FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
( Mark one )
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: March 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to ____________
Commission file number 0-21528
Bell Microproducts Inc.
(Exact name of registrant as specified in its charter)
California 94-3057566
( State or other jurisdiction of ( I.R.S. Employer
incorporation or organization) Identification No.)
1941 Ringwood Avenue, San Jose, California 95131-1721
(Address of principal executive offices ) (Zip Code )
(408) 451-9400
(Registrant's telephone number, including area code )
N/A
(Former name, former address and former fiscal year, if changed
since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Common Stock, $.01 Par Value --
Number of Shares Outstanding at March 31, 2000: 9,401,000
Bell Microproducts Inc.
Index to Form 10-Q
Page
PART I - FINANCIAL INFORMATION Number
Item 1: Financial Statements
Condensed Consolidated Balance Sheets - March 31, 2000
and December 31, 1999 3
Condensed Consolidated Statements of Income - Three
months ended March 31, 2000 and 1999 4
Condensed Consolidated Statements of Cash Flows - Three
months ended March 31, 2000 and 1999 5
Notes to Condensed Consolidated Financial Statements 6
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Item 3: Quantitative and Qualitative Disclosure about Market Risk 11
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports 12
Signature 13
Exhibit Index 14
2
PART I - FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATements
Bell Microproducts Inc.
Condensed Consolidated Balance Sheets
(in thousands)
(unaudited)
March 31, December 31,
2000 1999
- -----------------------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash $ 11,830 $ 5,103
Accounts receivable, net 200,127 168,857
Inventories 131,226 156,648
Deferred income taxes 4,501 4,220
Prepaid expenses and other current assets 1,924 1,238
-------------------- -----------------------
Total current assets 349,608 336,066
Property and equipment, net 8,689 7,626
Goodwill and other intangibles 15,993 16,059
Other assets 668 600
==================== =======================
Total assets $374,958 $360,351
==================== =======================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $141,600 $143,632
Other accrued liabilities 11,152 9,808
-------------------- -----------------------
Total current liabilities 152,752 153,440
Borrowings under the line of credit 119,900 110,600
Other long-term liabilities 1,792 38
-------------------- -----------------------
Total liabilities 274,444 264,078
-------------------- -----------------------
Commitments and contingencies (Note 6)
Shareholders' equity:
Common Stock, $0.01 par value, 20,000 shares
authorized; 9,401 and 9,251 issued and outstanding 59,583 58,527
Retained earnings 40,495 37,285
Accumulated other comprehensive income 436 461
-------------------- -----------------------
Total shareholders' equity 100,514 96,273
-------------------- -----------------------
Total liabilities and shareholders' equity $374,958 $360,351
==================== =======================
The accompanying notes are an integral part of these condensed
consolidated financial statements.
3
Bell Microproducts Inc.
Condensed Consolidated Statements of Income
(in thousands, except per share data)
(unaudited)
Three months ended March 31,
-----------------------------------
2000 1999
---------------- ---------------
Net sales $366,270 $219,599
Cost of sales 337,012 200,177
---------------- ---------------
Gross profit 29,258 19,422
Selling, general and
administrative expenses 21,355 14,955
---------------- ---------------
Operating Income from continuing
operations 7,903 4,467
Interest expense 2,366 1,224
Foreign exchange remeasurement loss 3 -
---------------- ---------------
Income from continuing operations
before income taxes 5,534 3,243
Provision for income taxes 2,324 1,362
---------------- ---------------
Income from continuing operations 3,210 1,881
Discontinued operations:
Loss from discontinued operations, net of
income tax benefit of $471 - (651)
---------------- ---------------
Net income $ 3,210 $ 1,230
================ ===============
Earnings per share
Basic
Continuing operations $ 0.34 $ 0.21
Discontinued operations - (0.07)
---------------- ---------------
Total $ 0.34 $ 0.14
================ ===============
Diluted
Continuing operations $ 0.32 $ 0.21
Discontinued operations - (0.07)
---------------- ---------------
Total $ 0.32 $ 0.14
================ ===============
Shares used in per share calculation
Basic 9,309 8,932
================ ===============
Diluted 9,987 9,010
================ ===============
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
Bell Microproducts Inc.
