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 March 31, 2002
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 March 31, 2002, 5,812,108 shares of the registrant's common stock, no par
value, were outstanding.
SCANSOURCE, INC.
INDEX TO FORM 10-Q
March 31, 2002
PART I. FINANCIAL INFORMATION Page No.
--------
Item 1. Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets
as of June 30, 2001 and March 31, 2002..................... 3
Condensed Consolidated Income Statements
for the Quarters and Nine Months Ended
March 31, 2001 and 2002.................................... 5
Condensed Consolidated Statements of
Cash Flows for the Nine Months Ended
March 31, 2001 and 2002.................................... 7
Notes to Condensed Consolidated Financial Statements.............. 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................... 20
Item 3. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 26
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................. 27
Item 2. Changes in Securities and Use of Proceeds......................... 27
Item 3. Defaults Upon Senior Securities................................... 27
Item 4. Submission of Matters to a Vote of Security Holders............... 27
Item 5. Other Information................................................. 27
Item 6. Exhibits and Reports on Form 8-K.................................. 27
SIGNATURES ............................................................................... 28
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* March 31, 2002
------ --------------- --------------
Current Assets:
Cash $ 594 $ 1,863
Receivables:
Trade, less allowance for doubtful accounts
of $6,765 at June 30, 2001 and $8,289
at March 31, 2002 86,917 111,965
Other 8,118 8,908
Inventories 154,182 166,404
Prepaid expenses and other assets 640 754
Deferred income taxes 9,904 10,595
--------------- --------------
Total current assets 260,355 300,489
--------------- --------------
Property and equipment, net 21,746 26,045
Goodwill 1,277 7,640
Other assets, including identifiable intangible assets 507 545
--------------- --------------
Total assets $ 283,885 $ 334,719
=============== ==============
* Derived from audited financial statements at June 30, 2001
See noted to condensed consolidated financial statements (unaudited).
3
SCANSOURCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Continued)
Liabilities and Shareholders' Equity June 30, 2001* March 31, 2002
------------------------------------ --------------- --------------
Current Liabilities:
Current portion of long-term debt $ 444 $ 543
Line of credit - 200
Trade accounts payable 154,561 164,149
Accrued expenses and other liabilities 9,433 9,468
--------------- --------------
Total current liabilities 164,438 174,360
Deferred income taxes - 186
Borrowings under revolving credit facility 17,104 40,631
Long-term debt 8,866 8,738
--------------- --------------
Total liabilities 190,408 223,915
--------------- --------------
Minority interest 115 1,421
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 5,812 shares issued and
outstanding at June 30, 2001 and
March 31, 2002, respectively 44,572 46,067
Retained earnings 48,790 63,403
Accumulated other comprehensive loss -
cumulative currency translation adjustment - (87)
--------------- --------------
Total shareholders' equity 93,362 109,383
--------------- --------------
Total liabilities and shareholders' equity $ 283,885 $ 334,719
=============== ==============
* Derived from audited financial statements at June 30, 2001
See noted 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 Nine months ended
March 31, March 31,
2001 2002 2001 2002
----------- ----------- ----------- ----------
Net sales $ 155,237 $ 211,484 $ 457,712 $ 608,183
Cost of goods sold 135,240 188,376 403,524 542,205
----------- ----------- ----------- ----------
Gross profit 19,997 23,108 54,188 65,978
----------- ----------- ----------- ----------
Operating expenses:
Selling, general and admin. expenses 12,419 14,633 33,181 41,841
Impairment of capitalized software - - - 840
----------- ----------- ----------- ----------
12,419 14,633 33,181 42,681
----------- ----------- ----------- ----------
Operating income 7,578 8,475 21,007 23,297
----------- ----------- ----------- ----------
Other expense (income):
Interest expense 1,032 559 2,267 2,143
Interest income (231) (274) (508) (922)
Other (income) expense (3) 93 (43) 131
----------- ----------- ----------- ----------
Other expense, net 798 378 1,716 1,352
----------- ----------- ----------- ----------
Income before income taxes and
extraordinary gain 6,780 8,097 19,291 21,945
Provision for income taxes 2,575 2,897 7,329 8,161
----------- ----------- ----------- ----------
Income before extraordinary gain 4,205 5,200 11,962 13,784
Extraordinary gain on excess of fair value of
net assets acquired over cost, net of
income taxes of $508 - - - 829
----------- ----------- ----------- ----------
Net income $ 4,205 $ 5,200 $ 11,962 $ 14,613
=========== =========== =========== ==========
See noted to condensed consolidated financial statements (unaudited).
