries, inter-company loans with foreign subsidiaries and transactions denominated in non-functional currencies. These risks may change over time as business practices evolve and could have a material impact on the Company’s financial results in the future. In the normal course of business, foreign exchange risk is managed by using foreign currency forward contracts to hedge these exposures, as well as balance sheet netting of exposures. The Company’s Board of Directors has approved a foreign exchange hedging policy to minimize foreign currency exposure. The Company’s policy is to utilize financial instruments to reduce risks where internal netting cannot be effectively employed and not to enter into foreign currency derivative instruments for speculative or trading purposes. The Company monitors its risk associated with the volatility of certain foreign currencies against its functional currencies and enters into foreign exchange derivative contracts to minimize short-term currency risks on cash flows. The Company continually evaluates foreign exchange risk and may enter into foreign exchange transactions in accordance with its policy. Foreign currency gains and losses are included in other expense (income).

The Company has elected not to designate its foreign currency contracts as hedging instruments, and therefore, the instruments are marked to market with changes in their values recorded in the Condensed Consolidated Income Statement each period. The underlying exposures are denominated primarily in British Pounds, Euros, and Canadian Dollars. At September 30, 2008, the fair value of the Company’s currency forward contracts outstanding was approximately $1.5 million. The Company does not utilize financial instruments for trading or other speculative purposes.

Item 4.

Controls and Procedures

An evaluation was carried out under the supervision and with the participation of the Company’s management, including its Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the Company’s disclosure controls and procedures as of September 30, 2008. Based on that evaluation, the Company’s management, including the CEO and CFO, has concluded that the Company’s disclosure controls and procedures are effective as of September 30, 2008. During the first quarter of fiscal 2009, there was no change in the Company’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

Part II. Other Information

Item 1.

Legal Proceedings

The Company and its subsidiaries are, from time to time, parties to other 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.

Item 1A.

Risk Factors

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year-ended June 30, 2008 and in this Form 10-Q, which could materially affect our business, financial condition or future operating results. The risks described in our Annual Report on Form 10-K and in this Form 10-Q are not the only risks facing our Company. Additional risks and uncertainties not currently known to the Company or that the Company currently deems to be immaterial also may materially and adversely affect the Company’s business, financial condition, or operating results.

Current economic conditions and market disruptions may adversely affect our business and results of operations.

Financial markets throughout the world have recently been experiencing extreme disruption, including, among other things, severely diminished liquidity and credit availability, rating downgrades of certain investments and declining valuations and pricing volatility of others, and failure and potential failures of major financial institutions. These developments and the related general economic downturn may adversely impact our business and financial condition in a number of ways. The slowdown could lead to reduced information technology spending by end users, which could adversely affect our sales. The current tightening of credit in financial markets and the general economic downturn may adversely affect the ability of our reseller customers, vendors and service providers to obtain financing for significant purchases and operations and to perform their obligations under our agreements with them. This could result in a decrease in or cancellation of orders for our products and services, could negatively impact our ability to collect our accounts receivable on a timely basis, could result in additional reserves for uncollectible accounts receivable being required, and could lead to elevated levels of obsolete inventory. Significant volatility and fluctuations in the rates of exchange for the U.S. dollar against currencies such as the euro, could also negatively impact our customer pricing and operating results.

We are unable to predict the duration and severity of the current economic downturn and disruption in financial markets or their effects on our business and results of operations, but the consequences may be materially adverse and more severe than other recent economic slowdowns.

Item 6.

Exhibits

Exhibits


10.1		Amended and Restated Employment Agreement dated as of September 2, 2008 between the Registrant and John J. Ellsworth.

31.1		Certification Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended.

31.2		Certification Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended.

32.1		Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURES

Pursuant to the requirements 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.

SCANSOURCE, INC.

/s/ Michael L. Baur

Michael L. Baur

Chief Executive Officer

(Principal Executive Officer)

/s/ Richard P. Cleys

Richard P. Cleys

Vice President and Chief Financial Officer

(Principal Financial Officer)

Date: November 6, 2008

EX-10.1 2 dex101.htm AMENDED AND RESTATED EMPLOYMENT AGREEMENT Amended and Restated Employment Agreement

Exhibit 10.1

AMENDED AND RESTATED EMPLOYMENT AGREEMENT

THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT (“Agreement”) between ScanSource, Inc., a South Carolina corporation (“Company”), and John J. Ellsworth (“Executive”) (collectively “the Parties”) is effective as of September 2, 2008 (“Effective Date”) as an amendment and restatement of the Employment Agreement originally dated as of July 1, 2008, between the Company and Executive.

BACKGROUND

The Company desires to employ Executive as Vice President, General Counsel and Corporate Secretary, and Executive is willing to serve in such capacity, in accordance with the terms and conditions of this Agreement.

In consideration of the foregoing and of the mutual commitments below, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties agree as follows:

1. Employment. On the Effective Date, Executive will be employed in the capacity stated above with such commensurate responsibilities as are assigned to him by the Company’s Board of Directors (“Board”) or Chief Executive Officer (“CEO”). Executive will report directly to the CEO.

2. Employment Period. Unless earlier terminated in accordance with Section 5, Executive’s employment will be for a term (the “Employment Period”), beginning on the Effective Date and ending two years after the Effective Date, the Employment Period End Date. Provided, however, that if a Change in Control, as defined in Exhibit C hereto, occurs during the Employment Period, the ending date of the Employment Period will be extended so that it expires on the later of the Employment Period End Date or the first anniversary of the date on which the Change in Control initially occurred.

3. Extent of Service. During the Employment Period, and excluding any periods of vacation and sick leave to which Executive is entitled, Executive agrees to devote his business time, attention, skill and efforts exclusively to the faithful performance of his duties hereunder. Provided, however, that it shall not be a violation of this Agreement for Executive to (i) devote reasonable periods of time to charitable and community activities and, with the approval of the Company, industry or professional activities, and/or (ii) manage personal business interests and investments, so long as these activities do not interfere with the performance of Executive’s responsibilities under this Agreement.

4. Compensation and Benefits.

(a) Base Salary. During the Employment Period, the Company will pay to Executive a base salary at the rate specified on Exhibit A (“Base Salary”), less normal withholdings, payable in equal monthly or more frequent installments as are customary under the Company’s payroll practices from time to time. The CEO will review

Executive’s Base Salary annually and in his sole discretion may increase (but not decrease) Executive’s Base Salary from year to year. This annual review of Executive’s Base Salary will consider, among other things, Executive’s performance and the Company’s performance. If Executive becomes eligible during the Employment Period to receive benefits under the Company’s short-term disability policy, the Company will continue to pay Executive’s Base Salary; provided, however, that Executive’s Base Salary during such period will be reduced by any amounts Executive receives under the short-term disability policy.

(b) Variable Compensation, Savings and Retirement Plans. During the Employment Period, Executive will be entitled to participate in all deferred compensation, savings and retirement plans, practices, policies and programs applicable to staff officers of the Company (“Peer Executives”) pursuant to their terms. The Executive will also be eligible to receive certain variable compensation (“Variable Compensation”) based on performance criteria established periodically by the CEO, as specified on Exhibit A.

