Exhibit 13
----------
2001 ANNUAL REPORT
empowerment
(em*pow'*er*ment) n. an energizing force that enables others to succeed
[LOGO] ScanSource
We're on a mission.
The mission is a simple one, and it's the same one that we made the founding
principle of our company back in 1992.
The mission is empowerment.
At ScanSource, Inc. we're committed to empowering our technology solution
provider customers to achieve new levels of success in specialty technology
markets like automatic data collection (ADC), point-of-sale (POS) and voice,
data and converged communications through programs and services that are second
to none. We're committed to empowering our vendor partners by expanding the
indirect sales channel to reach a greater number of customers on their behalf
and by getting their products to market more efficiently. We're committed to
empowering our shareholders by always working diligently to strengthen
shareholder value. We're committed to empowering our employees by providing them
with unlimited opportunities to build lasting, successful careers. And it is
that commitment to empowerment that defines us, that drives us, that makes us
who we are.
As the leading international value-added distributor of specialty technology
products like automatic data collection, point-of-sale and converged
communications, ScanSource, Inc. offers over 18,000 products from more than 50
of the industry's best-of-breed manufacturers. It's no secret that automatic
data collection, point-of-sale and voice, data and converged communications
technologies are some of the technology industry's fastest growing. These
revolutionary products are helping companies around the globe become more
efficient and more productive, which ultimately drives down the overall cost of
doing business. And because these innovations offer profitable new opportunities
for solution providers, it is our focused and single-minded goal to empower them
to enter and thrive in these markets.
The company includes two sales units - ScanSource and Catalyst Telecom - as well
as an independently managed business unit, ChannelMax. The ScanSource sales unit
provides ADC and POS products such as bar code scanners and thermal bar code
printers, mobile data collection terminals, wireless 802.11 networks,
computer-based point-of-sale terminals, receipt printers, cash drawers,
keyboards and related peripherals. The Catalyst Telecom sales unit offers voice,
data and converged communications products like key, hybrid and PBX phone
systems, voicemail, fax-on-demand, interactive voice response, unified
messaging, videoconferencing and other solutions.
ChannelMax is an independently managed business unit that provides logistics and
fulfillment services to specialty technology manufacturers from its
240,000-square-foot distribution center in Memphis, Tennessee. ChannelMax's
web-based logistics solution is designed to improve delivery lead-times and
order fill-rates for manufacturers while allowing them to focus less on filling
orders and more on developing new technology and products. Further, it also
offers solution providers the opportunity to become e-enabled for the future
through Black Arrow. This offering creates customized web storefronts
specifically designed for solution providers of specialty technology, allowing
them to quickly and inexpensively offer online ordering to their end user
customers, as well as conduct web-based marketing and more.
[GRAPHIC of building appears here]
ScanSource's headquarters and principal sales office is located in Greenville,
South Carolina. The company also has satellite sales offices in Georgia,
California, Washington, New Jersey, New York, Arizona, Canada and Mexico, each
serviced by a state-of-the-art, 240,000-square-foot distribution center that is
centrally located in Memphis, Tennessee.
At ScanSource and Catalyst Telecom, there's one mission: empowerment. And no
matter what happens in the years ahead, that mission will remain at the core of
who we are.
[GRAPHIC of man at computer appears here]
ScanSource's Custom Solution Configuration Team is located in a
25,000-square-foot, state-of-the-art facility housed inside our Memphis
distribution center.
[GRAPHIC of man in in front of group appears here]
The Education Opportunities program provides ScanSource and Catalyst Telecom
customers with the training they need to succeed in an ever-changing
marketplace.
Empowering Solution Providers
We're dedicated to making it easy for our customers to succeed and prosper in
the fast-growing specialty technology markets. In fact, our commitment to
empowering solution providers is what drives us to always seek new ways to help
our customers achieve growth and profitability. We call it esp. While we can't
predict the future, our commitment to esp means we'll work to anticipate our
customers' needs and develop world-class solutions to meet them. By taking
advantage of our empowering resources and tools, our customers have more time to
focus on what they do best - closing sales and building business.
Our complete lineup of empowerment tools includes:
Online Configuration Tools
Our convenient, Web-based "configurators" for scanners, POS, wireless, mobile
computing, printers and networking help solution providers build complete
systems quickly, allowing them to spend more time building business and closing
deals. Best of all, these tools are available 24/7.
Custom Solution Configuration
ScanSource and Catalyst Telecom's Custom Solution Configuration Team provides
assistance with product staging, operating system loading, custom software
loading and configuration, final assembly and integration, testing and
burning-in, complete rollout services and more. Our 25,000-square-foot, ISO
9002-certified solution configuration facility is staffed by
manufacturer-trained technicians and is strategically located inside
ScanSource's Memphis distribution center to allow for speed and efficiency in
shipping the total solutions requested by our customers.
[GRAPHIC of esp logo appears here]
Online Ordering
Our complete catalog of more than 16,000 products from more than 50 top
manufacturers is available 24/7. Our online ordering system also allows solution
providers to check the real-time availability of our entire product inventory,
see customer-specific pricing, track their shipments and more.
Education Opportunities
Our Education Opportunities program offers a complete curriculum of business-,
technology- and human resources-related training designed specifically for
specialty technology solution providers and offered via on-site learning,
webinars, and self-paced programs. Our Empowerment Expo educational road show
series makes stops in 12 major cities each year and is designed to recruit new
solution providers to the industry and to build valuable relationships with our
vendor partners and customers.
Lead Generation Tools
ScanSource and Catalyst Telecom's Lead Generation Tools offer customized direct
mail pieces, custom catalogs, fax flyers, telemarketing, e-mail blasts, press
releases, specialty items, event planning services and other marketing materials
to help solution providers spread the word about their solutions and services.
Web Storefront Solutions
Through our partnership with Black Arrow, we provide e-commerce storefronts
specifically designed for specialty technology solution providers, allowing them
to sell the complete ScanSource/Catalyst Telecom catalog, as well as their
company's software, services and more, over the Internet. These custom
storefronts can be created in just a few days and complement the look and feel
of the solution provider's existing website.
Power PartnersTM
ScanSource's Power PartnersTM program offers a higher level
of service and support to qualifying solution providers, including an "Instant
Access" technical support 800 number, flexible return policies, inclusion in our
nationwide leads program, special product pricing, discounts on our empowerment
tools and more.
[GRAPHIC of Black Arrow Screenshot appears here]
ScanSource's partnership with Black Arrow allows us to provide our customers
with web storefront solutions that make it easy for them to create a convenient
online sales channel.
partnership- (pa'art*ner*ship) the act of two or more entities aligning their
respective forces to more efficiently achieve success
partnership
[LOGOS of multiple companies appear here]
The people behind the power.
[GRAPHIC of Distribution Center appears here]
The ScanSource Distribution Center is staffed by more than 150 professionals who
work to ensure that we make good on our promise of delivering high-quality
technology solutions quickly.
teamwork-(teem*werk)
an interdependent passion and trust that allows groups of people to efficiently
reach a common goal
ScanSource has consistently enjoyed strong growth since its inception in 1992.
There are a number of factors that have contributed to that track record of
success, but one of the most important is our dynamic, motivated team of
employees. From the very beginning, we've made it a priority to encourage
independence and decision-making among all of our employees. And our commitment
to fostering an atmosphere of creativity, possibility, imagination and
opportunity has resulted in a vibrant corporate culture that is uniquely our
own.
Newcomers to ScanSource and Catalyst Telecom are often impressed not just by the
entrepreneurial, energetic atmosphere here, but also by how important the
concept of teamwork is to our company. Indeed, our employees relish the
challenge of leadership while working within a team. The departments within our
company don't just work together - they depend on each other, forming powerful
partnerships that are dedicated to success. The bottom-line? All of our
relationships are built on trust. Our employees believe in one another, which
inspires our customers, vendor partners and shareholders to place their trust in
us. We wouldn't have it any other way.
[GRAPHIC of man on telephone appears here]
Our Business Development Specialists are committed to assisting solution
providers in identifying new sales opportunities, closing deals and working more
closely with our manufacturer partners.
[GRAPHIC of woman at desk appears here]
The Credit Department is made up of a dedicated team whose mission is to help
our customers access the resources they need to conduct business efficiently.
The strength of those relationships has been the driving force behind a large
part of our success -- success that has regularly led to national recognition
for our company. ScanSource was named one of the nation's 100 "Hot Growth
Companies" by BusinessWeek magazine in June 2001, and was for the second
consecutive year listed on that magazine's "InfoTech 200" list of the country's
leading technology companies. In August 2001, ScanSource was named to Fortune's
"100 Fastest Growing Companies in America" list, also for the second year in a
row. In recent years, the company has also been included on similar rankings
from Forbes and Deloitte & Touche. And we have consistently been awarded
"Distributor of the Year" honors from the leading manufacturers in our industry.
Through it all, the one constant has been our dedicated team of people - the
people behind the power.
[GRAPHIC of women and children appears here]
The ScanSource Charitable Foundation is governed entirely by ScanSource, Inc.
employees and is designed to apply donations of time and resources directly to
local families and schools in need.
[GRAPHIC of two women in Customer Service Department appear here]
When our customers need assistance on a variety of questions and challenges,
ScanSource's Customer Service Department stands ready to serve them.
We've built a reputation for attracting enthusiastic, out-of-the-box thinkers to
our company. And while it is precisely that brand of thinking that has helped us
surge ahead, our employees also find time to devote their creative energies to
more than just business. The ScanSource Charitable Foundation is operated
entirely by ScanSource, Catalyst Telecom and ChannelMax employees and is funded
solely by employees, our vendor partners and the company. Throughout the year,
the Foundation works to assist local families and schools in need through
donations of both financial aid and of time, labor and resources.
At ScanSource and Catalyst Telecom, our growth has been founded upon a belief
system, a shared vision and a relentless dedication to our core values:
o We believe in honesty and integrity in everything we do
o We believe each employee's opinion counts and deserves respect
o We highly value our customers and vendors and are committed to meeting their
needs quickly and fairly
o We protect our company resources to benefit those who depend on us, such as
our employees and shareholders
o We encourage innovation and creativity from every employee, in every
department
o We are committed to helping those less fortunate in our communities by giving
our time, talents and resources
To Our Shareholders:
"The past year was one of the most significant in the history of our company."
