certify that:UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
- --------------------------------------------------------------------------------FORM 10-Q
(Mark(Mark One)
[X] Quarterly Report Pursuant to Section
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended December 31, 2002 or
15 (d) of the Securities Exchange Act of 1934 for the Quarterly Period Ended December 31, 2001 or [_] Transition Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 for the transition period from ___________________ to ____________________
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period fromto Commission File Number: 000-26926
SCANSOURCE, INC.
(Exact(Exact name of registrant as specified in its charter)
SOUTH CAROLINA 57-0965380 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 6 Logue Court, Greenville, South Carolina 29615 (Address of principal executive offices) (Zip Code)
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(Registrant’s telephone number, including area code)
Not Applicable
(Former(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
Xx No____ -----¨As of
December 31, 2001, 5,750,394February 1, 2003, 12,170,970 shares of theregistrant'sregistrant’s common stock, no par value, were outstanding.SCANSOURCE, INC.
December 31,
20012002
Page No.
PART
I.I.FINANCIAL INFORMATION
Page No. --------Item 1.
Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets as of June 30,
20012002 and December 31,2001 .....20023
5
7
Notes to Condensed Consolidated Financial Statements
............................8
Item 2.
Management's17
Item 3.
24
Item 4.
25
PART II.
OTHER INFORMATION
Item 1.
26
Item 2.
26
Item 3.
26
Item 4.
26
Item 5.
27
Item 6.
27
28
29
Cautionary Statements
Certain of the statements contained in this Form 10-Q, as well as in the
Company'sCompany’s other filings with the Securities and Exchange Commission, that are not historical facts are forward-looking statements subject to the safe harbor created by the Private Securities Litigation Reform Act of 1995. The Company cautions readers of this report that a number of important factors could cause theCompany'sCompany’s activities and/or actual results in fiscal20022003 and beyond to differ materially from those expressed in any such forward-looking statements. These factors include, without limitation, theCompany'sCompany’s dependence on vendors, product supply, senior management, centralized functions, and third-party shippers, theCompany'sCompany’s ability to compete successfully in a highly competitive market and manage significant additions in personnel and increases in working capital, theCompany'sCompany’s entry into new product markets in which it has no prior experience, theCompany'sCompany’s susceptibility to quarterly fluctuations in net sales and results of operations, theCompany'sCompany’s ability to manage successfully pricing or stock rotation opportunities associated with inventory value decreases, and other factors described herein and in other reports and documents filed by the Company with the Securities and Exchange Commission, including Exhibit 99.1 to theCompany'sCompany’s Form 10-K for the year ended June 30,2001.) 22002. PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
SCANSOURCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In(In thousands)
June 30,
2002*
December 31, 2002
Assets
Current Assets:
Cash
$
1,296
$
3,463
Receivables:
Trade, less allowance for doubtful accounts of $9,580 at June 30, 2002 and $9,710 at December 31, 2002
119,158
135,510
Other
7,860
6,106
Inventories
182,636
152,499
Prepaid expenses and other assets
1,258
1,140
Prepaid taxes
—
5,015
Deferred income taxes
10,225
10,423
Total current assets
322,433
314,156
Property and equipment, net
25,995
26,940
Goodwill
9,575
9,841
Other assets, including identifiable intangible assets
1,029
1,328
Total assets
$
359,032
$
352,265
Assets June 30, 2001* December 31, 2001 ------ ------------- -----------------Current Assets: Cash $ 594 $ 1,037 Receivables: Trade, less allowance for doubtful accounts of $6,765* Derived from audited financial statements at June 30, 2001 and $8,226 at December 31, 2001 86,917 105,653 Other 8,118 10,351 Inventories 157,468 162,727 Prepaid expenses and other assets 640 774 Deferred income taxes 9,904 10,581 ------------ ----------- Total current assets 263,641 291,123 ------------ ----------- Property and equipment, net 21,746 24,514 Goodwill 1,277 7,617 Other assets, including identifiable intangible assets 507 638 ------------ ----------- Total assets $ 287,171 $ 323,892 ============ ===========2002* Derived from audited financial statements at June 30, 2001.See notes to condensed consolidated financial statements (unaudited).
3SCANSOURCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands)
(Continued)
June 30,
2002*
December 31,
2002
Liabilities and Shareholders’ Equity
Current Liabilities:
Current portion of long-term debt
$
769
$
779
Subsidiary lines of credit
1,559
703
Trade accounts payable
175,406
152,163
Accrued expenses and other liabilities
8,261
8,960
Income taxes payable
935
406
Total current liabilities
186,930
163,011
Deferred income taxes
517
1,295
Borrowings under revolving credit facility
43,780
40,151
Long-term debt
8,319
7,925
Total liabilities
239,546
212,382
Minority interest
1,437
1,470
Commitments and contingencies
Shareholders’ equity:
Preferred stock, no par value; 3,000 shares authorized, none issued
—
—
Common stock, no par value; 25,000 shares authorized, 11,661 and 12,160 shares issued and outstanding at June 30, 2002 and December 31, 2002, respectively
48,223
56,055
Retained earnings
68,732
80,545
Accumulated other comprehensive income—cumulative currency translation adjustment
1,094
1,813
Total shareholders’ equity
118,049
138,413
Total liabilities and shareholders’ equity
$
359,032
$
352,265
Liabilities and Shareholders' Equity June 30, 2001* December 31, 2001 ------------------------------------ ------------- -----------------Current Liabilities: Current portion of long-term debt $ 444 $ 598 Line of credit -- 560 Trade accounts payable 157,847 165,880 Accrued expenses and other liabilities 9,433 8,688 ------------ ---------- Total current liabilities 167,724 175,726 Deferred income taxes -- 239 Borrowings under revolving credit facility 17,104 34,195 Long-term debt 8,866 8,998 ------------ ---------- Total liabilities 193,694 219,158 ------------ ---------- Minority interest 115 1,400 Commitments and contingencies Shareholders' equity: Preferred stock, no par value; 3,000 shares authorized, none issued -- -- Common stock, no par value; 10,000 shares authorized, 5,711 and 5,750 shares issued and outstanding* Derived from audited financial statements at June 30, 2001 and December 31, 2001, respectively 44,572 45,131 Retained earnings 48,790 58,203 ------------ ---------- Total shareholders' equity 93,362 103,334 ------------ ---------- Total liabilities and shareholders' equity $ 287,171 $ 323,892 ============ ==========2002*Derived from audited financial statements at June 30, 2001.See notes to condensed consolidated financial statements (unaudited).
4SCANSOURCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED INCOME STATEMENTS (UNAUDITED)
(In thousands, except share and per share data)
Quarter ended Six months ended December 31, December 31, 2000 2001 2000 2001 ---- ---- ---- ----Net sales $ 146,187 $ 207,856 $ 302,473 $ 396,699 Cost of goods sold 128,918 185,898 268,284 353,829 --------- --------- --------- --------- Gross profit 17,269 21,958 34,189 42,870 --------- --------- --------- --------- Operating Expenses: Selling, general and admin. expenses 10,482 14,204 20,761 27,208 Impairment of capitalized software -- 840 -- 840 --------- --------- --------- --------- 10,482 15,044 20,761 28,048 --------- --------- --------- --------- Operating income 6,787 6,914 13,428 14,822 --------- --------- --------- --------- Other expense (income): Interest expense 756 690 1,235 1,584 Interest income (273) (308) (277) (648) Other (income) expense (40) (16) (40) 38 --------- --------- --------- --------- Other expense, net 443 366 918 974 --------- --------- --------- --------- Income before income taxes and extraordinary gain 6,344 6,548 12,510 13,848 Provision for income taxes 2,411 2,490 4,754 5,264 --------- --------- --------- --------- Income before extraordinary gain 3,933 4,058 7,756 8,584 Extraordinary gain on excess of fair value of net assets acquired over cost, net of income taxes of $508 -- 829 -- 829 --------- --------- --------- --------- Net Income $ 3,933 $ 4,887 $ 7,756 $ 9,413 ========= ========= ========= =========(In thousands)
Quarter ended
December 31,
Six months ended
December 31,
2001
2002
2001
2002
Net sales
$
207,856
$
250,117
$
396,699
$
510,720
Cost of goods sold
185,898
223,207
353,829
453,615
Gross profit
21,958
26,910
42,870
57,105
Operating expenses:
Selling, general and admin. expenses
14,204
16,467
27,208
36,144
Impairment of capitalized software
840
—
840
—
15,044
16,467
28,048
36,144
Operating income
6,914
10,443
14,822
20,961
Other expense (income):
�� Interest expense
690
556
1,584
1,249
Interest income
(308
)
(282
)
(648
)
(586
)
Other (income) expense
(16
)
126
38
331
Other expense, net
366
400
974
994
Income before income taxes and extraordinary gain
6,548
10,043
13,848
19,967
Provision for income taxes
2,490
4,221
5,264
8,154
Income before extraordinary gain
4,058
5,822
8,584
11,813
Extraordinary gain on excess of fair value of net assets acquired over cost, net of income taxes of $508
829
—
829
—
Net income
$
4,887
$
5,822
$
9,413
$
11,813
See notes to condensed consolidated financial statements (unaudited).
5SCANSOURCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED INCOME STATEMENTS (UNAUDITED)
(continued)(In thousands, except per share data)
(Continued)
Quarter ended
December 31,
Six months ended December 31,
2001
2002
2001
2002
Per share data:
Basic earnings per share:
Income before extraordinary gain *
$
0.35
$
0.49
$
0.75
$
1.00
Extraordinary gain on excess of fair value of net assets acquired over cost, net of income taxes *
0.07
—
0.07
—
Net income *
$
0.42
$
0.49
$
0.82
$
1.00
Weighted-average shares outstanding *
11,466
11,947
11,447
11,822
Diluted earnings per share:
Income before extraordinary gain *
$
0.33
$
0.46
$
0.70
$
0.94
Extraordinary gain on excess of fair value of net assets acquired over cost, net of income taxes *
0.06
—
0.06
—
Net income *
$
0.39
$
0.46
$
0.76
$
0.94
Weighted-average shares outstanding *
12,408
12,646
12,371
12,527
Quarter ended Six* Share and per share amounts for the quarter and six months ended December 31, December 31, 2000 2001 2000 2001 ---- ---- ---- ----Per share data: Basic earnings per share: Income before extraordinary gain $ 0.69 $ 0.71 $ 1.37 $ 1.50 Extraordinary gainhave been restated to reflect a two-for-onestock split effected in the form of a 100% common stock dividend onexcess of fair value of net assets acquired over cost, net of income taxes - 0.14 - 0.14 --------- --------- --------- --------- Net Income $ 0.69 $ 0.85 $ 1.37 $ 1.64 ========= ========= ========= ========= Weighted-average shares outstanding 5,693 5,733 5,671 5,723 ========= ========= ========= ========= Diluted earnings per share: Income before extraordinary gain $ 0.64 $ 0.65 $ 1.26 $ 1.39 Extraordinary gain on excess of fair value of net assets acquired over cost, net of income taxes - 0.14 - 0.13 --------- --------- --------- --------- Net Income $ 0.64 $ 0.79 $ 1.26 $ 1.52 ========= ========= ========= ========= Weighted-average shares outstanding 6,154 6,204 6,146 6,186 ========= ========= ========= =========January 28, 2003.See notes to condensed consolidated financial statements (unaudited).
6SCANSOURCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In(In thousands)
Six Months Ended December 31, ------------ 2000 2001 ---- ----Cash flows from operating activities: Net income $ 7,756 $ 9,413 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Extraordinary gain, net of income taxes -- (829) Depreciation 1,940 2,282 Amortization of identifiable intangible assets 92 58 Provision for doubtful accounts 1,124 2,630 Impairment of capitalized software -- 840 Deferred income tax benefit (1,545) (562) Minority interest in net income of subsidiaries -- 2 Changes in operating assets and liabilities, net of acquisitions: Trade receivables 1,184 (13,751) Other receivables 1,319 (1,421) Inventories (27,028) 9,335 Prepaid expenses and other assets (3,045) 20 Trade accounts payable 5,307 (912) Accrued expenses and other liabilities (413) (1,379) Other noncurrent assets 29 1 -------- -------- Net cash (used in) provided by operating activities (13,280) 5,727 -------- -------- Cash flows used in investing activities: Capital expenditures (2,962) (4,871) Cash paid for business acquisitions -- (17,689) -------- -------- Net cash used in investing activities (2,962) (22,560) -------- -------- Cash flows from financing activities: Advances on revolving credit, net 4,283 16,874 Proceeds from long-term debt borrowings 7,350 -- Repayments of long-term debt borrowings (81) (304) Exercise of stock options 1,205 706 -------- -------- Net cash provided by financing activities 12,757 17,276 -------- -------- Increase (decrease) in cash (3,485) 443 Cash at beginning of period 4,612 594 -------- -------- Cash at end of period $ 1,127 $ 1,037 ======== ========
Six Months Ended December 31,
2001
2002
Cash flows from operating activities:
Net income
$
9,413
$
11,813
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Extraordinary gain, net of income taxes
(829
)
—
Depreciation and amortization
2,340
2,429
Provision for doubtful accounts
2,630
1,902
Impairment of capitalized software
840
—
Deferred income tax benefit
(562
)
421
Tax benefit of stock option exercises
—
3,420
Minority interest in net income of subsidiaries
2
224
Changes in operating assets and liabilities, net of acquisitions:
Trade receivables
(13,751
)
(17,919
)
Other receivables
(1,421
)
1,757
Inventories
9,335
30,442
Prepaid expenses and other assets
20
118
Other noncurrent assets
1
(335
)
Trade accounts payable
(912
)
(23,319
)
Accrued expenses and other liabilities
(1,379
)
867
Income taxes payable
—
(5,545
)
Net cash provided by operating activities
5,727
6,275
Cash flows used in investing activities:
Capital expenditures
(4,871
)
(3,331
)
Cash paid for business acquisitions
(17,689
)
(457
)
Net cash used in investing activities
(22,560
)
(3,788
)
Cash flows from financing activities:
Advances (payments) on revolving credit, net
16,874
(4,485
)
Repayments of long-term debt borrowings
(304
)
(384
)
Exercise of stock options
706
4,412
Net cash provided by (used in) financing activities
17,276
(457
)
Effect of exchange rate changes upon cash
—
137
Increase in cash
443
2,167
Cash at beginning of period
594
1,296
Cash at end of period
$
1,037
$
3,463
See notes to condensed consolidated financial statements (unaudited).
7SCANSOURCE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) FOR THE QUARTERS AND SIX MONTHS ENDED DECEMBER 31, 2000 AND 2001(1) Basis of Presentation
The interim financial information included herein is unaudited. Certain information and footnote disclosures normally included in the consolidated financial statements have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (SEC), although the Company believes that the disclosures made are adequate to make the information presented not misleading. These financial statements should be read in conjunction with the financial statements and related notes contained in the
Company'sCompany’s June 30,20012002 annual report on Form 10-K. Other than as indicated herein, there have been no significant changes from the financial data published in that report. In the opinion of management, such unaudited information reflects all adjustments, consisting only of normal recurring accruals and other adjustments as disclosed herein, necessary for a fair presentation of the unaudited information.Results for interim periods are not necessarily indicative of results expected for the full year, or for any subsequent period.
(2) Business Description and Certain Accounting Policies
ScanSource,ScanSource, Inc.
("Company"(“Company”) is a leading distributor of specialty technology products, providing both value-added distribution sales to technology resellers andInternet-based fulfillmente-logistics services tomanufacturers and others inspecialty 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 and Europe. The North American distribution segment markets automatic identification and data capture(ADC)(“AIDC”) and point-of-sale(POS)(“POS”) products through itsScanSourceScanSource salesunitunit; voice, data andbusiness telephoneconverged communications equipment through its Catalyst Telecom salesteam.unit; and converged communications products through its Paracon sales unit. The international distribution segment markets AIDC and POS products. A third segment, ChannelMax,isprovides e-logistics services.Stock Split –Effective January 28, 2003, the Board of Directors approved a
providertwo-for-one stock split oflogistics, e-fulfillment servicesthe common stock effected in the form of a 100% common stock dividend. The effect of the stock split has been recognized retroactively in all share andweb storefronts.per share data in the accompanying consolidated financial statements and the related notes to the consolidated financial statements.Consolidation Policy
-–The consolidated financial statements include the accounts of the Company and all wholly-owned and majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.Minority Interest
-–Minority interestis therepresents that portion ofcommon stock and earnings from operationsthe net equity of majority-owned subsidiaries of the Companyownedthat is held by minority shareholders.As discussedThe minority shareholders’ share of the subsidiaries’ income or loss is included inNote 6, on September 28, 2001 and November 9, 2001,other expense in the consolidated income statements. Effective July 1, 2002, the Company acquiredtwo 52% owned subsidiaries. Duringan additional 8% of thesecond quarter ended December 31, 2001, the Company's sharestock ofChannelMax was reduced from 95% to 90%Netpoint International, Inc. (“Netpoint”) and an additional 12% of Outsourcing Unlimited, Inc. (“OUI”).8The Company now owns 60% of Netpoint and 64% of OUI. SCANSOURCE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) FOR THE QUARTERS AND SIX MONTHS ENDED DECEMBER 31, 2000 AND 2001Use of
Estimates -estimates –The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.Significant financial statementOn an ongoing basis management evaluates its estimates,includeincluding those related to the allowance for uncollectible accounts receivable and inventory reserves to reduce inventories to the lower of cost or market. Managementdetermines the estimate of the allowance for uncollectible accounts considering a number of factors, includingbases its estimates on historical experienceagingand on various other assumptions that management believes to be reasonable under the circumstances, the results of which form a basis for making judgments about theaccountscarrying value of assets andthe credit worthiness of its customers. Management determines the inventory reserves to reduce inventories to the lower of costliabilities that are not readily available from other sources. Actual results may differ from these estimates under different assumptions ormarket based principally on the effects of technological changes, quantities of goods on hand, and other factors. Managementconditions; however, management believes that its estimates,provided in the financial statements,including those for theabove-describedabove described items, arereasonable. However,reasonable and that the actual resultscould differwill not vary significantly fromthose estimates.the estimated amounts.Revenue Recognition
-– Revenues are recognized for the sale of products upon shipment. The Company provides a reserve for estimated product returns and allowances. The Company also has arrangements in which it earns a service fee determined as a percentage of the value of products shipped on behalf of the manufacturer,whowhich retains the risk of ownership and credit loss. Such service fees earned by the Company are included in net sales and were less than 1% of net sales for the quarters and six months ended December 31,20002001 and2001.2002.Inventories
-–Inventories (consisting ofautomatic data capture, point-of-sale,AIDC, POS, business phone and computer telephony equipment) are stated at the lower of cost (first-in, first-out method) or market.Accounting Standards Recently Adopted - Effective July 1, 2001,Foreign Currencies –The currency effects of translating the
Company adopted Statement of Financial Accounting Standard ("SFAS") No. 141, "Business Combinations", and SFAS No. 142, "Goodwill and Other Intangible Assets". Thesefinancial statementsmake significant changes to the accounting for business combinations, goodwill, and intangible assets. SFAS 141 requires that the purchase method of accounting be used for all business combinations and clarifies the criteria for recognition of intangible assets acquired in a business combination (including business combinations recorded in prior periods) separately from goodwill. SFAS 141 also requires that if the fair valueof thenetCompany’s foreign entities that operate in local currency environments other than the U.S. dollar are included in the cumulative currency translation adjustment component of accumulated other comprehensive income. The assetsacquired exceedsand liabilities of these foreign entities are translated into U.S. dollars using thecostexchange rate at the end of theacquired entity, thenrespective period. Sales, costs and expenses are translated at average exchange rates effective during theexcess should be recognized as an extraordinary gain. SFAS 142 discontinues the amortization of goodwillrespective period.Foreign currency transaction gains and
requires that goodwill be tested for impairment annually or when events or circumstances occur between annual tests indicating that goodwill for a reporting unit (as defined) might be impaired. The Company early-adopted SFAS 142losses are included in selling, general andthe Company's initial assessment of goodwill impairment indicated that goodwill was not impaired. At June 30, 2001 and December 31, 2001, the carrying value of the Company's goodwill was $1,277,000 and $7,617,000, respectively. Other assets included a $147,000 intangible asset acquired on November 9, 2001 (see Note 6), which is being amortized on a straight-line basis over its estimated five-year useful life. Changesadministrative costs in thecarrying amountconsolidated income statement and were less than 1% ofgoodwilloperating income for the quarters and six months ended December 31, 2001by operating segment, are as follows: North American International Distribution E-Logistics Distribution Segment Segments Segment Total --------------------------------------------------------- (in thousands) Balance asand 2002.Comprehensive Income –For the quarter and six months ended December 31, 2002, comprehensive income, comprised of
June 30, 2001 1,105 172 - 1,277 Goodwill acquired duringnet income and foreign currency translation gains or losses, approximated $6.5 million and $12.5 million, respectively. For theperiod 4,753 - 1,587 6,340 --------------------------------------------------------- Balance as ofquarter and six months ended December 31, 2001,5,858 172 1,587 7,617 ========================================================= 9comprehensive income, comprised only of net income, approximated $4.9 million and $9.4 million, respectively. SCANSOURCE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) FOR THE QUARTERS AND SIX MONTHS ENDED DECEMBER 31, 2000 AND 2001 The following pro forma information reconciles the net income and earnings per share reported for the quarter and six-month periods ended December 31, 2000 and 2001 to adjusted net income and earnings per share which reflect the application of SFAS No. 142 and compares the adjusted information to the current year results.
