Conformed
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
(Mark One)
[x] Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities Exchange
Act of 1934 for the Quarterly Period Ended December 31, 1997
or
[ ] Transition Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 for the transition period from ____________ to ____________
Commission file number 1-12842
ScanSource, Inc.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
South Carolina 57-0965380
- -------------------------------- -----------------------------------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporated or organization)
6 Logue Court, Suite G
Greenville, SC 29615
- -------------------------------- ------------------------------------
(Address of principal executive (Zip Code)
offices)
(864) 288-2432
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(Registrant's telephone number, including area code)
Not Applicable
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(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
---- ----
As of December 31, 1997, 4,817,583 shares of the registrant's common stock, no
par value, were outstanding.
SCANSOURCE, INC.
INDEX
FORM 10-Q
December 31, 1997
PART I. FINANCIAL INFORMATION Page No.
Item 1. Financial Statements (Unaudited).................... 2
Condensed Balance Sheets............................ 2
Condensed Income Statements......................... 4
Condensed Statements of Cash Flows.................. 5
Notes to Condensed Financial Statements............. 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................. 8
Item 3. Quantitative and Qualitative Disclosures About
Market Risk......................................... 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................... 10
Item 2. Changes in Securities............................... 10
Item 3. Defaults Upon Senior Securities..................... 10
Item 4. Submission of Matters to a Vote of Security-Holders. 10
Item 5. Other Information................................... 10
Item 6. Exhibits and Reports on Form 8-K.................... 10
SIGNATURES............................................................ 11
1
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
SCANSOURCE, INC.
CONDENSED BALANCE SHEETS
June 30, December 31,
1997 1997
----------- --------------
(Note 1) (Note 1)
(Unaudited)
Assets (In thousands)
Current assets:
Cash.............................................$ -- 10,657
Receivables:
Trade, less allowance for doubtful accounts of
$1,174,000 at June 30, 1997 and
$1,556,000 at December 31, 1997................ 11,385 18,148
Other............................................ 732 1,157
------- -------
12,117 19,305
Inventories...................................... 20,724 29,602
Prepaid expenses and other....................... 300 404
Deferred tax asset............................... 1,565 1,565
------- -------
Total current assets........................... 34,706 61,533
------- -------
Property and equipment, net........................ 1,880 2,282
Intangible assets, net............................. 788 1,263
Deferred offering cost............................. 390 0
Other assets....................................... 524 325
------- -------
Total assets...................................$38,288 65,403
======= =======
See notes to condensed financial statements.
2
SCANSOURCE, INC.
CONDENSED BALANCE SHEETS (Continued)
June 30, December 31,
Liabilities and Shareholders' Equity 1997 1997
------------------------------------ --------- --------------
(Note 1) (Note 1)
(Unaudited)
(In thousands)
Current liabilities:
Trade accounts payable............................ $13,397 17,236
Accrued compensation cost......................... 207 270
Accrued expenses and other liabilities............ 664 1,577
Income tax payable................................ 257 0
------- ------
Total current liabilities........................ 14,525 19,083
Deferred tax liability............................ 47 47
Line of credit.................................... 5,391 0
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Total liabilities............................... 19,963 19,130
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Shareholders' equity:
Preferred stock, no par value; 3,000,000 shares
authorized, none issued and outstanding......... -- --
Common stock, no par value; 10,000,000 shares
authorized, 3,249,183 and 4,817,583 issued and
outstanding at June 30, 1997 and
December 31, 1997, respectively................. 12,307 38,196
Retained earnings................................. 6,018 8,077
------- ------
Total shareholders' equity...................... 18,325 46,273
------- ------
Total liabilities and shareholders' equity....... $ 38,288 65,403
======== ======
See notes to condensed financial statements.
3
SCANSOURCE, INC.
