Conformed
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
(Mark One)
{x} Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities Exchange
Act of 1934 for the Quarterly Period Ended March 31, 2000
or
{ } Transition Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 for the transition period from ___________________ to
____________________
Commission file number 1-12842
ScanSource, Inc.
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(Exact name of registrant as specified in its charter)
South Carolina 57-0965380
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(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporated or organization)
6 Logue Court, Suite G
Greenville, SC 29615
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(Address of principal executive (Zip Code)
offices)
(864) 288-2432
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(Registrant's telephone number, including area code)
Not Applicable
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(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ________
-----
As of March 31, 2000, 5,596,460 shares of the registrant's common stock, no par
value, were outstanding.
SCANSOURCE, INC.
INDEX
FORM 10-Q
March 31, 2000
PART I. FINANCIAL INFORMATION Page No.
--------
Item 1. Consolidated Financial Statements (Unaudited).......................................... 2
Condensed Consolidated Balance Sheets.................................................. 2
Condensed Consolidated Income Statements............................................... 4
Condensed Consolidated Statements of Cash Flows........................................ 5
Notes to Condensed Consolidated Financial Statements................................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................................. 8
Item 3. Quantitative and Qualitative Disclosures About Market
Risk................................................................................. 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...................................................................... 12
Item 2. Changes in Securities.................................................................. 12
Item 3. Defaults Upon Senior Securities........................................................ 12
Item 4. Submission of Matters to a Vote of Security-Holders.................................... 12
Item 5. Other Information...................................................................... 12
Item 6. Exhibits and Reports on Form 8-K....................................................... 13
SIGNATURES................................................................................................... 14
1
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
SCANSOURCE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, March 31,
1999 2000
---- ----
(Note 1) (Note 1)
(Unaudited) (Unaudited)
Assets (In thousands)
------
Current assets:
Cash............................................................... $ 15,282 684
Receivables:
Trade, less allowance for doubtful accounts of
$5,002,000 at June 30, 1999 and
$6,716,000 at March 31, 2000.................................... 42,774 52,274
Other.............................................................. 2,443 2,026
-------- -------
45,217 54,300
Inventories........................................................ 50,282 99,079
Prepaid expenses and other assets.................................. 464 320
Deferred income taxes.............................................. 5,197 8,388
-------- -------
Total current assets............................................. 116,442 162,771
Property and equipment, net......................................... 7,453 16,859
Intangible assets, net.............................................. 1,520 1,575
Other assets........................................................ 312 297
-------- -------
Total assets..................................................... $125,727 181,502
======== =======
See notes to condensed consolidated financial statements.
2
SCANSOURCE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
June 30, March 31,
Liabilities and Shareholders' Equity 1999 2000
------------------------------------ -------- ---------
(Note 1) (Note 1)
(Unaudited) (Unaudited)
(In thousands)
Current liabilities:
Current portion of long-term debt.............................. $ 24 24
Trade accounts payable......................................... 59,728 90,073
Accrued compensation........................................... 1,147 982
Accrued expenses and other liabilities......................... 3,252 4,891
Income taxes payable........................................... 1,131 1,221
-------- -------
Total current liabilities.................................... 65,282 97,191
Deferred income taxes.......................................... 70 117
Long-term debt................................................. 1,673 1,656
Revolving line of credit....................................... -- 13,953
-------- -------
Total liabilities.......................................... 67,025 112,917
Shareholders' equity:
Preferred stock, no par value; 3,000,000 shares
authorized, none issued and outstanding..................... -- --
Common stock, no par value; 10,000,000 shares
authorized, 5,503,512 and 5,596,460 shares issued
and outstanding at June 30, 1999 and
March 31, 2000, respectively................................ 40,161 41,325
Retained earnings.............................................. 18,541 27,260
-------- -------
Total shareholders' equity.................................. 58,702 68,585
-------- -------
Total liabilities and shareholders' equity.................... $125,727 181,502
======== =======
See notes to condensed consolidated financial statements.
3
SCANSOURCE, INC.
