Form 10-Q

-----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, UKo0fa1mz8T7ZXGSMJrLXbKP9j2haoIaWM3L8iQBqk8RMnj+tXqPUZzaPKvElRO2 oHbDJJnPDh8UZROFuMO1mg== 0001193125-04-188072.txt : 20041108 0001193125-04-188072.hdr.sgml : 20041108 20041105180208 ACCESSION NUMBER: 0001193125-04-188072 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20040930 FILED AS OF DATE: 20041108 DATE AS OF CHANGE: 20041105 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SCANSOURCE INC CENTRAL INDEX KEY: 0000918965 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-COMPUTER & PERIPHERAL EQUIPMENT & SOFTWARE [5045] IRS NUMBER: 570965380 STATE OF INCORPORATION: SC FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-26926 FILM NUMBER: 041123839 BUSINESS ADDRESS: STREET 1: 6 LOGUE COURT STE G CITY: GREENVILLE STATE: SC ZIP: 29615 BUSINESS PHONE: 8032882432 MAIL ADDRESS: STREET 1: 6 LOGUE COURT STE G CITY: GREENVILLE STATE: SC ZIP: 29615 10-Q 1 d10q.htm FORM 10-Q Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x	Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934

for the Quarterly Period Ended September 30, 2004

¨	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: 000-26926

SCANSOURCE, INC.

(Exact name of registrant as specified in its charter)


SOUTH CAROLINA		57-0965380
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

6 Logue Court, Greenville, South Carolina		29615
(Address of principal executive offices)		(Zip Code)

(864) 288-2432

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in rule 12b-2 of the Exchange Act). Yes x No ¨

As of November 1, 2004, 12,618,792 shares of the registrant’s common stock, no par value, were outstanding.

SCANSOURCE, INC.

INDEX TO FORM 10-Q

September 30, 2004


			Page No.
PART I.	FINANCIAL INFORMATION

	Item 1.	Financial Statements (Unaudited):

		Condensed Consolidated Balance Sheets as of September 30, 2004 and June 30, 2004	3

		Condensed Consolidated Income Statements for the Quarter Ended September 30, 2004 and 2003	5

		Condensed Consolidated Statements of Cash Flows for the Three Months Ended September 30, 2004 and 2003	7

		Notes to Condensed Consolidated Financial Statements	8

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	29

	Item 4.	Controls and Procedures	30

PART II.	OTHER INFORMATION

	Item 6.	Exhibits	31

SIGNATURES			32

Cautionary Statements

Certain of the statements contained in this Form 10-Q, as well as in the Company’s other filings with the Securities and Exchange Commission (“SEC”), 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 2004 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 to manage significant additions in personnel and increases in working capital; the Company’s ability to collect outstanding accounts receivable; the Company’s entry into new product markets in which it has no prior experience; the Company’s susceptibility to quarterly fluctuations in net sales and results of operations; the Company’s ability to manage successfully pricing or stock rotation opportunities associated with inventory value decreases; other factors such as narrow profit margins, inventory risks due to shifts in market demand, dependence on information systems, credit exposure due to the deterioration in the financial condition of our customers, a downturn in the general economy, the inability to obtain required capital, potential adverse effects of acquisitions, fluctuations in interest rates, foreign currency exchange rates and exposure to foreign markets [including the imposition of governmental controls, currency devaluations, export license requirements, restrictions on the export of certain technology, political instability, trade restrictions, tariff changes, difficulties in staffing and managing international operations, changes in the interpretation and enforcement of laws (in particular related to items such as duty and taxation), longer collection periods and the impact of local economic conditions and practices], the impact of changes in income tax legislation, acts of war or terrorism, exposure to natural disasters, potential impact of labor strikes, volatility of common stock, and the accuracy of forecast data; and other factors described herein and in other reports and documents filed by the Company with the SEC, including Exhibit 99.1 to the Company’s Form 10-K for the year ended June 30, 2004.

Additional discussion of these and other factors affecting our business and prospects is contained in our periodic filings with the SEC, copies of which can be obtained at the Investor Relations section of our website at www.scansource.com. We provide our annual and quarterly reports free of charge on www.scansource.com, as soon as reasonably practicable after they are electronically filed, or furnished to, the SEC. We provide a link to all SEC filings where current reports on Form 8-K and any amendments to previously filed reports may be accessed, free of charge.

PART 1. FINANCIAL INFORMATION

Item 1. Financial Statements

SCANSOURCE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(In thousands)


	September 30, 2004		June 30, 2004*
Assets

Current assets:
Cash	$	2,438	$	1,047
Trade and notes receivable:
Trade, less allowance of $11,708 at September 30, 2004 and $9,725 at June 30, 2004		191,420		175,417
Other		3,118		3,919
Inventories		188,398		182,868
Prepaid expenses and other assets		1,755		1,670
Deferred income taxes		8,577		8,440

Total current assets		395,706		373,361

Property and equipment, net		22,756		23,663
Goodwill		10,258		9,978
Other assets, including identifiable intangible assets		6,503		6,190

Total assets	$	435,223	$	413,192

*	Derived from audited financial statements at June 30, 2004.

See notes to condensed consolidated financial statements (unaudited).

SCANSOURCE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(In thousands, except for share information)

(Continued)


	September 30, 2004		June 30, 2004*
Liabilities and Shareholders’ Equity

Current liabilities:
Current portion of long-term debt	$	5,556	$	854
Trade accounts payable		181,741		167,053
Accrued expenses and other liabilities		12,146		14,803
Income taxes payable		1,069		2,555

Total current liabilities		200,512		185,265

Deferred income taxes		1,725		1,058
Long-term debt		1,673		6,584
Borrowings under revolving credit facility		32,806		32,569
Other long-term liabilities		90		—

Total liabilities		236,806		225,476

Minority interest		831		1,072
Commitments and contingencies

Shareholders’ equity:
Preferred stock, no par value; 3,000,000 shares authorized, none issued		—		—
Common stock, no par value; 25,000,000 shares authorized, 12,618,292 and 12,559,689 shares issued and outstanding at September 30, 2004 and June 30, 2004, respectively		63,888		61,856
Retained earnings		130,202		121,288
Accumulated other comprehensive income - equity adjustment from foreign currency translation		3,496		3,500

Total shareholders’ equity		197,586		186,644

Total liabilities and shareholders’ equity	$	435,223	$	413,192

*	Derived from audited financial statements at June 30, 2004.

See notes to condensed consolidated financial statements (unaudited).

SCANSOURCE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED INCOME STATEMENTS (UNAUDITED)

(In thousands)


	Quarter ended September 30,
	2004			2003
Net sales	$	362,709		$	276,474
Cost of goods sold		325,727			245,630

Gross profit		36,982			30,844

Operating expenses:
Selling, general and administrative expenses		22,312			21,159

Operating income		14,670			9,685

Other expense (income):
Interest expense		413			343
Interest income		(216	)		(161	)
Other, net		47			(166	)

Total other expense		244			16

Income before income taxes and minority interest		14,426			9,669

Provision for income taxes		5,482			3,589

Income before minority interest		8,944			6,080

Minority interest in income of consolidated subsidiaries, net of income taxes of ($4) and $0, respectively,		30			—

Net income	$	8,914		$	6,080

See notes to condensed consolidated financial statements (unaudited).

SCANSOURCE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED INCOME STATEMENTS (UNAUDITED)

(In thousands, except per share data)

(Continued)


	Quarter ended September 30,
	2004		2003
Per share data:

Net income per common share, basic	$	0.71	$	0.50

Weighted-average shares outstanding, basic		12,580		12,265

Net income per common share, assuming dilution	$	0.68	$	0.48

Weighted-average shares outstanding, assuming dilution		13,053		12,681

See notes to condensed consolidated financial statements (unaudited).

SCANSOURCE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(In thousands)


	Three Months Ended September 30,
	2004			2003
Cash flows from operating activities:
Net income	$	8,914		$	6,080
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation		1,219			1,218
Amortization of intangible assets		156			52
Allowance for accounts and notes receivable		1,966			386
Impairment of capitalized software		30			—
Deferred income tax expense		527			—
Tax benefit of stock option exercises		1,098			480
Minority interest in income of subsidiaries		30			—
Changes in operating assets and liabilities, net of acquisitions:
Trade and notes receivables		(17,833	)		(10,306	)
Other receivables		802			1,841
Inventories		(5,291	)		(3,973	)
Prepaid expenses and other assets		(79	)		269
Other noncurrent assets		69			42
Trade accounts payable		14,099			(1,539	)
Accrued expenses and other liabilities		(2,579	)		(1,452	)
Income taxes payable		(1,503	)		993

Net cash provided by (used in) operating activities		1,625			(5,909	)

Cash flows used in investing activities:
Capital expenditures		(336	)		(652	)
Cash paid for business acquisitions		(518	)		(100	)

Net cash used in investing activities		(854	)		(752	)

Cash flows from financing activities:
(Payments) advances on revolving credit, net		(110	)		3,996
Exercise of stock options		934			1,227
Repayments of long-term debt borrowings		(209	)		(221	)

Net cash provided by financing activities		615			5,002

Effect of exchange rate changes on cash		5			333

Increase (decrease) in cash		1,391			(1,326	)
Cash at beginning of period		1,047			2,565

Cash at end of period	$	2,438		$	1,239

See notes to condensed consolidated financial statements (unaudited).

SCANSOURCE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(1) Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of ScanSource, Inc. (the “Company”) have been prepared by the Company’s management in accordance with generally accepted accounting principles for interim financial information and applicable rules and regulations of the Securities Exchange Act of 1934, as amended. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles in the United States for annual financial statements. The unaudited condensed consolidated financial statements included herein contain all adjustments (consisting of normal recurring adjustments) which are, in the opinion of management, necessary to present fairly the financial position as of September 30, 2004 and June 30, 2004, the results of operations for the quarters ended September 30, 2004 and 2003 and statement of cash flows for the quarters ended September 30, 2004 and 2003. The results of operations for the quarters ended September 30, 2004 and 2003 are not necessarily indicative of the results to be expected for a full year. These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2004.

(2) Business Description

The Company is a leading distributor of specialty technology products, providing value-added distribution sales to resellers in the specialty technology markets. The Company has two geographic distribution segments: one serving North America from the Memphis distribution center, and an international segment currently serving Latin America (including Mexico) and Europe. The North American distribution segment markets automatic identification and data capture (“AIDC”) and point-of-sale (“POS”) products through its ScanSource sales unit; voice, data and converged communications equipment through its Catalyst Telecom sales unit; voice, data and converged communications products through its Paracon sales unit; and electronic security products through its ScanSource Security Distribution unit. The international distribution segment markets AIDC and POS products through its ScanSource sales unit.

3) Summary of Significant Accounting Policies and Accounting Standards Recently Issued

Consolidation Policy

The consolidated financial statements include the accounts of the Company and all wholly-owned and majority-owned subsidiaries. All significant inter-company accounts and transactions have been eliminated.

Minority Interest

Minority interest represents that portion of the net equity of majority-owned subsidiaries of the Company held by minority shareholders. The minority shareholders’ share of the subsidiaries’ income or loss is listed separately in the Consolidated Income Statements. Effective July 1, 2004, the Company acquired an additional 12% of Outsourcing Unlimited, Inc. (“OUI”) and an additional 8% of Netpoint International, Inc. (“Netpoint”). The Company now owns 88% of OUI, and 76% of Netpoint.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis management evaluates its estimates, including those related to the allowance for uncollectible accounts receivable and inventory reserves to reduce inventories to the lower of cost or market. Management bases its estimates on historical experience and on various other assumptions that management believes to be reasonable under the circumstances, the results of which form a basis for making judgments about the carrying value of assets and liabilities that are not readily available from other sources. Actual results may differ from these estimates under different assumptions or conditions; however, management believes that its estimates, including those for the above described items, are reasonable and that the actual results will not vary significantly from the estimated amounts.

SCANSOURCE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The following significant accounting policies relate to the more significant judgments and estimates used in the preparation of the consolidated financial statements:

(a) Allowances for Accounts Receivable

The Company maintains an allowance for uncollectible accounts receivable for estimated losses resulting from customers’ failure to make payments on accounts receivable due to the Company. Management determines the estimate of the allowance for uncollectible accounts receivable considering a number of factors, including: (1) historical experience, (2) aging of the accounts receivable and (3) specific information obtained by the Company on the financial condition and the current credit worthiness of its customers. If the financial condition of the Company’s customers were to deteriorate and reduce the ability of the Company’s customers to make payments on their accounts, the Company may be required to increase its allowance by recording additional bad debt expense. Likewise, should the financial condition of the Company’s customers improve and result in payments or settlements of previously reserved amounts, the Company may be required to record a reduction in bad debt expense to reverse the recorded allowance. In addition, the Company maintains an allowance for credits to customers that will be applied against future purchases.

(b) Inventory Reserves

Management determines the inventory reserves required to reduce inventories to the lower of cost or market based principally on the effects of technological changes, quantities of goods on hand, and other factors. An estimate is made of the market value, less costs to dispose, of products whose value is determined to be impaired. If these products are ultimately sold at less than estimated amounts, additional reserves may be required. Likewise, if these products are sold for more than the estimated amounts, reserves may be reduced.

Cash and Cash Equivalents

The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. Book overdrafts of $25,030,000 and $8,953,000 as of September 30, 2004 and June 30, 2004, respectively, are included in accounts payable.

Derivative Financial Instruments

The Company’s foreign currency exposure results from selling to customers internationally in several foreign currencies. In addition, the Company has foreign currency risk related to debt that is denominated in currencies other than the U.S. Dollar. The Company may reduce its exposure to fluctuations in foreign exchange rates by creating offsetting positions through the use of derivative financial instruments. The market risk related to the foreign exchange agreements is offset by changes in the valuation of the underlying items hedged. The Company currently does not use derivative financial instruments for trading or speculative purposes, nor is the Company a party to leveraged derivatives.

Derivative financial instruments are accounted for on an accrual basis with gains and losses on these contracts recorded in income in the period in which their value changes. These contracts are generally for a duration of 90 days or less. The Company has elected not to designate its foreign currency contracts as hedging instruments. They are, therefore, marked to market with changes in their value recorded in the Consolidated Income Statement each period. The underlying exposures are denominated primarily in British Pounds, Euros, and Canadian Dollars. Summarized financial information related to these derivative contracts and changes in the underlying value of the foreign currency exposures follows:


	Quarter ended September 30,
	2004			2003
Foreign exchange derivative contract losses, net of gains	$	(188,000	)	$	—
Foreign currency transactional and remeasurement gains, net of losses		153,000			222,000

Net foreign currency transactional and remeasurement (losses) gains	$	(35,000	)	$	222,000

SCANSOURCE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The Company had no currency forward contracts outstanding as of September 30, 2004. At June 30, 2004, the Company had one currency forward contract outstanding with a net liability under this contract of $21,000 which was included in accrued expenses and other liabilities. The following table provides information about the outstanding foreign currency derivative financial instrument as of June 30, 2004:


	Notional Amount		Weighted Average Contract Rate	Estimated Fair Market Value
June 30, 2004
US Dollar functional currency
Forward contracts - purchase US Dollar, sell Euro	$	4,848,000	1.2120	$	(21,000	)

The notional amount of forward exchange contracts is the amount of foreign currency to be bought or sold at maturity. Notional amounts are indicative of the extent of the Company’s involvement in the various types and uses of derivative financial instruments and are not a measure of the Company’s exposure to credit or market risks through its use of derivatives. The estimated fair value of derivative financial instruments represents the amount required to enter into similar offsetting contracts with similar remaining maturities based on quoted market prices.

