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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OF 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 (I.R.S. Employer
of incorporation or organization) Identification Number)
1941 Ringwood Avenue, San Jose, California 95131-1721
(Address of principal executive office, including zip code)
Registrant's telephone number, including area code: (408) 451-9400
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 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 the 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. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant, as of March 15, 2000, was approximately $119,432,070 based upon
the last sale price reported for such date on the Nasdaq National Market. For
purposes of this disclosure, shares of Common Stock held by officers and
directors of the Registrant have been excluded because such persons may be
deemed to be affiliates. This determination is not necessarily conclusive.
The number of shares of Registrant's Common Stock outstanding as of March
15, 2000 was 9,345,747.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the definitive Proxy Statement for the Company's Annual Meeting
of Shareholders to be held on May 11, 2000 are incorporated by reference into
Part III of this Form 10-K
Index of Exhibits appears on Pages 43, 44 and 45.
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PART I
ITEM 1: Business
Founded in 1987, Bell Microproducts Inc. and its subsidiaries (the
"Company") markets and distributes a select group of semiconductor and computer
products to original equipment manufacturers ("OEMs") and value-added resellers
("VARs"). Semiconductor products include memory, logic, microprocessor,
peripheral and specialty components. Computer products include disk, tape and
optical drives and subsystems, drive controllers, storage systems, monitors,
board-level products and computers. The Company also provides a variety of
value-added services to its customers, including subsystem testing, software
loading, mass storage and computer systems integration, disk drive formatting
and testing, and the packaging of electronic component kits to customer
specifications.
When used in this report, the words "expects," "anticipates," "estimates,"
"intends" and similar expressions are intended to identify forward-looking
statements within the meaning of Section 27A under the Securities Act of 1933
and Section 21E under the Securities Exchange Act of 1934. Such statements
include but are not limited to statements regarding the ability to obtain
favorable product allocations and the ability to increase gross profit while
controlling expenses. These statements are subject to risks and uncertainties
that could cause actual results to differ materially, including those risks
described under "Risk Factors" below.
Products and Services
Computer Products
While a substantial portion of the Company's sales of computer products in
1999 was attributable to hard disk drives, the Company's computer product sales
also included tape drives, optical disk drives, networking products, monitors,
computers, motherboards and value-added services and solution products. Based on
a comparison of its product lines with product lines offered by other major
industrial electronics distributors, the Company believes that its breadth of
product offerings for mass storage computer products is among the strongest in
the industry. The Company distributes these products primarily to industrial
OEMs, hardware integrators, VARs and other resellers.
Disk, Tape and Optical Drives. The Company sells floppy, hard and optical
disk and tape drives to a wide range of customers, including industrial OEMs
(some of which produce computer, office, medical and telecommunications
products), as well as integrators and manufacturers of computers based on the
UNIX, DOS/Windows, Linux and Macintosh operating systems and frequently markets
subsystems to integrators and VARs. To serve these customers, Bell Microproducts
offers a full range of products from the industry leaders in mass storage such
as IBM, Maxtor Corporation, Quantum Corporation, Seagate Technology, Sun
Microelectronics (a division of Sun Microsystems Inc.) and TEAC.
Networking Products. The Company sells specialized board-level mass storage
and memory systems products including full "plug and play" (ready for immediate
installation) tape, optical (including jukebox) and RAID (Redundant Array of
Inexpensive Disks) solutions for OEMs, VARs and sophisticated end users. These
solutions are configured using standard components from the Company's inventory.
The Company also offers one of the industries most complete lines of Fibre
Channel and interconnectivity products and believes it is one of the leading
resellers of these products.
1
Computers. The Company delivers standard and custom configurations of
motherboards, computers and file servers to the VAR and OEM markets, including
medical, commercial and test system OEMs and vertical market integrators. The
principal motherboard supplier is Sun Microelectronics.
Semiconductor Products
The Company distributes a broad range of semiconductor, passive and
electromechanical products including memory, logic, microprocessor, peripheral
and specialty components. The products distributed primarily are advanced
integrated circuits, critical to the performance of the customer's products
utilizing these components. The Company's customer base for its semiconductor
products comprises primarily small and medium-sized OEMs, including
manufacturers of computer and office products, industrial equipment (including
machine tools, factory automation and robotic equipment), scientific and medical
instruments and telecommunications products. The Company's principal suppliers
of semiconductor products in 1999 included Cypress Semiconductor, IBM
Microelectronics, NEC Electronics, OKI Semiconductor, Quick Logic and Sony
Electronics.
Value-Added Services
The Company provides the following value-added services:
Systems Integration. Systems integration is a customer specific turnkey
solution provided by the Company which integrates such high technology products
as motherboards, disk, tape and optical drives with power supplies, enclosures,
interface electronics, cables and connectors to build a completed system.
Subsystem and Device Value-Added Services. The Company provides value-added
services to board and mass storage products to a customer's specification
delivering subsystems modified to meet the requirements of specific
applications.
Bellstor. The Company offers its own branded BellStor product line of disk
and tape subsystems and RAID products to OEMs, VARs, and integrators for
application in standard interface computer environments. The Bellstor product
family ranges from a subsystem to a complete RAID ready (JBOD) storage solution,
and extends to SAN systems and Fibre Channel products with assured
interoperability via Bellstor's SANPower program.
Trademark. The Company offers private-labeled personal computers and
servers that are sold to value-add resellers under the brand name Trademark.
These products are based on the Windows and Linux operating systems.
Kitting. Kitting of customer component product requirements is provided to
a select customer base. Kitting is a service whereby the Company purchases
materials according to the customer's specifications and assembles them into kit
form, ready for the assembly process.
Operations
The majority of the products sold by the Company are purchased pursuant to
authorized distributor agreements. These agreements generally establish
marketing relationships with product manufacturers, provide for joint sales and
marketing programs and generally provide the Company price protection and
limited inventory rotation rights. These agreements are typically for renewable
terms of one year, are non-exclusive, and authorize the Company to sell through
most or all of its sales and distribution centers all or a portion of the
products produced by that manufacturer.
2
The Company manages the quality and quantity of its distribution inventory
through its asset management group, which seeks to maximize responsiveness to
customer requirements while optimizing inventory turns. Inventory management is
critical to a distributor's business. The Company's strategy is to focus on a
high number of resales or "turns" of existing inventory to reduce exposure to
product obsolescence, changing consumer demands and declining average selling
prices. The Company's computer system facilitates the control of purchasing and
inventory, accounts payable, shipping and receiving, and invoicing and
collection information for the Company's distribution business. Each of the
Company's sales centers is electronically linked to the Company's central
computer system which provides fully integrated on-line real-time data with
respect to the Company's inventory levels. Inventory turns are tracked by part
number or device type, and the Company's inventory management system provides
information to assist in making future purchasing and stock rotation decisions.
This system seeks to enable the Company to effectively manage its inventory so
as to respond quickly to customer requirements while minimizing inventory
levels. The asset management group also monitors supplier stock rotation
programs, inventory price protection opportunities, rejected material and other
factors related to inventory quality and quantity.
Backlog
The Company does not believe that information concerning backlog is
material to an understanding of its business, as the Company's objective is to
ship orders on the same day they are received unless the customer has requested
a specific future delivery date on an order. Additionally, it is common industry
practice for customers, in most cases, to be able to re-schedule or cancel
orders with future delivery dates without penalties.
Marketing and Sales
The semiconductor and computer products industries are characterized by
rapid technological advances and a constant flow of new products. The resulting
shorter product life cycles have necessitated compressed design and development
cycles, more rapid production build-up and quick response to major technological
shifts. To react to these factors, manufacturers are focusing on and devoting
significant resources to their core areas of expertise including research and
product design and development, and are increasingly outsourcing their marketing
and manufacturing requirements.
Over the past two decades the growth in the electronics distribution
industry reflects a gradual trend among electronics manufacturers towards the
use of distributors, particularly for servicing medium and smaller size OEMs and
VARs. As a result of these trends, distributors such as the Company have
expanded their customer lists and line cards and consequently achieved increased
revenues.
Strategy
The Company's business strategy is designed to benefit from the industry
trend toward increasing use of distributors. The Company's strategy includes the
following key elements:
Focus on Select Product Offerings. The Company's product strategy is to
focus its line card on a select group of semiconductor and computer products,
including a particularly strong line of mass storage products, with the goal of
achieving a leadership position in the major markets for such products. This
approach allows the Company to provide more knowledgeable service and technical
support to its customers than it could if it offered a more extensive array of
products. The Company also believes that this approach should allow it to
develop close working relationships with suppliers and to strengthen its ability
to obtain favorable product allocations in times of shortage of supply.
3
Expand Operating Profit. The Company seeks to maximize its operating profit
primarily through two aspects of its sales, marketing and product strategies:
(i) increasing distribution of relatively high gross margin products, such as
semiconductors Fibre Channel, interconnectivity, storage systems and its value
added products and capabilities, and (ii) selling high volume products, thereby
enhancing productivity and allowing the Company to increase gross profit while
controlling operating expenses.
Provide Major Market Distribution. The Company focuses its marketing and
sales strategy on the major markets in the Americas with the goal of maximizing
productivity per sales office. With the July, 1999 acquisition of Miami-based
Future Tech, Inc., serving US customers who primarily re-sell in Latin America,
the Company has extended its sales coverage to include all of the Americas. The
Company addresses what it believes constitutes many of the largest sectors for
semiconductor and computer products throughout the Americas. The Company will
continue to evaluate potential expansion into additional markets.
Employees
At December 31, 1999, the Company had a total of 601 employees. None of the
Company's employees are represented by a labor union. The Company has not
experienced any work stoppages and considers its relations with its employees to
be good. The Company's future success will depend in part upon its continuing
ability to attract and retain highly qualified personnel. Competition for such
employees is intense and there can be no assurance that the Company will be
successful in attracting and retaining such personnel. Failure to attract and
retain highly qualified personnel could have a material adverse effect on the
Company's results of operations.