CONDENSED INCOME STATEMENTS
(UNAUDITED)
Quarter Ended Six Months Ended
December 31, December 31,
1996 1997 1996 1997
---- ---- ---- ----
(In thousands except per share data)
Net sales................................... $22,437 39,230 42,110 74,572
Cost of goods sold......................... 19,407 34,158 36,382 65,449
------- ------ ------ ------
Gross profit.............................. 3,030 5,072 5,728 9,123
Selling, general and administrative
expenses.................................. 1,889 3,337 3,557 5,828
Amortization of intangibles................. 21 30 41 50
------- ------ ------ ------
Total operating expenses.................. 1,910 3,367 3,598 5,878
------- ------ ------ ------
Operating income.......................... 1,120 1,705 2,130 3,245
Other income (expense):
Interest income (expense), net............ (88) 214 (169) 111
Other income (expense), net................ (--) (4) (--) (34)
------- ------ ------ ------
Total other income (expense)........... (88) 210 (169) 77
------- ------ ------ ------
Income before income taxes................ 1,032 1,915 1,961 3,322
Income taxes................................ 392 728 745 1,263
------- ------ ------ ------
Net income............................. $ 640 1,187 1,216 2,059
====== ====== ====== ======
Basic EPS
Net income per share................... $ .20 .25 .37 .52
====== ====== ====== ======
Weighted average shares outstanding.... 3,246 4,665 3,246 3,960
====== ====== ====== ======
Diluted EPS
Net income per share................... $ .18 .24 .35 .49
====== ====== ====== ======
Weighted average shares outstanding.... 3,484 4,970 3,469 4,227
====== ====== ====== ======
See notes to condensed financial statements.
4
SCANSOURCE, INC.
STATEMENT OF CASH FLOWS
(UNAUDITED)
Six Months Ended
December 31,
1996 1997
---- ----
(In thousands)
Cash flows from operating activities:
Net income......................................... $ 1,216 2,059
Adjustments to reconcile net income to cash used
in operating activities:
Depreciation.................................... 170 322
Amortization of intangible assets............... 41 50
Changes in operating assets and liabilities:
Receivables..................................... (1,254) (6,378)
Other receivables (28) (425)
Inventories..................................... (7,631) (7,998)
Prepaid expenses and other...................... (74) (104)
Accounts payable 7,315 3,427
Accrued compensation............................ 46 63
Accrued expenses and other liabilities.......... (105) 203
Income tax payable.............................. (540) (257)
Other noncurrent assets......................... (129) 199
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Net cash provided by operating activities......... (973) (8,839)
Cash flows from investing activities:
Capital expenditures, net........................ (340) (692)
Purchase of ProCom............................... -- (700)
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Net cash used in investing activities............. (340) (1,392)
Cash flows from financing activities:
Proceeds from secondary offering................. -- 25,822
Borrowings (payments) on line of credit.......... 1,290 (5,391)
Proceeds from option exercises................... 23 67
Deferred offering cost........................... -- 390
------- ------
Net cash provided by financing activities......... 1,313 20,888
Increase in cash.................................. -- 10,657
Cash at beginning of period......................... -- --
------- ------
Cash at end of period............................... $ -- 10,657
======= ======
5
SCANSOURCE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The interim financial information included herein is unaudited. Certain
information and footnote disclosures normally included in the 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 annual report on Form 10-K for the period ended
June 30, 1997. Other than as indicated herein, there have been no
significant changes from the financial data published in that report. In
the opinion of management, such unaudited information reflects all
adjustments, consisting only of normal recurring accruals and other
adjustments as disclosed herein, necessary for a fair presentation of the
unaudited information.
Results for interim periods are not necessarily indicative of results
expected for the full year, or for any subsequent period.
The balance sheet for June 30, 1997 has been derived from the audited
balance sheet for that date.
(2) SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition - The Company records revenue when products are
shipped.
Inventories - Inventories consisting of point of sale and bar code
equipment are stated at the lower of cost (first-in, first-out method) or
market.
(3) LINE OF CREDIT
In November 1996 the Company closed a line of credit agreement with a bank
which extends to October 1998 whereby the Company can borrow up to $15
million, based upon 80% of eligible accounts receivable and 40% of non-IBM
inventory at the 30 day LIBOR rate of interest plus a rate varying from
2.00% to 2.65% tied to the Company's debt to net worth ratio ranging from
1:1 to 2:1. All outstanding debt under the line of credit was repaid in
October 1997 with proceeds from the sale of stock described in note 5,
therefore the full $15 million line was available at December 31, 1997.
6
NOTES TO CONDENSED FINANCIAL STATEMENTS
(4) PURCHASE OF PROCOM SUPPLY CORPORATION
On September 12, 1997 the Company acquired the assets and assumed the
liabilities of ProCom Supply Corporation (ProCom), a business telephone
distributor, as follows:
Accounts receivable............................ $385,000
Inventory...................................... 880,000
Fixed assets and other......................... 22,000
Goodwill....................................... 525,000
----------
1,812,000
----------
Trade accounts payable......................... (412,000)
Other liabilities.............................. (150,000)
Amount due to former ProCom owner.............. (550,000)
----------
(1,112,000)
Cash paid...................................... $700,000
==========
The value of goodwill is based primarily upon the acquired customer base,
telephony industry knowledge, and established presence which ProCom had in
the industry. The amount due to former ProCom owner will be paid after the
collectibility of receivables and the marketability of inventory is
determined.