5
SCANSOURCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED INCOME STATEMENTS (UNAUDITED)
(continued)
Quarter ended Nine months ended
March 31, March 31,
2001 2002 2001 2002
----------- ----------- ----------- ----------
Per share data:
Basic earnings per share:
Income before extraordinary gain $ 0.74 $ 0.90 $ 2.11 $ 2.40
Extraordinary gain on excess of fair
value of net assets acquired over
cost, net of income taxes - - - 0.14
----------- ----------- ----------- ----------
Net income $ 0.74 $ 0.90 $ 2.11 $ 2.54
=========== =========== =========== ==========
Weighted-average shares outstanding 5,703 5,781 5,674 5,743
=========== =========== =========== ==========
Diluted earnings per share:
Income before extraordinary gain $ 0.69 $ 0.83 $ 1.96 $ 2.23
Extraordinary gain on excess of fair
value of net assets acquired over
cost, net of income taxes - - - 0.13
----------- ----------- ----------- ----------
Net income $ 0.69 $ 0.83 $ 1.96 $ 2.36
=========== =========== =========== ==========
Weighted-average shares outstanding 6,060 6,238 6,118 6,188
=========== =========== =========== ==========
See noted to condensed consolidated financial statements (unaudited).
6
SCANSOURCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
Nine Months Ended March 31,
2001 2002
------------- -------------
Cash flows from operating activities:
Net income $ 11,962 $ 14,613
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Extraordinary gain, net of income taxes - (829)
Depreciation and amortization 3,207 3,373
Provision for doubtful accounts 1,359 3,850
Impairment of capitalized software - 943
Deferred income tax benefit (324) (607)
Minority interest in net income of subsidiaries - 170
Changes in operating assets and liabilities, net
of acquisitions:
Trade receivables (14,252) (21,283)
Other receivables 1,502 22
Inventories (41,383) 2,372
Prepaid expenses and other assets (2,680) 40
Other noncurrent assets (95) 65
Trade accounts payable 37,657 643
Accrued expenses and other liabilities 1,730 (599)
------------- -------------
Net cash (used in) provided by operating activities (1,317) 2,773
------------- -------------
Cash flows used in investing activities:
Capital expenditures (5,374) (7,525)
Cash paid for business acquisitions - (17,718)
------------- -------------
Net cash used in investing activities (5,374) (25,243)
------------- -------------
Cash flows from financing activities:
Net advances (payments) on revolving credit, net (5,987) 22,950
Proceeds from long-term debt borrowings 7,350 -
Repayments of long-term debt borrowings (132) (619)
Exercise of stock options 1,308 1,495
------------- -------------
Net cash provided by financing activities 2,539 23,826
------------- -------------
Effect of exchange rate changes upon cash - (87)
------------- -------------
Increase (decrease) in cash (4,152) 1,269
Cash at beginning of period 4,612 594
------------- -------------
Cash at end of period $ 460 $ 1,863
============= =============
See notes to condensed consolidated financial statements (unaudited).
7
SCANSOURCE, INC. AND SUBSIDIARIES
NOTES TO UNADUITED 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, 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.
Certain prior year amounts have been reclassified to conform with the
current year presentation in the accompanying financial statements.
(2) BUSINESS DESCRIPTION AND SUMMARY OF CRITICAL AND OTHER SIGNIFICANT
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, business telephone equipment
through its Catalyst Telecom sales unit and converged communications products
through its Paracon sales unit. 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 October 2001, the
Company's share of ChannelMax was reduced from 95% to 90%.