Risk Factors
Potential Fluctuations in Quarterly Operating Results
The Company's quarterly operating results have in the past and could in the
future fluctuate substantially. The Company's expense levels are based, in part,
on expectations of future sales. If sales in a particular quarter do not meet
expectations, operating results could be adversely affected. Factors affecting
quarterly operating results include the loss of key suppliers or customers,
price competition, problems incurred in managing inventories or receivables, the
timing or cancellation of orders from major customers, a change in the product
mix sold by the Company, customer demand, availability of products from
suppliers, management of growth, the Company's ability to collect accounts
receivable, price decreases on inventory that is not price protected, the timing
or cancellation of purchase orders with or from suppliers, the ability of the
Company to integrate recently acquired companies, managing foreign currency
exposure, changing economic conditions in North and South America, and the
timing of expenditures in anticipation of increased sales and customer product
delivery requirements. Price competition in the industries in which the Company
competes is intense and could result in gross margin declines, which could have
an adverse impact on the Company's profitability. Due in part to supplier rebate
programs and increased sales by the Company near the end of each quarter, a
significant portion of the Company's gross profit has historically been earned
by the Company in the third month of each quarter. Failure to receive products
from its suppliers in a timely manner or the discontinuance of rebate programs
and marketing development funds could have a material adverse effect on the
Company's results of operations in a particular quarter. In various periods in
the past, the Company's operating results have been affected by all of these
factors. In particular, price fluctuations in the disk drive and semiconductor
industries have affected the Company's gross margins in recent periods. The
Company's cash requirements will depend on numerous factors, including the rate
of growth of its sales. The Company believes that its working capital, including
its existing credit facility, will be sufficient to meet the Company's
short-term capital requirements. However, the Company may seek additional debt
or equity financing to fund continued growth as well as potential acquisitions.
4
Management of Growth
The Company's growth in recent years has placed, and continues to place, a
strain on the Company's management, financial and operational resources. The
Company intends to continue to pursue its growth strategy through increasing
sales of existing and new product offerings, increasing geographical sales
coverage, and possibly through strategic acquisitions. In 1999, the Company
acquired Miami-based Future Tech, Inc. and in 1998, the Company acquired the
Computer Products Division of Philadelphia-based Almo Corporation and
Toronto-based Tenex Data, a division of Axidata Inc. The integration of newly
acquired companies involves the assimilation of operations and products, which
could divert the attention of the Company's management team and may have a
material adverse effect on the Company's operating results in future quarters.
The Company's strategy includes consideration of possible additional
acquisitions in the future. Such acquisitions entail numerous risks, including
an inability to assimilate acquired operations and products, diversion of
management's attention, difficulties and uncertainties in transitioning the
business relationships from the acquired entity to the Company, difficulty in
integrating new employees and loss of key employees of acquired companies. In
addition, future acquisitions by the Company may result in dilutive issuances of
equity securities, the incurrence of additional indebtedness, large one-time
expenses, and the creation of goodwill or other intangible assets that could
result in significant amortization expense. Continued growth may require
additional equipment, increased personnel, expanded information systems and
additional financial and administrative control procedures. There can be no
assurance that the Company will be able to attract and retain qualified
personnel, expand information systems, or further develop accounting and control
systems to successfully manage expanding operations, including an increasing
number of supplier and customer relationships and geographically dispersed
locations. Further, there can be no assurance that the Company will be able to
sustain its recent rate of growth or continue its profitable operations.
Dependence on Suppliers
Three suppliers provided products which represented 47% of the Company's
sales in 1999. Two suppliers provided products which represented 43% of the
Company's sales in 1998 and 1997. The Company's distribution agreements with
these suppliers are cancelable upon 90 days notice. In the past, distribution
arrangements with significant suppliers have been terminated and there can be no
assurance that, in the future, one or more of the Company's significant
distributor relationships will not be terminated. Three vendors accounted for
55% of the Company's inventory purchases during 1999. Two vendors accounted for
49% and 57% of the Company's distribution inventory purchases during 1998 and
1997, respectively. One of these vendors has obtained a second priority lien
against the Company's inventories to secure payment on the Company's purchase of
goods. The loss of any significant supplier or the shortage or loss of any
significant product line could materially adversely affect the Company. As the
Company enters into distribution arrangements with new suppliers, other
competitive suppliers may terminate their distribution arrangements with the
Company with minimal notice. To the extent that the Company is unable to enter
into or maintain distribution arrangements with leading suppliers of components,
the Company's sales and operating results could be materially adversely affected
Competition
The distribution industry is highly competitive. In the distribution of
semiconductor and computer products, the Company generally competes for both
supplier and customer relationships with numerous local, regional and national
authorized and unauthorized distributors and for customer relationships with
semiconductor and computer product manufacturers, including some of its own
suppliers. Many of the Company's distribution competitors are larger, more
established and have greater name recognition and financial and marketing
resources than the Company. The Company believes that competition for
distribution customers is based on product lines, customer service, product
availability, competitive pricing and technical information, as well as
5
value-added services and kitting. The Company believes that it competes
favorably with respect to these factors. Recently, with the increased acceptance
of companies transacting business through the Internet, competition in the
distribution of semiconductors, computer products and related value-added
products is expected to increase. There can be no assurance that the Company
will be able to compete successfully with existing or new competitors. Failure
to do so would have a material adverse effect on the Company's results of
operations.
Value-added services are highly competitive and are based upon technology,
quality, service, price and the ability to deliver finished products on an
expeditious and reliable basis. The Company believes it competes favorably with
respect to such factors. The Company attempts to focus on markets where it has
advantages in flexibility, service and high component content of the total
price. In this area, the Company competes with many distributors, as well as
with the in-house manufacturing capabilities of its existing and potential
customers. Many of the Company's competitors are larger, more established and
have greater name recognition and financial and marketing resources than the
Company.
The distribution business is highly competitive, and there can be no
assurance that the Company will be able to compete successfully with existing or
new competitors. Failure to do so could have a material adverse effect on the
Company's operating results.
Risks Associated with Limited Price and Inventory Protection Rights
The Company's authorized distributor agreements may be canceled by either
party on short notice and generally provide for a return of the inventory to the
manufacturer upon cancellation. Such agreements also generally provide the
Company with limited price protection and inventory protection rights. There can
be no assurance that such agreements will not be canceled, or that price
protection and inventory rotation policies will provide complete protection or
will not be changed in the future. From time to time the Company purchases
significant amounts of products on terms that do not include effective price
protection or inventory rotation rights, the Company bears the risk of
obsolescence and price fluctuation for those products, which could have a
material adverse effect on the Company's results of operations.
Dependence on the Personal Computer Industry
Many of the products the Company sells are used in the manufacture or
configuration of personal computers. These products are characterized by rapid
technological change, short product life cycles and intense competition and
pricing pressures. The personal computer industry has experienced significant
unit volume growth over the past several years which has, in turn, increased
demand for many of the products distributed by the Company. However, any
slowdown in the growth of the personal computer industry, or growth at less than
expected rates, or significant reductions in gross margins earned by the
Company, could adversely affect the Company's ability to continue its revenue
growth and maintain or increase the Company's profitability. In addition, many
of the Company's customers in the personal computer industry are subject to the
risks of significant shifts in demand and severe price pressures to their
customers, which may increase the risk that the Company may not be able to
collect accounts receivable owed by some of its customers. To the extent the
Company is unable to collect its accounts receivable, the Company's results of
operations would be adversely affected.
The Company faces certain industry-related risks. To the extent that its
suppliers do not maintain their product leadership, the Company's operating
results could be materially adversely affected. Moreover, the increasingly short
product life cycles experienced in the electronics industry may increase the
Company's exposure to inventory obsolescence and the possibility of fluctuations
in operating results. Other factors adversely affecting the semiconductor or
computer industries in general, including trade barriers which may affect the
6
Company's supply of products from its Japanese suppliers, could have a material
adverse effect on the Company's operating results.
Cyclical Nature of the Semiconductor and Disk Drive Industries
Semiconductors and disk drives have represented a significant portion of
the Company's sales and the Company believes they will continue to do so in
future periods. Both the semiconductor and the disk drive industries have
historically been characterized by fluctuations in product supply and demand
and, consequently, severe fluctuations in price. In the event of excess supply
of disk drives or semiconductors, the Company's gross margins may be adversely
affected. In the event of a shortage of supply of disk drives or semiconductors,
the Company's results of operations will depend on the amount of product
allocated to the Company by its suppliers and the timely receipt of such
allocations. Additionally, technological changes that affect the demand for and
prices of the products distributed by the Company may further affect the
Company's gross margins. Although the Company's agreements with its suppliers
provide the Company with limited price protection and certain rights of stock
rotation, rapid price declines or a shortfall in demand for disk drives or
semiconductor products could have an adverse effect on the Company's sales or
gross margins.
Debt
The Company has raised significant funding through debt which bears
interest at variable rates. The Company is also required to exceed certain
financial tests and other covenants on a quarterly basis. Changes in interest
rates may have a significant effect on the results of operations. Failure to
meet debt covenant requirements may result in the debt providers demanding
immediate repayment of amounts outstanding. The Company may not be able to find
alternative sources of finance and liquidity and failure to do so would have a
significant impact on the results of operations and the financial condition of
the Company.
Foreign Currency
Substantially all of the Company's revenue and capital expenditure is
transacted in US Dollars. Transactions in other currencies and the associated
risks of depreciation of value and volatility of cash flows 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 Future Tech, Inc. in July, 1999. Future Tech
sells to Latin America based companies or through US affiliates for export and
to US companies that sell to their Latin America channels. The collection of a
substantial portion of Future Tech's receivables are susceptible to changes in
the Latin American economic and political environment. To the extent the Company
is unable to manage these risks, the Company's results and financial position
could be materially adversely affected.
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.
7
ITEM 2: Properties
Square
Location Type Principal Use Footage Ownership
- -------- ---- ------------- ------- ---------
San Jose, CA Office, warehouse Headquarters, 56,840 Leased until
distribution center December 2002.
(Bldg. One)
San Jose, CA Office Headquarters, 15,657 Leased until 2002 with five
(Bldg. Two) one-year options to extend.
San Jose, CA Warehouse Distribution center 37,797 Leased until June 2002.
New Castle, DE Warehouse Distribution center 51,677 Leased until May 2005.
Miami, FL Office, Distributon center 64,086 Leased until April 2002
warehouse with three two-year
options to extend.
Marlboro, MA Office, plant & Distribution center, 14,975 Leased until February
warehouse Manufacturing 2002.
Champlin, MN Office, plant & Distribution center, 26,330 Leased until April 2002.
warehouse Manufacturing
Markham, Ontario Office, Distribution center 17,628 Leased until March 2004
warehouse with option to extend
five years.
The Company also leases sales and/or warehouse locations in Huntsville,
Alabama; Phoenix, Arizona; Agoura Hills, Irvine and San Diego, California;
Denver, Colorado; Altamonte Springs and Bonita Springs, Florida; Marietta,
Georgia; Chicago, Illinois; Columbia, Maryland; Woburn, Massachusetts; Eden
Prairie, Minnesota; Clifton and Pine Brook, New Jersey; Smithtown, New York;
Beaverton, Oregon; Strongsville, Ohio; Langhorne and Needmore, Pennsylvania;
Austin, Houston and Richardson, Texas; Centerville, Utah; Herndon, Virginia;
Bellevue, Washington; Buenos Aires, Argentina; Sao Paolo, Brazil; Vancouver,
British Columbia; Montreal, Quebec; Santiago, Chile; and Mexico City, Mexico.