(c) Welfare Benefit Plans. During the Employment Period, Executive and Executive’s eligible dependents may participate pursuant to their terms in the welfare benefit plans, practices, policies and programs provided by the Company which may include, medical, prescription, dental, disability, employee life, group life, accidental death and travel accident insurance plans and programs) (“Welfare Plans”) to the extent applicable to Peer Executives. Contributions will be required by the Executive. The Company may, in its sole discretion, modify, change, or eliminate its Welfare Plans.

(d) Expenses. During the Employment Period, Executive will be entitled to receive reimbursement for all reasonable expenses incurred by Executive in accordance with the policies, practices and procedures of the Company, and such reimbursements will be made no later than the last day of the year immediately following the year in which Executive incurs the reimbursable expense.

(e) Fringe Benefits. During the Employment Period, Executive will be entitled to fringe benefits in accordance with the plans, practices, programs and policies of the Company in effect for Peer Executives.

(f) Vacation. During each fiscal year during the Employment Period, Executive will be entitled to the number of days of paid vacation specified on Exhibit A. Executive may take vacation at the times Executive reasonably requests, subject to the prior approval of the person specified on Exhibit A. Unused vacation time will not carry over to the next fiscal year and will not be paid upon termination of employment.

5. Termination of Employment.

(a) Death, Retirement or Disability. Executive’s employment terminates automatically upon Executive’s death or Retirement during the Employment Period. For purposes of this Agreement, “Retirement” means normal retirement as defined in the Company’s retirement plan in effect when Executive retires, or if there is no retirement plan, “Retirement” will mean the Executive’s voluntary termination of employment after age 55 with fifteen years of service. If the Company determines that the Executive has become disabled during the Employment Period (pursuant to the definition of Disability set forth below), it may give to Executive written notice of its intention to terminate Executive’s employment. Executive’s employment with the Company will terminate effective on the 30th day after receipt of such written notice by Executive (“Disability Effective Date”), unless, within the 30 days after such receipt, Executive has returned to full-time performance of Executive’s duties. For purposes of this Agreement, “Disability” means a mental or physical disability as determined by the Board in accordance with standards and procedures similar to those under the Company’s long-term disability plan, if any. If the Company has no long-term disability plan, “Disability” will mean the inability of Executive, as determined by the Board, to perform the essential functions of his regular duties and responsibilities, with or without reasonable accommodation, due to a medically determinable physical or mental condition which has lasted (or can reasonably be expected to last) for twelve workweeks in any twelve-month period. At the request of Executive or his personal representative, the Board’s determination that the Disability of Executive has occurred will be certified by two physicians mutually agreed upon by Executive, or his personal representative, and the Company. If the two physicians are unwilling to certify that the Executive is disabled, Executive’s termination will be deemed a termination by the Company without Cause and not a termination because of his Disability.

(b) Termination by the Company. The Company may terminate Executive’s employment during the Employment Period with or without Cause. For purposes of this Agreement, “Cause” means:

(i) the failure of Executive to satisfactorily perform Executive’s duties with the Company (other than failure resulting from incapacity due to Disability), after a written demand for satisfactory performance is delivered to Executive by the CEO, which specifically identifies the manner in which the CEO believes that Executive has not satisfactorily performed Executive’s duties. The decision of whether Executive has satisfactorily performed his duties with the Company or complied with the demand for satisfactory performance is in the sole discretion of the Company;

(ii) engaging in unethical or illegal conduct or misconduct that includes but is not limited to violations of the Company’s policies concerning employee conduct; or

(iii) the Executive’s breach of any term of this Agreement.

(c) Termination by Executive. Executive’s employment may be terminated by Executive for Good Reason or no reason. For purposes of this Agreement, “Good Reason” means:

(i) without the consent of Executive, the assignment to Executive of any duties materially inconsistent for Peer Executives, excluding an isolated, insubstantial, and inadvertent action taken in good faith which is remedied by the Company promptly after receipt of notice from Executive;

(ii) a material reduction by the Company in Executive’s Base Salary or a material reduction in Executive’s Variable Compensation opportunity;

(iii) the failure by the Company (a) to continue in effect any compensation plan in which Executive participates as of the Effective Date that is material to Executive’s total base compensation, unless the Company provides a substantially equivalent alternative plan, or (b) to continue Executive’s participation in the alternative plan on a basis that is substantially equivalent in terms of the value of benefits provided;

(iv) the Company’s requiring Executive, without his consent, to be based at any location that increases Executive’s normal work commute by fifty (50) miles or more as compared to Executive’s normal work commute or otherwise is a material change in the location at which Executive is based;

(v) any failure by the Company to comply with and satisfy Section 12(c) of this Agreement;

(vi) the material breach of this Agreement by the Company; or

(vii) if no new employment agreement has been entered into by Executive and the Company or its successor after or in contemplation of a Change in Control, termination by Executive for any reason or no reason during the 60-day period beginning on the sixth-month anniversary of a Change in Control.

Executive must provide written notice to the Company of Executive’s intent to terminate employment for Good Reason within 30 days of the initial existence of the Good Reason. The Company will have an opportunity to cure any claimed event of Good Reason within 30 days of notice from Executive. The Board’s good faith determination of cure will be binding. The Company will notify Executive in writing of the timely cure of any claimed event of Good Reason and how the cure was made. Any Notice of Termination delivered by Executive based on a claimed Good Reason which was thereafter cured by the Company will be deemed withdrawn and ineffective to terminate this Agreement. If the Company fails to cure any claimed event of Good Reason within 30 days of notice from Executive, Executive must terminate employment for such claim of Good Reason within 180 days of the initial existence of the Good Reason, and if Executive fails to do so, such claimed event of Good Reason will be deemed withdrawn and ineffective to terminate this Agreement.

(d) Notice of Termination. Any termination of Executive’s employment by the Company or by Executive must be communicated by Notice of Termination to the other Party in accordance with Section 13(f) of this Agreement. For purposes of this Agreement, a “Notice of Termination” means a written notice which (i) states the specific termination provision in this Agreement relied upon, including whether such termination is for Cause or Good Reason, (ii) if such termination is for Cause or Good Reason, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Executive’s employment under the provisions so indicated, and (iii) specifies the termination date. The failure by Executive or the Company to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason or Cause will not waive any right of Executive or the Company, or preclude Executive or the Company from asserting applicable facts or circumstances in enforcing rights under this Agreement.

(e) Date of Termination. “Date of Termination” means the date specified in the Notice of Termination or, if Executive’s employment is terminated by reason of death, Retirement or Disability, the date of death or Retirement or the Disability Effective Date.

