-----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, K8/5bR3O9xnwvH7EJgp7C6P1WHoqIuepHu0sq8zm9lBoMT+OldfdRBDfPCF7hckF q/IGoeA3GJyg8FF9a7iIqg== 0000931763-98-002523.txt : 19980930 0000931763-98-002523.hdr.sgml : 19980930 ACCESSION NUMBER: 0000931763-98-002523 CONFORMED SUBMISSION TYPE: 10-K405/A PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980929 SROS: NASD 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-K405/A SEC ACT: SEC FILE NUMBER: 000-26926 FILM NUMBER: 98716808 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-K405/A 1 FORM 10-K405 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K/A (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ---------------------- -------------- Commission File Number: 1-12842 SCANSOURCE, INC. (Exact name of registrant as specified in its charter) SOUTH CAROLINA 57-0965380 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 6 LOGUE COURT, SUITE G 29165 (Address of principal executive offices) (Zip Code) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (864) 288-2432 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: None. SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: Common Stock, no par value Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting stock of the Registrant held by non- affiliates of the Registrant at September 22, 1998 was $80,916,000, as computed by reference to the average bid and asked prices of such stock on such date. As of June 30, 1998, 5,353,310 shares of the Registrant's Common Stock, no par value, were outstanding. The Registrant had no other classes of common equity outstanding as of such date. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Annual Report to Shareholders for the fiscal year ended June 30, 1998 are incorporated by reference into Parts II and IV of this Form 10-K, and portions of the Registrant's Proxy Statement to be furnished in connection with its 1998 Annual Meeting of Shareholders are incorporated by reference into Part III of this Form 10-K. PART I This Form 10-K/A amends the Form 10-K filed with the Securities and Exchange Commission on September 25, 1998 by ScanSource, Inc. to include certain financial statements which were inadvertently omitted from such filing. ITEM 1. BUSINESS. ScanSource Inc., ("ScanSource" or the "Company") is a leading value-added wholesale distributor of automatic identification ("Auto ID"), point of sale ("POS") and telephony products. These specialty technology products interface with computer systems used to automate the collection, processing and communication of information for commercial and industrial applications, including retail sales, distribution, shipping, inventory control, materials handling and warehouse management. PRODUCTS AND MARKETS The Company currently markets approximately 14,000 products from over 60 hardware and software vendors from its central warehouse in Memphis, Tennessee to approximately 9,300 reseller customers. Auto-ID technology incorporates the capabilities for electronic recognition and data processing without the need for manual input and consists of a wide range of products, including bar code printers and labeling devices, contact wands, light pens, hand-held and fixed-mount laser scanners, portable data collection devices, keyboard wedges, and magnetic stripe readers. As Auto-ID technology has become more pervasive, applications have evolved from traditional uses such as inventory control, materials handling, distribution, shipping, and warehouse management to more advanced applications such as medical research. POS technology consists of devices used for the capture, processing, analysis, and dissemination of transaction data. POS product lines include computer-based terminals, monitors, receipt printers, pole displays, cash drawers, keyboards, peripheral equipment, and fully integrated processing units used primarily in retail applications. Telephony products include business telephone systems (PBXs, key systems, telephone handsets and cabling) and computer telephony components used in voice, fax, data, voice recognition, call center management and IP telephony applications. INDUSTRY OVERVIEW The distribution channels for specialty technology products generally consist of manufacturers, wholesale distributors such as ScanSource, resellers, and end- users. In recent years, these distribution channels have evolved through three stages: (i) direct sales by manufacturers to end-users; (ii) single-tier distribution in which manufacturers sell to resellers who, in turn, sell directly to end-users; and (iii) two-tier, or wholesale distribution, in which manufacturers sell to wholesale distributors, including ScanSource, who sell only to resellers who, in turn, sell directly to end-users. Currently, the wholesale distribution channel is highly fragmented, comprised of several large national distributors and many smaller regional distributors. Large national distributors are engaged primarily in conventional order fulfillment and typically offer few value-added services, while small regional distributors are limited in the scale and scope of their operations and services. Competition among an expanding number of manufacturers has caused product prices to decrease and product applications to expand, which has resulted in an increasing number of resellers entering the market in order to support a broader base of potential end-users. As the number of resellers and end-users grows, competition among manufacturers and within the reseller channel has intensified, resulting in a less orderly market structure. As a result of the transition of specialty technology products to open-systems (whereby a variety of manufacturers' products can be configured together to create a system solution), both manufacturers and resellers have become more dependent upon wholesale distributors such as ScanSource for the organization and maintenance of an efficient market structure. In addition, manufacturers which face declining product prices and rising costs of direct sales increasingly rely upon value-added wholesale distributors for outsourcing certain support functions, such as product assortment, delivery, inventory management, technical assistance, and marketing. At the same time, shortened product life cycles and the introduction of new products and applications have caused resellers increasingly to rely on wholesale distributors for various inventory management, financing, technical support, and related functions. The Company believes that as the reseller market grows and becomes more fragmented, and as specialty technology products continue to transition to open systems, the wholesale distribution channel in which the Company operates will become increasingly more important. 2 VENDORS The Company's vendors include most of the leading Auto-ID and POS manufacturers, including Axiohm, Cherry Electrical, Cognitive Solutions, Datamax, Eltron, Epson America, IBM, Intermec, Ithaca Peripherals, Javelin, Metrologic, MicroTouch Systems, MMF Cash Drawer, Monarch Marking Systems, Percon, PSC, Spectra-Physics, StrandWare, Symbol Technologies, and Zebra Technologies. The Company's key telephony vendors include Lucent Technologies, Dialogic, Comdial, Vodavi, VocalTech, and Voice Technology Group. The Company's merchandising director recruits vendors and manages important aspects of its vendor relationships, such as purchasing arrangements, cooperative marketing initiatives, vendor sales force relationships, product training, and monitoring rebate programs and various contract terms and conditions. The Company generally enters into non-exclusive distribution agreements with vendors. These agreements typically provide the Company with stock rotation and price protection provisions that may mitigate the risk of loss from slow moving inventory, vendor price reductions, product updates or obsolescence. Some of these distribution agreements contain minimum purchase amounts in order to receive preferential prices. The distribution agreements are generally terminable on 30 to 120 days' notice by either party. CUSTOMERS The Company's reseller customers currently include approximately 9,300 active value-added reseller accounts ("VARS") located in the U.S. and Canada. No single customer accounted for more than three percent of the Company's net sales in fiscal 1998. The Company segments its significant reseller customers into two broad categories: Specialty Technology VARs. These resellers focus on selling specialty technology products as a tailored software or integrated hardware solution for their end-users' existing applications or incorporating specialty technology products as part of customized technology solutions for their end-users. Primary industries served by these resellers include manufacturing, distribution, health care, pharmaceuticals, hospitality, convenience, grocery, and other retail markets. General or PC VARs. These resellers develop computer solutions for their end- users' microcomputer needs. They typically have well-established relationships with end-user management information system directors and are seeking additional revenue and profit opportunities in related technology markets, such as Auto-ID, POS, or telephony. SALES AND MARKETING The Company's sales force is comprised of 61 inside sales representatives located in South Carolina, California, Georgia, Washington, New Jersey and Canada. In order to build strong customer relationships, each active reseller is assigned to a sales representative. Each sales representative negotiates pricing directly with his assigned customers. The Company also employs several product managers who are responsible for developing technical expertise within broad product markets, evaluating competitive markets, and reviewing overall product and service requirements of resellers. Each sales representative and product manager receives comprehensive training with respect to the technical characteristics of each vendor's products. This training is supplemented by quarterly product seminars conducted by vendors' representatives and by weekly meetings among all product managers, marketing and sales representatives. The Company provides a range of marketing services which include: cooperative advertising with vendors through trade publications and direct mail; a product catalog which is published three times per year; periodic newsletters; management of sales leads; trade shows with software companies and vendors; direct mail; and sales promotions. In addition, the Company organizes and operates its own "Solutions USA" trade show on a quarterly basis to recruit prospective resellers and introduce new applications for the specialty technology products it distributes. The Company frequently customizes its marketing services for vendors and resellers. VALUE-ADDED SERVICES In addition to the basic order fulfillment and credit services that conventional wholesale distributors typically provide to resellers, the Company differentiates itself by providing an array of value-added services, including the following: 3 Pre-Sale Technical Support. Technical support personnel assist the reseller with systems configuration as the order is placed. Pre-sale support also includes testing products to ensure their compatibility with other products and applications. Post-Sale Technical Support. Technical support personnel also assist sales representatives and customers in diagnosing and solving technical, configuration, or compatibility issues which may arise after sale. Technical support personnel will, if necessary, serve as a liaison or advocate between the manufacturer and the reseller. Bundling of Separate Product Assortments into Solution Kits. Product managers and technical support personnel work together to select specific products that are compatible and continually develop "solution kits" or bundles to better meet the reseller's needs. Professional Services Group. The Company's Professional Services Group assists resellers with pen-based programming and radio-frequency data collection applications, areas in which resellers need greater technical expertise. This group offers needs-analysis, pre-sale equipment configuration, sales assistance, site surveys, on-site installation, post-sale maintenance, software programming (both utilities and applications), and project management. OPERATIONS Information System The Company's information system is a highly scalable, centralized processing system capable of supporting numerous operational functions including purchasing, receiving, order processing, shipping, inventory management, and accounting. Sales representatives rely on the information system for on-line, real-time information on product pricing, inventory availability and reservation, and order status. The Company's warehouse operations use bar code technology for receiving and shipping, and automated UPS and FedEx systems for freight processing and shipment tracking, each of which is integrated with the Company's information system. The customer service and technical support departments employ the system for documentation and faster processing of customer product returns. To ensure that adequate inventory levels are maintained, the Company's buyers depend on the system's purchasing and receiving functions to track inventory on a continual basis. Central Warehouse and Shipping The Company's 81,000 square foot warehouse facility (of which it currently uses approximately 50,000 square feet), located approximately four miles from the FedEx hub facility in Memphis, Tennessee, serves the Company's United States market. A single 20,000 square foot warehouse in Toronto serves the Company's Canada market using Purolator as the primary freight carrier. The Company believes that its centralized distribution creates several advantages, including: (i) a reduced amount of "safety stock" inventory, which, in turn reduces the Company's working capital borrowings; (ii) an increased turnover rate by tighter control over inventory; (iii) maintenance of a consistent order- fill rate; (iv) improved personnel productivity; (v) improved delivery time; (vi) simplified purchasing and tracking; (vii) decreased demand for management personnel; and (viii) flexibility to meet customer needs for systems integration. The Company's objective is to ship on the same day all orders received by 8:00 p.m. Eastern Time. Orders are currently processed in the central warehouse, where bar code technology is utilized to minimize shipping errors. The Company also has an automated package handling system used to send products from the picking area to invoicing stations. Upon fulfillment of the order, the package is immediately shipped to the reseller or "drop-shipped" to an end-user specified by the reseller by FedEx or UPS overnight service. The Company charges its customers local ground delivery rates for this service. Credit Services The Company routinely offers 20-day credit terms for qualified resellers. The Company believes this policy eliminates the customer's need to establish multiple credit relationships with a large number of manufacturers. In addition, the Company arranges floor planning and lease financing for its resellers through a number of credit institutions. 4 COMPETITION The markets in which the Company operates are highly competitive. Competition is based primarily on factors such as price, product availability, speed and accuracy of delivery, effectiveness of sales and marketing programs, credit availability, ability to tailor specific solutions to customer needs, quality and breadth of product lines and services, and availability of technical and product information. The Company's competitors include regional and national wholesale distributors, as well as hardware manufacturers (including most of the Company's vendors) that sell directly to resellers and to end-users. In addition, the Company competes with master resellers which sell to franchisees, third-party dealers and end-users. Certain of the Company's current and potential competitors have greater financial, technical, marketing, and other resources than the Company and may be able to respond more quickly to new or emerging technologies and changes in customer requirements. Such competition could also result in price reductions, reduced margins, and loss of market share by the Company. EMPLOYEES As of August 6 , 1998 the Company had 229 employees, none of whom was a member of an industry trade union or collective bargaining unit. The Company considers its employee relations to be good. SERVICE MARKS The Company conducts its business under the trademark and service mark "ScanSource." The Company has been issued registrations for the mark "ScanSource" in the United States and Canada. The Company is also pursuing registrations of its trademarks and service marks "Catalyst" and "Catalyst Telecom" in the United States and Canada. The Company does not believe that its operations are dependent upon any of its trademarks or service marks. The Company also sells products and provides services under various trademarks, service marks, and trade names to which reference is made in this report that are the property of owners other than the Company. Such owners have reserved all rights with respect to their respective trademarks, service marks, and trade names. PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 Certain of the statements contained in this PART I, Item 1 (Business) and PART II, Item 7 (Management's Discussion and Analysis of Financial Condition and Results of Operations) of this Annual Report on Form 10-K that are not historical facts are forward-looking statements subject to the safe harbor created by the Private Securities Litigation Reform Act of 1995. The Company cautions readers of this Annual Report on Form 10-K that a number of important factors could cause the Company's activities and/or actual results in fiscal 1998 and beyond to differ materially from those expressed in any such forward- looking statements. These factors include, without limitation, the Company's dependence on vendors, product supply, senior management, centralized functions, and third-party shippers, the Company's ability to compete successfully in a highly competitive market and manage significant additions in personnel and increases in working capital, the Company's entry into new products markets in which it has no prior experience, the Company's susceptibility to quarterly fluctuations in net sales and operations results, the Company's ability to manage successfully price protection or stock rotation opportunities associated with inventory value decreases, and other factors described in other reports and documents filed by the Company with the Securities and Exchange Commission. ITEM 2. PROPERTIES. In June 1998, the Company purchased a 70,000 square foot building in Greenville, South Carolina in which it had formerly leased 32,000 square feet for its principal executive and sales office. The Company is continuing to maintain such space as its principal executive and sales office and is leasing the remainder of the building to third parties until additional space is required for the Company's needs. The Company's 81,000 square foot distribution center in Memphis, Tennessee is leased through November 2000 and its 20,000 square foot warehouse in Toronto, Canada is leased through January 31, 2003. The Company also leases small sales offices of 6,800 square feet or less in each of Tustin, California; Norcross, Georgia; Cranford, New Jersey; Bellingham, Washington; and Vancouver and Toronto, Canada. Management believes the Company's office and warehouse facilities are adequate to support its level of operations at their current level and for the foreseeable future. 5 ITEM 3. LEGAL PROCEEDINGS. The Company is not a party to any legal proceedings it believes could have a material adverse effect on its business, financial condition, or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. PART II ITEM 5. Market For Registrant's Common Equity and Related Stockholder Matters. The information called for by this Item is incorporated herein by reference from the inside back cover page of the Registrant's Annual Report to Shareholders for the fiscal year ended June 30, 1998. ITEM 6. SELECTED FINANCIAL DATA. The information called for by this Item is incorporated herein by reference from page 8 of the Registrant's Annual Report to Shareholders for the fiscal year ended June 30, 1998. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The information called for by this Item is incorporated herein by reference from pages 9 through 14 of the Registrant's Annual Report to Shareholders for the fiscal year ended June 30, 1998. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The information called for by this Item is incorporated herein by reference from pages 13 through 14 of the Registrant's Annual Report to Shareholders for the fiscal year ended June 30, 1998. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The financial statements listed in Item 14(a)1 of this Form 10-K are incorporated herein by reference from pages 15 through 24 of the Registrant's Annual Report to Shareholders for the fiscal year ended June 30, 1998. The financial statement schedules listed in Item 14(a)2 of this Form 10-K are included in this report on pages F-1 through F-2. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III Information called for by Part III (Items 10, 11, 12 and 13) of this report on Form 10-K has been omitted as the Company intends to file with the Securities and Exchange Commission not later than 120 days after the close of its fiscal year ended June 30, 1998 a definitive Proxy Statement pursuant to Regulation 14A promulgated under the Securities Exchange Act of 1934. Such information will be set forth in such Proxy Statement and is incorporated herein by reference. 6 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The information required by this item is incorporated herein by reference to the Proxy Statement for the Company's 1998 Annual Meeting of Shareholders. ITEM 11. EXECUTIVE COMPENSATION. The information required by this item is incorporated herein by reference to the Proxy Statement for the Company's 1998 Annual Meeting of Shareholders. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information required by this item is incorporated herein by reference to the Proxy Statement for the Company's 1998 Annual Meeting of Shareholders. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information required by this item is incorporated herein by reference to the Proxy Statement for the Company's 1998 Annual Meeting of Shareholders. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (A)(1) CONSOLIDATED FINANCIAL STATEMENTS: The following financial statements of ScanSource, Inc. and Independent Auditors' Report are incorporated herein by reference from the Registrant's Annual Report to Shareholders for the fiscal year ended June 30, 1998: Independent Auditors' Report Consolidated Balance Sheets as of June 30, 1997 and 1998 Consolidated Statements of Income for the years ended June 30, 1996, 1997 and 1998 Consolidated Statements of Shareholders' Equity for the years ended June 30, 1996, 1997 and 1998 Consolidated Statements of Cash Flows for the years ended June 30, 1996, 1997 and 1998 Notes to Consolidated Financial Statements (A)(2) FINANCIAL STATEMENT SCHEDULE: The following financial statement schedule of ScanSource, Inc. and Independent Auditors' Report for the years ended June 30, 1996, 1997 and 1998 are presented on Page F-1 to F-2. Independent Auditors' Report Schedule - Allowance for Doubtful Accounts Receivable (A)(3) EXHIBITS: The Exhibits listed on the accompanying Index to Exhibits on pages E-1 to E- 2 are filed as part of this report. (B) REPORTS ON FORM 8-K None. 7 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. September 24, 1998 SCANSOURCE, INC. By: /s/ STEVEN H. OWINGS ------------------------ Steven H. Owings Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. SIGNATURE TITLE DATE - ------------------------- ------------------------- ----------------- /s/ STEVEN H. OWINGS Chairman of the Board and September 24, 1998 - ------------------------- Chief Executive Officer Steven H. Owings /s/ MICHAEL L. BAUR President and Director September 24, 1998 - ------------------------- Michael L. Baur /s/ JEFFERY A. BRYSON Chief Financial Officer and September 24, 1998 - ------------------------- Treasurer (principal financial Jeffery A. Bryson and accounting officer) /s/ STEVEN R. FISCHER Director September 24, 1998 - ------------------------- Steven R. Fischer /s/ JAMES G. FOODY Director September 24, 1998 - ------------------------- James G. Foody 8 INDEPENDENT AUDITORS' REPORT ---------------------------- The Board of Directors ScanSource, Inc.: Under date of August 7, 1998, we reported on the consolidated balance sheets of ScanSource, Inc. and subsidiaries as of June 30, 1997 and 1998, and the related consolidated statements of income, shareholders' equity and cash flows for each of the years in the three-year period ended June 30, 1998, which are included herein. In connection with our audits of the aforementioned financial statements, we also audited the related accompanying financial statement schedule listed in Item 14(a)2. The financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statement schedule based on our audits. In our opinion, such schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. Greenville, South Carolina /s/KPMG Peat Marwick LLP August 7, 1998 F-1 SCANSOURCE, INC. AND SUBSIDIARIES Allowance for Doubtful Accounts Receivable (In thousands)
Balance at Amounts Balance at Beginning of Charged to End of Description Year Bad Debt Expense Deduction Year ----------- ------------ ---------------- --------- ---------- Allowance for doubtful accounts receivable: Year ended June 30, 1996 $ 317 400 (180) 537 ====== ===== ==== ===== Year ended June 30, 1997 $ 537 899 (209) 1,227 ====== ===== ==== ===== Year ended June 30, 1998 $1,227 1,230 (412) 2,045 ====== ===== ==== =====
F-2 INDEX TO EXHIBITS EXHIBIT NUMBER DESCRIPTION ------- ----------- 3.1 Amended and Restated Articles of Incorporation of the Registrant. (Incorporated by Reference to Exhibit 3.1 to Registrant's Form SB-2 filed with the Commission on February 7, 1994, Registration No. 33-75026-A). 3.2 Bylaws of the Registrant (Incorporated by Reference to Exhibit 3.2 to Registrant's Form SB-2 filed with the Commission on February 7, 1994, Registration No. 33-75026-A). 4.1 Form of Common Stock Certificate (Incorporated by Reference to Exhibit 4.1 to Registrant's Form SB-2 filed with the Commission on February 7, 1994, Registration No. 33-75026-A). 10.9 Stock Option Agreement dated July 1, 1993 covering stock options issued to Michael L. Baur. (Incorporated by Reference to Exhibit 10.9 to the Registrant's Form SB-2 filed with the Commission on February 7, 1994, Registration No. 33-75026-A). 10.10 1993 Incentive Stock Option Plan (As Amended) of the Registrant and Form of Stock Option Agreement (Incorporated by reference to Exhibit 10.10 to Registrant's Form S-1 filed with the Commission on January 23, 1997, Registration No. 333-20231). 10.11 1994 Stock Option Plan for Outside Directors of the Registrant and Form of Stock Option Agreement. (Incorporated by Reference to Exhibit 10.11 to the Registrant's Form SB-2 filed with the Commission on February 7, 1994, Registration No. 33-75026-A). 10.13 Stock Option Agreement dated December 30, 1993 covering stock options issued to Irwin Lieber. (Incorporated by Reference to Exhibit 10.13 to the Registrant's Form SB-2 filed with the Commission on February 7, 1994, Registration No. 33-75026-A). 10.18 Agreement to Terminate Distribution Services dated June 24, 1994 between the Registrant and Gates/FA Distributing, Inc. (Incorporated by Reference to Exhibit 99.1 to Registrant's Form 8-K filed with the Commission on June 6, 1994). 10.21 Software License Agreement dated April 18, 1995 between the Registrant and Technology Marketing Group, Inc. d/b/a Globelle, including letter agreement dated November 22, 1995 between the parties with respect to stock options. (Incorporated by reference to Exhibit 10.21 to the Registrant's registration statement on Form S-3 filed with the Commission on December 29, 1995, Registration No. 33-81043). 10.25* Agreement for Wholesale Financing (Security Agreement) dated April 8, 1996 between the Registrant and IBM Credit Corporation, including letter agreement dated April 17, 1996 between the parties. 10.26 Intercreditor Agreement dated April 8, 1996 among the Registrant, IBM Credit Corporation, and Branch Banking and Trust Company. (Incorporated by reference to Exhibit 10.26 to the Registrant's Form S-1 filed with the Commission on January 23, 1997, Registration No. 333-20231). 10.27 Loan and Security Agreement dated November 25, 1996 between the Registrant and Branch Banking and Trust Company. (Incorporated by reference to Exhibit 10.27 to the Registrant's Form S-1 filed with the Commission on January 23, 1997, Registration No. 333-20231). 10.28 Employment Agreement dated as of January 1, 1997 between the Registrant and Steven H. Owings. (Incorporated by reference to Exhibit 10.28 to the Registrant's Form S-1 filed with the Commission on January 23, 1997, Registration No. 333-20231). 10.29 Employment Agreement dated as of January 1, 1997 between the Registrant and Michael L. Baur. (Incorporated by reference to Exhibit 10.29 to the Registrant's Form S-1 filed with the Commission on January 23, 1997, Registration No. 333-20231). 10.30 Employment Agreement dated as of January 1, 1997 between the Registrant and Jeffery A. Bryson. (Incorporated by reference to Exhibit 10.30 to the Registrant's Form S-1 filed with the Commission on January 23, 1997, Registration No. 333-20231). E-1 EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.32 Stock Option Agreement dated July 18, 1996 covering stock options granted to James G. Foody. (Incorporated by reference to Exhibit 10.32 to the Registrant's Form S-1 filed with the Commission on January 23, 1997, Registration No. 333-20231). 10.33 Stock Option Agreement dated December 3, 1996 covering stock options granted to Steven H. Owings. (Incorporated by reference to Exhibit 10.33 to the Registrant's Form S-1 filed with the Commission on January 23, 1997, Registration No. 333-20231). 10.34 Stock Option Agreement dated December 3, 1996 covering stock options granted to Michael L. Baur. (Incorporated by reference to Exhibit 10.34 to the Registrant's Form S-1 filed with the Commission on January 23, 1997, Registration No. 333-20231). 