UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
- --------------------------------------------------------------------------------
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 for the Quarterly Period Ended 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
____________________
Commission File Number: 000-26926
SCANSOURCE, INC.
(Exact name of registrant as specified in its charter)
SOUTH CAROLINA 57-0965380
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
6 Logue Court, Greenville, South Carolina 29615
(Address of principal executive offices) (Zip Code)
(864) 288-2432
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last
report)
- --------------------------------------------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ____
-----
As of December 31, 2001, 5,750,394 shares of the registrant's common stock, no
par value, were outstanding.
SCANSOURCE, INC.
INDEX TO FORM 10-Q
December 31, 2001
PART I. FINANCIAL INFORMATION Page No.
--------
Item 1. Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets
as of June 30, 2001 and December 31, 2001 ..... 3
Condensed Consolidated Income Statements
for the Quarters and Six Months Ended
December 31, 2000 and 2001 .................... 5
Condensed Consolidated Statements of
Cash Flows for the Six Months Ended
December 31, 2000 and 2001 .................... 7
Notes to Condensed Consolidated
Financial Statements ............................ 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ............. 18
Item 3. Quantitative and Qualitative Disclosures About Market
Risk ........................................... 22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings .................................... 23
Item 2. Changes in Securities and Use of Proceeds ............ 23
Item 3. Defaults Upon Senior Securities ...................... 23
Item 4. Submission of Matters to a Vote of Security Holders .. 23
Item 5. Other Information .................................... 23
Item 6. Exhibits and Reports on Form 8-K ..................... 23
SIGNATURES...................................................................... 24
Cautionary Statements
Certain of the statements contained in this Form 10-Q, as well as in
the Company's other filings with the Securities and Exchange Commission, that
are not historical facts are forward-looking statements subject to the safe
harbor created by the Private Securities Litigation Reform Act of 1995. The
Company cautions readers of this report that a number of important factors could
cause the Company's activities and/or actual results in fiscal 2002 and beyond
to differ materially from those expressed in any such forward-looking
statements. These factors include, without limitation, the Company's dependence
on vendors, product supply, senior management, centralized functions, and
third-party shippers, the Company's ability to compete successfully in a highly
competitive market and manage significant additions in personnel and increases
in working capital, the Company's entry into new product markets in which it has
no prior experience, the Company's susceptibility to quarterly fluctuations in
net sales and results of operations, the Company's ability to manage
successfully pricing or stock rotation opportunities associated with inventory
value decreases, 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 the Company's Form 10-K for the year ended June 30,
2001.)
2
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
SCANSOURCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands)
Assets June 30, 2001* December 31, 2001
------ ------------- -----------------
Current Assets:
Cash $ 594 $ 1,037
Receivables:
Trade, less allowance for doubtful accounts of
$6,765 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
============ ===========
* Derived from audited financial statements at June 30, 2001.
See notes to condensed consolidated financial statements (unaudited).
3
SCANSOURCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Continued)
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 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
============ ==========
*Derived from audited financial statements at June 30, 2001.
See notes to condensed consolidated financial statements (unaudited).
4
SCANSOURCE, 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
========= ========= ========= =========
See notes to condensed consolidated financial statements (unaudited).
5
SCANSOURCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED INCOME STATEMENTS (UNAUDITED)
(continued)
Quarter ended 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 gain on excess 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
========= ========= ========= =========
See notes to condensed consolidated financial statements (unaudited).
6
SCANSOURCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(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
======== ========
See notes to condensed consolidated financial statements (unaudited).
7
SCANSOURCE, INC. AND SUBSIDIARIES
NOTES TO 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's June 30, 2001 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, Inc. ("Company") is a leading distributor of specialty
technology products, providing both value-added distribution sales to technology
resellers and Internet-based fulfillment to manufacturers and others in
specialty technology markets. The Company has two 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 data capture (ADC) and point-of-sale
(POS) products through its ScanSource sales unit and business telephone
equipment through its Catalyst Telecom sales team. A third segment, ChannelMax,
is a provider of logistics, e-fulfillment services and web storefronts.
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 interest is the portion of common stock
and earnings from operations of subsidiaries of the Company owned by minority
shareholders. As discussed in Note 6, on September 28, 2001 and November 9,
2001, the Company acquired two 52% owned subsidiaries. During the second quarter
ended December 31, 2001, the Company's share of ChannelMax was reduced from 95%
to 90%.
