-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MDkzJ0rDhe3+c3AgWOCQzRCGHJkpbHKWY4MZIAHdXULMytkHXwiTtaGZHlmbv1QR EHn90gG9Vx/pCR11QIbT2g== /in/edgar/work/0000931763-00-002187/0000931763-00-002187.txt : 20000928 0000931763-00-002187.hdr.sgml : 20000928 ACCESSION NUMBER: 0000931763-00-002187 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20000926 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SCANSOURCE INC CENTRAL INDEX KEY: 0000918965 STANDARD INDUSTRIAL CLASSIFICATION: [5045 ] IRS NUMBER: 570965380 STATE OF INCORPORATION: SC FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-26926 FILM NUMBER: 729124 BUSINESS ADDRESS: STREET 1: 6 LOGUE COURT STE G CITY: GREENVILLE STATE: SC ZIP: 29615 BUSINESS PHONE: 8032882432 MAIL ADDRESS: STREET 1: 6 LOGUE COURT STE G CITY: GREENVILLE STATE: SC ZIP: 29615 10-K405 1 0001.txt FORM 10-K FOR FISCAL YEAR END 06-30-00 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended June 30, 2000. [_] 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 (IRS Employer of incorporation or organization) Identification No.) 6 Logue Court Greenville, South Carolina 29615 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (864) 288-2432 Securities registered pursuant to Section 12(b) of the Act: None. Securities registered pursuant to Section 12(g) of the Act: Common Stock, no par value 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 [_] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting stock of the Registrant held by non- affiliates of the Registrant at August 31, 2000 was $324,487,250, as computed by reference to the average bid and asked prices of such stock on such date. As of June 30, 2000, 5,610,875 shares of the Registrant's Common Stock, no par value, were outstanding. The Registrant had no other classes of common equity outstanding as of such date. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Annual Report to Shareholders for the fiscal year ended June 30, 2000 are incorporated by reference into Parts II and IV of this Form 10-K, and portions of the Registrant's Proxy Statement to be furnished in connection with its 2000 Annual Meeting of Shareholders are incorporated by reference into Part III of this Form 10-K. PART I ITEM 1. Business. ScanSource Inc. ("ScanSource" or the "Company") is a leading value-added wholesale distributor of automatic identification ("Auto ID"), point of sale ("POS") and telephony products. These specialty technology products interface with computer systems used to automate the collection, processing and communication of information for commercial and industrial applications, including retail sales, distribution, shipping, inventory control, materials handling and warehouse management. Products and Markets The Company currently markets approximately 16,000 products from over 50 hardware and software vendors from its central warehouse in Memphis, Tennessee to approximately 11,000 reseller customers. Auto-ID technology incorporates the capabilities for electronic recognition and data processing without the need for manual input and consists of a wide range of products, including bar code printers and labeling devices, contact wands, light pens, hand-held and fixed-mount laser scanners, portable data collection devices, keyboard wedges, and magnetic stripe readers. As Auto-ID technology has become more pervasive, applications have evolved from traditional uses such as inventory control, materials handling, distribution, shipping and warehouse management to more advanced applications such as medical research. POS technology consists of devices used for the capture, processing, analysis, and dissemination of transaction data. POS product lines include computer-based terminals, monitors, receipt printers, pole displays, cash drawers, keyboards, peripheral equipment and fully integrated processing units used primarily in retail applications. Telephony products include business telephone systems (PBXs, key systems, telephone handsets and cabling) and computer telephony components used in voice, fax, data, voice recognition, call center management and IP telephony applications. Industry Overview The distribution channels for specialty technology products generally consist of manufacturers, wholesale distributors such as ScanSource, resellers and end-users. In recent years, these distribution channels have evolved through three stages: (i) direct sales by manufacturers to end-users; (ii) single-tier distribution in which manufacturers sell to resellers who, in turn, sell directly to end-users; and (iii) two-tier, or wholesale distribution, in which manufacturers sell to wholesale distributors, including ScanSource, who sells only to resellers who, in turn, sell directly to end-users. Currently, the wholesale distribution channel is