ITEM 3: Legal Proceedings
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 affect on the Company's financial
position or results of operations. Such litigation could in the future result in
substantial costs and diversion of management resources. Such litigation could
also result in payment of substantial damages or prohibitions against
utilization of essential technologies, and could have a material adverse effect
on our business, financial condition and results of operations.
8
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.
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 Company's Common Stock is traded on the Nasdaq National Market under
the symbol "BELM." The following table sets forth for the periods indicated the
high and low sale prices of the Common Stock as reported by Nasdaq.
High Low
---- ---
Fiscal 1998
First quarter $ 8.75 $7.06
Second quarter 8.75 6.63
Third quarter 9.25 5.25
Fourth quarter 11.00 5.25
Fiscal 1999
First quarter $10.44 $5.50
Second quarter 8.25 5.69
Third quarter 10.31 6.56
Fourth quarter 11.00 6.44
Fiscal 2000
First quarter (through March 15, 2000) $16.50 $8.88
On March 15, 2000, the last sale price of the Common Stock as reported by
Nasdaq was $14.44 per share.
As of March 15, 2000, there were approximately 272 holders of record of the
Common Stock (not including shares held in street name).
To date, the Company has paid no cash dividends to its shareholders. The
Company has no plans to pay cash dividends in the near future. The Company's
line of credit agreement prohibits the Company's payment of dividends or other
distributions on any of its shares except dividends payable in the Company's
capital stock.
9
ITEM 6: Selected Financial Data
The selected financial data of the Company set forth below should be read
in conjunction with the consolidated financial statements of the Company,
including the notes thereto, and Management's Discussion and Analysis included
elsewhere herein.
(in thousands, except earnings per share data)
Year Ended December 31,
----------------------------------------------------------------
Statement of Income Data: 1999(1) 1998(2) 1997 1996 1995
---------- --------- --------- -------- ---------
Net sales $1,058,275 $ 575,330 $ 460,516 $391,240 $ 296,633
Cost of sales 967,491 511,476 406,301 345,189 261,895
---------- --------- --------- -------- ---------
Gross profit 90,784 63,854 54,215 46,051 34,738
Selling, general and administrative expense 69,507 46,070 40,942 36,175 27,901
---------- --------- --------- -------- ---------
Income from continuing operations 21,277 17,784 13,273 9,876 6,837
Interest expense 6,413 3,168 2,451 3,192 3,143
Foreign currency remeasurement gain 647 -- -- -- --
---------- --------- --------- -------- ---------
Income from continuing operations before taxes 15,511 14,616 10,822 6,684 3,694
Provision for income taxes 6,581 6,139 4,545 2,807 1,515
---------- --------- --------- -------- ---------
Income from continuing operations 8,930 8,477 6,277 3,877 2,179
Income/(loss) from discontinued operations,
net of income taxes (2,946) (2,402) (1,588) 3,985 1,823
Gain on sale of contract manufacturing segment 1,054 -- -- -- --
---------- --------- --------- -------- ---------
Net income $ 7,038 $ 6,075 $ 4,689 $ 7,862 $ 4,002
========== ========= ========= ======== =========
Basic earnings per shares (3)
Continuing operations $ 0.99 $ 0.96 $ 0.73 $ 0.46 $ 0.27
Discontinued operations (0.21) (0.27) (0.18) 0.48 0.22
---------- --------- --------- -------- ---------
Total $ 0.78 $ 0.69 $ 0.55 $ 0.94 $ 0.49
========== ========= ========= ======== =========
Diluted earnings per share (3)
Continuing operations $ 0.98 $ 0.95 $ 0.70 $ 0.46 $ 0.26
Discontinued operations (0.21) (0.27) (0.18) 0.47 0.22
---------- --------- --------- -------- ---------
Total $ 0.77 $ 0.68 $ 0.53 $ 0.92 $ 0.48
========== ========= ========= ======== =========
Shares used in per share calculation
Basic 9,042 8,792 8,562 8,359 8,173
========== ========= ========= ======== =========
Diluted 9,123 8,881 8,906 8,511 8,350
========== ========= ========= ======== =========
Year Ended December 31,
----------------------------------------------------------------
1999(1) 1998(2) 1997 1996 1995
Balance Sheet Data: ---------- --------- --------- -------- ---------
Working capital $ 182,626 $ 167,109 $ 134,612 $ 105,958 $ 106,914
Total assets 360,351 285,580 205,420 175,680 157,277
Total long-term debt 110,638 106,963 74,460 50,885 59,453
Total shareholders' equity 96,273 86,476 77,667 71,127 62,462
- ----------
(1) 1999 Statement of Income Data and Balance Sheet Data include the results of
operations of Future Tech, Inc. from the date of acquisition on July 21,
1999. See Note 3 of Notes to Consolidated Financial Statements.
10
(2) 1998 Statement of Income Data and Balance Sheet Data include the results of
operations of the Computer Products Division of Almo Corporation since
acquisition on November 13, 1998 and Tenex Data Division of Axidata Inc. on
November 19, 1998. See Note 3 of Notes to Consolidated Financial
Statements.
(3) All per share amounts have been restated in accordance with Statement of
Financial Accounting Standards No. 128 "Earnings Per Share". See Note 2 of
Notes to Consolidated Financial Statements.
ITEM 7: Management's Discussion and Analysis of Financial Condition and
Results of Operations
For an understanding of the significant factors that influenced the
Company's performance during the past three years, the following discussion
should be read in conjunction with the consolidated financial statements and the
other information appearing elsewhere in this report.
When used in this report, the words "expects," "anticipates," "estimates,"
"intends" and similar expressions are intended to identify forward-looking
statements within the meaning of Section 27A under the Securities Act of 1933
and Section 21E under the Securities Exchange Act of 1934. Such statements
include but are not limited to statements regarding the ability to obtain
favorable product allocations, the ability to increase gross profit while
controlling expenses, and the costs of Year 2000 compliance. These statements
are subject to risks and uncertainties that could cause actual results to differ
materially, including those risks described under "Risk Factors" in Item 1
hereof.
RESULTS OF OPERATIONS
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Net sales were $1,058.3 million for the year ended December 31,1999, which
represented an increase of $483.0 million or 84% over 1998. Computer Product
sales increased by $440.5 million primarily due to the expansion of the customer
base related to the acquisitions of Future Tech International ("FTI") in July
1999, the Computer Products Division of Almo Corporation ("Almo CPD") and Tenex
Data Division of Axidata, Inc. ("Tenex Data") in November 1998, and to the
growth in unit sales in existing product lines and the addition of new lines.
Semiconductor sales increased by $42.5 million primarily due to the acquisition
of FTI, growth in unit sales in existing product lines and the addition of new
lines. FTI contributed net sales of $107.9 million, since acquisition on July
21, 1999.
The Company's gross profit for 1999 was $90.8 million, an increase of $26.9
million, or 42% over 1998. The increase in gross profit was primarily the result
of increased sales volume. As a percentage of sales, overall gross margins were
8.6% compared to 11.1% in 1998. This decrease was primarily due to increased
competitive pricing in the industry and the increase in the proportion of
computer product sales, which typically have lower margins than semiconductors
products.
Selling, general and administrative expenses increased 51% to $69.5 million
in 1999 from $46.1 million in 1998, but decreased as a percentage of sales to
6.6% from 8.0%. The increase in expenses was attributable to increased sales
volume, the acquisitions of FTI, Almo CPD and Tenex Data and the Company's
continuing effort to strengthen its financial and administrative support.
Interest expense increased in 1999 to $6.4 million from $3.2 million in
1998, or 100%. The increase in interest expense was due to increased bank
borrowings during 1999 to fund the Company's working capital needs and increases
in interest rates on outstanding borrowings. The average interest rate in 1999
was 7.3%, versus 7.0% in 1998. The average balance outstanding was $103.2
million in 1999, versus $73.6 million in 1998.
11
In 1999, the Company recognized remeasurement gains of approximately
$647,000 relating to the retranslation of US dollar denominated debt of Tenex
Data.
The Company's effective income tax rate remained unchanged at 42% in 1999.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Net sales were $575.3 million for the year ended December 31,1998, which
represented an increase of $114.8 million or 25% over 1997. Computer products
sales increased from 1997 primarily due to the growth of unit sales in existing
product lines, the addition of new lines and expansion of the customer base
related to the acquisitions of Almo CPD and Tenex Data in November 1998. Almo
CPD and Tenex Data contributed net sales of $16.3 million and $8.3 million
respectively in the year ended December 31, 1998. The contribution to net income
was not material. Semiconductor sales decreased from 1997 primarily due to
industry-wide price declines.
The Company's gross profit for 1998 was $63.9 million, an increase of $9.6
million, or 18% over 1997. The increase in gross profit was primarily the result
of increased sales volume. As a percentage of sales, overall gross margins were
11.1% compared to 11.8% in 1997. This decrease was primarily due to increased
competitive pricing in the industry and the increase in the proportion of
computer product sales, which typically have lower margins than semiconductor
products.
Selling, general and administrative expenses increased 13% to $46.1 million
in 1998 from $40.9 million in 1997, but decreased as a percentage of sales to
8.0% from 8.9%. The increase in expenses was attributable to increased sales
volume, the acquisitions of Almo CPD and Tenex Data and the Company's continuing
effort to expand its sales and marketing organization. The Company also
increased its bad debt expenses due to increased sales volumes and changing
market conditions.
Interest expense increased in 1998 to $3.2 million from $2.5 million in
1997. The increase in interest expense was due to increased bank borrowings
during 1998 to fund the Company's working capital needs and the acquisitions of
Almo CPD and Tenex Data.
The Company's effective income tax rate remained unchanged at 42% in 1998.
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 (8.5% at December 31, 1999) or the adjusted LIBOR rate plus a
maximum of 2.25%. The balance outstanding on the revolving line of credit at
December 31, 1999 was $110.6 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
12
stock, making investments and profitability. The Company was in compliance with
its bank covenants at December 31, 1999; 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. On November 13, 1998,
the Company acquired the Almo CPD for approximately $20.7 million in cash and a
stock warrant valued at $1.0 million. On November 19, 1998, the Company acquired
Tenex Data Inc. for a total consideration of approximately $5.8 million in cash.