8
SCANSOURCE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE QUARTERS AND SIX MONTHS ENDED DECEMBER 31, 2000 AND 2001
Use of Estimates - The preparation of financial statements in
conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Significant financial
statement estimates include the allowance for uncollectible accounts receivable
and inventory reserves to reduce inventories to the lower of cost or market.
Management determines the estimate of the allowance for uncollectible accounts
considering a number of factors, including historical experience, aging of the
accounts and the credit worthiness of its customers. Management determines the
inventory reserves to reduce inventories to the lower of cost or market based
principally on the effects of technological changes, quantities of goods on
hand, and other factors. Management believes that its estimates provided in the
financial statements, including those for the above-described items, are
reasonable. However, actual results could differ from those estimates.
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 who 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, 2000 and 2001.
Inventories - Inventories (consisting of automatic data capture,
point-of-sale, 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, 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.
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.
Changes in the carrying amount of goodwill for the six months ended
December 31, 2001, by operating segment, are as follows:
North American International
Distribution E-Logistics Distribution
Segment Segments Segment Total
---------------------------------------------------------
(in thousands)
Balance as of
June 30, 2001 1,105 172 - 1,277
Goodwill acquired
during the period 4,753 - 1,587 6,340
---------------------------------------------------------
Balance as of
December 31, 2001 5,858 172 1,587 7,617
=========================================================
9
SCANSOURCE, INC. AND SUBSIDIARIES
NOTES TO 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
======= ======= ======= =======
10
SCANSOURCE, 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 Yet Adopted - In October 2001, the Financial
Accounting Standards Board issued SFAS No.144, "Accounting for the Impairment or
Disposal of Long-Lived Assets", which addresses financial reporting for the
impairment or disposal of long-lived assets. SFAS 144 supersedes SFAS 121 and
the accounting and reporting provisions of APB 30 related to the disposal of a
segment of a business. SFAS 144 will become effective in the Company's fiscal
year beginning July 1, 2002. The Company is evaluating the impact of the
adoption of SFAS 144 and has not yet determined the effect, if any, that
adoption of the standard will have on the Company's financial position and
results of operations.
11
SCANSOURCE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE QUARTERS AND SIX MONTHS ENDED DECEMBER 31, 2000 AND 2001
(3) Revolving Credit Facility and Line of Credit
In July 2001, the Company put in place a new revolving credit facility with
its bank group extending the maturity of the facility to September 2003 with a
borrowing limit of the lesser of (i) $80 million or (ii) the total 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 the Company'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. 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, maximum funded debt to EBITDA ratio and a 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, 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's subsidiaries has an asset 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 the bank's prime rate of interest plus one percent
(5.75% at December 31, 2001). All of the subsidiary's assets collateralize the
line of credit. The Company has guaranteed 52% of the balance on the line, while
the remaining 48% of the balance is guaranteed by the subsidiary's minority
shareholder. The outstanding balance on the line of credit was $560,000 at
December 31, 2001, and no additional borrowings were available.
12
SCANSOURCE, INC. AND SUBSIDIARIES
NOTES TO 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, 2001 and December 31,
2001:
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
========== ==========
The note payable secured by the distribution center contains certain
financial covenants, including minimum net worth, capital expenditure limits,
and a maximum debt to tangible net worth ratio; the payment of dividends is
prohibited. The Company was in compliance with the various covenants at December
31, 2001.
The Company owns an equity interest in a limited liability company for
which it has guaranteed debt up to approximately $525,000.
(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.
13
SCANSOURCE, 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
====== ====== ======
(6) Acquisitions and Extraordinary 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
14
SCANSOURCE, 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
or 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 $ 1.56
On September 28, 2001 the Company purchased 52% of the stock of
Outsourcing Unlimited, Inc., a provider 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 acquisition was accounted 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 price for the existing business exceeded the
fair value of the net assets acquired. The purchase price was allocated to the
fair value of the net assets acquired, and approximately $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 quarter ended December 31,
2001, the Company finalized its accounting for the acquisition and collected
approximately $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 exceeded the purchase price by approximately $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.
15
SCANSOURCE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE QUARTERS AND SIX MONTHS ENDED DECEMBER 31, 2000 AND 2001
(7) Segment Information
The Company operates its business in three reportable segments.