highly fragmented and is comprised of several large national distributors and many smaller regional distributors. Large national distributors are engaged primarily in conventional order fulfillment and typically offer few value-added services, while small regional distributors are limited in the scale and scope of their operations and services. Competition among an expanding number of manufacturers has caused product prices to decrease and product applications to expand, which has resulted in an increasing number of resellers entering the market in order to support a broader base of potential end-users. As the number of resellers and end-users grows, competition among manufacturers and within the reseller channel has intensified, resulting in a less orderly market structure. As a result of the transition of specialty technology products to open-systems (whereby a variety of manufacturers' products can be configured together to create a system solution), both manufacturers and resellers have become more dependent upon wholesale distributors such as ScanSource for the organization and maintenance of an efficient market structure. In addition, manufacturers which face declining product prices and rising costs of direct sales increasingly rely upon value-added wholesale distributors for outsourcing certain support functions, such as product assortment, delivery, inventory management, technical assistance and marketing. At the same time, shortened product life cycles and the introduction of new products and applications have caused resellers increasingly to rely on wholesale distributors for various inventory management, financing, technical support and related functions. The Company believes that as the reseller market grows and becomes more fragmented, and as specialty technology products continue to transition to open systems, the wholesale distribution channel in which the Company operates will become increasingly more important. 2 Vendors The Company's vendors include most of the leading Auto-ID and POS manufacturers, including Axiohm, Cherry Electrical, Cognitive Solutions, Datamax, Epson America, IBM, Intermec, Ithaca Peripherals, Javelin, Metrologic, MicroTouch Systems, MMF Cash Drawer, Monarch Marking Systems, PSC, Sato America, Symbol Technologies and Zebra Technologies. The Company's key telephony vendors include Lucent Technologies, and Intel/Dialogic. The Company's merchandising department recruits vendors and manages important aspects of its vendor relationships, such as purchasing arrangements, cooperative marketing initiatives, vendor sales force relationships, product training and monitoring rebate programs and various contract terms and conditions. The Company generally enters into non-exclusive distribution agreements with vendors. These agreements typically provide the Company with stock rotation and price protection provisions that may mitigate the risk of loss from slow moving inventory, vendor price reductions, product updates or obsolescence. Some of these distribution agreements contain minimum purchase amounts in order to receive preferential prices. The distribution agreements are generally terminable on 30 to 120 days' notice by either party. Customers The Company's reseller customers currently include approximately 11,000 active value-added reseller accounts ("VARs") located in the U.S. and Canada. The largest customer accounted for less than 7% of the total Company's net sales in fiscal 2000. The Company targets two types of reseller customers: Specialty Technology VARs. These resellers focus on selling specialty technology products as a tailored software or integrated hardware solutions for their end-users' existing applications or incorporating specialty technology products as part of customized technology solutions for their end-users. Primary industries served by these resellers include manufacturing, distribution, health care, pharmaceuticals, hospitality, convenience, grocery and other retail markets. General or PC VARs. These resellers develop computer solutions for their end-users' microcomputer needs. They typically have well-established relationships with end-user management information system directors and are seeking additional revenue and profit opportunities in related technology markets, such as Auto-ID, POS or telephony. Sales and Electronic Commerce The Company's sales force is comprised of 64 inside sales representatives located in South Carolina, California, Georgia, Washington, New Jersey and Canada. In order to build strong customer relationships, each active reseller is assigned to a sales representative. Each sales representative negotiates pricing directly with his assigned customers. The Company also employs several product managers who are responsible for developing technical