CONDENSED CONSOLIDATED INCOME STATEMENTS
(UNAUDITED)
Quarter Ended Nine Months Ended
March 31, March 31,
1999 2000 1999 2000
---- ---- ---- ----
(In thousands except per share data)
Net sales....................................... $76,932 120,391 203,194 347,492
Cost of goods sold.............................. 68,351 107,021 180,015 309,887
------- ------- ------- -------
Gross profit................................ 8,581 13,370 23,179 37,605
Selling, general and administrative
expenses.................................... 5,349 8,040 14,662 23,133
Amortization of intangibles..................... 33 34 100 101
------- ------- ------- -------
Total operating expenses.................... 5,382 8,074 14,762 23,234
Operating income............................ 3,199 5,296 8,417 14,371
Other income (expense):
Interest income (expense), net.............. 6 (274) (27) (307)
Other expense, net.......................... (71) -- (60) --
------- ------- ------- -------
Total other income (expense)........... (65) (274) (87) (307)
Income before income taxes...................... 3,134 5,022 8,330 14,064
Income taxes........................... 1,161 1,909 3,084 5,345
------- ------- ------- -------
Net income...................................... $ 1,973 3,113 5,246 8,719
======= ======= ======= =======
Basic EPS
Net income per share................... $ .36 .56 .96 1.57
======= ======= ======= =======
Weighted average shares outstanding.... 5,479 5,577 5,449 5,540
======= ======= ======= =======
Diluted EPS
Net income per share................... $ .35 .51 .93 1.46
======= ======= ======= =======
Weighted average shares outstanding.... 5,699 6,057 5,636 5,967
======= ======= ======= =======
See notes to condensed consolidated financial statements.
4
SCANSOURCE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
March 31,
1999 2000
-------- -------
(In thousands)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to cash $ 5,246 8,719
(used in) provided by operating activities:
Depreciation 801 1,666
Amortization of intangible assets 100 101
Deferred taxes -- (3,144)
Changes in operating assets and liabilities:
Receivables (10,917) (9,500)
Other receivables (1,493) 417
Inventories (10,512) (33,773)
Prepaid expenses and other assets (214) 144
Accounts payable 33,028 15,321
Accrued compensation 731 (165)
Accrued expenses and other liabilities 1,084 1,639
Income tax payable 1,029 90
Other noncurrent assets (133) (141)
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Net cash provided by (used in) operating activities 18,750 (18,626)
-------- -------
Cash flows from investing activities:
Capital expenditures, net (1,678) (4,082)
Purchase of building -- (6,990)
-------- -------
Net cash used in investing activities (1,678) (11,072)
-------- -------
Cash flows from financing activities:
(Payments) borrowings on line of credit (4,861) 13,953
Net proceeds from option exercises 449 1,164
Payments on building loan (16) (17)
-------- -------
Net cash (used in) provided by financing activities (4,428) 15,100
-------- -------
Increase (decrease) in cash 12,644 (14,598)
Cash at beginning of period 88 15,282
-------- -------
Cash at end of period $ 12,732 684
======== =======
See notes to condensed consolidated financial statements
5
SCANSOURCE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(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's June 30, 1999 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.
The condensed consolidated balance sheet for June 30, 1999 has been derived
from the audited consolidated balance sheet for that date.
(2) Significant Accounting Policies
Revenue Recognition - The Company records revenue when products are
shipped.
Inventories - Inventories are stated at the lower of cost (first-in, first-
out method) or market.
Net Income Per Share - Basic net income per share is computed by dividing
net income by the weighted average number of common shares outstanding.
Diluted net income per share is computed by dividing net income by the
weighted average number of common and potential common shares outstanding.
Diluted weighted average common and potential common shares include common
shares and stock options using the treasury stock method. Basic and diluted
weighted average shares differed only by the effect of dilutive stock
options. There were no differences between the net income used to calculate
basic and diluted net income per share for the nine months ended March 31,
1999 and 2000.