[PHOTO of Mike Baur]
Mike Baur
President and Chief Executive Officer
The past year was one of the most significant in the history of our company.
While changing economic forces posed new challenges for companies large and
small, ScanSource, Inc. once again demonstrated the brand of steady, consistent
growth that our shareholders, vendor partners and others have come to expect
from us. Our determined, focused commitment to empowering our solution provider
customers and vendor partners for new success in the specialty technology
marketplace - and our continued dedication to strengthening shareholder value -
led us to seek out new and exciting opportunities for growth, and resulted in
another strong year for ScanSource and Catalyst Telecom.
In Fiscal Year 2001, we recorded large gains in sales for the ninth consecutive
year, earning $631 million in revenue as compared to $497 million for the year
ended on June 30, 2000. Further, net income rose 20 percent to $16.5 million as
compared to $13.8 million for the previous year. And earnings per share
increased 16 percent to $2.69 per share, moving up from $2.31 per share in
Fiscal Year 2000.
We vigorously pursued new customers, new markets and new avenues for growth in
2001. ScanSource acquired Positive ID Wholesale, a leading distributor of
automatic data collection (ADC) and point-of-sale (POS) equipment. This move,
finalized in July, further entrenched our ScanSource sales unit as the largest
and strongest distributor of its kind in North America, and provided us with new
opportunities to expand our sales to more customers. The acquisition also
resulted in the addition of experienced employees in sales, technical support
and professional services to our team, deepening our talent pool and
strengthening the resources we provide to our customers.
Of further significance, ScanSource signed a distribution agreement with NCR,
giving us a partnership with a world leader in point-of-sale solutions and
adding one of the most recognizable brands in the industry to our product
lineup. In addition to broadening our product line, the agreement also exposed
our company to a number of new customers and reinforced our position as the
market's source for the highest quality POS and ADC equipment. We look forward
to a prosperous relationship with NCR and to the continued success of
longstanding partnerships with manufacturers such as Symbol Technologies, IBM
Retail Solutions, Zebra Technologies and Intermec Technologies.
In May, ScanSource, Inc. purchased the voice, data and converged communications
unit of distributor Pinacor and merged it with our telephony sales unit,
Catalyst Telecom. The addition expanded the Catalyst Telecom sales team and
enhanced our efforts to further build upon our sales growth in the voice and
data marketplace with Avaya. Indeed, the Catalyst sales unit continued to
experience robust growth in this market throughout the past year, a fact that is
evidenced by our selection as the sole distributor of Intel's groundbreaking new
Converged Communications Platform - a standards-based, application-ready
platform that allows solution providers to consolidate many communication
applications from multiple vendors onto a single system.
Our ChannelMax business unit turned in a solid performance during the past year,
offering an end-to-end Web-based inventory and distribution service for
manufacturers and solution providers that is built to drive costs out of the
supply chain and bring new efficiency to the channel. Of particular note,
ChannelMax formed an agreement to begin providing logistics and e-fulfillment
services for Expanets, the nation's largest mid-market networked communications
solution provider, which added to the services it already provides for leading
technology manufacturers.
We brought a renewed focus and energy to our mission of empowering solution
providers in 2001 by expanding the complete lineup of tools and services we
provide to customers. We call this offering of tools esp, and it's how we
empower our customers to succeed and thrive in the specialty technology
marketplace. Over the past few months, we have enhanced such services as our
Online Configuration and Lead Generation Tools, making it easier for solution
providers to build complete systems on the Internet and to access marketing
services that can help them reach new customers. Our Education Opportunities
program offers technology- and business-related training that is designed
exclusively to meet the needs of our customer base and to help them prepare for
the challenges of the future. And our Web Storefront Solutions allow solution
providers to quickly develop cost-efficient web storefronts, where they can
offer the entire ScanSource/Catalyst Telecom product lineup online. We also
offer Custom System Integration, Online Ordering, the Power Partners program and
much more in our ongoing effort to empower solution providers for growth.
On a similar note, ScanSource and Catalyst Telecom each debuted powerful new Web
sites this year that include added functionality and a variety of new features.
The sites serve as our headquarters on the World Wide Web and are designed to
provide new convenience to our customers, making it easier than ever for them to
efficiently get the information they need about anything relating to the
technology we offer. We also organized a Solutions Engineering Team using
resources from our Wireless Business Development Team and our Professional
Services Group. This team of business and technical experts provide assistance
and support on a variety of technology opportunities for our customers, helping
solution providers identify new opportunities and expand their sales to include
other types of technology.
As in recent years, our continued growth has drawn national attention. Our stock
was recently named to the reconstituted Russell 2000 Index - one of the most
widely recognized stock indices for small-cap companies. The ranking is based
solely on market capitalization and is used by the financial community as a
benchmark for investment consideration. ScanSource was also named one of the
nation's "100 Hot Growth Companies" by BusinessWeek magazine based on sales and
earnings growth and other factors, as well as to that magazine's "InfoTech 100"
ranking of the country's top performers in the information technology sector.
The BusinessWeek listings follow the similar recognition our company has
received in recent years from Fortune, Forbes, Deloitte&Touche and others.
As we look to the future, we do so with an eye toward efficiently delivering
these innovative products and solutions to customers throughout the world. We
recently opened a sales office for our ADC and POS business in Mexico City and
have already begun an aggressive effort to attract customers there while
continuing to utilize our existing, state-of-the-art 240,000-square-foot Memphis
distribution center to quickly fulfill customer orders in Mexico. Further, we
are developing strategic plans with the support of our key vendors to expand our
business across Latin America and Europe during 2002.
While economic conditions may come and go, one thing that will never change is
our steadfast commitment to empowering our solution provider customers and
vendor partners, and to strengthening shareholder value. That is the mission
that defines us, and it is that banner that we will carry into the future. These
are truly exciting times for ScanSource, Inc. I hope you'll join me in looking
forward to the years ahead with excitement and anticipation.
Sincerely,
/s/ Mike L. Baur
vision-(vizh'*en)
1. ability to vividly
perceive way to
future success
2. keen insight
[CHART appears here]
Earnings per Share
1994 1995 1996 1997 1998 1999 2000 2001
$.23 $.50 $.90 $.75 $.95 $1.32 $2.31 $2.69
FISCAL YEAR ENDED JUNE 30
[CHART appears here]
Net Sales
1994 1995 1996 1997 1998 1999 2000 2001
$16 $34 $56 $100 $183 $298 $497 $631
FISCAL YEAR ENDED JUNE 30
($ IN MILLIONS)
[CHART appears here]
Operating Income
1994 1995 1996 1997 1998 1999 2000 2001
$.6 $1.6 $2.8 $4.8 $7.7 $12.2 $22.9 $28.8
FISCAL YEAR ENDED JUNE 30
($ IN MILLIONS)
Selected Financial Data
The selected financial data below should be read in conjunction with
"Management's Discussion and Analysis" and the Company's consolidated
financial statements and related notes thereto included elsewhere in this
annual report.
The following statement of income data and balance sheet data was derived
from the Company's consolidated financial statements. The Company's
consolidated financial statements for the year ended June 30, 2001 have been
audited by Deloitte & Touche LLP. The Company's consolidated financial
statements for the years ended June 30, 2000, 1999, 1998, and 1997 have been
audited by KPMG LLP.
Fiscal Year Ended June 30,
-----------------------------------------------
1997 1998 1999 2000 2001
------- -------- -------- -------- --------
(In thousands, except per share data)
Statement of Income Data:
Net sales.................... $99,839 $182,795 $297,717 $497,421 $630,744
Cost of goods sold........... 86,024 159,410 263,941 443,716 556,919
------- -------- -------- -------- --------
Gross profit............... 13,815 23,385 33,776 53,705 73,825
Selling, general and
administrative expenses..... 8,940 15,620 21,410 30,685 44,857
Amortization of intangibles.. 81 113 137 147 170
------- -------- -------- -------- --------
Total operating expenses... 9,021 15,733 21,547 30,832 45,027
------- -------- -------- -------- --------
Operating income............. 4,794 7,652 12,229 22,873 28,798
Interest income (expense),
net......................... (380) 160 103 (639) (2,034)
Other income (expense), net.. (85) (305) (470) -- (207)
------- -------- -------- -------- --------
Total other income
(expense)................. (465) (145) (367) (639) (2,241)
------- -------- -------- -------- --------
Income before income taxes... 4,329 7,507 11,862 22,234 26,557
Provision for income taxes... 1,556 2,736 4,392 8,449 10,093
------- -------- -------- -------- --------
Net income................. $ 2,773 $ 4,771 $ 7,470 $ 13,785 $ 16,464
======= ======== ======== ======== ========
Basic net income per share... $ 0.80 $ 0.99 $ 1.37 $ 2.48 $ 2.90
======= ======== ======== ======== ========
Basic weighted average shares
outstanding................. 3,481 4,833 5,460 5,556 5,683
======= ======== ======== ======== ========
Diluted net income per
share....................... $ 0.75 $ 0.95 $ 1.32 $ 2.31 $ 2.69
======= ======== ======== ======== ========
Diluted weighted average
shares outstanding.......... 3,704 5,035 5,661 5,969 6,124
======= ======== ======== ======== ========
As of June 30,
-----------------------------------------------
1997 1998 1999 2000 2001
------- -------- -------- -------- --------
(In thousands)
Balance Sheet Data:
Working capital.............. $20,496 $ 48,154 $ 51,160 $ 80,544 $ 95,802
Total assets................. 40,268 72,112 125,727 205,880 287,171
Total long-term obligations
(including current
portion).................... 5,391 6,580 1,697 26,592 26,414
Total shareholders' equity... 18,650 49,781 58,702 74,466 93,362
8
Management's Discussion and Analysis
The following discussion and analysis contains forward-looking statements
which involve risks and uncertainties. The Company's actual results could
differ materially from those anticipated in these forward-looking statements
as a result of certain factors. This discussion and analysis should be read in
conjunction with "Selected Financial Data" and the Financial Statements and
the Notes thereto included elsewhere in this Annual Report.