expertise within broad product markets, evaluating competitive markets, and reviewing overall product and service requirements of resellers. Each sales representative and product manager receives comprehensive training with respect to the technical characteristics of each vendor's products. This training is supplemented by quarterly product seminars conducted by vendors' representatives and by weekly meetings among product managers, marketing and sales representatives. Increasingly, customers rely upon the Company's electronic ordering and information systems, in addition to its product catalogs and frequent mailings, as sources for product information, including availability and price. Through the Company's website, most customers can gain remote access to the Company's information systems to check real-time product availability, see their customized pricing and place orders. Customers can also follow the status of their orders and obtain UPS and FedEx package tracking numbers from this site. By the fourth quarter of fiscal 2000 approximately 22% of the Company's sales orders were entered electronically. Marketing The Company provides a range of marketing services, including cooperative advertising with vendors through trade publications and direct mail, a product catalog which is published three times a year, periodic newsletters, management of sales leads, trade shows with software companies and vendors, direct mail and sales promotions. In addition, the Company organizes and operates its own "TechTeach" seminars three times a year, teaming with top vendors to recruit prospective resellers and 3 introduce new applications for the specialty technology products it distributes. The Company frequently customizes its marketing services for vendors and resellers. Value-Added Services In addition to the basic order fulfillment and credit services that conventional wholesale distributors typically provide to resellers, the Company differentiates itself by providing an array of value-added services, including the following: Pre-Sale Technical Support. Technical support personnel assist the reseller with system configurations as the order is placed. Pre-sale support also includes testing products to ensure their compatibility with other products and applications. Post-Sale Technical Support. Technical support personnel also assist sales representatives and customers in diagnosing and solving technical, configuration or compatibility issues which may arise after the sale. Technical support personnel will, if necessary, serve as liaisons or advocates between the manufacturers and the resellers. Shipping Options. Product managers and technical support personnel work together to select specific products that are compatible and continually develop "solution kits" or bundles to better meet the reseller's needs. Resellers have come to trust the Company's shipping accuracy and reliability such that many no longer hold their own inventory. Instead, by the fourth quarter of fiscal 2000, approximately 66% of sales orders were drop shipped directly to an end user on behalf of a reseller. Professional Services Group. The Company's Professional Services Group assists resellers with pen-based programming and radio-frequency data collection applications, areas in which resellers need greater technical expertise. This group offers needs-analysis, pre-sale equipment configuration, sales assistance, site surveys, on-site installation, post-sale maintenance, software programming (both utilities and applications), and project management. The Company has recently hired a group of engineers to begin a similar initiative called Catalyst Advantage to help telephony resellers. Operations Information System The Company's information system is a highly scalable, centralized processing system capable of supporting numerous operational functions including purchasing, receiving, order processing, shipping, inventory management and accounting. Sales representatives rely on the information system for on-line, real-time information on product pricing, inventory availability and reservation, and order status. The Company's warehouse operations use bar code technology for receiving and shipping, and automated UPS and FedEx systems for freight processing and shipment tracking, each of which is integrated with the Company's information system. The customer service and technical support departments employ the system for documentation and faster processing of customer product returns. To ensure that adequate inventory levels are maintained, the Company's buyers depend on the system's purchasing and receiving functions to track inventory on a continual basis. Central Warehouse and Shipping The Company's 233,000 square foot warehouse facility, located approximately