Inventories

Inventories (consisting of AIDC, POS, business phone, converged communications equipment, and electronic security system products) are stated at the lower of cost (first-in, first-out method) or market.

Vendor Programs

Funds received from vendors for marketing programs and product rebates have been accounted for as a reduction of selling, general and administrative expenses (“SG&A”) or product cost according to the nature of the program, in accordance with Emerging Issues Task Force (“EITF”) No. 02-16, Accounting for Cash Consideration Received from a Vendor.

Product Warranty

The Company’s vendors generally warrant the products distributed by the Company and allow the Company to return defective products, including those that have been returned to the Company by its customers. The Company does not independently warrant the products it distributes. However, to maintain customer relations, the Company facilitates vendor warranty policies by accepting for exchange, with the Company’s prior approval, most defective products within 30 days of invoicing.

Long-Lived Assets

Property and equipment are recorded at cost. Depreciation is computed using the straight-line method over estimated useful lives of 3 to 5 years for furniture and equipment, 3 to 5 years for computer software, 40 years for buildings and 15 years for building improvements. Leasehold improvements are amortized over the shorter of the lease term or the estimated useful life. Maintenance, repairs and minor renewals are charged to expense as incurred. Additions, major renewals and betterments to property and equipment are capitalized.

SCANSOURCE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For long-lived assets other than goodwill, if the sum of the expected cash flows, undiscounted and without interest, is less than the carrying amount of the asset, an impairment loss is recognized as the amount by which the carrying amount of the asset exceeds its fair value.

The Company reviews its long-lived assets for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable or may be impaired. The Company recognized charges of $30,000 and $0 for the quarters ended September 30, 2004 and September 30, 2003, respectively, in operating expenses for the impairment of certain capitalized software for the North American distribution segment. This software was no longer functional based on current operational needs.

Goodwill and Other Identifiable Intangible Assets

Goodwill represents the excess of the purchase price over the fair value of the identifiable net assets acquired in acquisitions accounted for using the purchase method. With the adoption of Statement of Financial Accounting Standards (“SFAS”) No. 142, Goodwill and Other Intangible Assets, on July 1, 2001, the Company discontinued the amortization of goodwill. During fiscal year 2004 and 2003, the Company performed its annual test of goodwill to determine if there was impairment. These tests included the determination of each reporting unit’s fair value using market multiples and discounted cash flows modeling. No impairment was required to be recorded related to the Company’s annual impairment testing under this pronouncement.

The Company reviews the carrying value of its intangible assets with finite lives, which includes customer lists and non-compete agreements, as current events and circumstances warrant to determine whether there are any impairment losses. If indicators of impairment are present in intangible assets used in operations, and future cash flows are not expected to be sufficient to recover the assets’ carrying amount, an impairment loss is charged to expense in the period identified. These assets are included in other assets. The customer lists are amortized using the straight-line method over a period of 5 years. The non-compete agreements are amortized over their expected life and the debt issue costs are amortized over the term of the credit facility (see Note 7).

Fair Value of Financial Instruments

The fair value of financial instruments is the amount at which the instrument could be exchanged in a current transaction between willing parties. The carrying values of financial instruments such as accounts receivable, accounts payable, accrued liabilities, borrowings under the revolving credit facility and the subsidiary lines of credits approximate fair value, based upon either short maturities or variable interest rates of these instruments.

Contingencies

The Company accrues for contingent obligations, including estimated legal costs, when it is probable that a liability is incurred and the amount is reasonably estimable. As facts concerning contingencies become known, management reassesses its position and makes appropriate adjustments to the financial statements. Estimates that are particularly sensitive to future changes include tax, legal, and other regulatory matters, which are subject to change as events evolve and as additional information becomes available during the administrative and litigation process.

Revenue Recognition

Revenue is recognized once four criteria are met: (1) the Company must have persuasive evidence that an arrangement exists; (2) delivery must occur, which happens at the point of shipment (this includes the transfer of both title and risk of loss, provided that no significant obligations remain); (3) the price must be fixed and determinable; and (4) collectibility must be reasonably assured. A provision for estimated losses on returns is recorded at the time of sale based on historical experience.

SCANSOURCE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The Company has service revenue associated with configuration and marketing which is recognized when work is complete and all obligations are substantially met. Revenue from multiple element arrangements is allocated to the various elements based on the relative fair value of the elements, and each revenue cycle is considered a separate accounting unit with recognition of revenue based on the criteria met for the individual element of the multiple deliverables. The Company has arrangements in which it earns a service fee determined as a percentage of the value of products shipped on behalf of the manufacturer, who retains the risk of credit loss. In the event of termination of the arrangements, the Company has the right to return certain inventory to the manufacturer. Such service fees earned by the Company are included in net sales and were less than 1% of net sales for each of the quarters ended September 30, 2004 and 2003.

Shipping Costs

Shipping revenue is included in net sales and related costs are included in the cost of goods sold.

Advertising Costs

The Company defers advertising related costs until the advertising is first run in trade or other publications or in the case of brochures, until the brochures are printed and available for distribution. Advertising costs, included in marketing costs, after vendor reimbursement, were not significant in the quarters ended September 30, 2004 or 2003. Deferred advertising costs at September 30, 2004 and 2003 were not significant.

Foreign Currency

The currency effects of translating the financial statements of the Company’s foreign entities that operate in their local currency are included in the cumulative currency translation adjustment component of accumulated other comprehensive income. The assets and liabilities of these foreign entities are translated into U.S. Dollars using the exchange rate at the end of the respective period. Sales, costs and expenses are translated at average exchange rates effective during the respective period.

Foreign currency transactional and remeasurement gains and losses are included in other expense (income) in the Condensed Consolidated Income Statement. Such losses, net of gains, were $35,000 for the quarter ended September 30, 2004. Such gains, net of losses, were $222,000 for the quarter ended September 30, 2003.

Income Taxes

Income taxes are accounted for using the liability method. Deferred taxes reflect tax consequences on future years of differences between the tax bases of assets and liabilities and their financial reporting amounts. Valuation allowances are provided against deferred tax assets that are unlikely to be realized. Federal income taxes are not provided on the undistributed earnings of foreign subsidiaries because it has been the practice of the Company to reinvest those earnings in the business outside of the United States.

Stock-Based Compensation

The Company has three stock-based employee compensation plans and a plan for its non-employee directors. The Company has adopted the disclosure provisions of Statement of Financial Accounting Standards (“SFAS”) No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure, which amends SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No. 148 allows for continued use of recognition and measurement principles of Accounting Principles Board (“APB”) Opinion No. 25 and related interpretations in accounting for those plans. The

SCANSOURCE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Company applies the recognition and measurement principles of APB Opinion No. 25, and related interpretations in accounting for those plans. No stock-based employee compensation expense is reflected in net income as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions to stock-based employee compensation. Such disclosure is not necessarily indicative of the fair value of stock options that could be granted by the Company in future fiscal years or of the value of all options currently outstanding.


	Quarter ended September 30,
	2004		2003
Net income, as reported	$	8,914,000	$	6,080,000
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		479,000		298,000

Pro forma net income	$	8,435,000	$	5,782,000


	Quarter ended September 30,
	2004		2003
Earnings per share:
Income per common share, basic, as reported	$	0.71	$	0.50

Income per common share, basic, pro forma	$	0.67	$	0.47

Income per common share, assuming dilution, as reported	$	0.68	$	0.48

Income per common share, assuming dilution, pro forma	$	0.65	$	0.46

For the quarters ended September 30, 2004 and 2003, the number of options exercised for shares of common stock were 58,603 and 96,293, respectively.

Comprehensive Income

Comprehensive income is comprised of net income and foreign currency translation. The foreign currency translation gains or losses are not tax-effected because the earnings of foreign subsidiaries are considered by Company management to be permanently reinvested. For the quarters ended September 30, 2004 and 2003, comprehensive income consisted of net income of the Company of $8.9 million and $6.1 million, respectively, and translation adjustments of $4,000 and $229,000, respectively.

Accounting Standards Recently Issued

In December 2002, the FASB’s EITF issued Issue No. 02-16. This issue addresses the appropriate accounting, by a distributor, for cash consideration received from a vendor and became effective for the Company on January 1, 2003. The adoption of EITF No. 02-16 requires that cash consideration received from a vendor should be recorded as a direct reduction to cost of goods sold, unless certain criteria are met. If these criteria are met, then the cash consideration should be a reduction of the operating expense for which it is being reimbursed. The guidance is applicable to all of the Company’s vendor arrangements entered into after December 31, 2002.

SCANSOURCE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

In January 2003, the FASB issued Interpretation No. 46 (“FIN 46”), Consolidation of Variable Interest Entities. FIN 46 clarifies the application of Accounting Research Bulletin No. 51, Consolidated Financial Statements, to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 applies immediately to variable interest entities (“VIEs”) created after January 31, 2003, and to VIEs in which an enterprise obtains an interest after that date. In December 2003, the FASB published a revision to FIN 46 to clarify some of the provisions and to exempt certain entities from its requirements. Under the new guidance, special effective date provisions apply to enterprises that have fully or partially applied FIN 46 prior to issuance of the revised interpretation. Otherwise, application of Interpretation 46R (“FIN 46R”) is required in financial statements of public entities that have interests in structures that are commonly referred to as special-purpose entities (“SPEs”) for periods ending after December 15, 2003. Application by public entities, other than small business issuers, for all other types of VIEs other than SPEs is required in financial statements for periods ending after March 15, 2004. The Company has completed its evaluation of all potential VIEs relationships existing prior to February 1, 2003. The Company did not create or obtain any interest in a variable interest entity during the period February 1, 2003 through September 30, 2004. However, changes in the Company’s business relationships with various entities could occur which may impact its financial statements under the requirements of FIN 46R. The Company has concluded that these relationships do not meet the requirements under the provision and therefore, there is no effect of these relationships on the Company’s consolidated financial position or results of operations as of September 30, 2004.

In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The adoption of SFAS No. 149 had no effect on the Company’s financial position or results of operations.

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. SFAS No. 150 requires that certain financial instruments, which under previous guidance were accounted for as equity, must now be accounted for as liabilities. The financial instruments affected include mandatorily redeemable stock, certain financial instruments that require or may require the issuer to buy back some of its shares in exchange for cash or other assets and certain obligations that can be settled with shares of stock. SFAS No. 150 is effective for all financial instruments entered into or modified after May 31, 2003 and must be applied to the Company’s existing financial instruments effective July 1, 2003, the beginning of the first fiscal period after June 15, 2003. The Company adopted SFAS No. 150 on July 1, 2003. The adoption of this statement had no effect on the Company’s financial position or results of operations.

SCANSOURCE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(4) Earnings Per Share

Basic earnings per share are computed by dividing net income by the weighted-average number of common shares outstanding. Diluted earnings per share are computed by dividing net income by the weighted-average number of common and potential common shares outstanding.


	Net Income		Shares	Per Share Amount
Quarter ended September 30, 2004:
Income per common share, basic	$	8,914,000	12,580,000	$	0.71

Effect of dilutive stock options		—	473,000

Income per common share, assuming dilution	$	8,914,000	13,053,000	$	0.68

Quarter ended September 30, 2003:
Income per common share, basic	$	6,080,000	12,265,000	$	0.50

Effect of dilutive stock options		—	416,000

Income per common share, assuming dilution	$	6,080,000	12,681,000	$	0.48

For the quarters ended September 30, 2004 and 2003, there were 0 and 18,000 shares, respectively, excluded from the computation of diluted earnings per share because their effect would have been antidilutive.

SCANSOURCE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(5) Revolving Credit Facility and Subsidiary Lines of Credit

At September 30, 2004, the Company had a $100 million multi-currency revolving credit facility with its bank group which matures on July 31, 2008. The new credit facility was entered into on July 16, 2004. This facility has an accordion feature that allows the Company to increase the revolving credit line up to an additional $50 million, the first $30 million of which is committed with the existing bank group and the remaining $20 million is subject to syndication. The facility bears interest at either the 30-day LIBOR rate of interest in the United States or the 30, 60, 90 or 180-day LIBOR rate of interest in Europe. The interest rate is the appropriate LIBOR rate plus a rate varying from .75% to 1.75% tied to the Company’s funded debt to EBITDA ratio ranging from 0.00:1.00 to 2.50:1.00 and a fixed charge coverage ratio of not less than 1.50:1. The effective weighted average interest rate at September 30, 2004 was 3.08% and the outstanding borrowings included $18.4 million denominated in U.S. Dollars, $8.9 million denominated in Euros, and $5.5 million denominated in British Pounds, totaling $32.8 million on a calculated borrowing base of $100 million, leaving $67.2 million available for additional borrowings. The facility is collateralized by domestic assets, primarily accounts receivable and inventory. The agreement contains other restrictive financial covenants, including among other things, total liabilities to tangible net worth ratio and capital expenditure limits. The Company was in compliance with its covenants at September 30, 2004.

At June 30, 2004, the Company’s former revolving credit facility with its bank group had a borrowing limit of the lesser of (i) $80 million or (ii) the sum of 85% of eligible accounts receivable plus the lesser of (a) 50% of eligible inventory or (b) $40 million. The interest rate was the 30-day LIBOR rate of interest plus a rate varying from 1.00% to 2.50% tied to the Company’s funded debt to EBITDA ratio ranging from 2.50:1 to 4.25:1 and a fixed charge coverage ratio of not less than 2.75:1. The effective interest rate at June 30, 2004 was 2.13% and the outstanding balance was $32.6 million on a calculated borrowing base of $80 million, leaving $47.4 million available for additional borrowings. The revolving credit facility was collateralized by accounts receivable and eligible inventory. The credit agreement contained various restrictive covenants, including among other things, minimum net worth requirements, capital expenditure limits, maximum funded debt to EBITDA ratio and a fixed charge coverage ratio. The Company was in compliance with its covenants at June 30, 2004 and at the restatement date of the credit agreement.

At September 30, 2004, Netpoint, doing business as ScanSource Latin America, had an asset-based line of credit with a bank that was due on demand and had a borrowing limit of $1 million (increased from $600,000 as of August 27, 2004). The facility matures on August 27, 2005 and is collateralized by accounts receivable and eligible inventory. The facility contains a restrictive covenant which requires an average deposit of $50,000 at the bank. The Company has guaranteed 76% of the balance on the line, while the remaining 24% of the balance was guaranteed by Netpoint’s minority shareholder. The facility bears interest at the bank’s prime rate minus one percent. At September 30, 2004, the effective interest rate was 3.75%. There was no outstanding balance at September 30, 2004 and the outstanding standby letters of credit totaled $40,000, leaving $960,000 available for borrowings. Netpoint was in compliance with its covenant at September 30, 2004.

At June 30, 2004, Netpoint had an asset-based line of credit agreement with a bank that was due on demand. The borrowing limit on the line was the lesser of $600,000 or the sum of 75% of domestic accounts receivable and 50% of foreign accounts receivable, plus 10% of eligible inventory (up to $250,000). The interest rate was the bank’s prime rate minus one percent, which was 3.00% at June 30, 2004. All of Netpoint’s assets collateralized the line of credit. The Company had guaranteed 68% of the balance on the line, while the remaining 32% of the balance was guaranteed by Netpoint’s minority shareholder. At June 30, 2004, there were no outstanding borrowings on the line of credit. However, outstanding standby letters of credit totaled $40,000 leaving $560,000 available for additional borrowings. Netpoint was in compliance with its covenants at June 30, 2004.