10.35* Distribution Agreement dated October 1, 1994 between the Registrant and Symbol Technologies, Inc. 10.36* Distribution Agreement dated January 1, 1996 between the Registrant and IBM Corporation. 10.37 Stock Option Agreement dated January 17, 1997 covering options granted to Steven H. Owings. (Incorporated by reference to Exhibit 10.37 to the Registrant's Form S-1 filed with the Commission on January 23, 1997, Registration No. 333-20231). 10.38 Stock Option Agreement dated January 17, 1997 covering options granted to Michael L. Baur. (Incorporated by reference to Exhibit 10.38 to the Registrant's Form S-1 filed with the Commission on January 23, 1997, Registration No. 333-20231). 10.39 Stock Option Agreement dated January 17, 1997 covering options granted to Jeffrey A. Bryson. (Incorporated by reference to Exhibit 10.39 to the Registrant's Form S-1 filed with the Commission on January 23, 1997, Registration No. 333-20231). 13* Portions of the Registrant's Annual Report to Shareholders for the Fiscal Year Ended June 30, 1998. 27* Financial Data Schedule. - ---------- * Filed herewith. E-2 EX-10.25 2 AGREEMENT FOR WHOLESALE FINANCING Exhibit 10.25 ------------- [LETTERHEAD OF IBM CREDIT CORPORATION APPEARS HERE] April 17, 1996 Mr. Michael Baur Scansource, Inc. 6 Logue Court Greenville, SC 29615 Dear Mr. Baur: We are pleased to have you as part of the IBM Credit Corporation Remarketer Financing Program. Your approved credit line is $7,000,000.00. To facilitate the administration of the program, an IBM Credit Corporation ("IBM Credit") Dealer Account Number (54319) has been established. Please use this number in your future communications with us regarding this program. The Remarketer Financing Program you have been approved for is the Scheduled Payment Plan (SPP). With this program, you remit a single payment in 75 days. Depending upon the date of each invoice, payments are due on the 5th, 15th and 25th of the month following your purchase. There are no financing charges associated with this program for 75 days. When the inventory financing program is made available to you, all new orders will be processed by the franchisor under the inventory financing program. IBM Credit is dedicated to providing the best possible customer service and financing programs which meet the changing needs of our customers. Your input is essential as we strive to remain your first choice for remarketer financing, and we have found that our most valuable feedback comes immediately following a completed transaction. Accordingly, IBM Credit headquarters will be contacting you within the next several days for your insight into "How we're doing". We would appreciate your participation in this brief telephone survey which will allow you to share your ideas and suggestions on how we could make your future business transactions with us even easier. IBM Credit sincerely appreciates this opportunity to provide a service to your organization and we look forward to a mutually beneficial business relationship. Please contact your Remarketer Financing Advisor, Joe Gibbons, at 800-678-6900 if you have questions. Sincerely, /s/ KATHY MITCHELL for Denise Dixon Contract Administrator EX-10.35 3 DISTRIBUTION AGREEMENT Exhibit 10.35 SYMBOL TECHNOLOGIES, INC. DISTRIBUTION AGREEMENT As of October 1, 1994, Symbol Technologies, Inc., a Delaware corporation having is principal place of business at 116 Wilbur Place, Bohemia, NY 11716 ("Symbol"), and ScanSource, a South Carolina corporation having its principal place of business at Greenville, South Carolina ("Distributor"), agree as follows: 1. APPOINTMENT. Symbol appoints Distributor an authorized distributor of its Products within the United States and Puerto Rico (the "Territory"). Symbol remains free to distribute its Products within the Territory through other distributors or dealers. As used in this Agreement, "Products" means all products offered for sale by Symbol generally as set forth and described in Symbol's current price list. Products may be added to or deleted from the price list by Symbol on sixty days prior written notice to Distributor. 2. RESPONSIBILITIES OF DISTRIBUTOR. Distributor will use its reasonable best efforts to: a. maintain a competent and aggressive sales force and otherwise promote the sale, lease, or other distribution of the Products, TO RESELLERS ONLY, within the Territory; b. maintain a representative inventory of Products in reasonably sufficient quantities to provide adequate and timely delivery to Distributor's customers; and c. participate in such training programs as may be offered by Symbol. 3. RESPONSIBILITIES OF SYMBOL. Symbol will use its reasonable best efforts to: a. furnish Distributor with current price and product information in suitable electronic formats and with a reasonable supply of such printed sales literature, books, catalogues, and the like as Symbol may prepare and make available such training and technical and sales support as may be necessary to assist Distributor in effectively carrying out its activities under this Agreement; b. advertise the Products throughout the Territory, inform the public that Distributor is an authorized distributor of the Products, encourage customers or potential customers potential customers for the Products to order the same from its distributors (including Distributor), and refer to its distributors (including Distributor) leads and ordersinvolving quantities of Products normally handled by distribution; and c. establish and maintain quality control manufacturing, handling and testing procedures, and such other programs as are necessary to ensure that the Products, as manufactured and sold to Distributor are of the highest quality and reliability, are in full compliance with all applicable laws, standards, codes and regulations, are duly marked and labeled and are suitable for resale or other distribution. 4. REPORTS AND AUDITS. Within fifteen business days after the end of each month, Distributor will send to Symbol in a mutually agreeable format, (i) a stock status report showing the month end on-hand quantities of Products by device type and warehouse location and (ii) a point of sale report showing each sale of the Products for the month by device type, selling location, customer name and address, and sale price. No more than twice during any year, at reasonable times and upon reasonable prior notice employees of Symbol may (i) conduct a physical inventory of Products in any stocking location (or, in automated facilities, observe cycle counts and related methodology) or (ii) audit such business records, located at Distributor's corporate headquarters, as pertain solely to the purchase of Products hereunder during any such year. 5. ORDERS; DELIVERY; RESCHEDULING; CANCELLATION A. ORDERS Distributor will place written, telefaxed, or electronically interchanged purchase orders with written confirmation within thirty days, which will include the Products ordered, quantities requested, delivery dates, prices, and shipping instructions (when necessary). Symbol will acknowledge each order in writing, by telefax or electronic interchange within ten business days of the receipt thereof and will confirm the requested shipment date or specify an alternative shipment date ("Acknowledged Shipment Date"). B. SHIPPING All shipments are F.O.B. Symbol's point of manufacture. C. RESCHEDULING AND CANCELLATION Distributor may, on at least thirty days prior written notice, reschedule or cancel the Acknowledged Shipment Date of any order without cost or penalty. D. DISTRIBUTOR'S ACCEPTANCE Distributor's acceptance of an order will occur upon its receipt of the Products, unless Distributor notifies Symbol within thirty business days of such receipt that the products are defective or do not conform to Symbol's applicable warranty, the terms of this Agreement, or Distributor's order. E. DOA'S Products received by Distributor that are defective on arrival will be handled under standard procedures then currently in place for DOA's and expedited replacement. 6. PRICES. The paces for Products will be as set forth in Symbol's Price list in effect as of the date of this Agreement, subject to discounts equal to Level "8" in the attached "Distributor Product and Discount Schedule". For discount levels above Level 7, see attached Addendum. Prices are also subject to change from such date forward upon at least sixty days prior written notice from Symbol to Distributor. A. PRICE INCREASES Prior to the effective date of a price increase, Distributor may order Products for delivery within the term at the prior (i.e., lower) price. Products shipped under orders submitted by Distributor prior to the effective date of any price increase will be shipped and invoiced at the price in effect at the time of order placement, providing shipment occurs within 90 days. B. PRICE DECREASES In the event Symbol decreases the price of any Product, Distributor will receive a credit equal to the difference between the price paid for the Product by Distributor (less any prior credits taken by Distributor on such Product) and the new decreased price for the Product multiplied by the quantity of such Product in Distributor's inventory, or in transit to Distributor, on the effective date of the decrease. Price protection will also apply to all Products returned to Distributor by its customers within sixty days of the effective date. Distributor will submit to Symbol within sixty business days following the later of the effective dateof such price decrease or the date Distributor actually receives notice thereof, a list of the Products upon which such credit is due. All Products shipped after the effective date of any price decrease will be shipped and invoiced at the price in effect at the time of shipment. C. SUPPLIER'S REPRESENTATION Symbol represents and warrants that its practices and policies, including prices and discounts, comply with all applicable laws. D. TAXES AND OTHER CHARGES Distributor will pay any applicable sales or use taxes pertaining to its purchase of the Products (and, if Products are to be delivered to points outside the United States, the cost of packing, duties, licenses, and fees) if Included as a separate item on the invoices sent by Symbol to Distributor. E. TERMS Terms of payment are two percent 20 net 45 days. 7. RETURN OF PRODUCT A. QUARTERLY ROTATION Once in each quarter, Distributor may return to Symbol for credit, a quantity of Products the value of which will not exceed ten percent of the amount invoiced by Symbol to Distributor for all Products purchased by Distributor during the previous quarter. Credit issued for such returned Products will equal the price paid by Distributor for such Products, less any prior credits taken thereon. Such returns, which may be made from one or more stocking locations, will be shipped F.O.B. Symbol's domestic facility, freight prepaid. Distributor must obtain a return authorization from Symbol prior to shipment. All Products returned must be in their original packaging or unsold and in merchantable condition. 8. PRODUCT CHANGES A. OBSOLESCENCE AND MODIFICATION Symbol reserves the right to discontinue the manufacture or sale of, or otherwise render or treat as obsolete, any or all of the Products (or to modify the design or manufacture of any Product so as to preclude or limit Distributor's sales of such Product) upon at least ninety days prior written notice to Distributor. Distributor may, in its discretion, within sixty days of its receipt of such notice, notify 2 Symbol in writing of its intention to return any or all such Products which remain in its inventory for a credit equal to the net price paid by Distributor for such Products. The Products will be returned within sixty days of the date of Distributor's receipt of Symbol's return authorization. B. INTRODUCTION OF NEW PRODUCTS Symbol will give Distributor at least thirty days prior written notice of the introduction of any new Products that preclude or materially limit Distributor from selling any Products in its inventory and will work with Distributor to resell the affected inventory. If, despite such efforts, affected Product still remains in Distributor's inventory, Symbol will replace it with the new Products within one hundred twenty days of the official public announcement, or Symbol's first shipment, of such new Products, whichever occurs first, for only the net cost difference, plus shipping. 9. WARRANTY. The Products will be covered by Symbol's standard warranties, copies of which are included in Product packaging, plus ninety days for resale stocking. 10. COMPLIANCE WITH LAWS. Despite anything to the contrary contained in Addendum I or elsewhere in this Agreement, Symbol will indemnify Distributor against, and hold it harmless from, any cost, loss, damage, or liability (including reasonable attorney's fees) arising from or related to Symbol's conduct or the failure, or alleged failure, of the Products, as manufactured and sold to Distributor to fully comply with all applicable Laws, standards, codes, specifications, and regulations or to be suitable for resale or other distribution by Distributor as contemplated by this Agreement. All warranty and indemnification provisions of this Agreement will survive the termination hereof. 11. INTELLECTUAL PROPERTY. Symbol will indemnify, defend and otherwise hold harmless Distributor, its affiliates and its customers from all cost, loss, damage, or liability arising from any proceeding or claim brought or asserted against Distributor, its affiliates or its customers to the extent such proceeding or claim is based on an allegation that the Products, any part thereof, or their distribution or use infringe any patent, copyright, trademark, trade secret, right in a mask work, or any similar claim, if Distributor notifies Symbol of any such proceeding or claim promptly after it becomes known and provides all the assistance and cooperation to Symbol that is reasonably requested. Symbol will not be liable to Distributor under thisparagraph to the extent that any claim is based on a use for which the Product or part was not designed, or an alteration of the Product by Distributor or at its direction which caused the infringement. 12. TERM AND TERMINATION A. Term This Agreement is effective once signed by both parties and until terminated in accordance with the provisions of this paragraph. Either party may at any time terminate this Agreement without cause and far its convenience by giving sixty days prior written notice to the other. Symbol and Distributor represent that they have considered the making of expenditures in preparing to perform under this Agreement. In that regard, both parties acknowledge that neither party will in any way be liable to the other for any loss, expense, or damage (including special, consequential or incidental damages) by reason of any termination of this Agreement without cause, excepting only the then current value of equipment purchased or improvements made by either party and dedicated to the Products or services of such other party. B. EVENTS OF DEFAULT Any of the following is a default under this Agreement: i. the assignment of this Agreement by either party without the prior written consent of the other party. ii. either party's failure to cure any breach of this Agreement within sixty days following written notice thereof from the other (or, if not curable within sixty days, if the cure is not commenced within that period and thereafter diligently completed); and, iii. the assignment by either party of its business for the benefit of creditors, or the filing of a petition by either party under Bankruptcy Code or any similar statute, or the filing of such a petition against either of them which is not discharged or stayed within sixty days, or the appointment of a receiver or similar officer to take charge of either party's property, or any other act indicative of bankruptcy or insolvency. 3 C REMEDIES UPON DEFAULT In the event of either party's default, the other party may terminate this Agreement for cause by written notice and/or avail itself of any remedy available at law or equity. d. RETURN OF INVENTORY In the event of any termination of this Agreement, Symbol may, at its option, repurchase from Distributor any or all unsold Products designated by Distributor from its inventory at the price paid therefor by Distributor, less any prior credits taken by Distributor on such Products. If Distributor terminates this Agreement without cause, or Symbol terminates it with cause, the price will be reduced by a five percent handling charge and Distributor will pay all freight and shipping charges (which otherwise will be paid by Symbol). In the event of any termination, Symbol will, at Distributor's request, honor any Distributor purchase order then outstanding. Symbol will only accept those Products which are in their original unopened packaging or are undamaged and in merchantable condition. No termination of this Agreement will affect any obligation of either party to pay amounts due to the other hereunder. 13. MARKETING COMMUNICATION. To assist Distributor in advertising and promoting the Products, Symbol will accrue into a cooperative marketing fund two percent of the net sales dollars invoiced to and paid by Distributor each month, to be used by Distributor for promotional efforts approved by both Distributor and Symbol, provided such funds are used before expiration in accordance with standard MAF policy. All such pre-approved activities will be reimbursed at one hundred percent of actual (pro-rated) expenses incurred by Distributor. 14. NOTICES. Notices under this Agreement will be deemed given when delivered by hand or deposited in the United States mail as certified mail, postage prepaid, addressed to the president of either party at its then principal place of business. 15. TRADEMARKS. This Agreement does not create, and neither party will have any right in, or to the use of, any mark, name, style, or logo of the other party. Distributor is, however, hereby granted a nonexclusive right to use Symbol's marks, names, or logos to identify itself as an authorized distributor of the Products and for advertising and promoting its services under this Agreement. 16. CONFIDENTIAL INFORMATION. Each party will receive and maintain in confidence all proprietary information, trade secrets or other know-how belonging to the other (including but not limited to knowledge of manufacturing or technical processes, financial and systems data, and customer information) provided that any such information, secrets, or know-how is expressly designated as being confidential, except and to the extent that disclosure is required by law, regulation, or court order, or enters into the public domain through no fault of the party obligated to maintain such confidentiality. Without limiting the foregoing, all material and information made known to Symbol by Distributor pursuant to paragraph 4 of this Agreement is hereby designated as confidential. 17. CREDITS. In the event Distributor is entitled to a credit from Symbol which exceeds Distributor's obligation to Symbol at the time, Symbol will promptly pay the amount of such excess to Distributor. 18. AUTHORIZATION NOT UNREASONABLY WITHHELD. Whenever any consent, action, or authorization is required or requested of either party hereunder, it will not be unreasonably withheld or delayed. Any required return authorization will be granted within thirty days from the day it is requested. 19. FORCE MAJEURE. Neither party will bear any liability to the other for any failure or delay to the extent that it results from acts of God, labor difficulties, inability to obtain materials, or any other cause beyond such party's reasonable control. 20. RELATIONSHIP OF PARTIES. The parties are independent contractors, each in full control of its business. Under no circumstances will either party have the right or authority to act or make any commitment on behalf of or bind the other or represent the other as its agent in any way. 21. PUBLICITY. This Agreement is confidential within the meaning of paragraph 16. Except as required by law, no press release or other like publicity regarding the relationship between Distributor and Symbol, this Agreement, or its termination will be made without the other party's prior approval. 22. SOFTWARE. Symbol warrants that it is the owner or licensee of all software provided to Distributor under this Agreement (whether or not included or embedded in any other Product) and has the authority to permit Distributor to use or resell or sublicense the software to third parties. Distributor will not resell or sublicense the software without the license 4 agreement provided by Symbol for that purpose and will advise Symbol of any known breach of the terms thereof. 23. GENERAL A. ENTIRE AGREEMENT This Agreement supersedes all prior communications or understandings between Distributor and Symbol and constitutes the entire agreement between the parties with respect to the matters covered herein. In the event of a conflict or inconsistency between the terms of this Agreement and those of any order, quotation, acknowledgment, or other communication from one party to the other, the terms of this Agreement will be controlling. FOR SYMBOL Name J. Callahan ---------------------------------- Signature /s/ J. CALLAHAN ----------------------------- Title Vice President --------------------------------- Date 10/29/94 ---------------------------------- B. AMENDMENT This Agreement cannot be changed in any way except by a writing signed by the party against which the enforcement of the change is sought. C. GOVERNING LAW This Agreement is made in, governed by, and will be construed solely in accordance with, the internal laws of the State of New York. Any action brought under or in connection with this Agreement must be instituted in the state or federal forum covering the defending party's principal place of business. In any such action, the prevailing party's reasonable legal fees will be paid by the other party. D. REFORMATION In the event any provision of this Agreement is held to be invalid or unenforceable for any reason, such invalidity or unenforceability will attach only to such provision and will not affect or render invalid or unenforceable any other provision of this Agreement. Any such provision may be reformed by a court of competent jurisdiction so as to render the same valid or enforceable while most nearly effectuating the intent of the parties. E. ASSIGNMENT Neither party has the right to assign this Agreement in whole or in part without the prior written consent of the other except to another corporation wholly-owned by or under commoncontrol with it. For purposes hereof, an assignment includes without limitation, a merger, sale of assets or business, or other transfer of control by operation of law or otherwise. Each party has entered this Agreement by having an authorized representative sign below. FOR DISTRIBUTOR Name Steve Owings -------------------------- Signature /s/ STEVE OWINGS --------------------- Title CEO ------------------------- Date Oct. 27, 1994 --------------------------- 5 ADDENDUM I To Symbol Technologies, Inc. Distribution Agreement between Symbol Technologies, Inc. ("Symbol") and ScanSource, Inc. ("ScanSource"), dated October 1, 1994 --------------- __________________________________________________________________ This Addendum is attached and made an integral part of the above-referenced agreement between the parties. All provisions and terms of the former remain in effect, except as modified below: I. PARAGRAPH 6 "PRICES": -------------------- Distributor is entitled to Discount Level 8 in exchange for a commitment to purchase and take delivery of at least $6,000,000 in Symbol products during the term of the agreement. The discounts will be as set forth in the Distributor Product and Discount Schedule for Level 7, plus one percent (1%) additional discount for Category A, B and C products. Category D products remain at 25%. Should Distributor, during the final four (4) months of 1995 purchase and take delivery of Symbol products totalling at least $3,333,334 ($10,000,000 annual purchase rate), Symbol will grant a credit of two percent (2%) of net purchases (made, invoiced and collected during the term of this agreement) toward future purchases to Distributor, for use in 1996. MAF funds will not apply to any purchases made suing the credit. II. PARAGRAPH 7 "RETURN OF PRODUCT": ------------------------------- The parties further agree that, for all Symbol products requested and delivered to Distributor from Symbol Express inventory shall not be eligible for stock rotation. Agreed to this date by the parties FOR SYMBOL: FOR SCANSOURCE: FOR SYMBOL Name J. Callahan Name Steve Owings -------------------------- --------------------------- Signature /s/ J. CALLAHAN Signature /s/ STEVE OWINGS --------------------- ---------------------- Title Vice President Title CEO ------------------------- -------------------------- Date 10/29/94 Date Oct. 27, 1994 --------------------------- --------------------------- 6 DISTRIBUTOR ------------------------------------- PRODUCT AND DISCOUNT SCHEDULE ------------------------------------- ATTACHMENT TO SYMBOL DISTRIBUTOR AGREEMENT CATEGORY A: ALL HANDHELD BARCODE SCANNING PRODUCTS: - ---------- -------------------------------------- LS2XXX, LS85XX, LS3XXX, LT17XX, HF2000 LSS24XX, LS9100, WK1780, WK2080 CATEGORY B: OTHER SCANNING PRODUCTS:* - ---------- ----------------------- LL5XX, SL67XX, SL95XX, LS6XXX, PDF1000, PDF6000, PL140, LL425 (SYSTEM), LS5000 PORTABLE TERMINALS ------------------ PDT31XX, PDT1475*, RFT15XX*, SDT*, PDT3300, LDT3805, PRC3310, VRC3910, LRT3800, APS3395, DATAWANDS* CATEGORY C: DATA MANAGEMENT PRODUCTS, PEN-BASED TERMINALS, - ---------- ---------------------------------------------- ACCESSORIES, PERIPHERALS, & CABLES ---------------------------------- PPT4100, LS5100, LS5200, DM8XX, LL7XX, MS7X, WANDS, POWER SUPPLIES, PS100X*, RF BASE STATIONS, NETWORK CONTROLLERS, CRADLES, ADAPTORS, ACCESSORIES, SCAN STANDS, INTELLISTANDS, SMART STANDS, TRANSCEIVERS, LL425 CABLE, TRAINING COURSES & VIDEOS DEVELOPMENT SOFTWARE -------------------- UBASIC, POWERGEN, LIBRARIES, PERFORM SOFTWARE, ETC. LL500 USER DOCUMENTATION, SERIES 3000ADK CATEGORY D: APPLICATION SOFTWARE & OEM PRODUCTS* - ---------- ----------------------------------- ALL THIRD PARTY APPLICATIONS* Products designated with an asterisk have a 90 day warranty to end user. All others are warranted for one year. - ----------------------------------------------------------------------------- DISTRIBUTOR DISCOUNT SCHEDULE DISCOUNT FROM LIST PRICE (PERCENT) DISC CERT. MINIMUM CREDIT ANNUAL PRODUCT CATEGORY LEVEL LEVEL LIMIT REQUIRED VOLUME (000'S) A B C D - ----- ------- -------------- -------------- - - - - 6 5C $105,000 2,000 - 3,999 59 49 39 25 7 6C $215,000 OVER 4,000 60 50 40 25 - 7C $21,5000 OVER 4,000 61 51 41 25 8 OVER 6,000 Negotiable - ----------------------------------------------------------------------------- EXHIBIT D 7 SYMBOL TECHNOLOGIES, INC. VALUE ADDED RESELLER AGREEMENT -------------------------------- Cooperative Marketing Partner REFERRAL FEE PAYMENT SCHEDULE -------------------------------- The following referral fee payment rates are in effect for qualifying conditions set forth in paragraph 4 of the Value Added Reseller Agreement for VARS or in the Cooperative Marketing Partner (CMP) Agreement for CMP's. Conditions for earning such referral fees are set forth therein. Symbol reserves the right to change all fees in Exhibit D without notice. - -------------------------------------------------------------------------------- Discount provided Referral Fee Amount Earned as to End-user by Symbol a % of Net Cost to End-user --------------------- --------------------------- ------------------------------------------------------------------ 0-10% 15 ------------------------------------------------------------------ 11-20% 12 ------------------------------------------------------------------ 21-30% 9 ------------------------------------------------------------------ 31-40% 6 ------------------------------------------------------------------ 41-50% 3 ------------------------------------------------------------------ >50% Negotiable - -------------------------------------------------------------------------------- 8 EX-10.36 4 DISTRIBUTION AGREEMENT Exhibit 10.36 IBM BUSINESS PARTNER AGREEMENT [LOGO] MANAGING INDUSTRY REMARKETER PROFILE ______________________________________________________ We welcome you as an IBM Business Partner. This Profile covers the details of your authorization to market our Products to Customers. Like you, we are committed to providing the highest quality Products to the Customer. As our managing industry remarketer, please let us know if you have any questions or problems with our Products. By signing below, each of us agrees to the terms of the following (collectively called the "Agreement"): (a) this Profile; (b) Remarketer General Terms (Z125-4800-07 05/95); and (c) the applicable Attachments referred to in this Profile. This Agreement and its applicable Transaction Documents are the complete agreement regarding this relationship, and replace any prior oral or written communications between us. Once this Profile is signed, 1) any reproduction of this Agreement or a Transaction Document made by reliable means (for example, photocopy or facsimile) is considered an original and 2) all Products you order and Services you perform under this Agreement are subject to it. Revised Profile (yes/no): no Date received by IBM: 02/20/96 Agreed to: (IBM Business Partner name) Agreed to: SCANSOURCE International Business Machines Corporation GREENVILLE, SC 29615 By /s/ Steven H. Owings By /s/ Terry Webb ------------------------------------- ------------------------------- Authorized signature Authorized signature Name (type or print): Steven H. Owings Name (type or print): Terry Webb Date 1/29/96 Date: 3/8/96 IBM Business Partner address: IBM Office address: SCANSOURCE 4111 NORTHSIDE PARKWAY, LO8C3 ATLANTA, GA 30327-3098 6 LOGUE COURT, SUITE G GREENVILLE, SC 29615 Page 1 of 5 - -------------------------------------------------------------------------------- After signing please return a copy of this Profile to the local "IBM Office address" shown above. - -------------------------------------------------------------------------------- DETAILS OF OUR RELATIONSHIP 1. CONTRACT-PERIOD START DATE (MONTH/YEAR): 01/96 DURATION (MONTHS): 12 The start date is always the first day of a month. The start date does not change with a revised Profile. 2. RELATIONSHIP APPROVAL/ACCEPTANCE OF ADDITIONAL TERMS: For our approved relationship, each of us agrees to the terms of the following Attachments by signing this Profile. Copies of those Attachments are included. Please make sure you have them (and the Remarketer General Terms) and notify us if any are missing. APPROVED AUTHORIZED RELATIONSHIP (YES/NO) ATTACHMENT 1) Managing Industry Remarketer yes Z125-4579-06 07/95 and Z125-4805-09 07/95 Industry Remarketer Attachment: yes Attachment for SureOne Point-of-Sale Terminal (4614) THE FOLLOWING OFFERING HAS ADDITIONAL TERMS IN THE APPLICABLE ATTACHMENT. 1) Market Development Fund yes Z125-5215-00 03/94 3. NAME AND ADDRESS OF YOUR AGGREGATOR, IF APPLICABLE: You may receive Products through this Aggregator. By selecting this Aggregator, you agree that it (and not we) will provide the functions identified in the Remarketer General Terms as the Aggregator's responsibility. N/A --------------------------------------------------------------------------- ___________________________________________________________________________ ___________________________________________________________________________ ___________________________________________________________________________ ___________________________________________________________________________ 4. PRODUCT APPROVAL: The following Products are listed in either the Industry Remarketer Exhibit, the Dealer Exhibit, the Software Remarketer Exhibit, or the Managing Industry Remarketer- Schedule A. The terms of the applicable Exhibit or Schedule A apply to the Products listed in it. Approval to market the Products includes approval for you to acquire them for development purposes. APPROVED TO MARKET TO RESELLERS(1) (YES/NO) SYSTEM TYPES 1) IBM RISC System/6000 no 2) IBM 9402 no 3) IBM 9404 (2) no 4) IBM 9406 no 5) IBM 4694 and IBM 4695 Retail POS Products yes 6) IBM Network Integration no Page 2 of 5 SYSTEM UNITS (3) (4) yes 1) IBM PC as workstations 2) IBM PC Server yes as workstations 3) ThinkPad yes as workstations PRODUCT CATEGORIES 1) IBM Finance Products - Category J1 no 2) IBM Storage Products (5) Category S1 Products (6) no Category S2 Products (7) no Category S3 Products (6) (7) no Category S4 Products (6) no (1) You may market only to resellers approved by us who 1) market Products together with their value-added enhancement (which we have previously approved) and 2) do not market to other resellers. When we approve you for Products listed in the Industry Remarketer Exhibit, you are also approved for their associated Programs and peripherals listed in the Industry Remarketer and Dealer Exhibits. When we approve you to market personal computer Products, you are also approved for their associated Programs and peripherals listed in the Dealer Exhibit. (2) The IBM 9404 Models 300, 310, 320 and 30S, which are only available as model conversions, may be made available to you on an exception basis. (3) May be available from an Aggregator. (4) May only be used, in conjunction with your value added enhancement, as 1) peripherals to IBM System Types, or 2) peripherals to point-of-sale systems. (5) Remarketers approved to market the IBM RISC System/6000 and the IBM AS/400 System Types, may market IBM Storage Products. (6) Your resellers may remarket these Products without a value-added enhancement. (7) You are also approved for Category S1 Products. EXCLUSIONS, IF APPLICABLE: Although included by reference above, you are not approved for these individual Products. N/A - ------------------------ --------------------- ---------------------- - ------------------------ --------------------- ---------------------- - ------------------------ --------------------- ---------------------- - ------------------------ --------------------- ---------------------- Page 3 of 5 5. AUTHORIZED LOCATIONS: TOTAL NUMBER OF AUTHORIZED LOCATIONS LISTED IN THIS PROFILE: 1
