Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
(Mark One)
{x} Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities Exchange
Act of 1934 for the Quarterly Period Ended September 30, 1996
or
{ } Transition Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 for the transition period from ___________________ to
____________________
Commission file number 1-12842
ScanSource, Inc.
(Exact name of small business issuer as specified in its charter)
South Carolina 57-0965380
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporated or organization)
6 Logue Court, Suite G
Greenville, SC 29615
- --------------------------------------- -----------------------
(Address of principal executive (Zip Code)
offices)
(864) 288-2432
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
As of September 30, 1996, 3,246,986 shares of the registrant's common stock, no
par value, were outstanding.
This report contains 12 pages. The exhibit index begins on sequentially
numbered page 10.
<PAGE>
SCANSOURCE, INC.
INDEX
FORM 10-Q
September 30, 1996
PART I. FINANCIAL INFORMATION Page No.
Item 1. Financial Statements (Unaudited).................... 2
Condensed Balance Sheets............................ 2
Condensed Income Statements......................... 4
Condensed Statements of Cash Flows.................. 5
Notes to Condensed Financial Statements............. 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............. 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................... 10
Item 2. Changes in Securities............................... 10
Item 3. Defaults Upon Senior Securities..................... 10
Item 4. Submission of Matters to a Vote of Security-Holders. 10
Item 5. Other Information................................... 10
Item 6. Exhibits and Reports on Form 8-K.................... 10
SIGNATURES................................................................. 11
EXHIBIT 27.................................................................. 12
1
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SCANSOURCE, INC.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, June 30,
Assets 1996 1996
(Note 1) (Note 1)
(Unaudited)
<S> <C> <C>
Current assets
Cash....................................................$ -- --
Receivables:
Trade, less allowance for doubtful accounts of
$637,280 at September 30, 1996 and
$526,819 at June 30, 1996....................... 7,865,542 7,462,791
Other................................................... 493,515 531,444
--------------- --------------
8,359,057 7,994,235
Inventories............................................. 22,518,026 17,538,471
Prepaid expenses and other.............................. 85,168 51,898
Deferred tax asset...................................... 1,001,000 1,001,000
------------- -------------
Total current assets............................... 31,963,251 26,585,604
Property and equipment, net............................. 1,314,354 1,183,786
Intangible assets, net.................................. 850,127 870,771
Note from officer....................................... 83,000 83,000
Other assets............................................ 142,355 19,332
-------------- -----------
Total assets....................................... $34,353,087 $28,742,493
=========== ===========
</TABLE>
See notes to condensed financial statements.
2
<PAGE>
SCANSOURCE, INC.
CONDENSED BALANCE SHEETS (Continued)
<TABLE>
<CAPTION>
September 30, June 30,
Liabilities and Shareholders' Equity 1996 1996
------------------------------------ ------------- ------------
(Note 1) (Note 1)
(Unaudited)
<S> <C> <C>
Current liabilities:
Trade accounts payable.............................. $14,122,622 8,286,964
Accrued compensation cost........................... 154,102 96,978
Accrued expenses and other liabilities.............. 549,021 600,388
Income tax payable.................................. 153,195 539,646
------------ ------------
Total current liabilities....................... 14,978,940 9,523,976
Deferred tax liability................................... 26,000 26,000
Line of credit........................................... 3,358,352 3,779,029
------------ ------------
Total liabilities.............................. 18,363,292 13,329,005
Shareholders' equity:
Preferred stock, no par value; 3,000,000 shares
authorized, none issued and outstanding........ -- --
Common stock, no par value; 10,000,000 shares
authorized, 3,246,986 and 3,235,186 issued and
outstanding at September 30, 1996 and
June 30, 1996, respectively.................... 11,935,375 11,935,424
Retained earnings................................... 4,054,420 3,478,064
------------ ------------
Total shareholders' equity..................... 15,989,795 15,413,488
------------ ------------
Total liabilities and shareholders' equity...... $34,353,087 28,742,493
=========== ============
</TABLE>
See notes to condensed financial statements.
3
<PAGE>
SCANSOURCE, INC.
CONDENSED INCOME STATEMENTS (UNAUDITED)
Three Months Ended
September 30,
1996 1995
---- ----
Net sales.........................................$19,672,687 10,788,176
Cost of goods sold................................ 16,974,649 9,211,547
----------- -----------
Gross profit ............................ 2,698,038 1,576,629
Selling, general and administrative expenses ..... 1,666,748 1,052,748
Amortization of intangibles ...................... 20,644 20,644
----------- -----------
Operating income ........................ 1,010,646 503,237
Other income (expense):
Interest income ............................. 1,210 5,124
Interest expense ............................ (57,347) (8,906)
Other income expense, net (note 3) ......... (25,353) 197,632
----------- -----------
Total other income (expense) ............ (81,490) 193,850
----------- -----------
Income before income taxes .............. 929,156 697,087
Income taxes ..................................... 352,800 274,000
----------- -----------
Net income..............................$ 576,356 423,087
=========== ===========
Per share data:
Primary
Net income...............................$ .17 .13
=========== ===========
Weighted average shares outstanding ..... 3,454,926 3,409,709
=========== ===========
Fully diluted
Net income............................... $ .17 .13
=========== ===========
Weighted average shares outstanding ..... 3,462,384 3,411,513
=========== ===========
See notes to condensed financial statements.