Condensed Consolidated Statements of Cash Flows
(Increase/(decrease) in cash, in thousands)
(unaudited)
Three months ended March 31,
- -----------------------------------------------------------------------------------------------
2000 1999
------------- -------------
Cash flows from operating activities:
Income from continuing activities $ 3,210 $ 1,881
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization 532 485
Change in allowance for doubtful accounts 462 491
Change in deferred income taxes (281) -
Changes in assets and liabilities:
Accounts receivable (31,732) (21,029)
Inventories 25,422 (12,061)
Prepaid expenses (686) (253)
Other assets (68) (120)
Accounts payable (2,032) 21,497
Other accrued liabilities 1,344 1,082
------------- -------------
Net cash used in continuing operating activities (3,829) (8,027)
Net cash provided by discontinued operations - 1,311
------------- -------------
Net cash used in operating activities (3,829) (6,716)
------------- -------------
Cash flows from investing activities:
Acquisition of property and equipment, net (1,534) (830)
------------- -------------
Net cash used in investing activities (1,534) (830)
------------- -------------
Cash flows from financing activities:
Net borrowings under line of credit agreement 9,300 5,200
Proceeds from issuance of Common Stock 1,056 152
Net borrowings under long term liabilities 1,754 1
------------- -------------
Net cash provided by financing activities 12,110 5,353
------------- -------------
Effect of exchange rate changes on cash (20) 53
------------- -------------
Net increase (decrease) in cash 6,727 (2,140)
Cash at beginning of period 5,103 4,082
------------- -------------
Cash at end of period $ 11,830 $ 1,942
============= =============
The accompanying notes are an integral part of these condensed
consolidated financial statements.
5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 1 - Basis of Presentation:
The Company operates in one business segment as a distributor of semi
conductors and computer products to original equipment manufacturors (OEMs),
value added resellers (VARs) and dealers in the United States, Canada and Latin
America.
The consolidated financial statements presented in this Quarterly
Report are unaudited. It is management's opinion that all adjustments,
consisting of normal recurring items, have been included for a fair basis of
presentation. This Quarterly Report on Form 10-Q should be read in conjunction
with the Company's 1999 Annual Report on Form 10-K. The operating results for
the period ended March 31, 2000 are not necessarily indicative of the results
that may be expected for the fiscal year ending December 31, 2000.
Note 2 - Acquisition and Divestitures:
On July 8, 1999, the Company completed the sale of its Contract
Manufacturing Division, Quadrus, for a total consideration of approximately
$34.7 million. The sale resulted in an after tax gain of $1.1 million or $0.11
per share. The results of Quadrus have been reported separately as discontinued
operations in the Consolidated Statements of Income and prior year consolidated
financial statements have been restated.
On July 21, 1999, the Company acquired certain assets and assumed
certain liabilities of Future Tech International, Inc., a privately held company
located in Miami. Prior to its reorganization in bankruptcy and subsequent
acquisition by the Company, FTI was a leading value-added distributor of
computer components to the markets of Latin America and the Caribbean. FTI
distributes products manufactured by AMD, Canon, Maxtor, NEC, Quantum and other
leading manufacturers, and manufactures and markets its proprietary
Markvision-branded products.
The FTI assets acquired were primarily accounts receivable, inventory
and fixed assets. As consideration for the assets purchased, the Company paid
$2.2 million in cash, including acquisition costs and assumed certain
liabilities, primarily trade accounts payable. The Company is obligated to pay
up to an additional $4.5 million in cash within 21 months of the closing date as
a contingent incentive payment to be based upon earnings achieved up to the
first anniversary of the acquisition.
The FTI purchase price was allocated to the acquired assets and
liabilities assumed based upon management's estimate of their fair market values
as of the acquisition date as follows (in thousands):
Restricted cash $ 23
Accounts receivable 12,576
Inventories 2,639
Equipment and other assets 3,947
Goodwill 4,227
Accounts payable (20,989)
Other accrued liabilities (204)
======================
Total consideration $ 2,219
======================
6
Note 3 - Earnings per Share
Basic EPS is computed by dividing net income available to common
shareholders (numerator) by the weighted average number of common shares
outstanding (denominator) during the period. Diluted EPS gives effect to all
dilutive potential common shares outstanding during the period including stock
options, using the treasury stock method, and convertible preferred stock, using
the if-converted method.
