<PAGE>
Conformed
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
(Mark One)
[x] Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 for the Quarterly Period Ended March 31, 1998
or
[_] Transition Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 for the transition period from ___________________ to
____________________
Commission file number 1-12842
ScanSource, Inc.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
South Carolina 57-0965380
- ------------------------------- --------------------------------------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporated or organization)
6 Logue Court, Suite G
Greenville, SC 29615
- ----------------------------------- --------------------------------------
(Address of principal executive (Zip Code)
offices)
(864) 288-2432
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Not Applicable
- -------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
------- -----
As of March 31, 1998, 5,343,527 shares of the registrant's common stock, no par
value, were outstanding.
<PAGE>
SCANSOURCE, INC.
INDEX
FORM 10-Q
March 31, 1998
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page No.
--------
<S> <C> <C>
Item 1. Consolidated Financial Statements (Unaudited)................... 2
Condensed Consolidated Balance Sheets........................... 2
Condensed Consolidated Income Statements........................ 4
Consolidated Statements of Cash Flows........................... 5
Notes to Consolidated Financial Statements...................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................. 8
Item 3. Quantitative and Qualitative Disclosures About Market
Risk............................................................ 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................... 10
Item 2. Changes in Securities and Use of Proceeds....................... 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
</TABLE>
1
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SCANSOURCE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, March 31,
1997 1998
-------- ---------
(Note 1) (Note 1)
(Unaudited)
(In thousands)
<S> <C> <C>
Assets
-------
Current assets:
Cash................................................... $ 429 1,466
Receivables:
Trade, less allowance for doubtful accounts of
$1,227,000 at June 30, 1997 and
$1,793,000 at March 31, 1998....................... 11,864 21,277
Other.................................................. 732 1,332
------- ------
12,596 22,609
Inventories............................................ 21,786 38,947
Prepaid expenses and other............................. 300 459
Deferred tax asset..................................... 1,565 1,565
------- ------
Total current assets............................... 36,676 65,046
------ ------
Property and equipment, net............................. 1,890 2,997
Intangible assets, net.................................. 788 1,234
Deferred offering cost.................................. 390 0
Other assets............................................ 524 469
----- -----
Total assets....................................... $40,268 69,746
======= ======
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
SCANSOURCE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
<TABLE>
<CAPTION>
June 30, March 31,
Liabilities and Shareholders' Equity 1997 1998
- ------------------------------------ -------- ------
(Note 1) (Note 1)
(Unaudited)
(In thousands)
<S> <C> <C>
Current liabilities:
Trade accounts payable............................. $15,045 20,608
Accrued compensation cost.......................... 214 435
Accrued expenses and other liabilities............. 664 976
Income tax payable................................. 257 --
------- ------
Total current liabilities......................... 16,180 22,019
Deferred tax liability............................. 47 47
Line of credit..................................... 5,391 --
------- ------
Total liabilities................................ 21,618 22,066
------- ------
Shareholders' equity:
Preferred stock, no par value; 3,000,000 shares
authorized, none issued and outstanding.......... -- --
Common stock, no par value; 10,000,000 shares
authorized, 3,249,183 and 5,343,527 issued and
outstanding at June 30, 1997 and
March 31, 1998, respectively..................... 12,350 38,092
Retained earnings.................................. 6,300 9,588
------- ------
Total shareholders' equity....................... 18,650 47,680
------- ------
Total liabilities and shareholders' equity........ $40,268 69,746
======= ======
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
SCANSOURCE, INC.