Overview
ScanSource, Inc. 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 markets automatic data capture (ADC) and point-of-sale
(POS) products through its ScanSource sales unit and business telephone
equipment through its Catalyst Telecom sales team. The Company's ChannelMax
unit provides logistics for customers who enter orders primarily over the web.
The Company was incorporated in December 1992, is headquartered in
Greenville, South Carolina and serves North America from a single, centrally
located distribution center located near the FedEx hub in Memphis, Tennessee.
The single warehouse and strong management information system form the
cornerstone of the Company's cost-driven operational strategy which has caused
operating income to grow at an average annual growth rate of 56.6% over the
past five years, while sales have grown at an average annual rate of 58.5% to
$630.7 million over the same period.
Distribution Segment. The Company's distribution segment sells products
exclusively to technology resellers and integrators in markets which are large
and growing. Key ADC vendors include Symbol, Intermec and Zebra, and some
leading POS lines include IBM, NCR and Epson. Avaya Communication is the
Company's premier business telephone partner, while Intel/Dialogic supplies
key components for the computer and telephone convergence market. Growth in
net sales has been principally driven by intensive marketing efforts to
recruit new reseller customers, competitive product pricing, selective
expansion of the Company's product line, and strategic acquisitions.
In January 2001, the ScanSource sales team signed a contract giving it
exclusive rights to distribute NCR's full line of POS products. In May 2001,
the Company purchased the operating assets of the business phone division of
Pinacor, Inc., one of two competitors who sold Avaya voice products. This unit
was merged into the Catalyst Telecom sales team, allowing them to expand sales
to former Pinacor customers from a new western sales office in Tempe, Arizona.
E-Logistics Segment. The e-logistics business segment, called ChannelMax,
provides real-time inventory availability and web catalog, order entry, order
tracking and logistics for companies in the ADC and business phone markets.
This unit also creates customized web storefronts that integrate with a
reseller's website, allowing resellers to offer on-line ordering and marketing
to their customers. Revenue in this unit has grown primarily as its key
accounts, Symbol, Avaya and Expanets, have expanded the number of orders they
want to have fulfilled by the ChannelMax team.
Cost Control/ Profitability. The Company's operating income growth has been
driven by increasing gross profit and disciplined control of operating
expenses. The Company's business strategy features a scalable information
system, streamlined management, and centralized distribution, enabling it to
achieve the economies of scale necessary for cost-effective order fulfillment.
From its inception, the Company has tightly managed its general and
administrative expenses by maintaining strong cost
9
Management's Discussion and Analysis
controls. While these cost control initiatives have helped control costs, this
has been partially offset by costs associated with new initiatives including
investments in new markets such as telephones and electronic commerce,
expansion into a new geographic market in Canada, increased marketing costs to
recruit resellers, and enhancements of employee benefit plans to retain
employees.
Results of Operations
The following table sets forth for the periods indicated certain income and
expense items as a percentage of net sales:
Fiscal Year Ended June 30,
----------------------------
1999 2000 2001
-------- -------- --------
Net sales........................................ 100.0% 100.0% 100.0%
Cost of goods sold............................... 88.7 89.2 88.3
-------- -------- --------
Gross profit.................................... 11.3 10.8 11.7
Selling, general and administrative expenses..... 7.2 6.2 7.1
Amortization of intangibles...................... 0.0 0.0 0.0
-------- -------- --------
Total operating expenses........................ 7.2 6.2 7.1
-------- -------- --------
Operating income................................. 4.1 4.6 4.6
Interest expense, net............................ (0.1) (0.1) (0.4)
Other expense, net............................... 0.0 0.0 0.0
-------- -------- --------
Total other expense............................. (0.1) (0.1) (0.4)
-------- -------- --------
Income before income taxes....................... 4.0 4.5 4.2
Provision for income taxes....................... 1.5 1.7 1.6
-------- -------- --------
Net income...................................... 2.5 2.8 2.6
======== ======== ========
Comparison of Fiscal Years Ended June 30, 2001, 2000 and 1999
Net Sales. Net sales increased by 26.8% to $630.7 million in fiscal 2001
from $497.4 million in fiscal 2000, and increased by 67.1% in fiscal 2000 from
$297.7 million in fiscal 1999. The Company is organized into two business
segments. Sales through value-added distribution increased 24.4% to $562.2
million in 2001, from $452.1 million in 2000, and rose by 66.3% in 2000 from
$271.9 million in 1999. E-logistics sales (net of intersegment sales)
increased 51.2% to $68.5 million in 2001 from $45.3 million in 2000, and
increased by 75.6% in 2000 from $25.8 million in 1999. Sales in Canada have
been less than 5.0% of the Company's total sales in each year presented.
Growth in net sales resulted primarily from additions to the Company's sales
force, competitive product pricing, selective expansion of its product line,
increased marketing efforts to specialty technology resellers, and the
acquisition of Pinacor, Inc. in May 2001.
Gross Profit. Cost of sales is comprised of purchase costs and freight, net
of early payment and volume discounts. Gross profit increased by 37% to $73.8
million in fiscal 2001 from $53.7 million in fiscal 2000, and increased by 59%
in fiscal 2000 from $33.8 million in fiscal 1999. Gross profit as a percentage
of net sales was 11.7% in fiscal 2001, 10.8 % in fiscal 2000, and 11.3% in
fiscal 1999. Gross margins from value-added distribution were 12.1%, 10.8% and
11.7% for the years ended June 30, 2001, 2000 and 1999, respectively. The
variation in gross profit as a percentage of net sales was a result of a
change in the mix of sales between lower- and higher-margin products and
volume
10
Management's Discussion and Analysis
discounts provided to resellers on large orders. Gross margins for e-logistics
(net of intersegment profits) were 8.6% in 2001, 10.6% in 2000, and 7.3% in
1999. E-logistics gross margins varied based upon the mix of customers served
in each of the three years and was higher in 2000 due to a higher mix of fee-
based programs relative to lower gross-margin product sales programs.
Operating Expenses. Operating expenses increased by 46.1% to $45.0 million
in fiscal 2001 from $30.8 million in fiscal 2000, and increased by 43.1% in
fiscal 2000 from $21.5 million in fiscal 1999. Operating expenses as a
percentage of net sales increased to 7.1% in fiscal 2001, from 6.2% in fiscal
2000, following a decrease from 7.2% in fiscal 1999. The increase in operating
expenses as a percentage of sales in 2001 resulted from increased marketing
costs to reach resellers, a profit sharing contribution to enhance the
Company's 401k plan benefit, a donation to charity, and higher depreciation
expense due to the November 1999 purchase of a new distribution center and its
subsequent furnishing and expansion. The decrease in 2000 operating expenses
as a percentage of net sales resulted from efficiencies gained through
increased sales volumes.
Operating Income. For reasons discussed above, operating income increased
by 26% to $28.8 million in fiscal 2001 from $22.9 million in fiscal 2000, and
increased by 87.0% in fiscal 2000 from $12.2 million in fiscal 1999, driven by
the improvement in gross profit as described above. Operating income as a
percentage of net sales was 4.6% in fiscal 2001, 4.6 % in fiscal 2000, and
4.1% in fiscal 1999.
Total Other Income (Expense). Other income (expense) consists principally
of net interest expense and other expense. Net interest expense in 2001
included interest of $2,853,000 paid on the Company's line of credit and long-
term debt, offset by interest income of $819,000 principally collected from
customers. The substantial increase in interest expense in 2001 resulted from
interest incurred on two new notes payable to bank, aggregating a principal
balance of $7.7 million at June 30, 2001, and interest incurred on additional
borrowings on the Company's line of credit to finance the Company's additional
working capital requirements. Other expense, net, of $207,000 in 2001,
consisted of a loss on an equity investment and minority interest on the
Company's majority-owned subsidiary. Other income (expense) in fiscal 2000
consisted primarily of $855,000 of interest paid on the Company's line of
credit, offset by $216,000 of interest income. Other income (expense) in
fiscal 1999 consisted primarily of $470,000 of warehouse closing costs and
interest income of $302,000, offset by $199,000 of interest expense.
Provision for Income Taxes. Income tax expense was $10.1 million, $8.4
million, and $4.4 million, in fiscal 2001, 2000 and 1999, respectively,
reflecting an effective tax rate of 38.0%, 38.0% and 37.0%, respectively.
Net Income. For reasons discussed above, net income increased by 19.4% to
$16.5 million in fiscal 2001 from $13.8 million in fiscal 2000, and increased
by 84.5% in fiscal 2000 from $7.5 million in fiscal 1999. Net income as a
percentage of net sales was 2.6% for fiscal 2001, 2.8% for fiscal 2000 and
2.5% for fiscal 1999.
11
Management's Discussion and Analysis
Quarterly Results
The following tables set forth certain unaudited quarterly financial data
and such data expressed as a percentage of net sales. The information has been
derived from unaudited financial statements that, in the opinion of
management, reflect all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of such quarterly information.
The operating results for any quarter are not necessarily indicative of the
results to be expected for any future period.