Quarter ended Six months ended December 31, December 31, 2000 2001 2000 2001 ---- ---- ---- ---- (In thousands, (In thousands, except per share data) except per share data)Income before extraordinary $ 3,933 $ 4,058 $ 7,756 $ 8,584 gain, as reported Goodwill amortization 46 - 92 - ------- ------- ------- ------- Income before extraordinary gain, as adjusted $ 3,979 $ 4,058 $ 7,848 $ 8,584 ======= ======= ======= ======= Net income, as reported $ 3,933 $ 4,887 $ 7,756 $ 9,413 Goodwill amortization 46 - 92 - ------- ------- ------- ------- Net income, as adjusted $ 3,979 $ 4,887 $ 7,848 $ 9,413 ======= ======= ======= ======= Basic earnings per share: ------------------------- Income before extraordinary gain, as reported $ 0.69 $ 0.71 $ 1.37 $ 1.50 Goodwill amortization 0.01 - 0.01 - ------- ------- ------- ------- Income before extraordinary gain, as adjusted $ 0.70 $ 0.71 $ 1.38 $ 1.50 ======= ======= ======= ======= Net income, as reported $ 0.69 $ 0.85 $ 1.37 $ 1.64 Goodwill amortization 0.01 - 0.01 - ------- ------- ------- ------- Net income, as adjusted $ 0.70 $ 0.85 $ 1.38 $ 1.64 ======= ======= ======= =======10SCANSOURCE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE QUARTERS AND SIX MONTHS ENDED DECEMBER 31, 2000 AND 2001
Quarter ended Six months ended December 31, December 31, 2000 2001 2000 2001 ---- ---- ---- ----Diluted earnings per share: --------------------------- Income before extraordinary gain, as reported $ 0.64 $ 0.65 $ 1.26 $ 1.39 Goodwill amortization 0.01 - 0.02 - ------ ------ ------ ------ Income before extraordinary gain, as adjusted $ 0.65 $ 0.65 $ 1.28 $ 1.39 ====== ====== ====== ====== Net income, as reported $ 0.64 $ 0.79 $ 1.26 $ 1.52 Goodwill amortization 0.01 - 0.02 - ------ ------ ------ ------ Net income, as adjusted $ 0.65 $ 0.79 $ 1.28 $ 1.52 ====== ====== ====== ======Accounting Standards
Not YetRecently Adopted-–In October 2001, the Financial Accounting Standards Board (“FASB”) issuedSFASStatement of Financial Accounting Standards (“SFAS”) No.144,"AccountingAccounting for the Impairment or Disposal of Long-LivedAssets"Assets, which addresses financial reporting for the impairment or disposal of long-lived assets. SFAS No. 144 supersedes SFAS No. 121 and the accounting and reporting provisions of APB 30 related to the disposal of a segment of abusiness.business and was adopted by the Company on July 1, 2002. The adoption of SFAS No. 144 had no effect on the Company’s financial position and results of operations.In June 2002, the FASB issued SFAS No. 146,Accounting for Costs Associated with Exit or Disposal Activities. This statement requires that the Company recognize costs associated with exit or disposal activities when they are incurred rather than at the date of commitment to an exit or disposal plan. The Company adopted SFAS No. 146 on July 1, 2002. The adoption of SFAS No. 146 had no effect on the Company’s financial position and results of operations.
Accounting Standards Not Yet Adopted – In December 2002, the FASB issued SFAS No. 148,Accounting for Stock-Based Compensation – Transition and Disclosure. This statement amends the transition requirements of SFAS No. 123,Accounting for Stock-Based Compensation, to provide alternative methods of transition to the fair value method of accounting for stock-based employee compensation. It also amends the disclosure provisions of SFAS No. 123 to require disclosure in the summary of significant accounting policies of the effects of an entity’s accounting policy with respect to stock-based employee compensation on reported net income and earnings per share in annual and interim financial statements. The disclosure provision is required for all companies with stock-based employee compensation, regardless of whether the company utilizes the fair value method of accounting described in SFAS No. 123 or the intrinsic value method described in APB Opinion No. 25,Accounting for Stock Issued to Employees. The amendments to the transition and annual disclosure provisions of SFAS No. 123 are effective for the Company’s fiscal year ended June 30, 2003. The disclosure requirements related to interim financial statements are effective for the Company’s quarter beginning January 1, 2003. The Company continues to account for stock-based employee compensation under the intrinsic value method described by APB Opinion No. 25. The Company anticipates that the adoption of SFAS No. 148 will not have an impact on the Company’s financial position and results of operations.
In December 2002, the FASB’s Emerging Issues Task Force (“EITF”) issued EITF Issue No. 02-16,Accounting by a Customer (including a Reseller) for Cash Consideration Received from a Vendor. This issue addresses the appropriate accounting, by a distributor, for cash consideration received from a vendor and will become effective
infor theCompany's fiscal year beginning JulyCompany on January 1,2002.2003. The Company is evaluating the impact ofthe adoption of SFAS 144this issue and has not yet determined the effect, if any, that the adoption of thestandardissue will have on theCompany'sCompany’s financial position and results of operations.11SCANSOURCE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) FOR THE QUARTERS AND SIX MONTHS ENDED DECEMBER 31, 2000 AND 2001(3) Revolving Credit Facility and
LineSubsidiary Lines of CreditIn July 2001, theThe Company
put in placehas anewrevolving credit facility with its bank groupextending the maturity of the facility tomaturing on September200330, 2004, with a borrowing limit of the lesser of (i) $80 million or (ii) thetotalsum of 85% of eligible accounts receivable plus the lesser of (a) 50% of eligible inventory or (b) $40 million. The facility bears interest at the 30-day LIBOR rate of interest plus a rate varying from 1.00% to 2.50% tied to theCompany'sCompany’s funded debt to EBITDA ratio ranging from 2.50:1 to 4.25:1 and fixed charge coverage ratio of not less than 2.75.1. The revolving credit facility is collateralized by accounts receivable and eligible inventory. The credit agreement contains certain financial covenants, including minimum net worth requirements, capital expenditure limits, a maximum funded debt to EBITDA ratio and a minimum fixed charge coverage ratio. The Company was in compliance with the various covenants at December 31, 2002. The effective interest rate at December 31,20012002 was3.86%3.44% and the outstanding balance was$34.2$40.2 million on a calculated borrowing base that exceeded $80 million, leaving$45.8$39.8 million available for additional borrowings.In connection with the acquisition of a Miami-based distributor on November 9, 2001 (see Note 6), the Company obtained waivers to allow it to guarantee 52% of the subsidiary's line of credit, as discussed below, and 52% of the subsidiary's trade payables. The Company was in compliance with the remaining covenants at December 31, 2001.One of the
Company'sCompany’s subsidiaries, ScanSource Latin America (Netpoint), has anasset basedasset-based line of credit agreement with a bank that is due on demand. The borrowing limit on the line is the lesser of $600,000 or the sum of 75% of domestic receivables and 50% of foreign receivables, plus 10% of eligible inventory (up to $250,000). The facility bears interest at thebank'sbank’s prime rate of interest plus one percent(5.75%(5.25% at December31, 2001)30, 2002). All of thesubsidiary'ssubsidiary’s assets collateralize the line of credit. The Company has guaranteed52%60% of the balance on the line, while the subsidiary’s minority shareholder guarantees the remaining48%40% of thebalance is guaranteed bybalance. The line of credit contains certain financial covenants including certain thresholds for thesubsidiary's minority shareholder.leverage ratio (liabilities to equity) and current ratio. The subsidiary was in compliance with the various covenants at December 31, 2002. At December 31, 2002, there were no outstanding borrowings on the line of credit and outstanding standby letters of credit totaled $40,000 leaving $560,000 available for additional borrowings.Another of the Company’s subsidiaries, ScanSource UK, has an asset-based line of credit agreement extending to February 23, 2003 with a borrowing limit of the lesser of £1.8 million (approximately $2.9 million) or 75% of eligible accounts receivable. The facility bears interest at the Bank of England’s prime rate plus 2.25%. The effective rate was 6.25% at December 31, 2002. All of the subsidiary’s assets collateralize the line of credit. At December 31, 2002, the outstanding balance on the line of credit was
$560,000approximately $380,000 on a borrowing base of approximately $2.9 million, leaving approximately $2.5 million available for additional borrowings. The Company does not currently plan to renew the line of credit when it expires on February 23, 2003.ScanSource UK also has an overdraft loan facility that is due on demand under which it can draw up to £225,000 (approximately $362,000). The facility bears interest at the Bank of England’s prime rate plus 2.5% or 3.5% depending on the level of borrowings (6.5% at December 31,