6. Obligations of the Company upon Termination.

(a) Termination by Executive for Good Reason; Termination by the Company Other Than for Cause, Death, Disability, Retirement, or Normal Expiration of Employment Period. If, during the Employment Period: (i) the Company terminates Executive’s employment other than for Cause, death, Disability, or Retirement, or (ii) Executive terminates employment for Good Reason following the Company’s failure to cure such Good Reason as set forth in Section 5(c) of this Agreement, the Company will pay Executive the following amounts and provide the following benefits:

(i) Executive’s Base Salary earned through the Date of Termination to the extent not already paid (such amount is hereinafter referred to as the “Accrued Obligations”) will be paid as soon as practicable after the Date of Termination per the Company’s customary payroll practices;

(ii) to the extent not previously paid or provided and only if earned as of the Date of Termination, the Company will timely pay or provide to Executive any other amounts or benefits which Executive is eligible to receive under any plan, program, policy, practice, contract or agreement of the Company (“Other Benefits”) pursuant to the terms of such Other Benefits; and

(iii) subject to Section 13(i) of this Agreement and Executive’s execution of a Release in substantially the form of Exhibit B hereto (the “Release”) within the time set forth in Section 6(g) of this Agreement, on the 30^thday after the Date of Termination, the Company will pay to Executive in a lump sum in cash the amount in (A), pay the amount in (B) as set forth below, and provide the benefits in (C):

(A) the amount equal to one (1) times the highest combined annual Base Salary and Variable Compensation earned by Executive from the Company, including any such amounts earned but deferred, in the last three fiscal years before the Date of Termination (the “Severance Benefits”), less normal withholdings. Notwithstanding the foregoing, if the Date of Termination occurs within 12 months after or otherwise in contemplation of a Change in Control, as defined in Exhibit C, Executive will receive Severance Benefits in an amount equal to two times the highest combined annual Base Salary and Variable Compensation earned by Executive from the Company, including any such amounts earned but deferred, in the last three fiscal years before the Date of Termination, less normal withholdings. Executive’s entitlement to receive and retain the amounts set forth in this Section 6 are conditioned on Executive’s compliance with the Restrictions on Conduct described in Section 11;

(B) a bonus equal to the pro rata portion (based on the number of days elapsed in the current fiscal year through the Date of Termination) of the current fiscal year annual variable compensation, if any, that would otherwise be payable if the Executive had continued employment through the end of the current fiscal year, based on actual performance (the “Pro Rata Bonus”). The Pro Rata Bonus, less normal withholdings will be paid at the normal time for payment of annual bonuses as if Executive had continued employment through the time of payment of the bonus, which will be no later than the later of March 15 following the end of the calendar year in which Executive’s right to the bonus vests or the 15^th day of the third month following the end of the Company’s fiscal year in which Executive’s right to the bonus vests; and

(C) for up to twelve (12) months following the Date of Termination, the Company will reimburse Executive on a monthly basis for COBRA payments made by Executive which are in excess of the monthly rates paid by active employees, for medical and dental insurance benefits. Reimbursement may cease sooner than twelve (12) months if Executive becomes eligible to receive similar benefits under another employer provided or group plan (which may be the plan of the Executive’s new employer or his spouse’s employer) and, in such event, Executive’s right to COBRA ceases. Such cash reimbursements will be made per the Company’s customary payroll practices (not less frequently than monthly) for up to the twelve (12) months following the Date of Termination.

(b) Death. If Executive’s employment is terminated because of Executive’s death during the Employment Period, this Agreement will terminate without further obligations to Executive’s legal representatives under this Agreement other than (i) the payment of Accrued Obligations as described in Section 6(a)(i), (ii) the payment of the

Pro Rata Bonus as described in Section 6(a)(iii)(B), and (iii) the timely payment or provision of Other Benefits as described in Section 6(a)(ii) of this Agreement. The Accrued Obligations and the Pro Rata Bonus will be paid to Executive’s estate or beneficiary, as applicable. Other Benefits as used in this Section 6(b) will include, without limitation, and Executive’s estate and/or beneficiaries will be entitled to receive, benefits under such plans, programs, practices and policies relating to death benefits, if any, as are applicable to Executive on the date of his death pursuant to the terms of such Other Benefits.

(c) Disability. If Executive’s employment is terminated because of Executive’s Disability during the Employment Period, this Agreement will terminate without further obligations to Executive other than (i) the payment of Accrued Obligations as described in Section 6(a)(i), (ii) the payment of the Pro Rata Bonus as described in Section 6(a)(iii)(B), and (iii) the timely payment or provision of Other Benefits as described in Section 6(a)(ii) of this Agreement. The term Other Benefits as used in this Section 6(c) includes, without limitation, and Executive will be entitled after the Disability Effective Date to receive, disability and other benefits under such plans, programs, practices and policies relating to disability, if any, as are applicable to Executive and his family on the Date of Termination pursuant to the terms of such Other Benefits.

(d) Retirement. If Executive’s employment is terminated because of Executive’s Retirement during the Employment Period, this Agreement will terminate without further obligations to Executive other than (i) the payment of Accrued Obligations as described in Section 6(a)(i), (ii) the payment of the Pro Rata Bonus as described in Section 6(a)(iii)(B), and (iii) the timely payment or provision of Other Benefits as described in Section 6(a)(ii) of this Agreement. The term Other Benefits as used in this Section 6(d) includes, without limitation, and Executive will be entitled after the Date of Termination to receive, retirement and other benefits under such plans, programs, practices and policies relating to retirement, if any, as applicable to Executive on the Date of Termination pursuant to the terms of such Other Benefits.

(e) Cause or Voluntary Termination without Good Reason. If Executive’s employment is terminated for Cause during the Employment Period, or if Executive voluntarily terminates employment during the Employment Period without Good Reason, this Agreement will terminate without further obligations to Executive, other than for (i) the payment of Accrued Obligations as described in Section 6(a)(i), and (ii) the timely payment or provision of Other Benefits as described in Section 6(a)(ii).

(f) Normal Expiration of Employment Period. If Executive’s employment is terminated due to the normal expiration of the Employment Period or is terminated within 60 days after the Employment Period End Date (for reasons other than Cause, death, Disability or Retirement), this Agreement will terminate without further obligations to Executive, other than for (i) the payment of Accrued Obligations as described in Section 6(a)(i), (ii) the payment of the Pro Rata Bonus as described in Section 6(a)(iii)(B), (iii) the payment of the Severance Benefits (subject to the

Executive’s execution of the Release) as described in Section 6(a)(iii)(A), and (iv) the timely payment or provision of Other Benefits as described in Section 6(a)(ii). Notwithstanding anything to the contrary in this Agreement, if the Company provides notice that the Agreement will not be renewed and a new employment agreement is not offered and the Executive remains an employee of the Company in any capacity, Executive’s employment will not be governed by this Agreement and Executive will be an at-will employee. In that instance, Executive remains subject to the Restrictions on Conduct described in Section 11.

(g) Execution of Release. Notwithstanding anything to the contrary in this Section 6, the Release must be executed and provided to the Company, and the period for revoking same must have expired, before the 30^th day following the Date of Termination.

7. Non-exclusivity of Rights. Nothing in this Agreement prevents or limits Executive’s continuing or future participation in any plan, program, policy or practice provided by the Company and for which Executive may qualify, nor, subject to Section 13(d), will anything in this Agreement limit or otherwise affect any rights Executive may have under any contract or agreement with the Company. Amounts which are vested benefits or which Executive is otherwise entitled to receive under any plan, policy, practice, program, contract or agreement with the Company at or subsequent to the Date of Termination will be payable in accordance with such plan, policy, practice, program, contract or agreement except as explicitly modified by this Agreement.

8. Mandatory Reduction of Payments in Certain Events. Any payments made to Executive under this Agreement will be made with the Executive’s best interests in mind related to the excise tax imposed by Code Section 4999 (the “Excise Tax”).

