<PAGE>
Exhibit 13
The following portions of the ScanSource, Inc. 2000 Annual Report to
Shareholders have been incorporated by reference into the Form 10-K, of which
this exhibit is a part.
The following information is incorporated by reference into Item 5 of the
Form 10-K:
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 1999
First quarter 19 1/4 14 3/4
Second quarter 21 13/16 13 1/2
Third quarter 23 3/8 16 5/8
Fourth quarter 23 18 3/16
Fiscal Year 2000
First quarter 31 3/8 22
Second quarter 45 1/8 25
Third quarter 48 34 7/8
Fourth quarter 38 7/8 26 1/4
On August 31, 2000, there were approximately 58 shareholders of record of
Common Stock. Certain of these shareholders of record hold shares in nominee or
street name for other beneficial owners.
Dividend Policy
The Company has never declared or paid cash dividends on its Common Stock,
and it is currently the intention of the Board of Directors not to pay cash
dividends in the foreseeable future. The Company intends to retain earnings, if
any, to finance its operations.
<PAGE>
The following information is incorporated by reference into Item 6 of the
Form 10-K:
Selected Financial Data
The following table sets forth certain selected financial data, which
should be read in conjunction with ''Management's Discussion and Analysis of
Financial Condition and Results of Operations'' and the Company's consolidated
financial statements and related notes thereto included elsewhere in this annual
report.
<TABLE>
<CAPTION>
Fiscal Year Ended June 30,
-------------------------
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Income Data:
Net sales $56,383 $99,839 $182,795 $297,717 $497,421
Cost of goods sold 48,413 86,024 159,410 263,941 443,716
------- ------- -------- -------- --------
Gross profit 7,970 13,815 23,385 33,776 53,705
Selling, general and administrative expenses 5,063 8,940 15,620 21,410 30,685
Amortization of intangibles 83 81 113 137 147
------- ------- -------- -------- --------
Total operating expenses 5,146 9,021 15,733 21,547 30,832
------- ------- -------- -------- --------
Operating income 2,824 4,794 7,652 12,229 22,873
Gain from contract termination, net 200 __ __ __ __
-------
Cost of business combinations (1) __ (305) __ __
-------
Other income (expense), net (2) 75 (465) 160 (367) (639)
------- ------- -------- -------- --------
Total other income (expense) 275 (465) (145) (367) (639)
------- ------- -------- -------- --------
Income before income taxes 3,099 4,329 7,507 11,862 22,234
Income taxes 1,193 1,556 2,736 4,392 8,449
------- ------- -------- -------- --------
Net income (1)(3) $ 1,906 $ 2,773 $ 4,771 $ 7,470 $ 13,785
======= ======= ======== ======== ========
Basic net income per share $ 0.55 $ 0.80 $0.99 $ 1.37 $ 2.48
======= ======= ======== ======== ========
Basic weighted average shares outstanding 3,482 3,481 4,833 5,460 5,556
======= ======= ======== ======== ========
Diluted net income per share (1)(3) $ 0.50 $ 0.75 $0.95 $ 1.32 $ 2.31
======= ======= ======== ======== ========
Diluted weighted average shares outstanding 3,799 3,704 5,035 5,661 5,969
======= ======= ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
As of June 30,
------------------
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
Balance Sheet Data: (In thousands)
<S> <C> <C> <C> <C> <C>
Working capital $17,137 $20,496 $48,154 $ 51,160 $80,544
Total assets 29,183 40,268 72,112 125,727 205,880
Total bank debt 3,779 5,391 6,580 1,697 26,592
Total shareholders' equity 15,504 18,650 49,781 58,702 74,466
</TABLE>
---------------------
(1) Excluding the effect of the cost of business combinations, the Company's
net income and net income per share for fiscal 1998 would have been
$4,960,000 and $0.99 per share, respectively.
(2) Includes net interest income (expense) and net other income (expense).
(3) Excluding the net effect in fiscal year 1996 of a one-time gain from a
contract termination payment by Gates/FA Distributing, Inc., the Company's
net income and net income per share for fiscal 1996 would have been
$1,786,000 and $0.47.
<PAGE>
The following information is incorporated by reference into Item 7 of the
Form 10-K:
Management's Discussion and Analysis of Financial Condition and Results of
Operations
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 Report.
Overview
ScanSource, Inc., incorporated in December 1992, serves North America as a
value-added distributor of specialty technologies, including automatic data
capture (ADC) and point-of-sale (POS) products and business telephone equipment.
The Company sells its products exclusively through technology resellers and
integrators in markets, which are large and growing. All of the Company's
products are shipped from a single, centrally located distribution center
located near the FedEx hub in Memphis, Tennessee.
The single warehouse and a sophisticated management information system form
the cornerstone of the Company's cost-driven operational strategy which has
caused operating income to grow 68.7% over the past five years, compounded
annually, while sales have grown 72.3% to $497.4 million over the same period.
The Company's key ADC vendors include Symbol Technologies, Intermec and Zebra
Technologies, and its leading POS lines include IBM, Javelin and Epson. Lucent
Technologies (soon to be Avaya Communication) is the Company's premier business
telephone partner, while Intel/Dialogic supplies key components for computer
telephony integration (CTI) sold by the Company's Catalyst Telecom sales team.
Growth in net sales has been principally driven by competitive product
pricing, selective expansion of the Company's product line, intensive marketing
efforts to the reseller channel and strategic acquisitions. Results have
benefitted significantly from expanded marketing efforts to recruit new reseller
customers and from the addition of new vendor relationships.
In fiscal year 2000 the Company organized a new business unit called
ChannelMax, which provides real-time inventory availability and web catalog,
order entry, order tracking and logistics for manufacturers in the bar code,
point-of-sale 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 its customers.
