Conformed
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
(Mark One)
{x} Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 for the Quarterly Period Ended March 31, 1999
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 March 31, 1999, 5,481,845 shares of the registrant's common stock, no par
value, were outstanding.
SCANSOURCE, INC.
INDEX
FORM 10-Q
March 31, 1999
PART I. FINANCIAL INFORMATION Page No.
--------
Item 1. Consolidated Financial Statements (Unaudited)................. 2
Condensed Consolidated Balance Sheets......................... 2
Condensed Consolidated Income Statements...................... 4
Condensed Consolidated Statements of Cash Flows............... 5
Notes to Condensed Consolidated Financial Statements.......... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................... 8
Item 3. Quantitative and Qualitative Disclosures About Market
Risk......................................................... 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................. 13
Item 2. Changes in Securities......................................... 13
Item 3. Defaults Upon Senior Securities............................... 13
Item 4. Submission of Matters to a Vote of Security-Holders........... 13
Item 5. Other Information............................................. 13
Item 6. Exhibits and Reports on Form 8-K.............................. 13
SIGNATURES........................................................................ 14
1
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
SCANSOURCE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, March 31,
1998 1999
------- --------
(Note 1) (Note 1)
(Unaudited)
Assets (In thousands)
------
Current assets:
Cash............................................. $ 88 12,732
Receivables:
Trade, less allowance for doubtful accounts of
$2,045,000 at June 30, 1998 and
$3,467,000 at March 31, 1999............. 28,198 39,115
Other............................................... 1,524 3,017
------- -------
29,722 42,132
Inventories......................................... 31,444 41,956
Prepaid expenses and other assets................... 268 482
Deferred income taxes............................... 2,381 2,381
------- -------
Total current assets............................ 63,903 99,683
Property and equipment, net.......................... 6,491 7,368
Intangible assets, net............................... 1,532 1,432
Other assets......................................... 186 319
------- -------
Total assets.................................... $72,112 108,802
======= =======
See notes to condensed consolidated financial statements.
2
SCANSOURCE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
June 30, March 31,
Liabilities and Shareholders' Equity 1998 1999
------------------------------------ ---- ----
(Note 1) (Note 1)
(Unaudited)
(In thousands)
Current liabilities:
Current portion of long-term debt........................ $ 22 22
Trade accounts payable................................... 14,029 47,057
Accrued compensation..................................... 456 1,187
Accrued expenses and other liabilities................... 1,242 2,326
Income taxes payable..................................... --- 1,029
------- -------
Total current liabilities............................... 15,749 51,621
Deferred income taxes.................................... 24 24
Long-term debt........................................... 1,697 1,681
Line of credit........................................... 4,861 --
------- -------
Total liabilities...................................... 22,331 53,326
Shareholders' equity:
Preferred stock, no par value; 3,000,000 shares
authorized, none issued and outstanding................ -- --
Common stock, no par value; 10,000,000 shares
authorized, 5,353,310 and 5,481,845 shares issued and
outstanding at June 30, 1998 and
March 31, 1999, respectively........................... 38,710 39,159
Retained earnings........................................ 11,071 16,317
------- -------
Total shareholders' equity............................. 49,781 55,476
------- -------
Total liabilities and shareholders' equity.............. $72,112 108,802
======= =======
See notes to condensed consolidated financial statements.
3
SCANSOURCE, INC.