2001,2002). All of the subsidiary’s assets collateralize this facility. At December 31, 2002, the outstanding balance on this facility was approximately $323,000 andnoapproximately $39,000 was available for additionalborrowings were available. 12borrowings. SCANSOURCE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) FOR THE QUARTERS AND SIX MONTHS ENDED DECEMBER 31,2000 AND 2001(4) Long-term Debt
Long-term debt consists of the following at June 30,
20012002 and December 31,2001:2002:
June 30, December 31, 2001 2001 ---- ----Note payable to a bank, secured by distribution center land and building; monthly payments of principal and interest of $65,000; 3.76% variable interest rate; maturing in 2005 $7,168,000 $6,975,000 Note payable to a bank, secured by office, land and building; monthly payments of principal and interest of $15,000; 9.19% fixed interest rate; maturing in 2006 1,646,000 1,631,000 Note payable to a bank, secured by motor coach; monthly payments of principal and interest of $7,000; 3.76% variable interest rate; maturing in 2006 496,000 465,000 Capital leases with monthly principal payments ranging from $33 to $1,391 and interest at 7.57% to 11.75% --- 375,000 Other --- 150,000 ---------- ---------- 9,310,000 9,596,000 Less current portion 444,000 598,000 ---------- ---------- $8,866,000 $8,998,000 ========== ==========
June 30,
2002
December 31,
2002
Note payable to a bank, secured by distribution center land and building; monthly payments of principal and interest of $65,000; 3.09% variable interest rate; maturing in fiscal 2006 with a balloon payment of approximately $4.9 million
$
6,712,000
$
6,447,000
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; maturing in fiscal 2007 with a balloon payment of approximately $1.5 million
1,618,000
1,600,000
Note payable to a bank, secured by motor coach; monthly payments of principal and interest of $7,000; 3.09% variable interest rate; maturing in fiscal 2006 with a balloon payment of approximately $153,000
429,000
393,000
Capital leases for equipment with monthly principal payments ranging from $33 to $1,391 and effective interest rates ranging from 7.6% to 11.75%
329,000
264,000
9,088,000
8,704,000
Less current portion
769,000
779,000
Long-term portion
$
8,319,000
$
7,925,000
The
notenotes payable secured by the distribution centercontainsand the motor coach contain certain financial covenants, including minimum net worth, capital expenditure limits, and a maximum debt to tangible net worthratio;ratio, and prohibit the payment ofdividends is prohibited.dividends. The Company was in compliance with the various covenants at December 31,2001. The2002.In addition to the foregoing, the Company owns an equity interest in a limited liability company for which it has guaranteed debt up to approximately
$525,000.$496,000. As of December 31, 2002, the limited liability company had assets with a fair market value in excess of $2.3 million and liabilities of approximately $2.0 million.SCANSOURCE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(5) 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.
13SCANSOURCE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE QUARTERS AND SIX MONTHS ENDED DECEMBER 31,2000 AND 2001
Per Share Income Shares Amount ------ ------ ------ (in thousands)Three months ended December 31, 2001: Basic earnings per share $4,887 5,733 $ 0.85 Effect of dilutive stock options 471 ====== ------ ------ Diluted earnings per share $4,887 6,204 $ 0.79 ====== ====== ====== Three months ended December 31, 2001: Basic earnings per share $3,933 5,693 $ 0.69 ====== Effect of dilutive stock options 461 ------ ------ Diluted earnings per share $3,933 6,154 $ 0.64 ====== ====== ====== Six months ended December 31, 2001: Basic earnings per share $9,413 5,723 $ 1.64 ====== Effect of dilutive stock options 463 ------ ------ Diluted earnings per share $9,413 6,186 $ 1.52 ====== ====== ====== Six months ended December 31, 2000: Basic earnings per share $7,756 5,671 $ 1.37 ====== Effect of dilutive stock options 475 ------ ------ Diluted earnings per share $7,756 6,146 $ 1.26 ====== ====== ======
Per Share
Amount
Income
Shares
Quarter ended December 31, 2001:
Basic earnings per share
$
4,887,000
11,466,000
$
0.42
Effect of dilutive stock options
—
942,000
Diluted earnings per share
$
4,887,000
12,408,000
$
0.39
Quarter ended December 31, 2002:
Basic earnings per share
$
5,822,000
11,947,000
$
0.49
Dilutive effect on earnings of ChannelMax options
(20,000
)
—
Effect of dilutive stock options
—
699,000
Diluted earnings per share
$
5,802,000
12,646,000
$
0.46
Six months ended December 31, 2001:
Basic earnings per share
$
9,413,000
11,447,000
$
0.82
Effect of dilutive stock options
—
924,000
Diluted earnings per share
$
9,413,000
12,371,000
$
0.76
Six months ended December 31, 2002:
Basic earnings per share
$
11,813,000
11,822,000
$
1.00
Dilutive effect on earnings of ChannelMax options
(93,000
)
—
Effect of dilutive stock options
—
705,000
Diluted earnings per share
$
11,720,000
12,527,000
$
0.94
(6)
AcquisitionsGoodwill andExtraordinary Gain On July 27, 2001, the Company's distribution segment purchased the operating assets of Positive ID Wholesale ("Positive ID"), a division of Azerty, Inc., a subsidiary of United Stationers. Positive ID was a distributor of automatic data capture products for whom the Company paid approximately $15 million in cash. The acquisition allowed the Company to reach additional customers and added sales and technical support employees in a new Buffalo, New York sales office. Accordingly the Company's purchase price to obtain this additional domestic market share and technical support exceeded the fair value of the net assets acquired. The acquisition was accounted for by the purchase method of accounting and accordingly, the operating results have been included in the Company's consolidated results of operations from the date of acquisition. The purchase price was allocated to the fair value of net assets acquired, principally accounts receivable and inventories, and approximately $4.2 million of goodwill is expected to result from the acquisition. The fair value of the accounts receivable and inventories acquired was based on preliminary estimates of amounts to be realized and may be revised if realization is different from the preliminary estimates. However, any adjustments resulting from the ultimate determination of the fair value of the net assets acquired is not expected to have a significant effect on the Company's financial position or future results of operations. On November 9, 2001, the Company's distribution segment purchased 52% of the stock of Netpoint International, a Miami-based distributor of ADC and POS equipment to the Latin American marketplace. The acquisition added new employees to and provided geographic expansion for the Company's business into Latin America. Accordingly the Company's purchase price exceeded the fair value of the net assets acquired. The Company paid approximately $2.8 million in cash and assumed certain liabilities. The acquisition was 14SCANSOURCE, INC, AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE QUARTERS AND SIX MONTHS ENDED DECEMBER 31,2000 AND 2001 accounted for by the purchase method of accounting. Operating results have been included in the Company's consolidated results of operations from the date of acquisition. The purchase price was allocated to the fair value of net assets acquired, principally accounts receivable and inventories, and approximately $1.6 million of goodwill is expected to result from the acquisition. The fair value of the accounts receivable and inventories acquired was based on preliminary estimates of amounts to be realized and may be revised if realization is different from the preliminary estimates. However, any adjustments resulting from the ultimate determination of the fair value of the net assets acquired is not expected to have a significant effect on the Company's financial position or future results of operations. The Company has a commitment to purchase the remaining 48% of the stock at a predetermined multiple of pre-tax earnings over the next six years. The following unaudited pro forma financial information shows the results of operations of the Company as though the two acquisitions noted above had occurred as of July 1, 2000 and 2001. The unaudited pro forma financial information presented below does not purport to be indicative of the results of operations had the acquisitions been consummated as of July 1, 2000 orOther Intangible AssetsEffective July 1, 2001,
or of the future results of operations of the combined businesses.