8
SCANSOURCE, INC. AND SUBSIDIARIES
NOTES TO UNADUITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
Critical Accounting Policies - The preparation of financial statements
in conformity with accounting principles generally accepted in the United States
of America requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. On an ongoing basis
management evaluates its estimates, including those related to the allowance for
uncollectible accounts receivable and inventory reserves, to reduce inventories
to the lower of cost or market. Management bases its estimates on historical
experience and on various other assumptions that management believes to be
reasonable under the circumstances, the results of which form a basis for making
judgments about the carrying value of assets and liabilities that are not
readily available from other sources. Actual results may differ from these
estimates under different assumptions or conditions; however, management
believes that its estimates, including those for the above described items, are
reasonable and that the actual results will not vary significantly from the
estimated amounts.
We believe the following critical accounting policies relate to our more
significant judgments and estimates used in the preparation of our consolidated
financial statements:
Allowance for Uncollectible Accounts Receivable - The Company maintains
an allowance for uncollectible accounts receivable for estimated losses
resulting from customers failure to make payments on accounts receivable due to
the Company. Management determines the estimate of the allowance for
uncollectible accounts receivable considering a number of factors, including:
(1) historical experience, (2) aging of the accounts receivable and (3) specific
information obtained by the Company on the financial condition and the current
credit worthiness of its customers. If the financial condition of the Company's
customers were to deteriorate and reduce the ability of the Company's customers
to make payments on their accounts, the Company may be required to increase its
allowance by recording additional bad debts expense. Likewise, should the
financial condition of the Company's customers improve and result in payments or
settlements of previously reserved amounts, the Company may be required to
record a reduction in bad debt expense to reverse the recorded allowance.
Inventory Reserves - 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. An estimate is made of the market value, less costs to dispose, of
products whose value is determined to be impaired. If these products are
ultimately sold at less than estimated amounts, additional reserves may be
required. Likewise, if these products are sold for more than the estimated
amounts, reserves may be reduced.
Following are accounting policies that significantly affect the
preparation of the consolidated financial statements:
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 nine months ended March 31, 2001 and 2002.
9
SCANSOURCE, INC. AND SUBSIDIARIES
NOTES TO UNADUITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
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.
Foreign Currencies - The currency effects of translating the financial
statements of the Company'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 loss. The
assets and liabilities of these foreign entities are translated into U.S.
dollars using the exchange rate at the end of the respective period. Sales,
costs and expenses are translated at average exchange rates effective during the
respective period.
Foreign currency transaction gains and losses are included in selling,
general and administrative costs in the consolidated income statement and were
less than 1% of operating income for the quarters and nine months ended March
31, 2001 and 2002.
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 completed in December 2001 indicated that goodwill was not impaired.
At June 30, 2001 and March 31, 2002, the carrying value of the Company's
goodwill was $1,277,000 and $7,640,000, respectively. Other assets included a
$153,000 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.
10
SCANSOURCE, INC. AND SUBSIDIARIES
NOTES TO UNADUITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
Changes in the carrying amount of goodwill for the nine months ended
March 31, 2002, by operating segment, are as follows:
North
American International
Distribution E-Logistics Distribution
Segment Segment Segment Total
------- ------- ------- -----
(in thousands)
Balance as of June 30, 2001 $ 1,105 $ 172 - $1,277
Goodwill acquired during the period 4,775 - 1,588 6,363
------- --- ------- ------
Balance as of March 31, 2002 $ 5,880 $ 172 $ 1,588 $7,640
======= ======= ======= ======
The following pro forma information reconciles the net income and
earnings per share reported for the quarters and nine-month periods ended March
31, 2001 and 2002 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 Nine months ended
March 31, March 31,
2001 2002 2001 2002
----------- ----------- ----------- ----------
(In thousands, (In thousands,
except per share data) except per share data)