Three Months Ended
--------------------------------------------------------------------------------
Fiscal 2000 Fiscal 2001
--------------------------------------- ---------------------------------------
Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30,
1999 1999 2000 2000 2000 2000 2001 2001
--------- -------- -------- -------- --------- -------- -------- --------
Net sales............... $ 113,179 $113.922 $120,391 $149,929 $ 156,286 $146,187 $155,237 $173,034
Cost of goods sold...... 102,159 100,707 107,021 133,829 139,366 128,918 135,240 153,395
--------- -------- -------- -------- --------- -------- -------- --------
Gross profit........... 11,020 13,215 13,370 16,100 16,920 17,269 19,997 19,639
Selling, general and
administrative
expenses............... 6,681 8,411 8,040 7,552 10,233 10,436 12,387 11,801
Amortization of
intangibles............ 34 34 34 46 46 46 32 46
--------- -------- -------- -------- --------- -------- -------- --------
Total operating
expenses.............. 6,715 8,445 8,074 7,598 10,279 10,482 12,419 11,847
--------- -------- -------- -------- --------- -------- -------- --------
Operating income........ 4,305 4,770 5,296 8,502 6,641 6,787 7,578 7,792
Interest income
(expense), net......... 98 (146) (272) (331) (475) (483) (798) (278)
Other income (expense),
net.................... 7 8 (2) (--) (--) 40 (--) (247)
--------- -------- -------- -------- --------- -------- -------- --------
Total other income
(expense)............. 105 (138) (274) (331) (475) (443) (798) (525)
--------- -------- -------- -------- --------- -------- -------- --------
Income before income
taxes.................. 4,410 4,632 5,022 8,171 6,166 6,344 6,780 7,267
Income taxes............ 1,676 1,760 1,909 3,104 2,343 2,411 2,575 2,764
--------- -------- -------- -------- --------- -------- -------- --------
Net income............. $ 2,734 $ 2,872 $ 3,113 $ 5,067 $ 3,823 $ 3,933 $ 4,205 $ 4,503
--------- -------- -------- -------- --------- -------- -------- --------
Basic net income per
share.................. $ 0.50 $ 0.52 $ 0.56 $ 0.90 $ 0.68 $ 0.69 $ 0.74 $ 0.79
========= ======== ======== ======== ========= ======== ======== ========
Basic weighted average
shares outstanding..... 5,512 5,531 5,577 5,604 5,648 5,693 5,703 5,709
========= ======== ======== ======== ========= ======== ======== ========
Diluted net income per
share.................. $ 0.47 $ 0.48 $ 0.51 $ 0.85 $ 0.62 $ 0.64 $ 0.69 $ 0.73
========= ======== ======== ======== ========= ======== ======== ========
Diluted weighted average
shares outstanding..... 5,850 5,994 6,057 5,975 6,139 6,154 6,060 6,144
========= ======== ======== ======== ========= ======== ======== ========
Three Months Ended
--------------------------------------------------------------------------------
Fiscal 2000 Fiscal 2001
--------------------------------------- ---------------------------------------
Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30,
1999 1999 2000 2000 2000 2000 2001 2001
--------- -------- -------- -------- --------- -------- -------- --------
Net sales............... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold...... 90.3 88.4 88.9 89.3 89.2 88.2 87.1 88.7
--------- -------- -------- -------- --------- -------- -------- --------
Gross profit........... 9.7 11.6 11.1 10.7 10.8 11.8 12.9 11.4
Selling, general and
administrative
expenses............... 5.9 7.4 6.7 5.0 6.5 7.1 8.0 6.8
Amortization of
intangibles............ 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
--------- -------- -------- -------- --------- -------- -------- --------
Total operating
expenses.............. 5.9 7.4 6.7 5.0 6.6 7.2 8.0 6.8
--------- -------- -------- -------- --------- -------- -------- --------
Operating income........ 3.8 4.2 4.4 5.7 4.2 4.6 4.9 4.5
Interest income
(expense), net......... 0.1 (0.1) (0.2) (0.2) (0.3) (0.3) (0.5) (0.2)
Other income (expense),
net.................... -- -- -- -- -- -- -- (0.1)
--------- -------- -------- -------- --------- -------- -------- --------
Total other income
(expense)............. 0.1 (0.1) (0.2) (0.2) (0.3) (0.3) (0.5) (0.3)
--------- -------- -------- -------- --------- -------- -------- --------
Income before income
taxes.................. 3.9 4.1 4.2 5.5 3.9 4.3 4.4 4.2
Provision for income
taxes.................. 1.5 1.6 1.6 2.1 1.5 1.6 1.7 1.6
--------- -------- -------- -------- --------- -------- -------- --------
Net income............. 2.4 2.5 2.6 3.4 2.4 2.7 2.7 2.6
========= ======== ======== ======== ========= ======== ======== ========
12
Management's Discussion and Analysis
Liquidity and Capital Resources
The Company's primary sources of liquidity are cash provided by operating
activities, borrowings under the Company's revolving credit facility, and,
from time to time, proceeds from the exercise of stock options.
Effective July 2001, the Company has a new line of credit agreement with
its bank group which extends to September 2003 with a borrowing limit of the
lesser of (i) $80 million ($50 million under the agreement in place at June
30, 2001) or (ii) the total of 85% of eligible accounts receivable plus 50% of
eligible inventory. 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 earnings before interest, taxes, depreciation and amortization ratio
ranging from 2.5:1 to 4.25:1 (from 1.25% to 2.50% tied to the Company's debt
to net worth ratio ranging from .75:1 to 2.75:1 under the agreement in place
at June 30, 2001). Borrowings under the revolving credit facility are
collateralized by accounts receivable and eligible inventory. The agreement
contains certain financial covenants including minimum net worth, capital
expenditure limits and a maximum of debt to tangible net worth ratio, and the
payment of cash dividends is prohibited. The effective interest rate at June
30, 2001 was 6.04% and the outstanding balance on the line of credit was $17.1
million, leaving $32.9 million available for additional borrowings at June 30,
2001.
Cash provided by operating activities was $19.6 million in 2001,
principally resulting from the Company's net income, a $59.2 million increase
in trade payables, offset by a $12.8 million increase in trade receivables,
and a $43.9 million increase in inventories. Cash used in operating activities
was $23.5 million in 2000, principally resulting from the Company's net
income, a $38.9 million increase in trade payables, offset by a $21.2 million
increase in trade receivables, and a $51.4 million increase in inventories.
Cash provided by operating activities was $21.5 million in 1999, principally
resulting from the Company's net income, a $45.7 million increase in trade
payables, offset by a $11.0 million increase in trade receivables, and $18.8
million increase in inventories.
Cash used in investing activities for fiscal 2001 of $24.9 million,
included $17.3 million for the acquisition of Pinacor, a phone distributor,
and $7.6 million for capital expenditures. In fiscal 2000, cash was used in
investing activities primarily for $6.6 million of capital expenditures and a
$7.0 million building purchase. In fiscal 1999, cash was used in investing
activities primarily for $2.1 million of capital expenditures.
Cash provided by financing activities for fiscal 2001 was $1.3 million,
primarily from the closing of a real estate loan for $7.8 million and proceeds
from stock option exercises of $1.5 million, offset by net payments on the
line of credit of $7.8 million. In fiscal 2000, cash provided by financing
activities was $26.5 million, primarily from $24.9 million of advances on the
Company's line of credit and proceeds from stock option exercises of $1.6
million. In fiscal 1999, cash used in financing activities was $4.2 million,
primarily from net payments of $4.9 million on the line of credit, offset by
$0.7 million of proceeds from stock option exercises.
The Company believes that it has sufficient liquidity to meet its
forecasted cash requirements for at least the next year.
13
Management's Discussion and Analysis
Backlog
The Company does not consider backlogs to be material to its business.
Virtually all orders are filled within 24 hours of receipt.
Recent Accounting Pronouncements
Effective July 1, 2000, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments
and Hedging Activities, as amended by SFAS No. 138. SFAS No. 133 establishes
accounting and reporting standards for derivative financial instruments,
including certain derivative instruments embedded in other contracts and
hedging activities. The adoption of SFAS No. 133 had no effect on the
Company's financial position or results of operations.
In July 2001, the Financial Accounting Standards Board ("FASB") approved
two new accounting standards related to the accounting for business
combinations, and goodwill and other intangible assets. The standards, SFAS
No. 141 and 142, (i) immediately prohibit the use of the pooling-of-interests
method of accounting for business combinations which were not initiated prior
to June 30, 2001, (ii) require that goodwill not be amortized in any
circumstance, and (iii) require that goodwill be tested for impairment
annually or when events or circumstances occur between annual tests indicating
that goodwill for a reporting unit might be impaired. SFAS No. 142 takes
effect for the Company's fiscal year beginning July 1, 2002. However, the
Company is considering early adoption of SFAS No. 142, permitted by the
standard, on July 1, 2001. Upon adoption, the Company will be required to
cease amortization of its remaining unamortized goodwill balance and will be
required to perform an impairment test based on a fair value concept of its
existing goodwill (the Company currently assesses recoverability of goodwill
based on estimated undiscounted future cash flows). The Company has not
completed an analysis of the potential impact, if any, of the impairment test
of goodwill upon adoption of SFAS No. 142; however, amortization of existing
goodwill, which was approximately $137,000, $147,000 and $170,000 for the
years ended June 30, 1999, 2000 and 2001, respectively, will cease upon
adoption.
Impact of Inflation
The Company has not been adversely affected by inflation as technological
advances and competition within specialty technology markets has generally
caused prices of the products sold by the Company to decline. Management
believes that any price increases could be passed on to its customers, as
prices charged by the Company are not set by long-term contracts.
Forward Looking Statements
Certain of the statements contained in this annual 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 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
14
Management's Discussion and Analysis
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 results of operations, the Company's ability to
manage successfully price protection or stock rotation opportunities
associated with inventory value decreases, and other factors described in
Exhibit 99.1 to the Annual Report on Form 10-K, into which portions of this
annual report to shareholders are incorporated by reference, and other reports
and documents filed by the Company with the Securities and Exchange
Commission.
Quantitative and Qualitative Disclosures About Market Risks
The Company's principal exposure to changes in financial market conditions
in the normal course of its business is a result of its selective use of bank
debt and, to a much lesser extent, transacting business 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. 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
approximate $333,000 increase or decrease in fiscal 2001 pre-tax income. The
Company does not currently use derivative instruments to adjust the Company's
interest rate risk profile.
The Company is minimally 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 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
June 30, 2001, the Company does not consider the potential near-term losses in
future earnings, fair values and cash flows from reasonably possible near-term
changes in interest rates and exchange rates to be material.