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 internal controls. Historically, general and administrative expenses
have decreased as a percentage of net sales. However, this decline has been
offset by costs associated with new initiatives including the organization of a
systems integration department, investments in new markets such as telephones
and electronic commerce, and the expansion into a new geographic market in
Canada.
<PAGE>
Results of Operations
The following table sets forth for the periods indicated certain income and
expense items as a percentage of net sales:
<TABLE>
<CAPTION>
Fiscal Year Ended June 30
------------------------------------
1998 1999 2000
---- ---- ----
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Cost of goods sold 87.2 88.7 89.2
----- ----- -----
Gross profit 12.8 11.3 10.8
Selling, general and administrative expenses 8.5 7.2 6.2
Amortization of intangibles 0.1 0.0 0.0
----- ----- -----
Total operating expenses 8.6 7.2 6.2
----- ----- -----
Operating income 4.2 4.1 4.6
Cost of business combinations (0.2) --- ---
Other income (expense), net 0.1 (0.1) (0.1)
----- ----- -----
Total other income (expense) (0.1) (0.1) (0.1)
----- ----- -----
Income before income taxes 4.1 4.0 4.5
Income taxes 1.5 1.5 1.7
----- ----- -----
Net income 2.6 2.5 2.8
===== ===== =====
</TABLE>
Comparison of Fiscal Years Ended June 30, 2000, 1999 and 1998
Net Sales. Net sales consist of sales of specialty technology products
billed to North American customers when shipped, net of sales discounts and
returns. Net sales increased by 67.1% to $497.4 million in fiscal 2000 from
$297.7 million in fiscal 1999, and increased by 62.9% in fiscal 1999 from $182.8
million in fiscal 1998. The Company is organized in two business units. Sales
through value-added distribution increased 64.5% to $447.2 million in 2000, from
$271.9 million in 1999, and rose by 50.3% in 1999 from $180.9 million in 1998.
Web order fulfillment sales increased 94.5% to $50.2 million in 2000 from $25.8
million in 1999, and increased by a factor of 12.8 in 1999 from $1.9 million in
1998. Canada sales have been less than 5.0% of the Company total 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 and increased marketing efforts to specialty technology resellers.
Gross Profit. Cost of sales is comprised of purchase costs and freight, net
of early payment and volume discounts. Gross profit as a percentage of net sales
is affected by several factors including the mix of high margin and low margin
products and the proportion of large orders on which the Company extends volume
discounts to resellers. Gross profit increased by 59% to $53.7 million from
$33.8 million in fiscal 1999, and increased by 44.4% in fiscal 1999 from $23.4
million in fiscal 1998. Gross profit as a percentage of net sales was 10.8% in
fiscal 2000, 11.3 % in fiscal 1999, and 12.8% in fiscal 1998. Gross margins from
value-added distribution were 12.8%, 11.7% and 10.8% for each of the years ended
June 30, 1998, 1999 and 2000, respectively. The decrease in gross profit as a
percentage of net sales was a result of a change in the mix of sales of more
lower-margin products and volume discounts provided to resellers on large
orders. Gross margins for web order fulfillment were 8% in 1998 and 1999, and
10.9% in 2000. The increase in margins for 2000 was caused by the addition of a
net revenue program which began in September 1999.
Operating Expenses. Operating expenses include commissions paid to sales
representatives; compensation paid to marketing, technical and administrative
personnel; the costs of marketing programs to reach resellers;
<PAGE>
telephone expense; provision for bad debt losses; and amortization of
intangibles. Fluctuations in operating expenses as a percentage of net sales can
result from the amount of value-added services which accompany higher or lower
gross margin sales; investments by the Company in additional marketing programs
and hiring additional technical support personnel; and general and
administrative efficiencies gained through higher sales volumes and accompanying
economies of scale.
Operating expenses increased by 43.1% to $30.8 million in fiscal 2000 from
$21.5 million in fiscal 1999, and increased by 37.0% in fiscal 1999 from $15.7
million in fiscal 1998. Operating expenses as a percentage of net sales declined
to 6.2% in fiscal 2000, from 7.2% in fiscal 1999 and 8.6% in fiscal 1998. The
decrease in operating expenses as a percentage of net sales resulted from
efficiencies gained through increased sales volumes.
Operating Income. Operating income increased by 87.0% to $22.9 million in
fiscal 2000 from $12.2 million in fiscal 1999, and increased by 59.8% in fiscal
1999 from $7.7 million in fiscal 1998, driven by the improvement in gross profit
as described above. Operating income as a percentage of net sales was 4.6% in
fiscal 2000, 4.1 % in fiscal 1999, and 4.2% in fiscal 1998.
Total Other Income (Expense). Total other income (expense) consists of
interest income (expense), net, and other expense. Net interest expense in 2000
included interest of $855,000 paid on the Company's long term debt offset by
interest income of $216,000 from invested cash. Other income (expense) in
fiscal 1999 consisted primarily of $470,000 of costs on warehouses closed by the
Company in 1999 and interest income of $302,000 offset by $199,000 of interest
expense. Other income (expense) in fiscal 1998 consisted primarily of $305,000
of business combination expenses and interest income of $383,000 offset by
interest expense of $223,000 paid on the Company's long term debt.
Income Taxes. Income tax expense was $8.4 million, $4.4 million, and $2.7
million, in fiscal 2000, 1999 and 1998, respectively, reflecting an effective
tax rate of 38.0%, 37.0% and 36.5%, respectively. Tax expense for 1998
reflects the effects of a business combination. The effective tax rate for
consolidated net income for periods following July 1, 2000 is expected to
continue to be 38%.