July 1, 2000 to July 1, 2001 to Dec. 31, 2000 Dec. 31, 2001 ------------- -------------Amounts in thousands, except per share data Net sales $336,983 $408,958 Net income $ 8,715 $ 9,631 Basic earnings per share $ 1.54 $ 1.68 Diluted earnings per share $ 1.42 $ 1.56On September 28, 2001the Companypurchased 52%adopted SFAS No. 142,Goodwill and Other Intangible Assets.SFAS No. 142 revised the standards of accounting for goodwill by replacing thestockregular amortization ofOutsourcing Unlimited, Inc.,goodwill with the requirement that goodwill be reviewed for impairment annually or when events or circumstances occur between annual tests indicating that goodwill for aprovider of services to the phone reseller market, for approximately $1.5 million in cash, plus certain assumed liabilities. The Company also has a commitment to purchase the remaining 48% of the stock at a pre-determined multiple of pre-tax earnings over the next four years. The acquisitionreporting unit (as defined) might be impaired. In accordance with SFAS No. 142, no goodwill amortization wasaccounted for by the purchase method of accounting. The acquisition will allow the Company to provide training, installation and programming services to its telephone reseller customers. Customers will be able to utilize a proven group of qualified installation and training providers. Accordingly the Company's purchase pricerecorded for theexisting business exceeded the fair value of the net assets acquired. The purchase price was allocated to the fair value of the net assets acquired,quarters andapproximately $600,000 of goodwill is expected to result from the acquisition. The allocation was based on preliminary estimates. The finalization of the purchase accounting is not expected to have a significant effect on the Company's financial position or future results of operations. Pro forma financial information is not provided because the total revenues from this acquisition are expected to be less than 1% of total Company revenue. In May 2001, the Company's distribution segment purchased the operating assets of Pinacor, Inc., a subsidiary of MicroAge, Inc., a business telephone distributor for approximately $17.3 million. At the acquisition date and subsequently, the preliminary fair value estimates of the net assets acquired approximated the purchase price. However, in the quartersix months ended December 31, 2001 and 2002.SCANSOURCE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Changes in the
Company finalized its accountingcarrying amount of goodwill for theacquisitionsix months ended December 31, 2002, by operating segment, are as follows:
North American Distribution Segment
ChannelMax Segment
International Distribution Segment
Total
Balance as of June 30, 2002
$
5,571,000
$
172,000
$
3,832,000
$
9,575,000
Goodwill acquired during the six months ended December 31, 2002
6,000
—
260,000
266,000
Balance as of December 31, 2002
$
5,577,000
$
172,000
$
4,092,000
$
9,841,000
Identifiable intangible assets, included in other assets, consist of $337,000 in intangible assets acquired in fiscal 2002. These intangible assets are amortized using the straight-line method over a period of 5 years. Amortization expense during the quarter and
collected approximately $1.3 million more of the purchased accounts receivable than it had previouslysix months ended December 31, 2002 was $17,000 and $34,000, respectively. Accumulated amortization at December 31, 2002 was $60,000. Amortization expense for fiscal years 2003 through 2006 is estimated to becollectible. As a result, the fair value of the assets acquired exceeded the purchase price byapproximately$1.3 million. In accordance with SFAS 141, this amount was recognized as an extraordinary gain, net of $508,000 in related income taxes, during the quarter ended December 31, 2001. 15SCANSOURCE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE QUARTERS AND SIX MONTHS ENDED DECEMBER 31, 2000 AND 2001$67,000 and $42,000 for fiscal 2007.(7) Segment Information
The Company operates
its businessin two industries as a wholesale distributor of specialty technology products and a provider of e-logistics services to specialty technology markets. Based on geographic location, the Company has two distribution segments for distribution of specialty technology products. Thus, for reporting purposes, the Company has three reportable segments.The measure of segment profit is income from operations, and the accounting policies of the segments are the same as those described in Note 1 of the Company’s June 30, 2002 annual report on Form 10-K.
The first reportable segment, North American distribution, offers approximately
18,00023,000 products for sale intwothree primary categories: i)automatic data captureAIDC andpoint-of-salePOS equipment sold by the ScanSource sales team, ii) voice, data andii) business telephones and computer telephony integration devicesconverged communications equipment sold by the Catalyst Telecom sales team and iii) converged communications products sold by the Paracon sales team. These products are sold to more than 12,000 resellers and integrators of technology products,whowhich are geographically disbursed over North America in a pattern that mirrors population concentration. Of its customers at December 31,2001,2002, no single account represented more than 10% of theCompany'sCompany’s consolidated net sales.The second reportable segment, international distribution,
was begun in November 2001 with the acquisition of a Miami-based distributorsells to two geographic markets, South America and Europe, and offersautomatic data captureAIDC andpoint-of-salePOS equipment to more than 1,000 resellers and integrators of technologyproducts located primarily in South America and Europe.products. Of its customers at December 31,2001,2002, no single account represented more than 10% of theCompany'sCompany’s consolidated net sales.SCANSOURCE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The third reportable segment, ChannelMax, provides e-logistics
provides real-time inventory availability and web catalog, order entry, order tracking and logisticsservices within North America for manufacturers and others in theautomatic data captureAIDC andbusiness telephonecommunication products markets. This unit serves less than 10 customers, none of whom accounted for more than 10% oftotal Companythe Company’s consolidated net sales. Certaine-logisticsChannelMax sales are recognized on a netrevenue recognitionfee basis (see Note 2). Duringwith thequarter and six months ended December 31, 2001, this segmentremainder recognizedan $840,000 impairment charge for capitalized software.on a gross revenue basis.The Company evaluates segment performance based on operating income.
Segment results for the quarter ended December 31, 2000 have been restated to conform to the current-year presentation.Intersegment sales consist primarily of fees charged by thee-logisticsChannelMax segment to the North American distribution segment and sales by the North American distribution segment to the international distribution segment. All intersegment revenues and profitsarehave been eliminated in the accompanying consolidated financial statements.Accounts receivable, inventories,
anddistribution center property and equipment and certain software can be identified by segment. However, cash, other current assets, other property and equipment, and other non-current assets are generally not distinguishableamongbetween the North American distribution and ChannelMax business segments and are listed as Corporate assets in the following table. Debt is also generally not distinguishable between segments.16SCANSOURCE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE QUARTERS AND SIX MONTHS ENDED DECEMBER 31, 2000 AND 2001Operating results for each business unit are summarized
below with historical databelow:
Quarter ended
December 31,
Six months ended
December 31,
2001
2002
2001
2002
Sales:
North American distribution
$
186,057
$
233,257
$
350,149
$
478,841
ChannelMax
22,124
5,898
49,502
13,318
International distribution
2,766
16,647
2,766
29,947
Less intersegment sales
(3,091
)
(5,685
)
(5,718
)
(11,386
)
$
207,856
$
250,117
$
396,699
$
510,720
Operating income:
North American distribution
$
7,162
$
10,327
$
14,278
$
19,466
ChannelMax
(347
)
364
445
1,928
International distribution
99
(248
)
99
(433
)
$
6,914
$
10,443
$
14,822
$
20,961
Depreciation and amortization:
ChannelMax
$
293
$
492
$
542
$
948
International distribution
10
80
10
151
Corporate
768
665
1,788
1,330
$
1,071
$
1,237
$
2,340
$
2,429
SCANSOURCE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Assets for
the quarter and six months ended December 31, 2000 restated to conform to the current organizational structure:
Quarter ended Six months ended December 31, December 31, 2000 2001 2000 2001 ---- ---- ---- ---- (In thousands) (In thousands)Sales: North American distribution $ 127,670 $ 186,057 $ 265,343 $ 350,149 E-logistics 20,176 22,124 40,711 49,502 International distribution -- 2,766 -- 2,766 Less intersegment sales (1,659) (3,091) (3,581) (5,718) --------- --------- --------- --------- $ 146,187 $ 207,856 $ 302,473 $ 396,699 ========= ========= ========= ========= Operating income: North American distribution $ 5,855 $ 7,162 $ 12,225 $ 14,278 E-logistics . 932 (347) 1,203 445 International distribution -- 99 -- 99 --------- --------- --------- --------- $ 6,787 $ 6,914 $ 13,428 $ 14,822 ========= ========= ========= ========= Assets: June 30, December 31, 2001 2001 ---- ---- North American distribution $ 202,032 $ 212,818 E-logistics 45,693 55,487 International distribution -- 15,082 Corporate 39,446 40,505 --------- --------- $ 287,171 $ 323,892 ========= ==========17each business unit are summarized below:
June 30, 2002
December 31, 2002
Assets:
North American distribution
$
243,129
$
240,243
ChannelMax
51,938
41,967
International distribution
23,788
28,756
Corporate
40,177
41,299
$
359,032
$
352,265
Item 2.