15
SCANSOURCE, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, 2000 and 2001
Assets 2000 2001
------ -------- --------
(Amounts in
thousands)
Current assets:
Cash..................................................... $ 4,612 $ 594
-------- --------
Receivables:
Trade, less allowance for doubtful accounts of $5,464
and $6,765 at June 30, 2000 and 2001, respectively.... 66,983 86,917
Other.................................................. 3,060 8,118
-------- --------
70,043 95,035
Inventories.............................................. 101,654 157,468
Prepaid expenses and other assets........................ 451 640
Deferred income taxes.................................... 8,632 9,904
-------- --------
Total current assets................................. 185,392 263,641
-------- --------
Property and equipment:
Land..................................................... 1,485 1,485
Building and improvements................................ 12,135 13,493
Furniture, fixtures and equipment........................ 9,953 16,025
-------- --------
23,573 31,003
Less accumulated depreciation............................ (5,183) (9,257)
-------- --------
18,390 21,746
Intangible assets, net..................................... 1,635 1,277
Other assets............................................... 463 507
-------- --------
Total assets......................................... $205,880 $287,171
======== ========
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Current portion of long-term debt............................... $ 26 $ 444
Trade accounts payable.......................................... 98,627 157,847
Accrued expenses and other liabilities.......................... 5,083 9,548
Income taxes payable............................................ 1,112 --
-------- --------
Total current liabilities................................... 104,848 167,839
-------- --------
Borrowings under revolving credit facility........................ 24,919 17,104
Long-term debt.................................................... 1,647 8,866
-------- --------
Total liabilities........................................... 131,414 193,809
-------- --------
Commitments and contingencies
Shareholders' equity:
Preferred stock, no par value; 3,000,000 shares authorized, none
issued......................................................... -- --
Common stock, no par value; 10,000,000 shares authorized;
5,610,875 and 5,711,414 shares issued and outstanding at June
30, 2000 and 2001, respectively................................ 42,140 44,572
Retained earnings............................................... 32,326 48,790
-------- --------
Total shareholders' equity.................................. 74,466 93,362
-------- --------
Total liabilities and shareholders' equity.................. $205,880 $287,171
======== ========
See accompanying notes to consolidated financial statements.
16
SCANSOURCE, INC. AND SUBSIDIARIES
Consolidated Statements of Income
Years ended June 30, 1999, 2000 and 2001
1999 2000 2001
-------- -------- --------
(Amounts in thousands,
except per share data)
Net sales........................................ $297,717 $497,421 $630,744
Cost of goods sold............................... 263,941 443,716 556,919
-------- -------- --------
Gross profit................................. 33,776 53,705 73,825
Selling, general and administrative expenses..... 21,410 30,685 44,857
Amortization of intangibles...................... 137 147 170
-------- -------- --------
Total operating expenses..................... 21,547 30,832 45,027
-------- -------- --------
Operating income............................. 12,229 22,873 28,798
Other expense (income):
Interest expense............................... 199 855 2,853
Interest income................................ (302) (216) (819)
Other expense.................................. 470 -- 207
-------- -------- --------
Other expense, net........................... 367 639 2,241
-------- -------- --------
Income before income taxes................... 11,862 22,234 26,557
Provision for income taxes....................... 4,392 8,449 10,093
-------- -------- --------
Net income................................... $ 7,470 $ 13,785 $ 16,464
======== ======== ========
Per share data:
Basic:
Earnings per share........................... $ 1.37 $ 2.48 $ 2.90
======== ======== ========
Weighted-average shares outstanding.......... 5,460 5,556 5,683
======== ======== ========
Diluted:
Earnings per share........................... $ 1.32 $ 2.31 $ 2.69
======== ======== ========
Weighted-average shares outstanding.......... 5,661 5,969 6,124
======== ======== ========
See accompanying notes to consolidated financial statements.
17
SCANSOURCE, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
Years ended June 30, 1999, 2000 and 2001
Common Common
Stock Stock Retained
(Shares) (Amount) Earnings Total
--------- ------- -------- -------
(Amounts in thousands, except
share data)
Balance at June 30, 1998................... 5,353,310 $38,710 $11,071 $49,781
Issuance of stock due to exercise of
options, net............................ 150,202 663 -- 663
Tax benefit of deductible compensation
arising from exercise of stock options.. -- 788 -- 788
Net income............................... -- -- 7,470 7,470
--------- ------- ------- -------
Balance at June 30, 1999................... 5,503,512 40,161 18,541 58,702
Issuance of stock due to exercise of
options, net............................ 107,363 1,505 -- 1,505
Tax benefit of deductible compensation
arising from exercise of stock options.. -- 474 -- 474
Net income............................... -- -- 13,785 13,785
--------- ------- ------- -------
Balance at June 30, 2000................... 5,610,875 42,140 32,326 74,466
Issuance of stock due to exercise of
options, net............................ 100,539 1,466 -- 1,466
Tax benefit of deductible compensation
arising from exercise of stock options.. -- 966 -- 966
Net income............................... -- -- 16,464 16,464
--------- ------- ------- -------
Balance at June 30, 2001................... 5,711,414 $44,572 $48,790 $93,362
========= ======= ======= =======
See accompanying notes to consolidated financial statements.
18
SCANSOURCE, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended June 30, 1999, 2000 and 2001
1999 2000 2001
-------- -------- --------
(Amounts in thousands)
Cash flows from operating activities:
Net income..................................... $ 7,470 $ 13,785 $ 16,464
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation................................. 1,119 2,531 4,264
Amortization of intangible assets............ 137 147 170
Provision for doubtful accounts.............. (3,582) (2,983) (2,570)
Deferred income tax benefit.................. (2,770) (3,649) (1,191)
Tax benefit of stock option exercise......... 788 474 966
Changes in operating assets and liabilities:
Trade receivables.......................... (10,994) (21,226) (12,766)
Other receivables.......................... (919) (617) (4,330)
Inventories................................ (18,838) (51,372) (43,872)
Prepaid expenses and other assets.......... (196) 13 (189)
Trade accounts payable..................... 45,699 38,899 59,220
Accrued expenses and other liabilities..... 2,701 634 4,465
Income taxes payable....................... 1,131 (19) (1,112)
Other noncurrent assets.................... (251) (159) 62
-------- -------- --------
Net cash provided by (used in) operating
activities.............................. 21,495 (23,542) 19,581
-------- -------- --------
Cash flows from investing activities:
Capital expenditures........................... (2,081) (6,588) (7,619)
Purchase of building........................... -- (6,990) --
Cash paid for business acquisitions............ -- -- (17,268)
-------- -------- --------
Net cash used in investing activities.... (2,081) (13,578) (24,887)
-------- -------- --------
Cash flows from financing activities:
Advances (payments) on revolving credit, net... (4,861) 24,919 (7,815)
Exercise of stock options...................... 663 1,555 1,466
Proceeds from long-term debt borrowings........ -- -- 7,856
Repayments of long-term debt borrowings........ (22) (24) (219)
-------- -------- --------
Net cash provided by (used in) financing
activities.............................. (4,220) 26,450 1,288
-------- -------- --------
Increase (decrease) in cash...................... 15,194 (10,670) (4,018)
Cash at beginning of year........................ 88 15,282 4,612
-------- -------- --------
Cash at end of year.............................. $ 15,282 $ 4,612 $ 594
-------- -------- --------
Supplemental information:
Interest paid.................................. $ 186 $ 1,009 $ 2,869
======== ======== ========
Income taxes paid.............................. $ 3,261 $ 8,563 $ 11,605
======== ======== ========
See accompanying notes to consolidated financial statements.
19
SCANSOURCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended June 30, 1999, 2000 and 2001
(1) Business Description and Summary of Significant Accounting Policies
Business Description
ScanSource, Inc. 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 markets automatic data capture and point-of-sale products
through its ScanSource sales unit and business telephone equipment through its
Catalyst Telecom sales team. The Company's ChannelMax unit provides logistics
services for customers who enter orders primarily over the web.
Consolidation Policy
The consolidated financial statements include the accounts of ScanSource,
Inc. ("Company") and its majority-owned subsidiaries. ScanSource currently
owns 95% (see Note 4) of its e-logistics subsidiary, ChannelMax, whose
minority interest is insignificant at June 30, 2001 and 2000. All significant
intercompany accounts and transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Significant financial statement
estimates include the allowance for uncollectible accounts receivable and
inventory reserves to reduce inventories to the lower of cost or market.
Management determines the estimate of the allowance for uncollectible accounts
considering a number of factors, including historical experience, aging of the
accounts and the credit worthiness of its customers. Management determines the
inventory reserves to reduce inventories to the lower of cost or market based
principally on the effects of technological changes, quantities of goods on
hand, and other factors. Management believes that its estimates provided in
the financial statements, including those for the above-described items, are
reasonable. However, actual results could differ from those estimates.
Revenue Recognition
Revenues are recognized for the sale of products upon shipment. The Company
provides a reserve for estimated product returns and allowances. The Company
also has arrangements in which it earns a service fee determined as a
percentage of the value of products shipped on behalf of the manufacturer who
retains the risk of ownership and credit loss. Such service fees earned by the
Company are included in net sales.
Shipping and Handling Costs
Costs related to shipping and handling products sold to the Company's
customers are charged to cost of goods sold as incurred.
20
SCANSOURCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended June 30, 1999, 2000 and 2001
Advertising Costs
The Company defers advertising related costs until the advertising is first
run in trade or other publications or in the case of brochures, until the
brochures are printed and available for distribution. Advertising costs, after
vendor reimbursements under co-operative advertising agreements, were not
significant in any of the three years ended June 30, 2001.
Vendor Programs
Funds received from vendors for price protection, product rebates,
marketing or training programs are recorded net of direct costs as adjustments
to product costs, or a reduction of selling, general and administrative
expenses according to the nature of the program.
The Company does not provide warranty coverage on its product sales.
However, to maintain customer relations, the Company facilitates vendor
warranty policies by accepting for exchange, with the Company's prior
approval, most defective products within 30 days of invoicing.
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.
Long-Lived Assets
Property and equipment are recorded at cost. Depreciation is computed using
the straight-line method over estimated useful lives of 2 to 5 years for
furniture and equipment, 40 years for the building, and 15 years for building
improvements. Leasehold improvements are amortized over the shorter of the
lease term or the estimated useful life. Maintenance, repairs and minor
renewals are charged to expense as incurred. Additions, major renewals and
betterments to property and equipment are capitalized.