(3) Line of Credit
The Company has a line of credit agreement with a bank extending to October
31, 2001 with a borrowing limit of $35 million, based upon 80% of eligible
accounts receivable and 40% of eligible inventory at the 30 day LIBOR rate
of interest plus a rate varying from 1.50% to 2.00% tied to the Company's
debt-to-net worth ratio ranging from .75:1 to 2:1. The loan base would have
provided borrowings up to $35 million at March 31, 2000. The revolving
credit facility is collateralized by accounts receivable and eligible
inventory. The agreement contains certain
6
financial covenants including minimum net worth and capital expenditure
requirements and a maximum debt to tangible net worth ratio. The effective
interest rate at March 31, 2000 was 7.95% and the outstanding balance on
the line of credit was $14.0 million on a loan base which exceeded $35
million, leaving $21 million available at March 31, 2000. The Company was
either in compliance or had obtained waivers of noncompliance with the
various covenants at March 31, 2000.
(4) Segment Information
SFAS 131 requires the use of the management approach to determine segment
information to be reported. The management approach is based on the way
management organizes the enterprise to assess performance and make
operating decisions regarding the allocation of resources. This statement
also requires companies that have a single reportable segment to disclose
information about products and services, geographic areas, and information
about major customers.
The Company operates as a single reportable segment as a specialty products
distributor in North America, with Canadian operations that are immaterial.
The Company ships its products from a single warehouse via UPS and FedEx to
technology resellers, who in turn sell directly to end-users. The Company's
products are specialty technology equipment items.
The Company's 16,000 product offerings may be divided into primary
categories: i) bar code and point of sale equipment and ii) business
telephones and computer telephony integration devices. The Company sells to
more than 10,000 resellers and integrators of technology products, who are
geographically disbursed over North America in a pattern that mirrors
population concentration.
7
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Results of Operations
Net Sales. Net sales for the quarter ended March 31, 2000 increased
56.5% to $120.4 million from $76.9 million for the comparable prior year
quarter. Net sales increased 71% to $347.5 million for the nine months ended
March 31, 2000 from $203.2 million for the comparable prior year period. Growth
of net sales resulted primarily from additions to the Company's sales force,
competitive product pricing, selective expansion of its product line, and
increased marketing efforts to specialty technology resellers.
Gross Profit. Gross profit for the quarter ended March 31, 2000
increased 55.8% to $13.4 million from $8.6 million for the comparable prior year
quarter. Gross profit increased 62.2% to $37.6 million for the nine months ended
March 31, 2000 from $23.2 million for the comparable prior year period. Gross
profit as a percentage of sales was 11.1% and 10.8%, respectively, for the
quarter and nine months ended March 31, 2000, compared to 11.2% and 11.4%,
respectively, for the comparable prior year periods. The decrease in gross
profit as a percentage of sales is the result of a change in the mix of sales to
more lower-margin products and the volume discounts provided to resellers on
large orders.
Operating Expenses. Operating expenses, which include selling, general and
administrative expenses and amortization, for the quarter ended March 31, 2000
increased 50% to $8.1 million compared to $5.4 million for the comparable prior
year period. Operating expenses for the nine months ended March 31, 2000
increased 57.4% to $23.2 million from $14.8 million for the comparable prior
year period. Operating expenses as a percentage of sales were 6.7% for both the
quarter and nine months ended March 31, 2000, compared to 7.0% and 7.3%,
respectively, for the comparable prior year periods. Generally, lower gross
margin sales require the Company to provide fewer value-added services causing a
corresponding decrease in operating expenses. The general and administrative
portion of operating expenses also decreased as a percentage of sales due to
efficiencies gained through increased sales volume.
Operating Income. Operating income for the quarter ended March 31, 2000
increased 65.6% to $5.3 million from $3.2 million for the same period in 1999,
driven by the improvement in gross profit as described above. Operating income
increased 70.7% to $14.4 million for the nine months ended March 31, 2000 from
$8.4 million for the comparable prior year period. Operating income as a
percentage of sales was 4.4% and 4.1%, respectively, for the quarter and nine
months ended March 31, 2000, compared to 4.2% and 4.1%, respectively, for the
comparable prior year periods.
