ScanSource, Inc. History

Address:

6 Logue Court, Suite G
Greenville, South Carolina 29615
U.S.A.

Telephone: (864) 288-2432
Toll Free: 800-944-2439
Fax: (864) 288-1165

Public Company
Incorporated: 1992 as ScanSource, Inc.
Employees: 229
Sales: $182.80 million (1998)
Stock Exchanges: NASDAQ
Ticker Symbol: SCSC
NAIC: 334119 Other Computer Peripheral Equipment Manufacturing

Company Perspectives:

ScanSource, Inc. is an international value-added distributor of specialty technologies, including automatic identification (Auto ID) and point-of-sale (POS) products, and--through Catalyst Telecom--business telephone systems (telephony) and computer telephony integration (CTI). Auto ID products distributed by ScanSource include bar code scanners and printers, portable data collection terminals, wireless networks, magnetic stripe readers and other related equipment. POS products sold by the Company include personal computer-based terminals, receipt printers, cash drawers, keyboards and related peripherals. Telephony and CTI products sold by the Company include key, hybrid and PBX phone systems as well as voice mail, peripherals, fax on demand, interactive voice response and other messaging solutions. Serving only the value-added reseller (VAR), ScanSource is committed to growing specialty technology markets by strengthening and enlarging the VAR channel. ScanSource's commitment to VARs includes offering a broad product selection, competitive pricing, fast delivery, system integration, technical support, sales training, customer financing and qualified leads. --ScanSource, Inc., "Corporate Overview," 1998 Annual Report

Company History:

ScanSource, Inc. supplies value-added resellers with bar code scanners and printers, magnetic stripe readers, and other tools for electronic inventory management. ScanSource maintains sales personnel in South Carolina, California, New Jersey, Georgia, Washington, and Canada and has a 100,000+-square-foot distribution center in Memphis, Tennessee and a 20,000-square-foot facility in Toronto. Its offerings include more than 14,000 products from 60 manufacturers.

Origins

ScanSource, Inc. was formed at the end of 1992 to service resellers of point-of-sale (POS) and auto identification (AutoID) equipment. This labor-saving technology allowed the transfer of data without manual input of each character and included such devices as bar code and label printers, laser scanners, and magnetic stripe readers. AutoID technology was spreading pervasively into many other uses aside from inventory control, materials handling, distribution, shipping, and warehouse management. Scientific researchers were discovering its uses as well. POS products included terminals, receipt printers, pole displays, cash drawers, and peripheral equipment. ScanSource was known as the only AutoID and POS distributor that did not sell to end users.

Gates/FA Distributing Inc. provided logistical support for the joint venture with one of its former CEOs, Steve Owings, who also had led the PC maker Argent Technologies, Inc. (Both companies were located in Greenville, South Carolina.)

By 1991, large retail chains were devotees of bar code scanners and printers. Although smaller businesses were beginning to use them in PC-based applications, these types of devices typically were not carried by microcomputer resellers. Cash register companies had been supplying this market. ScanSource's backers felt that therein lay an excellent opportunity to capture a large share of the $2.5 billion bar coding market.

The company started with 19 employees. Demand increased steadily from the beginning. Within a few months, ScanSource was representing about 20 vendors, including AutoID market leader Symbol Technologies Inc., Fargo Electronics Inc., and Star Micronics America. Business continued to pour in as retail inventory management grew more complex. At the same time, AutoID and POS equipment were becoming more standardized, less dependent upon proprietary technology. This was expected to spur growth in the AutoID segment at an annual rate of 14 percent through the end of the century. The AutoID market was valued at $2.2 billion; the POS equipment market was valued at $2.6 billion.

In May 1993, ScanSource bought Marietta, Georgia-based Alpha Data Systems Inc., a ten-year-old company. The transaction introduced a national client list to ScanSource. The purchase of the equipment distribution portion of MicroBiz Corp. of Spring Valley, New York soon followed. The transaction was valued at approximately $650,000. MicroBiz, a $4-million-a-year company, developed PC-based POS software for small retail stores.

ScanSource ended its first fiscal year in June 1993, having lost $243,242 on sales of $2.4 million in its first seven months. The next six months, however, saw a profit of $64,597 on sales of $6.5 million, and fiscal year 1993--94 ended with sales of $16.1 million and a $352,000 profit.

An initial public offering in March 1994 raised $4.6 million in capital. The stock was a lively seller and within a couple of months the share price had nearly tripled from $5 to $14. Gates/FA owned a 12.5 percent stake, while Stephen Owings owned 15 percent. Fast growth was part of the plan. Company founders expected to reach $100 million in sales within five years.

Dropping Gates/FA in July 1994

With Arrow Electronics Inc.'s impending acquisition of Gates/FA, ScanSource cut ties to its partner in July 1994. Arrow also had begun to compete in the POS market. ScanSource was compensated $1.4 million to make up for losing its warehouse partner.