4
<PAGE>
SCANSOURCE, INC.
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
1995 1996
<S> <C> <C>
Net cash provided by (used in) operating activities............$ 631,173 (1,668,846)
Cash flows from investing activities:
Capital expenditures, net ................................. (210,447) (109,917)
Payments to MicroBiz ...................................... -- (37,500)
--------- ----------
Net cash used in investing activities ............ (210,447) (147,417)
Cash flows from financing activities:
Advances (repayments) on line of credit, net .............. (420,677) (1,200,000)
Net proceeds from issuance of stock upon:
Exercise of purchase warrants prior to redemption ..... -- 6,333,379
Exercise of stock options ............................. -- 35,740
Other ..................................................... (49) --
--------- ----------
Net cash provided by (used in) financing activities ... (420,726) 5,169,119
--------- ----------
Increase (decrease) in cash ........................... -- 3,352,856
Cash at beginning of period .................................... -- 186,572
--------- ----------
Cash at end of period..........................................$ -- 3,539,428
========= ==========
</TABLE>
See note to condensed financial statements.
5
<PAGE>
SCANSOURCE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The interim financial information included herein is unaudited. Certain
information and footnote disclosures normally included in the financial
statements have been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission (SEC), although the
Company believes that the disclosures made are adequate to make the
information presented not misleading. These financial statements should be
read in conjunction with the financial statements and related notes
contained in the Company's annual report on Form 10- KSB for the period
ended June 30, 1996. Other than as indicated herein, there have been no
significant changes from the financial data published in that report. In
the opinion of management, such unaudited information reflects all
adjustments, consisting only of normal recurring accruals and other
adjustments as disclosed herein, necessary for a fair presentation of the
unaudited information.
Results for interim periods are not necessarily indicative of results
expected for the full year.
The balance sheet for June 30, 1996, has been derived from the audited
balance sheet for that date.
(2) SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION - The Company records revenue when products are
shipped.
INVENTORIES - Inventories consisting of point of sale and bar code
equipment are stated at the lower of cost (first-in, first-out method) or
market.
(3) AGREEMENT WITH GATES/FA DISTRIBUTING, INC.
As compensation for terminating an operations agreement with the Company
and reducing the term of a non-compete agreement, Gates/FA Distributing
Inc. (Gates/FA) agreed to pay the Company $1.4 million. The Company
recognized the $1.4 million, net of $100,000 of related expenses, as other
income in the income statement ratably over the remaining term of the
non-compete agreement from September 1994 to August 1995. Therefore
$200,000 of this amount is shown as other income in the three month period
ended September 30, 1995.
6
<PAGE>
(4) LINE OF CREDIT
On October 26, 1995 the Company closed a line of credit agreement with a
bank whereby the Company can borrow up to $8 million, based upon 80% of
eligible accounts receivable and 40% of non-IBM inventory, at the 30 day
Libor rate of interest, plus 2.35%. The revolving credit is secured by
accounts receivable and inventory. The outstanding balance on the line of
credit was approximately $3,358,000 on a loan base which exceeded $8
million, leaving approximately $4,642,000 available at September 30, 1996.
The Company has accepted a commitment from the bank to renew the line of
credit under terms similar to its existing agreement for amounts up to $15
million to October 31, 1998.
7
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
NET SALES. Net sales for the quarter ended September 30, 1996 were
$19,673,000 compared to sales of $10,788,000 for the comparable prior year
quarter. Growth of net sales resulted primarily from additions to the Company's
sales force, competitive product pricing, selective expansion of its product
line, and increased marketing efforts to automatic identification (Auto ID) and
point of sale (POS) resellers.
GROSS PROFIT. Gross profit for the quarter ended September 30, 1996 was
$2,698,000 compared to gross profit of $1,577,000 for the comparable prior year
quarter. Gross profit as a percentage of sales for the quarter ended September
30, 1996 was 13.7% compared to14.6% for the comparable prior year period.