Following is a reconciliation of the numerators and denominators of the
Basic and Diluted EPS computations for the periods presented below (in
thousands):
Three Months Ended
March 31,
------------------------------------
2000 1999
---------------- ---------------
Net income $ 3,210 $ 1,230
================ ===============
Weighted average common shares outstanding (Basic) 9,309 8,932
Effect of dilutive warrants and options 678 78
---------------- ---------------
Weighted average common shares outstanding (Diluted) 9,987 9,010
================ ===============
Note 4 - Property and Equipment:
A summary of property and equipment follows (in thousands):
March 31, 2000 December 31, 1999
--------------------------- ---------------------------
Computer and other equipment $ 8,064 $ 6,753
Furniture and fixtures 2,444 2,354
Leasehold improvements 1,027 899
Warehouse and other equipment 1,419 1,412
--------------------------- ---------------------------
12,951 11,418
Accumulated depreciation (4,262) (3,792)
--------------------------- ---------------------------
Total $ 8,689 $ 7,626
=========================== ===========================
Note 5 - Line of Credit
On December 8, 1999 and as further amended on December 31,1999, the
Company entered into an amendment to the Third Amended and Restated Syndicated
Credit Agreement, arranged by California Bank & Trust, as agent. The amendment
increased the Company's $130 million revolving line of credit to $160 million,
and extended its maturity date to May 31, 2001. At the Company's option, the
borrowings under the line of credit will bear interest at California Bank &
Trust's prime rate (9.0% at March 31, 2000) or the adjusted LIBOR rate plus a
maximum of 2.25%. The balance outstanding on the revolving line of credit at
March 31, 2000 was $119.9 million. Obligations of the Company under the
revolving line of credit are secured by substantially all of the Company's
assets. The revolving line of credit requires the Company to meet certain
financial tests and to comply with certain other covenants on a quarterly basis,
including restrictions on incurrence of debt and liens, restrictions on mergers,
acquisitions, asset dispositions, declaration of dividends, repurchases of
stock, making investments and profitability. The Company was in compliance with
its bank covenants at March 31, 2000; however, there can be no assurance that
the Company will be in compliance in the future.
7
Note 6 - Commitments and Contingencies
The Company is subject to legal proceedings and claims that arise in
the normal course of business. Management believes that the ultimate resolution
of such matters will not have a material adverse effect on the Company's
financial position or results of operations.
During 1999, the Company filed suit against American Credit Indemnity
("ACI"), its former credit insurer, for recovery of amounts due under claim made
by the Company. ACI has counter sued for rescission of the credit insurance
contract for repayment of claims previously paid. Management has reviewed and
investigated the claims, and while no assurance can be given regarding the
outcome of this matter, management believes that the final outcome of the matter
will not have a material impact on consolidated financial position or results of
operations. However, because of the nature and inherent uncertainties of
litigation, should the outcome of this matter be unfavorable, the Company may be
required to pay damages and other expenses, which could have a material adverse
effect on its financial position and results of operations.
Note 7 - Subsequent Events
On May 3, 2000 the Company signed a definitive purchase agreement with
Rorke Data, Inc. ("Rorke"), a privately held company that provides leading-edge
Fibre Channel and SAN storage solutions to vertical markets such as digital
audio/video, publishing, and medical imaging throughout the U.S. and Europe. The
agreement provides for the Company to pay approximately $6 million in cash and
shares of the Company for all of the outstanding shares of Rorke and to
immediately satisfy or replace approximately $6 million of certain specified
debt of Rorke. The agreement is subject to a number of conditions that must be
satisfied prior to closing.
On April 25, 2000, the Company signed a letter of intent to acquire
Ideal Hardware plc. ("Ideal"), a wholly owned subsidiary of InterX plc. Ideal is
a United Kingdom based value-added, storage-centric distributor. The letter of
intent is non-binding and the acquisition is subject to the completion of due
diligence and the negotiation of final terms and conditions of a definitive
purchase agreement. The purchase price has yet to be determined. Based on InterX
plc's financial statements, Ideal recorded sales in the fiscal year ending July
1999 of approximately $500 million.
Note 8 - Recently Issued Accounting Statement
In April 2000, the Financial Accounting Standards Board issued FASB
interpretation of No. 44, Accounting for Certain Transactions Involving Stock
Compensation, an interpretation of APB Opinion No. 25 ("FIN44"). Among other
issues, FIN 44 clarifies (a) the definition of employees for purposes of
applying Opinion No. 25, (b) the criteria for determining whether a plan
qualifies as a noncompensatory plan, (c) the accounting consequence of various
modifications to the terms of a previously fixed stock option or award, and (d)
the accounting for an exchange of stock compensation awards in a business
combination. FIN 44 is effective July 1, 2000, but certain conclusions in the
interpretation cover specific events that occur after either December 15, 1998
or January 12, 2000. To the extent that this interpreation covers events
occurring during the period after December 15, 1998, or January 12, 2000, but
before the effective date of July 1, 2000, the effect of applying this
interpretation are recognized on a prospective basis from July 1, 2000. The
Company is currently reviewing stock grants to determine the impact, if any,
that may arise from implementation of FIN 44, although management does not
expect the imapct, if any, to be material to the financial statements.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition," which provides
guidance on the recognition, presentation, and disclosure of revenue in
financial statements filed with the SEC. SAB 101 outlines the basic criteria
8
that must be met to recognize revenue and provides guidance for disclosures
related to revenue recognition policies. The Company's revenue recognition
policies comply with the requirements of SAB 101.