(a) Anything in this Agreement to the contrary notwithstanding, if it is determined that any benefit, payment or distribution by the Company to or for the benefit of Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise) (a “Payment”) would be subject to the Excise Tax, then, before making the Payment to Executive, a calculation will be made comparing (i) the net benefit to Executive of all Payments after payment of the Excise Tax, to (ii) the net benefit to Executive if the Payment had been limited to the extent necessary to avoid being subject to the Excise Tax. If the amount calculated under (i) above is less than the amount calculated under (ii) above, then the Payments will be limited to the extent necessary to avoid being subject to the Excise Tax (the “Reduced Amount”). In that event, Executive will direct which Payments are to be reduced and any such reduction will be made so as not to violate Code Section 409A.

(b) The determination of whether an Excise Tax would be imposed, the amount of such Excise Tax, and the calculation of the amounts referred to in Section 8(a)(i) and (ii) above will be made by the Company’s regular independent accounting firm at the expense of tie Company or, at the election and expense of Executive, another nationally recognized independent accounting firm (the “Accounting Firm”) which will provide detailed supporting calculations. Any determination by the

Accounting Firm will be binding upon the Company and Executive. As a result of the uncertainty in the application of Code Section 4999 at the time of the initial determination by the Accounting Firm hereunder, it is possible that Payments to which Executive was entitled, but did not receive pursuant to Section 8(a), could have been made without the imposition of the Excise Tax (“Underpayment”). In such event, the Accounting Firm will determine the amount of the Underpayment that has occurred and any such Underpayment will be promptly paid by the Company to or for the benefit of Executive.

(c) If the provisions of Code Section 280G and 4999 or any successor provisions are repealed without succession, this Section 8 will be of no further force or effect.

9. Costs of Enforcement. Subject to Section 8(b), each Party will pay its own costs and expenses incurred in enforcing or establishing its rights under this Agreement, including, without limitation, attorneys’ fees, whether a suit is brought or not, and whether or not incurred in trial, bankruptcy, or appellate proceedings.

10. Representations and Warranties. Executive represents and warrants to the Company that Executive is not a party to, or otherwise subject to, any restrictive covenant not to compete, not to solicit or not to disclose or use confidential information, with any person or entity, and Executive’s execution of this Agreement and performance of his obligations will not violate the terms or conditions of any contract or obligation, written or oral, between Executive and any other person or entity.

11. Restrictions on Conduct of Executive.

(a) General. Executive agrees that as part of the services he will perform for the Company he will be exposed to, and help create and maintain, competitive advantages over other “Competitive Businesses,” as well as good will with the Company’s customers and suppliers. By virtue of the position Executive will hold, Executive is receiving, will receive, or will be provided access to the Company’s: (1) customers, suppliers, advertisers, and vendors as well as pricing information, distribution channels, and other terms of those relationships; (2) “Confidential Information” and “Trade Secrets;” (3) the relationships and other elements that together comprise good will; and/or (4) institutional knowledge regarding product development, its engineering, product specification, material suppliers, material specifications, product suppliers, manufacturing knowledge, customer feedback, surveys, design-around information, research and development information, internal quality control tests, other quality control information, and other similar information. Executive agrees that the competitive advantage and good will the Company has created, and which Executive will assist in furthering and maintaining, is an important and legitimate business asset of the Company. Should Executive compete against the Company, having intimate knowledge of the information that gives the Company its competitive advantage and good will would give Executive, or those “Competitive Businesses” he is assisting, an unfair advantage over the Company.

(b) Definitions. The following capitalized terms used in this Section 11 will have the meanings assigned to them below, which definitions will apply to both the singular and the plural forms of these terms:

“Competitive Business” – means any entity that distributes any goods or services in or to the point of sale, automatic identification, data capture, security, business telephony, communication products and peripherals markets if such entity distributes any product that is the same or similar to any good or service offered by the Company, including reasonable alternatives, within the final two (2) years of Executive’s employment with the Company. Executive agrees that Competitive Businesses include, but are not limited to, the following entities: Ingram Micro, Tech Data, Avnet, BlueStar, Westcon, Voda One, Arrow, Agilysis, Azerty, PC POS, Jarltech, Jenne, Securematics, Synnex, Alliance (NEI), NETXUSA, ADI, Tri-Ed, Northern Video, and Anixter.

“Confidential Information” means any and all information of the Company that has value and is not generally known to the Company’s competitors. This includes, but is not limited to, any information or documents about: the Company’s accounting practices; financial data; financial plans and practices; the Company’s operations; its future plans (including new products, improved products, and products under development); its methods of doing business; internal forms, checklists, or quality assurance testing; programs; customer and supplier lists or other such related information as pricing or terms of business dealings; supply chains; shipping chains and prices; packaging technology or pricing; sourcing information for components, materials, supplies, and other goods; employees; pay scales; bonus structures; contractor information and lists; marketing strategies and information; product plans; distribution plans and distribution channel relationships; business plans; manufacturing, operation, sales and distribution processes; costs; margins for products; prices, sales, orders and quotes for the Company’s business that is not readily attainable by the general public; existing and future services; testing information (including methods and results) related to materials used in the development of the Company’s products or materials that could be used with the Company’s products; development information (including methods and results) related to computer programs that design or test products or that track information from a central database; and the computer or electronic passwords of all employees and/or firewalls of the Company. Notwithstanding the definitions stated above, the term Confidential Information does not include any information which (i) at the time of disclosure to Executive, was in the public domain; (ii) after disclosure to Executive, is published or otherwise becomes part of the public domain through no fault of Executive; (iii) without a breach of duty owed to the Company, was already in Executive’s possession at the time of disclosure; (iv) was received after disclosure to Executive from a third party who had a lawful right to the information other than through a relationship of trust and confidence with the Company, and without a breach of duty to the Company, disclosed the information to Executive; or (v) where Executive can show it was independently developed by Executive on non-Company time without reference to, or reliance upon, other Confidential Information or Trade Secrets.

“Prohibited Duties” means supervising, consulting, advising, coaching, providing any information related to, or directly or indirectly performing any task for a Competitive Business that is similar or related to one or more duties Executive performed or supervised for the Company. Prohibited duties include owning greater than 10% of any Competitive Business. Prohibited duties includes supervising, consulting, advising, coaching, providing any information related to, or directly or indirectly performing any task for any material, product or service provider of any Competitive Business, if Executive’s work for such material, product or service provider is associated with a Competitive Business.

“Restricted Territory” means any place where the Company or its affiliates is (or is attempting to) actively manufacturing, marketing, selling, or distributing its products within the final two (2) years of Executive’s employment, or places where the Company made affirmative steps to market or sell its products within the final six (6) months of Executive’s employment. If Executive was assigned only a portion of the territory in which the Company operates or sells, then the Restricted Territory shall be narrowly construed to include only the limited territory of the Executive.