- -------------------------------------------------------------------------------------------------------------------------- Loc. ID Authorized Location (street address, city, state, ZIP code) - -------------------------------------------------------------------------------------------------------------------------- 83639 6 LOGUE COURT GREENVILLE, SC 29615 - -------------------------------------------------------------------------------------------------------------------------- MINIMUM RENEWAL CRITERIA --------------------------------------------------------------------------------------------------- Product Name Volumes/Revenue/Other --------------------------------------------------------------------------------------------------- POS PRODUCTS --------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------- MINIMUM NUMBER OF TRAINED PERSONNEL --------------------------------------------------------------------------------------------------- Product/Course Name Mgmt Sales Prog Support Service --------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------------- Loc. ID Authorized Location (street address, city, state, ZIP code) - -------------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------------- MINIMUM RENEWAL CRITERIA --------------------------------------------------------------------------------------------------- Product Name Volumes/Revenue/Other --------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------- MINIMUM NUMBER OF TRAINED PERSONNEL --------------------------------------------------------------------------------------------------- Product/Course Name Mgmt Sales Prog Support Service --------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------
Page 4 of 5 -------------------------------------------------------------------------- -------------------------------------------------------------------------- -------------------------------------------------------------------------- 6. YOUR COMMITMENT, IF APPLICABLE: A) This section identifies by System Type (1): your Contract Period System Revenue Commitment (2); its Applicable Discount Percentage (3); and, the Minimum Revenue Attainment you are required to achieve at the mid-point of your Contract Period, in order to maintain the current discount percentage (4). At your request we will review your Revenue Attainment, any time during the contract period to determine if you qualify for a higher discount percentage. At the mid-point of your contract period, IBM will review your Revenue Attainment by System Type. If it is less than the amount specified in column (4), your discount percentage will be adjusted downward one level for the remainder of the contract period.
- ---------------------------------------------------------------------------------------------- (1) (2) (3) (4) System Type System Revenue Applicable Discount Six Months'* Minimum Commitment Percentage Revenue Attainment to Maintain Current Discount Percentage - ---------------------------------------------------------------------------------------------- IBM RISC N/A Commercial - Machines NA Programs NA NA Federal** - Machines NA Programs NA System/6000 ----------------------------------------------------------------------------------------------
*12 Months if you have a 24-month Contract **The discount which applies to sales to the Federal Government are listed in the Industry Remarketer Federal Discount Schedule F. B) This applies only to those Products listed in the Industry Remarketer Exhibit which require a quantity commitment. COMMITTED COMMITTED QUANTITY OF CATEGORY PRODUCTS BY CATEGORY __________________________________ ____________________________ __________________________________ ____________________________ __________________________________ ____________________________ __________________________________ ____________________________ __________________________________ ____________________________ 7. ASSIGNMENT OF WARRANTY SERVICE RESPONSIBILITY, IF APPLICABLE: You assign to us, or an IBM Premier Personal Computer Servicer, Warranty Service responsibility for the following Dealer Exhibit Machines. TYPE/MODEL TYPE/MODEL TYPE/MODEL TYPE/MODEL ______________ _________________ __________________ _________________ ______________ _________________ __________________ _________________ ______________ _________________ __________________ _________________ ______________ _________________ __________________ _________________ Unless you wish to make this assignment to us, please specify the name of the IBM Premier Personal Computer Servicer: _____________________________ 8. ADDITIONAL TERMS: The attached Transaction Document, "Schedule A," contains additional terms. Please make sure you have it and notify us if it is missing. Page 5 of 5 ATTACHMENT TO IBM BUSINESS PARTNER AGREEMENT - REMARKETER MANAGING INDUSTRY REMARKETER ATTACHMENT ATTACHMENT FOR SUREONE POINT-OF-SALE TERMINAL (SUREONE) The terms included in this Attachment amend the above agreement for the period beginning January 1, 1996 and ending December 31, 1996. Page 1 IBM BUSINESS PARTNER AGREEMENT - REMARKETER MANAGING INDUSTRY REMARKETER - ATTACHMENT This Attachment for Machine Type 4614 Point-of-Sale Terminal (hereinafter referred to as SureOne) is added to your-IBM Business Partner Agreement - Remarketer. The following terms and conditions apply to the acquisition and resale of the IBM 4614 only and are in addition to those contained in the IBM Business Partner Agreement - Remarketer. RESPONSIBILITIES SCANSOURCE (YOU) 1. You will assign a minimum of four (4) people who have business development skills and are capable of: 1) recruiting and managing Industry Remarketer Affiliates (IRAs); 2) developing and delivering SureOne marketing materials to re-sellers; 3) preparing and analyzing monthly marketing measurements; and 4) managing the ScanSource/IBM relationship. 2. You will purchase and maintain demonstration equipment for the purpose of IRA recruitment. In addition, this purchased demonstration equipment will aggregate against your annual MIR revenue attainment. You will identify to IBM any products You acquire for demonstration purposes. 3. You will develop and provide IRA recruitment kits. These kits will provide the necessary information to potential remarketers to generate their interest in applying to the IBM IRA program. 4. You will develop and provide a direct mail product for the purpose of creating end user demand in cooperation with independent software vendors. 5. You will develop and provide IRA mailers or handouts featuring a section on SureOne hardware. These mailers and handouts must be capable of being customized later to include total hardware and application software solution for SureOne. 6. You will develop and provide marketing materials sufficient to allow IRAs to keep their name and the name of IBM in front of customers and potential customers a minimum of four (4) times per year. You will also provide four (4), 4-6 page background discussions on different profit-producing aspects of SureOne (inventory control, etc.) along with suggested cover letters. 7. You will develop and secure SureOne Product advertising in the "Retail Systems Reseller" magazine for March, April and May of 1996. Page 2 8. You will be responsible for updating the ScanSource Catalog to reflect SureOne products by March 1, 1996. Marketing Development Funds (MDF) may be used to pay for all of the ScanSource Responsibilities listed above with the exception of Item 1, and will be covered under the MDF program as outlined in the MDE: Attachment to your IBM Business Partner Agreement -Remarketer. IBM IBM will be responsible for creating a market presence for SureOne by providing items such as the following: 1. General product/brand advertising 2. Product press announcement 3. Marketing video 4. Trade press seminar 5. End user direct marketing campaign 6. Product specification sheet 7. Trade press reprints 8. Early user application briefs 9. Product poster IBM ORDERING REQUIREMENTS 1. Every order will be given a minimum scheduled ship date of ninety (90) days prior to the expected scheduled delivery date. 2. You will place full shipping container orders with IBM with a minimum order quantity of 336 units per shipping container. 3. You will place orders through IBM Partner Link DELIVERY TO IRA 1. You will deliver product to SureOne IRAs within five (5) working days from the date you accept an order form an IRA. Page 3 2. IBM will ship these products only to You - not the IRAs or their customers. WARRANTY SERVICE Basic warranty service will be provided free of charge via Customer Carry- ln-Repair (CCR - also known as Depot) by TSS. Each SureOne product shipped will include a warranty registration form and a copy of its 12-month, warranty terms and conditions. The warranty form must be completed by the IRA and submitted to You for entitlement registration with IBM. You are responsible for insuring warranty form completion by the IRAs and subsequent submission to IBM. RETURNS Returns will not be accepted by IBM for SureOne Product WITHDRAWN SUREONE PRODUCTS Six months after IBM announces the withdrawal of a SureOne Product, You and IBM will jointly conduct a physical inventory of the machines you have in your possession. Once the inventory has been counted, we will engage an independent appraiser to provide us with an Average Wholesale Value (AWV) at the time of the appraisal. The AWV price will be used for the liquidation of the jointly counted inventory. If the AWV is less per machine than the amount You paid IBM, IBM will issue You a credit for the difference for each machine in your possession as of the date of our joint inventory. FORECASTS You will provide twelve (12) month rolling forecasts with monthly updates on projected SureOne sales. PRICE REDUCTION CREDIT PROVISIONS Price Reduction Credits for SureOne Products will be as specified in the Business Partner Agreement, Managing Industry Remarketer Attachment, Schedule A, for Machine Types 4694 and 4695. LEAD MANAGEMENT You will contact the IRA within two (2) business days from the date IBM provides You with an IRA contact name. You will call the customer within ten (10) business days for satisfaction and sales information. ENDING OF ATTACHMENT Page 4 This Attachment ends on December 31, 1996. Either of us may terminate this Attachment with or without cause upon one month's written notice. IBM may terminate this Attachment at any time if You materially breach any of its terms. Upon termination, You will return to IBM all marketing materials in your possession relating to SureOne Products. Page 5 IBM BUSINESS PARTNER AGREEMENT REMARKETER GENERAL TERMS - -------------------------------------------------------------------------------- TABLE OF CONTENTS
Section Title Page 1. Definitions............................................. 2 2. Agreement Structure..................................... 3 3. Our Relationship........................................ 4 4. Marketing Funds and Promotional Offerings............... 7 5. Status Change........................................... 7 6. Export of Products...................................... 7 7. Federal Reporting Requirements.......................... 8 8. Ordering and Delivery................................... 8 9. Inventory Adjustments................................... 9 10. Prices and Price Changes................................ 10 11. Invoicing, Payment, and Taxes........................... 10 12. Title................................................... 11 13. Risk of Loss............................................ 12 14. Engineering Changes..................................... 12 15. Licensed Internal Code.................................. 12 16. Programs................................................ 13 17. Installation and Warranty............................... 13 18. Warranty Service........................................ 14 19. Marketing of IBM Maintenance Services................... 16 20. Patents and Copyrights.................................. 16 21. Liability............................................... 17 22. Trademarks.............................................. 18 23. No Property Rights...................................... 19 24. Changes to the Agreement Terms.......................... 19 25. Ending the Agreement.................................... 19 26. Waiver of Noncompliance................................. 20 27. Electronic Communications............................... 20 28. Geographic Scope........................................ 21 29. Governing Law........................................... 21
Page 1 of 21 IBM BUSINESS PARTNER AGREEMENT REMARKETER GENERAL TERMS - -------------------------------------------------------------------------------- 1. DEFINITIONS AGGREGATOR is our remarketer who we authorize to acquire Products from us to supply to its Customers who are also our remarketers. In addition, we may authorize a remarketer to supply our Products to others (for example, our industry remarketers). An "Aggregator" is responsible for ordering, delivery, invoicing, payment, taxes, price reductions and inventory adjustments. In your Profile, we specify 1) the identity of your "Aggregator," if any, or 2) if we approve you as an "Aggregator." AUTHORIZED LOCATION is a site, controlled and operated by you, at which we authorize you to perform your responsibilities under this Agreement. We may specify in your Profile certain requirements to which you must adhere at each Authorized Location (such as, minimum renewal criteria and minimum number of trained personnel). CUSTOMER is either an End User, or a reseller who does not market to other resellers We specify in your Profile if we authorize you to provide Products to End Users, resellers, or both. CUSTOMER-SET-UP MACHINE is an IBM Machine that you (or your Customer) set up according to our instructions. END USER is anyone, unaffiliated with you (except if you are a qualified educational institution), who acquires Products for its own use and not for resale. MACHINE is an IBM or non-IBM machine, its features, conversions, upgrades, elements, accessories, cables, or any combination of them (provided by us or your Aggregator) that we approve you to provide to your Customers. PRODUCT is a Machine, Program, or Service. PROGRAM is an IBM or non-IBM licensed program (provided by us or your Aggregator) that we approve you to provide to your Customers. The term "Program" does not include Licensed Internal Code. SERVICE is assistance (for example, Product maintenance) that we approve you to perform or market. The term "Service" includes use of a resource (such as a network) that we approve you to provide to your Customers. Page 2 of 21 2. AGREEMENT STRUCTURE The Remarketer General Terms apply to all our remarketers. PROFILES We specify the details of our relationship (for example, the type of remarketer you are) in a document called a "Profile." Each of us agrees to the terms of the Profile, the Remarketer General Terms, and the applicable Attachments referred to in the Profile, (collectively called the "Agreement"), by signing the Profile. ATTACHMENTS We describe additional terms that apply to our relationship in documents called "Attachments." For example, we describe the additional terms that apply specifically to dealers in an Attachment. Several Attachments may apply to you. We specify in your Profile the Attachments that apply. TRANSACTION DOCUMENTS We will provide to you the appropriate "Transaction Documents" that confirm the details of your order or provide additional information about our relationship. The following are examples of Transaction Documents with examples of the information they may contain: 1. invoices (item, quantity, price, and amount due); 2. addenda (trial period and trial Products); and 3. exhibits (eligible Products, warranty information, and other Product- specific information). We may change the terms of an exhibit on written notice. CONFLICTING TERMS If there is a conflict among the terms in the various documents, those of an Attachment prevail over those of the Remarketer General Terms. The terms of a Profile prevail over those of both of these documents. The terms of a Transaction Document prevail over those of all the documents. OUR ACCEPTANCE OF YOUR ORDER A Product becomes subject to this Agreement when we accept your order by 1. sending you a Transaction Document; or Page 3 of 21 2. providing the Product to you. ACCEPTANCE OF THE TERMS IN A TRANSACTION DOCUMENT You accept the terms in a Transaction Document by doing any of the following: 1. signing it; 2. accepting the Product described in the Transaction Document; 3. providing the Product to your Customer; or 4. making any payment for the Product. 3. OUR RELATIONSHIP MUTUAL RESPONSIBILITIES Each of us agrees that under this Agreement: 1. the Products we approve you to market are complex in nature and require that you provide high quality support, both before and after the sale, to ensure Customer satisfaction; 2. we offer a money-back guarantee to End Users for certain Products. You agree to inform the Customer of the terms of this guarantee before the applicable sale. For any such Product, you agree to 1) accept its return within the time frame we specify, 2) refund the full amount paid to you for it, and 3) dispose of it (including all its components) as we specify. We will pay transportation charges for return of the Product to us and will give you an appropriate credit; 3. you are an independent contractor. Neither of us is a legal representative or agent of the other. Neither of us is legally a partner of the other (for example, neither of us is responsible for debts incurred by the other), and you are not our employee or franchisee; 4. each is free to enter into similar agreements with others, to market competitive Products, and to conduct its business in whatever way it chooses, provided there is no conflict with this Agreement. We may increase or decrease the number of our remarketers, the types of distribution channels, and the number of participants in such channels; 5. each is free to establish its own prices and terms and neither of us will discuss its customer prices and terms in the presence of the other; Page 5 of 21 6. all information exchanged is nonconfidential. If either of us requires the exchange of confidential information, it will be made under a signed confidentiality agreement; 7. we will provide you with access to our information systems only in support of your authorized marketing activities. Programs associated with these systems are subject to the terms of their applicable license agreements, except that you may not transfer them; 8. neither of us will bring a legal action against the other more than two years after the cause of action arose; and 9. you may acquire an insignificant number of Products for your own internal use. YOUR OTHER RESPONSIBILITIES You agree not to do any of the following: 1. assign, or otherwise transfer, this Agreement or your rights under it, delegate your obligations, or appoint another reseller (including a related company) - or agent to represent you or to market our Products, without our prior written consent. Any attempt to do so is void; 2. assume or create any obligations on our behalf, or make any representations or warranties about us or our Products, other than those we authorize; or 3. conduct your business in a way (for example, failure to maintain the highest quality professionalism in all your dealings with Customers) that adversely affects our reputation or goodwill. You agree to: 1. sell only to End Users, unless otherwise specified in this Agreement, 2. be responsible for Customer satisfaction with our Products and all your related activities, and participate in Customer-satisfaction programs as we determine. For example, if we request, you agree to provide us with the names and addresses of all End Users who have acquired our Products from you; 3. actively and diligently promote our Products; 4. ensure that your compensation or incentive plans for your employees who market our Products are not unfair to us in comparison with your plans for competitive products you market; Page 5 of 21 5. meet, during the contract period, any minimum renewal criteria specified in your Profile. These criteria are a measurement of the performance expected of you (such as sales); 6. maintain trained personnel and comply with any certification requirements; 7. provide us with relevant financial information about your business enterprise on request; 8. furnish sales receipts to your Customers before or upon delivery of Products. You agree to specify on the sales receipt your Customer's name and address, the Machine type/model and serial number, installed location, date of sale, any non-IBM alterations or attachments made, and the Warranty Service provider; 9. provide us with any Customer documents we require, within 10 days of the applicable transaction (for example, End User signing of our license or maintenance agreement); 10. provide us with sales and inventory information for our Products on request; 11. retain records by location of each Product transaction (for example, a sale or credit) for five years and of each warranty claim for three years. Records must include (as applicable) Machine type/model and serial number, Authorized Location to which distributed, and Customer name and address; 12. assist us in tracing and locating Products; 13. provide us with sufficient, free, and safe access to your facilities, at a mutually-convenient time, for us to fulfill our obligations. If you become aware of any unsafe conditions or hazardous materials to which our personnel would be exposed at any of your facilities, you agree to notify us promptly; and 14. comply with all laws and regulations (such as those governing consumer transactions). OUR REVIEW OF YOUR COMPLIANCE WITH THIS AGREEMENT We may periodically review your performance under this Agreement. You agree to provide us with relevant records on request. We have the right to reproduce them, retain the copies, and audit your compliance with this Agreement on your premises during your normal business hours. We may use an independent auditor for this. Page 6 of 21 4. MARKETING FUNDS AND PROMOTIONAL OFFERINGS You agree to use any marketing funds and promotional offerings according to our guidelines. For Products you provide to resellers, you agree to administer and disburse these funds or offerings in a proportional and equitable manner. You also agree to keep records of such funds or offerings for three years. We may withhold or recover marketing funds and promotional offerings if you breach any of the terms of this Agreement. Upon notice of termination, any marketing funds and promotional offerings will no longer be available for use by, or accrual to, you. 5. STATUS CHANGE You agree to give us prompt written notice (unless precluded by law or regulation) of any change, or anticipated change, in your financial condition, business structure, or operating environment (for example, a material change in equity ownership or management, closing or relocation of an Authorized Location, or any change to information supplied in your application). Such change or failure to give notice may result in termination of this Agreement. 6. EXPORT OF PRODUCTS You are not authorized to actively market Products outside the geographic scope of this Agreement, and you agree not to use anyone else to do so. If a Customer acquires a Product for export, our responsibilities under this Agreement no longer apply to that Product. You agree to use your best efforts to ensure that your Customer complies with United States export laws and regulations, and any import requirements of the destination country. Before the sale of a Product, you agree to prepare a support plan for it and obtain your Customer's agreement to that plan. Within one month of sale, you agree to provide us with the Customer's name and address, Machine type/model and serial number, date of sale, and destination country. We exclude these Products from: 1. attainment of your minimum renewal criteria; 2. attainment of your committed quantities: 3. qualification for applicable promotional offerings and marketing funds; and 4. qualification for any lower prices. Page 7 of 21 We may also reduce future supply allocations to you by the number of exported Products. The license agreement of certain Programs state the country in which the license is valid. Such Programs may not be exported. 7. FEDERAL REPORTING REQUIREMENTS To comply with Federal law, you agree not to employ or compensate any individuals to perform activities under this Agreement (without our prior written approval) who were, within the last two years: 1. members of the armed forces in a pay grade of 0-4 or higher; or 2. civilians employed by the Department of Defense with a pay rate equal to, or greater than, the minimum rate for a grade GS-13. You agree to provide us with any information that we need to comply with this law. 8. ORDERING AND DELIVERY You may order Products either from us or your Aggregator. We accept orders for withdrawn Products subject to their availability. On our request, you agree to make reasonable efforts to use our automated order-entry system. You agree to pay all expenses associated with it. We will mutually agree to a location to which we ship Products. We will use reasonable efforts to meet your requested delivery dates for Products you order from us. We select the method of transportation and pay associated charges for Products we ship. You agree to notify us within 20 days of receipt, of any discrepancies between our shipping manifest and the Products received from us. We will work with you to reconcile any differences. CANCELLATION OF AN ORDER You may cancel an order for a Product before we ship it. We may charge you a cancellation charge. We determine this charge by multiplying the amount we charge you for the Product by the cancellation-charge percent. We will inform you in writing of that percent. The cancellation charge does not apply to a Product if 1) we postpone its shipment for more than 15 days from its estimated shipment date and 2) you cancel your order before shipment. Page 8 of 21 We may not be able to honor a cancellation request received less than 10 business days before the Product's estimated shipment date. If you return such Product, our inventory-adjustment terms apply. DELAYED SHIPMENT OF A PRODUCT Circumstances may arise where we delay the shipment of a Product due to our inability to meet the original estimated shipment date. If this delay causes the estimated shipment date to be after the end of your contract period, the terms of this Agreement apply to that Product. It will be treated as if you had acquired it during the contract period. 