In June 1999, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 137 ("SFAS 137"), "Accounting
for Derivative Instruments and Hedging Activities - Deferral of the Effective
Date of FASB Statement No. 133." SFAS 137 amends Statement of Financial
Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative
Instruments and Hedging Activities," to defer its effective date to all fiscal
quarters of all fiscal years beginning after June 15, 2000. SFAS 133 establishes
accounting and reporting standards for derivative instruments including
standalone instruments, such as forward currency exchange contracts and interest
rate swaps or embedded derivatives and requires that these instruments be
marked-to-market on an ongoing basis. These market value adjustments are to be
included either in the income statement or stockholders' equity, depending on
the nature of the transaction. The Company is required to adopt SFAS 133 in the
first quarter of its fiscal year 2001. The effect of SFAS 133 is not expected to
be material to the Company's financial statements.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Information Regarding Forward-Looking Statements
The following Management's Discussion and Analysis of Financial
Condition and Results of Operations contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Actual results could differ materially from
those projected in the forward-looking statements as a result of a number of
factors, including the timing of delivery of products from suppliers, the
product mix sold by the Company, the integration of acquired businesses,
customer demand, the Company's dependence on a small number of customers that
account for a significant portion of revenues, availability of products from
suppliers, cyclicality in the disk drive and other industries, price competition
for products sold by the Company, management of growth, the Company's ability to
collect accounts receivable, price decreases on inventory that is not price
protected, potential year 2000 costs, potential interest rate fluctuations as
described below and the other risk factors detailed in the Company's Annual
Report on Form 10-K for the year ended December 31, 1999 filed with the
Securities and Exchange Commission. The Company assumes no obligation to update
such forward-looking statements or to update the reasons actual results could
differ materially from those anticipated in such forward-looking statements.
Three months ended March 31, 2000 compared to three months ended March 31, 1999
Sales were $366.3 million for the quarter ended March 31, 2000, which
represented an increase of $146.7 million, or 67% compared to the same quarter
in 1999. This increase in sales was attributable to the growth in unit sales in
existing product lines, the addition of new lines and expansion of the customer
base related to the acquisition of FTI in July of 1999.
The Company's gross profit for the first quarter of 2000 was $29.3
million, an increase of $9.8 million, or 51% from the first quarter of 1999. The
increase in gross profit was primarily the result of increased sales volume. As
a percentage of sales, overall gross margins were 8.0% compared to 8.8% in the
same period last year. This decrease was primarily due to inceased competitive
pricing in the industry, sales into Latin America, which typically have lower
margins than sales in North America, and customer mix.
Selling, general and administrative expenses increased to $21.4 million
in the first quarter of 2000 from $15.0 million in the first quarter of 1999, an
increase of $6.4 million, or 42%. This increase in expenses was attributable to
the acquisition of FTI, the Company's continuing effort to expand its sales and
9
marketing organization and strengthen its financial and administrative support,
and increased sales volume. As a percentage of sales, operating expenses
decreased in the first quarter of 2000 to 5.8% from 6.8% in the first quarter of
1999.
Interest expense was $2.4 million in the first quarter of 2000 as
compared to $1.2 million in the same period last year. This increase was
primarily due to higher bank borrowings throughout the first quarter of 2000 in
relation to the comparable 1999 quarter.
The effective income tax rate remained the same, 42%, during both
periods.
In the first quarter of 2000, the Company recognized remeasurement
losses of $3,000 relating to the translation of US dollar dominated debt of its
Canadian subsidiary, Tenex Data, and subsidiaries of FTI.
LIQUIDITY AND CAPITAL RESOURCES
In recent years, the Company has funded its working capital
requirements principally through borrowings under bank lines of credit. Working
capital requirements have included the financing of increases in inventory and
accounts receivable resulting from sales growth.