Other Income (Expense). Total other income (expense) net consists of
interest income (expense), net, and other income, net. Net interest expense for
the quarter ended March 31, 2000 was $235,000 resulting primarily from interest
expense on the line of credit and building loan of $39,000. Net interest expense
for the quarter ended March 31, 1999 from interest paid on the
8
building was offset by interest income from invested cash.
Income Taxes. Tax expense was provided at an effective rate of 38% and
37%, respectively, for the periods ended March 31, 2000 and 1999, respectively,
and represented the state and federal tax expected to be due after annualizing
income to the fiscal year end.
Net Income. Improved operating income caused net income to increase 57.8%
to $3.1 million for the quarter ended March 31, 2000 from $2.0 million for the
year-earlier quarter. Net income for the nine months ended March 31, 2000
increased 66.2% to $8.7 million from $5.2 million for the comparable prior year
period. Net income as a percentage of sales was 2.6% and 2.5%, respectively for
the quarter and nine months ended March 31, 2000 compared to 2.6% for both of
the comparable prior year periods.
Liquidity and Capital Resources
The Company's primary sources of liquidity are results of operations,
borrowings under its revolving credit facility, and proceeds from the sales of
securities.
The Company has a line of credit agreement with a bank extending to October
31, 2001 with a borrowing limit to $35.0 million at an interest rate equal to
the 30 day LIBOR rate plus a rate varying from 1.50% to 2.00% tied to the
Company's debt-to-net worth ratio ranging from .75:1 to 2:1. The borrowing base
available under the credit facility is limited to 80% of eligible accounts
receivable and 40% of eligible inventory. The outstanding balance on the line of
credit was $14.0 million on a borrowing base which exceeded $35 million, leaving
$21.0 million available at March 31, 2000.
On December 1999, the Company purchased a new Memphis distribution center
for a purchase price of approximately $7 million of which $6.1 million was
allocated to the building and $900,000 was allocated to land. The Company
temporarily funded the purchase with borrowings from the line of credit while a
traditional real estate loan is being negotiated.
For the nine months ended March 31, 2000 net cash of $18.6 million was used
in operating activities compared to $18.8 million provided by operations for the
nine months ended March 31, 1999. Cash used in operations in 2000 was primarily
from an increase in inventory. Cash provided by operations in 1999 was primarily
from an increase in accounts payable which exceeded the amount needed to fund
increases in receivables and inventory.
Cash used in investing activities of $11.1 million for the nine months
ended March 31, 2000 included $4.1 million for capital expenditures and $7.0
million for the land and building purchase. Cash used in investing activities of
$1.7 million for the nine months ended March 31, 1999 was for capital
expenditures.
Cash provided by financing activities for the nine months ended March 31,
2000 was $15.1 million, primarily from borrowings on the line of credit. Cash
used in financing activities for the nine months ended March 31, 1999 was $4.4
million, primarily from payments on the line of credit.
The Company's current ratios at March 31, 2000 and at June 30, 1999 were
1.67 and 1.78, respectively.
9
Year 2000
During the years leading up to the Year 2000 ("Y2K"), an important business
issue relating to the Company arose over the concern that many computer systems,
software and devices used either directly by the Company or indirectly by the
Company's vendors and customers would fail to properly handle dates after 1999.
This issue was caused by the practice of storing the year as the last two
digits, and assuming the first two digits as "19" (i.e., the number "99" for the
year "1999"). Systems, software and devices that do not adequately address Y2K
could cause an interruption of services.
With the assistance of an outside consultant, the Company formed a Y2K Project
Team to oversee the Company's Y2K readiness activities in the information
technology (IT) and non-IT areas, assess Y2K risks in connection with third-
party relationships and develop contingency plans. The Y2K Project Team
conducted a review of the Company's computer systems, including its primary
business software, and concluded that such computer systems and software were
and are Y2K compliant. The absence of system failures or other Y2K problems in
both IT and non-IT areas following January 1, 2000 is consistent with the
conclusions of the Y2K Project Team. The Y2K Project Team has the involvement of
members of senior management, who have kept the Board of Directors advised as to
all developments and progress.