Fluctuations in gross profit as a percentage of sales are a result of changes in
the mix of sales of higher and lower-margin products and the volume discounts
which accompany large customer orders.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses, including amortization, (SG&A) for the quarter ended
September 30, 1996 was $1,687,000 compared to SG&A of $1,073,000 for the
comparable prior year period. SG&A as a percentage of sales was 8.6% for the
quarter ended September 30, 1996, compared to 9.9% for the comparable prior year
period. Generally, lower gross margin sales require the Company to provide fewer
value-added services causing a corresponding decrease in SG&A.
OPERATING INCOME. Operating income for the quarter ended September 30,
1996 increased to $1,011,000 from $503,000 for the same period in 1995, driven
by the improvement in gross profit as described above.
INTEREST EXPENSE. Interest expense for the quarter ended September 30,
1996 increased to $57,000 from $9,000 for the quarter ended September 30, 1995.
Higher interest resulted from the Company's use of its line of credit to fund
growth in receivables and inventory.
OTHER INCOME (EXPENSE). In September 1994 Gates/FA agreed to pay the
Company $1.4 million in connection with a reduction in the term of Gates/FA's
non-compete obligation with the Company. The Company recognized the $1.4
million, net of $100,000 of related expenses, as other income ratably over the
term of the non-compete period from September 1994 to August 1995. Accordingly,
$200,000 was recognized as other income for the quarter ended September 30,
1996.
8
<PAGE>
INCOME TAXES. Tax expense was provided at a 38% effective rate for the
quarter ended September 30, 1996, and represented the state and federal taxes
expected to be due after annualizing income to June 30, 1997.
NET INCOME. The effect of improved operating income, net of higher
interest expense, resulted in net income for the quarter ended September 30,
1996 of $576,000.
LIQUIDITY AND CAPITAL RESOURCES
The Company financed its initial operating requirements and growth
through private financings. In March 1994, the Company closed a public offering
of common stock and common stock purchase warrants which provided the Company
with approximately $4,560,000. The Company also received proceeds of
approximately $6,340,000 from common stock issued upon the exercise of stock
purchase warrants prior to their redemption date in September 1995.
For the quarter ended September 30, 1996, net cash of $631,000 was
provided by operating activities, compared to $1,669,000 used in operating
activities for the quarter ended September 30, 1995. Greater cash provided by
operations was primarily from growth in trade payables to vendors which exceeded
the funding required by higher inventory and receivables.
Cash used in investing activities of $210,000 for the quarter ended
September 30, 1996 was primarily for capital expenditures. Cash used in
investing activities for the quarter ended September 30, 1995 was $147,000 and
consisted of $110,000 for capital expenditures and payments to MicroBiz
Corporation for $37,500.
Cash used in financing activities for the quarter ended September 30,
1996 included $421,000 paid on the line of credit. Cash provided by financing
activities for the quarter ended September 30, 1995 included net proceeds of
$6,333,000 and $36,000 from the issuance of stock upon the exercise of stock
purchase warrants and employee stock options, respectively. A portion of these
proceeds was used to repay the Company's line of credit for $1.2 million. In
October 1995 the line of credit was renegotiated to $8 million based upon and
collateralized by accounts receivable and non-IBM inventory. The line had an
outstanding balance at September 30, 1996 of $3,358,000 on a loan base exceeding
$8 million, which left $4,642,000 available.
The Company's current ratios at September 30, 1996 and at June 30, 1996
were 2.13 and 2.79, respectively.
9
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
Not applicable.
Item 2. Changes in Securities.
Not applicable.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security-Holders.
None
Item 5. Other information.
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit 27 - Financial Data Schedule - Page 12
(b) Reports on Form 8-K
None
10
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SCANSOURCE, INC.
/s/ Steven H. Owings
STEVEN H. OWINGS
Chief Executive Officer
/s/ Jeffery A. Bryson
JEFFERY A. BRYSON
Chief Financial Officer
Date: November 14, 1996
11
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> SEP-30-1996
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 7,865,542
<ALLOWANCES> 637,280
<INVENTORY> 22,518,026
<CURRENT-ASSETS> 31,963,251
<PP&E> 1,756,866
<DEPRECIATION> 442,512
<TOTAL-ASSETS> 34,353,087
<CURRENT-LIABILITIES> 18,363,292
<BONDS> 0
0
0
<COMMON> 11,935,375
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 34,353,087
<SALES> 19,672,687
<TOTAL-REVENUES> 19,672,687
<CGS> 16,974,649
<TOTAL-COSTS> 1,687,392
<OTHER-EXPENSES> 25,353
<LOSS-PROVISION> 138,000
<INTEREST-EXPENSE> 56,137
<INCOME-PRETAX> 929,156
<INCOME-TAX> 352,800
<INCOME-CONTINUING> 576,356
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 576,356
<EPS-PRIMARY> .17
<EPS-DILUTED> .17
</TABLE>