Net Income. Net income increased by 84.5% to $13.8 million in fiscal 2000
from $7.5 million in fiscal 1999, and increased by 56.6% in fiscal 1999 from
$4.8 million in fiscal 1998. Net income as a percentage of net sales was 2.8%
for fiscal 2000, 2.5% for fiscal 1999 and 2.6% for fiscal 1998.
<PAGE>
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.
<TABLE>
<CAPTION>
Three Months Ended
---------------------------------------------------------------------------------
Fiscal 1999 Fiscal 2000
--------------------------------------- ----------------------------------------
Sept. 30 Dec. 31 Mar. 31 June 30 Sept. 30 Dec. 31 Mar. 31 June 30
------- ------- ------- ------- -------- -------- -------- --------
1998 1998 1999 1999 1999 1999 2000 2000
------- ------- ------- ------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $60,719 $65,543 $76,932 $94,523 $113,179 $113,922 $120,391 $149,929
Cost of goods sold 53,732 57,931 68,351 83,927 102,159 100,707 107,021 133,829
------- ------- ------- ------- -------- -------- -------- --------
Gross profit 6,987 7,612 8,581 10,596 11,020 13,215 13,370 16,100
Selling, general and administrative expenses 4,459 4,854 5,349 6,748 6,681 8,411 8,040 7,552
Amortization of intangibles 33 34 33 37 34 34 34 46
------- ------- ------- ------- -------- -------- -------- --------
Total operating expenses 4,492 4,888 5,382 6,785 6,715 8,445 8,074 7,598
------- ------- ------- ------- -------- -------- -------- --------
Operating income 2,495 2,724 3,199 3,811 4,305 4,770 5,296 8,502
Cost of business combinations -- -- -- -- -- -- --
Other income (expense), net (41) 18 (65) (279) 105 (138) (274) (331)
------- ------- ------- ------- -------- -------- -------- --------
Total other income (expense) (41) 18 (65) (279) 105 (138) (274) (331)
------- ------- ------- ------- -------- -------- -------- --------
Income before income taxes 2,454 2,742 3,134 3,532 4,410 4,632 5,022 8,171
Income taxes 908 1,015 1,161 1,308 1,676 1,760 1,909 3,104
------- ------- ------- ------- -------- -------- -------- --------
Net income $ 1,546 $ 1,727 $ 1,973 $ 2,224 $ 2,734 $ 2,872 $ 3,113 $ 5,067
======= ======= ======= ======= ======== ======== ======== ========
Basic net income per share $ 0.29 $ 0.32 $ 0.36 $ 0.40 $ 0.50 $ 0.52 $ 0.56 $ 0.90
======= ======= ======= ======= ======== ======== ======== ========
Basic weighted average shares outstanding 5,404 5,464 5,479 5,493 5,512 5,531 5,577 5,604
======= ======= ======= ======= ======== ======== ======== ========
Diluted net income per share $ 0.28 $ 0.31 $ 0.35 $ 0.39 $ 0.47 $ 0.48 $ 0.51 $ 0.85
======= ======= ======= ======= ======== ======== ======== ========
Diluted weighted average shares outstanding 5,585 5,624 5,699 5,736 5,850 5,994 6,057 5,975
======= ======= ======= ======= ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
------------------------------------------------------------------------------------
Fiscal 1999 Fiscal 2000
--------------------------------------- -------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sept. 30 Dec. 31 Mar. 31 June 30 Sept. 30 Dec. 31 Mar. 31 June 30
-------- ------- ------- ------- -------- ------- ------- ---------
1998 1998 1999 1999 1999 1999 2000 2000
-------- ------- ------- ------- -------- ------- ------- --------
Net sales 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Cost of goods sold 88.5 88.4 88.8 88.8 90.3 88.4 88.9 89.3
-------- ------- ------- ------- -------- ------- ------- --------
Gross profit 11.5 11.6 11.2 11.2 9.7 11.6 11.1 10.7
Selling, general and administrative expenses 7.3 7.4 7.0 7.2 5.9 7.4 6.7 5.0
Amortization of intangibles 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0
-------- ------- ------- ------- -------- ------- ------- --------
Total operating expenses 7.4 7.4 7.0 7.2 5.9 7.4 6.7 5.0
-------- ------- ------- ------- -------- ------- ------- --------
Operating income 4.1 4.2 4.2 4.0 3.8 4.2 4.4 5.7
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Cost of business combinations -- -- -- -- -- -- -- --
Other income (expense), net (0.1) 0.0 (0.1) (0.3) 0.1 (0.1) (0.2) (0.2)
--- --- --- --- --- --- --- ---
Total other income (expense) (0.1) 0.0 (0.1) (0.3) 0.1 (0.1) (0.2) (0.2)
--- --- --- --- --- --- --- ---
Income before income taxes 4.0 4.2 4.1 3.7 3.9 4.1 4.2 5.5
Income taxes 1.5 1.6 1.5 1.4 1.5 1.6 1.6 2.1
--- --- --- --- --- --- --- ---
Net income 2.5 2.6 2.6 2.3 2.4 2.5 2.6 3.4
=== === === === === === === ===
</TABLE>
Liquidity and Capital Resources
The Company's primary sources of liquidity are results of operations,
borrowings under its revolving credit facility, and proceeds from the sales of
securities. In October 1997, the Company completed a secondary offering of stock
which provided the Company approximately $26.2 million for general corporate
purposes.