Management'sManagement’s Discussion and Analysis of Financial Conditions and Results of OperationsResults of Operations
Net
Sales. NetSales.The following tables summarize the Company’s salesfor the quarter ended December 31, 2001 increased 42% to $207.9 million from $146.2 million for the comparable prior year quarter. Net sales increased 31% to $396.7 million for the six months ended December 31, 2001 from $302.5 million for the comparable prior year period. The Company is organized into three business segments. Sales (net of intersegment sales) throughresults:
Quarter ended
December 31,
Percentage
2001
2002
Difference
Change
(In thousands)
North American distribution
$
185,954
$
231,401
$
45,447
24.4
%
ChannelMax
19,136
2,069
(17,067
)
-89.2
%
International distribution
2,766
16,647
13,881
501.8
%
Net Sales
$
207,856
$
250,117
$
42,261
20.3
%
Six months ended
December 31,
Percentage
2001
2002
Difference
Change
(In thousands)
North American distribution
$
350,046
$
475,298
$
125,252
35.8
%
ChannelMax
43,887
5,475
(38,412
)
-87.5
%
International distribution
2,766
29,947
27,181
982.7
%
Net Sales
$
396,699
$
510,720
$
114,021
28.7
%
North American distribution
which includessales include sales to the United States, Canada (less than5%3% ofCompanytotal sales) and Mexico (less than 1% ofCompanytotal sales)increased 46% to $185.9 millionfrom the Company’s Memphis, Tennessee distribution center. The increase in North American distribution sales for the quarterended December 31, 2001 from $127.7 millionwas driven by strong sales in the AIDC and POS product categories. The increase in North American distribution sales for thecomparable prior year quarter. International distributionsix months was driven by strong saleswere $2.8 million forin thequarter ended December 31, 2001,AIDC, POS andincludes sales to South America which were less than 2% of the Company's total sales. E-logistics sales (net of intersegment sales) increased 3% to $19.1 million for the quarter ended December 31, 2001 from $18.5 million for the comparable prior year quarter.communication product categories. Growth of net sales resulted from increased sales to existing customers through competitive product pricing and marketing efforts to reach specialty technology resellers.SalesDuring the current quarter, net sales growth was alsoincreaseddriven by several large POS orders.The decreases in sales in the ChannelMax segment for the quarter and the six months are primarily due to the
additionDecember 2001 renegotiation ofnew customers, additional sales representativesa customer’s contract that extended its term andexpansionlessened the amount ofthe product line dueinventory and accounts receivable risk to theacquisitionCompany. As a result oftwo bar code / POS distributorsthose changes to the contract, revenue from the customer is now recognized on a net fee basis, rather than a gross revenue basis as it was inJuly and November 2001, andthe prior periods. Had this customer’s contract been accounted for on aphone distributor in May 2001. Gross Profit. Gross profit for the quarter ended December 31, 2001 increased 27% to $22.0 million from $17.3 million for the comparable prior year quarter. Gross profit increased 25% to $42.9 million for the six months ended December 31, 2001 from $34.2 million for the comparable prior year period. Gross profit as a percentage of sales was 10.6% and 10.8%, respectively,gross revenue basis for the quarter and six months ended December 31, 2002, ChannelMax revenue would have been $15.8 million and $35.9 million, respectively. ChannelMax’s revenues were also impacted during the quarter and six months by the slow economy. Over the past year, some telephone dealers have experienced lower sales and have therefore decreased their usage of ChannelMax’s services. Additionally, manufacturers served by ChannelMax have sufficient capacity due to the slower economy and have less need for ChannelMax’s outsourcing services.Item 2. Management’s Discussion and Analysis of Financial Conditions and Results of Operations
The international distribution segment commenced in November 2001
comparedwith the acquisition of Netpoint International, a Miami-based distributor that exports primarily to11.8%Latin America. In January 2002, the Company opened a headquarters and11.3%, respectively, fordistribution center in Liege, Belgium, serving all of Europe. In May 2002, thecomparable prior year periods.Company acquired ABC Technology Distribution, a United Kingdom-based distributor that serves the United Kingdom, Ireland and the remainder of Europe.Gross Profit.The
decrease infollowing tables summarize the Company’s gross profit:
Quarter ended
December 31,
Percentage of Sales December 31,
2001
2002
2001
2002
(In thousands)
North American distribution
$
20,068
$
23,948
10.8
%
10.3
%
ChannelMax
1,535
674
8.0
%
32.6
%
International distribution
355
2,288
12.8
%
13.7
%
Gross Profit
$
21,958
$
26,910
10.6
%
10.8
%
Six months ended
December 31,
Percentage of Sales
December 31,
2001
2002
2001
2002
(In thousands)
North American distribution
$
39,438
$
51,108
11.3
%
10.8
%
ChannelMax
3,077
1,746
7.0
%
31.9
%
International distribution
355
4,251
12.8
%
14.2
%
Gross Profit
$
42,870
$
57,105
10.8
%
11.2
%
Gross profit as a percentage of net sales
wasfor theresult of a change in the mix of sales to larger orders and lower margin productsNorth American distribution segment decreased during the quarter and six months ended December 31,20012002 as a result of several large low-margin POS sales orders during the quarter and a more competitive market environmentoverfor communications products due to a significant vendor’s decision to switch a portion of its product line to open sourcing.The increase in the
past year. Operating Expenses. Operating expenses for the quarter ended December 31, 2001 increased 44% to $15.0 million compared to $10.5 million for the comparable prior year quarter. Operating expenses for the six months ended December 31, 2001 increased 35% to $28.0 million from $20.8 million for the comparable prior year period. Operating expensesChannelMax gross profit margin as a percentage of net saleswere 7.2% and 7.1%, respectively, forduring the quarter and six months ended December 31,2001, compared2002 is attributable to7.2% and 6.9%, respectively, forthecomparable prior year periods. Operating expensesrenegotiation of a customer contract, as discussed above, that resulted in revenue being recognized on a net fee basis.The increase in the international distribution gross profit margin as a percentage of net sales during the quarter and six
month period increased as a result of an impairment of capitalized software of $840,000, a discretionary, $800,000 higher-than-normal profit sharing contributionmonths ended December 31, 2002 is primarily attributable to the401(K) plan, and a $400,000 higher than expected increasecommencing of operations inbad debts expense. The Company also settled a claim with a former customer resulting in a $924,000 recovery of operating expenses that partially offsetEurope during theincreases noted above. 18past year. Item 2.
Management'sManagement’s Discussion and Analysis of Financial Conditions and Results of OperationsOperating
Income. Operating income forExpenses.The following table summarizes the Company’s operating expenses:
December 31,
Percentage
Percentage of Sales December 31,
2001
2002
Difference
Change
2001
2002
(In thousands
)
Quarter
$
15,044
$
16,467
$
1,423
9.5
%
7.2
%
6.6
%
Six months
$
28,048
$
36,144
$
8,096
28.9
%
7.1
%
7.1
%
For the quarter ended December 31, 2002, operating expenses benefited from approximately $800,000 in lower bad debts expense as compared to levels experienced in prior quarters. This decrease was partially offset, however, by approximately $500,000 of incremental direct expenses associated with the continued development of the European operations. For the quarter ended December 31, 2001,
increased by 2%operating expenses included an $840,000 impairment of capitalized software, a discretionary $800,000 profit sharing contribution to$6.9 million from $6.8 million forthesame periodCompany’s 401(k) plan, $400,000 in2000, driven byhigher than expected bad debts expense, and theimprovementsettlement of a claim with a former customer that resulted ingross profit, neta $924,000 recovery ofincreases inoperating expenses. Excluding these items, pro forma operating expenses asdescribeda percentage of net sales would have been 6.7% for both of the quarters ended December 31, 2001 and 2002.Operating expenses for the six months ended December 31, 2002 included a $1.4 million discretionary profit sharing contribution to the 401(k) plan, approximately $900,000 of incremental direct expenses associated with the continued development of the European operations, and charitable contributions of approximately $700,000. These increases to operating expenses during the six months were partially offset by approximately $800,000 in lower bad debts expense as compared to levels experienced in the comparable six month period. Operating expenses for the six months ended December 31, 2002 included the same items that affected the quarter ended December 31, 2002 noted above.
Operating income increased 10% to $14.8 millionWithout the effects of these items, pro forma operating expenses for the six months ended December 31, 2001from $13.4 million forand 2002 would have been 6.8% and 6.6%, respectively of net sales.Operating Income.The following table summarizes the
comparable prior period.Company’s operating income:
December 31,
Percentage
Percentage of Sales December 31,
2001
2002
Difference
Change
2001
2002
(In thousands
)
Quarter
$
6,914
$
10,443
$
3,529
51.0
%
3.3
%
4.2
%
Six months
$
14,822
$
20,961
$
6,139
41.4
%
3.7
%
4.1
%
Operating
incomemargins as a percentage of net saleswas 3.3% and 3.7%, respectively,for the quarterandended December 31, 2002 were higher than the prior year quarter due primarily to decreased operating expenses as a percentage of net sales as noted above. The increase in operating margins as a percentage of net sales for the six months ended December 31,2001, compared2002 is attributable to4.6%the increase in gross margins during past six months as noted above.Item 2. Management’s Discussion and
4.4%, respectively, for the comparable prior year periods. Without the software impairment cost, operating income would have been $7.8 million, at 3.7%Analysis ofsales, a 14% increase over the same quarter last year.Financial Conditions and Results of OperationsTotal Other Expense (Income).Other expense (income) consists principally of interest expense and interest income. Interest expense for the
quarter and six monthsquarters ended December 31, 2001 and 2002 was $690,000 and$1.6 million,$556,000, respectively, reflecting interest paid on borrowings on theCompany's lineCompany’s lines of credit and long-term debt. Interest expense for the six months ended December 31, 2001 and 2002 was $1.6 million and $1.2 million, respectively. Interest expense for the quarter and six months ended December 31,20002002 was$756,000lower due to the decline in interest rates over the past year and$1.2 million, respectively.lower average borrowings during the past 6 months.Interest
expenseincome for thequarterquarters ended December 31, 2001 and 2002 waslower than the prior year quarter due to lower$308,000 and $282,000, respectively, representing interestrates.collected principally from customers. Interestexpenseincome for the six months ended December 31, 2001 and 2002 washigher due to higher line of credit borrowings, partially offset by lower interest rates. Interest income$648,000 and $586,000, respectively.Other expense for the quarter and six months ended December 31, 2002 was $16,000 and $48,000, respectively. Other expense for the quarter and six months ended December 31, 2001 was
$308,000$17,000 and$648,000, respectively, principally collected from customers. Interest income$71,000, respectively. Other expense is comprised primarily of the Company’s loss on an equity investment.Minority interest, included in other expense, is comprised of the minority interest share of the subsidiaries’ net income. For the quarter and six months ended December 31, 2002 minority interest amounted to $110,000 and $283,000, respectively. Minority interest for the quarter and six months ended December 31,
20002001 was$273,000 and $277,000, respectively. Interest income was higher in 2001 due to the growth in certain customer programs under which customers reimburse the Company for interest incurred on their behalf. Other income for the quarter ended December 31, 2001 of $16,000 was comprised of the minority interest share of the subsidiaries' net loss offset by a loss on an equity investment. Other expense for the six months ended December 31, 2001 of $38,000 consisted of a loss on an equity investment and minority interest earnings. Other income of $40,000 for the comparable prior year periods consisted of gains on the sales of non-operating assets.$(33,000).Provision For Income Taxes. Income tax expense was $2.5 million and
$2.4$4.2 million for the quarters ended December 31, 2001 and2000,2002, respectively, reflecting an effective income tax rate of 38.0% and 42.0%,representing federal and state tax expected to be due after annualizing income to the fiscal year end.respectively. Income tax expense was $5.3 million and$4.8$8.2 million for the six months ended December 31, 2001 and2000,2002, respectively, reflecting an effective income tax rate of 38.0% and 40.8%, respectively. The increase in the tax rate during the past quarter and six months is attributable to the effect of not recognizing tax benefits for European operating losses during the quarter and six months ended December 31, 2002.Extraordinary Item.During the quarter ended December 31, 2001, the Company finalized its accounting for the May 2001 acquisition of Pinacor, Inc., a business telephone distributor. The Company collected $1.3 million more of the purchased accounts receivable than it had previously estimated to be collectible. As a result, the fair value of the assets acquired in the acquisition exceeded the purchase price by $1.3 million. In accordance with SFAS 141, this amount was recognized as an extraordinary gain, net of $508,000 in taxes, during the quarter
and six monthsended December 31, 2001.19Item 2.