(5) SECONDARY OFFERING
In October 1997 the Company completed a public offering of 1,538,600 shares
of common stock at $18.25 per share. Proceeds to the Company, after
approximately $578,000 of offering expenses and a $1.095 per share
underwriting discount, was approximately $25.8 million. The Company used a
portion of the offering proceeds to pay off its line of credit described in
note 3 above.
(6) SUBSEQUENT EVENTS
In January 1998 ScanSource issued 220,513 shares of its common stock in
exchange for all the outstanding shares of two companies, doing business as
POS ProVisions (USA) and POS ProVisions, Ltd. (Canada), in a business
combination that meets all the criteria for the pooling-of-interests
accounting. Previously reported financial statements of ScanSource will not
be restated for the combinations, since the acquired companies are not
material to ScanSource. POS ProVisions are each distributors of point-of-
sale equipment.
In January 1998 the Company issued 60,000 shares of its common stock in a
cashless exercise by the holders of the remaining 42,000 units of the
underwriters Unit Purchase Option.
7
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
NET SALES. Net sales for the quarter ended December 31, 1997 increased
75.0% to $39.2 million from $22.4 million for the comparable prior year quarter.
Net sales increased 77.2% to $74.6 million for the six months ended December 31,
1997 from $42.1 million for the comparable prior year period. Growth of net
sales resulted primarily from additions to the Company's sales force,
competitive product pricing, selective expansion of its product line, and
increased marketing efforts to specialty technology resellers.
GROSS PROFIT. Gross profit for the quarter ended December 31, 1997
increased 70.0% to $5.1 million from $3.0 million for the comparable prior year
quarter. Gross profit increased 59.7% to $9.1 million for the six months ended
December 31, 1997 from $5.7 million for the comparable prior year period. Gross
profit as a percentage of sales for the quarter and six months ended December
31, 1997 was 12.9% and 12.2%, respectively, compared to 13.5% and 13.6%,
respectively, for the comparable prior year periods. The decrease in gross
profit as a percentage of sales is the result of a change in the mix of sales of
more lower-margin products and the volume discounts provided to resellers on
large orders.
OPERATING EXPENSES. Operating expenses, which include selling, general and
administrative expenses and amortization, for the quarter ended December 31,
1997 increased 79.0% to $3.4 million compared to $1.9 million for the comparable
prior year period. Operating expenses for the six months ended December 31,
1997 increased 63.9% to $5.9 million from $3.6 million for the comparable prior
year period. Operating expenses as a percentage of sales was 8.6% and 7.9%,
respectively, for the quarter and six months ended December 31, 1997, compared
to 8.4% for both of the comparable prior year periods. Generally, lower gross
margin sales require the Company to provide fewer value-added services causing a
corresponding decrease in operating expenses. The general and administrative
portion of operating expenses also decreased as a percentage of sales due to
efficiencies gained through increased sales volume.
OPERATING INCOME. Operating income for the quarter ended December 31,
1997 increased 54.6% to $1.7 million from $1.1 million for the same period in
1996, driven by the improvement in gross profit as described above. Operating
income increased 57.1% to $3.3 million for the six months ended December 31,
1997 from $2.1 million for the comparable prior year period. Operating income
as a percentage of sales was 4.4% for both the quarter and six months ended
December 31, 1997, compared to 5.0% and 5.1%, respectively, for the comparable
prior year periods.
OTHER INCOME (EXPENSE). Total other income (expense), net consists of
interest income (expense), net, and other expense, net. Net interest income for
the quarter and six months ended December 31, 1997 was $214,000 and $111,000,
respectively, representing earnings from invested cash resulting from the
Company's sale of stock in October 1997. Net interest expense for the quarter
and six months ended December 31, 1996 of $88,000 and $169,000, respectively,
resulted from interest paid on borrowings under the Company's line of credit.
8
INCOME TAXES. Tax expense was provided at a 38% effective rate for both
the quarter and six months ended December 31, 1997, and represented the state
and federal tax expected to be due after annualizing income to the fiscal year
end. Tax expense was also provided at a 38% effective rate for the quarter and
six months ended December 31, 1996.