CONDENSED CONSOLIDATED INCOME STATEMENTS
(UNAUDITED)
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
March 31, March 31,
1997 1998 1997 1998
---- ---- ---- ----
(In thousands except per share data)
<S> <C> <C> <C> <C>
Net sales................................ $25,098 46,538 69,626 126,148
Cost of goods sold....................... 21,544 40,289 59,807 109,798
------ ------ ------ -------
Gross profit........................... 3,554 6,249 9,819 16,350
Selling, general and administrative
expenses............................... 2,311 4,329 6,314 11,038
Amortization of intangibles.............. 20 30 61 79
----- ------ ------ -------
Total operating expenses................ 2,331 4,359 6,375 11,117
----- ------ ------ -------
Operating income....................... 1,223 1,890 3,444 5,233
Other income (expense):
Interest income (expense), net........ (164) 124 (334) 237
Acquisition expense................... -- (305) -- (335)
Other income (expense), net........... (--) ( 15) (--) ( 21)
----- ------ ----- ------
Total other (expense).............. (164) (196) (334) (119)
----- ----- ----- ------
Income before income taxes............ 1,059 1,694 3,110 5,114
Income taxes............................. 376 563 1,121 1,826
----- ----- ----- ------
Net income.......................... $ 683 1,131 1,989 3,288
======= ===== ===== ======
Basic EPS
Net income per share............... $ .20 .21 .57 .72
======= ===== ===== ======
Weighted average shares outstanding 3,487 5,321 3,485 4,571
======= ===== ===== ======
Diluted EPS
Net income per share................ $ .18 .20 .54 .71
======= ===== ===== ======
Weighted average shares outstanding 3,710 5,587 3,715 4,663
======= ===== ===== =====
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
SCANSOURCE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
1997 1998
---- ----
(In thousands)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,989 3,288
Adjustments to reconcile net income
to cash used in operating activities:
Depreciation 265 547
Amortization of intangible assets 62 79
Changes in operating assets and liabilities:
Receivables (3,711) (8,075)
Other receivables (73) (600)
Inventories (6,047) (15,206)
Prepaid expenses and other (448) (146)
Accounts payable 7,848 3,567
Accrued compensation 182 221
Accrued expenses and other liabilities 155 (104)
Income tax payable (540) (257)
Other noncurrent assets (149) 55
------- -------
Net cash used in operating activities (467) (16,631)
Cash flows from investing activities:
Capital expenditures, net (600) (1,530)
Acquisition of business -- (1,100)
------- -------
Net cash used in investing activities (600) (2,630)
Cash flows from financing activities:
Proceeds from secondary offering -- 25,822
Borrowings (payments) on line of credit 1,513 (5,946)
Net proceeds from option exercises 25 32
Deferred offering cost (378) 390
------- -------
Net cash provided by financing activities 1,160 20,298
------- -------
Increase in cash 93 1,037
Cash at beginning of period 102 429
------- -------
Cash at end of period $ 195 1,466
======= =======
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
SCANSOURCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The interim financial information included herein is unaudited. Certain
information and footnote disclosures normally included in the consolidated
financial statements have been condensed or omitted pursuant to the rules
and regulations of the Securities and Exchange Commission (SEC), although
the Company believes that the disclosures made are adequate to make the
information presented not misleading. These consolidated financial
statements should be read in conjunction with the financial statements and
related notes contained in the Company's annual report on Form 10-K for the
period ended June 30, 1997. All reported amounts, including the June 30,
1997 balance sheet and all income statement and cash flow amounts have been
adjusted to reflect the pooling of The CTI Authority's financial position
and operating results for those periods. Other than as indicated herein,
there have been no significant changes from the financial data published in
that report. In the opinion of management, such unaudited information
reflects all adjustments, consisting only of normal recurring accruals and
other adjustments as disclosed herein, necessary for a fair presentation of
the unaudited information.
Results for interim periods are not necessarily indicative of results
expected for the full year, or for any subsequent period.
(2) SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition - The Company records revenue when products are
shipped.
Inventories - Inventories consisting of point of sale, bar code, and
telephony equipment are stated at the lower of cost (first-in, first-out
method) or market.
(3) LINE OF CREDIT
The Company has a line of credit agreement with a bank which extends to
October 1998 whereby the Company can borrow up to $15 million, based upon
80% of eligible accounts receivable and 40% of non-IBM inventory at the 30
day LIBOR rate of interest plus a rate varying from 2.00% to 2.65% tied to
the Company's debt to net worth ratio ranging from 1:1 to 2:1. All
outstanding debt under the line of credit was repaid in October 1997 with
proceeds from the sale of stock described in note 5, therefore the full $15
million line was available at March 31, 1998.