Management'sManagement’s Discussion and Analysis of Financial Conditions and Results of OperationsNet
Income. For reasons discussed above,Income. The following table summarizes the Company’s net income:
December 31,
Percentage
Percentage of Sales
December 31,
2001
2002
Difference
Change
2001
2002
(In thousands
)
Quarter
$
4,887
$
5,822
$
935
19.1
%
2.4
%
2.3
%
Six months
$
9,413
$
11,813
$
2,400
25.5
%
2.4
%
2.3
%
The increase in the amount of net income
increased by 24% to $4.9 million forand decline in thequarter ended December 31, 2001 from $3.9 million for the comparable prior year quarter. Net income for the six months ended December 31, 2001 increased 21% to $9.4 million from $7.8 million for the comparable year period. Net income as a percentage of sales was 2.4% for both the quarter and six months ended December 31, 2001 compared to 2.7% and 2.6%, respectively, for the comparable prior year periods. Without the after tax cost of $521,000 from the software impairment and the extraordinary gain of $829,000,net income margin are attributable to the changes in operating profits and provision forthe quarter ended December 31, 2001 would have been $4.6 million, an increase of 16% from $3.9 million for the quarter ended December 31, 2000.income taxes discussed above.Liquidity and Capital Resources
The
Company'sCompany’s primary sources of liquidity are cashflowflows from operations, borrowings under theCompany'sCompany’s revolving credit facility, and, to a lesser extent, borrowings under the Company’s subsidiaries’ lines of credit and proceeds from the exercise of stock options.In JulyThe Company’s cash balance totaled $3.5 million at December 31, 2002 compared to $1.3 million at June 30, 2002. Domestic cash is generally swept on a nightly basis to pay down the Company’s line of credit. The Company’s working capital increased to $151.1 million at December 31, 2002 from $135.5 million at June 30, 2002. The increase in working capital resulted primarily from a $16.3 million increase in accounts receivable and a $23.2 million decrease in accounts payable. This was partially offset by a $30.1 million decrease in inventory.
The increase in the accounts receivable balance is attributable to an increase in sales during the past six months and an increase in days sales outstanding (DSO) in ending trade receivables from 45 days at June 30, 2002 to 50 days at December 31, 2002. The decrease in inventory was attributable to changes in inventory management. For the quarter ended December 31, 2002, inventory turnover improved to 5.8 times from 4.8 times at June 30, 2002. The decrease in accounts payable resulted primarily from the reduction in inventory purchases during the past six months.
Cash provided by operating activities was $6.3 million for the six months ended December 31, 2002 compared to $5.7 million provided by operations for the six months ended December 31, 2001. The increase in cash provided by operating activities was primarily attributable to the changes in current assets and liability accounts discussed in the above working capital analysis.
Cash used in investing activities for the six months ended December 31, 2002 was $3.8 million and included approximately $3.3 million for capital expenditures and $457,000 paid for the acquisition of additional ownership interests in two of the Company’s majority-owned subsidiaries (Netpoint and OUI). The Company’s capital expenditures resulted from the purchases of software and furniture and equipment. For the six months ended December 31, 2001, cash used in investing activities totaled $22.6 million, including $17.7 million paid for the
Company put in place a new revolvingPositive ID, Netpoint and OUI acquisitions and capital expenditures of approximately $4.9 million, primarily for furniture and equipment.Item 2. Management’s Discussion and Analysis of Financial Conditions and Results of Operations
Net borrowings under the Company’s credit facility with its bank group
extending the maturity of thetotaled $40.2 million at December 31, 2002 compared to $43.8 million at June 30, 2002, reflecting cash provided by operating activities.The credit facilityto September 2003 withhas a borrowing limit of the lesser of (i) $80 million or (ii) thetotalsum of 85% of eligible accounts receivable plus the lesser of (a) 50% of eligible inventory or (b) $40 million. At December 31, 2002, the borrowing base exceeded $80 million, leaving $39.8 million for additional borrowings. The credit facility matures on September 30, 2004 and bears interest at the30 day30-day LIBOR rate of interest plus a rate varying from 1.00% to 2.50% tied to theCompany'sCompany’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 December 31, 2002 was 3.44%. The revolving credit facility is collateralized by domestic accounts receivable and eligible inventory. The credit agreement contains certain financial covenants, including minimum net worth requirements, capital expenditure limits, a maximum funded debt to EBITDA ratio and a minimum fixed charge coverage ratio.The effective interest rate at December 31, 2001 was 3.86% and the outstanding balance was $34.2 million on a borrowing base that exceeded $80 million, leaving $45.8 million available for additional borrowings. In connection with the acquisition of a Miami-based distributor on November 9, 2001 (see Note 6), the Company obtained waivers to allow it to guarantee 52% of the subsidiary's line of credit and 52% of the subsidiary's trade payables.The Company was in compliance with theremaining covenants at December 31, 2001. Cash provided by operating activities was $5.7 million for the six months ended December 31, 2001 compared to $13.3 million used in operations for the six months ended December 31, 2000. For the six months ended December 31, 2001, cash was principally provided by $9.4 million in net income and a $9.3 million decrease in inventory, partially offset by a $13.8 million increase in accounts receivable and a $2.3 million reduction in accounts payable and accrued expenses. For the six months ended December 31, 2000, cash was provided by $7.8 million in net income and principally used to fund a $27.0 million increase in inventory, partially offset by a $5.3 increase in trade payables. The number of days' sales outstanding (DSO) in ending trade receivables at June 30, 2001 and December 31, 2001 was 45 and 46 days, respectively. Inventory turns were 3.9 and 4.6 turns for the quarters ended June 30, 2001 and December 31, 2001, respectively. This improvement was driven by higher sales in the December 2001 quarter without a corresponding increase in inventory.various covenants.Cash used in
investingfinancing activities for the six months ended December 31,2001 included $17.7 million cash paid primarily for the acquisition of two bar code distributors in July 2001 and November 2001 and2002 totaled $457,000, including $4.9 millionfor capital expenditures. Forin payments on long-term debt and thesix months ended December 31, 2000, $3.0Company’s credit facility and $4.4 millionof cash was usedininvesting activities primarily for capital expenditures. 20proceeds from stock option exercises. Cash provided by financing activities for the six months ended December 31, 2001 wastotaled $17.3 million, primarily fromadvances onborrowings under therevolving line of credit. Cash provided by financing activities for the six months ended December 31, 2000 was $12.8 million primarily from the closing of a real estate loan for $7.4 million and advances on the revolving line ofCompany’s creditof $4.3 million.facility.The Company owns an equity interest in a limited liability company for which it has guaranteed debt up to approximately
$525,000.$496,000. As of December 31, 2002, the limited liability company had assets with a fair market value in excess of $2.3 million and liabilities of approximately $2.0 million.The Company believes that it has sufficient liquidity to meet its forecasted cash requirements for at least the next year.
Recent Accounting Pronouncements
Accounting Standards Recently Adopted
- Effective July 1, 2001, the Company adopted Statement of Financial Accounting Standard ("SFAS") No. 141, "Business Combinations", and SFAS No. 142, "Goodwill and Other Intangible Assets". These statements make significant changes to the accounting for business combinations, goodwill, and intangible assets. SFAS 141 requires that the purchase method of accounting be used for all business combinations and clarifies the criteria for recognition of intangible assets acquired in a business combination (including business combinations recorded in prior periods) separately from goodwill. SFAS 141 also requires that if the fair value of the net assets acquired exceeds the cost of the acquired entity, then the excess should be recognized as an extraordinary gain. SFAS 142 discontinues the amortization of goodwill and requires that goodwill be tested for impairment annually or when events or circumstances occur between annual tests indicating that goodwill for a reporting unit (as defined) might be impaired. The Company early-adopted SFAS 142 and the Company's initial assessment of goodwill impairment indicated that goodwill was not impaired. Accounting Standards Not Yet Adopted -–In October 2001, the Financial Accounting Standards Board (“FASB”) issuedSFASStatement of Financial Accounting Standards (“SFAS”) No.144,"AccountingAccounting for the Impairment or Disposal of Long-LivedAssets"Assets, which addresses financial reporting for the impairment or disposal of long-lived assets. SFAS No. 144 supersedes SFAS No. 121 and the accounting and reporting provisions of APB 30 related to the disposal of a segment of abusiness.business and was adopted by the Company on July 1, 2002. The adoption of SFAS No. 144 had no effect on the Company’s financial position and results of operations.In June 2002, the FASB issued SFAS No. 146,Accounting for Costs Associated with Exit or Disposal Activities. This statement requires that the Company recognize costs associated with exit or disposal activities when they are incurred rather than at the date of commitment to an exit or disposal plan. The Company adopted SFAS No. 146 on July 1, 2002. The adoption of SFAS No. 146 had no effect on the Company’s financial position and results of operations.
Accounting Standards Not Yet Adopted – In December 2002, the FASB issued SFAS No. 148,Accounting for Stock-Based Compensation – Transition and Disclosure. This statement amends the transition requirements of SFAS No. 123,Accounting for Stock-Based Compensation, to provide alternative methods of transition to the fair value method of accounting for stock-based employee compensation. It also amends the disclosure provisions of SFAS No. 123 to require disclosure in the summary of significant accounting policies of the effects of an entity’s accounting policy with respect to
Item 2. Management’s Discussion and Analysis of Financial Conditions and Results of Operations
stock-based employee compensation on reported net income and earnings per share in annual and interim financial statements. The disclosure provision is required for all companies with stock-based employee compensation, regardless of whether the company utilizes the fair value method of accounting described in SFAS No. 123 or the intrinsic value method described in APB Opinion No. 25,Accounting for Stock Issued to Employees. The amendments to the transition and annual disclosure provisions of SFAS No. 123 are effective for the Company’s fiscal year ended June 30, 2003. The disclosure requirements related to interim financial statements are effective for the Company’s quarter beginning January 1, 2003. The Company continues to account for stock-based employee compensation under the intrinsic value method described by APB Opinion No. 25. The Company anticipates that the adoption of SFAS No. 148 will not have an impact on the Company’s financial position and results of operations.