The Company has a revolving credit agreement with a bank extending to October
31, 2001 with a borrowing limit of $35.0 million at an interest rate equal to
the 30-day LIBOR rate plus a rate varying from 1.50% to 2.00% tied to the
Company's debt-to-net worth ratio ranging from 0.75:1 to 2:1. The borrowing base
available under the credit facility is limited to 80% of eligible accounts
receivable and 40% of eligible inventory. The effective interest rate at June
30, 2000 was 8.64% and the outstanding balance on the revolving credit was $24.9
million on a loan base, which exceeded $35 million, leaving $10.1 million
available at June 30, 2000.
In December 1999, the Company purchased a new distribution center in Memphis
for a purchase price of approximately $7 million of which $6.1 million was
allocated to the building and $900,000 was allocated to land. The Company
temporarily funded the purchase with borrowings from the revolving credit and
closed a real-estate loan in August 2000 in the amount of $7.4 million.
For the fiscal year ended June 30, 2000, operating activities used cash in
the amount of $24.1 million primarily to fund increases in inventory and
accounts receivable partially offset by increases in accounts payable. For the
fiscal year ended June 30, 1999, operating activities provided cash in the
amount of $20.7 million, primarily from an increase in accounts payable which
exceeded the amount needed to fund increases in receivables and inventory.
Cash used in investing activities for fiscal 2000 of $13.5 million included
$7.0 for the building purchase and $6.5 million for other capital expenditures.
For the fiscal year ended June 30, 1999, cash was used in investing activities
for $2.1 million of capital expenditures.
Cash provided by financing activities for fiscal 2000 was $26.9 million
primarily from advances on the Company's line of credit. For the fiscal year
ended June 30, 1999, cash used in financing activities was $3.4 million
primarily due to payments on the Company's line of credit.
The Company believes that cash flows from operations, its bank revolving
credit facility and vendor financing will be sufficient to meet its forecasted
cash requirements for at least the next year.
<PAGE>
Backlog
The Company does not consider backlog to be material to its business.
Virtually all orders are filled within 24 hours of receipt.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities". This statement establishes
requirements for accounting and reporting of derivative instruments and hedging
activities. SFAS 133 was updated by the issuance of SFAS No. 137, "Accounting
for Derivative Instruments and Hedging Activities - Deferral of the Effective
Date of FAS No. 133" and SFAS No. 138 "Accounting for Derivative Instruments and
Hedging Activities" and is effective for fiscal years beginning after June 15,
2000. The future impact of this statement on the Company's results of operations
is not expected to be material.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101, Revenue Recognition (SAB 101), which provides
guidance on the recognition, presentation and disclosure of revenue in financial
statements filed with the SEC. SAB 101 outlines the basic criteria that must be
met to recognize revenue and provides guidance for disclosure related to revenue
recognition policies. Management believes that the Company's revenue recognition
policy is in compliance with the provisions of SAB 101 and that SAB 101 will
have no material effect on the financial position or results of operations of
the Company.
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.
Quantitative and Qualitative Disclosures About Market Risks
The Company is exposed to changes in financial market conditions in the
normal course of its business as a result of its selective use of bank debt as
well as transacting in Canadian currency in connection with its Canadian
operations.
The Company is exposed to changes in interest rates primarily as a result of
its borrowing activities, which includes a revolving credit facility with a bank
used to maintain liquidity and fund the Company's business operations. The
nature and amount of the Company's debt may vary as a result of future business
requirements, market conditions and other factors. The definitive extent of the
Company's interest rate risk is not quantifiable or predictable because of the
variability of future interest rates and business financing requirements, but
the Company does not believe such risk is material. The Company does not
currently use derivative instruments to adjust the Company's interest rate risk
profile.
The Company is exposed to changes in foreign exchange rates in connection
with its Canadian operations. It is the Company's policy to enter into foreign
currency transactions only to the extent considered necessary to support its
Canadian operations. The amount of the Company's cash deposits denominated in
Canadian currency has not been, and is not expected to be, material.
Furthermore, the Company has no capital expenditure or other purchase
commitments denominated in 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.
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, 2000, 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.
<PAGE>
Forward Looking Statements
Certain of the statements contained in this report to shareholders as well as
in the Company's other filings with the Securities and Exchange Commission that
are not historical facts are forward-looking statements subject to the safe
harbor created by the Private Securities Litigation Reform Act of 1995. The
Company cautions readers of this report that a number of important factors could
cause the Company's activities and/or actual results in fiscal 2000 and beyond
to differ materially from those expressed in any such forward-looking
statements. These factors include, without limitation, the Company's dependence
on vendors, product supply, senior management, centralized functions, and third-
party shippers, the Company's ability to compete successfully in a highly
competitive market and manage significant additions in personnel and increases
in working capital, the Company's entry into new products markets in which it
has no prior experience, the Company's susceptibility to quarterly fluctuations
in net sales and 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 other reports and
documents filed by the Company with the Securities and Exchange Commission.