NET INCOME. The effect of improved operating income, and net interest
income, resulted in net income increasing 85.5% to $1.2 million for the quarter
ended December 31, 1997 from $640,000 for the year-earlier quarter. Net income
for the six months ended December 31, 1997 increased 75.0% to $2.1 from $1.2
million for the comparable prior year period. Net income as a percentage of
sales was 3.0% and 2.8%, respectively, for the quarter and six months ended
December 31, 1997 compared to 2.9% for both the quarter and six months ended
December 31, 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company financed its initial operating requirements and growth through
private financings totaling $500,000. In March 1994, the Company completed an
initial public offering of units, which consisted of common stock and warrants,
which provided the Company with approximately $4.6 million. The Company also
received proceeds of approximately $6.3 million from common stock issued upon
the exercise of stock purchase warrants prior to their redemption date in
September 1995. In October 1997 the Company completed a secondary offering of
stock which provided the Company approximately $25.8 million for general
corporate purposes, including working capital and possible acquisitions.
In November 1996 the Company renegotiated a bank line of credit agreement
extending to October 31, 1998 whereby the Company can borrow up to $15 million,
based upon 80% of eligible accounts receivable and 40% of non-IBM inventory, at
the 30 day LIBOR rate of interest, plus a rate varying from 2.00% to 2.65% tied
to the Company's debt to net worth ratio ranging from 1:1 to 2:1. The revolving
credit is secured by accounts receivable and inventory. All outstanding debt
under the line of credit was repaid in October 1997 with proceeds from the sale
of stock; therefore the full $15 million line was available at December 31,
1997.
For the six months ended December 31, 1997 net cash of $8.8 million was
used in operating activities compared to $973,000 for the six months ended
December 31, 1996. Cash used in operations was primarily from increases in
receivables and inventory partially offset by growth in trade payables.
Cash used in investing activities of $1.4 million for the six months ended
December 31, 1997 included $700,000 for the purchase of ProCom Supply
Corporation and $692,000 for capital expenditures, including $170,000 for the
Company's computer conversion to a UNIX-based operating system. Cash used in
investing activities for the six months ended December 31, 1996 was $340,000 for
capital expenditures.
Cash provided by financing activities for the six months ended December 31,
1997 and 1996 was $20.9 million and $1.3 million, respectively. For 1997 cash
of $25.8 million and $67,000 was
9
provided from the sale of common stock in an October 1997 public offering and
from the exercise of stock options, respectively. Approximately $6.6 million of
this cash was used to pay down the outstanding balance under the Company's line
of credit, compared to $1.3 million borrowed on the line of credit for the same
period in 1996.
The Company's current ratios at December 31, 1997 and at June 30, 1997 were
3.23 and 2.39, respectively.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
Not Applicable
10
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS.
Not applicable
Item 2. CHANGES IN SECURITIES.
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 4, 1997.
(b) The four directors listed in subsection (c) below were elected at the
meeting. The Company has no other directors whose term of office continued
after the meeting.
(c) (i) Election of Directors.
Number of Shares
----------------
Withhold
Nominees For Authority
- -------- --------- ---------
Michael L. Baur 3,651,716 4,100
Steven H. Owings 3,651,716 4,100
Steven R. Fischer 3,651,716 4,100
James G. Foody 3,651,716 4,100
(ii) Proposal to ratify adoption of the Company's 1997 Stock Incentive Plan.
Number of Shares
----------------
For 2,234,995
Against 58,310
Abstain 25,689
Not voted 1,336,822
(iii) Proposal to ratify grants in 1996 and 1997 of non-qualified stock options
to the Company's Chief Executive Officer, President, and Chief
Financial Officer and Treasurer:
Number of Shares
----------------
For 2,086,520
Against 209,085
Abstain 23,389
Not voted 1,336,822
11
(iv) Proposal to ratify the appointment of KPMG Peat Marwick LLP as the
Company's independent auditors for the fiscal year ending June 30,
1997:
Number of Shares
----------------
For 3,629,274
Against 9,317
Abstain 17,225
Not voted
Item 5. OTHER INFORMATION.
Not applicable.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibit 10.40--1997 Stock Incentive Plan
Exhibit 27--Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a report on Form 8-K on December 23,
1997 to announce in item 5 it had signed a letter of
intent to acquire POS ProVisions (USA) and POS
ProVisions, Ltd. (Canada).
The Company filed a report on Form 8-K on January 20,
1998 to announce in items 5 and 9 the completion of the
acquisitions described above and the issuance of 220,513
shares of the Company's common stock in connection with
the acquisitions.
12
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/ Steven H. Owings
------------------------------
STEVEN H. OWINGS
Chief Executive Officer
/s/ Jeffery A. Bryson
------------------------------
JEFFERY A. BRYSON
Chief Financial Officer
Date: February 13, 1998
13