9. INVENTORY ADJUSTMENTS For purposes of rebalancing your inventory, we will inform you in writing which Products you may return to us for credit, their inventory-adjustment categories, and any terms associated with these categories. We will issue a credit to you when we accept the returned Product. You may use the credit only after we issue it. We may charge you a handling charge for returned Products. We determine this charge by multiplying the inventory-adjustment credit amount for the Product by the handling-charge percent. We will inform you n writing of that percent. You agree to pay shipping charges for Products you return. They must be in our original, undamaged packages (unopened for Machines), and without any non-IBM labels. Certain Products may be acquired only as Machines and Programs packaged together as a solution. These Products must be returned with all their components intact. However, we do not require the shipping container to be unopened for some of these Products (for example, Selected Academic Solutions), as we determine. Returned Products must be unused and in new condition. You agree to ensure that the Products are free of any legal obligations or restrictions that prevent their return. We accept them only from locations to which we ship Products. We will reject any returned Product that does not comply with these terms and send it back to you at your expense. 10. PRICES AND PRICE CHANGES We will specify the prices for each Product and inform you of any changes. Price increases do not apply to you if we receive your order before the effective date of the increase. You receive the benefit of a price decrease for Products we ship on or after the effective date. Page 9 of 21 PRICE-REDUCTION CREDITS If we decrease the price for a Product, you may be eligible to receive a price-reduction credit for eligible Products in your inventory. We will specify the Product's price-reduction credit category and associated terms in writing, and will inform you periodically of any changes. You may use the credit only after we issue it. ADDITIONAL CHARGES Depending on the circumstances, additional charges may apply. For example, if we perform a Service for you, we charge an additional amount. We will notify you in advance if these charges apply. FEE PAYMENTS When you perform certain activities, such as those we may specify in exhibits, we will pay you a fee. 11. INVOICING, PAYMENT, AND TAXES Payment in full is due upon receipt of our invoice. You agree to pay as we specify in the invoice. We may offset any amounts due you, or designated for your use (for example, marketing funds or promotional offerings), against amounts due us or any of our subsidiaries. You agree to pay amounts equal to any applicable taxes resulting from any transaction under this Agreement. This does not include taxes based on our net income. You are responsible for personal property taxes for each Product from the date we ship it to you or the End User. You agree to provide us with valid reseller-exemption documentation for each applicable taxing jurisdiction to which we ship Products. Otherwise, we will charge you all applicable state and local taxes or duties. You agree to notify us promptly if this documentation is revoked or modified. You are liable for any claims or assessments that result from any taxing jurisdiction refusing to recognize your exemption. FAILURE TO PAY ANY AMOUNTS DUE If your account becomes delinquent, you agree that we may do one or more of the following: Page 10 of 21 1. impose a finance charge, up to the maximum permitted by law, on the delinquent portion of the balance due; 2. require cash payment on or before delivery of any Products; 3. repossess any Products. If we do so, you agree to pay all expenses associated with repossession and collection, including reasonable attorney's fees. You agree to make the Products available to us at a site that is mutually convenient; 4. terminate this Agreement; or 5. pursue any other remedy available at law. In addition, if your account with any of our subsidiaries becomes delinquent, we may invoke any of these options allowable by law. 12. TITLE As an Aggregator, when you order a Machine from us, we do not transfer title to you. As any other remarketer, when you order a Machine, we transfer title to you when the Machine is shipped by us or your Aggregator. Any prior transfer of title to a Machine to you is void from its inception when 1) it is accepted as a returned Machine, or 2) the End User finances it through the IBM Credit Corporation. We do not transfer title to Programs. PURCHASE MONEY SECURITY INTEREST We reserve a purchase money security interest in a Machine, and you grant us a purchase money security interest in your proceeds from the sale of, and your accounts receivable for a Product, until we receive the amounts due for a feature, conversion, or upgrade involving the removal of parts that become our property, we reserve the security interest until we receive the amounts due and the removed parts. You agree to sign an appropriate document (for example, a "UCC-1") to permit us to perfect our purchase money security interest. END USER LEASE FINANCING If an End User obtains a lease for a Machine for legitimate financing purposes, you may transfer title to the Machine to the lessor. You may finance End Users' Product acquisitions. Page 11 of 21 13. RISK OF LOSS We bear the risk of loss for a Product until its initial delivery from us. 14. ENGINEERING CHANGES You agree to allow us to install at a mutually-convenient location mandatory engineering changes (such as those required for safety) on all Machines in your inventory and to use your best efforts to enable us to install such engineering changes on your Customers' Machines. Mandatory engineering changes are installed at our expense and any removed parts become our property. During the warranty period, we manage and install engineering changes at: 1. your or your Customers' locations for Machines for which we provide Warranty Service; and 2. your location for other Machines. Alternatively, we will provide you with the parts (at no charge) and instructions to do the installation yourself. We will reimburse you for your labor at a rate we specify. 15. LICENSED INTERNAL CODE Certain Machines we specify (called "Specific Machines" use Licensed Internal Code (called "Code"). The IBM Corporation owns copyrights in Code and owns all copies of Code, including all copies made from them. We will identify each Specific Machine in writing. We grant the rightful possessor of a Specific Machine a license to use the Code (or any replacement we provide) on or in conjunction with, only the Specific Machine designated by serial number, for which the Code is provided. We license the Code to only one rightful possessor at a time. You agree that you are bound by the terms of the separate license agreement that we will provide to you. YOUR RESPONSIBILITIES You agree to inform your Customer, and record on the sales receipt, that the Machine you provide is a Specific Machine using Licensed Internal Code. You agree to 1) provide the applicable license agreement to your Customer before the sale and 2) ensure that the agreement is signed before a sale to an End User. Page 12 of 21 16. PROGRAMS For certain Programs, we require End Users to sign our license agreements. You agree to ensure those signatures are obtained and the appropriate supplements are issued before those Programs are provided. All other Programs (called "Program Packages") are licensed under the terms of the agreements provided with them. When you make authorized copies of Programs, you agree to reproduce the copyright notice and any other legend of ownership on the copies. When we provide you with service materials for Programs, you agree to copy and distribute those materials to End Users. You agree to refund the amount paid for 1. an IBM Program Package returned to you because the End User does not accept the terms of the license (for example, by not opening the media envelope or not using the Program). However, if such Program is packaged together with other Programs or Machines as a solution, all components must be returned. In this case, you agree to refund the amount paid for all the components; and 2. any defective IBM Program returned to you under the terms of its warranty. In either case, you may return the IBM Product to us, at our expense, for credit. 17. INSTALLATION AND WARRANTY For a Machine to function properly, it must be installed in a suitable physical environment. For a Machine we install, we will ensure that it is in good working order and meets the criteria specified in its Official Published Specifications before we consider it installed. We provide instructions to enable the setup of Customer-set-up Machines. We are not responsible for the installation of Programs or non-IBM Machines. With each IBM Machine we ship, we include a copy of our statement of limited warranty. We will provide a copy to you. You agree to make it available to the End User for review before the sale. We provide non-IBM Products on an "AS IS" basis. However, non-IBM manufacturers, suppliers, or publishers may provide their own warranties to you. DATE OF INSTALLATION We calculate the expiration of an IBM Machine's warranty period from the Machine's Date of installation. Page 13 of 21 The Date of Installation for a Machine we are responsible for installing is the business day after the day 1) we install it or 2) we make it available for installation, if you (or the End User) defer installation. Otherwise (for example, if others install it or break its warranty seal), it is the day we deliver the Machine to you (or the End User). The Date of Installation for a Customer-set-up Machine: 1. that we ship to the End User (or to you for your own use), is the fifth business day after the day the Machine is received; 2. that you ship, is the earlier of 1) the second business day after the End User receives the Machine or 2) the day you or your Customer place the Machine in use: or 3. is the same as the Date of Installation for a Machine that we install, if the Customer-set-up Machine is being installed with, and attached to, it. If we authorize you to install Programs on a Machine at an Authorized Location (and therefore you set up the Machine), we do not consider this as the Date of Installation, as long as you promptly ship the Machine to the End User. You (or your Customer, if other than an End User) must record the Machine's Date of Installation on the End User's sales receipt. You must also notify us upon our request. 18. WARRANTY SERVICE We will inform you in writing who is responsible for providing Warranty Service for Machines. We do so by specifying the Warranty Service category for each Machine. WHEN WE ARE RESPONSIBLE FOR SERVICING MACHINES When we are responsible for providing Warranty Service, we do so for the IBM Machine during its warranty period at no charge to keep it in, or restore it to good working order. In this case, you are not authorized to perform Warranty Service. You agree to convey all (or the remaining portion) of our warranty to your Customer. WHEN YOU ARE RESPONSIBLE FOR SERVICING MACHINES When you are responsible for providing Warranty Service, you agree to do the following according to the Service support guidelines we provide: 1. maintain Warranty Service capability; Page 14 of 21 2. ensure that it is performed only by personnel trained to our standards and consistent with our service terms and statement of limited warranty; 3. provide it even for Machines that the End User did not acquire from you; and 4. submit only valid warranty-reimbursement requests to us that are within the specified time limits. We will: 1. train you to provide Warranty Service. We provide training, at no charge, for the minimum number of your Service personnel that we require. Additional training may be provided for a fee; 2. provide you with necessary technical information; and 3. pay you for Warranty Service performed and exchange (or reimburse you for) parts. MAINTENANCE PARTS We sell maintenance parts for use in providing Warranty Service and for maintaining Machines. You may sell such parts to others for use in maintaining Machines. ASSIGNMENT OF WARRANTY SERVICE RESPONSIBILITY FOR MACHINES WITH ON-SITE TYPE OF SERVICE For a Machine that we designate as having on-site type of service (performed at the Customer's location as opposed to the warranty provider's service location), you may assign Warranty Service responsibility to us or to anyone else authorized by us to provide it. You agree to: 1. ensure that the assignee accepts Warranty Service responsibility for each Machine assigned to it; 2. provide a copy of the sales receipt to the assignee: 3. notify your Customer of the assignment; and 4. remain responsible for your Customer's satisfaction with that Service. If you assign Warranty Service responsibility for all units of a Machine type to us, you are no longer required to be Warranty Service capable for that Machine type. Page 15 of 21 When you accept Warranty Service responsibility from another of our remarketers, you may not reassign that responsibility and are responsible for Customer satisfaction with that Service. WARRANTY SERVICE FOR NON-IBM PRODUCTS For non-IBM Products that we do not warrant and other non-IBM equipment that a Customer may reasonably believe is warranted by us, you agree to inform your Customer in writing, before the sale, that we do not warrant them. You also agree to inform your Customer 1) that the Products or equipment are non-IBM, 2) of the applicable warranty (if any), and 3) of the procedure to obtain any warranty service. 19. MARKETING OF IBM MAINTENANCE SERVICES FOR A FEE When you have marketed a Machine you are approved to market, to an End User, you may market our Maintenance Services on eligible machines in that account and receive a fee from us for marketing the Maintenance Services on those machines. We may specify additional terms in a relationship Attachment (for example, an Industry Remarketer Attachment). We provide Maintenance Services to the End User under the terms of our applicable agreement, signed by the End User. You agree to provide us with any required documents signed by you or the End User, as applicable, and inform the End User of our service procedures. We will not pay you the fee if the machine is already under our Maintenance Services or if the Maintenance Services had been terminated on the machine within the prior six months at the same account. 20. PATENTS AND COPYRIGHTS For purposes of this section only the term Product includes Licensed Internal Code and excludes Services. If a third party claims that a Product we provide under this Agreement infringes that party's patent or copyright, we will defend you against that claim at our expense and pay all costs, damages, and attorney's fees that a court finally awards, provided that you: 1. promptly notify us in writing of the claim; and 2. allow us to control, and cooperate with us in, the defense and any related settlement negotiations. Page 16 of 21 If such a claim is made or appears likely to be made, about a Product in your inventory, you agree to permit us to either enable you to continue to market and use the Product, or to modify or replace it. If we determine that none of these alternatives is reasonably available, you agree to return the Product to us on our written request. We will then give you an appropriate credit, as we determine, which will be either 1) the price you paid us for the Product (less any price-reduction credit) or 2) the depreciated price. This is our entire obligation to you regarding any claim of infringement. CLAIMS FOR WHICH WE ARE NOT RESPONSIBLE We have no obligation regarding any claim based on any of the following: 1. your modification of a Product, or a Program's use in other than its specified operating, environment; 2. the combination, operation, or use of a Product with any product, data, or apparatus that we did not provide; or 3. infringement by a non-IBM Product alone, as opposed to its combination as part of a system of Products that we provide. 21. LIABILITY Circumstances may arise where, because of a default or other liability, one of us is entitled to recover damages from the other. In each such instance, regardless of the basis on which damages can be claimed, the following terms apply. OUR LIABILITY We are responsible for 1. payments referred to in our patent and copyright terms described above: 2. bodily injury (including death), and damage to real property and tangible personal property caused by our Products: and 3. the amount of any other actual- loss or damage. up to the greater of $100,000 or the charges (if recurring, 12 months' charges apply) for the Product that is the subject of the claim. ITEMS FOR WHICH WE ARE NOT LIABLE Page 17 of 21 Under no circumstances are we liable for any of the following: 1. third-party claims against you for losses or damages (other than those under the first two items above); 2. loss of, or damage to, your records or data; or 3. economic consequential damages (including lost profits or savings) or incidental damages, even if we are informed of their possibility. YOUR LIABILITY In addition to damages for which you are liable under law and the terms of this Agreement, you will indemnify us for claims by others made against us (particularly regarding statements, representations' or warranties not authorized by us) arising out of your conduct under this Agreement or as a result of your relations with anyone else. 22. TRADEMARKS We will provide you with advertising guidelines for our togos, trade and service marks, trade names, emblems, and titles (collectively called "Trademarks"). We will notify you in writing of the title you are authorized to use. You may also use the IBM Business Partner emblem associated with that title. You may use the Trademarks only as described in the guidelines and only in association with the Products we approve you to market. On our request, you agree to change or stop using any advertising or promotional material that does not comply (as we determine) with our guidelines or this Agreement. When this Agreement ends, you agree to promptly stop using our Trademarks. If you do not, you agree to pay any expenses and fees that we incur in getting you to stop. You agree that any goodwill attaching to our Trademarks as a result of your use of them belongs to us. You agree not to register or use any mark that is confusingly similar to any of our Trademarks. 23. NO PROPERTY RIGHTS Your rights under this Agreement are not property rights and therefore. you cannot transfer them to anyone else or encumber them in any way. For example, you may not sell your authorization to market our Products or your right to use our Trademarks. 24. CHANGES TO THE AGREEMENT TERMS In order to maintain flexibility in our relationships, we may change the terms of this Agreement by giving you one month's written notice. However, these changes are not Page 18 of 21 retroactive. They apply as of the effective date we specify in the notice. If you do not accept a change, you must inform us in writing before its effective date. If you do so, any future change will not apply to you. However, if you sign a revised Profile, then all prior changes become effective. Otherwise, for a change to be valid, both of us must sign it. Additional or different terms in any order or written communication from you are void. 25. ENDING THE AGREEMENT This Agreement ends when terminated or when the contract period ends. You may terminate this Agreement, with or without cause, on one month's written notice. We may terminate this Agreement, with or without cause, on three months' written notice. If the termination is for cause, we may (at our discretion) allow you a reasonable opportunity to cure. If you fail to do so, the date of termination is that specified in the notice. However, certain acts or omissions are so serious as to warrant immediate termination. If you repudiate this Agreement, materially breach any of its terms, or make any material misrepresentation to us, we may terminate this Agreement at any time, on written notice. Examples of a material breach are violation of our status-change terms, violation of our trademark terms, submission of a false warranty claim, unauthorized sale to a reseller, and failure to maintain Customer satisfaction. You agree that our only obligation is to provide the notice called for in this section and we are not liable for any claims or losses if we do so. At the end of this Agreement, you agree to: 1. pay for or return to us, at our discretion, any Products for which you have not paid: and 2. allow us, at our discretion, to repurchase any other Products in your possession or control at the price you paid us, less any credits issued to you. Products to be returned must be unused, in new condition, and in your inventory (or in transit from us) on the day this Agreement ends. We will inspect the Products and reserve the right to reject them. You agree to pay ail shipping charges. Products returned to you under our money-back guarantee terms may be used and we pay their shipping charges. At the end of this Agreement, you must immediately pay us all amounts due. We may offset any amounts due you against amounts due us or any of our subsidiaries. Any terms of this Agreement, which by their nature extend beyond the day this Agreement ends, remain in effect until fulfilled, and apply to respective successors and assignees. Page 19 of 21 We may permit you to continue to provide Products after this Agreement ends. If we do so, you agree to provide those Products under the terms of this Agreement. 26. WAIVER OF NONCOMPLIANCE Failure by either of us to insist on strict performance or to exercise a right when entitled, does not prevent us from doing so at a later time, either in relation to that default or any subsequent one. 27. ELECTRONIC COMMUNICATIONS Each of us may communicate with the other by electronic means. Therefore, you agree to utilize electronic communications with us. if and as we specify In such case, both of us agree to the following for all electronic communications: 1. an identification code (called a "USERID") contained in an electronic document is legally sufficient to verify the sender's identity and the document's authenticity: 2. an electronic document that contains a USERID is a signed writing. and 3. an electronic document, or any computer printout of it, is an original when maintained in the normal course if business. ELECTRONIC DATA INTERCHANGE We may provide Electronic Data Interchange (Called "EDI") Options to you Electronic invoicing and electronic payment are examples of these Options. When using EDI Options, each of us agrees: 1. when a bank is involved, to pay our respective bank charges and to promptly notify the other of any changes to the bank payment process; and 2. to promptly notify the other of any changes to the technology, process, or information upon which the EDI transactions are based. We will specify respective responsibilities for the EDI Option you choose. 28. GEOGRAPHIC SCOPE All your rights and all our obligations are valid only in the United States and Puerto Rico. 29. GOVERNING LAW The laws of the State of New York govern this Agreement. Page 20 of 21 IBM BUSINESS PARTNER AGREEMENT --REMARKETER MANAGING INDUSTRY REMARKETER ATTACHMENT __________________________________________________________ These terms are in addition (unless otherwise noted), to those of the Industry Remarketer Attachment and prevail over them. 1. VALUE-ADDED ENHANCEMENT These terms replace those of the Value-Added Enhancement section of the Industry Remarketer Attachment. You agree to market Products only to resellers we approve, who market those Products together with their value-added enhancement (which we have previously approved) to End Users (and not to other resellers). You may also market Products to the reseller for their internal use. Such sales do not count towards your Commitment attainment or minimum renewal criteria. Resellers may provide, without their value added enhancement. 1) Products for their internal use, 2) up to 25% of the personal computer system units, including associated features and options, in each transaction, and 3) certain Products we specify to you. In any case, you are still responsible for all your obligations under this Agreement. You agree to collect from the reseller (and provide to us) applicable documentation that we require of resellers. We provide Product support to you tend not to End Users or resellers). We reserve the right to withdraw any reseller's approval. 2. MARKETING OF PRODUCTS These terms replace those of the Marketing of Products section of the ===================================================================== Industry Remarketer Attachment. =============================== You agree to: 1. market only to approved resellers and not to End Users: 2. provide Products to the reseller only after you receive confirmation from us that we have received and accepted the signed Industry Remarketer Affiliate Document of Understanding. 3. require the reseller to market our Products in a manner not contrary to this Agreement; 4. ensure that the reseller is trained and capable of providing the support required to maintain Customer satisfaction; 5. use your best efforts to ensure that for each Product the reseller markets, the reseller maintains the required records (and obtains them for us on request) and provides the Page 1 of 5 applicable money-back guarantee, warranty information, license agreement, and sales receipt; 6. notify us within one month when you terminate your relationship with a reseller. 7. when you no longer have a relationship with a reseller, acquire and maintain a copy of that reseller's records (including sales and credit receipts): and 8. notify us within 10 days of the installation of Products. You may acquire Products for your internal use at your discount at the time we ship the Products. You agree not to remarket such Products for 24 months from their Date of Installation. These Products do not count toward your minimum renewal criteria or any Commitment. DEALER EXHIBIT PRODUCTS For Products listed in the Dealer Exhibit, you also agree to: 1. market, support (including set up and test), and service them only at Authorized Locations; and 2. receive and place them (and their maintenance parts) in inventory only at Authorized Locations or ship-to locations (and not at resellers' or End Users' locations). Maintenance parts are only available for Machines listed in the Dealer Exhibit and for Warranty Service Category B Machines listed in the Industry Remarketer Exhibit. 3. RESELLER SUPPORT You agree that you are responsible for providing support to your resellers (and that we are not). At a minimum, you will provide the following to your resellers: 1. Product configuration assistance; 2. verification of the operation of the Product: 3. Product installation assistance; 4. Product technical usage support: 5. information regarding the Product's technical function; 6. explanation of the functions and expected performance of the Product: 7. Product announcements. brochures. and promotional information: Page 2 of 5 8. general Product administrative support; and 9. information regarding applicable courses we provide and the course enrollment procedures. You also agree to assist us, in a manner we specify, in the proportional distribution of our offerings and services to your resellers. You are responsible for your reseller satisfaction. 4. END USER SUPPORT You must provide Warranty Service and Program Services to the End User, if applicable. You are responsible for End User satisfaction. You must ensure that the reseller does not display or market our Products in a retail store or similar location. You must require the reseller to do the following: 1. provide facilities to demonstrate the enhancement; 2. select Products that best meet the End Users' needs; 3. ensure that a completed license agreement is signed by the End User, where applicable, before a Program is distributed: 4. verify the operation, and explain the functions and expected performance, of the Products and the enhancement to End Users; 5. provide support (such as documentation and technical assistance) for the Products, the enhancement, and other products it requires; 6. inform the End Users, upon their request, of applicable courses that we provide and how to enroll in them: 7. assist the End Users with the installation of Products; and 8. select, develop, procure, integrate, and install all elements of the enhancement and any updates to it. However, you must inform the End Users that you are ultimately responsible for End User satisfaction. 5. DEVELOPMENT SYSTEMS AND DEMONSTRATION SYSTEMS Page 3 of 5 These terms replace those of the Development Systems section of the Industry Remarketer Attachment. DEVELOPMENT SYSTEM PRODUCTS We may allow you to acquire Products for resellers, primarily for their use in developing, testing, supporting, and demonstrating their value added enhancement. We call these "Development System" Products. We may also approve you to acquire Products for your resellers for their exclusive use in developing, supporting and testing their value-added enhancement. Such Products may not be used for demonstration purposes. We will provide applicable Warranty Services, and you will provide Program Services and all other support for Development System Products used by the resellers, even if they did not acquire them from you. Each reseller must agree to comply with these terms (as applicable) as though it were acquiring the Development System directly from us. If you or the reseller does not comply with these terms we may refuse to provide you with additional Development Systems at Development System discounts. DEMONSTRATION SYSTEM PRODUCTS We may allow you to acquire Products for your use primarily for demonstration and testing purposes and for supporting your industry remarketer affiliates. We call these "Demonstration System" Products. DEVELOPMENT SYSTEM PRODUCTS AND DEMONSTRATION SYSTEM PRODUCTS If the Development System or Demonstration System is a Machine for which there is a field upgrade available, and you have acquired the maximum number of Demonstration System Machines for your contract period, or if your reseller has acquired the maximum number of Development System Machines for a calendar year, you may acquire the field upgrade (but not a replacement Machine) as a Development or Demonstration System, as applicable. A Development or Demonstration System may not be resold, leased or transferred for 12 months from the Date of Installation of the Product (or its Machine upgrade). For Programs, you must ensure that, when required, the applicable license agreement is signed by the reseller and the completed supplement issued before the Program is distributed. We make Programs, and their upgrades if applicable, available to you at a 100% discount for use on an authorized Development or Demonstration System. Certain Programs may require your payment of a fee. We will specify such Programs and their fee. For a Development or Demonstration System (other than Programs) we will specify its applicable discount or price, as applicable. You may not combine this offering with any other discount or allowance. A Development or Demonstration System may not be resold, leased, or transferred for 12 months from its Date of Installation (or its Machine upgrade). You agree not to resell, lease or transfer Programs you acquire under these terms. Page 4 of 5 We specify, in the applicable Exhibit, 1) the maximum quantity of each Development System Product you may acquire for your reseller in a calendar year, 2) the maximum number of Demonstration System Products you may acquire during your contract period. Development or Demonstration System Products do not count toward your minimum renewal criteria or any Commitment. 