Intangible assets consist primarily of goodwill, which is being amortized
on a straight-line basis over 5 to 15 years. Accumulated amortization was
$703,000 and $761,000 at June 30, 2000 and 2001, respectively.
The Company reviews its long-lived assets for impairment whenever events or
circumstances indicate that the carrying amount of an asset may not be
recoverable. If the sum of the expected cash flows, undiscounted and without
interest is less than the carrying amount of the asset, an impairment loss is
recognized as the amount by which the carrying amount of the asset exceeds its
fair value. No impairment has been recognized in the accompanying consolidated
statements of income.
Concentration of Credit Risk
The Company sells its products generally on net 20-day terms to a large
base of value-added resellers throughout North America. The Company performs
ongoing credit evaluations of its customer's financial condition and generally
does not require collateral.
21
SCANSOURCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended June 30, 1999, 2000 and 2001
Income Taxes
The Company records income taxes under the asset and liability method
whereby deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
Accounting for Stock-Based Compensation
Statement of Financial Accounting Standards ("SFAS") No. 123 allows an
entity to continue to apply the provisions of APB Opinion No. 25 and provide
pro forma net income and pro forma earnings per share disclosures for employee
stock options granted as if the fair-value-based method defined in SFAS No.
123 had been applied. The Company has elected to continue to apply the
provisions of APB Opinion No. 25 and provide the pro forma disclosures of SFAS
No. 123.
Fair Value of Financial Instruments
The fair value of financial instruments is the amount at which the
instrument could be exchanged in a current transaction between willing
parties. The carrying values of financial instruments such as accounts
receivable, accounts payable, accrued liabilities and borrowings under
revolving credit facility (see Note 3) approximate fair values, based upon
either short maturities or variable interest rates of these instruments.
Comprehensive Income
Comprehensive income is recognized as the change in equity during a period
from transactions and other events and circumstances from non-owner sources.
Comprehensive income was the same as net income in each of the three years
ended June 30, 2001.
Foreign Currency
Foreign currency transaction gains and losses are included in selling,
general and administrative expenses. Net currency transaction losses were less
than $100,000 in each of the three years ended June 30, 2001. Translation
gains and losses were insignificant in each of the three years ended
June 30, 2001.
Recent Accounting Pronouncements
Effective July 1, 2000, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments
and Hedging Activities, as amended by SFAS No. 138. SFAS No. 133 establishes
accounting and reporting standards for derivative financial instruments,
including certain derivative instruments embedded in other contracts and
hedging activities. The adoption of SFAS No. 133 had no effect on the
Company's financial position or results of operations.
22
SCANSOURCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended June 30, 1999, 2000 and 2001
In July 2001, the Financial Accounting Standards Board ("FASB") approved
two new accounting standards related to the accounting for business
combinations, and goodwill and other intangible assets. The standards, SFAS
No. 141 and 142, (i) immediately prohibit the use of the pooling-of-interests
method of accounting for business combinations which were not initiated prior
to June 30, 2001, (ii) require that goodwill not be amortized in any
circumstance, and (iii) require that goodwill be tested for impairment
annually or when events or circumstances occur between annual tests indicating
that goodwill for a reporting unit might be impaired. SFAS No. 142 takes
effect for the Company's fiscal year beginning July 1, 2002. However, the
Company is considering early adoption of SFAS No. 142, permitted by the
standard on July 1, 2001. Upon adoption, the Company will be required to cease
amortization of its remaining unamortized goodwill balance and will be
required to perform an impairment test using a fair value concept of its
existing goodwill (the Company currently assesses recoverability of goodwill
based on estimated undiscounted future cash flows). The Company has not
completed an analysis of the potential impact, if any, of the impairment test
of goodwill upon adoption of SFAS No. 142; however, amortization of existing
goodwill, which was approximately $137,000, $147,000 and $170,000 for the
years ended June 30, 1999, 2000 and 2001, respectively, will cease upon
adoption.
Reclassifications
Certain prior year amounts have been reclassified to conform with the
current year presentation in the accompanying financial statements.
(2) Revolving Credit Facility
The Company has a line of credit agreement with a bank extending to
September 2002 with a borrowing limit of the lesser of (i) $50 million or (ii)
the total of 85% of eligible accounts receivable plus 50% of eligible
inventory. The facility bears interest at the 30-day LIBOR rate of interest
plus a rate varying from 1.25% to 2.50% tied to the Company's debt to net
worth ratio ranging from .75:1 to 2.75:1. The revolving credit facility is
collateralized by accounts receivable and eligible inventory. The agreement
contains certain financial covenants, including minimum net worth, capital
expenditure limits, a maximum debt to tangible net worth ratio, and the
payment of cash dividends is prohibited. The effective interest rate at June
30, 2001 was 6.04% and the outstanding balance on the line of credit was $17.1
million, leaving $32.9 million available for additional borrowings at June 30,
2001. The Company was in compliance with the various covenants at June 30,
2001.
See Note 11 for subsequent increases in available line of credit.
23
SCANSOURCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended June 30, 1999, 2000 and 2001
(3) Long-term Debt
Long-term debt consists of the following at June 30, 2000 and 2001:
June 30, June 30,
2000 2001
---------- ----------
Note payable to a bank, secured by distribution center
land and building (net book value of $6,747,000 at
June 30, 2001); monthly payments of principal and
interest of $65,000; 6.19% variable interest rate;
maturing in 2005..................................... $ -- $7,168,000
Note payable to a bank, secured by office, land and
building (net book value of $3,151,000 at June 30,
2001); monthly payments of principal and interest of
$15,000; 9.19% fixed interest rate; maturing in
2006................................................. 1,673,000 1,646,000
Note payable to a bank, secured by motor coach (net
book value of $513,000 at June 30, 2001); monthly
payments of principal and interest of $7,000; 6.19%
variable interest rate; maturing in 2006............. -- 496,000
---------- ----------
1,673,000 9,310,000
Less current portion.................................. 26,000 444,000
---------- ----------
$1,647,000 $8,866,000
========== ==========
The note payable secured by the distribution center contains certain
financial covenants, including minimum net worth, capital expenditure limits,
a maximum debt to tangible net worth ratio, and the payment of dividends is
prohibited. The Company was in compliance with the various covenants at June
30, 2001.
The fair value of long-term debt is estimated by discounting the scheduled
payment streams to present value based on current rates for similar
instruments and was approximately $1,717,000 and $9,501,000 at June 30, 2000
and 2001, respectively.
Scheduled maturities of long-term debt at June 30, 2001 are as follows:
2002.............................................................. $ 444,000
2003.............................................................. 474,000
2004.............................................................. 505,000
2005.............................................................. 538,000
2006.............................................................. 5,879,000
Thereafter........................................................ 1,470,000
----------
Total............................................................. $9,310,000
==========
(4) Stock Options and Earnings Per Share
(a) Stock Option Plans:
. The 1993 Incentive Stock Option Plan reserved 280,000 shares of common
stock for issuance to key employees. The plan provides for three-year
vesting of the options at a rate of 33%
24
SCANSOURCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended June 30, 1999, 2000 and 2001
annually. The options are exercisable over 10 years, and options are not
to be granted at less than the fair market value of the underlying
shares at the date of grant.
. The Non-Employee Director Stock Option Plan reserved 100,000 shares of
common stock for issuance to non-employee directors, and provides for
vesting six months after grant date and an option term of 10 years.
Options under this plan are automatically granted at fair market value
for 5,000 shares of common stock per director on the day following the
annual meeting of shareholders.
. The amended 1997 Stock Incentive Plan reserved 600,000 shares of stock
for issuance to officers, directors, employees, consultants or advisors
to the Company. This plan provides for incentive stock options,
nonqualified options, stock appreciation rights and restricted stock
awards to be granted at exercise prices to be determined by the
Compensation Committee of the Board of Directors. The term of each
option is 10 years from the grant date.
A summary of stock option activity for the years ended June 30, 1999, 2000
and 2001 is as follows:
Weighted- Weighted- Weighted-
Average Average Average
1999 Exercise 2000 Exercise 2001 Exercise
Shares Price Shares Price Shares Price
-------- --------- -------- --------- -------- ---------
Options outstanding:
Beginning of year...... 731,483 $14.51 754,534 $14.70 823,208 $18.50
Granted................ 445,000 15.90 187,439 30.70 124,415 39.95
Exercised.............. (150,202) 4.61 (105,864) 13.16 (100,039) 14.66
Terminated............. (271,747) 17.43 (12,901) 16.40 (26,202) 18.57
-------- -------- --------
End of year............ 754,534 14.70 823,208 18.50 821,382 22.23
======== ======== ========
Exercisable, end of
year................... 358,117 $13.60 446,181 $15.18 527,594 $18.09
======== ======== ========
The following table summarizes information about stock options outstanding
under the plans at June 30, 2001:
Options Outstanding Options Exercisable
------------------------------------------------ ---------------------------
Weighted-
Average Weighted-
Remaining Average
Range of Number Contractual Number Exercise
Exercise Prices Outstanding Life Exercisable Price
--------------- ----------- ----------- ----------- ---------
$8.63-15.38 274,653 5.77 years 231,727 $13.04
16.50-21.13 279,062 6.20 years 227,550 17.30
25.00-33.63 106,502 8.49 years 34,652 33.00
35.38-54.75 161,165 9.26 years 33,665 42.80
------- -------
821,382 527,594
======= =======
25
SCANSOURCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended June 30, 1999, 2000 and 2001
(b) Fair Value and Pro Forma Information
The pro forma fair value of stock options granted by the Company has been
estimated at the date of grant using the Black Scholes option-pricing model
with the following weighted-average assumptions:
Weighted-Average Assumptions 1999 2000 2001
---------------------------- -------- -------- --------
Risk-free interest rate...................... 4.8% 6.2% 5.3%
Expected dividend yield...................... 0.0% 0.0% 0.0%
Expected volatility factor................... 41.7% 62.8% 75.7%
Expected life................................ 10 years 10 years 10 years
Per Share Weighted-Average
--------------------------
Pro forma fair value of stock options
granted..................................... $ 9.65 $ 25.09 $ 31.98
The Company applies APB Opinion No. 25 in accounting for its stock options
and, accordingly, no compensation cost has been recognized for its stock
options in the financial statements. Had the Company determined compensation
cost based on the fair value at the grant date for stock options in its Plan
under SFAS No. 123, the Company's net income and earnings per share would have
been reduced to the pro forma amounts indicated below:
1999 2000 2001
---------- ----------- -----------
Net income........... As Reported $7,470,000 $13,785,000 $16,464,000
========== =========== ===========
Pro forma $6,580,000 $11,883,000 $14,262,000
========== =========== ===========
Earnings per share:
Basic............... As Reported $ 1.37 $ 2.48 $ 2.90
========== =========== ===========
Pro forma $ 1.21 $ 2.14 $ 2.51
========== =========== ===========
Diluted............. As Reported $ 1.32 $ 2.31 $ 2.69
========== =========== ===========
Pro forma $ 1.16 $ 1.99 $ 2.34
========== =========== ===========
Pro forma net income reflects only options granted during the years ended
June 30, 1999, 2000 and 2001. Therefore, the full impact of calculating
compensation cost for stock options under SFAS No. 123 is not reflected in the
net income above because compensation cost is reflected over the options'
vesting period of 3 years for options issued under the incentive stock option
plans.