SCANSOURCE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(6) Long-term Debt

Long-term debt consists of the following at September 30, 2004 and June 30, 2004:


	September 30, 2004		June 30, 2004
Note payable to a bank, secured by distribution center land and building; monthly payments of principal and interest of $65,000; 3.07% and 2.53% variable interest rate, respectively at September 30, 2004 and June 30, 2004; maturing in fiscal year 2006 with a balloon payment of approximately $4,782,000	$	5,372,000	$	5,528,000

Note payable to a bank, secured by office building and land; monthly payments of principal and interest of $15,000; 9.19% fixed interest rate at September 30, 2004 and June 30, 2004; maturing in fiscal 2007 with a balloon payment of approximately $1,458,000		1,540,000		1,549,000

Note payable to a bank, secured by motor coach; monthly payments of principal and interest of $7,000; 3.07% and 2.53% variable interest rate, respectively at September 30, 2004 and June 30, 2004; maturing in fiscal 2006 with a balloon payment of approximately $144,000		254,000		274,000

Capital leases for equipment with monthly principal payments ranging from $33 to $1,903 and effective interest rates ranging from 7.60% to 23.82% at September 30, 2004 and June 30, 2004, respectively		63,000		87,000

		7,229,000		7,438,000

Less current portion		5,556,000		854,000

Long-term portion	$	1,673,000	$	6,584,000

The notes payable secured by the distribution center and the motor coach contain certain financial covenants, including minimum net worth, capital expenditure limits, and a maximum debt to tangible net worth ratio, and prohibit the payment of dividends. The Company was in compliance with the various covenants at September 30, 2004.

The note payable secured by the distribution center land and building matures on September 5, 2005 with a balloon payment of approximately $4.8 million. The Company has ample borrowing capacity under its existing credit facility and is reviewing its various financing options. As of September 30, 2004, the $5.4 million balance was classified as current debt. As of June 30, 2004, the current portion of the debt was $647,000 and the long-term portion was $4.9 million.

SCANSOURCE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(7) Goodwill and Identifiable Intangible Assets

In accordance with SFAS No. 142, Goodwill and Other Intangible Assets, the Company performs its annual test of goodwill at the end of each fiscal year to determine if impairment has occurred. This testing includes the determination of each reporting unit’s fair value using market multiples and discounted cash flows modeling. At the end of fiscal year 2004, no impairment charge was recorded. During the first quarter of fiscal year 2005, the Company acquired additional goodwill through the acquisition of an additional 12% interest in OUI and an additional 8% interest in Netpoint. Changes in the carrying amount of goodwill and other intangibles assets for the three months ended September 30, 2004, by operating segment, are as follows:


	North American Distribution Segment		International Distribution Segment		Total
Balance as of June 30, 2004	$	5,719,000	$	4,259,000	$	9,978,000

Excess of cost over fair value of acquired net assets, net		27,000		253,000		280,000

Balance as of September 30, 2004	$	5,746,000	$	4,512,000	$	10,258,000

Included within other assets are identifiable intangible assets as follows:


	As of September 30, 2004						As of June 30, 2004
	Gross Carrying Amount		Accumulated Amortization		Net Book Value		Gross Carrying Amount		Accumulated Amortization		Net Book Value
Amortized intangible assets:
Customer lists	$	338,000	$	184,000	$	154,000	$	338,000	$	167,000	$	171,000
Debt Issue Costs		515,000		21,000		494,000		—		—		—
Non-compete agreements		425,000		368,000		57,000		425,000		250,000		175,000

Total	$	1,278,000	$	573,000	$	705,000	$	763,000	$	417,000	$	346,000

The customer lists are amortized using the straight-line method over a period of 5 years. The non-compete agreements are amortized over their expected life and the debt issue costs are amortized over the term of the credit facility. Amortization expense for the quarters ended September 30, 2004 and 2003 was $156,000 and $52,000, respectively. Amortization expense is estimated to be approximately $360,000 for fiscal year 2005, $196,000 for fiscal year 2006, $166,000 for fiscal year 2007, $129,000 for fiscal year 2008 and $10,000 for fiscal year 2009.

SCANSOURCE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(8) Segment Information

The Company is a leading distributor of specialty technology products, providing value-added distribution sales to resellers in the specialty technology markets. Based on geographic location, the Company has two segments for distribution of specialty technology products. The measure of segment profit is income from operations, and the accounting policies of the segments are the same as those described in Note 2 to the audited consolidated financial statements contained in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2004. Beginning with the first quarter of fiscal 2004, the ChannelMax segment has been restructured into the North American Distribution segment.

North American Distribution

North American Distribution offers products for sale in three primary categories: (i) AIDC and POS equipment sold by the ScanSource sales unit, (ii) voice, data and converged communications equipment sold by the Catalyst Telecom sales unit and (iii) voice, data and converged communications products sold by the Paracon sales unit. These products are sold to more than 11,000 resellers and integrators of technology products that are geographically disbursed over the United States and Canada in a pattern that mirrors population concentration. No single account represented more than 7% of the Company’s consolidated net sales during the quarters ended September 30, 2004 and 2003.

International Distribution

International Distribution sells to two geographic areas, Latin America (including Mexico) and Europe, and offers AIDC and POS equipment to approximately 4,000 resellers and integrators of technology products. This segment began during fiscal 2002 with the Company’s purchase of a majority interest in Netpoint and the start-up of the Company’s European operations. Of this segment’s customers, no single account represented 1% or more of the Company’s consolidated net sales during the quarters ended September 30, 2004 and 2003.

The Company evaluates segment performance based on operating income. Inter-segment sales consist of sales by the North American Distribution segment to the International Distribution segment. All inter-segment revenues and profits have been eliminated in the accompanying consolidated financial statements.

SCANSOURCE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Selected financial information of each business segment are presented below:


	Quarter ended September 30,
	2004			2003
Sales:
North American distribution	$	332,959,000		$	255,212,000
International distribution		32,466,000			23,653,000
Less intersegment sales		(2,716,000	)		(2,391,000	)

	$	362,709,000		$	276,474,000

Depreciation and amortization:
North American distribution	$	1,248,000		$	1,192,000
International distribution		127,000			78,000

	$	1,375,000		$	1,270,000

Operating income:
North American distribution	$	14,580,000		$	9,699,000
International distribution		90,000			(14,000	)

	$	14,670,000		$	9,685,000

Capital expenditures:
North American distribution		234,000			615,000
International distribution		102,000			37,000

	$	336,000		$	652,000

Assets for each business unit are summarized below:


	September 30, 2004		June 30, 2004
Assets:

North American distribution	$	391,099,000	$	373,101,000
International distribution		44,124,000		40,091,000

	$	435,223,000	$	413,192,000

SCANSOURCE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(9) Special Charges

The Company incurred special charges of $2.3 million during the quarter ended September 30, 2003 related to the restructuring of the ChannelMax business segment into the North American Distribution segment. Effective July 1, 2003, the Company reassigned the ChannelMax segment to become a part of the North American Distribution segment. The Company consolidated the information services and operational staff into the Company’s corporate group. These charges primarily consisted of costs associated with employee severance for 9 employees of the operations management and programming groups and ChannelMax option settlement costs associated with the segment. These charges are included in operating expenses on the Company’s Condensed Consolidated Income Statements.

(10) Commitments and Contingencies

Contingencies – The Company received an assessment for a sales and use tax matter for the three calendar years ended 2001. Based on this assessment, the Company has determined a probable range for the disposition of that assessment and for subsequent periods. Although the Company is disputing the assessment, it had accrued a liability of $1.4 million at September 30, 2004 and June 30, 2004. Although there can be no assurance of the ultimate outcome at this time, the Company intends to vigorously defend its position.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Results of Operations

Net Sales

The following tables summarize the Company’s net sales results (net of inter-segment sales):


	Quarter ended September 30,						Percentage Change
	2004		2003		Difference		Percentage Change
	(In thousands)
North American Distribution	$	330,243	$	252,821	$	77,422	30.6	%
International Distribution		32,466		23,653		8,813	37.3	%

Net Sales	$	362,709	$	276,474	$	86,235	31.2	%

North American Distribution

North American Distribution sales include sales to technology resellers in the United States and Canada from the Company’s Memphis, Tennessee distribution center. Sales to technology resellers in Canada account for less than 3% of total net sales for the quarters ended September 30, 2004 and 2003. The 30.6% increase in North American Distribution sales for the quarter ended September 30, 2004, as compared to the same period in the prior year, was due to an increase in large orders and a gain in market share.

Sales of the AIDC and POS product categories for the North America distribution segment increased 24.3% as compared to the prior year quarter. The ScanSource selling unit benefited from the aforementioned larger orders and market share gain.

Sales of converged communications products increased 38.2% as compared to the prior year quarter. Both Catalyst Telecom, which distributes small and medium business (SMBS) and enterprise (ECG) products, and Paracon, which distributes communication products, experienced record sales for the quarter due to the recruitment of additional resellers and to larger orders.

International Distribution

The international distribution segment includes sales to Latin America (including Mexico) and Europe from the ScanSource selling unit. Sales for the overall international segment increased 37.3% or $8.8 million for the quarter ended September 30, 2004 as compared to the same period in the prior year. The favorable Euro versus U.S. Dollar exchange rate accounts for approximately $2.0 million of the increase for the quarter ended September 30, 2004. Without the benefit of the foreign exchange rates, the increase for the quarter would have been 28.8% or $6.8 million. The increase in sales was primarily attributable to obtaining additional market share in Europe and Latin America.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Gross Profit

The following tables summarize the Company’s gross profit:


	Quarter ended September 30,						Percentage Change		Percentage of Sales September 30,
	2004		2003		Difference		Percentage Change		2004		2003
	(In thousands)
North American Distribution	$	33,129	$	27,747	$	5,382	19.4	%	10.0	%	11.0	%
International Distribution		3,853		3,097		756	24.4	%	11.9	%	13.1	%

Gross Profit	$	36,982	$	30,844	$	6,138	19.9	%	10.2	%	11.2	%

North American Distribution

Gross profit for the North American Distribution segment increased $5.4 million for the quarter ended September 30, 2004 as compared to the prior year quarter. The increase in gross profit quarter over quarter is a result of increased sales volume of the segment.

Gross profit as a percentage of net sales for the North American Distribution segment decreased compared to the prior year quarter. The decrease is a result of product sales mix, including a greater percentage of large orders with a low value-add requirement, and changes in vendor purchasing programs which had the effect of increasing unit costs.

International Distribution

Gross profit for the international distribution segment increased $756,000 for the quarter ended September 30, 2004 as compared to the prior year quarter. The increase was primarily due to increased distribution sales volume as the segment gained additional resellers and market share.

Gross profit, as a percentage of net sales, which is typically greater than the North American Distribution segment, decreased for the quarter ended September 30, 2004 due to changes in product mix for Latin America and the inclusion of additional freight costs in the European business.

Operating Expenses

The following table summarizes the Company’s operating expenses:


	Quarter ended September 30,						Percentage Change		Percentage of Sales September 30,
	2004		2003		Difference		Percentage Change		2004		2003
	(In thousands)
Operating Expenses	$	22,312	$	21,159	$	1,153	5.4	%	6.2	%	7.7	%

For the quarter ended September 30, 2004, operating expenses included additional bad debt expense of $865,000 over the same period in prior year. Operating expenses as a percentage of net sales decreased for the quarter ended September 30, 2004 due to greater economics of scale in selling, general and administrative expenses as the sales volume increased.

For the quarter ended September 30, 2003, the Company incurred restructuring costs for the ChannelMax segment of approximately $2.3 million.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Operating Income

The following table summarizes the Company’s operating income:


	Quarter ended September 30,						Percentage Change		Percentage of Sales September 30,
	2004		2003		Difference		Percentage Change		2004		2003
			(In thousands)
Operating Income	$	14,670	$	9,685	$	4,985	51.5	%	4.0	%	3.5	%

The increase in operating income for the quarter ended September 30, 2004 as compared to the prior year quarter was due to increased gross margin as a result of increased sales volume and cost controls that held operating expense growth below the rate of sales growth. Operating margins as a percentage of net sales for the quarter ended September 30, 2004 were higher compared to the same period of the prior year, primarily due to decreased operating expenses as a percentage of net sales.

Total Other Expense (Income)

The following table summarizes the Company’s total other expense (income):


	September 30,									Percentage Change		September 30,
	2004			2003			Difference			Percentage Change		2004		2003
				(In thousands)
Interest expense	$	413		$	343		$	70		20.4	%	0.1	%	0.1	%
Interest income	$	(216	)		(161	)		(55	)	34.2	%	-0.1	%	-0.1	%
Net foreign exchange losses (gains)	$	35			(222	)		257		-115.8	%	0.0	%	-0.1	%
Other, net	$	12			56			(44	)	-78.6	%	0.0	%	0.0	%

Total other expense		244			16			228		1425.0	%	0.1	%	0.0	%

Interest expense for the quarters ended September 30, 2004 and 2003 was $413,000 and $343,000, respectively, reflecting interest paid on borrowings on the Company’s line of credit and long-term debt. Interest expense for the current year quarter was higher due to increased interest rates and higher average borrowings on the Company’s line of credit over the prior year.

Interest income for the quarters ended September 30, 2004 and 2003 was $216,000 and $161,000, respectively, principally representing interest collected from customers. This has increased from the prior year as a result of increased interest income from certain customer financing arrangements.

Foreign exchange gains and losses consist of foreign currency transactional and functional currency re-measurements, offset by net foreign currency exchange contract losses. Net foreign exchange losses for the quarter ended September 30, 2004 were $35,000 and net foreign exchange gains for the quarter ended September 30, 2003 were $222,000. The change in foreign exchange gains and losses is the result of a more effective foreign exchange hedging program for the current year quarter. The Company’s foreign exchange policy prohibits entering into speculative transactions.

Provision For Income Taxes

Income tax expense was $5.5 million and $3.6 million for the quarters ended September 30, 2004 and 2003,

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

respectively, reflecting an effective income tax rate of 38.0% and 37.1%, respectively. The higher tax rate for the quarter ended September 30, 2004 was attributable to the utilization of domestic and foreign net operating loss carryforwards in prior periods, which are no longer available to offset taxable income.

Minority Interest in Income of Consolidated Subsidiaries

The Company consolidates two subsidiaries that have a minority ownership interest. For the quarters ended September 30, 2004 and 2003, the Company recorded $30,000 and $0, net of income taxes, respectively, of minority interest in the Company’s majority owned subsidiaries’ net income. The increase in the minority interest income for the three-month period is result of the earnings of the subsidiaries.

For the quarter ended September 30, 2004, the Company owned 88% of OUI and 76% of Netpoint. For the quarter ended September 30, 2003 the Company owned 76% of OUI and 68% of Netpoint.

Net Income

The following table summarizes the Company’s net income:


	Quarter ended September 30,						Percentage Change		Percentage of Sales September 30,
	2004		2003		Difference		Percentage Change		2004		2003
			(In thousands)
Net Income	$	8,914	$	6,080	$	2,834	46.6	%	2.5	%	2.2	%

The increase in the amount of net income is attributable to the changes in operating profits and provision for income taxes discussed above.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Liquidity and Capital Resources

The Company’s primary sources of liquidity are cash flow from operations, borrowings under the revolving credit facility, and, to a lesser extent, borrowings under the subsidiary’s line of credit, and proceeds from the exercise of stock options.

The Company’s cash balance totaled $2.4 million at September 30, 2004 compared to $1.0 million at June 30, 2004. Domestic cash is generally swept on a nightly basis to pay down the Company’s line of credit under the revolving credit facility. The Company’s working capital increased to $195.2 million at September 30, 2004 from $188.1 million at June 30, 2004. The increase in working capital resulted primarily from a $16.0 million increase in the Company’s trade and notes receivable and a $5.5 million increase in inventory offset by a $14.7 increase in accounts payable.