Both the 1998 acquisitions were funded through the Company's revolving line of
credit.
The Company's accounts receivable and inventories increased to $168.9
million and $156.6 million at December 31, 1999, respectively, from $106.6
million and $105.3 million, respectively, as of December 31, 1998. Days sales
outstanding at December 31, 1999 were 47 days and inventory turns were 7.6 times
per year compared to DSO of 51 days and turns of 6.0 in 1998. These increases
were primarily the result of the Company's increased sales volume and the
purchase of accounts receivable and inventory through the Company's acquisition
of FTI in July 1999. The Company's accounts payable increased to $143.6 million
in 1999 from $72.0 million in 1998 due to increased inventory purchases and the
addition of accounts payable through the Company's acquisition in 1999.
Net cash provided by investing activities in 1999 totaled $27.4 million,
which was primarily related to the sale of Quadrus. The net amount of cash
provided by financing activities in 1999 was $10.6 million, principally from
utilization of the Company's revolving line of credit with its banks. The net
amount of cash used in continuing operating activities was $32.6 million in
1999.
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.
Recent Developments
On February 16, 2000, the Company entered into a non-binding letter of
intent with Rorke Data, Incorporated ("Rorke"), pursuant to which the Company
would acquire all the outstanding equity securities of Rorke for a total
purchase price of $5,350,000 payable cash, subject to certain post-closing net
worth adjustments.
13
ITEM 7A: Quantitative and Qualitative Disclosures 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 $1.1 million, based on the
borrowings at December 31, 1999.
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 foward currency exchange
contracts and does not invest in derivative financial instruments.
14
ITEM 8: Financial Statements and Supplementary Data
Index to Consolidated Financial Statements Form 10-K
Page Number
-----------
Report of Independent Accountants 16
Consolidated Balance Sheets at December 31, 1999 and 1998 17
Consolidated Statements of Income for the years ended
December 31, 1999, 1998 and 1997 18
Consolidated Statements of Shareholders' Equity for the years
ended December 31, 1999, 1998 and 1997 19
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997 20
Notes to Consolidated Financial Statements 21
15
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of
Bell Microproducts Inc.
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14 (a) (1) and (2) on page 36 present fairly, in all
material respects, the financial position of Bell Microproducts Inc. at December
31, 1999 and 1998, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States. 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 of these statements in accordance with
auditing standards generally accepted in the United States, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material mistatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
PricewaterhouseCoopers LLP
San Jose, California
February 14, 2000
16
BELL MICROPRODUCTS INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
December 31,
----------------------
1999 1998
-------- --------
ASSETS
Current assets:
Cash $ 5,103 $ 4,082
Accounts receivable, net of allowance for doubtful
accounts of$4,986 and $3,374 168,857 106,609
Inventories 156,648 105,330
Prepaid expenses and other current assets 5,458 5,226
Assets of discontinued operations -- 47,790
-------- --------
Total current assets 336,066 269,037
Property and equipment, net 7,626 3,355
Goodwill and other intangibles, net of accumulated
amortization of $2,314 and $1,518 16,059 12,362
Other assets 600 826
-------- --------
Total assets $360,351 $285,580
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $143,632 $ 72,002
Other accrued liabilities 9,808 8,429
Liabilities relating to discontinued operations -- 16,240
-------- --------
Total current liabilities 153,440 96,671
Borrowings under the line of credit 110,600 102,400
Other long-term liabilities 38 33
-------- --------
Total liabilities 264,078 199,104
-------- --------
Commitments and contingencies (Note 8)
Shareholders' equity:
Preferred Stock, $0.01 par value, 10,000 shares
authorized; none issued and outstanding -- --
Common Stock, $0.01 par value, 20,000 shares
authorized;9,251 and 8,914 shares issued and
outstanding 58,527 56,181
Comprehensive income:
Retained earnings 37,285 30,247
Cumulative translation adjustment 461 48
-------- --------
Total shareholders' equity 96,273 86,476
-------- --------
Total liabilities and shareholders' equity $360,351 $285,580
======== ========
The accompanying notes are an integral part of
these consolidated financial statements.
17
BELL MICROPRODUCTS INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
Year Ended December 31,
-----------------------------------------------
1999 1998 1997
----------- ----------- -----------
Net sales $ 1,058,275 $ 575,330 $ 460,516
Cost of sales 967,491 511,476 406,301
----------- ----------- -----------
Gross profit 90,784 63,854 54,215
Selling, general and administrative expenses 69,507 46,070 40,942
----------- ----------- -----------
Operating income from continuing operations 21,277 17,784 13,273
Interest expense 6,413 3,168 2,451
Foreign currency remeasurement gain 647 -- --
----------- ----------- -----------
Income from continuing operations before income taxes 15,511 14,616 10,822
Provision for income taxes 6,581 6,139 4,545
----------- ----------- -----------
Income from continuing operations 8,930 8,477 6,277
Discontinued operations:
Loss from operations, net of tax
benefit of $2,132, $1,739 and $1,150 (2,946) (2,402) (1,588)
Gain on sale, net of tax of $763 1,054 -- --
----------- ----------- -----------
Discontinued operations, net (1,892) (2,402) (1,588)
----------- ----------- -----------
Net income 7.038 6,075 4,689
----------- ----------- -----------
Other comprehensive income, net of tax:
Foreign currency translation adjustments 413 48 --
----------- ----------- -----------
Comprehensive income $ 7,451 $ 6,123 $ 4,689
=========== =========== ===========
Earnings per share (Note 2)
Basic
Continuing operations $ 0.99 $ 0.96 $ 0.73
Discontinued operations (0.21) (0.27) (0.18)
----------- ----------- -----------
Total $ 0.78 $ 0.69 $ 0.55
=========== =========== ===========
Earnings per share
Diluted
Continuing operations $ 0.98 $ 0.95 $ 0.71
Discontinued operations (0.21) (0.27) (0.18)
----------- ----------- -----------
Total $ 0.77 $ 0.68 $ 0.53
=========== =========== ===========
Shares used in per share calculation (Note 2)
Basic 9,042 8,792 8,562
=========== =========== ===========
Diluted 9,123 8,881 8,906
=========== =========== ===========
The accompanying notes are an integral part of
these consolidated financial statements.
18
BELL MICROPRODUCTS INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands)
Comprehensive Income
Common Stock ---------------------
------------------- Retained
Shares Amount Earnings Other Total
------ ------ -------- ----- -----
Balance at January 1, 1997 8,445 $51,644 $19,483 $ -- $71,127
Exercise of stock options, including
related tax benefit of $225 147 1,117 -- -- 1,117
Issuance of Common Stock under
Stock Purchase Plan 104 734 -- -- 734
Net income -- -- 4,689 -- 4,689
------ ------- ------- ----- -------
Balance at December 31, 1997 8,696 53,495 24,172 -- 77,667
Exercise of stock options, including
related tax benefit of $86 111 943 -- -- 943
Issuance of Common Stock under
Stock Purchase Plan 107 700 -- -- 700
Issuance of stock warrant (Note 3) -- 1,043 -- -- 1,043
Foreign currency translation -- -- -- 48 48
Net income -- -- 6,075 -- 6,075
------ ------- ------- ----- -------
Balance at December 31, 1998 8,914 56,181 30,247 48 86,476
Exercise of stock options, including
related tax benefit of $72 235 1,743 -- -- 1,743
Issuance of Common Stock under
Stock Purchase Plan 102 603 -- -- 603
Foreign currency translation -- -- -- 413 413
Net income -- -- 7,038 -- 7,038
------ ------- ------- ----- -------
Balance at December 31, 1999 9,251 $58,527 $37,285 $ 461 $96,273
====== ======= ======= ===== =======
The accompanying notes are an integral part of
these consolidated financial statements.
19
BELL MICROPRODUCTS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Increase (decrease) in cash, in thousands)
Year Ended December 31,
--------------------------------------
1999 1998 1997
-------- -------- --------
Cash flows from operating activities:
Income from continuing activities $ 8,930 $ 8,477 $ 6,277
Adjustments to reconcile net income to net
cash (used in)/provided by operating activities:
Depreciation and amortization 2,254 1,132 779
Change in allowance for doubtful accounts 1,113 2,099 (2,885)
Change in deferred and refundable income taxes (148) (1,477) 1,119
Changes in assets and liabilities:
Accounts receivable (50,785) (18,704) (6,888)
Inventories (48,679) (14,776) (22,034)
Prepaid expenses 2,721 (497) (299)
Other assets 226 (548) (38)
Accounts payable 50,641 23,995 (1,621)
Other accrued liabilities 1,175 1,289 481
-------- -------- --------
Net cash (used in)/provided by continuing
operating activities (32,552) 990 (25,109)
Net cash (used in)/provided by discontinued
operations (4,745) (9,261) 1,570
-------- -------- --------
Net cash used in operating activities (37,297) (8,271) (23,539)
-------- -------- --------
Cash flows from investing activities:
Acquisition of property and equipment, net (4,412) (1,308) (1,490)
Acquisitions of businesses (Note 3) (2,808) (26,770) --
Proceeds from sale of business (Note 3) 34,665 -- --
-------- -------- --------
Net cash provided by/(used in) investing activities 27,445 (28,078) (1,490)
-------- -------- --------
Cash flows from financing activities:
Net borrowings under line of credit 8,200 32,400 24,100
agreement
proceeds from issuance of Common Stock 2,346 1,643 1,851
Net payments/(borrowings) under long-term liabilities 5 15 (279)
-------- -------- --------
Net cash provided by financing activities 10,551 34,058 25,672
Effect of exchange rate changes on cash 322 48 --
-------- -------- --------
Net increase/(decrease) in cash 1,021 (2,243) 643
Cash at beginning of year 4,082 6,325 5,682
-------- -------- --------
Cash at end of year $ 5,103 $ 4,082 $ 6,325
======== ======== ========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 7,523 $ 5,555 $ 4,641
Income taxes $ 5,606 $ 4,592 $ 2,695
Supplemental non-cash financing activities:
Obligations incurred under capital leases $ -- $ 2,519 $ 1,333
Stock warrant issued in connection with
acquisition (Note 3) $ -- $ 1,043 --
The accompanying notes are an integral part of
these consolidated financial statements.