CONDENSED CONSOLIDATED INCOME STATEMENTS
(UNAUDITED)
Quarter Ended Nine Months Ended
March 31, March 31,
1998 1999 1998 1999
---- ---- ---- ----
(In thousands except per share data)
Net sales......................... 46,538 76,932 126,148 203,194
Cost of goods sold................ 40,289 68,351 109,798 180,015
------ ------ ------- -------
Gross profit.................... 6,249 8,581 16,350 23,179
Selling, general and
administrative
expenses........................ 4,329 5,349 11,038 14,662
Amortization of intangibles....... 30 33 79 100
------ ------ ------- -------
Total operating expenses........ 4,359 5,382 11,117 14,762
------ ------ ------- -------
Operating income................ 1,890 3,199 5,233 8,417
Other income (expense):
Interest income (expense),
net............................ 124 6 237 (27)
Acquisition expense............. (305) -- (335) --
Other income (expense), net..... ( 15) (71) (21) (60)
------ ------ ------- -------
Total other income
(expense)................... (196) (65) (119) (87)
------ ------ ------- -------
Income before income taxes...... 1,694 3,134 5,114 8,330
Income taxes...................... 563 1,161 1,826 3,084
------ ------ ------- -------
Net income................... $1,131 1,973 3,288 5,246
====== ====== ======= =======
Basic EPS
Net income per share...... $ .21 .36 .72 .96
====== ====== ======= =======
Weighted average
shares outstanding....... 5,321 5,479 4,571 5,449
====== ====== ======= =======
Diluted EPS
Net income per share......... $ .20 .35 .71 .93
====== ====== ======= =======
Weighted average shares
outstanding................. 5,587 5,699 4,663 5,636
====== ====== ======= =======
See notes to condensed consolidated financial statements.
4
SCANSOURCE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
March 31,
1998 1999
---------- ----------
(In thousands)
Cash flows from operating activities:
Net income $ 3,288 5,246
Adjustments to reconcile net income to cash
(used in) provided by operating activities:
Depreciation 547 801
Amortization of intangible assets 79 100
Changes in operating assets and liabilities:
Receivables (8,075) (10,917)
Other receivables (600) (1,493)
Inventories (15,206) (10,512)
Prepaid expenses and other (146) (214)
Accounts payable 3,567 33,028
Accrued compensation 221 731
Accrued expenses and other liabilities (104) 1,084
Income tax payable (257) 1,029
Other noncurrent assets 55 (133)
--------- -------
Net cash (used in) provided by operating
activities (16,631) 18,750
Cash flows from investing activities:
Capital expenditures, net (1,530) (1,678)
Acquisition of business (1,100) --
--------- -------
Net cash used in investing activities (2,630) (1,678)
Cash flows from financing activities:
Payments on line of credit (5,946) (4,861)
Net proceeds from option exercises 32 449
Payments on building loan -- (16)
Proceeds from secondary offering 26,212 --
--------- -------
Net cash provided (used in) by financing
activities 20,298 (4,428)
-------- -------
Increase in cash 1,037 12,644
Cash at beginning of period 429 88
-------- -------
Cash at end of period $ 1,466 12,732
======== =======
See notes to condensed consolidated financial statements
5
SCANSOURCE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The interim financial information included herein is unaudited. Certain
information and footnote disclosures normally included in the consolidated
financial statements have been condensed or omitted pursuant to the rules
and regulations of the Securities and Exchange Commission (SEC), although
the Company believes that the disclosures made are adequate to make the
information presented not misleading. These financial statements should be
read in conjunction with the financial statements and related notes
contained in the Company's annual report on Form 10-K for the period ended
June 30, 1998. 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.
In February 1998, the Company merged with a telephony distributor in a
stock-for-stock transaction accounted for as a pooling-of-interest.
Accordingly, the condensed consolidated financial statements for the
periods prior to the combination have been restated to include the accounts
and results of the merged company.
Results for interim periods are not necessarily indicative of results
expected for the full year, or for any subsequent period.
The condensed consolidated balance sheet for June 30, 1998 has been derived
from the audited consolidated balance sheet for that date.
(2) SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition - The Company records revenue when products are
shipped.
Inventories - Inventories consisting of point of sale and bar code
equipment are stated at the lower of cost (first-in, first-out method) or
market.
Net Income Per Share - Basic net income per share is computed by dividing
net income by the weighted average number of common shares outstanding.
Diluted net income per share is computed by dividing net income by the
weighted average number of common and potential common shares outstanding.
Diluted weighted average common and potential common shares include common
shares and stock options using the treasury stock method. Basic and diluted
weighted average shares differed only by the effect of dilutive stock
options. There were no differences between the net income used to calculate
basic and diluted net income per share for the three and nine months ended
March 31, 1998 and 1999.