“Trade Secrets” means information related to the business or services of the Company which (1) derives independent actual or potential commercial value from not being generally known or readily ascertainable through independent development or reasonable reverse engineering processes by persons who can obtain economic value from its disclosure or use; and (2) is the subject of efforts by the Company and affiliated third parties that are reasonable under the circumstances to maintain its secrecy. Assuming the foregoing criteria in clauses (1) and (2) are met, Trade Secret encompasses business and technical information including, without limitation, know-how, designs, formulas, patterns, compilations, programs, devices, inventions, methods, techniques, drawings processes, finances, actual or potential customers and suppliers, and existing and future products and services of the Company. Notwithstanding the definitions stated above, the term Confidential Information does not include any information which (i) at the time of disclosure to Executive, was in the public domain; (ii) after disclosure to Executive, is published or otherwise becomes part of the public domain through no fault of Executive; (iii) without a breach of duty owed to the Company, was already in Executive’s possession at the time of disclosure; (iv) was received after disclosure to Executive from a third party who had a lawful right to the information through some avenue other than through a relationship of trust and confidence with the Company, and without a breach of duty to the Company, disclosed the information to Executive; or (v) where Executive can show it was independently developed by Executive on non-Company time without reference to, or reliance upon, other Confidential Information or Trade Secrets.

(c) Restrictions. Executive understands and agrees that the compensation the Company has agreed to provide pursuant to this Agreement would not be as lucrative if the restrictions set forth in this section were not included in this Agreement Therefore, in consideration of the compensation provided in this Agreement, and the other terms agreed to by the Company, along with the disclosure (and continued disclosure of Confidential Information and Trade Secrets) a portion of which is being paid to compensate Executive for these covenants, Executive covenants and agrees as follows:

(i) for the term of Executive’s employment, and for a period of twenty-four (24) months following the Date of Termination, Executive agrees he will not engage in any Prohibited Duties for a Competitive Business in the Restricted Territory;

(ii) for the term of Executive’s employment, and for a period of twenty-four (24) months following the Date of Termination, Executive agrees he will not solicit any of the Company’s customers or suppliers with whom Executive had contact during the course of Executive’s employment with the Company for any Competitive Business;

(iii) for the term of Executive’s employment, and for a period of twenty-four (24) months following the Date of Termination, Executive agrees he will not solicit any of the Company’s prospective customers or prospective suppliers with whom Executive had contact during the course of Executive’s employment with the Company for any Competitive Business;

(iv) for the term of Executive’s employment, and for a period of twenty-four (24) months following the Termination Date, Executive agrees he will not solicit any of the Company’s employees whom Executive supervised during the course of his employment with the Company, any employees with whom he had contact during his employment, any employees who had contacts of employment with the Company at the time solicited, or any employees who had restrictive covenants at the time solicited, to leave the Company for any purpose;

(v) for the term of Executive’s employment, and for a period of no less than twenty-four (24) months (for Confidential Information) or for so long as the information remains protected under this Agreement or applicable statute (for Trade Secrets) thereafter, Executive agrees that he will not, either directly or indirectly, publish, disseminate, provide, or otherwise disclose any Confidential Information or Trade Secrets to any third party, unless required to do so by legal process or other law, without the Company’s prior written consent. Executive agrees that if he believes he is compelled to reveal Confidential Information or Trade Secrets pursuant to the limited exception provided herein, Executive will provide the Company at least 7 days advance notice before doing so, and will explain the specifics under which such Confidential Information or Trade Secrets are to be disclosed.

(vi) For the term of Executive’s employment, and for a period of no less than twenty-four (24) months (for Confidential Information) or for so long as the information remains protected under this Agreement or applicable statute (for Trade Secrets) thereafter, Executive agrees that he will not, either directly or indirectly, for his own behalf or otherwise, use in any manner the Company’s Confidential Information or Trade Secrets.

(d) Non-Disparagement. The Company and Executive agree that for the term of Employee’s employment, and for a period of five (5) years thereafter, they will not disparage each other to any non-governmental third parties. Nothing in this subsection should be interpreted as any restriction on either Party’s compliance with any laws requiring or compelling disclosure, or any disclosures that are considered absolutely privileged, such as legal proceedings.

(e) Blue Pencil. The Company and Executive agree that the provisions of Section 11, including all subparts, are intended to strike the balance between Executive earning a livelihood and the Company protecting its important competitive advantages and good will. The Parties have drafted the provisions of Section 11, including all subparts, to allow for enforcement. The Parties agree that should a court determine that any word, phrase, clause, sentence, or paragraph is unreasonably broad in time, territory, or scope so as to render any remaining provisions unenforceable, the Parties desire the court to strike the offending language in the narrowest way possible and enforce the remainder as if the offending language was not there, so that only reasonable restrictions are enforced.

(f) Elective Right of the Company. If Executive challenges the enforceability of the Restrictive Covenants (or asserts an affirmative defense to an action seeking to enforce the Restrictive Covenants) based on an argument that the Restrictive Covenants are (i) not enforceable as a matter of law, (ii) unreasonable in geographical scope or duration or (iii) void as against public policy, the Company will have the right (1) to cease making the payments required under Section 6 above, and (2) upon demand, to have Executive repay, within 10 business days of any such demand, any payments already made. Any right afforded to, or exercised by, the Company under this Agreement will not affect the enforceability of the Restrictive Covenants or any other right of the Company under this Agreement.

12. Assignment and Successors.

(a) This Agreement is personal to Executive and without the prior written consent of the Company will not be assignable by Executive otherwise than by will or the laws of descent and distribution. This Agreement will inure to the benefit of and be enforceable by Executive’s legal representatives.

(b) This Agreement will inure to the benefit of and be binding upon the Company and its successors and assigns.

(c) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, “Company” will mean the Company as herein before defined and any successor to its business and/or assets which assumes and agrees to perform this Agreement by operation of law, or otherwise.

13. Miscellaneous.

(a) Waiver. Failure of either Party to insist, in one or more instances, on performance by the other in strict accordance with the terms and conditions of this Agreement will not be deemed a waiver or relinquishment of any right granted in this Agreement or of the future performance of any such term or condition or of any other term or condition of this Agreement, unless the waiver is in a writing signed by the Party making the waiver.

(b) Severability. If any provision or covenant, or any part thereof, of this Agreement should be held by any court to be invalid, illegal or unenforceable, either in whole or in part, such invalidity, illegality or unenforceability will not affect the validity, legality or enforceability of the remaining provisions or covenants, or any part thereof, of this Agreement, all of which will remain in full force and effect.

(c) Other Agents. Nothing in this Agreement is to be interpreted as limiting the Company from employing other personnel on such terms and conditions as may be satisfactory to it.

(d) Entire Agreement. Except as provided herein, this Agreement contains the entire agreement between the Parties on the subject matter hereof. From and after the Effective Date, this Agreement will supersede any other agreement between the Parties on the subject matter hereof, including without limitation, any prior Agreement.

(e) Governing; Law and Jurisdiction. Without regard to conflict of laws principles, the laws of the State of South Carolina will govern this Agreement in all respects, whether as to its validity, construction, capacity, performance or otherwise. This Agreement may only be enforced in a court of competent jurisdiction in Greenville County, South Carolina and Executive agrees to submit to the exclusive jurisdiction of a court of competent jurisdiction in Greenville, South Carolina.

(f) Notices. All notices, requests, demands and other communications required or permitted in this Agreement must be in writing and will be deemed to have been duly given if delivered or three days after mailing if mailed, first class, certified mail, postage prepaid:


To Company:		ScanSource, Inc.
		6 Logue Court Greenville, SC 29615 Attn: Chief Executive Officer

To Executive:		To the address specified on Exhibit A

Any Party may change the address to which notices, requests, demands and other communications will be delivered or mailed by giving notice thereof to the other Party in the same manner provided herein.