The increase in the amount of trade and notes receivable is attributable to an increase in sales during the quarter. The number of days sales outstanding (DSO) in ending trade receivables has remained the same at September 30, 2004 and June 30, 2004, at 47 days. Inventory turnover improved to 7.0 times for the quarter ended September 30, 2004 from 6.5 times for the quarter ended June 30, 2004.

Cash provided by operating activities was $1.6 million for the quarter ended September 30, 2004 compared to cash used in operating activities of $5.9 million for the quarter ended September 30, 2003. The increase in cash provided by operating activities was primarily attributable to changes in current assets and liability accounts for each respective period referenced above.

Cash used in investing activities for the quarter ended September 30, 2004 was $854,000, which included $336,000 for capital expenditures and $518,000 for additional ownership interest in one of the Company’s majority-owned subsidiaries (Netpoint). The Company’s capital expenditures resulted from purchases of software, furniture and equipment.

Cash used in investing activities for the quarter ended September 30, 2003 was $752,000. This includes $100,000 cash paid for the acquisition of the remaining 10% of ChannelMax. The company’s capital expenditures resulted from purchases of software for reporting management for the finance department, as well as a CRM package for the credit department, and furniture and equipment.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

was $32.6 million on a calculated borrowing base of $80 million, leaving $47.4 million available for additional borrowings. The revolving credit facility was collateralized by accounts receivable and eligible inventory. The credit agreement contained various restrictive covenants, including among other things, minimum net worth requirements, capital expenditure limits, maximum funded debt to EBITDA ratio and a fixed charge coverage ratio. The Company was in compliance with its covenants at June 30, 2004 and at the restatement date of the credit agreement.

Cash provided by financing activities for the quarter ended September 30, 2004 totaled $615,000, including $934,000 in proceeds from stock option exercises offset by $110,000 in payments under the Company’s credit facility and $209,000 in payments on long-term debt. Cash provided by financing activities for the quarter ended September 30, 2003 totaled $5.0 million, including advances under the Company’s credit facility.

The note payable secured by the distribution center land and building matures on September 5, 2005 with a balloon payment of approximately $4.8 million. The Company has ample borrowing capacity under its existing credit facility and is reviewing its various financing options. As of September 30, 2004 the $5.4 million balance was classified as current debt. As of June 30, 2004, the current portion of the debt was $647,000 and the long-term portion was $4.9 million.

The Company believes that it has sufficient liquidity to meet its forecasted cash requirements for at least the next fiscal year.

Accounting Standards Recently Issued

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

parties. FIN 46 applies immediately to variable interest entities (“VIEs”) created after January 31, 2003, and to VIEs in which an enterprise obtains an interest after that date. In December 2003, the FASB published a revision to FIN 46 to clarify some of the provisions and to exempt certain entities from its requirements. Under the new guidance, special effective date provisions apply to enterprises that have fully or partially applied FIN 46 prior to issuance of the revised interpretation. Otherwise, application of Interpretation 46R (“FIN 46R”) is required in financial statements of public entities that have interests in structures that are commonly referred to as special-purpose entities (“SPEs”) for periods ending after December 15, 2003. Application by public entities, other than small business issuers, for all other types of VIEs other than SPEs is required in financial statements for periods ending after March 15, 2004. The Company has completed its evaluation of all potential VIEs relationships existing prior to February 1, 2003. The Company did not create or obtain any interest in a variable interest entity during the period February 1, 2003 through September 30, 2004. However, changes in the Company’s business relationships with various entities could occur which may impact its financial statements under the requirements of FIN 46R. The Company has concluded that these relationships do not meet the requirements under the provision and therefore, there is no effect of these relationships on the Company’s consolidated financial position or results of operations as of September 30, 2004.

Impact of Inflation

The Company has not been adversely affected by inflation as technological advances and competition within specialty technology markets has generally caused prices of the products sold by the Company to decline. Management believes that any price increases could be passed on to its customers, as prices charged by the Company are not set by long-term contracts.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

The Company’s principal exposure to changes in financial market conditions in the normal course of its business is a result of its selective use of bank debt and transacting business in foreign currencies in connection with its foreign operations. The Company has chosen to present this information below in a sensitivity analysis format.

The Company is exposed to changes in interest rates primarily as a result of its borrowing activities, which include revolving credit facilities with a group of banks used to maintain liquidity and fund the Company’s business operations. The nature and amount of the Company’s debt may vary as a result of future business requirements, market conditions and other factors. The definitive extent of the Company’s interest rate risk is not quantifiable or predictable because of the variability of future interest rates and business financing requirements, but the Company does not believe such risk is material. A hypothetical 100 basis point increase or decrease in interest rates on borrowings on the Company’s revolving line of credit, variable rate long term debt and subsidiary line of credit for the quarter ended September 30, 2004 and 2003 would have resulted in an approximately $87,000 and $122,000 decrease or increase, respectively, in pre-tax income. The Company does not currently use derivative instruments or take other actions to adjust the Company’s interest rate risk profile.

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

The Company has elected not to designate its foreign currency contracts as hedging instruments, and therefore, the instruments are marked to market with changes in their values recorded in the Consolidated Income Statement each period. The underlying exposures are denominated primarily in British Pounds, Euros, and Canadian Dollars. At September 30, 2004, the Company had no currency forward contracts outstanding. At June 30, 2004, the Company had one currency forward contract outstanding with a net liability under the contract of $21,000.

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 September 30, 2004 and June 30, 2004, the Company does not consider the potential near-term losses in future earnings, fair values and cash flows from reasonably possible near-term changes in interest rates and exchange rates to be material.

Item 4. Controls and Procedures

Evaluation of Controls and Procedures

The Company maintains disclosure controls and procedures designed to ensure that information required to be disclosed in reports filed or submitted under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. As of the end of the period covered by this report, the Company’s Chief Executive Officer and Chief Financial Officer evaluated, with the participation of management, the effectiveness of the Company’s disclosure controls and procedures as required by Rule 13a-15 or 15d-15 of the Exchange Act. Based on the evaluation, which disclosed no significant deficiencies or material weaknesses, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective. There were no changes in the Company’s internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 or 15d-15 of the Exchange Act, that occurred during the Company’s most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Limitations on the Effectiveness of Controls

The Company maintains a system of internal accounting controls to provide reasonable assurance that assets are safeguarded and that transactions are executed in accordance with management’s authorization and recorded properly to permit the preparation of financial statements in accordance with accounting principles generally accepted in the United States. However, the Company’s management, including the CEO and CFO, does not expect that the Company’s disclosure controls or internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty. Breakdowns in the control systems can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

PART II. OTHER INFORMATION

Item 6. Exhibits and Reports on Form 8-K.

Exhibits


10.1		Employment Agreement dated as of September 30, 2004 between the Registrant and Jeffery A. Bryson.

10.2		Nonqualified Deferred Compensation Plan effective July 1, 2004.

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

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

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

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

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

SCANSOURCE, INC.

/s/ MICHAEL L. BAUR

MICHAEL L. BAUR

President and Chief Executive Officer

(Principal Executive Officer)

/s/ RICHARD P. CLEYS

RICHARD P. CLEYS

Vice President and Chief Financial Officer

(Principal Financial Officer)

Date: November 5, 2004

EX-10.1 2 dex101.htm EMPLOYMENT AGREEMENT Employment Agreement

Exhibit 10.1

EMPLOYMENT AGREEMENT

THIS EMPLOYMENT AGREEMENT (hereinafter the “Agreement”) between ScanSource, Inc., a South Carolina corporation (hereinafter, the “Company”), and Jeffrey A. Bryson (hereinafter, “Executive”) is effective as of July 1, 2004 (hereinafter the “Effective Date”).

BACKGROUND

The Company desires to employ Executive in the position stated on Exhibit A and Executive is willing to serve in such capacity, in accordance with the terms and conditions of this Agreement.

NOW THEREFORE, in consideration of the foregoing and of the mutual covenants and agreements set forth herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

1. Employment. On the Effective Date, Executive shall hereby be employed in the capacity indicated above and shall have the responsibilities commensurate with such position as shall be assigned to him by the Board of Directors, CEO of the Company, or President of the Business Unit in which the Executive is assigned.

2. Employment Period. Unless earlier terminated herein in accordance with Section 5 hereof, Executive’s employment shall be for a term (the “Employment Period”), beginning on the Effective Date and ending on June 30, 2006, the Employment Period End Date.

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

4. Compensation and Benefits.

(a) Base Salary. During the Employment Period, the Company will pay to Executive a base salary at the rate specified on Exhibit A to this Agreement (“Base Salary”), less normal withholdings, payable in equal monthly or more frequent installments as are customary under the Company’s payroll practices from time to time. The Compensation Committee of the Board of Directors of the Company shall review Executive’s Base Salary annually and in its sole discretion, subject to approval of the Board of Directors of the Company, may increase or decrease Executive’s Base Salary from year to year. The annual review of Executive’s Base Salary by the Board of Directors of the Company will consider, among other things, Executive’s own performance and the Company’s performance.

(b) Incentive Compensation, Savings and Retirement Plans. During the Employment Period, Executive shall be entitled to participate in all deferred compensation, savings and retirement plans, practices, policies and programs applicable to staff officers of the Company (“Peer Executives”). Without limiting the foregoing, during the Employment Period, Executive will be eligible to receive certain incentive compensation (“Incentive Compensation”) based on financial and/or performance criteria established from year to year by the Compensation Committee of the Board of Directors of the Company, as specified on Exhibit A to this Agreement.

(c) Welfare Benefit Plans. During the Employment Period, Executive and Executive’s eligible dependents shall be eligible for participation in the welfare benefit plans, practices, policies and programs provided by the Company which may include, medical, prescription, dental, disability, employee life, group life, accidental death and travel accident insurance plans and programs) (“Welfare Plans”) to the extent applicable generally to Peer Executives. Bi-weekly payroll contributions will be required by Executive. The Company reserves the right, in its sole discretion to modify, change, or eliminate its Welfare Plans.

(d) Expenses. During the Employment Period, Executive shall be entitled to receive reimbursement for all reasonable expenses incurred by Executive in accordance with the policies, practices and procedures of the Company to the extent applicable generally to Peer Executives.

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

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

5. Termination of Employment.

(a) Death, Retirement or Disability. Executive’s employment shall terminate automatically upon Executive’s death or Retirement during the Employment Period. For purposes of this Agreement, “Retirement” shall mean normal retirement as defined in the Company’s then-current retirement plan, or if there is no such retirement plan, “Retirement” shall mean voluntary termination after age 65 with ten years of service. If the Company determines that the Disability of Executive has occurred during the Employment Period (pursuant to the definition of Disability set forth below), it may give to Executive written notice of its intention to

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terminate Executive’s employment. In such event, Executive’s employment with the Company shall terminate effective on the 30th day after receipt of such written notice by Executive (the “Disability Effective Date”), provided that, within the 30 days after such receipt, Executive shall not have returned to full-time performance of Executive’s duties. For purposes of this Agreement, “Disability” shall mean a mental or physical disability as determined by the Board of Directors of the Company in accordance with standards and procedures similar to those under the Company’s employee long-term disability plan, if any. At any time that the Company does not maintain such a long-term disability plan, “Disability” shall mean the inability of Executive, as determined by the Board, to perform the essential functions of his regular duties and responsibilities, with or without reasonable accommodation, due to a medically determinable physical or mental condition which has lasted (or can reasonably be expected to last) for twelve workweeks in any twelve-month period. At the request of Executive or his personal representative, the Board’s determination that the Disability of Executive has occurred shall be certified by two physicians mutually agreed upon by Executive, or his personal representative, and the Company. Failing such independent certification (if so requested by Executive), Executive’s termination shall be deemed a termination by the Company without Cause and not a termination by reason of his Disability.

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

The failure of Executive to satisfactorily perform Executive’s duties with the Company as identified in any Company policy applicable to Executive, Executive’s job description, the formal written goals and objectives of Executive determined annually with his or her immediate supervisor, or other objective performance criteria as developed by the Company and communicated in writing to Executive (other than any such failure resulting from incapacity due to physical or mental illness), within 30 days after a written demand for satisfactory performance is delivered to Executive by the Board of Directors, CEO of the Company or President of the Business Unit to which the Executive is assigned, which specifically identifies the manner in which the Board, the CEO or the President believes that Executive has not satisfactorily performed Executive’s duties. The decision of whether Executive has satisfactorily performed his duties with the Company is in the discretion of the Company; or

Engaging in unethical or illegal conduct or gross misconduct which is materially injurious to the Company, whether financially or otherwise.

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

(i) without the consent of Executive, the assignment to Executive of any duties materially inconsistent for a member of the management team, excluding for this purpose an isolated, insubstantial, and inadvertent action not taken in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by Executive;

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(ii) a reduction by the Company in Executive’s Base Salary as in effect on the Effective Date or as the same may be increased from time to time;

(iii) the failure by the Company (a) to continue in effect any compensation plan in which Executive participates as of the Effective Date that is material to Executive’s total compensation, unless an equitable arrangement (embodied in an ongoing substitute or alternative plan) has been made with respect to such plan, or (b) to continue Executive’s participation therein (or in such substitute or alternative plan) on a basis not materially less favorable in terms of the amount of benefits provided;

(iv) the Company’s requiring Executive, without his consent, to be based at any office or location other than in Greenville County, South Carolina;

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

(vi) the material breach of this Agreement by the Company.

Good Reason shall not include Executive’s death or Disability. The Company shall have an opportunity to cure any claimed event of Good Reason (other than under clauses (v) above) within 30 days of notice from Executive and the Board’s good faith determination of cure shall be binding. The Company shall notify Executive of the timely cure of any claimed event of Good Reason and the manner in which such cure was effected, and any Notice of Termination delivered by Executive based on such claimed Good Reason shall be deemed withdrawn and shall not be effective to terminate the Agreement.

(d) Notice of Termination. Any termination of Executive’s employment by the Company or by Executive shall be communicated by Notice of Termination to the other party hereto given in accordance with Section 13(f) of this Agreement. For purposes of this Agreement, a “Notice of Termination” means a written notice which (i) indicates the specific termination provision in this Agreement relied upon, including whether such termination is for Cause or Good Reason, (ii) specifies the termination date. The failure by Executive or the Company to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason or Cause shall not waive any right of Executive or the Company, respectively, hereunder or preclude Executive or the Company, respectively, from asserting such fact or circumstance in enforcing Executive’s or the Company’s rights hereunder.

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

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6. Obligations of the Company upon Termination.

(a) Termination by Executive for Good Reason; Termination by Company Other Than for Cause, Disability or In Connection with Change of Control. If, during the Employment Period, the Company shall terminate Executive’s employment, for other than for Cause or Disability, or Executive shall terminate employment for Good Reason within a period of 30 days after the occurrence of the event giving rise to Good Reason, or if within 60 days after the Employment Period End Date, the Company (for reasons other than Cause or Disability) terminates the employment of Executive, and, with respect to the payments and benefits described in clauses (i)(B) and (ii) below, only if Executive executes a Release in substantially the form of Exhibit B hereto (the “Release”):

Termination In Connection with Change in Control. If Executive’s employment is terminated within 12 months after, or otherwise in contemplation of, a Change in Control, as defined in Exhibit C, and Executive’s employment is so terminated other than for Cause or Disability, then and, with respect to the payments and benefits described in clauses (i)(B) and (ii) below, only if Executive executes a Release in substantially the form of Exhibit B hereto (the “Release”):

(i) within 30 days after the later of (a) Date of Termination or (b) the date Executive executes the Release (or such longer period as may be required for the Company to determine the amount of earned unpaid Incentive Compensation under any program which is dependent on quantifying quarterly financial results), the Company shall pay to Executive in a lump sum in cash the aggregate of the following amounts:

(A) the sum of (1) Executive’s Base Salary earned through the Date of Termination to the extent not theretofore paid, (2) unpaid Incentive Compensation earned to the Date of Termination; (the sum of the amounts described in clauses (1) and (2) shall be hereinafter referred to as the “Accrued Obligations”). For purposes of determining the amount of unpaid Incentive Compensation earned in the event the Date of Termination is in the middle of a calendar quarter, the Company shall pro-rate and reduce the amount it determines would have been earned for the complete quarter, based on the ratio of the number of days the Executive was employed in the quarter over the number of actual days in the quarter; and

(B) an amount equal to a multiple (the “Severance Multiple”), times the highest combined annual Base Salary and Incentive Compensation earned by Executive from the Company, including any such amounts earned but deferred, in the last three calendar years prior to the Date of Termination (the “Severance Benefits”). The Severance Multiple shall be one (1).