The first reportable segment, North American distribution, offers
approximately 18,000 products for sale in two primary categories: i) automatic
data capture and point-of-sale equipment sold by the ScanSource sales team and
ii) business telephones and computer telephony integration devices sold by the
Catalyst Telecom sales team. These products are sold to more than 12,000
resellers and integrators of technology products, who are geographically
disbursed over North America in a pattern that mirrors population concentration.
Of its customers at December 31, 2001, no single account represented more than
10% of the Company's net sales.
The second reportable segment, international distribution, was begun in
November 2001 with the acquisition of a Miami-based distributor and offers
automatic data capture and point-of-sale equipment to more than 1,000 resellers
and integrators of technology products located primarily in South America and
Europe. Of its customers at December 31, 2001, no single account represented
more than 10% of the Company's sales.
The third reportable segment, e-logistics, provides real-time inventory
availability and web catalog, order entry, order tracking and logistics for
manufacturers and others in the automatic data capture and business telephone
markets. This unit serves less than 10 customers, none of whom accounted for
more than 10% of total Company sales. Certain e-logistics sales are recognized
on a net revenue recognition basis (see Note 2). During the quarter and six
months ended December 31, 2001, this segment recognized an $840,000 impairment
charge for capitalized software.
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 the e-logistics segment to the North American distribution
segment and sales by the North American distribution segment to the
international distribution segment. All intersegment revenues and profits are
eliminated in the accompanying consolidated financial statements.
Accounts receivable, inventories, and distribution center property and
equipment can be identified by segment. However, cash, other current assets,
other property and equipment and other non-current assets are generally not
distinguishable among the business segments.
16
SCANSOURCE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE QUARTERS AND SIX MONTHS ENDED DECEMBER 31, 2000 AND 2001
Operating results for each business unit are summarized below with historical
data 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
========= ==========
17
Item 2. Management's Discussion and Analysis of Financial Conditions and Results
of Operations
Results of Operations
Net Sales. Net sales for 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)
through North American distribution, which includes sales to the United States,
Canada (less than 5% of Company sales) and Mexico (less than 1% of Company
sales) increased 46% to $185.9 million for the quarter ended December 31, 2001
from $127.7 million for the comparable prior year quarter. International
distribution sales were $2.8 million for the quarter ended December 31, 2001,
and includes 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. Growth of net sales resulted from increased sales
to existing customers through competitive product pricing and marketing efforts
to reach specialty technology resellers. Sales also increased due to the
addition of new customers, additional sales representatives and expansion of the
product line due to the acquisition of two bar code / POS distributors in July
and November 2001, and a phone 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, for the
quarter and six months ended December 31, 2001, compared to 11.8% and 11.3%,
respectively, for the comparable prior year periods. The decrease in gross
profit as a percentage of net sales was the result of a change in the mix of
sales to larger orders and lower margin products during the quarter and six
months ended December 31, 2001 and a more competitive market environment over
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 expenses as a percentage of sales were
7.2% and 7.1%, respectively, for the quarter and six months ended December 31,
2001, compared to 7.2% and 6.9%, respectively, for the comparable prior year
periods.
Operating expenses 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 contribution to the 401(K) plan, and
a $400,000 higher than expected increase in bad debts expense. The Company also
settled a claim with a former customer resulting in a $924,000 recovery of
operating expenses that partially offset the increases noted above.
18
Item 2. Management's Discussion and Analysis of Financial Conditions and
Results of Operations
Operating Income. Operating income for the quarter ended December 31, 2001
increased by 2% to $6.9 million from $6.8 million for the same period in 2000,
driven by the improvement in gross profit, net of increases in operating
expenses, as described above. Operating income increased 10% to $14.8 million
for the six months ended December 31, 2001 from $13.4 million for the comparable
prior period. Operating income as a percentage of sales was 3.3% and 3.7%,
respectively, for the quarter and six months ended December 31, 2001, compared
to 4.6% 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% of sales, a 14% increase over the same quarter last year.
Total Other Expense (Income). Other expense (income) consists principally
of interest expense and interest income. Interest expense for the quarter and
six months ended December 31, 2001 was $690,000 and $1.6 million, respectively,
reflecting interest paid on borrowings on the Company's line of credit and
long-term debt. Interest expense for the quarter and six months ended December
31, 2000 was $756,000 and $1.2 million, respectively. Interest expense for the
quarter ended December 31, 2001 was lower than the prior year quarter due to
lower interest rates. Interest expense for the six months ended December 31,
2001 was higher due to higher line of credit borrowings, partially offset by
lower interest rates.