6. CHANGES IN EQUITY OWNERSHIP Your managing industry remarketer authorization will immediately terminate if your business structure changes such that 50% or more of your equity ownership is held other than as specified in your application. Page 5 of 5 IBM BUSINESS PARTNER AGREEMENT - REMARKETER INDUSTRY REMARKETER ATTACHMENT - ----------------------------------------- 1. VALUE-ADDED ENHANCEMENT You agree to market Products only with your value-added enhancement that we approve as part of an integrated solution for End Users. Certain Products we specify to you may not require a value-added enhancement. However, you may provide up to 25% of the personal computer system units, including associated features and options, in each transaction without such enhancement. If we withdraw approval of any such enhancement we also withdraw your authorization as our industry remarketer with regard to that specific enhancement. You are responsible for your enhancement, (and we are not). You agree to market Products only to End Users for whom your enhancement is the primary reason for acquiring Products (a sale without a required value- added enhancement is an additional example of a material breach). Unless we specify otherwise in writing, you will market only to such End Users who intend ongoing use of that enhancement as a significant part of their business operations. Your enhancement is not required to be the primary reason for acquiring upgrades to systems you have installed with your enhancement and where your enhancement is still in productive use. Upgrades include peripherals, programs and processor upgrades. However, your enhancement must be the primary reason for a processor upgrade requiring a processor serial number change. You agree to assist the End Users to achieve productive use of Products promptly after acquisition. If we inform you in writing of a specific industry code, you agree to market only to End Users within that code. We may provide certain installation planning assistance. We provide Product support to you (and not to End Users). You agree to: 1. provide facilities to demonstrate your enhancement; 2. verify the operation. and explain the functions and expected performance, of the Products and your enhancement to End Users; 3. provide support (such as documentation and technical assistance) for the Products, your enhancement, and other products it requires; and 4. select, develop, procure integrate, and install all elements of your enhancement and any updates to it. Page 1 of 11 2. USE OF AGENTS To assist you in the successful installation and your ongoing End User support requirements for the Products you are approved to market as an Industry Remarketer - Mid-Range, you may contract for the necessary skills with IBM Authorized Business Partners, who may perform such activities directly for your End User. However, you are responsible for your End User's satisfaction with such installation and support activities. You agree to indemnify IBM from any liability for the activities performed by such parties. Additionally, you may select IBM to perform such activities. In that event, IBM assumes customer satisfaction responsibilities for its activities. We may allow you to use an agent to represent you for other activities. If so we will provide written guidelines to you. 3. MARKETING OF PRODUCTS You agree to: 1. select Products that best meet the End Users' needs; 2. order Products in sufficient time to be shipped during the contract period for them to count toward your minimum renewal criteria or any Commitment: 3. receive Products (listed in the Industry Remarketer Exhibit) only at Authorized Locations or ship-to locations (including End Users' locations); 4. inform the End Users, upon their request, of applicable courses that we provide and how to enroll in them; 5. assist the End Users with the installation of Products; and 6. if you are approved as an industry remarketer of mid-range computer Products, notify us within 10 days of the installation of Products. For Products listed in the Dealer Exhibit, you also agree to: 1. market, support (including setup and test) and service them only at Authorized Locations or at End Users' locations; and 2. receive and place them (and their maintenance parts) in inventory only at Authorized Locations or ship-to locations (and not at End Users' locations). Maintenance parts are only available for Machines listed in the Dealer Exhibit. Page 2 of 11 For Products listed in the Dealer Exhibit which we announce as withdrawn from marketing, you may market them to resellers and to End Users without your value-added enhancement. However, you may not market withdrawn certified Products to resellers. When you market withdrawn Products to resellers you agree to: 1. distribute Products fairly. 2. require your resellers to retain the necessary records (such as sales and credit receipts): 3. identify the resellers to us; and 4. notify the resellers in writing that such Products are made available for marketing only in the United States and Puerto Rico. 4. ASSOCIATION WITH AN AGGREGATOR If you acquire IBM Personal System Products from an Aggregator, your Aggregator is authorized to set up and test those Products for you on your request. If the setup includes preloaded IBM Programs, you must ensure that the End User has agreed to the terms of the applicable license agreement prior to the preload. 5. INTERNAL USE OF PRODUCTS If we authorize you as an industry remarketer of mid-range computer Products, we allow you to acquire certain of those Products which you are approved to market, for your own internal use within your remarketing operations only and not for any other use including End User productive use, even if such use is managed within your business enterprise. Your value-added enhancement is not required for such acquisitions. The Industry Remarketer Exhibit includes further details. You may acquire Products for your internal use at your discount level at the time we ship the Products. You agree not to remarket such Products for 24 months from their Date of Installation. These Products do not count toward your minimum renewal criteria or any Commitment. 6. PRICES AND PRICE CHANGES FOR INDUSTRY REMARKETER EXHIBIT PRODUCTS The following terms apply for Products listed in the Industry Remarketer Exhibit. Page 3 of 11 A price decrease is effective on the date specified in our notice to you. We apply the associated discount to the decreased single-unit price for Products not yet shipped, provided you accept any related changes in terms. Otherwise, you may select 1) the decreased price without discount or 2) the discounted price available to you before the decrease. Prices increases do not apply to you if we receive your order prior to the effective date of the increase and if we ship your order within six months of the date we receive it. We may increase a recurring charge at any time. However, the effective date of the increase may not be less than 90 days from the date of our notice to you, and will be effective on the first day of the applicable invoice period specified in the notice. DISCOUNTS We provide a discount schedule for Products listed in the Industry Remarketer Exhibit. Some discount schedules have deeper discounts available when you agree to acquire, as applicable, 1) a specific quantity of Products from a specific Product Category, or 2) a minimum revenue amount as specified in the Exhibit. We call this your "Commitment". If you change your Commitment, you may subject to a higher or lower discount, as applicable. The discount applies only to Products acquired after the effective date of your Commitment change. To determine your discounted price, we apply the applicable discount to the Products lowest single-unit price in effect between the date we receive your order and our date of shipment, if such shipment is within six months of our receipt of your order. For Products shipped beyond the six months period, the discount is applied to the single-unit price in effect on our date of shipment. Unless we specify otherwise, discounts do not apply to Program upgrades, accessories, or field-installed Machine features, conversions, or upgrades. If during our review of your compliance with this Agreement, we find you have materially breached the terms of our relationship, in addition to our rights under law and the terms of this Agreement, for the applicable transactions, you will refund the discount you received from us and reimburse us for all administrative expenses associated with our compliance review activity. 7. RE-WORK EXPENSE If you alter, defer, or cancel an order for Products and we incur expenses to re-work the Products, we will invoice you for the actual expenses incurred. For orders cancelled after shipment, the re-work charge is in addition to the inventory adjustment handling charge specified in the Industry Remarketer Exhibit. Page 4 of 11 8. INSTALLATION OF MACHINE FEATURES, CONVERSIONS, AND UPGRADES For Machines listed in the Industry Remarketer Exhibit, we may require that Machine features, conversions, and upgrades be installed only on designated, serial-numbered Machines. You represent that you have the permission of the owner (if you are not the owner of the Machine) and any lien holders to 1) install features, conversions, and upgrades and 2) transfer removed parts to us. Some of these transactions (called "Net-Priced" transactions) include associated replacement parts. We provide these parts on an exchange basis. All removed parts in a Net-Priced transaction become our property. Replacement parts assume the service status of the parts they replace. For a Net-Priced transaction, you or your Customer must allow us to install it within 30 days of its delivery and to recover the removed parts. Otherwise, we may terminate the transaction, and the feature, conversion, or upgrade must be returned to us at your expense. 9. IBM INDUSTRY REMARKETER EXHIBIT PROGRAMS You agree to have one license for each Program you provide to End Users, that is listed in the Industry Remarketer Exhibit. A Program which we provide to you at no charge and which is licensed for use with a Development System fulfills this requirement. You are responsible for copying and distributing the Programs you provide to End Users. On our request, you agree to also distribute documentation. You agree to: 1. ensure that, when required, the applicable license agreement is signed by the End User and the completed supplement is issued (with a copy sent to us) before you copy and distribute the Program. Failure to provide us with the signed agreements promptly after they are signed is a material breach of this Agreement and cause for its immediate termination; 2. promptly notify us if you become aware of any violation (or threatened violation) of the license terms, and give us reasonable assistance in enforcing our rights; 3. promptly notify us if the End User provides you with any required notices under the license. 4. provide the End User with all Program Services we make available to you; and 5. copy and distribute to the End User any defect-correction information and subsequent Program releases we provide. page 5 of 11 COPYING AIX PROGRAMS CONTAINING THIRD-PARTY CODE If you are approved to market IBM RISC System/6000 AIX Programs containing third-party code, you may neither 1) delegate your right to copy these Programs nor 2) make copies that contain modifications you created from the use of UNIX(R) or OSF/1(R) source code. We do not grant you any rights to any trademarks of AT&T Technologies, Inc., UNIX System Laboratories, Inc., or any of their affiliates. You will not adopt a name for your product which is confusingly similar to any trademark of AT&T Technologies, Inc., UNIX System Laboratories, Inc., or any of their affiliates. You agree to: 1. maintain accurate records of the number of copies made; 2. provide us quarterly statements of the number of copies made in that calendar quarter; and 3. annually, upon request, make all relevant records available for audit by us, AT&T Technologies, Inc., UNIX System Laboratories, Inc., and Open Software Foundation, Inc.(R) PAYMENT The following are the bases on which we may require the amount payable for a Program to be paid: 1. one-time; 2. recurring (for example, a monthly license charge); or 3. a combination of both (for example, an initial charge and an annual license charge). We will specify the amount and basis for the particular Program. Programs licensed to you on a recurring-charge basis are licensed for the period indicated in our invoice. You may market such Programs only on the same basis as licensed to you. You may not charge an End User a one-time charge for a Program you license from us on a recurring-charge basis. However, you may charge the End User whatever amount you wish for the recurring charge. (R) UNIX is a registered trademark of UNIX System Laboratories, Inc. Page 6 of 11 (R)OSF/1 and Open Software Foundation are registered trademarks of Open Software Foundation, Inc. 10. DEVELOPMENT SYSTEMS We may allow you to acquire Products for use primarily in developing, testing. supporting, or demonstrating your value-added enhancement. We call these Development System Products. We may also approve you to acquire Products under these terms, for the exclusive use of development, support and testing your value-added enhancement. Such Products may not be used for demonstration purposes. If you have a Development System Product that is a Machine for which there is a field upgrade available, and you have acquired the maximum number of Development System Products you may acquire for the contract period, you may acquire the field upgrade (but not a replacement Machine) as a Development System Product. You agree not to resell, lease, or transfer a Development System Product for 12 months from the Date of Installation of the Product (or its Machine upgrade). For a Development System Product listed in the Industry Remarketer Exhibit (other than Programs), we will specify either a Development System price or a Development System discount. We make Programs, and their upgrades if applicable, available to you at a 100 percent discount, for use on an authorized Development System. Certain Programs may require your payment of a fee. We will specify such Programs and their fee. You agree not to resell, lease or transfer Programs you acquire under these terms. For a Development System Product listed in the Dealer Exhibit, we will specify a Development System price. We will specify, in the applicable Exhibit, the maximum quantity of each Development System Product that you may acquire. If you are an industry remarketer of mid-range computer Products, you must have a Development System for each system type that you are approved to market. We will provide applicable Warranty and Program Services for Development System Products listed in the Industry Remarketer Exhibit. You are responsible for these Services for Development System Products listed in the Dealer Exhibit. Development System Products do not count toward your minimum renewal criteria or any Commitment. If you use a Development System Product in a manner that does not comply with these terms, we may charge you the difference between what you paid and the full price. Page 7 of 11 You may not combine this offering with any other discount or allowance. 11. PRELOAD OF PROGRAMS For certain Machines specified in the applicable Exhibit, we will, on your request, preload programs you select onto those on-order Machines. We will: 1. send you a utility program and a kit containing blank tapes and instructions so you can provide us with tapes containing the programs selected for preload; 2. make production copies of the tapes you send us, use those copies to load the Machine, and verify that the process is successfully completed; 3. verify that the Machine is successfully delivered in a preloaded condition: and 4. retain the tapes for at least three months following the shipment of the last Machine for which preloading is ordered. You may request a shorter retention period in writing. At the end of that period, we will erase the programs from all tapes in our possession. You agree to: 1. have a license for each IBM Program for which you order preloading; 2. ensure that the applicable license agreement is signed by the End User and the completed supplement is issued (with a copy sent to us). You must do this before we ship the Machine; 3. obtain approval from each owner of each non-IBM program you send us to copy, to - a. make as many copies as we may need to support the preload process, and b. reproduce, in each copy, only those copyright notices that appear within the program; 4. provide us with programs and documentation according to the instructions that accompany the kit we send to you. You agree to return the entire kit and utility program; 5. provide us with tapes at least four weeks before the scheduled shipment of the Machine for which you require preloading; Page 8 of 11 6. not send us any information that is confidential or proprietary to anyone; and 7. pay any applicable charges for preloading. Any discount that applies to the Machine also applies to preload charges. 12. TRIAL PRODUCTS We may offer certain Products as "Trial Products." If you are approved for a Trial Product, you may provide it to End Users for evaluation purposes, or (if we agree) you may use it as part of a Development System. You may either return or retain a Trial Product. If you do not wish to retain it, you must notify us in writing before the end of the trial period. Otherwise, we will consider the Product to be retained. We will list in an Addendum the specifics of a trial, such as Trial period, Trial Products, and, if applicable, the End User. We reserve the right to withdraw a trial at any time. If the End User is participating in the trial, you agree to ensure that we receive the applicable agreement signed by you and the End User. You agree to provide the End User with the necessary details of the trial. We do not transfer title to Trial Products during the trial period. We will service and support them, and bear the risk of loss (except for theft or vandalism]. You agree: 1. to inform us of each Trial Product's location; 2. that the Product may not be moved to another location or altered, without our prior written approval. However, you may attach a non-IBM product or device to an IBM Machine without notice. You may not make any alteration or attachment that creates a safety hazard or renders maintenance of the Machine impractical; 3. to return, at the end of the trial period, all Products (including any copies of Programs) not retained. The Products should be returned unaltered and in the same condition as when delivered to you. Alternatively, for Programs, you may destroy all copies; and 4. to furnish all labor for unpacking and packing. If you retain a Trial Product, payment is due on the business day following the last day of the trial period. For a Machine, we transfer title to you and no longer bear the risk of loss as of that day. However, the warranty period begins on the Date of Installation. Page 9 of 11 13. TRADE-IN MACHINES We may specify certain Machines as eligible for trade-in. We will list in an Addendum such items as the Machine you agree to purchase (called the "Replacement Machine") and the Machine you agree to return to us (called the "Replaced Machine"). When we accept a Replaced Machine, we give you credit towards the purchase from us of other, eligible Machines. You agree to ensure that the same End User who was using the Replaced Machine, acquires the Replacement Machine. A Trial Machine may qualify as a Replacement Machine. For the Replaced Machine, you agree to: 1. restore an IBM Machine to its unaltered condition; 2. have it in operating condition on the day before it is available for pickup; 3. furnish all labor for packing; and 4. ensure that title to it is free of any legal obligations or restrictions on the day it is picked up, unless the IBM Credit Corporation owns both the Replacement and Replaced Machines. For the Replaced Machine, we will: 1. arrange for its pickup at your or the End User's location; 2. bear the risk of loss after it is picked up; and 3. pay normal transportation charges. The credit we give is in addition to any other discount for which the Replacement Machine may be eligible. The Replacement Machine counts toward your Commitment, unless the Replaced Machine was previously counted toward that Commitment. You agree to pay the full amount due for the Replacement Machine. You may not reduce your payment in anticipation of receiving the credit. If both Machines in a trade-in are used as part of a Development System, the Replaced Machine is not subject to Development System adjustment charges. 14. MARKETING OF IBM SERVICES FOR A FEE We approve you to market, and will pay you a fee, for eligible Services you market 1) as our industry remarketer to End Users, or 2) as our managing industry remarketer, to resellers. You, or if you are a managing industry remarketer, your reseller, may market Services on Page 10 of 11 any eligible machine in an account when 1) the End User to which the Service is marketed acquired your IBM approved value-added enhancement from you, or if you are a managing industry remarketer, from your reseller, and the enhancement is installed on one or more Machines you are approved to market, regardless of who marketed the Machine to the End User, or 2) you, or if you are a managing industry remarketer, your reseller, marketed a Machine to the End User under an IBM Business Partner relationship which did not require an IBM approved value-added enhancement. Services may be marketed on eligible non-IBM machines regardless of whether an IBM approved value- added enhancement is installed on a Machine in the account. We specify the eligible Sen/ices, and the percentages used to determine your fee, in an Exhibit: We will not pay you the fee if the machine is already under the Service or if the Service had been terminated on the machine within the prior six months at the same account. Page 11 of 11 IBM BUSINESS PARTNER AGREEMENT - REMARKETER MARKET DEVELOPMENT FUND ATTACHMENT - -------------------------------------------------------------------------------- These terms are in addition to those of the Industry Remarketer and Managing Industry Remarketer Attachments. If there is a conflict among terms, the terms of this Attachment will prevail. This Market Development Fund program will end on December 1, 1994. We do not guarantee that it will be renewed or, if it is, that it will be structured in the same way. 1. MUTUAL RESPONSIBILITIES Each of us agrees to: 1. jointly develop a market development fund plan (specified in an Addendum) for our RISC System/6000 Products; and 2. participate in quarterly reviews (for example, of marketing strategy and market development activities). 2. OUR OTHER RESPONSIBILITIES We will: 1. set up a market development fund to support your marketing of our RISC System/6000 Products to resellers; 2. credit this fund with an amount which will be the greater of 1) 125 percent of your 1993 Product attainment multiplied by 1.5 percent, or 2) $30,000. Amounts we credit to the fund belong to us until we disburse them for an approved market development activity. Therefore, the fund and all amounts we credit to it belong to us. Any amounts remaining in the market development fund after December 15, 1994, are forfeited by you; 3. determine Your eligibility for disbursements from the fund: 4. reimburse you for preapproved expenses, for which you submit an invoice and any other documentation that we may require. Reimbursement amounts will not exceed your available market development fund balance. We will provide reimbursements from the fund based on the reimbursement percent we specify in the Addendum. If this percent is less than 100, then you are responsible for the balance; 5. change the reimbursement percent solely at our discretion; Page 1 of 2 6. reimburse you, in the following quarter, for approved expenses which we do not reimburse (due to an insufficient market development fund balance) in the quarter you submitted them; and 7. periodically reconcile disbursements from the fund to amounts credited to the fund. 3. YOUR OTHER RESPONSIBILITIES You agree to: 1. perform the activities specified in the market development fund plan; 2. use disbursements from the tuna to market our RISC System/6000 Products to resellers, according to the guidelines we provide; 3. submit our reimbursement form on a quarterly basis, by the dates specified in the Addendum. You also agree to submit invoices for reimbursement from the fund (if applicable), as we specify: and 4. retain records (according to our guidelines) for three years of your use of a disbursement and expenses associated with the fund. 4. ENDING THE ATTACHMENT This Attachment ends the earlier of 1) its termination or 2) December 1, 1994. When this Attachment ends, any Addendum under it will also end. Either of us may terminate this Attachment, with or without cause, on one month's written notice. We may terminate this Attachment at any time if you materially breach any of its terms. Page 2 of 2 IBM BUSINESS PARTNER AGREEMENT - REMARKETER MANAGING INDUSTRY REMARKETER- SCHEDULE A - ---------------------------------------- These terms are in addition to those of the Industry Remarketer and Dealer Exhibits and prevail over them. We may change these terms by giving you written notice. These discount schedules apply to specific Products as identified in the IBM Industry Remarketer Exhibit (Z125-4096). Those RISC System/6000, AS/400, IBM Point of Sale Products, and Network Integration Products identified with an "A" in the MIR column of the Industry Remarketer Exhibit are available to you at the discounts described below. 1. RISC SYSTEM/6000 AND AS/400 DISCOUNT SCHEDULES A. RISC SYSTEM/6000 PRODUCTS ------------------------- 1) Included in Category A of the Industry Remarketer Exhibit; Annual Revenue Discount Base Entry-$9.99M 37% $10.0-14.99M 38% $15.0-19.99M 39% $20M + 40% Includes Field Installed Features and Model Conversions. Includes Software and 1/0. RISC System/6000 Software Group to Group Upgrades, where available, are eligible for the same discount as the base license they are upgrading. 2) Not included in the Industry Remarketer Exhibit. . RISC System/6000 Machine Type 7020 Model 40P discount is 40% (Dealer Exhibit terms and conditions). . Managing Industry remarketers (MIRs) currently approved for the IBM RISC System/6000 are authorized to market the IBM 7586 Model 43P Industrial Computer to their Industry Remarketer Affiliates. 7586 Model 43P is subject to standard Industrial Computer discounts. Contact an IBM representative for the applicable discounts. The following remarketer information applies for the 7586 Model 43P. - Price Reduction Category: 5 - Inventory Adjustment Category: 6 - Annual System Revenue Performance applies. - The product is a customer setup machine. - The product does not contain licensed internal code. Please refer to IBM announcement letter, 595-104, dated 10/31/95, for complete terms and information on this product. . 7573 Model 001 and 7574 Model 001 Industrial Graphics Displays. These Products are eligible for the RISC System/6000 Products discount grid, listed in this Schedule, that applies to Category A Products of the Industry Remarketer Exhibit. The following Remarketer information applies for these Products: - Price Reduction Category: 5 - Inventory Adjustment Category: 6 - Annual System Revenue Performance applies - The Product is a customer setup machine. - The Product does not contain licensed internal code. B. AS/400 PRODUCTS --------------- INCLUDED IN CATEGORY B OF THE INDUSTRY REMARKETER EXHIBIT Machine Type Discount 9401/P03 20% 9402 39% (9402 Model 236 new machine orders are available at a 30% discount). 