(ii) for up to 12 months after Date of Termination, the Company will reimburse Executive for COBRA payments made by Executive which are in excess of the monthly rates paid by active employees, with respect to medical and dental insurance benefits,

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but only until such time Executive is eligible to receive similar benefits under another employer-provided or group plan (which plan may be the plan of the Executive’s new employer or his spouse’s employer.)

(iii) to the extent not theretofore paid or provided, the Company shall timely pay or provide to Executive any other amounts or benefits required to be paid or provided or which Executive is eligible to receive under any plan, program, policy or practice or contract or agreement of the Company (such other amounts and benefits shall be hereinafter referred to as the “Other Benefits”) only if such Other Benefits were earned as of the Date of Termination.

(b) Death. If Executive’s employment is terminated by reason of Executive’s death during the Employment Period, this Agreement shall terminate without further obligations to Executive’s legal representatives under this Agreement, other than for payment of Accrued Obligations and the timely payment or provision of Other Benefits. Accrued Obligations shall be paid to Executive’s estate or beneficiary, as applicable, in a lump sum in cash within 30 days of the Date of Termination. With respect to the provision of Other Benefits, the term Other Benefits as used in this Section 6(b) shall include, without limitation, and Executive’s estate and/or beneficiaries shall be entitled to receive, benefits under such plans, programs, practices and policies relating to death benefits, if any, as are applicable to Executive on the date of his death.

(c) Disability. If Executive’s employment is terminated by reason of Executive’s Disability during the Employment Period, this Agreement shall terminate without further obligations to Executive, other than for payment of Accrued Obligations and the timely payment or provision of Other Benefits. Accrued Obligations shall be paid to Executive in a lump sum in cash within 30 days of the Date of Termination. With respect to the provision of Other Benefits, the term Other Benefits as used in this Section 6(c) shall include, without limitation disability benefits, and Executive shall be entitled after the Disability Effective Date to receive, disability and other benefits under such plans, programs, practices and policies relating to disability, if any, as are applicable to Executive and his family on the Date of Termination.

(d) Retirement. If Executive’s employment is terminated by reason of Executive’s Retirement during the Employment Period, this Agreement shall terminate without further obligations to Executive, other than for payment of Accrued Obligations and the timely payment or provision of Other Benefits. Accrued Obligations shall be paid to Executive in a lump sum in cash within 30 days of the Date of Termination. With respect to the provision of Other Benefits, the term Other Benefits as used in this Section 6(d) shall include, without limitation retirement benefits, and Executive shall be entitled after the Date of Termination to receive, retirement and other benefits under such plans, programs, practices and policies relating to retirement, if any, as applicable to Executive on the Date of Termination.

(e) Cause or Voluntary Termination without Good Reason. If Executive’s employment is terminated for Cause during the Employment Period, or if Executive voluntarily terminates employment during the Employment Period without Good Reason, this Agreement shall terminate without further obligations to Executive, other than for payment of Accrued Obligations.

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(f) Normal Expiration of Employment Period. If Executive’s employment is terminated due to the normal expiration of the Employment Period or is terminated within 60 days after the Employment Period End Date (for reasons other than Cause or Disability), this Agreement shall terminate without further obligations to Executive, other than for payment of Accrued Obligations, Severance Benefits and the timely payment or provision of Other Benefits. Notwithstanding anything to the contrary herein, the Company is not required to provide notice if the Agreement will not be renewed or if a new employment agreement will not be offered in a situation where the Executive will remain an employee of the Company in the same position or in a management capacity without an employment agreement but as an at-will employee.

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

8. Mandatory Reduction of Payments in Certain Events.

(a) Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that any benefit, payment or distribution by the Company to or for the benefit of Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise) (a “Payment”) would be subject to the excise tax (the “Excise Tax”) imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the “Code”), then, prior to the making of any Payment to Executive, a calculation shall be made comparing (i) the net benefit to Executive of all Payments after payment of the Excise Tax, to (ii) the net benefit to Executive if the Payment had been limited to the extent necessary to avoid being subject to the Excise Tax. If the amount calculated under (i) above is less than the amount calculated under (ii) above, then the Payments shall be limited to the extent necessary to avoid being subject to the Excise Tax (the “Reduced Amount”). In that event, Executive shall direct which Payments are to be modified or reduced.

(b) The determination of whether an Excise Tax would be imposed, the amount of such Excise Tax, and the calculation of the amounts referred to in Section 8(a)(i) and (ii) above shall be made by the Company’s regular independent accounting firm at the expense of the Company or, at the election and expense of Executive, another nationally recognized independent accounting firm (the “Accounting Firm”) which shall provide detailed supporting calculations. Any determination by the Accounting Firm shall be binding upon the Company and Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Payments which

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Executive was entitled to, but did not receive pursuant to Section 8(a), could have been made without the imposition of the Excise Tax (“Underpayment”). In such event, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of Executive.

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

9. Costs of Enforcement. Subject to Section 8(b), each party hereto shall pay its own costs and expenses incurred in enforcing or establishing its rights hereunder, including, without limitation, attorneys’ fees, whether the suit be brought or not, and whether or not incurred in trial, bankruptcy, or appellate proceedings.

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

11. Restrictions on Conduct of Executive.

(a) General. Executive and the Company understand and agree that the purpose of the provisions of this Section 11 is to protect legitimate business interests of the Company, as more fully described below, and is not intended to eliminate Executive’s post-employment competition with the Company per se, nor is it intended to impair or infringe upon Executive’s right to work, earn a living, or acquire and possess property from the fruits of his labor. Executive hereby acknowledges that Executive has received good and valuable consideration for the post-employment restrictions set forth in this Section 11 in the form of compensation and benefits provided herein and the grant of stock options from time to time by the Company. Executive hereby further acknowledges that the post-employment restrictions set forth in this Section 11 are reasonable and that they do not, and will not, unduly impair his ability to earn a living after the termination of this Agreement.

In addition, the parties acknowledge: (A) that Executive’s services under this Agreement require special expertise and talent in the provision of Competitive Services and that Executive will have substantial contacts with customers, suppliers, advertisers and vendors of the Company; (B) that pursuant to this Agreement, Executive will be placed in a position of trust and responsibility and he will have access to a substantial amount of Confidential Information and Trade Secrets and that the Company is placing him in such position and giving him access to such information in reliance upon his agreement not to compete with the Company during the Restricted Period; (C) that due to his management duties, Executive will be the repository of a substantial portion of the goodwill of the Company and would have an unfair advantage in competing with the Company; (D) that due to Executive’s special experience and talent, the loss of Executive’s services to the Company under this Agreement cannot reasonably or adequately be compensated solely by damages in an action at law; (E) that Executive is capable of competing with the Company; and (F) that Executive is capable of obtaining gainful, lucrative and desirable employment that does not violate the restrictions contained in this Agreement.

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Therefore, subject to the limitations of reasonableness imposed by law, Executive shall be subject to the restrictions set forth in this Section 11.

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

“Competitive Position” means any employment with a Competitor in which Executive will use or is likely to use any Confidential Information or Trade Secrets, or in which Executive has duties for such Competitor that involve Competitive Services and that are the same or similar to those services actually performed by Executive for the Company;

“Competitive Services” means the distribution of automatic identification, bar-code, point of sale, or telephony products and other products the Company begins to distribute during the Employment Period, to resellers of such products, except such term shall not include distribution conducted by a Person whose principal business is the manufacture and sale of such products to resellers and/or end users and which Person does not normally act as a distributor of such products manufactured by others.

“Competitor(s)” means any Person engaged, wholly or in material part, in Competitive Services. Competitors include but are not limited to: Agilysis, Alliance Systems, Arrow, Avnet, Blue Star, Comstor, Cygcom, Ingram, Jenne Distributors, Metropolitan Sales, Nimax, Tech Data, Telpar, Voda One, Westcon, as well as any of their business units or affiliated companies.

“Confidential Information” means all information regarding the Company, its activities, business or clients that is the subject of reasonable efforts by the Company to maintain its confidentiality and that is not generally disclosed by practice or authority to persons not employed by the Company, but that does not rise to the level of a Trade Secret. “Confidential Information” shall include, but is not limited to, financial plans and data concerning the Company; management planning information; business plans; operational methods; market studies; marketing plans or strategies; product development techniques or plans; customer lists; details of customer contracts; current and anticipated customer requirements; past, current and planned research and development; business acquisition plans; and new personnel acquisition plans. “Confidential Information” shall not include information that has become generally available to the public by the act of one who has the right to disclose such information without violating any right or privilege of the Company. This definition shall not limit any definition of “confidential information” or any equivalent term under state or federal law.

“Determination Date” means the date of termination of Executive’s employment with the Company for any reason whatsoever or any earlier date (during the Employment Period) of an alleged breach of the Restrictive Covenants by Executive.

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“Person” means any individual or any corporation, partnership, joint venture, limited liability company, association or other entity or enterprise.

“Principal or Representative” means a principal, owner, partner, shareholder, joint venturer, investor, member, trustee, director, officer, manager, employee, agent, representative or consultant.

“Protected Customers” means any Person to whom the Company has sold its products or services or solicited to sell its products or services during the twelve (12) months prior to the Determination Date.

“Protected Employees” means employees of the Company who were employed by the Company at any time within six (6) months prior to the Determination Date.

“Restricted Period” means the Employment Period, and a period of two-years following the Date of Termination of employment with the Company if such termination occurs during the Employment Period or within 60 days of the Employment Period End Date.

“Restricted Territory” means North America.

“Restrictive Covenants” means the restrictive covenants contained in Section 11(c) hereof.

“Trade Secret” means all information, without regard to form, including, but not limited to, technical or nontechnical data, a formula, a pattern, a compilation, a program, a device, a method, a technique, a drawing, a process, financial data, financial plans, product plans, distribution lists or a list of actual or potential customers, advertisers or suppliers which is not commonly known by or available to the public and which information: (A) derives economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use; and (B) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy. Without limiting the foregoing, Trade Secret means any item of confidential information that constitutes a “trade secret(s)” under the common law or statutory law of the State of South Carolina.

(i) Restriction on Disclosure and Use of Confidential Information and Trade Secrets. Executive understands and agrees that the Confidential Information and Trade Secrets constitute valuable assets of the Company and its affiliated entities, and may not be converted to Executive’s own use. Accordingly, Executive hereby agrees that Executive shall not, directly or indirectly, at any time during the Restricted Period reveal, divulge, or disclose to any Person not expressly authorized by the Company any Confidential Information, and Executive shall not, directly or indirectly, at any time during the Restricted Period use or make use of any Confidential Information in connection with any business activity other than that of the

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Company. Throughout the term of this Agreement and at all times after the date that this Agreement terminates for any reason, Executive shall not directly or indirectly transmit or disclose any Trade Secret of the Company to any Person, and shall not make use of any such Trade Secret, directly or indirectly, for himself or for others, without the prior written consent of the Company. The parties acknowledge and agree that this Agreement is not intended to, and does not, alter either the Company’s rights or Executive’s obligations under any state or federal statutory or common law regarding trade secrets and unfair trade practices.

Anything herein to the contrary notwithstanding, Executive shall not be restricted from disclosing or using Confidential Information that is required to be disclosed by law, court order or other legal process; provided, however, that in the event disclosure is required by law, Executive shall provide the Company with prompt notice of such requirement so that the Company may seek an appropriate protective order prior to any such required disclosure by Executive.

(ii) Nonsolicitation of Protected Employees. Executive understands and agrees that the relationship between the Company and each of its Protected Employees constitutes a valuable asset of the Company and may not be converted to Executive’s own use. Accordingly, Executive hereby agrees that during the Restricted Period Executive shall not directly or indirectly on Executive’s own behalf or as a Principal or Representative of any Person or otherwise solicit or induce any Protected Employee to terminate his or her employment relationship with the Company or to enter into employment with any other Person.

(iii) Restriction on Relationships with Protected Customers. Executive understands and agrees that the relationship between the Company and each of its Protected Customers constitutes a valuable asset of the Company and may not be converted to Executive’s own use. Accordingly, Executive hereby agrees that, during the Restricted Period, Executive shall not, without the prior written consent of the Company, directly or indirectly, on Executive’s own behalf or as a Principal or Representative of any Person, solicit, divert, take away or attempt to solicit, divert or take away a Protected Customer for the purpose of providing or selling Competitive Services; provided, however, that the prohibition of this covenant shall apply only to Protected Customers with whom Executive had material “Contact” on the Company’s behalf during the twelve (12) months immediately preceding the termination of his or her employment at the Company. For purposes of this Agreement, Executive had material “Contact” with a Protected Customer if (a) he had business dealings with the Protected Customer on the Company’s behalf; (b) he was responsible for supervising or coordinating the dealings between the Company and the Protected Customer; or (c) he obtained Trade Secrets or Confidential Information about the customer as a result of his association with the Company.

(iv) Noncompetition with the Company. Executive hereby understands and agrees that, during the Restricted Period, Executive will not, without prior written consent of the Company, directly or indirectly seek or obtain a Competitive Position in the Restricted Territory with a Competitor; provided, however, that the provisions of this Agreement shall not be deemed to prohibit the ownership by Executive of any securities of the Company or its affiliated entities of not more than five percent (5%) of any class of securities of any corporation having a class of

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securities registered pursuant to the Securities Exchange Act of 1934, as amended. Executive acknowledges that in the performance of his duties for the Company he is charged with operating on the Company’s behalf throughout the Restricted Territory and he hereby acknowledges, therefore, that the Restricted Territory is reasonable.

(d) Enforcement of Restrictive Covenants.

(i) Rights and Remedies Upon Breach. In the event Executive breaches, or threatens to commit a breach of, any of the provisions of the Restrictive Covenants, the Company shall have the following rights and remedies, which shall be independent of any others and severally enforceable, and shall be in addition to, and not in lieu of, any other rights and remedies available to the Company at law or in equity:

(A) the right and remedy to enjoin, preliminarily and permanently, Executive from violating or threatening to violate the Restrictive Covenants and to have the Restrictive Covenants specifically enforced by any court of competent jurisdiction, it being agreed that any breach or threatened breach of the Restrictive Covenants would cause irreparable injury to the Company and that money damages would not provide an adequate remedy to the Company; and

(B) the right and remedy to require Executive to account for and pay over to the Company all compensation, profits, monies, accruals, increments or other benefits derived or received by Executive as the result of any transactions constituting a breach of the Restrictive Covenants.