Income before extraordinary $ 4,205 $ 5,200 $ 11,962 $ 13,784
gain, as reported
Goodwill amortization 33 - 125 -
----------- ----------- ----------- ----------
Income before extraordinary
gain, as adjusted $ 4,238 $ 5,200 $ 12,087 $ 13,784
=========== =========== =========== ==========
Net income, as reported $ 4,205 $ 5,200 $ 11,962 $ 14,613
Goodwill amortization 33 - 125 -
----------- ----------- ----------- ----------
Net income, as adjusted $ 4,238 $ 5,200 $ 12,087 $ 14,613
=========== =========== =========== ==========
11
SCANSOURCE, INC. AND SUBSIDIARIES
NOTES TO UNADUITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
Quarter ended Nine months ended
March 31, March 31,
2001 2002 2001 2002
----------- ----------- ----------- ----------
Basic earnings per share:
- -------------------------
Income before extraordinary
gain, as reported $ 0.74 $ 0.90 $ 2.11 $ 2.40
Goodwill amortization 0.00 - 0.02 -
----------- ----------- ----------- ----------
Income before extraordinary
gain, as adjusted $ 0.74 $ 0.90 $ 2.13 $ 2.40
=========== =========== =========== ==========
Net income, as reported $ 0.74 $ 0.90 $ 2.11 $ 2.54
Goodwill amortization 0.00 - 0.02 -
----------- ----------- ----------- ----------
Net income, as adjusted $ 0.74 $ 0.90 $ 2.13 $ 2.54
=========== =========== =========== ==========
Diluted earnings per share:
- ---------------------------
Income before extraordinary
gain, as reported $ 0.69 $ 0.83 $ 1.96 $ 2.23
Goodwill amortization 0.01 - 0.02 -
----------- ----------- ----------- ----------
Income before extraordinary
gain, as adjusted $ 0.70 $ 0.83 $ 1.98 $ 2.23
=========== =========== =========== ==========
Net income, as reported $ 0.69 $ 0.83 $ 1.96 $ 2.36
Goodwill amortization 0.01 - 0.02 -
----------- ----------- ----------- ----------
Net income, as adjusted $ 0.70 $ 0.83 $ 1.98 $ 2.36
=========== =========== =========== ==========
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.
12
SCANSOURCE, INC. AND SUBSIDIARIES
NOTES TO UNADUITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(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 March 31, 2002 was 3.87% and the
outstanding balance was $40.6 million on a borrowing base that exceeded $80
million, leaving $39.4 million available for additional borrowings. The Company
was in compliance with the various covenants at March 31, 2002.
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 March 31, 2002). 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. At March 31, 2002, the outstanding balance on the line of credit
was $200,000, outstanding standby letters of credit totaled $40,000 and $360,000
was available for additional borrowings.
13
SCANSOURCE, INC. AND SUBSIDIARIES
NOTES TO UNADUITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(4) LONG-TERM DEBT
Long-term debt consists of the following at June 30, 2001 and March 31,
2002:
June 30, March 31,
2001 2002
---- ----
Note payable to a bank, secured by distribution center land and building;
monthly payments of principal and interest of $65,000;
3.77% variable interest rate; maturing in 2005 $7,168,000 $6,842,000
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 1,623,000
Note payable to a bank, secured by motor coach; monthly payments of
principal and interest of $7,000; 3.77% variable interest
rate; maturing in 2006 496,000 447,000
Capital leases with monthly principal payments ranging from $33 to
$1,391 and interest at 7.57% to 11.75% --- 369,000
---------- ----------
9,310,000 9,281,000
Less current portion 444,000 543,000
---------- ----------
$8,866,000 $8,738,000
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 March
31, 2002.
The Company owns an equity interest in a limited liability company for
which it has guaranteed debt up to approximately $525,000. As of March 31, 2002,
the limited liability company owned assets with a fair market value in excess of
$2.3 million and owed liabilities of approximately $2.1 million.
14
SCANSOURCE, INC. AND SUBSIDIARIES
NOTES TO UNADUITED 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.
Net Weighted Per Share
Income Avg. Shares Amount
------ ----------- ------
(in thousands)
Three months ended March 31, 2002:
Basic earnings per share $5,200 5,781 $ 0.90
======
Effect of dilutive stock options 457
------ -----
Diluted earnings per share $5,200 6,238 $ 0.83
====== ===== ======
Three months ended March 31, 2001:
Basic earnings per share $4,205 5,703 $ 0.74
======
Effect of dilutive stock options 357
------ -----
Diluted earnings per share $4,205 6,060 $ 0.69
====== ===== ======
Nine months ended March 31, 2002:
Basic earnings per share $14,613 5,743 $ 2.54
======
Effect of dilutive stock options 445
------- ------
Diluted earnings per share $14,613 6,188 $ 2.36
======= ===== ======
Nine months ended March 31, 2001:
Basic earnings per share $11,962 5,674 $ 2.11
======
Effect of dilutive stock options 444
------- ------
Diluted earnings per share $11,962 6,118 $ 1.96
======= ===== ======
(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
$14.3 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
$4.1 million of goodwill resulted 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 results of
operations.