20
BELL MICROPRODUCTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - THE COMPANY:
The Company operates in one business segment, as a distributor of
semiconductor and computer products to original equipment manufacturers (OEMs),
value-added resellers (VARs) and dealers in the United States, Canada and Latin
America. Semiconductor products include memory, logic, microprocessor,
peripheral and specialty components. Computer products include disk, tape and
optical drives and subsystems, drive controllers, computers and board-level
products. The Company also provides a variety of value-added services to its
customers, including subsystem testing, software loading, mass storage and
computer systems integration, disk drive formatting and testing, and the
packaging of electronic component kits to customer specifications.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation and Basis of Preparation
The consolidated financial statements include the accounts of the parent
company and all of its wholly owned subsidiaries. All material intercompany
transactions and balances have been eliminated on consolidation.
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 when products are shipped. Provisions for estimated
losses on returns and for expected warranty costs are recorded at the time of
sale and are adjusted periodically to reflect changes in experience and expected
obligations.
Concentration of Credit and Other Risks
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of accounts receivable. The
Company performs ongoing credit evaluations of its customers and generally does
not require collateral. The Company maintains reserves for estimated collection
losses. No customer accounts for more than 10% of sales in any of the three
years ended December 31, 1999, 1998 and 1997, or accounts receivable at December
31, 1999 and 1998.
Three vendors accounted for 55% of the Company's inventory purchases during
1999. Two vendors accounted for 49% and 57% of the Company's inventory purchases
during 1998 and 1997, respectively. One such vendor has obtained a second
priority lien against the Company's inventories to secure payment for the
Company's purchase of goods.
Inventories
Distribution inventories are stated at the lower of cost or market, cost
being determined by the first-in, first-out (FIFO) method. Market is based on
estimated net realizable value.
21
Property and Equipment
Property and equipment are recorded at cost. Depreciation and amortization
is computed using the straight-line method based upon the estimated useful lives
of the assets which range from three to five years. Amortization of leasehold
improvements is computed using the straight-line method over the shorter of the
estimated life of the asset or the lease term.
Goodwill
Assets and liabilities acquired in connection with business combinations
accounted for under the purchase method are recorded at their respective fair
values. The excess of the purchase price over the fair value of the assets
acquired is recorded as goodwill and amortized on a straight-line basis over a
fifteen year period for 1999 and 1998 acquisitions and a twenty-five year period
for prior years' business combinations. The Company periodically reviews the
recoverability of goodwill.
Impairment of Long-Lived Assets
The Company continually monitors its long-lived assets to determine whether
any impairment of these assets has occurred. In making such determination, the
Company evaluates the performance of the underlying businesses, products and
product lines. The Company recognizes impairment of long-lived assets in the
event the net book value of such assets exceeds the future undiscounted cash
flows attributable to such assets. No material impairments have been
experienced.
Income Taxes
Deferred income taxes are provided for temporary differences between the
financial reporting basis and the tax basis of the Company's assets and
liabilities as part of the income tax provisions.
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. In computing Diluted EPS, the average stock price for
the period is used in determining the number of shares assumed to be purchased
from the exercise of stock options.
Following is a reconciliation of the numerators and denominators of the
Basic and Diluted EPS computations for the periods presented below (in
thousands, except per share data):
Year Ended December 31,
------------------------------
1999 1998 1997
------ ------ ------
Net income $7,038 $6,075 $4,689
====== ====== ======
Weighted average common shares outstanding (basic) 9,042 8,792 8,562
Effect of dilutive warrant and options 81 89 344
------ ------ ------
Weighted average common shares outstanding (diluted) 9,123 8,881 8,906
====== ====== ======
Earnings Per Share:
Basic $ 0.78 $ 0.69 $ 0.55
====== ====== ======
Diluted $ 0.77 $ 0.68 $ 0.53
====== ====== ======
22
Options and warrant to purchase 1,053,650 shares of common stock at a
weighted average price of $10.08 per share were outstanding at December 31, 1999
but were not included in the computation of Diluted EPS because the exercise
prices were greater than the average market price of the common shares. At
December 31, 1998, there were 1,129,100 options and warrant outstanding to
purchase common stock at a weighted average price of $9.97 per share excluded
from the Diluted EPS computation due to their anti-dilution. At December 31,
1997, there were 478,200 options and warrant outstanding to purchase common
stock at a weighted average price of $9.98 per share excluded from the Diluted
EPS computation due to their anti-dilution.
Foreign Currency Translation and Transactions
The financial statements of the Company's foreign subsidiary are measured
using the local currency as the functional currency. Assets and liabilities of
this subsidiary are translated at the rate of exchange at the balance sheet
date. Income and expense items are translated at average quarterly rates of
exchange prevailing during the year. The resulting translation adjustments are
included in accumulated other comprehensive income as a separate component of
stockholders' equity. Gains and losses from foreign currency transactions are
included in the statement of income.
Comprehensive Income
Comprehensive income is defined as the change in equity of a business
enterprise during a period from transactions and other events and circumstances
from non-owner sources. For the Company, comprehensive income consists of its
reported net income or loss and the change in the foreign currency translation
adjustment during a period.
Stock-Based Compensation
The Company accounts for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion (APB) No. 25,
"Accounting for Stock Issued to Employees." The Company's policy is to grant
options with an exercise price equal to the quoted market price of the Company's
stock on the date of the grant. Accordingly, no compensation cost has been
recognized in the Company's Statements of Income. The Company provides
additional proforma disclosures as required under Statement of Financial
Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based
Compensation."
Segment Reporting
Financial Accounting Standards Board Statement No.131, "Disclosure about
Segments of an Enterprise and Related Information" ("SFAS 131") requires that
companies report separately in the financial statements certain financial and
descriptive information about operating segments profit or loss, certain
specific revenue and expense items and segment assets. Additionally, companies
are required to report information about the revenues derived from their
products and service groups, about geographic areas in which the Company earns
revenues and holds assets, and about major customers (see Note 11).
Recently Issued Accounting Standards
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.
23
NOTE 3 - ACQUISITIONS 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
of 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
========
On November 19, 1998, the Company acquired certain assets and assumed
certain liabilities of Tenex Data Division of Axidata, Inc., for a purchase
price of approximately $5.8 million in cash including acquisition costs.
On November 13, 1998, the Company acquired certain assets and assumed
certain liabilities of the Computer Products Division of Almo Corporation, for a
total consideration of approximately $21.7 million including acquisition costs.
The Company issued to Almo a fully vested warrant to purchase 350,000 shares of
the Company's Common Stock at $12.00 per share, in consideration for a covenant
not to compete. The warrant may be exercised at any date for a period up to five
years from the date of acquisition. The warrant was independently valued at
$1,043,000; significant assumptions used were a risk free rate of 4.89%, fair
value of Common Stock of $5.88 and an expected life of five years. The warrant
was recorded as a component of equity and as a covenant not to compete. The
related charge will be amortized over a period of five years.
24
The Almo CPD and Tenex Data purchase prices were allocated to the acquired
assets and liabilities assumed based upon management's estimate of their fair
market values as of the acquisition dates as follows (in thousands):
Almo CPD Tenex Data Total
-------- ---------- --------
Accounts receivable $ 15,525 $ 5,365 $ 20,890
Inventories 5,991 2,737 8,728
Equipment and other assets 517 177 694
Intangibles-covenant not to compete 1,043 -- 1,043
Goodwill 3,645 1,373 5,018
Accounts payable (4,135) (3,645) (7,780)
Other accrued liabilities (929) (186) (1,115)
-------- ------- --------
Total consideration $ 21,657 $ 5,821 $ 27,478
======== ======= ========
All acquisitions have been accounted for under the purchase method and were
funded through borrowings under the Company's revolving line of credit. The
results of operations of the acquired businesses are included in the
consolidated financial statements from the dates of acquisition.
The following unaudited pro forma combined summary of operations of the
Company give effect to the acquisitions of FTI, Almo CPD, and Tenex Data, as
though these acquisitions had occurred on January 1, 1998.
Year Ended December 31,
------------------------
(unaudited)
1999 1998
--------- --------
(in thousands)
Pro forma net sales $1,131,003 $913,551
Pro forma net income/(loss) $ 3,908 $ (7,642)
Pro forma earnings per share - continuing
operations
Basic $ 0.43 $ (0.87)
Diluted $ 0.42 $ (0.86)
Shares used in per share calculation
Basic 9,190 8,792
Diluted 9,289 8,881
The pro forma loss for 1998 includes charges incurred by FTI for $13.3
million of unrecoverable related party receivables due from the former
controlling shareholder and $3.1 million of legal and professional fees.
Excluding these charges, the pro forma income for 1998 would have been $1.9
million and pro forma earnings per share would have been $0.21 per share.
The unaudited pro forma combined summary of operations assumes: 1) the
amortization of goodwill over a fifteen year period, 2) the amortization of the
covenant not to compete over the five year period, and 3) the additional
interest expense on debt incurred in connection with the acquisitions as if the
debt had been outstanding from January 1, 1998.
The unaudited pro forma combined summary of operations does not purport to
be indicative of the results which actually would have been obtained if the
acquisitions had been made at the beginning of 1998 or of those results which
may be obtained in the future.
25
NOTE 4 - BALANCE SHEET COMPONENTS:
December 31,
------------------------
1999 1998
-------- -------
(in thousands)
Property and equipment:
Computer and other equipment $ 6,753 $ 3,121
Furniture and fixtures 2,354 1,761
Leasehold improvements 899 476
Warehouse equipment 1,412 484
-------- -------
11,418 5,842
Less: accumulated depreciation (3,792) (2,487)
-------- -------
$ 7,626 $ 3,355
======== =======
NOTE 5 - LINE OF CREDIT AND TERM LOAN:
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 (8.50% at December 31, 1999) or the adjusted LIBOR rate plus
a maximum of 2.25%. The balance outstanding on the revolving line of credit at
December 31, 1999 was $110.6 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 December 31, 1999; however, there can be no assurance that
the Company will be in compliance in the future.
NOTE 6 - STOCK-BASED COMPENSATION PLANS:
Stock Option Plans
In May of 1998, the Company adopted the 1998 Stock Plan (the "Plan") which
replaced the 1988 Amended and Restated Incentive Stock Plan (the "1988 Plan")
and the 1993 Director Stock Option Plan (the "Director Plan"). All options
granted after May 1998 are granted under the 1998 Stock Plan.
The Plan provides for the grant of stock options and stock purchase rights
to employees, directors and consultants of the Company at prices not less than
the fair value of the Company's Common Stock at the date of grant for incentive
stock options and prices not less than 85% of the fair value of the Company's
Common Stock for nonstatutory stock options and stock purchase rights. Under the
Plan, the Company has reserved for issuance a total of 856,569 shares of Common
Stock plus 181,672 shares of Common Stock which were reserved but unissued under
the 1988 Plan and 35,000 shares of Common Stock which were reserved but unissued
under the Director Plan. The maximum aggregate number of shares of Common Stock
which may be optioned and sold under the Plan is 1,073,241 shares, plus an
annual increase to be added on January 1 of each year beginning in 1999, equal
to the lesser of (i) 400,000 shares, (ii) 4% of the outstanding shares on such
date, or (iii) a lesser amount determined by the Board of Directors, subject to
adjustment upon changes in capitalization of the Company. Since inception, the
Company has reserved 3,895,322 shares of Common Stock for issuance under the
aggregate of all stock option plans.