(ii) Severability of Covenants. Executive acknowledges and agrees that the Restrictive Covenants are reasonable and valid in time and scope and in all other respects. The covenants set forth in this Agreement shall be considered and construed as separate and independent covenants. Should any part or provision of any covenant be held invalid, void or unenforceable in any court of competent jurisdiction, such invalidity, voidness or unenforceability shall not render invalid, void or unenforceable any other part or provision of this Agreement. If any portion of the foregoing provisions is found to be invalid or unenforceable by a court of competent jurisdiction because its duration, the territory, the definition of activities or the definition of information covered is considered to be invalid or unreasonable in scope, the invalid or unreasonable term shall be redefined, or a new enforceable term provided, such that the intent of the Company and Executive in agreeing to the provisions of this Agreement will not be impaired and the provision in question shall be enforceable to the fullest extent of the applicable laws.

(iii) Reformation. The parties hereunder agree that it is their intention that the Restrictive Covenants be enforced in accordance with their terms to the maximum extent possible under applicable law. The parties further agree that, in the event any court of competent jurisdiction shall find that any provision hereof is not enforceable in accordance with its terms, the court shall reform the Restrictive Covenants such that they shall be enforceable to the maximum extent permissible at law.

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(ii) Elective Right of the Company. In the event that Executive challenges the enforceability of the Restrictive Covenants (or asserts an affirmative defense to an action seeking to enforce the Restrictive Covenants) based on an argument that the Restrictive Covenants are (x) not enforceable as a matter of law, (y) unreasonable in geographical scope or duration or (z) void as against public policy, the Company shall have the right (1) to cease making the payments required under Section 6 above and, upon demand, to have Executive repay, within 10 business days of any such demand, any such payments already made. Any right afforded to, or exercised by, the Company hereunder shall in no way affect the enforceability of the Restrictive Covenants or any other right of the Company hereunder.

12. Assignment and Successors.

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

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

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

13. Miscellaneous.

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

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

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

(d) Entire Agreement. Except as provided herein, this Agreement contains the entire agreement between the Company and Executive with respect to the subject matter hereof and, from and after the Effective Date, this Agreement shall supersede any other agreement between the parties with respect to the subject matter hereof, including without limitation, the Prior Agreement.

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

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


To Company:		ScanSource, Inc.
		6 Logue Court
		Greenville, SC 29615
		Attn: General Counsel


To Executive:		To the address specified on Exhibit A to this Agreement

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

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

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

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


EXECUTIVE:

Name (print): Jeffrey A. Bryson

Signature:		/s/ Jeffrey A. Bryson

Date: September 30, 2004

SCANSOURCE, INC.:

By:		/s/ Michael L. Baur
Name:		Michael L. Baur
Title:		Chief Executive Officer
Date:		September 30, 2004

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EXHIBIT A to EMPLOYMENT AGREEMENT

Executive: Jeffrey A. Bryson

Title: Vice President of Administration and Investor Relations

Base Salary: $180,000 annually

Incentive Compensation: Incentive Compensation earned in 2004 shall be based on the following:


2004 Variable Pay Program:

A.		You are eligible to receive $5,000 per quarter based on achievement of objectives

B.		You are eligible to receive an additional $4,000 to $7,000 per quarter based on achievement of variable performance objectives

2005 and 2006 Variable Pay Programs:

The variable pay program for 2005 and 2006 will be determined by February 28, 2005 and 2006, respectively.


Days of Paid Vacation per Fiscal Year:		Approving Person:

20		Chief Executive Officer

Executive Notice Address:

102 Robin Road
Greenville, SC 29609

Initials: /

EXHIBIT B to EMPLOYMENT AGREEMENT

Form of Release

THIS RELEASE (“Release”) is granted effective as of the day of , , by (“Executive”) in favor of ScanSource, Inc. (the “Company”). This is the Release referred to that certain Employment Agreement dated as of January 1, 2004 by and between the Company and Executive (the “Employment Agreement”). Executive gives this Release in consideration of the Company’s promises and covenants as recited in the Employment Agreement, with respect to which this Release is an integral part.

1. Release of the Company. Executive, for himself, his successors, assigns, attorneys, and all those entitled to assert his rights, now and forever hereby releases and discharges the Company and its respective officers, directors, stockholders, trustees, employees, agents, parent corporations, subsidiaries, affiliates, estates, successors, assigns and attorneys (the “Released Parties”), from any and all claims, actions, causes of action, sums of money due, suits, debts, liens, covenants, contracts, obligations, costs, expenses, damages, judgments, agreements, promises, demands, claims for attorney’s fees and costs, or liabilities whatsoever, in law or in equity, which Executive ever had or now has against the Released Parties, including any claims arising by reason of or in any way connected with any employment relationship which existed between the Company or any of its parents, subsidiaries, affiliates, or predecessors, and Executive. It is understood and agreed that this Release is intended to cover all actions, causes of action, claims or demands for any damage, loss or injury, which may be traced either directly or indirectly to the aforesaid employment relationship, or the termination of that relationship, that Executive has, had or purports to have, from the beginning of time to the date of this Release, whether known or unknown, that now exists, no matter how remotely they may be related to the aforesaid employment relationship including but not limited to claims for employment discrimination under federal or state law, except as provided in Paragraph 2; claims arising under Title VII of the Civil Rights Act, 42 U.S.C. § 2000(e), et seq. or the Americans With Disabilities Act, 42 U.S.C. § 12101 et seq.; claims for statutory or common law wrongful discharge, including any claims arising under the Fair Labor Standards Act, 29 U.S.C. § 201 et seq.; claims for attorney’s fees, expenses and costs; claims for defamation; claims for wages or vacation pay; claims for benefits, including any claims arising under the Employee Retirement Income Security Act, 29 U.S.C. § 1001, et seq.; and provided, however, that nothing herein shall release the Company of its obligations to Executive under the Employment Agreement or any other contractual obligations between the Company or its affiliates and Executive, or any indemnification obligations to Executive under the Company’s bylaws, certificate of incorporation, South Carolina law, or otherwise.

2. Release of Claims Under Age Discrimination in Employment Act. Without limiting the generality of the foregoing, Executive agrees that by executing this Release, he has released and waived any and all claims he has or may have as of the date of this

Release for age discrimination under the Age Discrimination in Employment Act, 29 U.S.C. § 621, et seq. It is understood that Executive is advised to consult with an attorney prior to executing this Release; that he in fact has consulted a knowledgeable, competent attorney regarding this Release; that he may, before executing this Release, consider this Release for a period of twenty-one (21) calendar days; and that the consideration he receives for this Release is in addition to amounts to which he was already entitled. It is further understood that this Release is not effective until seven (7) calendar days after the execution of this Release and that Executive may revoke this Release within seven (7) calendar days from the date of execution hereof.

Executive agrees that he has carefully read this Release and is signing it voluntarily. Executive acknowledges that he has had twenty one (21) days from receipt of this Release to review it prior to signing or that, if Executive is signing this Release prior to the expiration of such 21-day period, Executive is waiving his right to review the Release for such full 21-day period prior to signing it. Executive has the right to revoke this release within seven (7) days following the date of its execution by him. However, if Executive revokes this Release within such seven (7) day period, no severance benefit will be payable to him under the Employment Agreement and he shall return to the Company any such payment received prior to that date.

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



Executive

Date:

EXHIBIT C to EMPLOYMENT AGREEMENT

Definition of Change in Control:

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

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

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

(iii) the consummation of a reorganization, merger, consolidation, statutory share exchange or similar form of corporate transaction involving the Company or a Subsidiary (a “Reorganization”), or the sale or other disposition of all or substantially all of the Company’s assets (a “Sale”) or the acquisition of assets or stock of another corporation (an “Acquisition”), unless immediately following such Reorganization, Sale or Acquisition: (A) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the outstanding Company Common Stock and outstanding Company Voting Securities immediately prior to such Reorganization, Sale or Acquisition

beneficially own, directly or indirectly, more than 55% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Reorganization, Sale or Acquisition (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company’s assets or stock either directly or through one or more subsidiaries, the “Surviving Corporation”) in substantially the same proportions as their ownership, immediately prior to such Reorganization, Sale or Acquisition, of the outstanding Company Common Stock and the outstanding Company Voting Securities, as the case may be, and (B) no person (other than (x) the Company or any Subsidiary of the Company, (y) the Surviving Corporation or its ultimate parent corporation, or (z) any employee benefit plan (or related trust) sponsored or maintained by any of the foregoing is the beneficial owner, directly or indirectly, of 35% or more of the total common stock or 35% or more of the total voting power of the outstanding voting securities eligible to elect directors of the Surviving Corporation, and (C) at least a majority of the members of the board of directors of the Surviving Corporation were Incumbent Directors at the time of the Board’s approval of the execution of the initial agreement providing for such Reorganization, Sale or Acquisition (any Reorganization, Sale or Acquisition which satisfies all of the criteria specified in (A), (B) and (C) above shall be deemed to be a “Non-Qualifying Transaction”); or

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

EX-10.2 3 dex102.htm NONQUALIFIED DEFERRED COMPENSATION PLAN Nonqualified Deferred Compensation Plan

Exhibit 10.2

SCANSOURCE, INC.

NONQUALIFIED DEFERRED COMPENSATION PLAN

Effective July 1, 2004

SECTION 1

Purpose and Administration

1.1. Name of Plan. ScanSource, Inc. (the “Company”) hereby adopts the ScanSource, Inc. Deferred Compensation Plan (the “Plan”), as set forth herein.

1.2. Effective Date. The effective date of this Plan is July 1, 2004.

1.3. Purpose. The Company has established the Plan primarily for the purpose of providing deferred compensation to a select group of management or highly compensated employees of the Participating Employers. The Plan is intended to be a top-hat plan as described in Section 201(2), 301(a)(3) and 401(a)(1) of ERISA. The Company intends that the Plan (and each Trust under the Plan as described in Section 13.2) shall be treated as unfunded for tax purposes and for purposes of Title I of ERISA. The Plan is not intended to qualify under Section 401(a) or the Code. A Participating Employer’s obligations hereunder, if any, to a Participant (or to a Participant’s beneficiary) shall be unsecured and shall be a mere promise by the Participating Employer to make payments hereunder in the future. A Participant (and, if applicable, the Participant’s beneficiary) shall be treated as a general unsecured creditor of any Participating Employer.

1.4. Administration. The Plan shall be administered by the committee appointed by the Company’s Board of Directors.

(a)	Authority. The Plan Administrative Committee shall have full authority and power to administer and construe the Plan, subject to applicable requirements of law. Without limiting the generality of the foregoing, the Plan Administrative Committee shall have the following powers and duties:

(i)

To make and enforce such rules and regulations as it deems necessary or proper for the administration of the Plan;

(ii)

To interpret the Plan and to decide all questions concerning the Plan;

(iii)

To designate persons eligible to participate in the Plan, subject to the approval of the Board;

(iv)

To determine the amount and the recipient of any payments to be made under the Plan;

(v)

To designate and value any investments deemed held in the Accounts;

(vi)

To appoint such agents, counsel, accountants, consultants and other persons as may be required to assist in administering the Plan; and

ScanSource, Inc.

Deferred Compensation Plan

Effective July 1, 2004

(vii)

To make all other determinations and to take all other steps necessary or advisable for the administration of the Plan.

Subject to paragraph (b) below, all decisions made by the Plan Administrative Committee pursuant to the provisions of the Plan shall be made in its sole discretion and shall be final, conclusive, and binding upon all parties.

(b)	Authority of Board of Directors. Notwithstanding anything in this Plan to the contrary, the Board shall have the power

(i)

to review and approve the persons who will be eligible to participate in the Plan; and

(ii)

to make determinations with respect to the participation and benefits of to any member of the Plan Administrative Committee who is a participant in the Plan.

(c)

Delegation of Duties. The Plan Administrative Committee may delegate such of its duties and may engage such experts and other persons as it deems appropriate in connection with administering the Plan. The Plan Administrative Committee shall be entitled to rely conclusively upon, and shall be fully protected in any action taken by the Plan Administrative Committee, in good faith in reliance upon any opinions or reports furnished to it by any such experts or other persons.

(d)

Expenses. All expenses incurred prior to the termination of the Plan that shall arise in connection with the administration of the Plan, including, without limitation, administrative expenses and compensation and other expenses and charges of any actuary, counsel, accountant, specialist, or other person who shall be employed by the Plan Administrative Committee in connection with the administration of the Plan shall be paid by the Participating Employers.

(e)

Indemnification of Plan Administrative Committee. The Participating Employers agree to indemnify and to defend to the fullest extent permitted by law any person serving as a member of the Plan Administrative Committee, and each employee of a Participating Employer or any of their affiliated companies appointed by the Plan Administrative Committee to carry out duties under this Plan, against all liabilities, damages, costs and expenses (including attorneys’ fees and amounts paid in settlement of any claims approved by the Company) occasioned by any act or omission to act in connection with the Plan, if such act or omission is in good faith.

(f)	Liability. To the extent permitted by law, neither the Plan Administrative Committee nor any other person shall incur any liability for any acts or for any failure to act except for liability arising out of such person’s own willful misconduct or willful breach of the Plan.

ScanSource, Inc.

Deferred Compensation Plan

Effective July 1, 2004

SECTION 2

Definitions

For purposes of the Plan, the following words and phrases shall have the meanings set forth below, unless their context clearly requires a different meaning:

2.1. Account. “Deferred Compensation Account” means the bookkeeping account maintained for the Participant in accordance with Section 7.1 and which includes the following subaccounts:

(a)	“Compensation Deferral Account” means the portion of the Participant’s Account attributable to Compensation Deferrals, and the earnings thereon.

(b)	“Employer Contribution Account” means the portion of the Participant’s Account attributable to Discretionary Matching Contributions, and the earnings thereon.

2.2. Affiliate. “Affiliate” means any corporation, partnership, joint venture, association or similar organization or entity in which the Company owns, directly or indirectly, a majority of equity interests.

2.3. Board. “Board” means the Board of Directors of ScanSource, Inc.

2.4. Change in Control. “Change in Control” means a Change in Control as described in Appendix A to this Plan.

2.5. Code. “Code” means the Internal Revenue Code of 1986, as amended from time to time. Any reference to a section of the Code includes any comparable section or sections of any future legislation that amends, supplements or supersedes that section.

2.6. Company. “Company” means ScanSource, Inc. or any successor company that adopts this Plan.

2.7. Compensation. “Compensation” means such forms of compensation payable in cash as may be designated by the Plan Administrative Committee, from time to time, in its sole discretion, as eligible for deferral under this Plan. Compensation may include, but shall be not limited to, base salary, and any bonus compensation, payable to the Participant.

2.8. Compensation Deferrals. “Compensation Deferrals” means the amount of Compensation that a Participant elects to defer pursuant to Section 4.

2.9. Deferral Election. “Deferral Election” means an election made by a Participant pursuant to Section 4 to defer Compensation.

ScanSource, Inc.

Deferred Compensation Plan

Effective July 1, 2004

2.10. Discretionary Matching Contribution. “Discretionary Matching Contribution” means the contribution deemed credited to a Participant’s Account pursuant to Section 5.

2.11. Eligible Employee. “Eligible Employee” means an employee of a Participating Employer who has been designated pursuant to Section 3 as eligible to make contributions to the Plan.

2.12. “ERISA. “ERISA” means the Employee Retirement Income Security Act of 1974, as amended from time to time. Any reference to a section of ERISA includes any comparable section or sections of any future legislation that amends, supplements or supersedes that section.

2.13. Participant. “Participant” means an Employee who meets the eligibility criteria set forth in Section 3 and who has made a Deferral Election in accordance with the terms of the Plan.

2.14. Participating Employer. “Participating Employer” means ScanSource, Inc., and any of its participating Affiliates, or any successor companies.

2.15. Plan Administrative Committee. The “Plan Administrative Committee” means the committee appointed by the Company’s Board of Directors to administer the Plan.