9404 37% (9404/3XX Models available on an exception basis only) 9406 31% . AS/400 Field Installed Features and Model Conversions for AS/400 Machine Types 9401/9402/9404/9406: 33% . AS/400 Software and I/O Products: 35% - Field Installed Features and Models Conversion for AS/400 I/O Products: 35% - ASI400 Software Group to Group Upgrades, where available, are eligible for the same discount as the base license being upgraded. Page 2 of 2 C. EXCEPTIONS ---------- The following exclusions and maximums apply and prevail over the Discount Schedules above: CATEGORY A ---------- The discount for RISC System/6000 Machine Type 7248 (all models), as well as Model Conversions for Machine Type 7248, is 40%. Discount Caps Maximum discount 5765-496 = 30% 5775-526 = 30% 5601-263 = 30% (Processor Category D5, 1-2 User Tier Only) 5621-027 = 10% 5765-083 = 20% 7010 = 40% (Models 140, 150, and 160 are available at a single discount of 40% and may be marketed independent of the standard Value-Added Enhancement requirement. Orders for field installed features and model upgrades are available at the discounts described in the Annual Revenue table of Schedule A. CATEGORY A1 - Architecture and Engineering Series Programs and CAD/CAM ----------- Programs These licensed programs may only be marketed to those IBM Industry Remarketer Affiliates who have been approved for those Products as their Approved Value-Added Enhancement. The following Licensed Programs are available at a 40% discount: 5696-054 5696-055 5696-057 5696-060 5696-061 5697-186 CATEGORY B ---------- The IBM 9337 is available at a 46% discount for new machine orders. CATEGORY B1 ----------- The following Licensed Programs are available at a 37% discount: 5696-024 5696-025 5696-026 5696-027 5696-029 5696-030 5696-034 5733-CLS 5733-CSB 5733-CSC 5733-CSR 5733-CSS 5733-CS5 5733-CS7 5733-CS9 5733-055 5733-056 5738-FNT 5738-FS1 5738-0S1 The following Licensed Programs are available at a 35% discount: 5696-006 The following Licensed Programs are available at a 28% discount: 5620-ABL CATEGORY G1 ----------- 7526, 7527 discount = 40% CATEGORY M ---------- The following Licensed Programs are available at a 45% discount: 5696-237 5896-238 5696-239 5696-240 5696-347 5765-117 5765-118 5765-119 5765-121 5765-148 5765-152 5765-532 5765-533 5765-534 5765-537 5765-538 5765-540 The following Licensed Programs are available al a 35% discount: 5601-260 5696-108 5696-236 5765-316 The following Licensed Programs are available at a 30% discount: 5765-191 5765-192 5765-193 5765-263 5765-337 5765-338 5765-339 5765-340 5765-341 5765-342 5765-347 5765-348 5765 440 5765 441 5765-442 5765 443 5765-605 5765-606 5765-607 The following Licensed Programs are available at a 37% discount: 5765-527 CATEGORY X ---------- Products included in this category are available for marketing by both AS/400 and RISC System/6000 Remarketers Page 4 of 2 The following Licensed Programs are available at a 37% discount: 5621-159 5622-275 5622-276 The following Licensed Programs are available at a 30% discount: 5798-RZB D. PRINTERS FROM THE IBM PRINTING SYSTEMS COMPANY ---------------------------------------------- The printers from the IBM Printing Systems Company may be marketed without the standard Value-Added Enhancement requirement, and are available via the IBM Printing Systems Company Remarketer Exhibit, for reference purposes, available Products are listed in Category L of the Industry Remarketer Exhibit. These printers are available at a 30% discount, with the following exceptions: 3930/03D, 03S = 35% 4232/302 = 35% 42471A00 = 40% 6252/P08, P12 = 35% 6400/004 = 39% 6408/A00 = 35% 6412/A00, CTO, CTA = 45% E. DEALER EXHIBIT PRODUCTS ----------------------- 3476, 3486, 3487, 3488 maximum = 32% F. IBM UNINTERRUPTIBLE POWER SUPPLY (UPS) -------------------------------------- 1) Discount Schedule for UPS Products. CATEGORY MACHINE TYPE MODEL ELIGIBLE DISCOUNT K5 9910 Bxx* 27% Exx* 27% B30, B50, EP5 21% EP8, E80, U33 21% MES orders for Machines in this Category are not eligible for a discount. * Except for models specifically listed at a different discount. 2) Discount Schedule for ail other UPS Products: KVA CAPACITY MIR DISCOUNT less than 3 KVA 27% 3 less than 18 KVA 18% equals to greater than 18 KVA Quoted on request. 2. IBM STORAGE PRODUCTS Products included in categories S1, S3, and S4 of the IR Exhibit may be marketed by Industry Remarketer Affiliates independent of the standard Value-Added Enhancement requirement. Category S1 All Products = 40% Category S2 3490/CXX, EXX = 35% 3494 = 35% Category S3 7135 = 40% Category S4 All Products = 35% Category SS 5765-564 = 35% MES orders are eligible for the same discount as the base machine,, unless otherwise indicated. 3. IBM POINT OF SALE PRODUCTS POINT OF SALE TERMINAL Machine Type* Discount 4694 40% 4695 40% Includes Field Installed features and ModeJ Conversions. . IBM Point of Sale Products acquired under the terms of this Schedule are subject to the following Inventory Adjustment and Price Reduction Credit Provisions: INVENTORY ADJUSTMENT PROVISIONS Each quarter of your contract period, you must report your inventory of approved IBM Products as of the last calendar day of the preceding quarter. You must use a form provided by IBM and the completed inventory form must be received by IBM no later than the 10th workday of the new quarter. The maximum number of units of a Product you may return in a given quarter is equal to the number of units of such Product you reported as the final inventory for the previous contract period quarter. You may return these Products only once per contract period quarter. If Products being returned are accompanied by an order for new Products in an amount equal to or greater than the dollar value of the Products being returned, no Inventory Adjustment Charge will apply. If Products are returned without an accompanying order of equal or greater value, a 2% Inventory Adjustment Charge will apply to all Products being returned. PRICE REDUCTION CREDIT PROVISIONS Price Reduction Credits are based on a nine (9) month look back and are applicable to machine type/models and associated field installed features and model conversions shipped from IBM as MES orders. In order to quality for a Price Reduction Credit, the following criteria must be met: - The Products must have been shipped by IBM during the 9-month period immediately preceding the effective date of the decrease. - The Products must be in the original unopened packaging. - The Products Date of Installation must not have occurred as of the effective date of the decrease. - The Product was not ordered for Development System installation. You must use a form provided by IBM to report that inventory in your possession as of the effective date of the decrease and to certify the above requirements. IBM may request copies of invoices, including any credit invoices, issued to you by IBM for the Products you are requesting credit on. IBM Customer Agreement Licensed Programs do not qualify for Price Reduction Credits. 4. IBM NETWORK INTEGRATION PRODUCTS Products included in this section have unique certification requirements. Please contact your IBM representative for details. Products included in this section are available at the discounts described below. MES orders for installed features and model conversions are available at the same discount as the base machine type/model it is ordered for installation on. CATEGORY D Eligible Type/Model Discount 8250/All 40% 8260/All 40% 8281 and 8282 40% Page 7 of 2 6611/120 35% 6811/125 35% 6611/145 42% 6611/175 42% 2210 31% 9741/001 40% CATEGORY D1 Licensed Programs included in Category D1 are available at a 37% discount with the following exceptions: 5648-016 35% 5765-368 31% 5. MANAGING INDUSTRY REMARKETER DEMONSTRATION SYSTEM Managing Industry Remarketers may acquire the following quantities of Demonstration System Products each contract period for use in supporting, recruiting, and training their Industry Remarketer Affiliates. Demonstration Products are made available to the MIR at the Development System Discounts specified in the Industry Remarketer Exhibit. Demonstration Products must be retained by the MIR for a minimum of twelve months from the Date of Installation. Refer to the Managing Industry Remarketer Attachment for additional terms. PRODUCT QUANTITY AVAILABLE ------- ------------------ RISC System/6000 Processors 20 POWERparallel Processors (9076) 2 AS/400 Processors 2 - 9401/P03 10 * Network Integration Products 20 * Point of sale Products 20 ** Storage Products 10 * MIRS may acquire the quantities indicated for each machine type they are approved to market in these Categories. ** MIRs may acquire up to 10 of the Products they are approved to market in these Categories . MIRs may acquire Products from the Complementary Categories in these quantities that IBM has indicated in the maximum number of these Products that will attach to their Demonstration System Processor Type. 6. FEDERAL DISCOUNTS Managing Industry Remarketers authorized to market the RISC System/6000 or Network Integration Products to Industry Remarketer Affiliates may acquire Products for installation in a Federal account under the following discount schedules. MIR specific revenue commitments and discounts are identified in the individual MIR's Profile. Please contact your IBM representative for details. A. MANAGING INDUSTRY REMARKETER FEDERAL DISCOUNT SCHEDULE ------------------------------------------------------ 1) RISC SYSTEM/6600 PRODUCTS ------------------------- Discounts Annual System Revenue Performance* Hardware Software Entry-$9,999,999 39% 37% $10,000,000 - 40% 38% $14,999,999 41% 39% $15,000,000 - 42% 40% $19,999,999 $20,000,000 and over * This discount schedule is based on a single RISC System/6000 revenue commitment for Products acquired for both federal and commercial installations. a) (Z12S-4096) are eligible for the hardware discounts above. b) The software Products in Category A are eligible for the software discounts listed above. c) Some Products listed in the Network Integration Products Federal Discount Schedule below may also be eligible RISC System/6000 Products. These Products may be acquired at the discounts listed below by IBM Authorized MIRs approved to market RISC System/6000 Products to Industry Remarketer Affiliates. Page 9 of 2 d) All other authorized Products are available at the standard MIR/IR published discounts. 2) NETWORK INTEGRATION PRODUCTS FEDERAL DISCOUNT SCHEDULE ------------------------------------------------------ Machine Type Description Discount Category O Network Processor - Model 12x 40% 6611 Multiprotocol Intelligent Switching Hub 45% 8260 High Speed Inverse Multiplexor 47% 9741 Nways Multiprotocol Router 32% 2210 Nways Multiprotocol Concentrator 34% 2217 40% Category D1 5648-016 Multiprotocol Network Program 25% Category K1 9309 Rack Enclosure Expansion Unit Category K2 3299 Multiplexor Hub a) Hardware Products specifically listed above are eligible for discounts listed above when sold to Federal End Users. b) All additional Network Integration Products are eligible to IBM Authorized Industry Remarketers approved to remarket Network Integration Products are available at standard MIR/IR published discounts. B. FEDERAL END USER DEFINITION --------------------------- The following definition of "end user" applies when marketing to federal Government accounts: A) "Federal End User" includes federal government agencies or any other entity listed in GSA Order ADM 4800.2D, including those entities listed in Appendices A, B, and G of the Order, and any successor Order which may be published by the GSA in the federal Register. The term Federal End User also includes federal government cost reimbursement prime contractors and management and operating contractors that receive proper authorization under FAR Part 51 from federal agencies to make federal purchases or acquisitions where licenses granted and title to equipment vest in the federal government. B) The IR may propose an integrated solution through a higher-tier federal contractor in fulfillment of a specific government procurement where title to the IBM equipment passes directly to the federal government. In no event shall the IR permit transfer of title for any IBM equipment purchased under this Agreement to other than the federal government. Under no circumstances may the IR assign any of its responsibilities under the IR Agreement to the Federal End User. 7. IBM SERVICES OFFERINGS ---------------------- MANAGING INDUSTRY REMARKETER
Service Offering DISCOUNT FEE PERCENT (1) Maintenance ----------- Maintenance Service N/A 25% Corporate Service Offering(CSO) N/A 25% Mid Range Service Offering (MRSO) N/A 25% Entry Systems Service for Remarketers (ESSR) (2) (2) Corporate Service Offering for Remarketers (CSO/R) (2) (2) Continuing Support ------------------ Support Family Services AS/400 20% 20% AIX 20% 20% Customized Operational Services ESCON Migration Services 20% 20% SiteManager 20% 20% Project Support (3) ------------------- Customized Operational services (4) 20% 20% Customized Operational Services Equipment Air Conditioners and Chillers 10% 20% Surge Suppressors 30% 20% Uninterruptible Power Supplies(UPS) Less than 3 KVA 21% 20% 3 to 18 KVA 15% 20% Greater than 18 KVA Upon Request 20% Liebert DataPad* 25% 20% Systems Integration N/A 6% Application Design & Development N/A 6% Other Services (Examples) LAN Doctor Services, SmoothStart, Softinstall 20% 20%
NOTES: ----- (1) The fee percent is applied to the Servico's one-time or recurring charge that IBM invoices the End User. For a recurring charge, we apply the percent to 12 times the monthly charge. (2) Eligible machines, discounts and periodic payment percentages are contained in the Exhibit for Corporate Service Option (Z125-3928) and Remarketer Exhibit for CSO Option (Z125 4170), and Remarketer Exhibit for Entry Systems Service (Z125-4254), as applicable. Payments are made quarterly for CSO and for ESS based upon the amount of adjusted charges invoiced during the quarter period. PAYMENT ADJUSTED Percent Charges Invoiced 5% $ 0 - $12,499 10% 12,500 - 49,999 13% 50,000 - 124,999 15% 125,000 or greater (3) Fees are paid on the total contract amount, including non-IBM Products, but excluding services which you, or your reseller we approve, perform as a subcontractor. Services offered by ISSC, EduQuest, and Education and Training are excluded. (4) The fee percent or discount is applied to the Service's charge, excluding moving company charges. * The following is a trademark of the indicated companies: DataPad (Liebert) EX-13 5 PORTIONS OF THE REGISTRANT'S ANNUAL REPORT EXHIBIT 13 Form 10-K The following portions of the ScanSource, Inc. 1998 Annual Report to Shareholders have been incorporated by reference into the Form 10-K, of which this exhibit is a part. The following information is incorporated by reference into Item 5 of the Form 10-K. PRICE RANGE OF COMMON STOCK The Company's Common Stock is quoted on The Nasdaq National Market under the symbol "SCSC." The following table sets forth, for the periods indicated, the high and low closing prices of the Common Stock on The Nasdaq National Market. HIGH LOW ------- ------- Fiscal Year 1997 First Quarter................................................... $14 $10 3/4 Second Quarter.................................................. $15 3/4 $13 Third Quarter................................................... $18 5/8 $14 Fourth Quarter.................................................. $15 $13 1/2 Fiscal Year 1998 First Quarter................................................... $17 1/2 $13 3/4 Second Quarter.................................................. $20 7/8 $17 Third Quarter................................................... $23 1/8 $18 1/2 Fourth Quarter.................................................. $21 3/8 $18 1/2 On September 15, 1998, there were approximately 63 shareholders of record of Common Stock. Certain of these shareholders of record hold shares in nominee or street name for other beneficial owners. DIVIDEND POLICY The Company has never declared or paid cash dividends on its Common Stock, and it is currently the intention of the Board of Directors not to pay cash dividends in the foreseeable future. The Company intends to retain earnings, if any, to finance its operations. 1 The following information is incorporated by reference into Item 6 of the Form 10-K. SELECTED FINANCIAL DATA The following table sets forth certain selected financial data, which should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Financial Statements and related Notes thereto included elsewhere herein. The following selected financial data for each of the years in the five-year period ended June 30, 1998 have been derived from the consolidated financial statements of the Company audited by KPMG Peat Marwick LLP, independent certified public accountants. The audited consolidated financial statements of the Company as of June 30, 1997 and 1998 and for each of the years in the three-year period ended June 30, 1998 are included elsewhere herein.
FISCAL YEAR ENDED JUNE 30 ------------------------------------------- 1994 1995 1996 1997 1998 ------- ------- ------- ------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF INCOME DATA: Net sales......................... $16,089 $34,235 $56,383 $99,839 $182,795 Cost of goods sold................ 13,676 29,444 48,413 86,024 159,410 ------- ------- ------- ------- -------- Gross profit..................... 2,413 4,791 7,970 13,815 23,385 Selling, general and administra- tive expenses.................... 1,718 3,128 5,063 8,940 15,620 Amortization of intangibles....... 50 83 83 81 113 ------- ------- ------- ------- -------- Total operating expenses......... 1,768 3,211 5,146 9,021 15,733 ------- ------- ------- ------- -------- Operating income.................. 645 1,580 2,824 4,794 7,652 Gain from contract termination, net.............................. -- 1,000 200 -- -- Cost of business combinations (1).............................. -- -- -- -- (305) Other income (expense), net (2)... (150) (72) 75 (465) 160 ------- ------- ------- ------- -------- Total other income (expense)..... (150) 928 275 (465) (145) ------- ------- ------- ------- -------- Income before income taxes........ 495 2,508 3,099 4,329 7,507 Income taxes...................... 143 997 1,193 1,556 2,736 ------- ------- ------- ------- -------- Net income (1)(3)................ $ 352 $ 1,511 $ 1,906 $ 2,773 $ 4,771 ======= ======= ======= ======= ======== Basic net income per share........ $ 0.80 $ 0.70 $ 0.55 $ 0.80 $ 0.99 ======= ======= ======= ======= ======== Basic weighted average shares out- standing......................... 1,207 2,154 3,482 3,481 4,833 ======= ======= ======= ======= ======== Diluted net income per share (1)(3)........................... $ 0.23 $ 0.50 $ 0.50 $ 0.75 $ 0.95 ======= ======= ======= ======= ======== Diluted weighted average shares outstanding...................... 1,663 3,271 3,799 3,704 5,035 ======= ======= ======= ======= ======== AS OF JUNE 30, ------------------------------------------- 1994 1995 1996 1997 1998 ------- ------- ------- ------- -------- (IN THOUSANDS) BALANCE SHEET DATA: Working capital.................. $ 4,888 $ 6,530 $17,137 $20,496 $ 48,154 Total assets..................... 6,740 13,939 29,183 40,268 72,112 Total bank debt.................. -- 1,200 3,779 5,391 6,580 Total shareholders' equity....... 4,751 6,396 15,504 18,650 49,781
- ------- (1) Excluding the effect of the cost of business combinations, the Company's net income and net income per share for fiscal 1998 would have been $4,960,000 and $0.99 per share, respectively. (2) Includes net interest income (expense) and net other income (expense). (3) Excluding the net effect of a one-time gain from a contract termination payment by Gates/FA Distributing, Inc. and the net effect of an additional warehouse relocation in May 1995, the Company's net income and net income per share for fiscal 1995 and 1996 would have been $911,000 and 1,786,000 and $0.32 and $0.47, respectively. 2 The following information is incorporated by reference into Item 7 of the Form 10-K. MANAGEMENT'S DISCUSSION AND ANALYSIS FOR YEAR-END JUNE 30, 1998 The following discussion and analysis contains forward-looking statements which involve risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors. This discussion and analysis should be read in conjunction with "Selected Financial Data" and the Financial Statements and the Notes thereto included elsewhere in this Report. OVERVIEW The Company was incorporated in December 1992 and began its operations as a distributor of Auto-ID (bar code) products, rapidly expanding into the distribution of point-of-sale (POS) products. In February 1997, pursuant to its contract with Lucent Technologies, the Company began distributing business telephone (telephony) products (including PBXs, key systems, telephone hand sets and voice mail) under the trade name of Catalyst Telecom. In addition to its own marketing and development activities, the Company has from time to time pursued strategic acquisitions in order to consolidate its presence in its existing specialty technology markets and to enter into new markets with characteristics similar and complementary to its business model. The Company consolidated its position in the telephony market in September 1997 through the purchase of ProCom Supply Corporation, a small wholesale telephone distributor which provided the Company with two new product lines and a west coast sales office. The Company entered the computer telephony market by the acquisition in February 1998 of The CTI Authority, Inc. ("CTI"), a wholesale distributor of Internet and computer telephony products, including the Dialogic product line. In January 1998, the Company entered the Canadian market through its acquisition of a small POS distributor which had an established presence and sales team in Vancouver and Toronto. From fiscal 1994 to fiscal 1998, net sales increased at a compound annual rate of 83.6% to $182.8 million, while over the same period operating income increased at an 85.6% compound annual rate to $7.7 million. Growth in net sales has been principally driven by competitive product pricing, selective expansion of the Company's product line, intensive marketing efforts to the reseller channel, and strategic acquisitions. Results have benefitted significantly from expanded marketing efforts to recruit new reseller customers and from the addition of significant new vendor relationships. Sales in fiscal 1997 were enhanced by the January 1997 addition of Intermec's full line of bar code products, and the contract with Lucent Technologies. In fiscal 1998, sales in the Company's core business of Auto-ID/POS products continued to increase across most of its vendor lines, while telephony sales were expanded by growth in the Lucent line and the acquisition of CTI. The Company's operating income growth has historically been driven by increasing gross profit and disciplined control of operating expenses. The Company's business strategy features a sophisticated information system, streamlined management, and centralized distribution, enabling it to achieve the economies of scale necessary for cost-effective order fulfillment. As the Company's markets have grown, pricing pressures have been mitigated by increased purchasing discounts earned through volume purchases from manufacturers. From its inception, the Company has tightly managed its general and administrative expenses by maintaining strong internal controls. Historically, general and administrative expenses have decreased as a percentage of net sales. However, this decline has been offset by costs associated with new initiatives in marketing, including, in fiscal 1997, the formation of a POS business development team and a Professional Services Group to serve Auto-ID customers; and in fiscal 1998, the organization of a systems integration department, investments in new product and service markets such as telephones and Internet order fulfillment, and the expansion into new geographic markets in Canada. The Company's operating results for fiscal 1995 and 1996 were impacted by a one-time net gain of $1.2 million resulting from a contract termination which was recognized ratably over a one-year period ending in August 1995. The net effect of this transaction was to increase net income by $600,000 in fiscal 1995 and by $120,000 in fiscal 1996. Excluding these amounts, net income and net income per share for fiscal 1995 and 1996 would have been $911,000 and $1.8 million and $0.32 and $0.47, respectively. Net income for 1998 includes the effect of $305,000 of expenses related to the acquisitions described above which occurred in September of 1997 and in January and February of 1998. Without these expenses, net income and net income per share for 1998 would have been $5.0 million and $0.99 per share, respectively. Weighted average shares outstanding at June 30, 1998 were higher by 1.3 million shares as a consequence of the Company's October 1997 public offering of Common Stock and the Company's issuance of Common Stock in connection with the two 1998 acquisitions accounted for as pooling-of-interest transactions. 3 MANAGEMENT'S DISCUSSION AND ANALYSIS FOR YEAR-END JUNE 30, 1998 - ------------------------------------------------------------------------------- RESULTS OF OPERATIONS The following table sets forth for the periods indicated certain income and expense items as a percentage of net sales:
FISCAL YEAR ENDED JUNE 30 ---------------------------- 1996 1997 1998 -------- -------- -------- Net sales.................................. 100.0% 100.0% 100.0% Cost of goods sold......................... 85.9 86.2 87.2 -------- -------- -------- Gross profit.............................. 14.1 13.8 12.8 Selling, general and administrative ex- penses.................................... 9.0 8.9 8.5 Amortization of intangibles................ 0.1 0.1 0.1 -------- -------- -------- Total operating expenses.................. 9.1 9.0 8.6 -------- -------- -------- Operating income........................... 5.0 4.8 4.2 Gain from contract termination, net........ 0.4 -- -- Cost of business combinations.............. -- -- (0.2) Other income (expense), net................ 0.1 (0.5) 0.1 -------- -------- -------- Total other income (expense).............. .5 (0.5) (0.1) -------- -------- -------- Income before income taxes................. 5.5 4.3 4.1 Income taxes............................... 2.1 1.5 1.5 -------- -------- -------- Net income................................ 3.4 2.8 2.6 ----------------------------
COMPARISON OF FISCAL YEARS ENDED JUNE 30, 1998, 1997, AND 1996 Net Sales. Net sales consist of sales of specialty technology products billed to customers when shipped, net of sales discounts and returns. Net sales increased by 83.1% to $182.8 million in fiscal 1998 from $99.8 million in fiscal 1997, and by 77.1% from $56.4 million in fiscal 1996. Growth in net sales resulted primarily from additions to the Company's sales force, competitive product pricing, selective expansion of its product line, and increased marketing efforts to the specialty technology resellers. Sales for 1996, 1997 and 1998 reflect the effect of pooling CTI's sales as described in Note 2 of the Financial Statements included elsewhere in this Report. Gross Profit. Cost of sales is comprised of purchase costs, net of early payment, volume discounts, and product freight. Gross profit as a percentage of net sales is affected by several factors including the mix of high margin and low margin products and the proportion of large orders on which the Company extends volume discounts to resellers. Gross profit increased by 69.3% to $23.4 million from $13.8 million in fiscal 1997, and by 73.3% from $8.0 million in fiscal 1996. Gross profit as a percentage of net sales was 12.8% in fiscal 1998, 13.8% in fiscal 1997 and 14.1% in fiscal 1996. The decrease in gross profit as a percentage of net sales was a result of a change in the mix of sales of more lower-margin products and volume discounts provided to resellers on large orders. Operating Expenses. Operating expenses include commissions paid to sales representatives; compensation paid to marketing, technical, and administrative personnel; the costs of marketing programs to reach resellers; telephone expense; a provision for bad debt losses; costs associated with the start-up of telephone distribution, the organization of a systems integration department and the entry into the Canadian and Internet order fulfillment markets; and amortization of intangibles. Fluctuations in operating expenses as a percentage of net sales can result from the amount of value-added services which accompany higher or lower gross margin sales; investments by the Company in additional marketing programs and hiring additional technical support personnel; and general and administrative efficiencies gained through higher sales volumes and accompanying economies of scale. Operating expenses increased by 74.4% to $15.7 million in fiscal 1998 from $9.0 million in fiscal 1997, and increased by 75.3% from $5.1 million in fiscal 1996. Operating expenses as a percentage of net sales declined to 8.6% in fiscal 1998, from 9.0% in fiscal 1997 and 9.1% in fiscal 1996. The decrease in operating expenses as a percentage of net sales resulted from efficiencies gained through increased sales volumes and the fact that lower gross margin sales generally require fewer value-added services and thus less operating expense. 4 MANAGEMENT'S DISCUSSION AND ANALYSIS FOR YEAR-END JUNE 30, 1998 - ------------------------------------------------------------------------------- Operating Income. Operating income increased by 59.7% to $7.7 million in fiscal 1998 from $4.8 million in fiscal 1997, and by 69.7 % from $2.8 million in fiscal 1996, driven by the improvement in gross profit as described above. Operating income as a percentage of net sales was 4.2% in fiscal 1998, 4.8% in fiscal 1997 and 5.0% in fiscal 1996. Total Other Income (Expense). Total other income (expense) consists of interest income (expense), net, the cost of business combinations and a net gain from a contract termination. Other income (expense) in fiscal 1998 consisted primarily of $305,000 of business combination expenses and net interest income of $213,000, representing earnings from invested proceeds resulting from the Company's sale of stock in October 1997 partially offset by interest paid on the Company's revolving credit facility for the period of July through September 1997 and May through June 1998. Net interest expense for fiscal 1997 was $380,000 representing interest paid on borrowings under the revolving credit facility. Income Taxes. Income tax expense was $2.7 million, $1.6 million and $1.2 million, in fiscal 1998, 1997, and 1996, respectively, reflecting an effective tax rate of 36.5%, 35.9% and 38.5%, respectively. Tax expense was provided at rates ranging from 36-39% reflecting the effects of the Company combining operating results with The CTI Authority, Inc. reducing the previously reported effective rate for all fiscal years. The effective tax rate for consolidated net income for periods following July 1, 1998 is expected to be 37%. Net Income. Net income increased by 72% to $4.8 million in fiscal 1998 from $2.8 million in fiscal 1997, and by 45.5% from $1.9 million in fiscal 1996. Net income as a percentage of net sales was 2.6% for fiscal 1998, 2.8% for fiscal 1997 and 3.4% for fiscal 1996. Without the effect of the 1996 contract termination payment, 1996 net income would have been $1.7 million or 3.1% of net sales. Without the effect of $305,000 of acquisition expenses, 1998 net income would have been $5.0 million or 2.7% of net sales. QUARTERLY RESULTS The following tables set forth certain unaudited quarterly financial data and such data expressed as a percentage of net sales. The information has been derived from unaudited financial statements that, in the opinion of management, reflect all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of such quarterly information. The operating results for any quarter are not necessarily indicative of the results to be expected for any future period.