6
(3) LINE OF CREDIT
In January 1999 the Company amended its bank line of credit: extending its
term to October 31, 2001 and raising its borrowing limit to $35 million,
based upon 80% of eligible accounts receivable and 40% of eligible
inventory at the 30 day LIBOR rate of interest plus a rate varying from
1.50% to 2.00% tied to the Company's debt-to-net worth ratio ranging from
.75:1 to 2:1. Since there were no borrowings on the line of credit, the
loan base would have provided borrowings of up to $31.9 million at March
31, 1999.
(4) RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities"
("SFAS No. 133") SFAS No. 133 requires that an enterprise recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. SFAS No. 133 is
effective for all fiscal quarters of fiscal years beginning after June 15,
1999. The Company is currently assessing the potential effects of SFAS No.
133 on its financial position.
7
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
NET SALES. Net sales for the quarter ended March 31, 1999 increased
65.4% to $76.9 million from $46.5 million for the comparable prior year quarter.
Net sales increased 61.1% to $203.2 million for the nine months ended March 31,
1999 from $126.1 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 March 31, 1999
increased 38.7% to $8.6 million from $6.2 million for the comparable prior year
quarter. Gross profit increased 41.5% to $23.2 million for the nine months
ended March 31, 1999 from $16.4 million for the comparable prior year period.
Gross profit as a percentage of sales was 11.2% and 11.4%, respectively, for the
quarter and nine months ended March 31, 1999, compared to 13.3% and 13.0%,
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 March 31, 1999
increased 22.7% to $5.4 million compared to $4.4 million for the comparable
prior year period. Operating expenses for the nine months ended March 31, 1999
increased 33.3% to $14.8 million from $11.1 million for the comparable prior
year period. Operating expenses as a percentage of sales were 7.0% and 7.3%,
respectively, for the quarter and nine months ended March 31, 1999, compared to
9.5% and 8.8%, respectively, for the comparable prior year periods. Generally,
lower gross margin sales require the Company to provide fewer value-added
services causing a corresponding decrease in operating expenses. The general
and administrative portion of operating expenses also decreased as a percentage
of sales due to efficiencies gained through increased sales volume.
OPERATING INCOME. Operating income for the quarter ended March 31, 1999
increased 68.4% to $3.2 million from $1.9 million for the same period in 1998,
driven by the improvement in gross profit as described above. Operating income
increased 61.5% to $8.4 million for the nine months ended March 31, 1999 from
$5.2 million for the comparable prior year period. Operating income as a
percentage of sales was 4.2% and 4.1%, respectively, for the quarter and nine
months ended March 31, 1999, compared to 4.1% for both of the comparable prior
year periods.
OTHER INCOME (EXPENSE). Total other income (expense) net consists of
interest income (expense), net, and other expense, net. Interest expense for
the quarter ended March 31, 1999 from interest paid on the building loan was
offset by interest income from invested cash. Net interest income for the
quarter ended March 31, 1998 was $124,000 representing earnings from invested
cash resulting from the Company's sale of stock in October 1997. Acquisition
expense recorded in the
8
prior year periods includes the nonrecurring costs associated with the Company's
acquisition of two businesses.
INCOME TAXES. Tax expense was provided at a 37% effective rate for all
periods presented, and represented the state and federal tax expected to be due
after annualizing income to the fiscal year end.
NET INCOME. Improved operating income caused net income to increase 81.8%
to $2.0 million for the quarter ended March 31, 1999 from $1.1 million for the
year-earlier quarter. Net income for the nine months ended March 31, 1999
increased 57.6% to $5.2 million from $3.3 million for the comparable prior year
period. Net income as a percentage of sales was 2.6% for both the quarter and
nine months ended March 31, 1999 compared to 2.4% and 2.6%, respectively, for
the quarter and nine months ended March 31, 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity are results of operations,
borrowings under its revolving credit facility, and proceeds from the sales of
securities. In October 1997 the Company completed a secondary offering of stock
which provided the Company approximately $26.2 million for general corporate
purposes.