In December 2002, the FASB’s Emerging Issues Task Force (“EITF”) issued EITF Issue No. 02-16,Accounting by a Customer (including a Reseller) for Cash Consideration Received from a Vendor. This issue addresses the appropriate accounting, by a distributor, for cash consideration received from a vendor and will become effective
infor theCompany's fiscal year beginning JulyCompany on January 1,2002.2003. The Company is evaluating the impact ofthe adoption of SFAS 144this issue and has not yet determined the effect, if any, that the adoption of thestandardissue will have on theCompany'sCompany’s financial position and results of operations.21Item
3:3. Quantitative and Qualitative DisclosuresAboutabout MarketRisksRiskThe
Company'sCompany’s principal exposure to changes in financial market conditions in the normal course of its business is a result of its selective use of bankborrowingsdebt and, to a much lesser extent, transacting business inCanadian or Mexican currencyforeign currencies in connection with itsCanadian and Mexicanforeign operations.The Company is exposed to changes in interest rates primarily as a result of its borrowing activities, which
includesinclude a revolving credit facility with a bank group used to maintain liquidity and fund theCompany'sCompany’s business operations. The nature and amount of theCompany'sCompany’s debt may vary as a result of future business requirements, market conditions and other factors. The definitive extent of theCompany'sCompany’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 theCompany'sCompany’s revolving line of credit, variable rate long term debt and subsidiary lines of credit would have resulted in anincreaseapproximate $123,000 decrease ordecrease of approximately $157,000increase in pre-tax income for the quarter ended December 31,2001.2002. The Company does not currently use derivative instruments or take other actions to adjustitsthe Company’s interest rate risk profile.The Company is
minimallyexposed to foreign currency risks that arise from its foreign operations in Canada, Mexico, Latin America and Europe. These risks include the translation of local currency balances of foreign subsidiaries, intercompany loans with foreign subsidiaries and, to a lesser extent, transactions denominated in foreign currencies. The Company monitors its risk associated with the volatility of certain foreign currencies against its functional currency, the U.S. dollar. The impact of changes inforeign exchange rates in connection with its foreign (Canada, Mexico, South America and Europe) operations. It istheCompany's policy to enter into foreign currency transactions onlyrelationship of other currencies to theextent considered necessary to support these operations. The amount of the Company's cash deposits denominated in these currencies hasU.S. dollar have historically not been significant, andissuch changes in the future are not expected to have a material impact on the Company’s results of operations or cash flows. If, however, there were a sustained decline of these currencies versus the U.S. dollar, the consolidated financial statements could bematerial. Furthermore, the Company has no capital expenditure or other purchase commitments denominated in any foreign currency.adversely affected. The Company does not utilize forward exchange contracts, currency options or other traditional hedging vehicles to adjust theCompany'sCompany’s foreign exchange rate risk profile. The Company does not enter into foreign currency transactions for speculative purposes. Foreign currency gains and losses are not material and are included in selling, general and administrative expenses.The Company does not utilize financial instruments for trading or other speculative purposes, nor does it utilize leveraged financial instruments. On the basis of the fair value of the
Company'sCompany’s market sensitive instruments at December 31,2001,2002, the Company does not consider the potential near-term losses in future earnings, fair valuesandor cash flows from reasonably possible near-term changes in interest ratesandor exchange rates to be material.22Item 4. Disclosure Controls and Procedures
As of February 5, 2003, under the supervision and with the participation of the Company’s Principal Executive Officer and the Principal Financial Officer, management has evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on that evaluation, the Principal Executive Officer and the Principal Financial Officer, concluded that the Company’s disclosure controls and procedures were effective as of December 31, 2002. There were no significant changes in the Company’s internal controls or in the other factors that could significantly affect those controls subsequent to December 31, 2002.
PART II. OTHER INFORMATION
Item 1.Legal
Proceedings.Proceedings. Not applicableItem 2.Changes in Securities and Use of Proceeds.Not applicable
Item 3.Defaults Upon Senior Securities.Not applicable
Item 4.Submission of Matters to a Vote of Security Holders.
(a)The
Company'sCompany’s annual meeting of shareholders was held on December6, 2001. (b) The5, 2002. At the annual meeting, the shareholders (i) elected five directorslisted below were selectedwho constitute all the directors continuing on the Board after the meeting, (ii) approved an amendment to the Company’s Amended and Restated Articles of Incorporation, (iii) approved the Company’s Long-Term Incentive Plan, and (iv) ratified the selection of auditors for fiscal 2003. Votes on each matter presented at themeeting. Theannual meeting (on a pre-split basis) were as follows:(a) Election of directors:
Number of Shares
Nominees
For
Withheld
Michael L. Baur
3,835,253
1,330,081
Steven R. Fischer
4,924,780
240,554
James G. Foody
4,924,688
240,646
Steven H. Owings
3,822,496
1,342,838
John P. Reilly
4,960,048
205,286
(b) Proposal to amend the Company’s Amended and Restated Articles of Incorporation to increase the number of authorized shares of Common Stock of the Company
has no other directors whose term of office continued afterfrom 10,000,000 to 25,000,000 shares:
Number of Shares
For
4,156,635
Against
1,004,290
Abstain
4,409
(c) Proposal to approve the
meeting. Number of Shares ---------------- Nominees For Withheld -------- --- -------- Michael L. Baur 4,324,283 686,765 James G. Foody 4,979,572 31,476 Steven R. Fischer 4,979,572 31,476 Steven H. Owings 4,329,483 681,565 John P. Reilly 4,979,523 31,525 (c)Company’s Long-Term Incentive Plan:
Number of Shares
For
4,609,708
Against
551,051
Abstain
4,575
(d) Proposal to ratify the appointment of
DeloitteErnst &ToucheYoung LLP as theCompany'sCompany’s independent auditors for the fiscal year ending June 30,2002. Number of Shares ---------------- For 4,975,174 Against 34,362 Abstain 1,512 (d) Proposal to approve amendment to the Company's Non-Employee Director Plan Number of Shares ---------------- For 3,285,338 Against 1,721,008 Abstain 4,7022003:
Number of Shares
For
5,008,902
Against
153,232
Abstain
3,200
Item 5.Other
Information.Information. Not applicableItem 6.Exhibits and Reports on Form 8-K.
None 23a) Exhibits
3.1
The Company’s Amended and Restated Articles of Incorporation increasing the number of authorized shares of Common Stock of the Company to 25,000,000 shares, as amended.
10.1
Second Amendment to the Credit Agreement dated as of October 31, 2002 by and among ScanSource, Inc., a South Carolina corporation, 4100 Quest, L.L.C., ChannelMax, Inc., Branch Banking and Trust Company of South Carolina, as agent and a bank, Fifth Third Bank, First Tennessee Bank National Association, and Hibernia National Bank.
10.2
*
Employment Agreement dated as of October 18, 2002 between the Registrant and Steven H. Owings.
10.3
*
Employment Agreement dated as of October 18, 2002 between the Registrant and Michael L. Baur.
10.4
*
Employment Agreement dated as of October 18, 2002 between the Registrant and Jeffery A. Bryson.
10.5
*
Employment Agreement dated as of November 12, 2002 between the Registrant and Richard P. Cleys.
10.6
*
2002 Long-Term Incentive Plan.
99.1
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
* Management contract or compensatory plan or arrangement (b) Reports on Form 8-K
A report was filed on October 18, 2002 regarding a change in independent accountants.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
SCANSOURCE, INC.
/s/ Michael L. Baur
MICHAEL L. BAUR
Chief Executive Officer
/s/ Richard P. Cleys
RICHARD P. CLEYS
Chief Financial Officer
Date: February 11, 2003
CERTIFICATE OF PRINCIPAL EXECUTIVE OFFICER
I, Michael L. Baur,
---------------------------- MICHAEL L. BAUR Chief Executive Officer /s/ Jeffery A. Bryson ---------------------------- JEFFERY A. BRYSON Chief Financial Officer Date: February 14, 2002 24
| 1. | I have reviewed this quarterly report on Form 10-Q of ScanSource, Inc.; |
| 2. | Based on my knowledge, this quarterly 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 quarterly report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly report; |
| 4. | The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant, and we have: |
| a. | designed such disclosure controls and procedures 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 quarterly report is prepared; |
| b. | evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and |
| c. | presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; |
| 5. | The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function): |
| a. | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and |
| b. | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and |
| 6. | The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. |
Date: February 11, 2003 | /s/ MICHAEL L. BAUR | |||||
Michael L. Baur President and Chief Executive Officer |
CERTIFICATE OF PRINCIPAL FINANCIAL OFFICER
I, Richard P. Cleys, certify that:
| 1. | I have reviewed this quarterly report on Form 10-Q of ScanSource, Inc.; |
| 2. | Based on my knowledge, this quarterly 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 quarterly report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly report; |
| 4. | The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant, and we have: |
| a. | designed such disclosure controls and procedures 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 quarterly report is prepared; |
| b. | evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and |
| c. | presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; |
| 5. | The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function): |
| a. | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and |
| b. | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and |
| 6. | The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. |
Date: February 11, 2003 | /s/ RICHARD P. CLEYS | |||||
Richard P. Cleys Vice President and Chief Financial Officer |
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