15
SCANSOURCE, INC. AND SUBSIDIARIES
NOTES TO UNADUITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
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 $2.6 million
in cash and assumed certain liabilities. The acquisition was 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 resulted 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 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 nine 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
March 31, 2001 March 31, 2002
-------------- --------------
Amounts in thousands, except per share data
Net sales $470,968 $615,904
Net income $12,437 $14,750
Basic earnings per share $2.19 $2.57
Diluted earnings per share $2.03 $2.38
On September 28, 2001, the Company purchased 52% of the stock of
Outsourcing Unlimited, Inc. ("OUI"), a provider of services to the phone
reseller market, for approximately $800,000 in cash and assumed certain
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.
Operating results have been included in the Company's consolidated results of
operations from the date of acquisition. 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 $643,000 of goodwill resulted 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.
16
SCANSOURCE, INC. AND SUBSIDIARIES
NOTES TO UNADUITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
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 (largely arising from the resolution of
disputed and aged receivables) 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.
(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 three primary categories: i)
automatic data capture and point-of-sale equipment sold by the ScanSource sales
team, ii) business telephone equipment sold by the Catalyst Telecom sales team
and iii) converged communications products by the Paracon 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 March 31, 2002, no single
account represented more than 10% of the Company's net sales.
The second reportable segment, international distribution, operates in
two geographic markets, South America and Europe, and offers automatic data
capture and point-of-sale equipment to more than 1,000 resellers and
integrators of technology products. Of its customers at March 31, 2002, 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 ended
December 31, 2001 and the nine months ended March 31, 2002, 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 March 31, 2001 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.
17
SCANSOURCE, INC. AND SUBSIDIARIES
NOTES TO UNADUITED CONDENSED 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.
Operating results for each business unit are summarized below with
historical data for the quarter and nine months ended March 31, 2001 restated to
conform to the current organizational structure:
Quarter ended Nine months ended
March 31, March 31,
2001 2002 2001 2002
------------- ----------- ----------- ------------
Sales:
North American distribution $ 141,794 $ 201,822 $ 407,536 $ 551,971
E-logistics 15,736 9,261 56,050 58,763
International distribution - 4,418 - 7,184
Less intersegment sales (2,293) (4,017) (5,874) (9,735)
--------- ---------- --------- ----------
$ 155,237 $ 211,484 $ 457,712 $ 608,183
========= ========== ========= ==========
Operating income:
North American distribution $ 7,012 $ 8,266 $ 19,238 $ 22,544
E-logistics 566 539 1,769 984
International distribution - (330) - (231)
--------- ---------- --------- ----------
$ 7,578 $ 8,475 $ 21,007 $ 23,297
========= ========== ========= ==========
Assets: June 30, March 31,
2001 2002
---------- -----------
North American distribution $ 202,032 $ 226,645
E-logistics 45,693 53,134
International distribution - 15,354
Corporate 36,160 39,586
---------- -----------
$ 283,885 $ 334,719
========= ==========
18
SCANSOURCE, INC. AND SUBSIDIARIES
NOTES TO UNADUITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(8) SUBSEQUENT EVENT
On May 7, 2002, the Company purchased 100% of the shares of ABC Technology
Distribution, Ltd., a bar code and electronic point-of-sale distributor based
in the United Kingdom, for approximately $2.4 million in cash. The acquisition
allowed the Company to expand its European customer base and to add employees
and an office in the United Kingdom, furthering the Company's expansion of its
European operations. Accordingly, the Company's purchase price exceeded the
fair value of the net assets acquired. The acquisition will be accounted for by
the purchase method of accounting, and accordingly, the operating results will
be included in the Company's consolidated results of operations from the date
of the acquisition. The allocation of the purchase price to the fair value of
the net assets acquired has not been completed.