(g) Amendments and Modifications. This Agreement may be amended or modified only by a writing signed by both Parties, which makes specific reference to this Agreement.

(h) Construction. Each Party and his or its counsel have been provided the opportunity to review and revise this Agreement and accordingly, the normal rule of construction to the effect that any ambiguities are to be resolved against the drafting party will not be employed in the interpretation of this Agreement. Instead, the language of all parts of this Agreement will be construed as a whole, and according to its fair meaning, and not strictly for or against either party.

(i) Deferred Compensation Provision. Notwithstanding any other provision of this Agreement, it is intended that any payment or benefit provided under this Agreement that is considered to be “deferred compensation” subject to Code Section 409A will be provided in such manner and at such time, including without limitation in connection with a permissible payment event under Code Section 409A, as is exempt from or complies with the requirements of Code Section 409A. All rights to payments and benefits under this Agreement are to be treated as rights to receive a series of separate payments and benefits to the fullest extent allowed by Code Section 409A. Termination of employment under this Agreement, to the extent required by Code Section 409A, will be construed to mean a “separation from service” under Code Section 409A where it is anticipated that no further services will be performed after such date or that the level of services Executive would perform after that date (whether as an employee or independent contractor) would permanently decrease to no more than twenty percent (20%) of the average level of services Executive performed over the prior thirty-six (36)-month period. The terms of this Agreement are intended to, and will be

construed and administered to the fullest extent possible, to permit compensation to be paid under this Agreement to be exempt from or comply with Code Section 409A. Regardless, the Company will not be liable to Executive or anyone else if the Internal Revenue Service or any court or other authority determines that any payments or benefits to be provided under this Agreement are subject to taxes, penalties or interest as a result of failing to comply with or be exempt from Code Section 409A.

Notwithstanding anything in this Agreement to the contrary, if any payment or benefit that constitutes non-exempt “deferred compensation” under Code Section 409A would otherwise be provided under this Agreement due to Executive’s separation from service during a period in which he is a “specified employee” (as defined in Code Section 409A and the associated final regulations), then, to the extent required by Code Section 409A, such payments or benefits will be delayed, to the extent applicable, until six months after Executive’s separation from service or, if earlier, Executive’s death (the “409A Deferral Period”). If such payments are otherwise due to be made in installments during the 409A Deferral Period, the payments that would otherwise have been made in the 409A Deferral Period will be accumulated and paid in a lump sum as soon as the 409A Deferral Period ends, and the balance of the payments will be made as otherwise scheduled. In the event benefits are required to be deferred, any such benefit may be provided during the 409A Deferral Period at Executive’s expense, with Executive having the right to reimbursement from the Company once the 409A Deferral Period ends, and the balance of the benefits will be provided as otherwise scheduled.

14. Arbitration. Any claim or dispute arising under this Agreement will be subject to arbitration, and before commencing any court action, the Parties agree that they will arbitrate all controversies and such arbitration will occur in Greenville, South Carolina according to the Employment Dispute Rules of the American Arbitration Association and the Federal Arbitration Act, 9 U.S.C. §1, et seq. The arbitrators will be authorized to award both liquidated and actual damages as well as injunctive relief, but no punitive damages. The arbitrator’s award will be binding and conclusive upon the Parties, subject to 9 U.S.C. §10. Each party has the right to have the award made the judgment of a court of competent jurisdiction.

IN WITNESS WHEREOF, the parties hereto have duly executed and delivered this Employment Agreement as of the dates indicated below.


EXECUTIVE:		SCANSOURCE, INC.:

Name:	/s/ John J. Ellsworth	By:	/s/ Michael L. Baur

Date:	9/2/08	Name:	Michael L. Baur

		Title:	CEO

		Date:	9/02/08

EXHIBIT A TO EMPLOYMENT AGREEMENT

Executive: John J. Ellsworth

Base Salary: $195,000 annually

Variable Compensation: Variable compensation may be paid in such amounts and at such times as may be determined by the CEO based upon Executive’s performance and attainment of management and performance goals established by the CEO. The target amount of such variable compensation will be $6,250 per quarter and the maximum amount of such variable compensation will be $25,000 per year.

Notwithstanding any other provision of this Agreement or this Exhibit A, any variable compensation to be paid under this Agreement will be paid to Executive by the later of (i) March 15^th following the end of the calendar year in which Executive right to such variable compensation vests or (ii) the 15^th day of the third month following the end of the Company’s fiscal year in which Executive’s right to such variable compensation vests.

Given Executive may be a “covered employee” under Code Section 162(m), the foregoing variable compensation is intended to be a Performance Unit granted under the terms of the Company’s 2002 Long-Term Incentive Plan and has been designated as a “Qualified Performance-Based Award.” The variable compensation is intended to qualify for the Code Section 162(m) Exemption within the meaning of the Company’s 2002 Long-Term Incentive Plan. In no event may Executive’s variable compensation under this Agreement for any year exceed the maximum amount allowed by the terms of the 2002 Long-Term Incentive Plan currently in effect, which is $3,000,000 as of the Effective Date. Executive’s right to receive and retain any payment of variable compensation is subject to the written certification of the Board Compensation Committee that the relevant performance goals have been achieved. To the extent appropriate, the Board Compensation Committee may provide for the payment of variable compensation under the terms of another Company variable plan that permits Qualified Performance-Based Awards, in which case the limits and terms of such other variable plan will apply.


Days of Paid Vacation per Fiscal Year:		Approving Person:

15		Chief Executive Officer

Executive Notice Address:

521 Windemere Lane

Spartanburg, SC 29301

Initials: /s/ JJE / /s/ MLB

EXHIBIT B TO EMPLOYMENT AGREEMENT

Form of Release

THIS RELEASE (“Release”) is granted effective as of the day of , , by (“Executive”) in favor of ScanSource, Inc. (the “Company”). This is the Release referred to that certain Employment Agreement dated as of , by and between the Company and Executive (the “Employment Agreement”). Executive gives this Release in consideration of the Company’s promises and covenants as recited in the Employment Agreement, with respect to which this Release is an integral part.

1. Release of the Company. Executive, for himself, his successors, assigns, executors, administrators, insureds, attorneys, and all those entitled to assert his rights, now and forever hereby releases and discharges the Company and its respective officers, directors, shareholders, stockholders, trustees, partners, joint ventures, board members, employees, agents, parent corporations, divisions, wholly or partially owned subsidiaries, affiliates, estates, predecessors, successors, heirs, executors, administrators, assigns, representatives, and attorneys (the “Released Parties”), from any and all legal, administrative, and equitable claims, actions, causes of action, sums of money due, suits, debts, liens, covenants, contracts, obligations, costs, expenses, damages, judgments, agreements, promises, demands, claims for attorneys’ fees and costs, or liabilities of any nature whatsoever, in law or in equity, which Executive ever had or now has against the Released Parties, including any claims arising by reason of or in any way connected with any employment relationship which existed between the Company or any of its parents, subsidiaries, affiliates, or predecessors, and Executive. It is understood and agreed that this Release is intended to cover all actions, causes of action, claims or demands for any damage, loss or injury, which may be traced either directly or indirectly to the aforesaid employment relationship, or the termination of that relationship, that Executive has, had or purports to have, from the beginning of time to the date of this Release, whether known or unknown, that now exists, no matter how remotely they may be related to the aforesaid employment relationship including but not limited to claims for employment discrimination under federal, state or local statutes, except as provided in Paragraph 2. without limiting the broadness of the foregoing language, Executive agrees to release Company from any and all claims under:

(1)

local, state or federal common law, statute, regulation, ordinance or treaty;

(2)

Title VII of the Civil Rights Act of 1964, 42 U.S.C. § 2000(e), et seq.