eight miles from the FedEx hub facility in Memphis, Tennessee, serves all of North America. The Company believes that its centralized distribution creates several advantages, including: (i) a reduced amount of "safety stock" inventory which, in turn, reduces the Company's working capital borrowings; (ii) an increased turnover rate by tighter control over inventory; (iii) maintenance of a consistent order-fill rate; (iv) improved personnel productivity; (v) improved delivery time; (vi) simplified purchasing and tracking; (vii) decreased demand for management personnel; and (viii) flexibility to meet customer needs for systems integration. The Company's objective is to ship on the same day all orders received by 8:00 p.m. Eastern Time. Orders are currently processed in the central warehouse, where bar code technology is utilized to minimize shipping errors. The Company also has an automated package handling system used to send products from the picking area to invoicing stations. Upon fulfillment of the order, the package is immediately shipped to the reseller or "drop-shipped" to an end-user specified by the reseller by FedEx or UPS. The Company charges its customers local ground delivery rates for this overnight service. 4 Credit Services The Company routinely offers 20-day credit terms for qualified resellers. The Company believes this policy eliminates the customer's need to establish multiple credit relationships with a large number of manufacturers. Competition The markets in which the Company operates are highly competitive. Competition is based primarily on factors such as price, product availability, speed and accuracy of delivery, effectiveness of sales and marketing programs, credit availability, ability to tailor specific solutions to customer needs, quality and breadth of product lines and services, and availability of technical and product information. The Company's competitors include regional and national wholesale distributors, as well as hardware manufacturers (including most of the Company's vendors) that sell directly to resellers and to end-users. In addition, the Company competes with master resellers which sell to franchisees, third-party dealers and end-users. Certain of the Company's current and potential competitors have greater financial, technical, marketing and other resources than the Company and may be able to respond more quickly to new or emerging technologies and changes in customer requirements. Such competition could also result in price reductions, reduced margins and loss of market share by the Company. Employees As of August 17, 2000 the Company had 469 employees, none of whom was a member of an industry trade union or collective bargaining unit. The Company considers its employee relations to be good. Service Marks The Company conducts its business under the trademark and service mark "ScanSource." The Company has been issued registrations for the mark "ScanSource" in the United States and Canada. The Company is also pursuing registrations of its trademarks and service marks "Catalyst" and "Catalyst Telecom" in the United States and Canada. The Company does not believe that its operations are dependent upon any of its trademarks or service marks. The Company also sells products and provides services under various trademarks, service marks and trade names to which reference is made in this report that are the property of owners other than the Company. Such owners have reserved all rights with respect to their respective trademarks, service marks and trade names. Private Securities Litigation Reform Act of 1995 Certain of the statements contained in this PART I, Item 1 (Business) and PART II, Item 7 (Management's Discussion and Analysis of Financial Condition and Results of Operations) of this Annual Report on Form 10-K 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 Annual Report on Form 10-K 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 operations results, the Company's ability to manage successfully price protection or stock rotation opportunities associated with inventory value decreases, and other factors described in other reports and documents filed by the Company with the Securities and Exchange Commission. ITEM 2. Properties. The Company owns a 70,000 square foot building in Greenville, South Carolina in which its principal executive and sales offices are located. The Company currently occupies approximately 50,000 square feet of that building for its own use, and the Company leases the remainder of the building to third parties until additional space is required for the Company's needs. The Company owns a 233,000 square foot distribution center in Memphis, Tennessee. The Company's 20,000 square foot warehouse 5 in Toronto, Canada is no longer used, but is leased