The stock options become exercisable over a vesting period as determined by
the Board of Directors and expire over terms not exceeding ten years from the
date of grant. If an optionee ceases to be employed by the Company, the optionee
may, within one month (or such other period of time, as determined by the Board
of Directors, but not exceeding three months) exercise options to the extent
vested.
26
As part of the Plan, the Board of Directors adopted a Management Incentive
Program (the "Program") for key employees. Under this Program, options for
140,000, 40,500 and 130,000 shares of Common Stock were granted in 1999, 1998
and 1997, respectively. The Program provides for ten-year option terms with
vesting at the rate of one tenth per year, with potential for accelerated
vesting based upon attainment of certain performance objectives. The options
lapse ten years after the date of grant or such shorter period as may be
provided for in the stock option agreement.
Options granted under the Director Plan prior to May 1998 and outstanding
at December 31, 1999 total 90,000. Under the Director Plan, 75,000 options were
granted in 1993 at an exercise price of $8.00 per share, and 20,000 options were
granted in 1996 at an exercise price of $7.00 per share. In 1997, 20,000 options
were granted at an exercise price of $12.63 per share. In 1998, 15,000 options
were granted at an exercise price of $7.50 per share. On August 5, 1999, the
Board of Directors approved the vesting in full of all options currently held by
the Directors and modified the Plan to immediately vest all future Board of
Directors options at the time they are granted.
The following table presents activity under all Stock Plans:
Options Outstanding
------------------------
Options Weighted
Available for Average
Grant Shares Exercise Price
---------- ------ --------------
Balance at December 31, 1996 246,843 1,304,000 $ 7.10
Increase in options available for grant 300,000 -- --
Options canceled 280,729 (280,729) $ 7.11
Options granted (649,500) 649,500 $ 9.64
Options exercised -- (147,312) $ 6.48
---------- ---------- ------
Balance at December 31, 1997 178,072 1,525,459 $ 8.24
Increase in options available for grant 500,000 -- --
Options canceled 491,050 (491,050) $ 8.33
Options granted (770,800) 770,800 $ 8.14
Options exercised -- (110,796) $ 7.14
---------- ---------- ------
Balance at December 31, 1998 398,322 1,694,413 $ 8.24
========== ========== ======
Increase in options available for grant 356,569 -- --
Options canceled 444,588 (444,588) $ 8.41
Canceled options not available for grant (408,238) -- $ 8.37
Options granted (715,200) 715,200 $ 6.99
Options exercised (234,877) $ 7.11
---------- ---------- ------
Balance at December 31, 1999 76,041 1,730,138 $ 8.25
========== ========== ======
At December 31, 1999, 555,475 options were exercisable under these Plans.
Upon the adoption of the 1998 Stock Plan, canceled options under the 1988 Plan
are not available for future grants.
27
The following table summarizes information about stock options outstanding
for all plans at December 31, 1999:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------- ----------------------------------
Number of
Options Weighted
Outstanding Average
As of Remaining Weighted Number of Shares Weighted
Range of Exercise December 31, Contractual Life Average Exercisable As of Average
Prices 1999 In Years Exercise Price December 31, 1999 Exercise Price
$ 6.44 - $ 6.50 292,788 4.70 $6.48 87,600 $6.50
$ 6.63 - $ 7.00 211,200 5.41 6.65 47,250 6.75
$ 7.25 - $ 7.25 378,000 4.80 7.25 26,250 7.25
$ 7.50 - $ 7.88 232,500 4.66 7.67 109,825 7.69
$ 8.00 - $ 8.75 138,750 2.47 8.37 96,750 8.32
$ 8.81 - $ 8.81 235,000 3.33 8.81 70,000 8.81
$ 9.00 - $11.13 226,400 3.41 10.16 102,300 10.19
$11.50 - $12.63 15,500 6.98 12.59 15,500 12.59
--------- ---- ----- ------- -----
1,730,138 4.29 $7.83 555,475 $8.25
========= ==== ===== ======= =====
Employee Stock Purchase Plan
The Employee Stock Purchase Plan ("ESPP") provides for automatic annual
increases in the number of shares reserved for issuance on January 1 of each
year beginning in 1999 by a number of shares equal to the lesser of (i) 150,000
shares, (ii) 1.5% of the outstanding shares on such date, or (iii) a lesser
amount determined by the Board of Directors, subject to adjustment upon changes
in capitalization of the Company.
The Company has reserved 763,714 shares of Common Stock for issuance to all
eligible employees under its ESPP. Sales made through this plan will be at the
lower of 85% of market price at the date of purchase or on the first day of each
six-month offering period in the prior two years. A total of 537,949 shares have
been issued under this plan as of December 31, 1999.
Fair Value Disclosures
At December 31, 1999, the Company had two stock-based compensation plans as
described above. The Company applies APB Opinion 25 and related interpretations
in accounting for its plans. Accordingly, no compensation cost has been
recognized for its plans, all of which are fixed plans. The fair value of each
option grant used for calculating pro forma net income is estimated on the date
of grant using the Black-Scholes multiple option-pricing model with the
following weighted average assumptions used for grants in 1999, 1998 and 1997,
respectively; expected volatility of 35%; risk free interest rate of 4.9%, 5.0%
and 5.9% and expected lives of 3.85, 3.79 and 3.92 years. The Company has not
paid dividends and assumed no dividend yield. The weighted average fair value of
those stock options granted in 1999, 1998 and 1997 was $2.26, $2.64 and $3.35
per option, respectively. The fair value of each ESPP purchase right is
estimated on the beginning of the offering period using the Black-Scholes
option-pricing model with the following weighted average assumptions used in
1999, 1998 and 1997, respectively; expected volatility of 35%; risk free
interest rate of 4.98%, 4.91% and 5.56% and expected lives of 0.5 years. The
Company has not paid dividends and assumed no dividend yield. The weighted
average fair value of those purchase rights granted in 1999, 1998 and 1997 as
defined by SFAS 123, was $2.04, $1.97 and $2.43 per right, respectively. Had
compensation cost for the Company's two stock-based compensation plans been
determined based on the fair value at the grant dates for awards in 1999, 1998
and 1997 under those plans consistent with the provisions of Financial
28
Accounting Standards No. 123, "Accounting for Stock-Based Compensation", the
Company's net income and earnings per share would have been reduced as presented
below (in thousands, except per share data):
1999 1998 1997
------ ------ ------
Net income:
As reported $8,930 $6,075 $4,689
Pro forma 8,126 5,499 4,015
Earnings per share
As reported
Basic 0.99 0.69 0.55
Diluted 0.98 0.68 0.53
Pro forma
Basic 0.90 0.63 0.47
Diluted 0.89 0.62 0.47
Because additional stock options and stock purchase rights are expected to
be granted each year and this pro forma presentation includes only the effect of
options granted subsequent to December 31, 1994, the above pro forma disclosures
are not considered by management to be representative of pro forma effects on
reported financial results for future years.
NOTE 7 - INCOME TAXES:
The provision for income taxes consists of the following (in thousands):
1999 1998 1997
------- ------- -------
Current:
Federal $ 4,264 $ 5,070 $ 1,880
State 747 790 396
Foreign 349 17 --
------- ------- -------
5,360 5,877 2,276
Deferred:
Federal (697) (1,195) 968
State 256 (282) 151
Foreign 293 -- --
------- ------- -------
$ 5,212 $ 4,400 $ 3,395
======= ======= =======
Deferred tax assets (liabilities) comprise the following (in thousands):
1999 1998 1997
------ ------ ------
Bad debt, sales and warranty reserves $1,914 $1,598 $ 637
Inventory reserves and basis differences 1,860 2,347 1,605
Compensation accruals and reserves 228 261 254
State taxes, net of federal benefit 265 198 70
Unrealized foreign gain (298) -- --
Other 322 600 805
------ ------ ------
Gross deferred tax assets 4,291 5,004 3,371
------ ------ ------
Basis differential in assets -- (89) (98)
Depreciation (71) (843) (678)
------ ------ ------
Gross deferred tax liabilities (71) (932) (776)
------ ------ ------
Net deferred tax asset $4,220 $4,072 $2,595
====== ====== ======
29
The net deferred tax asset represents temporary differences for future tax
deductions which can generally be realized by carryback to taxable income in
prior years. Net deferred tax assets are included in prepaid expenses and other
assets at December 31, 1999 and 1998.
A reconciliation of the Federal statutory tax rate to the effective tax
rate follows:
1999 1998 1997
---- ---- ----
Federal statutory rate 35.0% 35.0% 34.0%
State income taxes, net of Federal tax
benefit and credits 4.6% 4.1% 4.2%
Foreign tax net of FTC 0.5% 0.0% 0.0%
Other 2.3% 2.9% 3.8%
---- ---- ----
42.4% 42.0% 42.0%
==== ==== ====
NOTE 8 - COMMITMENTS AND CONTINGENCIES:
The Company leases its facilities under cancelable and noncancelable
operating lease agreements. The leases expire at various times through 2006 and
contain renewal options. Certain of the leases require the Company to pay
property taxes, insurance, and maintenance costs.
The following is a summary of commitments under leases:
Operating
Year Ending December 31, Leases
------------------------ ------
(in thousands)
2000 $2,753
2001 2,372
2002 1,841
2003 861
2004 546
2005 and beyond 135
------
Total minimum lease payments $8,508
======
Total operating lease expense was $2,797,000, $2,920,000 and $2,508,000 for
the years ended December 31, 1999, 1998 and 1997, respectively.
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.