6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(4) ACQUISITIONS
(a) THE CTI AUTHORITY
In February 1998 the Company issued 238,830 shares of its common stock in
exchange for all outstanding stock of The CTI Authority, Inc., a distributor
of telephony products. The transaction has been accounted for as a pooling-
of-interests combination, and, accordingly, the consolidated financial
statements for the periods prior to the combination have been restated to
include the accounts and results of The CTI Authority, Inc.. The results of
operations previously reported by the separate enterprises and the combined
amounts presented in the accompanying consolidated financial statements are
summarized below.
<TABLE>
<CAPTION>
Years ended June 30, Six months ended
1996 1997 December 31, 1998
---- ---- -----------------
<S> <C> <C> <C>
Net Sales
ScanSource $55,670,000 93,922,000 74,572,000
The CTI Authority 713,000 5,916,000 5,038,000
----------- ---------- ----------
Combined $56,383,000 99,838,000 79,610,000
=========== ========== ==========
Net Income
ScanSource $ 1,858,000 2,540,000 2,059,000
The CTI Authority 48,000 233,000 98,000
----------- ---------- ----------
Combined $ 1,906,000 2,773,000 2,157,000
=========== ========= ==========
</TABLE>
(b) In September 1997 and January 1998 the Company acquired two distributors
of business telephones and point-of-sale equipment, respectively. The Company
paid $1.1 million and issued 220,513 shares of its common stock in the two
business combinations.
(5) EQUITY TRANSACTIONS
In October 1997 the Company completed a public offering of 1,538,600 shares of
common stock at $18.25 per share. Proceeds to the Company, after
approximately $578,000 of offering expenses and a $1.095 per share
underwriting discount, were approximately $25.8 million. The Company used a
portion of the offering proceeds to pay off its line of credit described in
note 3 above.
In January 1998 the Company issued 60,000 shares of its common stock in a
cashless exercise by the holders of the remaining 42,000 units of the
underwriters Unit Purchase Option.
7
<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 March 31, 1998 increased
85.3% to $46.5 million from $25.1 million for the comparable prior year quarter.
Net sales increased 81.2% to $126.1 million for the nine months ended March 31,
1998 from $69.6 million for the comparable prior year period. Growth of net
sales resulted primarily from additions to the Company's sales force,
competitive product pricing, selective expansion of its product line, and
increased marketing efforts to specialty technology resellers. Sales for all
quarters presented were increased by the effects of pooling The CTI Authority's
sales as described in note 4(a) of the consolidated financial statements.
GROSS PROFIT. Gross profit for the quarter ended March 31, 1998
increased 72.2% to $6.2 million from $3.6 million for the comparable prior year
quarter. Gross profit increased 67.3% to $16.4 million for the nine months ended
March 31, 1998 from $9.8 million for the comparable prior year period. Gross
profit as a percentage of sales for the quarter and nine months ended March 31,
1998 was 13.3% and 13.0%, respectively, compared to 14.3% and 14.1%,
respectively, for the comparable prior year periods. The decrease in gross
profit as a percentage of sales is the result of a change in the mix of sales of
more lower-margin products and the volume discounts provided to resellers on
large orders.
OPERATING EXPENSES. Operating expenses, which include selling, general and
administrative expenses and amortization, for the quarter ended March 31, 1998
increased 91.3% to $4.4 million compared to $2.3 million for the comparable
prior year period. Operating expenses for the nine months ended March 31, 1998
increased 73.4% to $11.1 million from $6.4 million for the comparable prior year
period. Operating expenses as a percentage of sales was 9.5% and 8.8%,
respectively, for the quarter and nine months ended March 31, 1998, compared to
9.2% for both of the comparable prior year periods. Generally, lower gross
margin sales require the Company to provide fewer value-added services causing a
corresponding decrease in operating expenses. The general and administrative
portion of operating expenses also decreased for the nine months ended March 31,
1998 as a percentage of sales due to efficiencies gained through increased sales
volume. Operating expenses as a percentage of sales for the quarter ended March
31, 1998 were higher than the prior year due to some duplicative costs resulting
from the acquisitions.