(3)

42 U.S.C. §§ 1981, 1981A, 1983 and 1985;

(4)

the Americans with Disabilities Act, 42 U.S.C. § 12101, et seq.;

(5)

the Federal Rehabilitation Act of 1973;

(6)

the Older Worker Benefit Protection Act, 29 U.S.C. §§ 621, et seq.;

(7)

the Family and Medical Leave Act of 1993, 29 U.S.C. §§ 2601, et seq.;

(8)

Employee Retirement Income Security Act of 1974 (“ERISA”), 29 U.S.C. §§ 301, et seq.;

(9)

the Health Insurance Portability Act;

(10)

the Occupational and Safety Health Act;

(11)

the Equal Pay Act;

(12)

the Worker Adjustment and Retraining Notification Act;

(13)

the Sarbanes-Oxley Corporate Reform Act of 2002, 15 U.S.C. 7201, et seq.;

(14)

Executive Orders 11246 and 11141;

(15)

South Carolina Human Affairs Law;

(16)

the South Carolina Payment of Wages Act;

(17)

the South Carolina Bill of Rights for Handicapped Persons;

(18)

the state workers’ compensation law, including S.C. Code Ann. § 41-1-80;

(19)

tort claims including, but not limited to, claims of wrongful termination, constructive discharge, defamation, invasion of privacy, interference with contract, interference with prospective economic advantage and intentional or negligent infliction of emotional distress and outrage;

(20)

contract claims, whether express or implied;

(21)

claims for unpaid wages, benefits or entitlements asserted under the Fair Labor Standards Act, 29 U.S.C. § 201, et seq., or under South Carolina wages and hours laws, including, but not limited to, the South Carolina Payment of Wages Act;

(22)

claims for unpaid benefits or entitlements asserted under any Company plan, policy, benefits offering or program except as otherwise required by law;

(23)

claims for attorneys’ fees, interest, expenses and costs, injunctive relief or reinstatement to which he is, claims to be or may be entitled; and

(24)

the Age Discrimination in Employment Act, 29 U.S.C. §§ 621, et seq.;

each as amended, and all other such similar statutes, city or county ordinances or resolutions and laws of the State of South Carolina, provided, however, that nothing herein shall release the Company of its obligations to Executive under the Employment Agreement or any other contractual obligations between the Company or its affiliates and Executive, or any indemnification obligations to Executive under the Company’s bylaws, certificate of incorporation, South Carolina law, or otherwise.

Without waiving any prospective or retrospective rights under the Family and Medical Leave Act (“FMLA”) or the Fair Labor Standards Act (“FLSA”), Executive admits that he has received from the Company all rights and benefits, if any, potentially due to him pursuant to the FMLA or FLSA. It is the parties’ intent to release all claims, which can legally be released, but no more than that.

Executive specifically agrees not to attempt to institute any proceedings or pursue any action pursuant to any laws (state, local, or federal) with any agency or in any jurisdiction (state, local, or federal) based on employment with or termination from the Company except as required or protected by law. Executive covenants that he will in not way encourage or assist any person or entity (including, but not limited to, any past, present or future employee(s) of Company) to take part or participate in any legal or administrative action against Company, except as otherwise required or protected by law. Nothing in the Agreement shall be interpreted or applied in a manner that affects or limits Executive’s otherwise lawful ability to bring an administrative charge with the Equal Employment Opportunity Commission or other appropriate state or local comparable administrative agency; however, the parties agree that Executive has released Company from all liability arising from the laws, statutes, and common law listed in paragraph 1 (except as set forth in this paragraph below, with respect to the Age Discrimination in Employment Act (“ADEA”)) and, as such, Executive is not and will not be entitled to any

monetary or other comparable relief on his own behalf. Nothing in this Agreement shall be interpreted or applied in a manner that affects or limits Executive’s ability to challenge (with a lawsuit or administrative charge) the validity of Executive’s release of Company in this Agreement for age claims under the ADEA (which release is provided for in paragraph 2 of this Agreement). Other than a challenge to the validity of the release of ADEA claims under this Agreement, Executive has released Company from all liability with respect to the laws, statutes, and common law listed in paragraph 2, including the ADEA.

2. Release of Claims Under Age Discrimination in Employment Act. Without limiting the generality of the foregoing, Executive agrees that by executing this Release, he has released and waived any and all claims he has or may have as of the date of this Release for age discrimination under the Age Discrimination in Employment Act, 29 U.S.C. § 621, et seq. It is understood that Executive is advised to consult with an attorney prior to executing this Release; that he in fact has consulted a knowledgeable, competent attorney regarding this Release; that he may, before executing this Release, consider this Release for a period of twenty-one (21) calendar days; and that the consideration he receives for this Release is in addition to amounts to which he was already entitled. It is further understood that this Release is not effective until seven (7) calendar days after the execution of this Release and that Executive may revoke this Release within seven (7) calendar days from the date of execution hereof.

3. Executive acknowledges and represents that as an employee of the Company he has been obligated to, and has been given the full and unfettered opportunity to, report timely to the Company any conduct that would give rise to an allegation that the Company or any affiliate of the Company has violated any laws applicable to its businesses or has engaged in conduct which could otherwise be construed as inappropriate or unethical in any way, even if such conduct is not, or does not appear to be, a violation of any law. Executive acknowledges that a condition of the payment of any consideration provided by the Company to the Executive hereunder is his truthful and complete representation to the Company regarding any such conduct, including but not limited to conduct regarding compliance with the Company’s Code of Ethics, polices, and procedures, and with all laws and standards governing the Company’s business.

Executive’s truthful and complete representation, based on his thorough search of his knowledge and memory, is as follows: Executive has not been directly or indirectly involved in any such conduct; no one has asked or directed him to participate in any such conduct; and Executive has no specific knowledge of any conduct by any other person(s) that would give rise to an allegation that the Company or any affiliate of the Company has violated any laws applicable to its businesses or has engaged in conduct which could otherwise be construed as inappropriate or unethical in any way.

Executive agrees that he has carefully read this Release and is signing it voluntarily. Executive acknowledges that he has had twenty one (21) days from receipt of this Release to review it prior to signing or that, if Executive is signing this Release prior to the expiration of such 21-day period, Executive is waiving his right to review the Release for such full 21-day period prior to signing it. Executive has the right to revoke this release within seven (7) days following the date of its execution by him, and must deliver written notice of revocation in

person to at the following address: , and such revocation shall not be effective unless actually received by , within seven (7) days following the date the release was signed by Executive. If Executive revokes this Release within such seven (7) day period, no severance benefit will be payable to him under the Employment Agreement and he shall return to the Company any such payment received prior to that date.