(c) Stock Options of Subsidiary
The Company's majority-owned subsidiary, ChannelMax, has reserved 500,000
shares of ChannelMax common stock for issuance to its officers, directors,
employees, consultants or advisors under the ChannelMax, Inc. 2000 Stock
Option Plan. This plan provides for incentive stock options and nonqualified
options to be granted at exercise prices to be determined by its Board of
Directors or a Committee designated by its Board of Directors, though
incentive stock options are not to be granted at less than the fair market
value of the underlying shares at the date of grant. The term of each option
will not be greater than 10 years from the grant date.
26
SCANSOURCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended June 30, 1999, 2000 and 2001
A summary of stock option activity for the years ended June 30, 2000 and
2001 is as follows:
Weighted- Weighted-
Average Average
2000 Exercise 2001 Exercise
Shares Price Shares Price
------- --------- ------- ---------
Options outstanding:
Beginning of year........................ -- 117,000 $0.53
Granted.................................. 117,000 $0.53 234,250 $0.71
------- -------
End of year.............................. 117,000 $0.53 351,250 $0.65
======= =======
Exercisable, end of year................. -- 78,083 $0.71
======= =======
If all of the ChannelMax, Inc. stock options outstanding at June 30, 2001
were exercised, the Company's ownership percentage in ChannelMax, Inc. would
be reduced from 95% to approximately 77%. The proforma effect on net income
and earnings per share, if these options had been accounted for under SFAS No.
123, would have been insignificant in 2000 and 2001.
(d) Earnings Per Share Reconciliation
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.
Per
Share
Income Shares Amount
----------- --------- ------
1999:
Basic earnings per share...................... $ 7,470,000 5,460,000 $1.37
=====
Effect of dilutive stock options.............. -- 201,000
----------- ---------
Diluted earnings per share.................... $ 7,470,000 5,661,000 $1.32
=========== ========= =====
2000:
Basic earnings per share...................... $13,785,000 5,556,000 $2.48
=====
Effect of dilutive stock options.............. -- 413,000
----------- ---------
Diluted earnings per share.................... $13,785,000 5,969,000 $2.31
=========== ========= =====
2001:
Basic earnings per share...................... $16,464,000 5,683,000 $2.90
=====
Effect of dilutive stock options.............. -- 441,000
----------- ---------
Diluted earnings per share.................... $16,464,000 6,124,000 $2.69
=========== ========= =====
27
SCANSOURCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended June 30, 1999, 2000 and 2001
(5) Income Taxes
Income tax expense (benefit) attributable to income before income taxes
consists of:
Current Deferred Total
----------- ----------- -----------
Year ended June 30, 1999:
U.S. Federal......................... $ 6,298,000 $(2,406,000) $ 3,892,000
State and local...................... 864,000 (364,000) 500,000
----------- ----------- -----------
$ 7,162,000 $(2,770,000) $ 4,392,000
=========== =========== ===========
Year ended June 30, 2000:
U.S. Federal......................... $10,661,000 $(3,169,000) $ 7,492,000
State and local...................... 1,437,000 (480,000) 957,000
----------- ----------- -----------
$12,098,000 $(3,649,000) $ 8,449,000
=========== =========== ===========
Year ended June 30, 2001:
U.S. Federal......................... $ 9,906,000 $(1,047,000) $ 8,859,000
State and local...................... 1,378,000 (144,000) 1,234,000
----------- ----------- -----------
$11,284,000 $(1,191,000) $10,093,000
=========== =========== ===========
A reconciliation of the U.S. Federal income tax expense statutory rate of
35% to the effective income tax expense is as follows:
1999 2000 2001
---------- ---------- -----------
U.S. Federal income tax at statutory
rate.................................. $4,152,000 $7,782,000 $ 9,295,000
Increase (decrease) in income taxes due
to:
State and local income taxes, net of
Federal income tax benefit........... 325,000 622,000 802,000
Other................................. (85,000) 45,000 (4,000)
---------- ---------- -----------
$4,392,000 $8,449,000 $10,093,000
========== ========== ===========
The tax effects of temporary differences that give rise to significant
portions of the deferred tax asset at June 30, 2000 and 2001 are presented
below:
2000 2001
---------- ----------
Deferred tax assets derived from:
Allowance for doubtful accounts.................... $2,171,000 $2,571,000
Reserve for inventories............................ 5,978,000 6,616,000
Nondeductible accrued expenses..................... 483,000 713,000
Timing of amortization deduction for intangible
assets............................................ 95,000 35,000
Timing of depreciation deduction for plant and
equipment......................................... 49,000 32,000
---------- ----------
Net deferred tax asset........................... $8,776,000 $9,967,000
========== ==========
Current deferred tax asset........................... $8,632,000 $9,904,000
Non-current deferred tax asset (included in other
assets)............................................. 144,000 63,000
---------- ----------
$8,776,000 $9,967,000
========== ==========
28
SCANSOURCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended June 30, 1999, 2000 and 2001
As of June 30, 2000 and 2001, no valuation allowance has been provided.
Management believes that a valuation allowance is not necessary based upon the
level of historical taxable income and the projections for future taxable
income over the periods during which the temporary differences are deductible.
(6) Commitments and Contingencies
The Company leases office space under noncancelable operating leases, which
expire through June 2006. The Company also leases a portion of its building to
third parties under noncancelable operating leases which expire through March
2004. Future minimum lease payments and rental income are as follows:
Rental
Payments Income
---------- --------
June 30:
2002................................................... $ 441,000 $138,000
2003................................................... 340,000 67,000
2004................................................... 270,000 12,000
2005................................................... 157,000 --
2006................................................... 11,000 --
---------- --------
$1,219,000 $217,000
========== ========
Lease expense was approximately $759,000, $724,000 and $835,000 for the
years ended June 30, 1999, 2000 and 2001, respectively. Rental income was
approximately $331,000, $263,000 and $303,000 for the years ended June 30,
1999, 2000 and 2001, respectively.
Contractual obligations to purchase warehouse management and customer
relationship management software amounted to approximately $818,000 at June
30, 2001.
The Company owns an equity interest in a limited liability company for
which it has guaranteed debt up to approximately $525,000.
A majority of the Company's net revenues in 1999, 2000 and 2001 were
received from the sale of products purchased from the Company's top ten
vendors. The Company has entered into written distribution agreements with
substantially all of its major vendors. While the Company's agreements with
most of its vendors contain standard provisions for periodic renewals, these
agreements generally permit termination by either party without cause upon 30
to 120 days notice.
The Company or its subsidiaries are from time to time parties of lawsuits
arising out of operations. Although there can be no assurance, based upon
information known to the Company, the Company believes that any liability
resulting from an adverse determination of such lawsuits would not have a
material adverse effect on the Company's financial condition or results of
operations.
29
SCANSOURCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended June 30, 1999, 2000 and 2001
(7) Employee Benefit Plan
The Company has a defined contribution plan under Section 401(k) of the
Internal Revenue Code, which covers all employees meeting certain eligibility
requirements. For the years ended June 30, 1999, 2000 and 2001, the Company
provided a matching contribution of $160,000, $148,000 and $205,000,
respectively, which was equal to one-half of each participant's contribution,
up to a maximum matching contribution per participant of $800 for 1999, 2000
and 2001. The Company determines its matching contributions annually and can
make discretionary contributions in addition to matching contributions. In
fiscal 2001, the Company made a discretionary profit-sharing contribution of
approximately $1.6 million to qualifying employees' 401(k) accounts in an
amount equal to approximately 8% of their salary for fiscal 2001. Also in
fiscal 2001, the Company provided for an additional discretionary contribution
of approximately $800,000 to participant 401(k) accounts. Employer
contributions are vested over a period of 3 to 5 years.
(8) Segment Information
The Company sells only in the United States and Canada. Its sales to Canada
were $11,953,000, $19,489,000 and $16,129,000 for the three years ended June
30, 1999, 2000 and 2001, respectively.
Prior to April 2000, the Company operated within a single reportable
segment, value-added distribution. However, in the fourth quarter of fiscal
2000, the Company created its second business unit, an e-logistics unit called
ChannelMax.
The first reportable segment, valued-added distribution, offers
approximately 18,000 products for sale in two primary categories: i) automatic
data capture and point-of-sale equipment sold by the ScanSource sales team and
ii) business telephones and computer telephony integration devices sold by the
Catalyst Telecom sales team. These products are sold to more than 11,000
resellers and integrators of technology products, who are geographically
disbursed over North America in a pattern that mirrors population
concentration. Of its customers, no single account represented more than 5% of
the Company's net sales in 2001 and its largest accounts receivable amount was
5.1% of total accounts receivable at June 30, 2001.