OPERATING INCOME. Operating income for the quarter ended March 31, 1998
increased 58.3% to $1.9 million from $1.2 million for the same period in 1997,
driven by the improvement in gross profit as described above. Operating income
increased 52.9% to $5.2 million for the nine months ended March 31, 1998 from
$3.4 million for the comparable prior year period. Operating income as a
percentage of sales was 4.1% for both the quarter and nine months ended March
31, 1998, compared to 4.8% and 4.9%, respectively, for the comparable prior year
periods.
OTHER INCOME (EXPENSE). Total other income (expense) consists of interest
income (expense), acquisition expense, and other expense. Net interest income
for the quarter and nine months ended March 31, 1998 was $124,000 and $237,000,
respectively, representing earnings from
8
<PAGE>
invested cash resulting from the Company's sale of stock in October 1997. Net
interest expense for the quarter and nine months ended March 31, 1997 of
$164,000 and $334,000, respectively, resulted from interest paid on borrowings
under the Company's line of credit. Acquisition expense includes the
nonreocurring costs associated with the Company's acquisition of The CTI
Authority and other businesses.
INCOME TAXES. Tax expense represents the state and federal tax expected
to be due after annualizing income to the fiscal year end. Tax expense was
provided at rates ranging from 33-36% reflecting the effects of the Company
combining operating results with The CTI Authority which reduced the effective
rate through March 1998. The tax rate for consolidated net income for the
periods following March 1998 is expected to be 38%.
NET INCOME. The effect of improved operating income and interest income
resulted in net income increasing 61.8% to $1.1 million for the quarter ended
March 31, 1998 from $680,000 for the year-earlier quarter. Net income for the
nine months ended March 31, 1998 increased 65.0% to $3.3 from $2.0 million for
the comparable prior year period. Net income as a percentage of sales was 2.4%
and 2.6%, respectively, for the quarter and nine months ended March 31, 1998
compared to 2.8% and 2.9%, respectively, for the comparable prior year periods.
LIQUIDITY AND CAPITAL RESOURCES
The Company financed its initial operating requirements and growth through
private financings totaling $500,000. In March 1994, the Company completed an
initial public offering of units, which consisted of common stock and warrants,
which provided the Company with approximately $4.6 million. The Company also
received proceeds of approximately $6.3 million from common stock issued upon
the exercise of stock purchase warrants prior to their redemption date in
September 1995. In October 1997 the Company completed a secondary offering of
stock which provided the Company approximately $25.8 million for general
corporate purposes, including working capital and possible acquisitions.
During the quarter ended March 31, 1998 the Company issued an aggregate of
459,343 shares of its common stock for acquisitions.
The Company has a bank line of credit agreement extending to October 31,
1998 whereby the Company can borrow up to $15 million, based upon 80% of
eligible accounts receivable and 40% of non-IBM inventory, at the 30 day LIBOR
rate of interest, plus a rate varying from 2.00% to 2.65% tied to the Company's
debt to net worth ratio ranging from 1:1 to 2:1. The revolving credit is secured
by accounts receivable and inventory. All outstanding debt under the line of
credit was repaid in October 1997 with proceeds from the sale of stock;
therefore the full $15 million line was available at March 31, 1998.
For the nine months ended March 31, 1998 net cash of $16.7 million was used
in operating activities compared to $467,000 for the nine months ended March 31,
1997. Cash used in operations was primarily from increases in receivables and
inventory partially offset by growth in trade payables. The higher inventory and
receivables for the period ended March 31, 1998 was the result of the Company's
acquisition of inventory and accounts receivable from The CTI Authority, its
stocking of a warehouse to serve the Canada market, and higher inventory to
prepare for fourth
9
<PAGE>
quarter sales opportunities.