2.16. Plan Year. “Plan Year” shall be July 1 through June 30, which is the fiscal year of the Company.

2.17. Retirement Date. “Retirement Date” means the date on which a Participant elects to retire having an attained age of 65 or greater.

2.18. Totally Disabled or Total Disability. A Participant shall be considered to be “Totally Disabled” or to have a “Total Disability” if he or she becomes entitled to receive disability benefits under a Participating Employer’s long-term disability insurance plan.

2.19. Valuation Date. “Valuation Date” means each business day the financial markets and Wachovia are open, unless the underlying investment requires a less frequent valuation.

2.20. Other Definitions. In addition to the terms defined in this Section 2, other terms are defined when first used in Sections of this Plan.

ScanSource, Inc.

Deferred Compensation Plan

Effective July 1, 2004

SECTION 3

Eligibility and Participation

3.1. Eligible Employees. Only employees who are designated by the Plan Administrative Committee and approved by the Board shall be eligible to participate in the Plan. See Appendix B.

3.2. Participation.

(a)

An Eligible Employee shall become a Participant in the Plan by (i) completing and submitting to the Company a Deferral Election in accordance with Section 4 below, and (ii) complying with such terms and conditions as the Board and/or the Plan Administrative Committee may from time to time establish for the implementation of the Plan, including, but not limited to, any condition the Board and/or the Plan Administrative Committee may deem necessary or appropriate for the Participating Employers to meet their obligations under the Plan.

(b)

An employee shall only be a Participant eligible to have compensation deferred under this Plan while he or she is designated as an Eligible Employee. If an employee subsequently ceases to be a designated eligible employee after becoming a Participant, he or she shall remain a Participant for the other purposes of the Plan to the extent of any existing Account balance subject to Section 14.1.

ScanSource, Inc.

Deferred Compensation Plan

Effective July 1, 2004

SECTION 4

Compensation Deferrals

4.1. Deferral Elections. Subject to Section 4.2, an Eligible Employee may elect to defer receipt of Compensation for a Plan Year as follows:

(a)

Except as otherwise provided in paragraph (b) below, an election to defer receipt of Compensation that otherwise would be payable to him or her for a Plan Year must be made no later than the last day of the Plan Year preceding the Plan Year in which the Compensation being deferred is earned and is made available to the Participant.

(b)

Notwithstanding paragraph (a), (i) an employee who becomes eligible to participate as of July 1, 2004 must make his or her election no later than July 30, 2004, and (ii) an employee who first becomes eligible to participate during a Plan Year may make an election to defer receipt of compensation payable within thirty (30) days after he or she first becomes eligible to participate in the Plan. An election made pursuant to this paragraph will be effective as of the first payroll period after such election is filed.

(c)	An Eligible Employee’s Deferral Election for any Plan Year shall continue in effect for subsequent Plan Years unless and until the employee

(i)

makes a new Deferral Election in accordance with the requirements of this Section 4,

(ii)

modifies or revokes the election as provided by Section 4.4, or

(iii)

fails to elect to have the maximum salary deferral contribution made to the ScanSource, Inc. 401(k) Plan for a Plan Year as required by Section 4.2.

4.2. Required 401(k) Plan Salary Deferral Election. Notwithstanding anything in this Section 4 to the contrary, an Eligible Employee may not make a Deferral Election for a Plan Year unless he or she has elected to make the maximum required salary deferral contribution to the ScanSource, Inc. 401(k) Plan for that Plan Year. The amount of the maximum required 401(k) Plan salary deferral election for a Plan Year will be determined by the Plan Administrative Committee at least thirty (30) days prior to the beginning of the Plan Year.

4.3. Amount of Deferral. A Participant may elect to defer receipt of a percentage of his or her Compensation payable for a Plan Year subject to the following rules:

(a)	The maximum percentage Compensation that can be deferred for a Plan Year will be determined by the Plan Administrative Committee at least thirty (30) days prior to the beginning of the Plan Year.

ScanSource, Inc.

Deferred Compensation Plan

Effective July 1, 2004

(b)

The amount of the deferral elected for the Plan Year cannot reduce the Participant’s cash compensation below the amount the Participating Employer determines necessary to satisfy applicable federal, state and local income and employment withholding taxes and any obligations to make benefit plan contributions.

4.4. Modification or Revocation of Deferral Election of Participant. A Participant may not change the amount of his or her Compensation Deferrals during a Plan Year. However, a Participant may discontinue Compensation Deferrals at any time by filing such forms and subject to such limitations and restrictions as the Plan Administrative Committee may prescribe in its discretion. If approved by the Plan Administrative Committee, revocation shall take effect as of the first payroll period next following approval by the Plan Administrative Committee. If a Participant discontinues a Deferral Election during a Plan Year, he or she will not be permitted to elect to make Compensation Deferrals again until the next Plan Year.

4.5. General Rules. An election to defer Compensation shall be made at the time, and in the form, manner, and in accordance with the notice requirements, prescribed by the Plan Administrative Committee.

4.6. Compensation Deferral Account.

(a)	The amount of Compensation deferred by a Participant shall be credited to the Participant’s Compensation Deferral Account as of the Valuation Date coincident with or immediately following the date such Compensation would, but for the Participant’s Deferral Election, be payable to the Participant.

(b)	The Compensation Deferrals, and the earnings thereon, credited to the Participant’s Compensation Deferral Account shall be immediately 100% vested and nonforfeitable at all times.

ScanSource, Inc.

Deferred Compensation Plan

Effective July 1, 2004

SECTION 5

Discretionary Matching Contributions

5.1. Discretionary Matching Contribution.

(a)

For any Plan Year, a Participating Employer may credit to the Deferred Compensation Account of any Participant employed by that Participating Employer with a Discretionary Matching Contribution in such amount as may be determined by the Participating Employer in its sole discretion at least thirty (30) days prior to the beginning of the Plan Year.

(b)

The amount of the Discretionary Matching Contribution to be credited to a Participant’s Account for a Plan Year shall be equal to such dollar amount, such percentage of a Participant’s Compensation Deferrals, or any combination thereof, as may be determined by the Participating Employer in its sole discretion.

(c)	Any Discretionary Matching Contribution will be credited to a Participant’s Participating Employer Contribution Account as of the Valuation Date specified by the Participating Employer.

5.2. Vesting of Discretionary Matching Contribution.

(a)	Except as otherwise provide in paragraph (b) below and subject to Section 10, the Discretionary Matching Contribution credited to a Participant’s Account with respect to a particular Plan Year shall become vested in accordance with the following schedule:


Years of Service Completed Following Plan Year for which Contribution is Credited		Vested Percentage
Less than 3 Years of Service		0%
3 Years of Service		50%
4 Years of Service		75%
5 or more Years of Service		100%

A Participant will be credited with a Year of Service if

(i)

he or she is actively employed by a Participating Employer for a continuous period of at least 6 full months during a Plan Year, or

(ii)

he or she fails to meet the active employment requirement in clause (i) above solely as a result of an approved leave of absence.

ScanSource, Inc.

Deferred Compensation Plan

Effective July 1, 2004

(b)

Notwithstanding the foregoing vesting schedule, the balance credited to a Participant’s Participating Employer Contribution Account shall be become fully vested if the Participant remains continuously employed by a Participating Employer or an Affiliate until his or her death, Total Disability, attainment of age 65, or the occurrence of a Change in Control.

ScanSource, Inc.

Deferred Compensation Plan

Effective July 1, 2004

SECTION 6

Distribution Elections

Subject to the other terms contained in this Plan, a Participant may make the following distribution elections:

6.1. In-Service Distribution. The Participant may elect to have the total amount of Compensation Deferrals and vested Discretionary Matching Contributions credited to his or her Account for a particular Plan Year, and any earnings thereon, distributed in a lump sum at a specified date prior to his or her termination of employment subject to the following rules:

(a)	The specified in-service distribution date cannot be earlier than the end of the five (5) Plan Year period following the Plan Year for which such Compensation Deferrals and Discretionary Matching Contributions are credited to his or her Account.

(b)	Such election shall be made at the same time the Participant makes the Deferral Election in accordance with Section 4 for that Plan Year. Any such election shall be irrevocable.

6.2. Retirement Distribution. A Participant may elect to have his or her Account distributed upon termination of employment following his or her Retirement Date as follows:

(a)	The Participant may elect to have his or her Account distributed all or part in a single lump sum payment; or

(b)

The Participant may elect to have the balance of his or her Account distributed in substantially equal monthly installment payments for a period of 36, 48 or 60 months. The balance of any Account not distributed in a single lump sum pursuant to Section 6.2(a) shall continue to be invested and reinvested as provided in Section 7.2 until the balance of the Account is distributed.

Such election shall be made at the time the Participant first elects to participate in this Plan; provided that the Participant may change his or her retirement distribution election by submitting a new election to the Plan Administrative Committee at least one (1) year prior to his or her Retirement Date.

Notwithstanding the provisions in this Section 6.2, the Company reserves the right to distribute a Participant’s Account in a lump sum if the Account balance totals less than $10,000.

6.3. Election of Distribution Upon Change in Control. A Participant may elect to have his or her Account distributed immediately following a Change in Control. Such election shall be made at the time the Participant first elects to participate in this Plan. Any such election shall be irrevocable.

ScanSource, Inc.

Deferred Compensation Plan

Effective July 1, 2004

6.4. General Rules. Elections under this Section 6 shall be made in the form, manner, and in accordance with the notice requirements prescribed by the Plan Administrative Committee. Except as otherwise provided in this Plan, if a Participant fails to make a distribution election under this Section 6, the balance credited to his or her Account will be distributed in a single lump sum payment following his or her employment termination date.

ScanSource, Inc.

Deferred Compensation Plan

Effective July 1, 2004

SECTION 7

Deferred Compensation Accounts

7.1. Participant’s Accounts. The Company shall establish and maintain a separate memorandum account in the name of each Participant. Such account shall be credited or charged with (a) the Participant’s Compensation Deferrals, if any; (b) Discretionary Matching Contributions, if any; (c) income, gains, losses, and expenses of investments deemed held in such account; and (d) distributions from such account.

7.2. Investment of Accounts.

(a)

The amount credited to a Participant’s Account shall be deemed to be invested and reinvested in mutual funds, stocks, bonds, securities, and any other assets or investment vehicles, as may be selected by the Plan Administrative Committee in its sole discretion; provided that in no event shall such Accounts be deemed to be invested in securities issued by the Company.

(b)

A Participant may elect the manner in which his or her Account is deemed to be invested and reinvested among the deemed investment options selected by the Plan Administrative Committee. A Participant’s investment election shall remain in effect until the Participant properly files a change of election with the Plan Administrative Committee. In the event that any Participant fails to make an election with respect to the investment of all or a portion of the balance in his or her account at any time, the Participant shall be deemed to have elected that such balance be deemed to be invested in a money market (or equivalent) fund and such assets shall remain in such investment fund until such time as the Participant directs otherwise.

(c)	A Participant’s investment direction (or any change in his or her investment direction) shall be made in the form, manner, and in accordance with the notice requirements, prescribed by the Plan Administrative Committee.

(d)

A Participant, by electing to participate in this Plan, agrees on behalf of himself or herself and his or her designated beneficiaries, to assume all risk in connection with any increase or decrease in value of the investments which are deemed to be held in his or her account. Each Participant further agrees that the Plan Administrative Committee and the Participating Employer shall not in any way be held liable for any investment decisions or for the failure to make any investments by the Plan Administrative Committee.

ScanSource, Inc.

Deferred Compensation Plan

Effective July 1, 2004

SECTION 8

Distribution of Compensation Deferral Account Prior to Termination of Employment

All or a portion of the balance credited to a Participant’s Compensation Deferral Account may be distributed prior to termination of a Participant’s employment as follows:

8.1. Designated In-Service Distribution Date. If the Participant has elected to receive an in-service distribution in accordance with Section 6.1, the Compensation Deferrals subject to such election, and any earnings thereon, shall be distributed to the Participant in a single lump sum payment as of the specified distribution date.

8.2. Financial Hardship. The Plan Administrative Committee, in his sole discretion, may permit a hardship payment to be made to a Participant at any time prior to termination of employment in the event of an “unforeseeable emergency”. Withdrawals of amounts because of an unforeseeable emergency will be permitted to the extent reasonably needed to satisfy the emergency need.

(a)

For purposes of this Section, an “unforeseeable emergency” is a severe financial hardship to the Participant resulting from a sudden and unexpected illness or accident of the Participant or of a dependent (as defined in Section 152(a) of the Code) of the Participant, loss of the Participant’s property due to casualty, or other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant.

(b)	The circumstances that will constitute an unforeseeable emergency will depend upon the facts of each case, but, in any case, payment may not be made to the extent that such hardship is or may be relieved:

(i)

Through reimbursement or compensation by insurance or otherwise;

(ii)

By liquidation of the Participant’s assets, to the extent the liquidation of such assets would not itself cause severe financial hardship; or

(iii)

By cessation of Compensation Deferrals under the Plan.

8.3. Distribution Upon Change in Control. If a Participant has elected to receive distribution of his or her Account upon the occurrence of a Change in Control, the balance credited to the Participant’s Account, shall be distributed to the Participant in a single lump sum payment within 30 days after the Change in Control.

ScanSource, Inc.

Deferred Compensation Plan

Effective July 1, 2004

SECTION 9

Distribution of Accounts Following Termination of Employment

9.1. Termination of Employment Prior to Retirement Date. In the event that a Participant terminates employment for any reason other than death or becoming Totally Disabled prior to his or her Retirement Date, the vested balance credited to his or her Account will be distributed to the Participant in a single lump sum within the calendar month following the calendar month of the Participant’s employment termination date.

9.2. Termination of Employment At or After Retirement Date. In the event that a Participant terminates employment at or after his or her Retirement Date, the Participant’s Account will be distributed as follows:

(a)	Distribution will be made to the Participant at the time and in the manner elected by the Participant in accordance with Section 6.2 commencing with the first calendar month following the calendar month of the Participant’s employment termination date.

Notwithstanding the foregoing, if the balance credited to the Participant’s Account as of the employment termination date is less than $10,000, then distribution will be made in a single lump sum payment within the calendar month following the calendar month of the Participant’s employment termination date.

(b)	If the Participant has not made a retirement distribution election, the Account will be distributed in a single lump sum payment no later than first calendar month following the calendar month of the Participant’s employment termination date.

9.3. Termination of Employment Due to Total Disability. In the event that a Participant terminates employment at any time by reason of becoming Totally Disabled, the balance credited to his or her Account will be distributed to the Participant in a single lump payment within the calendar month following the calendar month of the Participant’s employment termination date.

9.4. Death. In the event that a Participant’s employment is terminated by reason of his or her death, the balance credited to his or her Account will be distributed to the Participant’s designated beneficiary in a single lump payment within the calendar month following the calendar month of the Participant’s death.

9.5. Designated Beneficiary.

(a)

The Participant may name a beneficiary or beneficiaries to receive the balance of the Participant’s Deferred Compensation Account in the event of the Participant’s death prior to the payment of the Participant’s entire Deferred Compensation Account. To be effective, any beneficiary designation must be filed in writing with the Plan Administrative Committee in accordance with rules and procedures adopted by the Plan Administrative Committee for that purpose.

ScanSource, Inc.

Deferred Compensation Plan

Effective July 1, 2004

(b)

A Participant may revoke an existing beneficiary designation by filing another written beneficiary designation with the Plan Administrative Committee. The latest beneficiary designation received by the Plan Administrative Committee shall be controlling; provided, however, that no designation, or change or revocation thereof, shall be effective unless received by the Plan Administrative Committee prior to the Participant’s death.