THREE MONTHS ENDED ------------------------------------------------------------------------------- FISCAL 1997 FISCAL 1998 --------------------------------------- -------------------------------------- SEPT. 30 DEC. 31 MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30 1996 1996 1997 1997 1997 1997 1998 1998 --------- -------- -------- -------- --------- -------- -------- -------- Net sales............... $ 20,972 $ 23,556 $ 25,098 $ 30,213 $ 37,933 $ 41,677 $ 46,538 $56,647 Cost of goods sold...... 17,985 20,278 21,544 26,217 33,360 36,149 40,289 49,612 -------- -------- -------- -------- -------- -------- -------- ------- Gross profit........... 2,987 3,278 3,554 3,996 4,573 5,528 6,249 7,035 Selling, general and ad- ministrative expenses.. 1,901 2,103 2,311 2,625 2,958 3,750 4,328 4,584 Amortization of intangi- bles................... 20 21 20 20 20 30 30 33 -------- -------- -------- -------- -------- -------- -------- ------- Total operating ex- penses................ 1,921 2,124 2,331 2,645 2,978 3,780 4,358 4,617 -------- -------- -------- -------- -------- -------- -------- ------- Operating income........ 1,066 1,154 1,223 1,351 1,595 1,748 1,891 2,418 Cost of business combi- nations................ -- -- -- -- -- -- (305) -- Other income (expense), net.................... (72) (97) (164) (132) (133) 210 109 (26) -------- -------- -------- -------- -------- -------- -------- ------- Total other income (ex- pense)................ (72) (97) (164) (132) (133) 210 (196) (26) -------- -------- -------- -------- -------- -------- -------- ------- Income before income taxes.................. 994 1,057 1,059 1,219 1,462 1,958 1,695 2,392 Income taxes............ 353 392 376 435 535 728 563 909 -------- -------- -------- -------- -------- -------- -------- ------- Net income............. $ 641 $ 665 $ 683 $ 784 $ 927 $ 1,230 $ 1,132 $ 1,483 ======== ======== ======== ======== ======== ======== ======== ======= Basic net income per share.................. $ 0.18 $ 0.19 $ 0.20 $ 0.22 $ 0.27 $ 0.25 $ 0.21 $ 0.28 ======== ======== ======== ======== ======== ======== ======== ======= Basic weighted average shares outstanding..... 3,480 3,485 3,487 3,485 3,489 4,904 5,321 5,351 ======== ======== ======== ======== ======== ======== ======== ======= Diluted net income per share.................. $ 0.17 $ 0.18 $ 0.18 $ 0.21 $ 0.25 $ 0.24 $ 0.20 $ 0.26 ======== ======== ======== ======== ======== ======== ======== ======= Diluted weighted avg. shares outstanding..... 3,701 3,723 3,710 3,671 3,722 5,209 5,587 5,623 ------------------------------------------------------------------------------
5 MANAGEMENT'S DISCUSSION AND ANALYSIS FOR YEAR-END JUNE 30, 1998 - -------------------------------------------------------------------------------
THREE MONTHS ENDED ------------------------------------------------------------------------- FISCAL 1997 FISCAL 1998 ------------------------------------ ------------------------------------ SEPT. 30 DEC. 31 MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30 1996 1996 1997 1997 1997 1997 1998 1998 --------- -------- -------- -------- --------- -------- -------- -------- Net sales............... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Cost of goods sold...... 85.8 86.1 85.8 86.8 87.9 86.7 86.6 87.6 ----- ----- ----- ----- ----- ----- ----- ----- Gross profit........... 14.2 13.9 14.2 13.2 12.1 13.3 13.4 12.4 Selling, general and ad- ministrative expenses.. 9.0 8.9 9.2 8.7 7.8 9.0 9.3 8.1 Amortization of intangi- bles................... 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 ----- ----- ----- ----- ----- ----- ----- ----- Total operating ex- penses................ 9.1 9.0 9.3 8.8 7.9 9.1 9.4 8.2 ----- ----- ----- ----- ----- ----- ----- ----- Operating income........ 5.1 4.9 4.9 4.4 4.2 4.2 4.0 4.2 Cost of business combi- nations................ -- -- -- -- -- -- (0.6) -- Other income (expense), net.................... (0.4) (0.4) (0.7) (0.4) (0.4) 0.5 0.2 0.0 ----- ----- ----- ----- ----- ----- ----- ----- Total other income (ex- pense)................ (0.4) (0.4) (0.7) (0.4) (0.4) 0.5 (0.4) 0.0 ----- ----- ----- ----- ----- ----- ----- ----- Income before income taxes.................. 4.7 4.5 4.2 4.0 3.8 4.7 3.6 4.2 Income taxes............ 1.7 1.7 1.5 1.4 1.4 1.7 1.2 1.6 ----- ----- ----- ----- ----- ----- ----- ----- Net income............. 3.0 2.8 2.7 2.6 2.4 3.0 2.4 2.6 ----------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES The Company financed its initial operating requirements and growth through private financings totaling $500,000. In March 1994, the Company completed an initial public offering of units consisting of Common Stock and warrants, which provided the Company with net proceeds of approximately $4.6 million. In September 1995, the Company received net proceeds of approximately $6.3 million from Common Stock issued upon the exercise of warrants. In October 1997, the Company completed a secondary public offering of Common Stock which provided the Company proceeds of approximately $26.2 million. In November 1996, the Company entered into a revolving credit facility with a bank which allowed for borrowings of up to $15.0 million at an interest rate equal to the 30-day LIBOR rate plus a rate varying from 2.00% to 2.65% tied to the Company's debt-to-net worth ratio ranging from 1:1 to 2:1. The borrowing base available under the credit facility is limited to 80% of eligible accounts receivable and 40% of eligible inventory. At June 30, 1998, the effective interest rate on the facility was 7.66%, and the outstanding balance was $4.9 million on a borrowing base which exceeded $15 million, leaving $10.1 million of credit availability. The Company has a commitment from the bank, which the Company intends to exercise, to renew the credit facility for amounts up to $35 million to October 2001 under terms similar to the existing agreement. On June 26, 1998, the Company purchased its corporate headquarters building for a purchase price of approximately $3,346,000, of which $2,761,000 was allocated to the building and $585,000 was allocated to land. The Company funded the purchase price with borrowings of $1,627,000 under its revolving credit facility and the assumption of a $1,719,000 nonrecourse 9.19% fixed- rate loan with a remaining term at June 30, 1998 of 8.25 years. The loan is collateralized by the land and building acquired. The Company had formerly leased, and is continuing to use, approximately 45% of the 70,000 square feet in the building as its principal executive and sales office. The Company is leasing the remainder of the building to third parties until such space is required for the Company's needs. Included in the expected benefits to the Company from the purchase of the building are the retention of leasehold improvements with a cost of approximately $703,000 (which are now included in the cost of the building for balance sheet purposes) as well as the expected savings of the costs of moving to a larger location which would otherwise have been necessary within the next 18 months. For the fiscal year ended June 30, 1998, operating activities used cash in the amount of $21.0 million. For this period, cash was used to fund a $14.9 million increase in receivables and a $7.5 million increase in inventory and a $3.1 million decrease in accounts payable. For fiscal 1997, net cash in the amount of $137,000 was provided by operating activities. 6 MANAGEMENT'S DISCUSSION AND ANALYSIS FOR YEAR-END JUNE 30, 1998 - ------------------------------------------------------------------------------- For the fiscal year ended June 30, 1998, cash used in investing activities of $4.7 million included $1.9 million for capital expenditures, $1.6 million for purchase of the Company's headquarters building and $1.1 million paid in a business combination. Cash used in investing activities for fiscal 1997 was $1.1 million for capital expenditures. For the fiscal year ended June 30, 1998, cash provided by financing activities was $25.3 million, resulting primarily from the sale of $26.2 million of Common Stock in an October 1997 public offering and $1.1 million in net repayments under the line of credit. Cash provided by financing activities for fiscal 1997 was $1.3 million, primarily from line of credit borrowings. The Company believes that cash flows from operations, its bank revolving credit facility and vendor financing will be sufficient to meet its cash requirements for at least the next 24 months. BACKLOG The Company does not consider backlog to be material to its business. Virtually all orders are filled within 24 hours of receipt. RECENT ACCOUNTING PRONOUNCEMENTS In June 1997, the FASB issued Statement of Financial Accounting Standards No. 131, "Disclosures About Segments of an Enterprise and Related Information" ("SFAS No. 131"). SFAS No. 131 requires that an enterprise disclose certain information about operating segments and is effective for financial statements for periods beginning after December 15, 1997. The Company is currently assessing the effects of SFAS No. 131 on its financial statement disclosure. In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 requires that an enterprise recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. SFAS No. 133 is effective for all fiscal quarters and all fiscal years beginning after June 15, 1999. The Company is currently assessing the effects of SFAS No. 133 on its financial position. YEAR 2000 It is possible that the Company's currently installed computer systems, software products or other business systems, or those of the Company's vendors or resellers, working either alone or in conjunction with other software or systems, will not accept input of, store, manipulate and output dates in the years 1999, 2000 or thereafter without error or interruption (commonly known as the "Year 2000" problem). The Company has conducted a review of its computer systems, including its primary business software, and believes that such software is Year 2000 compliant. The Company is also querying its vendors and resellers as to their progress in identifying and addressing problems that their computer systems may face in correctly processing date information as the year 2000 approaches and is reached. There can be no assurance that the Company's systems will address all such Year 2000 problems, that its current and ongoing efforts will identify all such problems in its own computer systems or those of its vendors or resellers in advance of their occurrence, or that the Company will be able to successfully remedy any problems that are discovered. The expenses of the Company's efforts to identify and address such problems have not been material. However, the expenses or liabilities to which the Company may become subject as a result of any such problems that may arise could have a material adverse effect on the Company's business, financial condition, and results of operations. In addition, the purchasing patterns of existing and potential customers may be affected by Year 2000 problems, which could cause fluctuations in the Company's sales volumes. Maintenance or modification costs have been and will continue to be expensed as incurred. The following information is incorporated by reference into Item 7A of the Form 10-K. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS The Company is exposed to changes in financial market conditions in the normal course of its business as a result of its selective use of bank debt as well as transacting in Canadian currency in connection with its Canadian operations. 7 - ------------------------------------------------------------------------------- The Company is exposed to changes in interest rates primarily as a result of its borrowing activities, which includes a revolving credit facility with a bank used to maintain liquidity and fund the Company's business operations. The nature and amount of the Company's debt may vary as a result of future business requirements, market conditions and other factors. The definitive extent of the Company's interest rate risk is not quantifiable or predictable because of the variability of future interest rates and business financing requirements, but the Company does not believe such risk is material. The Company does not currently use derivative instruments to adjust the Company's interest rate risk profile. The table below presents principal amounts and related weighted average rates by year of maturity for the Company's debt obligations at June 30, 1998:
1999 2000 2001 2002 2003 THEREAFTER TOTAL FAIR VALUE (IN THOUSANDS) ---- ----- ---- ---- ---- ---------- ----- ---------- Line of credit.......... -- 4,861 -- -- -- -- 4.861 4,861 Average interest rate (variable)............. -- 7.66% -- -- -- -- 7.66% Long-term debt.......... 22 24 26 29 31 1,587 1,719 1,870 Average interest rate (fixed)................ 9.19% 9.19% 9.19% 9.19% 9.19% 9.19% 9.19%
The Company is exposed to changes in foreign exchange rates in connection with its Canadian operations. It is the Company's policy to enter into foreign currency transactions only to the extent considered necessary to support its Canadian operations. The amount of the Company's cash deposits denominated in Canadian currency has not been, and is not expected to be, material. Furthermore, the Company has no capital expenditure or other purchase commitments denominated in any foreign currency. The Company does not utilize forward exchange contracts, currency options or other traditional hedging vehicles to adjust the Company's foreign exchange rate risk profile. The Company does not enter into foreign currency transactions for speculative purposes. The Company does not utilize financial instruments for trading or other speculative purposes, nor does it utilize leveraged financial instruments. On the basis of the fair value of the Company's market sensitive instruments at June 30, 1998, the Company does not consider the potential near-term losses in future earnings, fair values and cash flows from reasonable possible near-term changes in interest rates and exchange rates to be material. FORWARD LOOKING STATEMENTS Certain of the statements contained in this report to shareholders as well as in the Company's other filings with the Securities and Exchange Commission that are not historical facts are forward-looking statements subject to the safe harbor created by the Private Securities Litigation Reform Act of 1995. The Company cautions readers of this report that a number of important factors could cause the Company's activities and/or actual results in fiscal 1998 and beyond to differ materially from those expressed in any such forward-looking statements. These factors include, without limitation, the Company's dependence on vendors, product supply, senior management, centralized functions, and third-party shippers, the Company's ability to compete successfully in a highly competitive market and manage significant additions in personnel and increases in working capital, the Company's entry into new products markets in which it has no prior experience, the Company's susceptibility to quarterly fluctuations in net sales and operations results, the Company's ability to manage successfully price protection or stock rotation opportunities associated with inventory value decreases, and other factors described in other reports and documents filed by the Company with the Securities and Exchange Commission. The following information has been incorporated by reference into Item 8 of the Form 10-K. 8 CONSOLIDATED BALANCE SHEETS June 30, 1997 and 1998
ScanSource, Inc. 1997 1998 - -------------------------------------------------------------------------------- (In thousands) ASSETS Current assets Cash......................................................... $ 429 88 Receivables: Trade, less allowance for doubtful accounts of $1,227,000 and $2,045,000 at June 30, 1997 and 1998, respectively..... 11,864 28,198 Other....................................................... 732 1,524 ------- ------ 12,596 29,722 Inventories.................................................. 21,786 31,444 Prepaid expenses and other assets............................ 300 268 Deferred income taxes........................................ 1,565 2,381 ------- ------ Total current assets....................................... 36,676 63,903 ------- ------ Property and equipment: Land......................................................... -- 585 Building..................................................... -- 3,464 Furniture, fixtures and equipment............................ 2,626 3,975 ------- ------ 2,626 8,024 ------- ------ Less accumulated depreciation................................ (736) (1,533) ------- ------ 1,890 6,491 Intangible assets, net........................................ 788 1,532 Other assets.................................................. 914 186 ------- ------ Total assets............................................... $40,268 72,112 --------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of long-term debt............................ $ -- 22 Trade accounts payable....................................... 15,045 14,029 Accrued compensation......................................... 214 456 Accrued expenses and other liabilities....................... 664 1,242 Income taxes payable......................................... 257 -- ------- ------ Total current liabilities.................................. 16,180 15,749 ------- ------ Deferred income taxes......................................... 47 24 Long-term debt................................................ -- 1,697 Line of credit................................................ 5,391 4,861 ------- ------ Total liabilities.......................................... 21,618 22,331 ------- ------ Shareholders' equity: Preferred stock, no par value; 3,000,000 shares authorized, none issued................................................. -- -- Common stock, no par value; 10,000,000 shares authorized; 3,488,013 and 5,353,310 shares issued and outstanding at June 30, 1997 and 1998, respectively........................ 12,350 38,710 ------- ------ 12,350 38,710 Retained earnings 6,300 11,071 ------- ------ Total shareholders' equity................................. 18,650 49,781 ------- ------ Total liabilities and shareholders' equity................. $40,268 72,112 ---------------
See accompanying notes to financial statements. 9 CONSOLIDATED STATEMENTS OF INCOME Years ended June 30, 1996, 1997 and 1998
ScanSource, Inc. and Subsidiaries 1996 1997 1998 - -------------------------------------------------------------------------------- (In thousands, except per share data) Net sales.............................................. $56,383 99,839 182,795 Cost of goods sold..................................... 48,413 86,024 159,410 ------- ------ ------- Gross profit......................................... 7,970 13,815 23,385 Selling, general and administrative expenses........... 5,063 8,940 15,620 Amortization of intangibles............................ 83 81 113 ------- ------ ------- Total operating expenses............................. 5,146 9,021 15,733 ------- ------ ------- Operating income..................................... 2,824 4,794 7,652 Other income (expense): Gain from contract termination, net................... 200 -- -- Cost of business combinations......................... -- -- (305) Other income (expense), net........................... 75 (465) 160 ------- ------ ------- Total other income (expense)......................... 275 (465) (145) ------- ------ ------- Income before income taxes........................... 3,099 4,329 7,507 Income taxes........................................... 1,193 1,556 2,736 ------- ------ ------- Net income........................................... $ 1,906 2,773 4,771 ----------------------- Per share data: Basic Net income per share................................. $ .55 .80 .99 ----------------------- Weighted average shares outstanding.................. 3,482 3,481 4,833 ----------------------- Diluted Net income per share................................. $ .50 .75 .95 ----------------------- Weighted average shares outstanding.................. 3,799 3,704 5,035 -----------------------
See accompanying notes to financial statements. 10 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Years ended June 30, 1996, 1997 and 1998
Common Stock Common Subject to Put/ Retained ScanSource, Inc. and Subsidiaries Stock Call Option Earnings Total - ------------------------------------------------------------------------------- (In thousands) Balance at June 30, 1995............. $ 5,526 (750) 1,620 6,396 Issuance of stock pursuant to the exercise of warrants and the unit purchase price option, net of offering costs..................... 6,732 -- -- 6,732 Issue of stock due to exercise of stock options, net................. 552 -- -- 552 Exercise of call option............. -- 750 -- 750 Purchase of shares owned by Gates/FA........................... (875) -- -- (875) Capital contributions............... 43 -- -- 43 Net income.......................... -- -- 1,906 1,906 ------- ---- ------ ------ Balance at June 30, 1996............. 11,978 -- 3,526 15,504 Issuance of stock due to exercise of options, net....................... 32 -- -- 32 Tax benefit of deductible compensation arising from exercise of stock options................... 165 -- -- 165 Issuance of stock options........... 175 -- -- 175 Net income.......................... -- -- 2,774 2,774 ------- ---- ------ ------ Balance at June 30, 1997............. 12,350 -- 6,300 18,650 Issuance of common stock in public offering, net of offering costs.... 25,820 -- -- 25,820 Issuance of stock due to exercise of options, net....................... 165 -- -- 165 Tax benefit of deductible compensation arising from exercise of stock options................... 225 -- -- 225 Issuance of stock and stock options in business combinations........... 150 -- -- 150 Net income.......................... -- -- 4,771 4,771 ------- ---- ------ ------ Balance at June 30, 1998............. $38,710 -- 11,071 49,781 ----------------------------------------
See accompanying notes to financial statements. 11 CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended June 30, 1996, 1997 and 1998
ScanSource, Inc. and Subsidiaries 1996 1997 1998 - ------------------------------------------------------------------------------- (In thousands) Cash flows from operating activities: Net income.......................................... $ 1,906 2,773 4,771 Adjustments to reconcile net income to net cash used in operating activities: Depreciation....................................... 238 373 797 Amortization of intangible assets.................. 83 84 113 Deferred income taxes, net......................... (347) (543) (839) Deferred gain...................................... (200) -- -- Changes in operating assets and liabilities: Trade receivables................................. (3,608) (4,306) (14,881) Other receivables................................. (296) (201) (792) Inventories....................................... (11,411) (4,069) (7,549) Prepaid expenses and other assets................. (53) (198) 45 Due from Gates/FA................................. 750 -- -- Trade accounts payable............................ 5,260 6,408 (3,112) Accrued compensation.............................. 5 117 242 Accrued expenses and other liabilities............ 195 64 162 Income taxes payable.............................. (768) (118) (31) Other noncurrent assets........................... (39) (247) 98 ------- ------ ------- Net cash used in operating activities............ (8,285) 137 (20,976) ------- ------ ------- Cash flows from investing activities: Capital expenditures, net........................... (675) (1,064) (1,928) Purchase of building................................ -- -- (1,627) Cash paid in business combination................... -- -- (1,100) Payments for 1994 business purchase................. (202) -- -- ------- ------ ------- Net cash used in investing activities............ (877) (1,064) (4,655) ------- ------ ------- Cash flows from financing activities: Advances (payments) on line of credit, net.......... 2,579 1,612 (1,085) Cash proceeds from exercise of stock options, net... 594 32 165 Deferred offering costs............................. -- (390) -- Proceeds from stock offering, net of offering costs.............................................. -- -- 26,210 Repurchase of shares from Gates/FA.................. (875) -- -- Cash proceeds from exercise of warrants and the unit purchase option, net of offering costs............. 6,779 -- -- ------- ------ ------- Net cash provided by financing activities........ 9,077 1,254 25,290 ------- ------ ------- Increase (decrease) in cash...................... (85) 327 (341) Cash at beginning of year............................ 187 102 429 ------- ------ ------- Cash at end of year.................................. $ 102 429 88 ------------------------ Supplemental information: Interest paid....................................... $ 15 387 166 ------------------------ Income taxes paid................................... $ 2,309 1,762 3,054 ------------------------