30
NOTE 9 - TRANSACTIONS WITH RELATED PARTIES:
The Company's manufacturing segment, which was disposed of in June 1999,
had entered into manufacturing agreements providing for the performance of
value-added turnkey services for Pinnacle Systems, Inc. ("Pinnacle"), Reply
Corporation ("Reply"), and Network Peripherals Inc., ("NPI"). Sales to these
parties and purchases of inventory from these parties for the three years ended
December 31, 1999 and accounts receivable and inventory on hand at December 31,
1999 and 1998 are summarized below:
(In thousands)
-------------------------------
1999 1998 1997
Sales: ---- ---- ----
Pinnacle $3,645 $9,590 $2,840
Reply - - 262
NPI 1,446 8,241 -
Accounts receivable:
Pinnacle - 1,828
Reply - -
NPI - 984
Inventory purchased:
Pinnacle 1,150 2,169 1,532
Reply - - 123
NPI - 546 -
Inventory on hand:
Pinnacle - 1,564
Reply - -
NPI - 737
The agreements were entered into in the ordinary course of business and the
Company believes that there were terms no less favorable than reasonably could
have been obtained from unaffiliated parties. The agreement with NPI commenced
in May 1998. The agreement with Reply terminated in 1997. Glenn E. Penisten, a
director of the Company, is a director of Pinnacle, Reply and NPI. Gordon A.
Campbell, a director of the Company, is a director of Reply.
The Company purchased approximately $0 and $858,000 of inventory from 3DFX
Interactive, Inc. ("3DFX") in 1999 and 1998 respectively. The inventory on hand,
purchased from 3DFX, totaled $0 at December 31, 1999 and $139,000 at December
31, 1998, respectively. Gordon A. Campbell, a director of the Company, is a
director of 3DFX. The Company sold $0 and $1,528,000 to 3Com Corporation
("3Com") in 1999 and 1998, respectively. The accounts receivable balance from
3Com was $0 and $469,000 at December 31, 1999 and 1998, respectively. Gordon A.
Campbell, a director of the Company, is a director of 3Com. The Company believes
that terms of these transactions were no less favorable than reasonable could be
expected to be obtained from unaffiliated parties.
NOTE 10 - SALARY SAVINGS PLAN:
The Company has a Section 401(k) Plan (the Plan) which provides
participating employees an opportunity to accumulate funds for retirement and
hardship. Participants may contribute up to 15% of their eligible earnings to
the Plan. The Company may elect to make matching contributions equal to a
discretionary percentage of participants' contributions up to the statutory
maximum of participants' eligible earnings. The Company has not made any
contributions to the Plan.
31
SELECTED QUARTERLY FINANCIAL DATA FROM CONTINUING OPERATIONS (UNAUDITED):
(in thousands, except per share amounts)
Quarter Ended
-------------------------------------------------------------------------------------------
Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31,
1998 1998 1998 1998 1999 1999 1999 1999
-------- -------- -------- -------- -------- -------- -------- --------
Net sales .............. $116,658 $124,402 $148,815 $185,455 $219,599 $231,627 $283,359 $323,690
Cost of ................ 102,069 109,666 133,085 166,656 200,177 210,826 259,384 297,104
-------- -------- -------- -------- -------- -------- -------- --------
Gross profit ........... 14,589 14,736 15,730 18,799 19,422 20,801 23,975 26,586
Selling, general and
administrative
expenses .............. 10,991 10,847 11,373 12,859 14,955 15,926 18,253 20,373
-------- -------- -------- -------- -------- -------- -------- --------
Income from continuing
operations ............ 3,598 3,889 4,357 5,940 4,467 4,875 5,722 6,213
Interest ............... 781 595 748 1,044 1,224 1,556 1,676 1,957
Remeasurement gain ..... -- -- -- -- -- (358) (123) (166)
-------- -------- -------- -------- -------- -------- -------- --------
Income from continuing
operations before
income taxes .......... 2,817 3,294 3,609 4,896 3,243 3,677 4,169 4,422
Provision for income
taxes ................. (1,183) (1,383) (1,516) (2,057) (1,362) (1,544) (1,813) (1,862)
-------- -------- -------- -------- -------- -------- -------- --------
Income from continuing
operations ............ $ 1,634 $ 1,911 $ 2,093 $ 2,839 $ 1,881 $ 2,133 $ 2,356 $ 2,560
======== ======== ======== ======== ======== ======== ======== ========
Earnings per share
Basic ................ $ 0.19 $ 0.22 $ 0.24 $ 0.32 $ 0.21 $ 0.24 $ 0.26 $ 0.28
Diluted .............. $ 0.19 $ 0.22 $ 0.24 $ 0.32 $ 0.21 $ 0.24 $ 0.26 $ 0.28
======== ======== ======== ======== ======== ======== ======== ========
Shares used in per share
calculation
Basic ................ 8,723 8,767 8,831 8,848 8,932 8,945 9,096 9,196
======== ======== ======== ======== ======== ======== ======== ========
Diluted .............. 8,795 8,855 8,874 8,998 9,010 8,982 9,211 9,289
======== ======== ======== ======== ======== ======== ======== ========
ITEM 9: Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
32
PART III
Pursuant to Paragraph G(3) of the General Instructions to Form 10-K,
portions of the information required by Part III of Form 10-K are incorporated
by reference from the Company's Proxy Statement to be filed with the Commission
in connection with the 2000 Annual Meeting of Shareholders (the "Proxy
Statement").
ITEM 10: Directors and Executive Officers of the Registrant
(a) Information concerning directors of the Company appears in the
Company's Proxy Statement, under Item 1 "Election of Directors." This
portion of the Proxy Statement is incorporated herein by reference.
(b) Executive Officers Of The Registrant
The following table and descriptions identify and set forth
information regarding the Company's six executive officers:
Name Age Position
---- --- --------
W. Donald Bell ........ 62 President, Chief Executive Officer
and Chairman of the Board
Remo E Canessa ....... 42 Vice President of Finance and Chief
Financial Officer
Brian J Clark ........ 46 Senior Vice President of Industrial
Sales
Gary Gammon ........... 35 Senior Vice President of Computer
Products Sales
Philip M Roussey ..... 57 Senior Vice President of Computer
Products Marketing
Robert J Sturgeon .... 46 Vice President of Operations
W. Donald Bell has been President, Chief Executive Officer and
Chairman of the Board of the Company since its inception in 1987. Mr.
Bell has over thirty years of experience in the electronics industry.
Mr. Bell was formerly the President of Ducommun Inc. and its
subsidiary, Kierulff Electronics Inc., as well as Electronic Arrays
Inc. He has also held senior management positions at Texas Instruments
Incorporated, American Microsystems and other electronics companies.
He is a member of the Board of Directors of Control Data Systems Inc.
Remo E. Canessa has been Vice President of Finance and Chief
Financial Officer since November of 1998. Mr. Canessa was formerly
Vice President of Finance and Chief Financial Officer of Infoseek
Corporation. From 1993 to 1998 he was a part of Bell Microproducts'
management team, serving first as Corporate Controller, then as Vice
President of Finance and as its Acting Chief Financial Officer. He has
held senior management positions at Ampex Corporation, Raster Graphics
Inc. and Geoworks Corporation.
Brian J. Clark has been Senior Vice President of Industrial Sales
since September of 1997. Mr. Clark has over twenty-three years in the
electronic business. Mr. Clark was formerly the Vice President of the
Northern California Region of Arrow Electronics, and prior to Arrow,
he held senior management positions at Kierulff and Wyle Electronics
33
Gary Gammon has been Senior Vice President of Computer Products
Sales since June of 1999. Before joining Bell Microproducts, Mr.
Gammon was Vice President of Sales for Gates/Arrow Distributing, a
distributor of computer systems, peripherals and software. While at
Gates/Arrow, he also served as Vice President for the enterprise
computing business and Vice President of technical sales. Prior to
that time, Mr. Gammon was a Sales Executive with Data General.
Philip M. Roussey has been Senior Vice President of Computer
Products Marketing since March 1993. Prior to that time, he was the
Company's Vice President of Marketing since its inception in 1987.
Prior to joining the Company, Mr. Roussey was Corporate Vice President
of Marketing of Kierulff Electronics during 1987, and from 1982 to
1986, Mr. Roussey held the position of Vice President of Computer
Products at Kierulff Electronics.
Robert J. Sturgeon has been Vice President of Operations since
1992. Mr. Sturgeon was formerly Director of Information Services for
Disney Home Video from January 1991 to February 1992. Prior to that
time, Mr. Sturgeon served as Management Information Services ("MIS")
Director for Paramount Pictures, Home Video Division from June 1989 to
January 1991 and as a Marketing Manager for MTI Systems, a division of
Arrow Electronics Inc., from January 1988 to June 1989. Other
positions Mr. Sturgeon has held include Executive Director of MIS for
Ducommun where he was responsible for ten divisions, including
Kierulff Electronics.
(c) Information concerning Compliance with Section 16(a) of the Securities
Exchange Act of 1934 appears in the Company's Proxy Statement, under
the heading "Compliance with Section 16(a) of the Securities Exchange
Act of 1934," and is incorporated herein by reference.
34
ITEM 11: Executive Compensation
Information concerning executive compensation appears in the Company's
Proxy Statement, under the caption "Executive Compensation," and is incorporated
herein by reference.
ITEM 12: Security Ownership of Certain Beneficial Owners and Management
Information concerning the security ownership of certain beneficial owners
and management appears in the Company's Proxy Statement, under Item 1 "Election
of Directors," and is incorporated herein by reference.
ITEM 13: Certain Relationships and Related Transactions
Information concerning certain relationships and related transactions
appears in the Company's Proxy Statement, under Item 1 "Election of Directors,"
and is incorporated herein by reference.
PART IV
ITEM 14: Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) The following documents are filed as part of this Form 10-K:
(1) Consolidated Financial Statements
The financial statements (including the notes thereto) listed in
the Index to Consolidated Financial Statement Schedule (set forth in
Item 8 of Part II of this form 10-K) are filed as part of this Annual
Report on Form 10-K.
(2) Consolidated financial Statement Schedule
II - Valuation and Qualifying Accounts and Reserves page 42
Schedules not listed above have been omitted because they are not required
or the information required to be set forth therein is included in the
Consolidated Financial Statements or Notes to Consolidated Financial Statements.
35
(3) Exhibits
Number Description of Document
3.1 Amended and Restated Articles of Incorporation of Registrant (2)
3.2 Amended and Restated Bylaws of Registrant (3)
4.1 Specimen Common Stock Certificate of the Registrant (3)
4.2 Amended and Restated Registration Rights Agreement dated June
11, 1992 between Registrant and certain investors named therein,
as amended (1)
4.3 Warrant issued to Almo Corporation (7)
10.1 1998 Stock Plan (9)
10.2 The form of Option Agreement used under the 1998 Stock Plan (9)
10.3 Employee Stock Purchase Plan, as amended through May 21, 1998
(9)
10.4 The form of Option Agreement used under the Employee Stock
Purchase Plan (4)
10.5 Registrant's 401(k) Plan (3)
10.6 Lease dated March 17, 1992 for Registrant's facilities at 1941
Ringwood Avenue, Suite 100, San Jose, California (3)
10.7 Lease dated April 15, 1993 for Registrant's facilities at 2350
Lundy Place, San Jose, California (1)
10.8 Standard Distributor Agreement dated June 1, 1990 by and between
Quantum Corporation and Registrant (3)
10.9 Form of Indemnification Agreement (3)
10.10 IBM Authorized Distributor Agreement dated May 17, 1993 between
IBM Corporation and Registrant (3)
10.11 Sublease dated November 12, 1996 for the Registrant's facilities
at 2020 South Tenth Street, San Jose, California, and related
exhibits (8)
10.12* Employment Agreement dated as of December 10, 1996 between the
Registrant and W. Donald Bell, the Registrant's Chief Executive
Officer (8)
10.13 Form of Management Retention Agreement between the Registrant
and the following executive officers of the Registrant: W.