<PAGE>
Financial Statements and Supplementary Data
The following information has been incorporated by reference into Item 8 of
the Form 10-K:
<PAGE>
SCANSOURCE, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, 1999 and 2000
Assets 1999 2000
------ ---- ----
(In thousands)
Current assets
Cash $ 15,282 4,612
Receivables:
Trade, less allowance for doubtful accounts of
$5,002,000 and $5,464,000 at June 30, 1999 and
2000, respectively 42,774 66,983
Other 2,443 3,060
--------- --------
45,217 70,043
Inventories 50,282 101,654
Prepaid expenses and other assets 464 451
Deferred income taxes 5,197 8,632
--------- --------
Total current assets 116,442 185,392
--------- --------
Property and equipment:
Land 585 1,485
Building 3,812 12,135
Furniture, fixtures and equipment 5,708 9,953
--------- --------
10,105 23,573
Less accumulated depreciation (2,652) (5,183)
--------- --------
7,453 18,390
Intangible assets, net 1,520 1,635
Other assets 312 463
--------- --------
Total assets $ 125,727 205,880
========= ========
See accompanying notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
Liabilities and Shareholders' Equity 1999 2000
------------------------------------ ---- ----
(In thousands)
<S> <C> <C>
Current liabilities:
Current portion of long-term debt $ 24 26
Trade accounts payable 59,728 98,627
Accrued expenses and other liabilities 4,399 5,083
Income taxes payable 1,131 1,112
----------- ----------
Total current liabilities 65,282 104,848
----------- ----------
Deferred income taxes 70 --
Long-term debt 1,673 1,647
Borrowings under revolving credit facility -- 24,919
----------- ----------
Total liabilities 67,025 131,414
----------- ----------
Shareholders' equity:
Preferred stock, no par value; 3,000,000 shares
authorized, none issued -- --
Common stock, no par value; 10,000,000 shares
authorized; 5,503,512 and 5,610,875 shares
issued and outstanding at June 30, 1999 and
2000, respectively 40,161 42,140
Retained earnings 18,541 32,326
----------- ----------
Total shareholders' equity 58,702 74,466
----------- ----------
Total liabilities and shareholders' equity $ 125,727 205,880
=========== ==========
</TABLE>
<PAGE>
SCANSOURCE, INC. AND SUBSIDIARIES
Consolidated Statements of Income
Years ended June 30, 1998, 1999 and 2000
<TABLE>
<CAPTION>
1998 1999 2000
---- ---- ----
(In thousands, except per share data)
<S> <C> <C> <C>
Net sales $ 182,795 297,717 497,421
Cost of goods sold 159,410 263,941 443,716
---------- ---------- ----------
Gross profit 23,385 33,776 53,705
Selling, general and administrative
expenses 15,620 21,410 30,685
Amortization of intangibles 113 137 147
---------- ---------- ----------
Total operating expenses 15,733 21,547 30,832
---------- ---------- ----------
Operating income 7,652 12,229 22,873
Other income (expense):
Interest income (expense), net 160 (367) (639)
Cost of business combinations (305) -- --
---------- ---------- ----------
Total other expense (145) (367) (639)
---------- ---------- ----------
Income before income taxes 7,507 11,862 22,234
Income taxes 2,736 4,392 8,449
---------- ---------- ----------
Net income $ 4,771 7,470 13,785
========== ========== ==========
Per share data:
Basic
Earnings per share $ .99 1.37 2.48
========== ========== ==========
Weighted average shares outstanding 4,833 5,460 5,556
========== ========== ==========
Diluted
Earnings per share $ .95 1.32 2.31
========== ========== ==========
Weighted average shares outstanding 5,035 5,661 5,969
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
SCANSOURCE, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
Years ended June 30, 1998, 1999 and 2000
<TABLE>
<CAPTION>
Common Retained
Stock Earnings Total
------- -------- -------
(In thousands)
<S> <C> <C> <C>
Balance at June 30, 1997 12,350 6,300 18,650
Issuance of common stock in public offering, net of
offering costs 25,820 -- 25,820
Issuance of stock due to exercise of options, net 165 -- 165
Tax benefit of deductible compensation
arising from exercise of stock options 225 -- 225
Issuance of stock and stock options in
business combinations 150 -- 150
Net income -- 4,771 4,771
------- -------- -------
Balance at June 30, 1998 38,710 11,071 49,781
Issuance of stock due to exercise of options, net 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 40,161 18,541 58,702
Issuance of stock due to exercise of options, net 1,433 -- 1,433
Tax benefit of deductible compensation
arising from exercise of stock options 474 -- 474
Issuance of stock in business acquisitions 72 -- 72
Net income -- 13,785 13,785
------- -------- -------
Balance at June 30, 2000 42,140 32,326 74,466
======= ======== =======
</TABLE>
See accompanying notes to financial statements.
<PAGE>
SCANSOURCE, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended June 30, 1998, 1999 and 2000
<TABLE>
<CAPTION>
1998 1999 2000
----------- ----------- -----------
(In thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 4,771 7,470 13,785
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation 797 1,119 2,531
Amortization of intangible assets 113 137 147
Provision for doubtful accounts (1,230) (3,582) (2,983)
Deferred income taxes, net (839) (2,770) (3,649)
Changes in operating assets and liabilities:
Trade receivables (13,651) (10,994) (21,226)
Other receivables (792) (919) (617)
Inventories (7,549) (18,838) (51,372)
Prepaid expenses and other assets 45 (196) 13
Trade accounts payable (3,112) 45,699 38,899
Accrued expenses and other liabilities 404 2,701 634
Income taxes payable (31) 1,131 (19)
Other noncurrent assets 98 (251) (159)
----------- ----------- -----------
Net cash provided by (used in) operating activities (20,976) 20,707 (24,016)
----------- ----------- -----------
Cash flows from investing activities:
Capital expenditures (1,928) (2,081) (6,478)
Purchase of building (1,627) -- (6,990)
Cash paid in business combination (1,100) -- (110)
----------- ----------- -----------
Net cash used in investing activities (4,655) (2,081) (13,578)
----------- ----------- -----------
Cash flows from financing activities:
Advances (payments) on revolving credit (1,085) (4,861) 24,919
Exercise of stock options including tax benefits 555 1,451 2,029
Proceeds from stock offering, net of offering costs 25,820 -- --
Payments on building loan -- (22) (24)
----------- ----------- -----------
Net cash provided by (used in) financing activities 25,290 (3,432) 26,924
----------- ----------- -----------
Increase (decrease) in cash (341) 15,194 (10,670)
Cash at beginning of year 429 88 15,282
----------- ----------- -----------
Cash at end of year $ 88 15,282 4,612
=========== =========== ===========
Supplemental information:
Interest paid $ 166 186 1,009
=========== =========== ===========
Income taxes paid $ 3,054 3,261 8,563
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
SCANSOURCE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999 and 2000
(1) Organization and Summary of Significant Accounting Policies
Consolidation Policy
The consolidated financial statements include the accounts of ScanSource,
Inc. ("Company") and its subsidiaries. All significant intercompany
accounts and transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles 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. Actual results could differ from those
estimates.