The second 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 15 customers, the largest of whom
accounted for less than 5% of total Company sales at June 30, 2001 and 9.3% of
total accounts receivable at June 30, 2001. Certain e-logistics sales are
recognized on a net revenue recognition basis (see Note 1).
Beginning in 2001, the Company evaluates segment performance based on
operating income. Segment results for 1999 and 2000 have been restated to
conform to the current-year presentation. Intersegment sales consist primarily
of fees charged by the e-logistics segment to the value-added distribution
segment. All intersegment revenues and profits are eliminated in the
accompanying consolidated financial statements.
30
SCANSOURCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended June 30, 1999, 2000 and 2001
Accounts receivable, a portion of inventories, and distribution center
property and equipment can be identified by segment but cash, other current
assets, other property and equipment and other noncurrent assets are not
distinguishable between business segments.
Operating results for each business unit are summarized below with
historical data for 1999 and 2000 restated to conform to the new
organizational structure:
1999 2000 2001
------------ ------------ ------------
Sales:
Value-added distribution......... $271,901,000 $452,072,000 $562,251,000
E-logistics...................... 29,215,000 53,143,000 77,213,000
Less intersegment sales.......... (3,399,000) (7,794,000) (8,720,000)
------------ ------------ ------------
$297,717,000 $497,421,000 $630,744,000
============ ============ ============
Operating income:
Value-added distribution......... $ 11,907,000 $ 20,595,000 $ 25,955,000
E-logistics...................... 322,000 2,278,000 2,843,000
------------ ------------ ------------
$ 2,229,000 $ 22,873,000 $ 28,798,000
============ ============ ============
Capital expenditures:
E-logistics...................... $ -- $ 8,732,000 $ 3,210,000
Corporate........................ 2,081,000 4,846,000 4,409,000
------------ ------------ ------------
$ 2,081,000 $ 13,578,000 $ 7,619,000
============ ============ ============
Depreciation and amortization:
E-logistics...................... $ -- $ 160,000 $ 934,000
Corporate........................ 1,256,000 2,518,000 3,500,000
------------ ------------ ------------
$ 1,256,000 $ 2,678,000 $ 4,434,000
============ ============ ============
Assets:
Value-added distribution......... $ 93,056,000 $168,637,000 $202,032,000
E-logistics...................... 8,731,000 21,040,000 45,693,000
Corporate........................ 23,940,000 16,203,000 39,446,000
------------ ------------ ------------
$125,727,000 $205,880,000 $287,171,000
============ ============ ============
(9) Acquisition
In May 2001, the Company's distribution segment purchased, at an auction
conducted by the U.S. Bankruptcy Court, the operating assets of a business
telephone distributor for approximately $17.3 million in cash. 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. 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, the ultimate determination of the fair value of the net assets
acquired is not expected to have a significant effect on the Company's
financial position or future results of operations.
31
SCANSOURCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended June 30, 1999, 2000 and 2001
The following unaudited pro forma financial information shows the results
of operations of the Company as though the acquisition had occurred as of July
1, 1999 or 2000, respectively. The unaudited pro forma financial information
presented below does not purport to be indicative of the results of operations
had the acquisition been consummated as of July 1, 1999 or July 1, 2000 or of
the future results of operations of the combined businesses:
2000 2001
-------- --------
Amounts in thousands, except per share data (Unaudited)
Net sales................................................. $606,782 $723,241
Net income................................................ $ 16,947 $ 18,387
Basic earnings per share.................................. $ 3.05 $ 3.24
Diluted earnings per share................................ $ 2.84 $ 3.00
(10) Related Party Transactions
An officer of the Company is indebted to the Company under the terms of a
secured loan to him, with an outstanding balance of approximately $231,000 and
$333,000 at June 30, 2000 and 2001, respectively. The loan is included in
other noncurrent assets in the accompanying consolidated balance sheets. The
loan bears interest at 6.5%, with principal and interest due to be repaid in
August 2002.
(11) Subsequent Events
In July 2001, the Company closed on a new line of credit with its bank
group extending to September 2003 with a borrowing limit of $80 million with
pricing tied to the Company's funded debt to earnings before interest, taxes,
depreciation and amortization, under terms similar to the agreement in place
at June 30, 2001.
In July 2001, the Company's distribution segment purchased the operating
assets of a distributor of automatic data capture products for approximately
$15 million in cash. 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
acquisition. The allocation of the purchase price to the fair value of net
assets acquired has not been completed. However, preliminary estimates
indicate that approximately $4 million of goodwill will result from the
acquisition.
32
Independent Auditors' Report
The Board of Directors
ScanSource, Inc.:
We have audited the accompanying consolidated balance sheet of ScanSource,
Inc. and subsidiaries as of June 30, 2001, and the related consolidated
statements of income, shareholders' equity, and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
ScanSource, Inc. and subsidiaries as of June 30, 2001, and the results of
their operations and their cash flows for the year then ended, in conformity
with accounting principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Greenville, South Carolina
August 13, 2001
33
Independent Auditors' Report
The Board of Directors
ScanSource, Inc.:
We have audited the accompanying consolidated balance sheets of ScanSource,
Inc. and subsidiaries as of June 30, 2000 and the related consolidated
statements of income, shareholders' equity and cash flows for each of the
years in the two-year period ended June 30, 2000. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
ScanSource, Inc. and subsidiaries as of June 30, 2000 and the results of their
operations and their cash flows for each of the years in the two-year period
ended June 30, 2000, in conformity with accounting principles generally
accepted in the United States of America.
KPMG LLP
Greenville, South Carolina
August 16, 2000
34
Management's Statement of Responsibility
The management of ScanSource is responsible for the information contained
in the financial statements and other parts of this report. The accompanying
consolidated financial statements of ScanSource, Inc. and subsidiaries have
been prepared in accordance with accounting principles generally accepted in
the United States of America. In preparing these statements, management has
made judgments based upon available information. To ensure that this
information will be as accurate and factual as possible, management has
communicated to all appropriate employees the requirements for accurate
recordkeeping and accounting.
The Company maintains a system of internal accounting controls designed to
provide reasonable assurances for the safeguarding of assets and the
reliability of financial records. The system is subject to continuous review
with appropriate management follow-up action. Management believes that through
the careful selection of employees, the division of responsibilities and the
application of formal policies and procedures, the Company has an effective
and responsible system of internal accounting controls.
The Company's independent accountants are responsible for conducting an
audit of the Company's consolidated financial statements in accordance with
auditing standards generally accepted in the United States of America and for
expressing their opinion as to whether these consolidated financial statements
present fairly, in all material respects, the financial position, results of
operations and cash flows of the Company and its subsidiaries in conformity
with accounting principles generally accepted in the United States of America.
There is an Audit Committee of the Board of Directors composed of three
nonemployee directors who meet regularly with management and the independent
accountants to discuss specific accounting, reporting and internal control
matters. The independent accountants have full and free access to the Audit
Committee.
35
Price Range of Common Stock
The Company's Common Stock is quoted on The Nasdaq National Market under
the symbol "SCSC." The following table sets forth, for the periods indicated,
the high and low closing prices of the Common Stock on The Nasdaq National
Market.
High Low
------ ------
Fiscal Year 2000
First quarter.............................................. $31.38 $22.00
Second quarter............................................. 45.13 25.00
Third quarter.............................................. 48.00 34.88
Fourth quarter............................................. 38.88 26.25
Fiscal Year 2001
First quarter.............................................. 67.63 37.63
Second quarter............................................. 59.75 35.50
Third quarter.............................................. 40.98 30.94
Fourth quarter............................................. 58.25 28.06
On August 31, 2001, there were approximately 5,000 record and known
beneficial holders of Common Stock.
Dividend Policy
The Company has never declared or paid cash dividends on its Common Stock.
Under the terms of the Company's revolving credit facility, the payment of
cash dividends is prohibited.
36
Board of Directors
Steven H. Owings
Chairman
Michael L. Baur
President &
Chief Executive Officer
Steven R. Fischer
President
Transamerica Business
Capital Corporation
James G. Foody
Business Consultant
John P. Reilly
Managing Partner
Keltic Financial
Services LLC
Management Team
Steven H. Owings
Chairman
Michael L. Baur
President and
Chief Executive Officer
R. Travis Collins
Chief Executive Officer -
ChannelMax
John K. Black
President -
Catalyst Telecom
Jeffery A. Bryson
Chief Financial Officer
and Treasurer
Robert S. McLain, Jr.
Vice President -
Marketing
Glen D.
(Buck) Baker
Vice President -
Merchandising
R. Scott Benbenek
Vice President -
Merchandising
Farrar R. Pittman
Vice President - Sales
& Merchandising
Sharon M. Huffman
Vice President - Sales
William T. Mauldin
Vice President -
Operations
William D. Dueger
Vice President -
European Sales
Gregory B. Dixon
Chief Technology Officer
Stock Listing
The Company's Stock is traded on
The Nasdaq National Market under
the symbol SCSC.
General Counsel
Alston & Bird LLP
Charlotte, North Carolina
Transfer Agent
First Union National Bank
Charlotte, North Carolina
Independent Accountants
Deloitte & Touche LLP
Greenville, South Carolina
Shareholder Inquiries
ScanSource, Inc., welcomes inquiries from its shareholders and other interested
investors. For further information or a copy of SEC form 10K, contact our
Investor Relations Department at (800) 944-2439, ext. 4375, or by e-mail at
investor@scansource.com.
Annual Meeting
The annual meeting of shareholders
of the Company will be held at
10:00 a.m. on December 6 at the
GSP Airport Marriott, 1 Parkway East,
Greenville, South Carolina.
Corporate Headquarters
Greenville, South Carolina
864-288-2432
Professional Services Group
Norcross, Georgia
800-292-3631
Sales Offices
Lake Forest, California
800-944-2432
Bellingham, Washington
800-830-2422
Cranford, New Jersey
908-931-1212
Richmond, British Columbia
604-303-9711
Buffalo, New York
800-944-2432
Tempe, Arizona
800-790-2029
Mexico City, Mexico
011-525-5406-111
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