through January 2003. The Company also leases small sales offices of 5,400 square feet or less in each of Lake Forest, California; Norcross, Georgia; Cranford, New Jersey; Bellingham, Washington; St. Paul, Minnesota; and Vancouver and Toronto, Canada. Management believes the Company's office and warehouse facilities are adequate to support its operations at their current level and for the foreseeable future. ITEM 3. Legal Proceedings. The Company or its subsidiaries are from time to time parties to 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. ITEM 4. Submission of Matters to a Vote of Security Holders. None. PART II ITEM 5. Market For Registrant's Common Equity and Related Stockholder Matters. The information called for by this Item is incorporated herein by reference from the inside back cover page of the Registrant's Annual Report to Shareholders for the fiscal year ended June 30, 2000. ITEM 6. Selected Financial Data. The information called for by this Item is incorporated herein by reference from page 8 of the Registrant's Annual Report to Shareholders for the fiscal year ended June 30, 2000. ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. The information called for by this Item is incorporated herein by reference from pages 9 through 15 of the Registrant's Annual Report to Shareholders for the fiscal year ended June 30, 2000. ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk. The information called for by this Item is incorporated herein by reference from pages 14 of the Registrant's Annual Report to Shareholders for the fiscal year ended June 30, 2000. ITEM 8. Financial Statements and Supplementary Data. The financial statements listed in Item 14(a)1 of this Form 10-K are incorporated herein by reference from pages 17 through 31 of the Registrant's Annual Report to Shareholders for the fiscal year ended June 30, 2000. The financial statement schedules listed in Item 14(a)2 of this Form 10-K are included in this report on pages F-1 through F-2. 6 ITEM 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure. None. PART III Information called for by Part III (Items 10, 11, 12 and 13) of this report on Form 10-K has been omitted as the Company intends to file with the Securities and Exchange Commission not later than 120 days after the close of its fiscal year ended June 30, 2000 a definitive Proxy Statement pursuant to Regulation 14A promulgated under the Securities Exchange Act of 1934. Such information will be set forth in such Proxy Statement and is incorporated herein by reference. ITEM 10. Directors and Executive Officers of the Registrant. The information required by this item is incorporated herein by reference to the Proxy Statement for the Company's 2000 Annual Meeting of Shareholders. ITEM 11. Executive Compensation. The information required by this item is incorporated herein by reference to the Proxy Statement for the Company's 2000 Annual Meeting of Shareholders. ITEM 12. Security Ownership of Certain Beneficial Owners and Management. The information required by this item is incorporated herein by reference to the Proxy Statement for the Company's 2000 Annual Meeting of Shareholders. ITEM 13. Certain Relationships and Related Transactions. The information required by this item is incorporated herein by reference to the Proxy Statement for the Company's 2000 Annual Meeting of Shareholders. PART IV ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. (a)(1) Consolidated Financial Statements: The following financial statements of ScanSource, Inc. and Independent Auditors' Report are incorporated herein by reference from the Registrant's Annual Report to Shareholders for the fiscal year ended June 30, 2000: Independent Auditors' Report Consolidated Balance Sheets as of June 30, 1999 and 2000 Consolidated Statements of Income for the years ended June 30, 1998, 1999 and 2000 Consolidated Statements of Shareholders' Equity for the years ended June 30, 1998, 1999 and 2000 7 Consolidated Statements of Cash Flows for the years ended June 30, 1998, 1999 and 2000 Notes to Consolidated Financial Statements (a)(2) Financial Statement Schedule: The following financial statement schedule of ScanSource, Inc. and Independent Auditors' Report for the years ended June 30, 1998, 1999 and 2000 are presented on Pages F-1 to F-2. Independent Auditors' Report Schedule - Allowance for Doubtful Accounts Receivable (a)(3) Exhibits: The Exhibits listed on the accompanying Index to Exhibits on pages E-1 to E- 2 are filed as part of this report. (b) Reports on Form 8-K. None. 8 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. September 26, 2000 SCANSOURCE, INC. By: /s/ MICHAEL L. BAUR ----------------------- Michael L. Baur Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date - -------------------------------- ----------------------------- ---------------------------- /s/ STEVEN H. OWINGS Chairman of the Board September 26, 2000 - -------------------------------- Steven H. Owings /s/ MICHAEL L. BAUR President, Chief Executive September 26, 2000 - -------------------------------- Officer and Director Michael L. Baur /s/ JEFFERY A. BRYSON Chief Financial Officer and September 26, 2000 - -------------------------------- Treasurer (principal Jeffery A. Bryson financial and accounting officer) /s/ STEVEN R. FISCHER Director September 26, 2000 - -------------------------------- Steven R. Fischer /s/ JAMES G. FOODY Director September 26, 2000 - -------------------------------- James G. Foody