In January 1999 the Company amended its bank revolving credit facility:
extending its term to October 31, 2001 and raising its borrowing limit to $35.0
million at an interest rate equal to the 30 day LIBOR, plus a rate varying from
1.50% to 2.00% tied to the Company's debt-to-net worth ratio ranging from .75:1
to 2:1. The borrowing base available under the credit facility is limited to 80%
of eligible accounts receivable and 40% of eligible inventory. The revolving
credit is secured by accounts receivable and inventory. Since there were no
borrowings on the line of credit, the loan base would have provided borrowings
of up to $31.9 million at March 31, 1999.
In June 1998 the Company assumed a non-recourse loan for $1,719,000 in
connection with the purchase of its office building. The loan's fixed interest
rate is 9.19%. The loan matures in October 2006 and is collateralized by the
land and building acquired.
For the nine months ended March 31, 1999 net cash of $18.8 million was
provided by operating activities compared to $16.6 million used in operations
for the nine months ended March 31, 1998. Cash provided by operations was
primarily from an increase in accounts payable which exceeded the amount needed
to fund increases in receivables and inventory. Cash used in operations in 1998
was primarily from increases in receivables and inventory partially offset by
growth in trade payables.
Cash used in investing activities of $1.7 million for the quarter ended
March 31, 1999 was for capital expenditures. Cash used in investing activities
for the nine months ended March 31, 1998 included $1.1 million for cash paid in
business combinations and $1.5 million for capital expenditures, including
$170,000 for the Company's computer conversion to a UNIX-based operating system.
Cash used in financing activities for the nine months ended March 31, 1999
was $4.4 million, primarily from payments on the Company's line of credit. Cash
provided by financing activities for the nine months ended March 31, 1998 was
$20.3 million. For the prior year period, cash was
9
provided primarily from the sale of $26.2 million of common stock in an October
1997 public offering from which $5.9 million was used to pay down the
outstanding balance under the company's line of credit.
The Company's current ratios at March 31, 1999 and at June 30, 1998 were
1.93 and 4.06, respectively.
YEAR 2000
THE ISSUE. It is possible that the Company's currently installed computer
systems, software products or other business systems, or those of the Company's
vendors or resellers, working either alone or in conjunction with other software
or systems, will not accept input of, store, manipulate and output dates in the
years 1999, 2000 or thereafter without error of interruption (commonly known as
the "Y2K" problem). Following is a summary of the initiatives the Company has
taken to address this issue.
STATE OF READINESS. With the assistance of an outside consultant, the
Company has formed a Y2K Project Team to oversee the Company's Y2K readiness
activities in the IT and non-IT areas, assess Y2K risks in connection with
third-party relationships and develop contingency plans. The Y2K Project Team
has conducted a review of its computer systems, including its primary business
software, and believes that such software is Y2K compliant.
IT SYSTEMS. Since early 1996, ScanSource, in support of its long-term
plans, has significantly upgraded and continues to upgrade its information
technology (IT) and communication systems. These upgrades include: enterprise-
wide application system, a Digital Alpha Server, personal computers "PC's", PC
software (standardized on Windows NT, Windows 9x, Microsoft Office Suite and
Lotus Notes), local area networks (LAN's), LAN software (Novell NetWare, Windows
NT), wide area networks (WAN's) and network integration of advanced fax,
printer, and copier systems. As a result, a large portion of ScanSource's IT
and non-voice communication systems, along with many of its voice communication
systems, are now Y2K compliant.
ScanSource's exceptions to the Y2K compliance are: certain PC's require
operating system and application system upgrades and certain network operating
systems need to be upgraded. The IT System software upgrades are being executed
under agreements with software vendors, and are expected to be remediated by the
end of the second calendar quarter of 1999.
NON IT SYSTEMS. ScanSource is assessing the Y2K readiness of Non-IT
systems such as intelligent office equipment used in a stand-alone mode
including fax machines, copiers and printers by requesting certification from
manufacturers that these products are not impacted by the Y2K date transition or
will continue to operate on and after January 1, 2000, just as they did prior to
such date.
THIRD PARTY INTERFACE. The Company has also completed its survey of its
vendors and resellers as to their progress in identifying and addressing
problems that their computer systems may face in correctly processing date
information as the year 2000 is reached. Survey responses are now being
reviewed and used in contingency plan development.