As of December 31, 1999, the Company had implemented its Y2K plan. To date,
the Company has not experienced any material disruptions associated with the Y2K
issue in its internal systems or with its products, customers, and vendors. The
Company does not expect to experience any material disruptions associated with
the Y2K issue in the future. As of March 31, 2000, the Company's costs had not
exceeded $100,000 in connection with its Y2K plan.
10
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to changes in financial market conditions in the
normal course of its business as a result of its selective use of bank debt as
well as transacting in Canadian currency in connection with its Canadian
operations.
The Company is exposed to changes in interest rates primarily as a result
of its borrowing activities, which includes a revolving credit facility with a
bank used to maintain liquidity and fund the Company's business operations. The
nature and amount of the Company's debt may vary as a result of future business
requirements, market conditions and other factors. The definitive extent of the
Company's interest rate risk is not quantifiable or predictable because of the
variability of future interest rates and business financing requirements, but
the Company does not believe such risk is material. The Company does not
currently use derivative instruments to adjust the Company's interest rate risk
profile.
The table below presents principal amounts and related weighted average
rates by year of maturity for the Company's debt obligations at March 31, 2000:
(In thousands) 2000 2001 2002 2003 Thereafter Total Fair Value
---- ---- ---- ---- ---------- ----- ----------
Long-term debt 11 26 29 31 1,587 1,683 1,808
Average interest
rate (fixed) 9.19% 9.19% 9.19% 9.19% 9.19% 9.19% 9.19%
The Company is exposed to changes in foreign exchange rates in connection
with its Canadian operations. It is the Company's policy to enter into foreign
currency transactions only to the extent considered necessary to support its
Canadian operations. The amount of the Company's cash deposits denominated in
Canadian currency has not been, and is not expected to be, material.
Furthermore, the Company has no capital expenditure or other purchase
commitments denominated in foreign currency. The Company does not utilize
forward exchange contracts, currency options or other traditional hedging
vehicles to adjust the Company's foreign exchange rate risk profile. The Company
does not enter into foreign currency transactions for speculative purposes.
The Company does not utilize financial instruments for trading or other
speculative purposes, nor does it utilize leveraged financial instruments. On
the basis of the fair value of the Company's market sensitive instruments at
March 31, 2000, the Company does not consider the potential near-term losses in
future earnings, fair values and cash flows from reasonable possible near-term
changes in interest rates and exchange rates to be material.
11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
Not applicable
Item 2. Changes in Securities.
During the three months ended March 31, 2000, the securities
identified below were issued by the Company without registration under
the Securities Act of 1933, as amended (the "1933 Act"). In each case,
all of the securities were issued pursuant to the exemption from
registration contained in Section 4(2) of the 1933 Act as a
transaction, not involving a general solicitation, in which the
purchaser was purchasing for investment. The Company believes that
each purchaser was given or had access to detailed financial and other
information with respect to the Company and possessed requisite
financial sophistication.
On February 24, 2000 the Company issued 2,000 shares of its common
stock, no par value, to Black Arrow Capital, Inc. in exchange for the
transfer to a wholly-owned subsidiary of the Company of substantially
all of the assets and liabilities of Black Arrow Capital, Inc. The
acquisition transaction was structured to be a tax-free reorganization
under Section 368(a)(1)(C) of the Internal Revenue Code.
Item 3. Defaults Upon Senior Securities.
Not applicable
Item 4. Submission of Matters to a Vote of Security-Holders.
Not applicable.
Item 5. Other information.
Not applicable.
12
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
None
13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SCANSOURCE, INC.
/s/ Michael L. Baur
-----------------------------------
MICHAEL L. BAUR
Chief Executive Officer
/s/ Jeffery A. Bryson
-----------------------------------
JEFFERY A. BRYSON
Chief Financial Officer
Date: May 12, 2000
14