9 INDEPENDENT AUDITORS' REPORT ---------------------------- The Board of Directors ScanSource, Inc.: Under date of August 16, 2000, we reported on the 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, which are incorporated by reference in the Annual Report on Form 10-K for the year 2000. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related accompanying consolidated financial statement schedule listed in Item 14(a)2. The financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statement schedule based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. Greenville, South Carolina /s/KPMG LLP August 16, 2000 F-1 SCANSOURCE, INC. AND SUBSIDIARIES Allowance for Doubtful Accounts Receivable (In thousands)
Balance at Beginning Amounts Balance at of Charged to End of Description Year Bad Debt Expense Deduction Year - ------------ ------------- -------------------- -------------- -------------- Allowance for doubtful accounts receivable: Year ended June 30, 1998 $ 1,227 1,230 (412) 2,045 ===== ===== ====== ===== Year ended June 30, 1999 $ 2,045 3,582 (625) 5,002 ===== ===== ====== ===== Year ended June 30, 2000 $ 5,002 2,983 (2,521) 5,464 ===== ===== ====== =====
F-2 INDEX TO EXHIBITS Exhibit ------- Number Description ------ ----------- 3.1 Amended and Restated Articles of Incorporation of the Registrant. (Incorporated by Reference to Exhibit 3.1 to Registrant's Form SB- 2 filed with the Commission on February 7, 1994, Registration No. 33-75026-A). 3.2 Bylaws of the Registrant (Incorporated by Reference to Exhibit 3.2 to Registrant's Form SB-2 filed with the Commission on February 7, 1994, Registration No. 33-75026-A). 4.1 Form of Common Stock Certificate (Incorporated by Reference to Exhibit 4.1 to Registrant's Form SB-2 filed with the Commission on February 7, 1994, Registration No. 33-75026-A). 10.9 Stock Option Agreement dated July 1, 1993 covering stock options issued to Michael L. Baur. (Incorporated by Reference to Exhibit 10.9 to the Registrant's Form SB-2 filed with the Commission on February 7, 1994, Registration No. 33-75026-A). 10.10 1993 Incentive Stock Option Plan (As Amended) of the Registrant and Form of Stock Option Agreement (Incorporated by reference to Exhibit 10.10 to Registrant's Form S-1 filed with the Commission on January 23, 1997, Registration No. 333-20231). 10.11 1994 Stock Option Plan for Outside Directors of the Registrant and Form of Stock Option Agreement. (Incorporated by Reference to Exhibit 10.11 to the Registrant's Form SB-2 filed with the Commission on February 7, 1994, Registration No. 33-75026-A). 10.13 1997 Stock Incentive Plan, as amended, of the Registrant and Form of Stock Option Agreement. (Incorporated by Reference to Exhibit 10.13 to the Registrant's Form 10-K for the fiscal year ended June 30, 1999.) 10.18 Agreement to Terminate Distribution Services dated June 24, 1994 between the Registrant and Gates/FA Distributing, Inc. (Incorporated by Reference to Exhibit 99.1 to the Registrant's Form 8-K filed with the Commission on June 6, 1994). 10.21 Software License Agreement dated April 18, 1995 between the Registrant and Technology Marketing Group, Inc. d/b/a Globelle, including letter agreement dated November 22, 1995 between the parties with respect to stock options. (Incorporated by reference to Exhibit 10.21 to the Registrant's registration statement on Form S-3 filed with the Commission on December 29, 1995, Registration No. 33-81043). 10.25 Agreement for Wholesale Financing (Security Agreement) dated April 8, 1996 between the Registrant and IBM Credit Corporation, including letter agreement dated April 17, 1996 between the parties. (Incorporated by Reference to Exhibit 10.25 to the Registrant's Form 10-K for the fiscal year ended June 30, 1998). 10.26 Intercreditor Agreement dated April 8, 1996 among the Registrant, IBM Credit Corporation, and Branch Banking and Trust Company. (Incorporated by reference to Exhibit 10.26 to the Registrant's Form S-1 filed with the Commission on January 23, 1997, Registration No. 333-20231). 