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Net Sales. The following tables summarize the Company's sales results:
Quarter ended
March 31, Percentage
2001 2002 Difference Change
---- ---- ---------- ------
(In thousands)
North American distribution $ 141,794 $ 201,013 $ 59,219 41.8%
E-logistics 13,443 6,053 (7,390) -55.0%
International distribution - 4,418 4,418 -
--------- ---------- ----------- -------
Net Sales $ 155,237 $ 211,484 $ 56,247 36.2%
========= ========== =========== ======
Nine months ended
March 31, Percentage
2001 2002 Difference Change
---- ---- ---------- ------
(In thousands)
North American distribution $ 407,536 $ 551,059 $ 143,523 35.2%
E-logistics 50,176 49,940 (236) -0.5%
International distribution - 7,184 7,184 -
--------- ---------- ----------- -------
Net Sales $ 457,712 $ 608,183 $ 150,471 32.9%
========= ========== =========== ======
North American distribution sales include sales to the United States,
Canada (less than 5% of total sales) and Mexico (less than 1% of total sales)
from the Company's Memphis, Tennessee distribution center. The increase in
North American distribution sales was driven by strong sales across all product
categories, particularly business telephones. 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 via the acquisition of two bar code / POS
distributors in July and November 2001 and a phone distributor in May 2001.
The decrease in sales in the E-logistics segment is primarily due to
the renegotiation of a customer's contract to qualify for net fee revenue
recognition, rather than gross revenue recognition, effective in December 2001.
The primary change in the contract is that the Company no longer contractually
bears inventory and accounts receivable risk. Had the contract been accounted
for on a net fee revenue basis for all of the nine months ended March 31, 2002,
pro forma E-logistics sales would have been $16.6 million. Had this qualified
for net fee revenue recognition in the quarter and nine months ended March 31,
2001, pro forma net sales for the E-logistics segment would have been $6.3
million and $32.5 million, respectively. The remainder of the decrease in sales
reflects a continued shift by some customers out of the e-logistics segment
into the distribution segment and the Catalyst Telecom sales unit.
20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The International distribution segment commenced in November 2001 with
the acquisition of Netpoint International, a Miami-based distributor which
sells primarily to Latin and South America. Also in January 2002, the Company
opened a headquarters and distribution center in Liege, Belgium, serving all of
Europe.
Gross Profit. The following tables summarize the Company's gross profit:
Quarter ended Percentage of Sales
March 31, March 31,
2001 2002 2001 2002
---- ---- ---- ----
(In thousands)
North American distribution $ 18,929 $ 21,212 13.3% 10.6%
E-logistics 1,068 1,263 7.9% 20.9%
International distribution - 633 - 14.3%
--------- -------- ------- ----
Gross Profit $ 19,997 $ 23,108 12.9% 10.9%
========= ======== ==== ====
Gross profit as a percentage of sales for the quarter ended March 31,
2002 was comparable to the most recent three quarters, which ranged from 10.6%
to 11.1% of sales. During the quarter ended March 31, 2001, the North American
distribution segment had higher than expected margins due to a change in order
mix, a reevaluation of inventory reserves, and some non-recurring rebates
received during that period. Excluding these items, pro forma gross profit for
the quarter and nine months ended March 31, 2001 would have been 10.8% and
11.6%, respectively, for this segment.
The increase in the E-logistics gross profit margin during the quarter
and nine months ended March 31, 2002 is attributable to the renegotiation of the
customer contract to qualify for net fee revenue recognition discussed above.