See accompanying notes to financial statements. 12 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 1997 and 1998 (In thousands, except share and per share data) ScanSource, Inc. and Subsidiaries - ------------------------------------------------------------------------------- (1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization and Nature of Business ScanSource, Inc. ("Company") is a leading distributor of specialty technology products, including automatic identification, point of sale and telephony equipment. In February 1998, the Company merged with The CTI Authority, Inc. ("CTI") in a stock-for-stock transaction accounted for as a pooling-of-interest (see note 2). Accordingly, the consolidated financial statements for the periods prior to the combination have been restated to include the accounts and results of CTI. Consolidation Policy The consolidated financial statements include the accounts of ScanSource, Inc. and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. Revenue Recognition The Company records revenue when products are shipped. Concentration of Credit Risk Financial instruments which potentially expose the Company to concentrations of credit risk consist primarily of trade accounts receivable. The Company has not experienced significant losses related to receivables from individual cus- tomers or groups of customers in a particular industry or geographic area. As a result, management believes no additional credit risk beyond amounts pro- vided for estimated collection losses is inherent in the Company's accounts receivable. A majority of the Company's net revenues in 1996, 1997 and 1998 were received from the sale of products purchased from the Company's top ten vendors. Inventories Inventories are stated at the lower of cost (first-in, first-out method) or market. Long-Lived Assets Property and equipment are recorded at cost. Depreciation is computed using the straight-line method over estimated useful lives of 3-5 years for furni- ture and equipment, 40 years for the building and 15 years for building im- provements. Leasehold improvements are amortized over the shorter of the lease term or the estimated useful life. Maintenance, repairs and minor renewals are charged to expense as incurred. Additions, major renewals and betterments to property and equipment are capitalized. Intangible assets consist primarily of goodwill which is being amortized on a straight-line basis over fifteen years. Accumulated amortization was $306,000 and $419,000 at June 30, 1997 and 1998, respectively. The Company reviews its long-lived assets (property, plant and equipment, and related goodwill that arose from business combinations accounted for under the purchase method) for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. If the sum of the ex- pected cash flows, undiscounted and without interest, is less than the carry- ing amount of the asset, an impairment loss is recognized as the amount by which the carrying amount of the asset exceeds its fair value. Cash Management System Under the Company's cash management system, disbursements cleared by the bank are reimbursed on a daily basis from the line of credit. As a result, checks issued but not yet presented to the bank are not considered reductions of cash or accounts payable. Included in accounts payable are $966,000 and $817,000 at June 30, 1997 and 1998, respectively, for which checks are outstanding. Vendor Programs Funds received from vendors for price protection, product rebates, marketing or training programs are recorded net of direct costs as adjustments to prod- uct costs, or a reduction of selling, general and administrative expenses ac- cording to the nature of the program. The Company does not provide warranty coverage of its product sales. However, to maintain customer relations, the Company facilitates vendor warranty poli- cies by accepting for exchange, with the Company's prior approval, most defec- tive products within 30 days of invoicing. Defective products received by the Company are subsequently returned to the vendor for credit or replacement. Income Taxes The Company records income taxes under the asset and liability method whereby deferred tax assets and liabilities are recognized for the future tax conse- quences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. De- ferred tax assets and liabilities are measured using enacted tax rates ex- pected to apply to taxable income in the years in which those temporary dif- ferences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. 13 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued ScanSource, Inc. and Subsidiaries - ------------------------------------------------------------------------------- Accounting for Stock-Based Compensation Statement of Financial Accounting Standards No. 123 allows an entity to con- tinue to apply the provisions of APB Opinion No. 25 and provide pro forma net income and, if earnings per share is presented, pro forma earnings per share disclosures for employee stock options granted in fiscal years beginning after December 15, 1994 and future years as if the fair-value-based method defined in SFAS No. 123 had been applied. The Company has elected to continue to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure pro- visions of SFAS No. 123. Fair Value of Financial Instruments The fair value of financial instruments is the amount at which the instrument could be exchanged in a current transaction between willing parties. The carrying value of financial instruments such as cash, accounts receiv- able, and accounts payable and accrued liabilities approximated their fair values, based upon the short maturities of these instruments. The carrying amounts of debt issued pursuant to the bank credit agreement ap- proximates fair value because interest rates on these instruments approximate current market interest rates. The fair value of long-term debt is estimated by discounting the scheduled payment streams to present value based on current rates for similar instruments. The fair value of the long-term debt at June 30, 1998 based on the Company's incremental borrowing rate of 7.66% was ap- proximately $1,870,000. Net Income Per Share During 1998, the Company implemented Statement of Financial Accounting Stan- dards No. 128, "Earnings Per Share" (SFAS No. 128). Basic net income per share is computed by dividing net income by the weighted average number of common shares outstanding. Diluted net income per share is computed by dividing net income by the weighted average number of common and potential common shares outstanding. Diluted weighted average common and potential common shares in- clude common shares and stock options using the treasury stock method. Basic and diluted weighted average shares for 1996, 1997 and 1998 differed only by the effect of dilutive stock options. There were no differences between the net income used to calculate basic and diluted net income per share for 1996, 1997 and 1998. Recent Accounting Pronouncements In June 1997, the FASB issued Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information (SFAS No. 131). SFAS No. 131 requires that an enterprise disclose certain in- formation about operating segments and is effective for financial statements for periods beginning after December 15, 1997. The Company will adopt SFAS No. 131 for the year ending June 30, 1999. In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS No. 133). SFAS No. 133 requires that an enterprise recognize all derivatives as either assets or liabilities in the statement of financial position and meas- ure those instruments at fair value. SFAS No. 133 is effective for all fiscal quarters and all, if any, fiscal years beginning after June 15, 1999. The Com- pany is currently assessing the effects, if any, of SFAS No. 133 on its finan- cial position. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Ac- tual results could differ from those estimates. (2) ACQUISITIONS In February 1998, the Company issued 238,830 shares of its common stock in exchange for all outstanding equity interests of CTI, a distributor of teleph- ony products. The transaction has been accounted for as a pooling-of-interests business combination, and, accordingly, the consolidated financial statements for the periods prior to the combination have been restated to include the ac- counts and results of CTI. The results of operations previously reported by the separate enterprises and the combined amounts presented in the accompany- ing consolidated financial statements are summarized below.
SIX MONTHS Years ended June 30, ENDED ---------------------- DECEMBER 31, 1996 1997 1998 ----------- ---------- ------------ Net sales The Company................................ $55,670,000 93,922,000 74,572,000 CTI........................................ 713,000 5,916,000 5,038,000 ----------- ---------- ---------- Combined.................................. $56,383,000 99,838,000 79,610,000 ----------- ---------- ---------- Net income The Company................................ 1,858,000 2,540,000 2,059,000 CTI........................................ 48,000 233,000 98,000 ----------- ---------- ---------- $ 1,906,000 2,773,000 2,157,000 ----------- ---------- ----------
14 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 1997 and 1998 ScanScource, Inc. and Subsidiaries - ------------------------------------------------------------------------------- In September 1997, the Company acquired a distributor of business telephones for cash of $1.1 million and 20,000 common stock options valued at $92,000. In January 1998, the Company issued 220,513 shares of common stock in exchange for all outstanding equity interests of a point-of-sale equipment distributor in an immaterial pooling-of-interest business combination, in which the Company recorded equity of $58,000. (3)LINE OF CREDIT In November 1996, the Company closed a line of credit agreement with a bank providing for maximum borrowings of $15 million, based upon 80% of eligible accounts receivable and 40% of eligible inventory at the 30 day LIBOR rate of interest plus a rate varying from 2.00% to 2.65% tied to the Company's debt to net worth ratio ranging from 1:1 to 2:1. The effective interest rate was 7.66% at June 30, 1998 and the outstanding balance on the line was $4.9 million on a loan base which exceeded $15 million, leaving $10.1 million available at June 30, 1998. The revolving credit facility is collateralized by accounts receivable and non-IBM inventory. The agreement contains certain financial covenants including minimum net worth and capital expenditure requirements and a maximum debt to tangible net worth ratio. The Company was in compliance with the various covenants or had obtained waivers of at June 30, 1998. The Company has a commitment from the bank, which it intends to exercise, to renew the line of credit under terms similar to its existing agreement for amounts up to $35 to October 2001. (4)LONG-TERM DEBT In June 1998, the Company assumed a nonrecourse loan in the amount of $1,719,000, in connection with the acquisition of its office building. This transaction is a non-cash item for statement of cash flow purposes. The fixed interest rate was 9.19% at June 30, 1998 with a remaining term of 8.25 years. The loan is collateralized by the land and building acquired. Scheduled maturity of long-term debt at June 30, 1998 is as follows: 1999....................... $ 22,000 2000....................... 24,000 2001....................... 26,000 2002....................... 29,000 2003....................... 31,000 Thereafter................. 1,587,000 ---------- Total.................... $1,719,000 ----------
(5)SHAREHOLDERS' EQUITY, STOCK OPTIONS, WARRANTS AND EQUITY TRANSACTIONS (a) Stock Option Plans The Company has three option plans: . The 1993 Incentive Stock Option Plan reserved 280,000 shares of common stock for issuance to key employees. The plan provides for three-year vesting of the options at a rate of 33% annually. The options are exercisable over 10 years, and options are not to be granted at less than the fair market value of the underlying shares at the date of grant. . The Directors' Stock Option Plan under which 65,000 shares of common stock have been reserved for issuance to non-employee directors, provides for vesting six months after grant date and an option term of five years. Options under this plan are to be granted at fair market value of the underlying shares on the date of grant. . The 1997 Stock Incentive Plan reserved 200,000 shares of stock for issuance to officers, directors, employees, consultants or advisors to the Company. This plan provides for incentive stock options, nonqualified options, stock appreciation rights and restricted stock awards to be granted at exercise prices to be determined by the Compensation Committee of the Board of Directors. The term of each option will be 10 years from the grant date. A summary of stock option activity for the years ended June 30, 1997 and 1998 is as follows:
1997 1998 ----------------- ----------------- Weighted WEIGHTED Average AVERAGE Exercise EXERCISE Shares Price SHARES PRICE ------- -------- ------- -------- Stock options outstanding: Beginning of year.......................... 290,167 $5.13 566,583 $9.96 Granted.................................... 300,750 14.35 237,750 18.23 Exercised.................................. (14,000) 3.11 (46,183) 4.31 Terminated................................. (10,334) 11.75 (26,667) 14.88 ------- ------- End of year................................ 566,583 9.96 731,483 14.51 ------- ------- Exercisable, end of year.................... 357,000 $9.28 412,844 9.81 ------- -------
15 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued ScanSource, Inc. and Subsidiaries - ------------------------------------------------------------------------------- The following table summarizes information about stock options outstanding under the plans at June 30, 1998:
Options Outstanding Options Exercisable ------------------------------------------------- -------------------------------- Weighted Average Weighted Range of Remaining Average Exercise Number Contractual Number Exercise Prices Outstanding Life Exercisable Price ----------- ----------- ----------- ----------- -------- $1.50-3.75 122,600 .5 years 122,600 2.01 8.00 8,600 6 years 8,600 8.00 8.63-11.88 25,000 7.2 years 21,667 9.37 8.88 48,617 7 years 48,617 8.88 10.75-12.50 52,666 8 years 19,277 11.20 13.50 25,000 3.5 years 25,000 13.50 14.13-16.50 211,250 8.5 years 167,083 15.25 16.63-21.38 207,750 9.5 years -- -- 18.50 30,000 10 years -- -- ------- ------- 731,483 412,844 ------- -------
(b) Other Equity Transactions In connection with the Company's initial public offering of units, the Company sold a unit purchase option (UPO) for the right to purchase up to 100,000 units at $6 per unit. The UPO became exercisable beginning March 1995 and 58,000 units were exercised in September 1995 providing the Company approximately $432,000. In January 1998 the Company issued 60,000 shares of its common stock in a cashless exercise by the holders of the remaining 42,000 units of the underwriters Unit Purchase Option. In September 1995, the Company redeemed its then outstanding common stock purchase warrants. Prior to the redemption date, substantially all of the outstanding warrants were exercised, generating proceeds of $6.3 million net of estimated costs of approximately $100,000. In May 1997, the Company issued options immediately exercisable to purchase 25,000 shares of common stock at the then current market price of $13.50 per share, extending to December 2003, to third-parties. The Company recorded the transaction at the fair value of $7.00 per share, or $175,000, computed using the Black Scholes option-pricing model. In September 1997, the Company issued options immediately exercisable to purchase 20,000 shares of common stock at the then current market price of $16.125 per share, extending to September 2000, as partial consideration in a purchase business combination. The Company recorded the transaction at the fair value of $4.60 per share, or $92,000, computed using the Black Scholes option-pricing model. In October 1997, the Company completed a public offering of 1,538,600 shares of common stock at $18.25 per share. Proceeds to the Company, after approximately $578,000 of offering expenses and a $1.095 per share underwriting discount, were approximately $25.8 million. $390,000 of the offering expenses were included in other noncurrent assets at June 30, 1997. (c) Fair Value and Pro Forma Information The per share weighted-average fair value of stock options granted during the years ended June 30, 1997 and 1998 was $12.35 and $10.22 on the date of grant using the Black Scholes option-pricing model with the following weighted- average assumptions: 1997--expected dividend yield 0%, expected volatility of 76.8%, risk-free interest rate of 6.43%, and an expected life of 10 years; 1998--expected dividend yield of 0%, expected volatility of 32.1%, risk-free interest rate of 5.71%, and an expected life of 10 years. The Company applies APB Opinion No. 25 in accounting for its stock options and accordingly, no compensation cost has been recognized for its stock options in the financial statements. Had the Company determined compensation cost based on the fair value at the grant date for stock options in its Plan under SFAS No. 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below:
1997 1998 ---------- --------- Net income As Reported $2,773,000 4,770,000 ---------- --------- Pro forma 2,275,000 4,094,000 ---------- --------- Earnings per share Basic As Reported $ .80 .99 ---------- --------- Pro forma .65 .85 ---------- --------- Diluted As Reported $ .75 .95 ---------- --------- Pro forma $ .61 .81 ---------- ---------
Pro forma net income reflects only options granted during the years ended June 30, 1996, 1997 and 1998. Therefore, the full impact of calculating compensation cost for stock options under SFAS No. 123 is not reflected in net income effected above because compensation cost is reflected over the options vesting period of 3 years for options issued under the incentive stock option plan and compensation cost for options granted prior to July 1, 1995 is not considered. (6)RELATED PARTY TRANSACTIONS (a) At June 30, 1996 and 1997 the Company had outstanding loans to an officer totaling $40,000 16 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 1997 and 1998 ScanSource, Inc. and Subsidiaries - ------------------------------------------------------------------------------- and $183,000, respectively, with interest of 7.25% and 8.5%, respectively. The remaining balance under these loans was repaid in 1998. During 1998, the Company loaned an officer $50,000 at 8.5% interest, with interest only payments for one year. The principal balance is due in April 1999. (b) In July 1995, the Company was granted 19% ownership of Transition Marketing (Transition), in exchange for the Company's commitment to use Transition as its contract provider of marketing services. A Company officer and director was a member of the Board of Directors of Transition. The Company invested $119,000 in Transition in September 1996 to increase its ownership to 42% at June 30, 1997. In November 1997, the Company purchased the remaining shares of Transition for $125,000. (c) From December 1992 to September 1994, the Company operated under an agreement with Gates/FA Distributing, Inc. ("Gates/FA"). An officer of Gates/FA was a director of the Company. The chief executive officer and several directors and shareholders of the Company were also directors and shareholders of Gates/FA. In December 1992, Gates/FA agreed to a non-compete contract in the data collection or bar code industry, and in return, received an option to purchase 250,000 shares of the Company's common stock which it exercised in December 1993. These shares were repurchased by the Company in March 1996. Under terms of an Agreement to Terminate Distribution Services, Gates/FA agreed to a more limited covenant not to compete and agreed to pay the Company $1.4 million. Of this amount, $650,000 was received in September 1994 and the remaining $750,000 was collected by April 1996 as described below. The Company recognized the $1.4 million as other income in the statement of income ratably over the term of the noncompete agreement including $200,000 in fiscal 1996. Under terms of the termination agreement, the Company had an option to call Gates/FA's shares of the Company's stock at $3.50 per share, which it exercised in March 1996. The Company collected the remaining $750,000 contract termination amount in March 1996 and used it to pay a portion of the $875,000 call price of the repurchased shares. (7)INCOME TAXES Income tax expense attributable to income from continuing operations consists of:
Current Deferred Total ---------- --------- ---------- Year ended June 30, 1996: U.S. Federal................................. $1,382,000 $(292,000) $1,090,000 State and local.............................. 158,000 (55,000) 103,000 ---------- --------- ---------- $1,540,000 $(347,000) $1,193,000 ---------- --------- ---------- Year ended June 30, 1997: U.S. Federal................................. $1,874,000 $(456,000) $1,418,000 State and local.............................. 225,000 (87,000) 138,000 ---------- --------- ---------- $2,099,000 $(543,000) $1,556,000 ---------- --------- ---------- Year ended June 30, 1998: U.S. Federal................................. $3,150,000 $(705,000) $2,445,000 State and local.............................. 425,000 (134,000) 291,000 ---------- --------- ---------- $3,575,000 $(839,000) $2,736,000 ---------- --------- ----------
Income tax expense attributable to income before income taxes for the years ended June 30, 1998, 1997 and 1996, respectively differed from the amount computed by applying the U.S. federal income tax rate of 34 percent to pretax income as a result of the following:
Year ended June 30, -------------------------------- 1996 1997 1998 ---------- --------- --------- Computed "expected" tax expense.............. $1,054,000 1,472,000 2,552,000 Increase (decrease) in income taxes resulting from: Additional provision for income taxes....... 84,000 66,000 87,000 State and local income taxes, net of Federal income tax expense......................... 68,000 91,000 192,000 Other....................................... 4,000 6,000 8,000 Income tax related to earnings of subchapter S-Corporation.............................. (17,000) (79,000) (103,000) ---------- --------- --------- $1,193,000 1,556,000 2,736,000 ---------- --------- ---------
17 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued ScanSource, Inc. and Subsidiaries - -------------------------------------------------------------------------------
June 30, --------------------- 1997 1998 ---------- --------- Deferred tax assets: Valuation and other reserves........................... $1,286,000 2,047,000 Inventory, principally due to differences in capitalization........................................ 279,000 334,000 Intangibles, principally due to differences in amortization.......................................... 25,000 28,000 ---------- --------- 1,590,000 2,409,000 Deferred tax liability: Plant and equipment, principally due to differences in depreciation.......................................... (72,000) (52,000) ---------- --------- Net deferred tax asset................................. $1,518,000 2,357,000 ---------- ---------
For the years ended June 30, 1997 and 1998 no valuation allowance was provided. Management believes that a valuation allowance is not necessary based upon the level of historical taxable income and the projections for future taxable income over the periods during which the temporary differences are deductible. (8)OPERATING LEASES The Company leases office space under noncancellable operating leases which expire through January 2003. The Company also leases a portion of its building to third-parties under noncancellable operating leases which expire through March 2004. Future minimum lease payments and revenues are as follows:
Payments Revenue ---------- ------- 1999.............. $ 623,000 337,000 2000.............. 507,000 246,000 2001.............. 253,000 65,000 2002.............. 90,000 15,000 2003.............. 52,000 15,000 2004.............. -- 12,000 ---------- ------- $1,525,000 690,000 ---------- -------
Lease expense was approximately $74,000, $233,000 and $680,000 for the years ended June 30, 1996, 1997 and 1998, respectively. There were no lease revenues for the years ended June 30, 1996, 1997, and 1998. (9)EMPLOYEE BENEFIT PLAN Effective October 22, 1993, the Company established a defined contribution plan under Section 401(k) of the Internal Revenue Code. This plan covers all employees meeting certain eligibility requirements. For the years ended June 30, 1996, 1997 and 1998 the Company provided a matching contribution of $18,000, $25,000 and $54,000, respectively, which was equal to one-half of each participant's contribution, up to a maximum matching contribution of $500 per participant. The Company determines its matching contributions annually and can make discretionary contributions in addition to matching contributions. Employer contributions are vested over a period of 3 to 5 years. 18 INDEPENDENT AUDITORS' REPORT The Board of Directors ScanSource, Inc. We have audited the accompanying consolidated balance sheets of ScanSource, Inc. and subsidiaries as of June 30, 1997 and 1998 and the related consolidated statements of income, shareholders' equity and cash flows for each of the years in the three-year period ended June 30, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of ScanSource, Inc. and subsidiaries at June 30, 1997 and 1998 and the results of their operations and their cash flows for each of the years in the three-year period ended June 30, 1998, in conformity with generally accepted accounting principles. Greenville, South Carolina KPMG Peat Marwick LLP August 7, 1998 19 EX-27 6 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BALANCE SHEET & INCOME STATEMENT FOR THE PERIOD ENDED JUNE 30, 1998. 1,000 12-MOS JUN-30-1998 JUL-01-1997 JUN-30-1998 88 0 28,198 2,045 31,444 63,903 8,024 1,533 72,112 15,749 0 0 0 38,710 0 72,112 182,795 182,795 159,410 15,733 113 0 0 7,507 2,736 4,771 0 0 0 4,771 .99 .95
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