10.27(a) Loan and Security Agreement dated November 25, 1996 between the Registrant and Branch Banking and Trust Company. (Incorporated by reference to Exhibit 10.27 to the Registrant's Form S-1 filed with the Commission on January 23, 1997, Registration No. 333-20231). 10.27(b) Loan Modification Agreement dated January 29, 1999 by and between the Registrant and Branch Banking and Trust Company, including Addendum to Promissory Note and Modification, Increase, Renewal and Restatement of Promissory Note. E-1 10.28 Employment Agreement dated as of July 1, 1999 between the Registrant and Steven H. Owings. (Incorporated by reference to Exhibit 10.28 to the Registrant's Form 10-Q for the quarter ended September 30, 1999). 10.29 Employment Agreement dated as of July 1, 1999 between the Registrant and Michael L. Baur. (Incorporated by reference to Exhibit 10.29 to the Registrant's Form 10-Q for the quarter ended September 30, 1999). 10.30 Employment Agreement dated as of July 1, 1999 between the Registrant and Jeffery A. Bryson. (Incorporated by reference to Exhibit 10.30 to the Registrant's Form 10-Q for the quarter ended September 30, 1999). 10.32 Stock Option Agreement dated July 18, 1996 covering stock options granted to James G. Foody. (Incorporated by reference to Exhibit 10.32 to the Registrant's Form S-1 filed with the Commission on January 23, 1997, Registration No. 333-20231). 10.33 Stock Option Agreement dated December 3, 1996 covering stock options granted to Steven H. Owings. (Incorporated by reference to Exhibit 10.33 to the Registrant's Form S-1 filed with the Commission on January 23, 1997, Registration No. 333-20231). 10.34 Stock Option Agreement dated December 3, 1996 covering stock options granted to Michael L. Baur. (Incorporated by reference to Exhibit 10.34 to the Registrant's Form S-1 filed with the Commission on January 23, 1997, Registration No. 333-20231). 10.35 Distribution Agreement dated October 1, 1994 between the Registrant and Symbol Technologies, Inc. (Incorporated by Reference to Exhibit 10.35 to the Registrant's Form 10-K for the fiscal year ended June 30, 1998). 10.36 Distribution Agreement dated January 1, 1996 between the Registrant and IBM Corporation. (Incorporated by Reference to Exhibit 10.36 to the Registrant's Form 10-K for the fiscal year ended June 30, 1998). 10.37 Stock Option Agreement dated January 17, 1997 covering options granted to Steven H. Owings. (Incorporated by reference to Exhibit 10.37 to the Registrant's Form S-1 filed with the Commission on January 23, 1997, Registration No. 333-20231). 10.38 Stock Option Agreement dated January 17, 1997 covering options granted to Michael L. Baur. (Incorporated by reference to Exhibit 10.38 to the Registrant's Form S-1 filed with the Commission on January 23, 1997, Registration No. 333-20231). 10.39 Stock Option Agreement dated January 17, 1997 covering options granted to Jeffrey A. Bryson. (Incorporated by reference to Exhibit 10.39 to the Registrant's Form S-1 filed with the Commission on January 23, 1997, Registration No. 333-20231). 13* Portions of the Registrant's Annual Report to Shareholders for the Fiscal Year Ended June 30, 2000. 23* Consent of KPMG LLP 27* Financial Data Schedule. _____________ * - Filed herewith. E-2 EX-13 2 0002.txt FINANCIAL PORTION OF ANNUAL REPORT 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. 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.
Fiscal Year Ended June 30, ------------------------- 1996 1997 1998 1999 2000 ---- ---- ---- ---- ---- (In thousands, except per share data) 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 ======= ======= ======== ======== ========
As of June 30, ------------------ 1996 1997 1998 1999 2000 ---- ---- ---- ---- ---- Balance Sheet Data: (In thousands) 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
- --------------------- (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. 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. Results of Operations The following table sets forth for the periods indicated certain income and expense items as a percentage of net sales:
Fiscal Year Ended June 30 ------------------------------------ 1998 1999 2000 ---- ---- ---- 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 ===== ===== =====
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; 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. Quarterly Results The following tables set forth certain unaudited quarterly financial data and such data expressed as a percentage of net sales. The information has been derived from unaudited financial statements that, in the opinion of management, reflect all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of such quarterly information. The operating results for any quarter are not necessarily indicative of the results to be expected for any future period.