ScanSource found an operational replacement for Gates/FA in MicroAge Inc. The firm's warehouse and MIS agreement began in the fall of 1994. MicroAge, however, did not provide financing support. MicroAge's warehouse facilities were located in Cincinnati.

Several new product lines enhanced ScanSource revenues in 1995: Epson America receipt printers, Zebra Technologies bar code label printers, and Micro-Touch POS touch screen monitors. PC-based POS units continued to rise in popularity in small retail applications. At the same time, the Windows operating system reached new levels of acceptance, prompting upgrading throughout the market. ScanSource competed against 50 other distributors in the POS market, including a dozen specializing in products for small business. Besides peripherals such as pole displays, cash drawers, and scanners, ScanSource also offered specialized software suited to various retail applications.

ScanSource revenues reached $90 million in 1996, when it had 101 employees. The company, which had an exclusive relationship with IBM, was well positioned when the computer maker unveiled its new PC-based SureOne POS system in February 1996. ScanSource expected to sell 10,000 units per year with an end price of about $3,000 each. IBM's new integrated system contrasted with the typical set-up patched together by resellers and was backed by more marketing savvy.

A leading data collection technology company, Intermec Corporation, tapped ScanSource to service its value-added resellers (VARs) in February 1997. Intermec cited ScanSource's experience with this particular market as a deciding factor in choosing the company. At this time, ScanSource already had a state-of-the-art shipping facility in Memphis, Tennessee, as well as regional sales offices in Canada and the United States.

ScanSource created its Professional Services Group to focus on hand-held, wireless data collection devices. Clients for these products required extra support through the installation process. ScanSource used special events to grow its market. The Solutions USA show, co-sponsored by Globelle, introduced hundreds of resellers to new products from dozens of vendors. Transition Marketing, Inc. was created in fiscal 1996 by ScanSource and Globelle Corporation to sponsor such trade shows. (Globelle later sold back its shares in the venture.) ScanSource also cooperated with vendors in advertising through trade periodicals, direct mail, and other promotional avenues.

In 1997 ScanSource acquired another PC-oriented distributor, POS ProVisions of Canada, for $4.3 million worth of stock. ProVisions had 15 employees and garnered $12 million in annual sales.

New Ventures in the Late 1990s

ScanSource created Catalyst Telecom in 1997 to distribute business telephone and computer telephony integration (CTI) products. Telephony products included business telephone systems and fax and data applications. ScanSource worked with Lucent Technologies to bring this to fruition, marketing Lucent's telephone handsets, cables, and voice mail equipment. ScanSource bought telephony company ProCom Supply the same year. In 1998 the company added The CTI Authority, Inc., a maker of computer-based voice messaging devices, which had sales of $8 million a year.

In its 1996--97 fiscal year, ScanSource had $2.5 million in profits on revenues of $93.9 million. It aimed to double sales in 1999 as the POS, AutoID, and telephony markets moved further away from direct sales. Employees numbered 131 in August 1997.

As PC-based applications began to become important in commercial security systems, ScanSource planned to enter that market as well, most likely through acquisition. An additional stock offering raised $26 million in capital that could be used toward this purpose. (The offering, delayed because of low share prices, had originally aimed for $32.5 million.) ScanSource also was considering expanding into the Canadian CTI market.

Lucent began to require ScanSource subsidiary Catalyst and other distributors to stock more parts for its switches to facilitate their timely delivery, rather than waiting for orders to be placed to begin building them. Having the distributors complete the assembly allowed the switches to be shipped in a matter of days versus up to six weeks.

ScanSource continued using road shows to recruit PC-oriented VARs to its line of POS, AutoID, and CTI products. TechTeach '99 featured educational seminars from some of the top vendors, such as IBM, Lucent, and Symbol, designed to help resellers enter new markets. PC VARs accounted for approximately half of ScanSource's 9,300 clients. The rest were specialty technology VARs.

In 1998 ScanSource launched Catalyst Commerce and the Internet Fulfillment Group to allow customers to place orders over the Internet. They also could check inventories and get delivery tracking information on-line.

In 1999 ScanSource boasted of sales growth in more than two dozen continuous quarters, a compound annual growth rate of 80 percent between 1994 and 1997. Operating income increased at a 92 percent compound annual rate during the same time period.

Both ScanSource and Catalyst Telecom achieved ISO 9002 certification in 1999. The process was completed in just eight months. The ISO 9000-series documents internationally accepted standards of quality management and assurance.

Sales increased by 65 percent to $76.9 million in the third quarter of 1998--99, compared with one year earlier. ScanSource's new ventures--business telephones, Catalyst Commerce, CTI, and Canada--performed as well as its core bar code and POS business, according to Mike Baur, company president.

Principal Subsidiaries: Transition Marketing, Inc. (58%).

Principal Divisions: Catalyst Telecom; Catalyst Commerce; Professional Services Group.

ScanSource, Inc. History

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