Revenue Recognition
Revenues are recognized for the sale of products upon shipment.
Sales of products are primarily recorded on a gross basis with a separate
display of cost of goods sold to arrive at gross profit. However revenues
associated with service-based order fulfillment contracts, in which the
Company earns a fee determined as a percentage of the value of products
shipped, are recorded on a net basis. That is, the net fee retained by the
Company is included in net sales. Criteria used in the determination
include whether the Company has received the risks and rewards of ownership
of the products, such as risk of loss of collection, delivery, or returns.
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 of 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 2-5 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 5-15 years. Accumulated amortization was
$556,000 and $703,000 at June 30, 1999 and 2000, respectively.
(Continued)
16
<PAGE>
SCANSOURCE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999 and 2000
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.
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 customers financial condition and generally
does not require collateral.
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 No. 123 (SFAS 123) allows an
entity to continue to apply the provisions of APB Opinion No. 25 and provide
pro forma net income and, if earnings per share is presented, pro forma
earnings per share disclosures for employee stock options granted as if the
fair-value-based method defined in SFAS 123 had been applied. The Company has
elected to continue to apply the provisions of APB Opinion No. 25 and provide
the pro forma disclosure provisions of SFAS 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 approximate fair value, based upon either short maturities or
variable interest rates of these instruments.
Business Segments
During 1999, the Company adopted Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related Information
(SFAS 131). SFAS 131 requires companies to report financial and descriptive
information about its reportable operating segments, including segment profit
or loss, certain specific revenue and expense items, and segment assets, as
well as information about the revenues derived from the Company's products
and services, the countries in which the Company earns revenues and holds
assets, and major customers.
(Continued)
17
<PAGE>
SCANSOURCE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999 and 2000
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 not different from net income in 1998,
1999 or 2000.
Foreign Operations
The Company's only operations outside the U.S. are two Canadian sales
offices. Foreign currency transaction and translation gains and losses are
included in selling, general and administrative expenses; currency
transaction losses were less than $100,000 for the period ended June 30,
2000.
(2) Revolving Credit Facility
The Company has a line of credit agreement with a bank extending to October
31, 2001 with a borrowing limit of $35 million, based upon 80% of eligible
accounts receivable and 40% of eligible inventory at the 30 day LIBOR rate
of interest plus a rate varying from 1.50% to 2.00% tied to the Company's
debt to net worth ratio ranging from .75:1 to 2:1. 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 and a maximum debt to tangible net worth
ratio. The effective interest rate at June 30, 2000 was 8.64% and the
outstanding balance on the line of credit was $24.9 million on a loan base
which exceeded $35 million, leaving $10.1 million available at June 30,
2000. The Company was either in compliance or had obtained waivers of
noncompliance with the various covenants at June 30, 2000. The Company has
the ability and intent to maintain outstanding amounts for a period longer
than one year.
(3) Long-term Debt
In June 1998, the Company assumed a nonrecourse loan in the amount of
$1,719,000, in connection with the acquisition of its office building. This
transaction was a non-cash item for statement of cash flow purposes. The
loan has a fixed interest rate of 9.19%, is due in November 2006, and is
collateralized by the land and building acquired.
Scheduled maturity of long-term debt at June 30, 2000 is as follows:
2001 $ 26,000
2002 29,000
2003 31,000
2004 35,000
2005 38,000
Thereafter 1,514,000
-----------
Total $ 1,673,000
===========
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 $1,926,000 and $1,717,000 at June 30,
1999 and 2000, respectively.
(Continued)
18
<PAGE>
SCANSOURCE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999 and 2000
(4) Equity 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% 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 Directors' Stock Option Plan under which 65,000 shares of
common stock have been reserved for issuance to non-employee
directors, provides for vesting six months after grant date and an
option term of five years. Options under this plan are to be
granted at fair market value of the underlying shares on the date
of grant.
. 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 will be 10 years from the grant date.