Three Months Ended --------------------------------------------------------------------------------- Fiscal 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 ------- ------- ------- ------- -------- -------- -------- -------- 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 ======= ======= ======= ======= ======== ======== ======== ========
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 -------- ------- ------- ------- -------- ------- ------- -------- 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
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 === === === === === === === ===
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. 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. 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. Financial Statements and Supplementary Data The following information has been incorporated by reference into Item 8 of the Form 10-K: 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.
Liabilities and Shareholders' Equity 1999 2000 ------------------------------------ ---- ---- (In thousands) 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 =========== ==========
SCANSOURCE, INC. AND SUBSIDIARIES Consolidated Statements of Income Years ended June 30, 1998, 1999 and 2000
1998 1999 2000 ---- ---- ---- (In thousands, except per share data) 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 ========== ========== ==========
See accompanying notes to financial statements. SCANSOURCE, INC. AND SUBSIDIARIES Consolidated Statements of Shareholders' Equity Years ended June 30, 1998, 1999 and 2000
Common Retained Stock Earnings Total ------- -------- ------- (In thousands) 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 ======= ======== =======
See accompanying notes to financial statements. SCANSOURCE, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows Years ended June 30, 1998, 1999 and 2000
1998 1999 2000 ----------- ----------- ----------- (In thousands) 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 =========== =========== ===========
See accompanying notes to financial statements. 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 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 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 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:
Weighted Weighted Weighted Average Average Average 1998 Exercise 1999 Exercise 2000 Exercise Shares Price Shares Price Shares Price -------- -------- -------- -------- -------- ---------- 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 ======= ======= =======
(Continued) 19 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:
Options Outstanding Options Exercisable ------------------------------------------------------------------ ----------------------------------- Weighted Average Weighted Remaining Average Range of Number Contractual Number Exercise Exercise Prices Outstanding Life Exercisable Price ----------------- ------------ ------------- ------------- ---------- $ 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 ========== =========
(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 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:
1998 1999 2000 ---- ---- ---- 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 ========= ========= ==========
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.
Per Share Income Shares Amount --------------- ---------- ------------------ 1998: 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 =============== ========== ===================
21 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:
1998 1999 2000 ----------- ----------- ----------- 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 =========== =========== ===========
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:
1999 2000 ------------ ------------ 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 ============ ============
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. 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. 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. 1998 1999 2000 --------------------- --------------------- --------------------- 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 ============= ============= =============
(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. 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 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. EX-23 3 0003.txt CONSENT OF KPMG LLP Exhibit 23 INDEPENDENT AUDITORS' CONSENT ----------------------------- The Board of Directors ScanSource, Inc.: We consent to the incorporation by reference in the registration statements on Form S-8 (No. 333-94640), (No. 333-25423), (No. 333-08884), (No. 333-49879), (No. 333-78281), and (No. 333-88133) of our report dated August 16, 2000, relating to the consolidated balance sheets of ScanSource, Inc. and subsidiaries (the "Company") 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, which report is incorporated by reference in the June 30, 2000 Annual Report on Form 10-K of the Company. Greenville, South Carolina /s/ KPMG LLP September 26, 2000 EX-27 4 0004.txt FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BALANCE SHEET & INCOME STATEMENT FOR PERIOD ENDED JUNE 30, 2000. 1,000 12-MOS JUN-30-2000 JUL-01-1999 JUN-30-2000 4,612 0 72,447 5,464 101,654 185,392 23,573 5,183 205,880 104,848 0 0 0 42,140 0 205,880 497,421 497,421 443,716 30,832 147 0 0 22,234 8,449 13,785 0 0 0 13,785 2.48 2.31
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