CONTINGENCY PLANNING. The Y2K Project Team is developing a contingency
plan to address the Company's at-risk business functions as a result of Y2K
issues. The Company anticipates that this plan will be completed in the third
quarter of 1999.
10
COSTS TO ADDRESS Y2K AND RISKS. There can be no assurance that the
Company's systems will address all Y2K problems, that its current and ongoing
efforts will identify all such problems in its own computer systems or those of
its vendors or resellers in advance of their occurrence, or that the Company
will be able to successfully remedy any problems that are discovered. To date
the expenses of the Company's efforts to identify and address such problems have
not exceeded $50,000 (excluding costs of systems upgrades that would normally
have been made on a similar timetable) and anticipates that its total
expenditures will not exceed $100,000. However, the expenses or liabilities to
which the Company may become subject as a result of any such problems that may
arise could have a material adverse effect on the Company's business, financial
condition, and results of operations. In addition, the purchasing patterns of
existing and potential customers may be affected by Y2K problems, which could
cause fluctuations in the Company's sales volumes. Maintenance or modification
costs have been and will continue to be expensed as incurred.
FORWARD LOOKING STATEMENTS
Certain of the statements contained in this report to shareholders 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 1999 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 products markets in which it
has no prior experience, the Company's susceptibility to quarterly fluctuations
in net sales and operations results, the Company's ability to manage
successfully price protection or stock rotation opportunities associated with
inventory value decreases, and other factors described in other reports and
documents filed by the Company with the Securities and Exchange Commission.
11
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
The Company is exposed to changes in financial market conditions in the
normal course of its business as a result of its selective use of bank debt as
well as transacting in Canadian currency in connection with its Canadian
operations.
The Company is exposed to changes in interest rates primarily as a result
of its borrowing activities, which includes a revolving credit facility with a
bank used to maintain liquidity and fund the Company's business operations. The
nature and amount of the Company's debt may vary as a result of future business
requirements, market conditions and other factors. The definitive extent of the
Company's interest rate risk is not quantifiable or predictable because of the
variability of future interest rates and business financing requirements, but
the Company does not believe such risk is material. The Company does not
currently use derivative instruments to adjust the Company's interest rate risk
profile.
The table below presents principal amounts and related weighted average
rates by year of maturity for the Company's debt obligations at March 31, 1999:
(IN THOUSANDS) 1999 2000 2001 2002 2003 THEREAFTER TOTAL FAIR VALUE
---- ---- ---- ---- ---- ---------- ----- ----------
Long-term debt 6 24 26 29 31 1,587 1,703 1,859
Average interest
rate (fixed) 9.19% 9.19% 9.19% 9.19% 9.19% 9.19% 9.19%
The Company is exposed to changes in foreign exchange rates in connection
with its Canadian operations. It is the Company's policy to enter into foreign
currency transactions only to the extent considered necessary to support its
Canadian operations. The amount of the Company's cash deposits denominated in
Canadian currency has not been, and is not expected to be, material.
Furthermore, the Company has no capital expenditure or other purchase
commitments denominated in foreign currency. The Company does not utilize
forward exchange contracts, currency options or other traditional hedging
vehicles to adjust the Company's foreign exchange rate risk profile. The
Company does not enter into foreign currency transactions for speculative
purposes.
The Company does not utilize financial instruments for trading or other
speculative purposes, nor does it utilize leveraged financial instruments. On
the basis of the fair value of the Company's market sensitive instruments at
March 31, 1999, the Company does not consider the potential near-term losses in
future earnings, fair values and cash flows from reasonable possible near-term
changes in interest rates and exchange rates to be material.
12
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.
Not applicable
Item 5. OTHER INFORMATION.
Not applicable.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
None
13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SCANSOURCE, INC.
/s/ Steven H. Owings
---------------------------------
STEVEN H. OWINGS
Chief Executive Officer
/s/ Jeffery A. Bryson
---------------------------------
JEFFERY A. BRYSON
Chief Financial Officer
Date: May 14, 1999
14