(c)	If no beneficiary is named by a Participant, or if the Participant survives all of the Participant’s named beneficiaries and does not designate another beneficiary, the Participant’s Deferred Compensation Account shall be paid in the following order of precedence:

(i)

The Participant’s Spouse;

(ii)

The Participant’s children (including adopted children) per stirpes; or

(iii)

The Participant’s estate.

ScanSource, Inc.

Deferred Compensation Plan

Effective July 1, 2004

SECTION 10

Forfeiture of Benefits

10.1. Notwithstanding anything in this Plan to the contrary, if the Plan Administrative Committee, in its sole discretion, determines that

(a)	the Participant’s employment with the Participating Employer has been terminated for Good Cause or,

(b)	if at any time during which a Participant is entitled to receive payments under the Plan, the Participant has breached any of his or her post-employment obligations, including, but not limited to, any restrictive covenants or obligations under any agreement and general release,

then the Plan Administrative Committee may cause the Participant’s entire interest in benefits attributable to his or her Employer Contribution Account to be forfeited and discontinued, or may cause the Participant’s payments of benefits under the Plan to be limited or suspended for such other period the Plan Administrative Committee finds advisable under the circumstances, and may take any other action and seek any other relief the Plan Administrative Committee, in its sole discretion, deems appropriate.

10.2. “Good Cause” means the Participant’s fraud, dishonesty, or willful violation of any law or significant policy of the Participating Employer that is committed in connection with the Participant’s employment by or association with the Company or Affiliate. Whether a Participant has been terminated for Good Cause shall be determined by the Plan Administrative Committee.

Regardless of whether a Participant’s employment initially was considered to be terminated for any reason other than Good Cause, the Participant’s employment will be considered to have been terminated for Good Cause for purposes of this Plan if the Plan Administrative Committee subsequently determines that the Participant engaged in an act constituting Good Cause.

10.3. The decision of the Plan Administrative Committee shall be final. The omission or failure of the Plan Administrative Committee to exercise this right at any time shall not be deemed a waiver of its right to exercise such right in the future. The exercise of discretion will not create a precedent in any future cases.

ScanSource, Inc.

Deferred Compensation Plan

Effective July 1, 2004

SECTION 11

Appeals Procedure

11.1. The Plan Administrative Committee shall approve or wholly or partially deny all claims for benefits under the Plan within a reasonable period of time after all required documentation has been furnished to the Plan Administrative Committee.

11.2. If a claim is wholly or partially denied, the Plan Administrative Committee shall provide the claimant with written notice setting forth the specific reasons for the denial, making reference to the pertinent provisions of the Plan or the Plan documents on which the denial is based; describe any additional material or information that should be received before the claim may be acted upon favorably, and explain why such material or information, if any, is needed; and inform the person making the claim of his or her right pursuant to this Section to request review of the decision by the Plan Administrative Committee.

11.3. A claimant shall have the right to request a review of the decision denying the claim. Such request must be made by filing a written application for review with the Plan Administrative Committee no later than sixty (60) days after receipt by the claimant of written notice of the denial of his or her claim. The claimant may review pertinent Plan documents and shall submit such written comments and other information which he or she wishes the Plan Administrative Committee to consider in connection with his or her claim.

11.4. The Plan Administrative Committee may hold any hearing or conduct any independent investigation which it deems necessary to render its decision on review. Such decision shall be made as soon as practicable after the Plan Administrative Committee receives the request for review. Written notice of the decision on review shall be promptly furnished to the claimant and shall include specific reasons for the decision.

11.5. For all purposes under the Plan, decisions on claims (where no review is requested) and decisions on review (where review is requested) shall be final, binding and conclusive on all interested persons.

ScanSource, Inc.

Deferred Compensation Plan

Effective July 1, 2004

SECTION 12

Amendment or Termination of the Plan

12.1. The Plan Administrative Committee may, in its sole discretion, terminate, suspend or amend this Plan at any time or from time to time, in whole or in part, with respect to any Participants or beneficiaries whether or not payments have commenced to such Participants or beneficiaries. Notwithstanding the foregoing, no amendment, termination, or suspension of the Plan will affect a Participant’s right to receive amounts previously deferred under the Plan.

12.2. In the event the Plan is terminated, the Plan Administrative Committee shall distribute the remaining amounts in Participants’ Accounts at such times and in such ways as the Plan Administrative Committee, in its sole discretion, may deem appropriate.

ScanSource, Inc.

Deferred Compensation Plan

Effective July 1, 2004

SECTION 13

Unfunded Plan; Change in Control

13.1. Unfunded Plan. Nothing in this Plan shall be construed as giving any Participant, or his or her legal representative or designated beneficiary, any claim against any specific assets of the Company or any of its affiliated companies or as imposing any trustee relationship upon the Company or any of its affiliated companies in respect of the Participant. The Participating Employers shall not be required to segregate any assets in order to provide for the satisfaction of the obligations hereunder. Investments deemed held in the Accounts shall continue to be a part of the general funds of the applicable Participating Employers, and no individual or entity other than the Participating Employer shall have any interest whatsoever in such funds. If and to the extent that the Participant or his or her legal representative or designated beneficiary acquires a right to receive any payment pursuant to this Plan, such right shall be no greater than the right of an unsecured general creditor of the applicable Participating Employer.

13.2. Rabbi Trust. The Participating Employers shall establish a trust (or trusts) for the purpose of providing funds for the payment of the amounts credited to Participants under the Plan subject to the following rules:

(a)	Such trust(s) shall be an irrevocable grantor trust containing provisions which are the same as, or are similar to, the provisions contained in the model “rabbi trust” set forth in Internal Revenue Service Revenue Procedure 92-64 (or any successor ruling thereto).

(b)

The Participating Employers shall make contributions to the trust(s) equal to the amount of the Compensation Deferrals and Discretionary Matching Contributions as soon as practicable, but in no event later 10 business days, following the date on which such contributions are credited to Participants’ Accounts.

(c)	The Participating Employers shall pay all costs relating to the establishment and maintenance of the trust(s) and the investment of funds held in such trust(s).

13.3. Change in Control. In the event of a Change in Control, the Participating Employers shall, as soon as possible, but in no event later than five (5) business days following a Change in Control, make an irrevocable contribution to the trust(s) established pursuant to Section 13.2 in an amount that is sufficient to pay the total amount credited to all Accounts under the Plan as of the date of the Change in Control.

ScanSource, Inc.

Deferred Compensation Plan

Effective July 1, 2004

SECTION 14

Miscellaneous Provisions

14.1. Top-Hat Status. Notwithstanding any provision of the Plan to the contrary, if the Plan Administrative Committee determines that participation in the Plan by any one or more Participants shall cause the Plan to be subject to Parts 2, 3 or 4 of Title I of ERISA, the entire interest of such Participant or Participants under the Plan shall be immediately paid to such Participant or Participants by the Participating Employer, or shall otherwise be segregated from the Plan in the discretion of the Plan Administrative Committee, and such Participant or Participants shall cease to have any interest under the Plan.

14.2. Benefits Non-Assignable. Benefits under the Plan may not be anticipated, assigned or alienated, and will not be subject to claims of a Participant’s creditors by any process whatsoever, except as specifically provided in this Plan or by the Plan Administrative Committee in its sole discretion.

14.3. Right to Withhold Taxes. The Participating Employers shall have the right to withhold such amounts from any payment under this Plan as it determines necessary to fulfill any federal, state, or local wage or compensation withholding requirements.

14.4. No Right to Continued Employment. Neither the Plan, nor any action taken under the Plan, shall confer upon any Participant any right to continuance of employment by the Company or any of its affiliated companies nor shall it interfere in any way with the right of the Company or any of its affiliated companies to terminate any Participant’s employment at any time.

14.5. Mental or Physical Incompetency. If the Plan Administrative Committee determines that any person entitled to payments under the Plan is incompetent by reason of physical or mental disability, as established by a court of competent jurisdiction, the Plan Administrative Committee may cause all payments thereafter becoming due to such person to be made to any other person for his or her benefit, without responsibility to follow the application of amounts so paid. Payments made pursuant to this Section shall completely discharge the Plan Administrative Committee and the Participating Employer.

14.6. Unclaimed Benefit. Each Participant shall keep the Plan Administrative Committee informed in writing of his or her current address and the current address of his or her beneficiary. The Plan Administrative Committee shall not be obligated to search for the whereabouts of any person. If the location of a Participant is not made known to the Plan Administrative Committee within three (3) years after the date on which payment of the Participant’s Account may first be made, payment may be made as though the Participant had died at the end of the three (3) year period. If, within one additional year after such three (3) year period has elapsed, or, within three years after the actual death of a Participant, the Plan Administrative Committee is unable to locate any designated beneficiary of the Participant, then the Participating Employer shall have no further obligation to pay any benefit hereunder to such Participant or beneficiary or any other person and such benefit shall be irrevocably forfeited.

ScanSource, Inc.

Deferred Compensation Plan

Effective July 1, 2004

14.7. Suspension of Payments. If any controversy, doubt or disagreement should arise as to the person to whom any distribution or payment should be made, the Plan Administrative Committee, in its discretion, may, without any liability whatsoever, retain the funds involved or the sum in question pending settlement or resolution to the Plan Administrative Committee’s satisfaction of the matter, or pending a final adjudication by a court of competent jurisdiction.

14.8. Governing Laws. The provisions of the Plan shall be construed, administered and enforced according to applicable Federal law and the laws of State of South Carolina.

14.9. Severability. The provisions of the Plan are severable. If any provision of the Plan is deemed legally or factually invalid or unenforceable to any extent or in any application, then the remainder of the provision and the Plan, except to such extent or in such application, shall not be affected, and each and every provision of the Plan shall be valid and enforceable to the fullest extent and in the broadest application permitted by law.

14.10. No Other Agreements or Understandings. This Plan represents the sole agreement between the Participating Employers and Participants concerning its subject matter, and it supersedes all prior agreements, arrangements, understandings, warranties, representations, and statements between or among the parties concerning its subject matter.

ScanSource, Inc.

Deferred Compensation Plan

Effective July 1, 2004

IN WITNESS WHEREOF, the Company has caused this Plan to be executed by its duly authorized officer on this 1st day of July, 2004.


		SCANSOURCE, INC.
		(the “Company”)

		By:	/s/ Jeffrey A. Bryson
		Title:	VP of Benefits

ATTEST:

By:	/s/ Amy Pharr
Title:	Manager, Benefits and Compensation

ScanSource, Inc.

Deferred Compensation Plan

Effective July 1, 2004

APPENDIX A

Change in Control

A “Change in Control” of the Company shall occur upon the happening of any of the following:

(a)

The purchase or other acquisition by any person, entity or group of persons, within the meaning of section 13(d) or 14(d) of the Securities Exchange Act of 1934 (“Act”), or any comparable successor provisions, other than the trustee of any other trust or plan maintained for the benefit of employees of the Company, of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Act) of 30 percent or more of either the outstanding shares of common stock or the combined voting power of the Company’s then outstanding voting securities entitled to vote generally, or the approval by the shareholders of the Company of a reorganization, merger, share exchange or consolidation, in each case, where persons who were shareholders of the Company immediately prior to such reorganization, merger, share exchange or consolidation do not, immediately thereafter, own more than 50 percent of the combined voting power entitled to vote generally in the election of directors of the reorganized, merged, surviving or consolidated company’s then outstanding securities; or a liquidation or dissolution of the Company or of the sale of all or substantially all of the Company’s assets.

(b)	Consummation of a business combination between the Company and any entity which has a market capitalization equal to or greater than 80% of the market capitalization of the Company.

(c)

Individuals who, as of the date hereof, constitute the Board (the “Incumbent Board”) cease for any reason to constitute at least a 50% of the Board, provided that any person becoming a director subsequent to the date hereof whose election, or nomination for election by the Company’s shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board (other than an election or nomination of an individual whose initial assumption of office is in connection with an actual or threatened election contest relating to the election of the directors of the Company, as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Act) shall be considered as though such person were a member of the Incumbent Board.

(d)	A change of 50% in the Executive Officers of the Company at the level of Executive Vice President, Senior Vice President, Division President, and above within a consecutive twelve (12) month period.

For purposes of this Appendix A, the Incumbent Board, by a majority vote, shall have the power to determine on the basis of information known to them (a) the number of shares beneficially owned by any person, entity or group; (b) whether there exists an agreement, arrangement or understanding with another as to matters referred to in this Appendix A; and (c) such other matters with respect to which a determination is necessary under this Appendix A.

ScanSource, Inc.

Deferred Compensation Plan

Effective July 1, 2004

APPENDIX B

Eligible Employees as of July 1, 2004

Pursuant to Section 3.1, the Employees of the Participating Employers who are eligible to participate in the Plan are as follows:


Group A:	Michael L. Baur Steve H. Owings	President and CEO, ScanSource, Inc. Chairman of the Board

Group B:	Glen D. “Buck” Baker	Senior Vice-President, Merchandising
	Raymond S. Benbenek	Executive Vice-President, Corporate Operations
	John K. Black	President, Catalyst Telecom
	Jeffery A. Bryson	Vice-President, Administration and Investor Relations
	Richard P. Cleys	Vice-President, Finance and CFO
	Paul J. Constantine	Vice-President, Merchandising
	Gregory B. Dixon	Chief Technology Officer
	Andrea D. Meade	Executive Vice-President, Corporate Operations
	Robert S. McLain	Vice-President, Marketing and Business Development
	Gladys Y. More	Vice-President, Merchandising
	Peter J. O’Brien	Vice-President, Partner Services
	Clayton D. Sorensen	President, Paracon

ScanSource, Inc.

Deferred Compensation Plan

Effective July 1, 2004

EX-31.1 4 dex311.htm SECTION 302 CERTIFICATION Section 302 Certification

Exhibit 31.1

Certification of Chief Executive Officer

Pursuant to Section 302 of the

Sarbanes-Oxley Act of 2002

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

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

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

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

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

(a)

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

(b)

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

(c)

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

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

(a)

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

(b)

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

/s/ Michael L. Baur

Michael L. Baur, President and Chief

Executive Officer

(Principal Executive Officer)

November 5, 2004

EX-31.2 5 dex312.htm SECTION 302 CERTIFICATION Section 302 Certification

Exhibit 31.2

Certification of Chief Financial Officer

Pursuant to Section 302 of the

Sarbanes-Qxley Act of 2002

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

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

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

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

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

(a)

(b)

(c)

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

(a)

(b)

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

/s/ Richard P. Cleys

Richard P. Cleys, Vice President and Chief

Financial Officer

(Principal Financial Officer)

November 5, 2004

EX-32.1 6 dex321.htm SECTION 906 CERTIFICATION Section 906 Certification

Exhibit 32.1

Certification of the Chief Executive Officer of ScanSource, Inc.

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

of the Sarbanes-Oxley Act of 2002

In connection with the quarterly report of ScanSource, Inc. (the “Company”) on Form 10-Q for the quarter ended September 30, 2004 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned officer of the Company certifies, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

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

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


November 5, 2004		/s/ Michael L. Baur
		Michael L. Baur, President and Chief Executive Officer
		(Principal Executive Officer)

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

EX-32.2 7 dex322.htm SECTION 906 CERTIFICATION Section 906 Certification

Exhibit 32.2

Certification of the Chief Financial Officer of ScanSource, Inc.

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

of the Sarbanes-Oxley Act of 2002

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

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


November 5, 2004		/s/ Richard P. Cleys
		Richard P. Cleys, Vice President and Chief Financial Officer
		(Principal Financial Officer)

-----END PRIVACY-ENHANCED MESSAGE-----

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