Donald Bell, Bruce M. Jaffe, Ronald H. Mabry, Philip M. Roussey
and Robert J. Sturgeon (8)
10.14 Third Amendment and Restated Credit Agreement dated as of
November 12, 1998 by and among the Registrant, the Banks named
therein and California Bank & Trust, as Agent for the Banks (7)
36
10.15 Asset Purchase Agreement dated as of November 5, 1998 by and
between the Company, Almo Corporation, Almo Distributing
Pennsylvania, Inc., Almo Distributing Maryland, Inc., Almo
Distributing Minnesota, Inc., Almo Distributing Wisconson, Inc.
and Almo Distributing, Inc.
10.16 Fourth Amendment to Third Amended and Restated Credit Agreement
dated December 8, 1999 by and among the Registrant, the Banks
named therein and California Bank & Trust, as agent for the
Banks (10)
10.17 Fifth Amendment to Third Amended and Restated Credit Agreement
dated December 31, 1999 by and among the Registrant, the Banks
named therein and California Bank & Trust, as agent for the
Banks (10)
10.18 Lease dated August 1, 1999 for Registrant's facilities at 1941
Ringwood Avenue, Suite 200, San Jose, California (10)
21.1 Subsidiaries of the Registrant
23.1 Consent of PricewaterhouseCoopers LLP, independent accountants
24.1 Power of Attorney (contained on page 21)
- ----------
* Confidential treatment has been granted for portions of this document.
(1) Incorporated by reference to exhibit filed with the Registrant's
Report on Form 10-K for the fiscal year ended December 31, 1993 filed
on March 31, 1994.
(2) Incorporated by reference to exhibit filed with the Registrant's
Registration Statement on Form S-8 (File No. 33-66580) filed on
July 29, 1993.
(3) Incorporated by reference to exhibit filed with the Registrant's
Registration Statement on Form S-1 (File No. 33-60954) filed on April
14, 1993 and which became effective on June 14, 1993.
(4) Incorporated by reference to exhibit filed with the Registrant's
Registration Statement on Form S-8 (File No. 33-83398) filed on
August 29, 1994.
(5) Incorporated by reference to exhibit filed with the Registrant's
Registration Statement on Form S-8 (File No. 333-10837) filed on
August 26, 1996.
(6) Incorporated by reference to exhibit filed with the Registrant's
Report on Form 10Q for the quarter ended June 30, 1996.
(7) Incorporated by reference to exhibit filed with the Registrant's
Report on Form 8-K (File No. 000-21528) filed on December 4, 1998.
(8) Incorporated by reference to exhibit filed with the Registrant's
Report on Form 10-K for the fiscal year ended December 31, 1996 filed
on March 31, 1997.
(9) Incorporated by reference to exhibit filed with the Registrant's
Report on Form S-8 (File No. 333-58053) filed on June 30, 1998.
(10) Incorporated by reference to exhibit filed with the Registrant's
Report on Form 10K for the fiscal year ended December 31, 1999 filed
on March 30, 2000.
(b) Reports on Form 8-K. Filed on October 4, 1999.
(c) Exhibits. See Item 14(a) above.
(d) Financial Statements Schedules. See Item 14(a) above.
37
SCHEDULE II
BELL MICROPRODUCTS INC.
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
ALLOWANCE FOR DOUBTFUL ACCOUNTS
(in thousands)
Additions
Balance at Charged to
Beginning of Costs and Deductions- Balance at End
Year Ended December 31, Period Expenses Write-offs of Period
- ----------------------- ------ -------- ---------- ---------
1999 $3,486 $6,896 $(5,396) $4,986
1998 1,331 4,630 (2,475) 3,486
1997 4,228 1,763 (4,660) 1,331
38
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 on March 30, 2000.
BELL MICROPRODUCTS INC.
By: /s/ Remo E. Canessa
-----------------------------------------------------
Remo E. Canessa
Chief Financial Officer and Vice President of Finance
(Principal Financial and Accounting Officer)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints W. Donald Bell and Remo E. Canessa and each of
them, jointly and severally, his attorneys-in-fact, each with full power of
substitution, for him in any and all capacities, to sign any and all amendments
to this Report on Form 10-K, and to file the same, with exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that each of said
attorneys-in-fact, or his substitute or substitutes, may do or cause to be done
by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report on Form 10-K 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/ W. Donald Bell Chairman of the Board, President and Chief March 30, 2000
- ----------------------------- Executive Officer (Principal Executive Officer)
(W. Donald Bell)
/s/ Remo E. Canessa Vice President of Finance and Chief Financial Officer March 30, 2000
- ----------------------------- (Principal Financial and Accounting Officer)
(Remo E. Canessa)
/s/ Gordon A. Campbell Director March 30, 2000
- -----------------------------
(Gordon A. Campbell)
/s/ Eugene Chaiken Director March 30, 2000
- -----------------------------
(Eugene Chaiken)
/s/ Edward L. Gelbach Director March 30, 2000
- -----------------------------
(Edward L. Gelbach)
/s/ James E. Ousley Director March 30, 2000
- -----------------------------
(James E. Ousley)
/s/ Glenn E. Penisten Director March 30, 2000
- -----------------------------
(Glenn E. Penisten)
39
INDEX TO EXHIBITS
Number Description of Document
- ------ -----------------------
3.1 Amended and Restated Articles of Incorporation of Registrant (2)
3.2 Amended and Restated Bylaws of Registrant (3)
4.1 Specimen Common Stock Certificate of the Registrant (3)
4.2 Amended and Restated Registration Rights Agreement dated June 11, 1992
between Registrant and certain investors named therein, as amended (1)
4.3 Warrant issued to Almo Corporation (7)
10.1 1998 Stock Plan (9)
10.2 The form of Option Agreement used under the 1998 Stock Plan (9)
10.3 Employee Stock Purchase Plan, as amended through May 21, 1998 (9)
10.4 The form of Option Agreement used under the Employee Stock Purchase
Plan (4)
10.5 Registrant's 401(k) Plan (3)
10.6 Lease dated March 17, 1992 for Registrant's facilities at 1941 Ringwood
Avenue, Suite 100, San Jose, California (3)
10.7 Lease dated April 15, 1993 for Registrant's facilities at 2350 Lundy
Place, San Jose, California (1)
10.8 Standard Distributor Agreement dated June 1, 1990 by and between
Quantum Corporation and Registrant (3)
10.9 Form of Indemnification Agreement (3)
10.10 IBM Authorized Distributor Agreement dated May 17, 1993 between IBM
Corporation and Registrant (3)
10.11 Sublease dated November 12, 1996 for the Registrant's facilities at
2020 South Tenth Street, San Jose, California, and related exhibits (8)
10.12* Employment Agreement dated as of December 10, 1996 between the
Registrant and W. Donald Bell, the Registrant's Chief Executive Officer
(8)
10.13 Form of Management Retention Agreement between the Registrant and the
following executive officers of the Registrant: W. Donald Bell, Bruce
M. Jaffe, Ronald H. Mabry, Philip M. Roussey and Robert J. Sturgeon (8)
10.14 Third Amendment and Restated Credit Agreement dated as of November 12,
1998 by and among the Registrant, the Banks named therein and
California Bank & Trust, as Agent for the Banks (7)
10.15 Asset Purchase Agreement dated as of November 5, 1998 by and between
the Company, Almo Corporation, Almo Distributing Pennsylvania, Inc.,
Almo Distributing Maryland, Inc., Almo Distributing Minnesota, Inc.,
Almo Distributing Wisconson, Inc. and Almo Distributing, Inc.
40
10.16 Fourth Amendment to Third Amended and Restated Credit Agreement dated
December 8, 1999 by and among the Registrant, the Banks named therein
and California Bank & Trust, as agent for the Banks (10)
10.17 Fifth Amendment to Third Amended and Restated Credit Agreement dated
December 31, 1999 by and among the Registrant, the Banks named therein
and California Bank & Trust, as agent for the Banks (10)
10.18 Lease dated August 1, 1999 for Registrant's facilities at 1941 Ringwood
Avenue, Suite 200, San Jose, California (10)
21.1 Subsidiaries of the Registrant
23.1 Consent of PricewaterhouseCoopers LLP, independent accountants
24.1 Power of Attorney (contained on page 21)
27 Financial Data Schedule
- ----------
* Confidential treatment has been granted for portions of this document.
(1) Incorporated by reference to exhibit filed with the Registrant's Report on
Form 10-K for the fiscal year ended December 31, 1993 filed on March 31,
1994.
(2) Incorporated by reference to exhibit filed with the Registrant's
Registration Statement on Form S-8 (File No. 33-66580) filed on July 29,
1993.
(3) Incorporated by reference to exhibit filed with the Registrant's
Registration Statement on Form S-1 (File No. 33-60954) filed on April 14,
1993 and which became effective on June 14, 1993.
(4) Incorporated by reference to exhibit filed with the Registrant's
Registration Statement on Form S-8 (File No. 33-83398) filed on August 29,
1994.
(5) Incorporated by reference to exhibit filed with the Registrant's
Registration Statement on Form S-8 (File No. 333-10837) filed on August 26,
1996.
(6) Incorporated by reference to exhibit filed with the Registrant's Report on
Form 10Q for the quarter ended June 30, 1996.
(7) Incorporated by reference to exhibit filed with the Registrant's Report on
Form 8-K (File No. 000-21528) filed on December 4, 1998.
(8) Incorporated by reference to exhibit filed with the Registrant's Report on
Form 10-K for the fiscal year ended December 31, 1996 filed on March 31,
1997.
(9) Incorporated by reference to exhibit filed with the Registrant's Report on
Form S-8 (File No. 333-58053) filed on June 30, 1998.
(10) Incorporated by reference to exhibit filed with the Registrant's Report on
Form 10K for the fiscal year ended December 31, 1999 filed on March 30,
2000.