Nine months ended Percentage of Sales
March 31, March 31,
2001 2002 2001 2002
---- ---- ---- ----
(In thousands)
North American distribution $ 50,073 $ 61,121 12.3% 11.1%
E-logistics 4,115 3,877 8.2% 7.8%
International distribution - 980 - 13.6%
---------- -------- --------- -----
Gross Profit $ 54,188 $ 65,978 11.8% 10.8%
========== ======== ==== ====
21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Operating Expenses. The following table summarizes the Company's
operating expenses:
Percentage of Sales
March 31, Percentage March 31,
2001 2002 Difference Change 2001 2002
---- ---- ---------- ------ ---- ----
(In thousands)
Quarter $ 12,419 $ 14,633 $ 2,214 17.8% 8.0% 6.9%
Nine months $ 33,181 $ 42,681 $ 9,500 28.6% 7.2% 7.0%
Operating expenses as a percentage of sales for the quarter ended March
31, 2002 was comparable to the most recent three quarters, which ranged from
6.9% to 7.2% of sales. Operating expenses in the quarter ended March 31, 2002
included approximately $500,000 to begin the European operations and a $250,000
fee paid for the first phase of a tax consulting project. Excluding these items,
pro forma operating expenses for the quarter ended March 31, 2002 would have
been $13.9 million and 6.6% of sales. During the quarter ended March 31, 2001,
the Company accrued a $2.4 million discretionary contribution to its 401(k) plan
and a $600,000 charitable contribution. These expenses were partially offset by
bad expense being $470,000 lower than historical experience. Excluding these
items, pro forma operating expenses for the quarter ended March 31, 2001 would
have been $9.9 million and 6.4% of sales.
Operating expenses for the nine months ended March 31, 2002 included
the items noted above and an impairment of capitalized software of $840,000, a
discretionary $800,000 profit sharing contribution to the 401(k) plan, and a
$400,000 higher-than-expected increase in bad debt expense. During the nine
months ended March 31, 2002 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. Without the effects of the unusual items, pro
forma operating expenses would have been 6.7% for each of the nine month periods
ended March 31, 2001 and 2002, respectively.
Operating Income. The following table summarizes the Company's
operating income:
Percentage of Sales
March 31, Percentage March 31,
2001 2002 Difference Change 2001 2002
----- ---- ---------- ------ ---- ----
(In thousands)
Quarter $ 7,578 $ 8,475 $ 897 11.8% 4.9% 4.0%
Nine months $ 21,007 $ 23,297 $ 2,290 10.9% 4.6% 3.8%
Operating margins for March 31, 2002 were lower than the prior year due
to a more competitive market landscape. Without the additional $500,000 in
operating expenses to begin European operations and the $250,000 fee paid for
tax consulting, the March 2002 pro forma operating margin would have been 4.4%.
22
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Total Other Expense (Income). Other expense (income) consists
principally of interest expense and interest income. Interest expense for the
quarters ended March 31, 2001 and 2002 was $1 million and $559,000,
respectively, reflecting interest paid on borrowings on the Company's line of
credit and long-term debt. Interest expense for the quarter ended March 31, 2002
was lower due to the decline in interest rates over the past year.
Interest income for the quarters ended March 31, 2001 and 2002 was
$231,000 and $274,000, respectively, representing interest principally collected
from customers. Interest income was higher in 2002 due to the growth in certain
customer programs under which customers reimburse the Company for interest
incurred on their behalf.
Other expense for the quarter ended March 31, 2002 of $93,000 was
comprised of the minority interest share of the subsidiaries' net income and a
loss on an equity investment. Other income for the quarter ended March 31, 2001
was $3,000.
Provision For Income Taxes. Income tax expense was $2.6 million and
$2.9 million for the quarters ended March 31, 2001 and 2002, respectively,
reflecting an effective income tax rate of 38.0% and 35.8%, respectively. The
decrease in the tax rate is attributable to a tax consulting project that
allowed the Company to capture various state incentive tax credits and other
deductions. Without these tax savings, the Company's quarterly effective tax
rate would have been 40.6% because no tax benefits were realized for the
European operating losses. Due to the continued impact of the fiscal year 2002
tax project, the Company expects the effective tax rate to remain at
approximately 36% in the quarter ending June 30, 2002; however, unless other
changes are made to the Company's tax structure, the overall effective tax rate
should return to the 38% to 41% range in the following quarters.
Extraordinary Item. During the nine months ended March 31, 2002, 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 nine months ended March 31, 2002.