On December 8, 1999 and as further amended on December 31, 1999, the
Company entered into an amendment to the Third Amended and Restated Syndicated
Credit Agreement arranged by California Bank & Trust, as Agent. The amendment
increased the Company's $130 million revolving line of credit to $160 million
and extended the maturity date to May 31, 2001. At the Company's option, the
borrowings under the line of credit will bear interest at California Bank &
Trust's prime rate (9.0% at March 31, 2000) or the adjusted LIBOR rate plus a
maximum of 2.25%. The balance outstanding on the revolving line of credit at
March 31, 2000 was $119.9 million. Obligations of the Company under the
revolving line of credit are secured by substantially all of the Company's
assets. The revolving line of credit requires the Company to meet certain
financial tests and to comply with certain other covenants on a quarterly basis,
including restrictions on incurrence of debt and liens, restrictions on mergers,
acquisitions, asset dispositions, declaration of dividends, repurchases of
stock, making investments and profitability. The Company was in compliance with
its bank covenants at March 31, 2000; however, there can be no assurance that
the Company will be in compliance with its bank covenants in the future. If the
Company does not remain in compliance with the covenants in its Amended and
Restated Syndicated Credit Agreement and is unable to obtain a waiver of
noncompliance from its banks, the Company's financial condition and results of
operations would be materially adversely affected. The Company intends to
utilize its revolving line of credit to fund future working capital
requirements. The Company evaluates potential acquisitions from time to time and
may utilize its line of credit to acquire complementary businesses, provided
consent from its banks is obtained.
On July 21, 1999, the Company acquired certain assets and assumed
certain liabilities of FTI for a purchase price of approximately $2.2 million in
cash including acquisition costs. The acquisition, which was accounted for as a
purchase, was funded through borrowings under the Company's revolving line of
credit. On June 8, 1999 the Company sold its Contract Manufacturing Division,
Quadrus, for a total cash consideration of $34.7 million
Net cash used in operating activities for the three months ended March
31, 2000, was $3.6 million. The Company's net accounts receivable as of March
31, 2000 increased to $200.1 million from $168.9 million as of December 31,
1999. The Company's inventories as of March 31, 2000 decreased to $131.2 million
from $156.7 million as of December 31, 1999, primarily as a result of a change
in the timing of inventory purchases and receipts. Net cash provided by
financing activities during the three months ended March 31, 2000 totaled $12.1
million, which was primarily related to the borrowings under the Company's line
of credit. The Company's future cash requirements will depend on numerous
factors, including potential acquisitions and the rate of growth of its sales.
The Company may, in the future, seek additional debt or equity financing to fund
continued growth.
10
YEAR 2000 COMPLIANCE
The Year 2000 issue relates to the way computer systems and programs
define calendar dates; they could fail or make miscalculations due to
interpreting a date including "00" to mean 1900, not 2000. This could result in
system failures causing disruptions in operations, including among other things,
interruptions in processing business transactions and other normal business
operations. Also, many systems and equipment that are not typically thought of
as "computer-related" (referred to as non-IT) contain embedded hardware or
software that may have a time element.
Thus far, the Company has not experienced any significant problems
related to year 2000 issues associated with products distributed, or with the
Company's internal computer systems. However, the Company cannot guarantee that
the year 2000 problem will not adversely affect its business, operating results
or financial condition at some point in the future.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company's line of credit has an interest rate that is based on
associated rates such as LIBOR and the Prime Rate that may fluctuate over time
based on changes in the economic environment. The Company is subject to interest
rate risk, and could be subjected to increased interest payments if market
interest rates fluctuate. An increase of 1% in such interest rate percentages
would increase the annual interest expense by $1.2 million, based on the
borrowings at March 31, 2000.
Substantially all of the Company's revenue and capital expenditure are
transacted in US Dollars. Transactions in other currencies and the associated
risks of depreciation of value and volatility of cashflows have not been
material to date. The Company is subject to increased foreign currency
transactions and associated risks following the acquisition of Toronto-based
Tenex Data in November 1998 and the acquisition of Future Tech, Inc. in July
1999. To the extent the Company is unable to manage these risks, the Company's
results and financial position could be materially adversely affected. The
Company does not engage in hedging activities such as forward currency exchange
contracts and does not invest in derivative financial instruments.
11
Item 6. Exhibits and Reports
(a) Exhibits:
27. Financial Data Schedule for the quarter
ended March 31, 2000.
(b) Reports on Form 8-K:
None
12
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: May 15, 2000
BELL MICROPRODUCTS INC.
By: /s/ Remo E. Canessa
Vice President of Finance &
Chief Financial Officer
(Principal Financial Officer and Accounting Officer)
13
EXHIBIT INDEX
BELL MICROPRODUCTS INC.
FORM 10Q
FOR QUARTER ENDED MARCH 31, 2000
Exhibit Number Description
- -------------- -----------
27. Financial Data Schedule (filed in electronic format only)
14