Interest income for the quarter and six months ended December 31, 2001 was
$308,000 and $648,000, respectively, principally collected from customers.
Interest income for the quarter and six months ended December 31, 2000 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.
Provision For Income Taxes. Income tax expense was $2.5 million and $2.4
million for the quarters ended December 31, 2001 and 2000, respectively,
reflecting an effective tax rate of 38.0%, representing federal and state tax
expected to be due after annualizing income to the fiscal year end. Income tax
expense was $5.3 million and $4.8 million for the six months ended December 31,
2001 and 2000, respectively.
Extraordinary Item. During the quarter ended December 31, 2001, the Company
finalized its accounting for the May 2001 acquisition of 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 months
ended December 31, 2001.
19
Item 2. Management's Discussion and Analysis of Financial Conditions and Results
of Operations
Net Income. For reasons discussed above, net income increased by 24% to
$4.9 million for the quarter 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 for
the 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.
Liquidity and Capital Resources
The Company's primary sources of liquidity are cash flow from operations,
borrowings under the Company's revolving credit facility, and, to a lesser
extent, proceeds from the exercise of stock options.
In July 2001, the Company put in place a new revolving credit facility with
its bank group extending the maturity of the facility to September 2003 with a
borrowing limit of the lesser of (i) $80 million or (ii) the total 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 the Company's funded
debt to EBITDA ratio ranging from 2.50:1 to 4.25:1 and a fixed charge coverage
ratio of not less than 2.75. 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, maximum funded debt to EBITDA ratio and a 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 the remaining 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.
Cash used in investing 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 and $4.9 million for capital
expenditures. For the six months ended December 31, 2000, $3.0 million of cash
was used in investing activities primarily for capital expenditures.
20
Cash provided by financing activities for the six months ended December 31,
2001 was $17.3 million primarily from advances on the revolving 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 of credit of $4.3 million.
The Company owns an equity interest in a limited liability company for
which it has guaranteed debt up to approximately $525,000.
The Company believes that it has sufficient liquidity to meet its
forecasted cash requirements for at least the next year.
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 issued SFAS No.144, "Accounting for the Impairment or
Disposal of Long-Lived Assets", which addresses financial reporting for the
impairment or disposal of long-lived assets. SFAS 144 supersedes SFAS 121 and
the accounting and reporting provisions of APB 30 related to the disposal of a
segment of a business. SFAS 144 will become effective in the Company's fiscal
year beginning July 1, 2002. The Company is evaluating the impact of the
adoption of SFAS 144 and has not yet determined the effect, if any, that
adoption of the standard will have on the Company's financial position and
results of operations.
21
Item 3: Quantitative and Qualitative Disclosures About Market Risks
The Company's principal exposure to changes in financial market
conditions in the normal course of its business is a result of its bank
borrowings and, to a much lesser extent, transacting business in Canadian or
Mexican currency in connection with its Canadian and Mexican 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.
A hypothetical 100 basis point increase or decrease in interest rates on
borrowings on the Company's revolving line of credit would have resulted in an
increase or decrease of approximately $157,000 in pre-tax income for the quarter
ended December 31, 2001. The Company does not currently use derivative
instruments to adjust its interest rate risk profile.
The Company is minimally exposed to changes in foreign exchange rates
in connection with its foreign (Canada, Mexico, South America and Europe)
operations. It is the Company's policy to enter into foreign currency
transactions only to the extent considered necessary to support these
operations. The amount of the Company's cash deposits denominated in these
currencies has not been, and is not expected to be, material. Furthermore, the
Company has no capital expenditure or other purchase commitments denominated in
any foreign currency. The Company does not utilize forward exchange contracts,
currency options or other traditional hedging vehicles to adjust the Company's
foreign exchange rate risk profile. The Company does not enter into foreign
currency transactions for speculative purposes. Foreign currency gains and
losses 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's market sensitive instruments at
December 31, 2001, the Company does not consider the potential near-term losses
in future earnings, fair values and cash flows from reasonably possible
near-term changes in interest rates and exchange rates to be material.
22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. Not applicable
Item 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's annual meeting of shareholders was held on December 6,
2001.
(b) The five directors listed below were selected at the meeting. The
Company has no other directors whose term of office continued
after 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) Proposal to ratify the appointment of Deloitte & Touche LLP as the
Company'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 4,702
Item 5. Other Information. Not applicable
Item 6. Exhibits and Reports on Form 8-K. None
23
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: February 14, 2002
24