Net Income. The following tables summarize the Company's net income:
Percentage of Sales
March 31, Percentage March 31,
2001 2002 Difference Change 2001 2002
---- ---- ---------- ------ ---- ----
(In thousands)
Quarter $ 4,205 $ 5,200 $ 995 23.7% 2.7% 2.5%
Nine months $ 11,962 $ 14,613 $ 2,651 22.2% 2.6% 2.4%
The increase in the amount of net income and decline in the net income
margin are attributable to the changes in operating profits and net interest
expense discussed above.
23
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity are cash flow from
operations, borrowings under the Company's revolving credit facility, and, to a
lesser extent, proceeds from the exercise of stock options.
The Company's cash balance totaled $1.9 million at March 31, 2002
compared to $594,000 at June 30, 2001. Cash is generally swept to pay down the
line of credit on a nightly basis. The Company's working capital increased to
$112.3 million (net of $13.8 million in acquired working capital) at March 31,
2002 from $95.9 million at June 30, 2001. The increase in the working capital,
net of acquisitions, primarily resulted from a $21.3 million increase in
accounts receivable. This was partially offset by a $2.4 million decrease in
inventory and a $643,000 increase in accounts payable.
The increase in the amount of accounts receivable is attributable to an
increase in sales over the past nine months. However, the number of days sales
outstanding (DSO) in ending trade receivables has remained comparable at June
30, 2001 and March 31, 2002 at 46 and 48 days, respectively. The decrease in the
dollar value of inventory was attributable to the Company's efforts to increase
sales without a corresponding increase in inventory. During the quarters ended
June 30, 2001 and March 31, 2002, inventory turns also improved from 4.0 to 4.5
turns, respectively. The change in accounts payable resulted primarily from the
timing of inventory purchases and related payments.
Cash provided by operating activities was $2.8 million for the nine
months ended March 31, 2002 compared to $1.3 million used in operations for the
nine months ended March 31, 2001. The increase in cash provided by operating
activities was primarily attributable to the increase in net income, net of the
changes in current assets and liabilities discussed above.
Cash used in investing activities for the nine months ended March 31,
2002 was $25.2 million and included $17.7 million cash paid for the acquisition
of three companies ($14.3 million for Positive ID, for $2.6 million for Netpoint
and approximately $800,000 for OUI) and $7.5 million for capital expenditures.
The Company's capital expenditures resulted from purchases of software for
warehouse management and customer relationship management (CRM) for the sales
department, as well as a CRM package for the credit department, and furniture
and equipment. For the nine months ended March 31, 2001, the Company's capital
expenditures approximated $5.4 million, primarily for furniture and equipment.
The Company's net borrowings under the Company's credit facility with
its bank group totaled $40.6 million at March 31, 2002 compared to $17.1 million
at June 30, 2001 reflecting cash requirements for the Company's acquisitions and
capital expenditures noted above. The credit facility has 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.
On March 31, 2002, the borrowing base exceeded $80 million, leaving $39.4
million available for additional borrowings. The credit facility matures on
September 2003 and 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. At March 31, 2002, the effective interest rate was 3.87%.
Accounts receivable and eligible inventory collateralize the revolving credit
facility. 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 Company was in compliance
with the various covenants at March 31, 2002.
24
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Cash provided by financing activities for the nine months ended March
31, 2002 totaled $23.8 million, including the cash provided by borrowings under
the Company's credit facility. Cash provided by financing activities for the
nine months ended March 31, 2001 totaled $2.5 million, primarily from long-term
debt borrowings.
The Company owns an equity interest in a limited liability company for
which it has guaranteed debt up to approximately $525,000. As of March 31, 2002,
the limited liability company owned assets with a fair market value in excess of
$2.3 million and owed liabilities of approximately $2.1 million.
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 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 completed in
December 2001 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.
25
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's principal exposure to changes in financial market
conditions in the normal course of its business is a result of its bank
borrowings and, to a much lesser extent, transacting business in foreign
currencies in connection with its foreign 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 $129,000 in pre-tax income for the quarter
ended March 31, 2002. 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
March 31, 2002, 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.
26
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. Not applicable
Item 5. Other Information. Not applicable
Item 6. Exhibits and Reports on Form 8-K. None
27
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 15, 2002