EXECUTIVE HAS CAREFULLY READ THIS RELEASE AND ACKNOWLEDGES THAT IT CONSTITUTES A GENERAL RELEASE OF ALL KNOWN AND UNKNOWN CLAIMS AGAINST THE COMPANY UNDER THE AGE DISCRIMINATION IN EMPLOYMENT ACT, AND ANY AND ALL OTHER STATE AND FEDERAL LAWS, WHETHER STATUTORY OR COMMON LAW. EXECUTIVE ACKNOWLEDGES THAT HE HAS HAD A FULL OPPORTUNITY TO CONSULT WITH AN ATTORNEY OR OTHER ADVISOR OF HIS CHOOSING CONCERNING HIS EXECUTION OF THIS RELEASE AND THAT HE IS SIGNING THIS RELEASE VOLUNTARILY AND WITH THE FULL INTENT OF RELEASING THE COMPANY FROM ALL SUCH CLAIMS.

EXHIBIT C TO EMPLOYMENT AGREEMENT

Definition of Change in Control:

For the purposes of this Agreement, a “Change in Control” shall mean the occurrence of any of the following events:

(i) individuals who, on the Effective Date, constitute the Board of Directors of the Company (the “Incumbent Directors”) cease for any reason to constitute at least a majority of such Board, provided that any person becoming a director after the Effective Date and whose election or nomination for election was approved by a vote of at least a majority of the Incumbent Directors then on the Board shall be an Incumbent Director; provided, however, that no individual initially elected or nominated as a director of the Company as a result of an actual or threatened election contest with respect to the election or removal of directors (“Election Contest”) or other actual or threatened solicitation of proxies or consents by or on behalf of any “person” (such term for purposes of this definition being as defined in Section 3(a)(9) of the Exchange Act and as used in Section 13(d)(3) and 14(d)(2) of the Exchange Act) other than the Board (“Proxy Contest”), including by reason of any agreement intended to avoid or settle any Election Contest or Proxy Contest, shall be deemed an Incumbent Director; or

(ii) any person is or becomes a “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of either (A) 35% or more of the then-outstanding shares of common stock of the Company (“Company Common Stock”) or (B) securities of the Company representing 35% or more of the combined voting power of the Company’s then outstanding securities eligible to vote for the election of directors (the “Company Voting Securities”); provided, however, that for purposes of this subsection (ii), the following acquisitions shall not constitute a Change in Control: (w) an acquisition directly from the Company, (x) an acquisition by the Company or a Subsidiary of the Company, (y) an acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any Subsidiary of the Company, or (z) an acquisition pursuant to a Non-Qualifying Transaction (as defined in subsection (iii) below); or

(iii) the consummation of a reorganization, merger, consolidation, statutory share exchange or similar form of corporate transaction involving the Company or a Subsidiary (a “Reorganization”), or the sale or other disposition of all or substantially all of the Company’s assets (a “Sale”) or the acquisition of assets or stock of another corporation (an “Acquisition”), unless immediately following such Reorganization, Sale or Acquisition: (A) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the outstanding Company Common Stock and outstanding Company Voting Securities immediately prior to such Reorganization, Sale or Acquisition beneficially own, directly or indirectly, more than 55% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such

Reorganization, Sale or Acquisition (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company’s assets or stock either directly or through one or more subsidiaries, the “Surviving Corporation”) in substantially the same proportions as their ownership, immediately prior to such Reorganization, Sale or Acquisition, of the outstanding Company Common Stock and the outstanding Company Voting Securities, as the case may be, and (B) no person (other than (x) the Company or any Subsidiary of the Company, (y) the Surviving Corporation or its ultimate parent corporation, or (z) any employee benefit plan (or related trust) sponsored or maintained by any of the foregoing is the beneficial owner, directly or indirectly, of 35% or more of the total common stock or 35% or more of the total voting power of the outstanding voting securities eligible to elect directors of the Surviving Corporation, and (C) at least a majority of the members of the board of directors of the Surviving Corporation were Incumbent Directors at the time of the Board’s approval of the execution of the initial agreement providing for such Reorganization, Sale or Acquisition (any Reorganization, Sale or Acquisition which satisfies all of the criteria specified in (A), (B) and (C) above shall be deemed to be a “Non-Qualifying Transaction”); or

(iv) approval by the stockholders of the Company of a complete liquidation or dissolution of the Company.

EX-31.1 3 dex311.htm SECTION 302 CEO CERTIFICATION SECTION 302 CEO CERTIFICATION

Exhibit 31.1

Certification of Chief Executive Officer

Pursuant to Section 302 of the

Sarbanes-Oxley Act of 2002

I, Michael L. Baur, Chief Executive Officer, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of ScanSource, Inc.;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors or persons performing equivalent functions:

(a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

/s/ Michael L. Baur

Michael L. Baur, Chief Executive Officer

(Principal Executive Officer)

November 6, 2008

EX-31.2 4 dex312.htm SECTION 302 CFO CERTIFICATION SECTION 302 CFO CERTIFICATION

Exhibit 31.2

Certification of Chief Financial Officer

Pursuant to Section 302 of the

Sarbanes-Oxley Act of 2002

I, Richard P. Cleys, Vice President and Chief Financial Officer, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of ScanSource, Inc.;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

(a)

(b)

(c)

(d)

5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors or persons performing equivalent functions:

(a)

(b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.


		/s/ Richard P. Cleys
		Richard P. Cleys, Vice President and Chief Financial Officer
		(Principal Financial Officer)

November 6, 2008

EX-32.1 5 dex321.htm SECTION 906 CEO CERTIFICATION SECTION 906 CEO CERTIFICATION

Exhibit 32.1

Certification of the Chief Executive Officer of ScanSource, Inc.

Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to § 906

of the Sarbanes-Oxley Act of 2002

In connection with the quarterly report of ScanSource, Inc. (the “Company”) on Form 10-Q for the quarter ended September 30, 2008 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned officer of the Company certifies, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

1)	The Report fully complies with the requirements of §13(a) or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”); and

2)	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

November 6, 2008

/s/ Michael L. Baur

Michael L. Baur, Chief Executive Officer

(Principal Executive Officer)

This certification is being furnished solely to comply with the provisions of § 906 of the Sarbanes-Oxley Act of 2002 and is not being filed as part of the accompanying Report, including for purposes of Section 18 of the Exchange Act, or as a separate disclosure document. A signed original of this written certification required by Section 906, or other document authenticating, acknowledging or otherwise adopting the signature that appears in typed form within the electronic version of this written certification required by Section 906, has been provided to the Company and will be rendered by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32.2 6 dex322.htm SECTION 906 CFO CERTIFICATION SECTION 906 CFO CERTIFICATION

Exhibit 32.2

Certification of the Chief Financial Officer of ScanSource, Inc.

Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to § 906

of the Sarbanes-Oxley Act of 2002

1)	The Report fully complies with the requirements of §13(a) or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”); and

2)	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

November 6, 2008

/s/ Richard P. Cleys

Richard P. Cleys, Vice President and Chief

Financial Officer

(Principal Financial Officer)

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(in thousands)

September 30,
2008

June 30,
2008

Short-term borrowings