A summary of stock option activity for the years ended June 30, 1998, 1999
and 2000 is as follows:
<TABLE>
<CAPTION>
Weighted Weighted Weighted
Average Average Average
1998 Exercise 1999 Exercise 2000 Exercise
Shares Price Shares Price Shares Price
-------- -------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding:
Beginning of year 566,583 $ 9.96 731,483 $ 14.51 754,534 $ 14.70
Granted 237,750 18.23 445,000 15.90 187,439 30.70
Exercised (46,183) 4.31 (150,202) 4.61 (105,864) 13.16
Terminated (26,667) 14.88 (271,747) 17.43 (12,901) 16.40
------- ------- -------
End of year 731,483 14.51 754,534 14.70 823,208 18.50
======= ======= =======
Exercisable, end of year 412,844 $ 9.81 358,117 $ 13.60 446,181 $ 15.18
======= ======= =======
</TABLE>
(Continued)
19
<PAGE>
SCANSOURCE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999 and 2000
The following table summarizes information about stock options outstanding
under the plans at June 30, 2000:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------------------------ -----------------------------------
Weighted
Average Weighted
Remaining Average
Range of Number Contractual Number Exercise
Exercise Prices Outstanding Life Exercisable Price
----------------- ------------ ------------- ------------- ----------
<S> <C> <C> <C> <C>
$ 1.50 - 9.75 51,533 4.95 years 51,533 $ 8.63
10.75 - 13.50 55,300 5.53 years 55,300 11.13
14.00 - 15.75 255,588 7.36 years 138,243 14.66
16.50 - 21.125 310,037 7.08 years 191,105 17.44
25.00 - 27.125 11,250 9.43 years -- N/A
33.625 - 36.00 139,500 9.18 years 10,000 35.37
---------- ---------
823,208 446,181
========== =========
</TABLE>
(b) Fair Value and Pro Forma Information
The per share weighted-average fair value of stock options granted during
the years ended June 30, 1998, 1999 and 2000 was $10.22, $9.65 and $25.09
on the date of grant using the Black Scholes option-pricing model with the
following weighted-average assumptions:
1998 1999 2000
---- ---- ----
Risk-free interest rate 5.7% 4.8% 6.2%
Expected dividend yield 0.0% 0.0% 0.0%
Expected volatility factor 32.1% 41.7% 62.8%
Expected life 10 years 10 years 10 years
(Continued)
20
<PAGE>
SCANSOURCE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999 and 2000
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:
<TABLE>
<CAPTION>
1998 1999 2000
---- ---- ----
<S> <C> <C> <C> <C>
Net income As Reported $ 4,771,000 7,470,000 13,785,000
========= ========= ==========
Pro forma 4,094,000 6,580,000 11,883,000
========= ========= ==========
Earnings per share
Basic
As Reported $ .99 1.37 2.48
========= ========= ==========
Pro forma .85 1.21 2.14
========= ========= ==========
Diluted
As Reported $ .95 1.32 2.31
========= ========= ==========
Pro forma $ .81 1.16 1.99
========= ========= ==========
</TABLE>
Pro forma net income reflects only options granted during the years ended
June 30, 1998, 1999 and 2000. Therefore, the full impact of calculating
compensation cost for stock options under SFAS No. 123 is not reflected in
net income effected above because compensation cost is reflected over the
options vesting period of 3 years for options issued under the incentive
stock option plans.
(c) Earnings Per Share Reconciliation
Basic net income per share is computed by dividing net income by the
weighted average number of common shares outstanding. Diluted net income
per share is computed by dividing net income by the weighted average number
of common and potential common shares outstanding.
<TABLE>
<CAPTION>
Per Share
Income Shares Amount
--------------- ---------- ------------------
1998:
<S> <C> <C> <C>
Basic income per share $ 4,771,000 4,833,000 $ 0.99
===================
Effect of dilutive stock options -- 202,000
--------------- ----------
Diluted income per share $ 4,771,000 5,035,000 $ 0.95
=============== ========== ===================
1999:
Basic income per share $ 7,470,000 5,460,000 $ 1.37
===================
Effect of dilutive stock options -- 201,000
--------------- ----------
Diluted income per share $ 7,470,000 5,661,000 $ 1.32
=============== ========== ===================
2000:
Basic income per share $ 13,785,000 5,556,000 $ 2.48
===================
Effect of dilutive stock options -- 413,000
--------------- ----------
Diluted income per share $ 13,785,000 5,969,000 $ 2.31
=============== ========== ===================
</TABLE>
21
<PAGE>
SCANSOURCE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999 and 2000
(5) Income Taxes
Income tax expense (benefit) attributable to income before income taxes
consists of:
Current Deferred Total
------------ ------------ ------------
Year ended June 30, 1998:
U.S. Federal $ 3,150,000 (705,000) 2,445,000
State and local 425,000 (134,000) 291,000
------------ ------------ ------------
$ 3,575,000 (839,000) 2,736,000
============ ============ ============
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
============ ============ ============
Income tax expense attributable to income before income taxes for the years
ended June 30, 1998, 1999 and 2000, respectively, differed from the amount
computed by applying the U.S. federal income tax rate of 34 percent to
pretax income for 1998 and 35 percent for 1999 and 2000 as a result of the
following:
<TABLE>
<CAPTION>
1998 1999 2000
----------- ----------- -----------
<S> <C> <C> <C>
Computed "expected" tax expense $ 2,552,000 4,152,000 7,782,000
Increase (decrease) in income taxes resulting
from:
State and local income taxes, net of Federal
income tax expense 192,000 325,000 622,000
Income tax related to earnings of subchapter
S-Corporation (103,000) -- --
Other 95,000 (85,000) 45,000
----------- ----------- -----------
$ 2,736,000 4,392,000 8,449,000
=========== =========== ===========
</TABLE>
<PAGE>
SCANSOURCE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999 and 2000
The tax effects of temporary differences that give rise to significant
portions of the deferred tax asset and deferred tax liability at June 30,
1999 and 2000 are presented below:
<TABLE>
<CAPTION>
1999 2000
------------ ------------
<S> <C> <C>
Deferred tax assets derived from:
Allowance for doubtful accounts $ 2,381,000 2,654,000
Inventories 2,816,000 5,978,000
Intangible assets 44,000 95,000
Plant and equipment -- 49,000
------------ ------------
5,241,000 8,776,000
Deferred tax liability derived from:
Plant and equipment (114,000) --
------------ ------------
Net deferred tax asset $ 5,127,000 8,776,000
============ ============
</TABLE>
As of June 30, 1999 and 2000 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 noncancellable operating leases which
expire through June 2005. The Company also leases a portion of its building
to third-parties under noncancellable operating leases which expire through
March 2004. Future minimum lease payments and sublease income are as
follows:
Sublease
Payments Income
----------- -----------
2001 $ 593,000 239,000
2002 272,000 149,000
2003 194,000 96,000
2004 144,000 42,000
2005 119,000 --
----------- -----------
$ 1,322,000 526,000
=========== ===========
Lease expense was approximately $680,000, $759,000 and $724,000 for the
years ended June 30, 1998, 1999 and 2000, respectively. There was no
sublease income for the year ended June 30, 1998. Sublease income was
approximately $331,000 and $263,000 for the years ended June 30, 1999 and
2000, respectively.