Cash used in investing activities of $2.6 million for the nine months ended
March 31, 1998 included $1.1 million for a business acquisition and $1.5 million
for capital expenditures, including $170,000 for the Company's computer
conversion to a UNIX-based operating system. Cash used in investing activities
for the nine months ended March 31, 1997 was $600,000 for capital expenditures.
Cash provided by financing activities for the nine months ended March 31,
1998 and 1997 was $20.3 million and $1.2 million, respectively. For the period
ended March 31, 1998 cash was provided primarily from the sale of $25.8 million
of common stock in an October 1997 public offering from which $6.0 million of
cash was used to pay down the outstanding balance under the Company's line of
credit. For the prior year period, cash was provided by $1.5 million borrowed on
the line of credit, offset by deferred offering costs.
The Company's current ratios at March 31, 1998 and at June 30, 1997 were
2.95 and 2.27, respectively.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
Not Applicable
10
<PAGE>
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS.
Not applicable
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
Recent Sales of Unregistered Securities
----------------------------------------
During the three months ended March 31, 1998, the securities
identified below were issued by the Company without registration
under Securities Act of 1933 (the "1933 Act"). In addition to
any exemption specifically identified below, in each case, all of
the shares were issued pursuant to the exemption from
registration contained in Section 4(2) of the 1933 Act and Rule
506 of Regulation D under the 1933 Act as a transaction, not
involving a general solicitation, in which the purchaser was
given or had access to detailed financial and other information
with respect to the Company and possessed requisite financial
sophistication.
On January 9, 1998, the Company issued an aggregate of
220,513 shares of its common stock as consideration in connection
with its acquisition of Kingtron Corporation d/b/a POS ProVisions
(USA) and POS ProVisions, Ltd. (Canada). Of the aggregate shares
issued, (a) 179,487 shares were issued to Bruce E. Bean and (b)
41,026 shares were issued to Greg S. Vance. The issuance of
shares to Mr. Vance was also made pursuant to the exemption from
registration contained in Regulation S promulgated under the 1933
Act as a securities transaction that occurred outside of the
United States.
On February 28, 1998, the Company issued 238,830 shares of
its common stock as consideration in connection with its
acquisition of The CTI Authority, Inc. Of the aggregate shares
issued, 119,415 shares were issued to each of Sandra Rivera and
Mike Stahl.
Item 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
Not applicable
Item 5. OTHER INFORMATION.
11
<PAGE>
Not applicable.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a report on Form 8-K on January 12,
1998 to announce in Items 5 and 9 the completion on
January 9, 1998 of the Company's acquisition of POS
ProVisions (USA) and POS ProVisions, Ltd. (Canada) and
the issuance of 220,513 shares of the Company's common
stock in connection with such acquisitions.
The Company filed a report on Form 8-K on March 3,1998
to: (1) announce in item 5 it had signed a letter of
intent to acquire TheCTI Authority, Inc., and (2)
announce in item 5 the completion on February 28, 1998
of such acquisition by the issuance of 238,830 shares of
the Company's common stock.
12
<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: May 15, 1998
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BALANCE
SHEET & INCOME STATEMENT FOR PERIOD ENDED 3/31/98.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 1,466
<SECURITIES> 0
<RECEIVABLES> 21,277
<ALLOWANCES> 1,793
<INVENTORY> 38,947
<CURRENT-ASSETS> 65,046
<PP&E> 4,280
<DEPRECIATION> 1,283
<TOTAL-ASSETS> 64,746
<CURRENT-LIABILITIES> 22,019
<BONDS> 0
0
0
<COMMON> 38,092
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 69,746
<SALES> 126,148
<TOTAL-REVENUES> 126,148
<CGS> 109,798
<TOTAL-COSTS> 11,117
<OTHER-EXPENSES> 79
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 5,114
<INCOME-TAX> 1,826
<INCOME-CONTINUING> 3,288
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,288
<EPS-PRIMARY> .72
<EPS-DILUTED> .71
</TABLE>