The Company also has commitments based on the financial results of acquired
operations or contracts that may result in potential payments of up to
$350,000 over the next two years.
<PAGE>
SCANSOURCE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999 and 2000
A majority of the Company's net revenues in 1998, 1999 and 2000 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 does not believe that any
liability which might result from an adverse determination of such lawsuits
would have a material adverse effect on the Company's financial condition
or results of operations.
(7) Employee Benefit Plan
Effective October 22, 1993, the Company established a defined contribution
plan under Section 401(k) of the Internal Revenue Code. This plan covers
all employees meeting certain eligibility requirements. For the years ended
June 30, 1998, 1999 and 2000 the Company provided a matching contribution
of $54,000, $160,000 and $148,000, respectively, which was equal to one-
half of each participant's contribution, up to a maximum matching
contribution per participant of $500 for 1998 and $800 for both 1999 and
2000. The Company determines its matching contributions annually and can
make discretionary contributions in addition to matching contributions.
Employer contributions are vested over a period of 3 to 5 years.
(8) Segment Information
SFAS 131 requires the use of the management approach to determine segment
information to be reported. The management approach is based on the way
management organizes the enterprise to assess performance and make
operating decisions regarding the allocation of resources.
The Company sells only in the United States and Canada. Its sales to Canada
were $3,670,000, $11,953,000 and $19,489,000 for each of the three years
ended June 30, 1998, 1999 and 2000, respectively.
Prior to April 2000, the Company operated within a single reportable
segment: however, in the fourth quarter of its fiscal year, the Company
named a president of its second business unit creating two reportable
segments: value-added distribution and a web-based order fulfillment unit
called ChannelMax. Each business unit is directed by a President who
reports to the Chairman of the Board. The Chairman evaluates performance
and allocates resources, in part, based upon the gross margin of each unit,
as described below.
The first reportable segment, value-added distribution, offers 16,000
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 2% of the Company's
net sales in 2000. All valued-added distribution sales are recognized on a
gross revenue basis when products are shipped.
<PAGE>
SCANSOURCE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999 and 2000
The second reportable segment is the web order fulfillment unit which
provides real-time inventory availability and web catalog, order entry,
order tracking and logistics for customers in the bar code and business
telephone markets. This unit serves less than 15 customers, the largest of
whom accounted for less than 7% of total Company sales at June 30, 2000.
Sales by this unit include some programs that meet gross revenue
recognition criteria and others that require net revenue recognition.
Business unit operating performance is evaluated by the Chairman using
gross profit rather than operating income, because products for both
business units are shipped from a single, centrally located distribution
center. Each business unit is supported by a single credit and customer
service department and uses the same information system and freight
program. Therefore operating expenses are considered to be corporate and
are not allocable to each reportable segment.
Accounts receivable and a portion of inventories can be identified by
segment, but cash, other current assets, and other noncurrent assets are
not distinguishable between business segments. Property, plant and
equipment are not identified by segment, therefore capital expenditures,
depreciation and amortization are assigned entirely to corporate.
Operating results for each business unit are summarized below with
historical data for 1998 and 1999 restated to conform to the organization
structure.
<TABLE>
1998 1999 2000
--------------------- --------------------- ---------------------
<S> <C> <C> <C>
Sales
Value added distribution $ 180,926,000 99% $ 271,901,000 91% $ 447,216,000 90%
Web-based order fulfillment 1,869,000 1% 25,816,000 9% 50,205,000 10%
------------- ------ ------------- ------ ------------- ------
$ 182,795,000 100% $ 297,717,000 100% $ 497,421,000 100%
============= ====== ============= ====== ============= ======
Operating Income
Value added distribution $ 23,235,000 12.8% $ 31,711,000 11.7% $ 48,211,000 10.8%
Web-based order fulfillment 150,000 8.0% 2,065,000 8.0% 5,494,000 10.9%
------------- ------ ------------- ------ ------------- ------
Gross Profit $ 23,385,000 12.8% 33,776,000 11.3% 53,705,000 10.8%
Corporate operating and
distribution center expenses (15,733,000) (21,547,000) (30,832,000)
------------- ------------- -------------
Operating income $ 7,652,000 $ 12,229,000 $ 22,873,000
============= ============= =============
Assets
Value added distribution $ 59,642,000 $ 93,056,000 $ 168,637,000
Web-based order fulfillment 2,149,000 8,731,000 21,040,000
Corporate cash and other assets 10,321,000 23,940,000 16,203,000
------------- ------------- -------------
$ 72,112,000 $ 125,727,000 $ 205,880,000
============= ============= =============
</TABLE>
(9) Subsequent Event (unaudited)
In August 2000, the Company closed a real estate loan in the amount of $7.4
million. The loan has a term of 5 years, is collateralized by the Memphis
distribution center land and building, and has a variable interest rate
similar to that of the revolving credit.
<PAGE>
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, 1999 and 2000 and the related consolidated
statements of income, shareholders' equity and cash flows for each of the years
in the three-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, 1999 and 2000 and the results of their operations
and their cash flows for each of the years in the three-year period ended June
30, 2000, in conformity with accounting principles generally accepted in the
United States of America.
Greenville, South Carolina /s/ KPMG LLP
August 16, 2000
<PAGE>
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 generally accepted accounting principles. 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 generally
accepted auditing standards 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 generally accepted accounting principles. There
is an Audit Committee of the Board of Directors composed of two 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.
