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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, 1997
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 February 28, 1998, was approximately $52,901,368 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
February 28, 1998 was 8,726,778.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the definitive Proxy Statement for the Company's Annual Meeting of
Shareholders to be held on May 21, 1998 are incorporated by reference into Part
III of this Form 10-K
Index of Exhibits appears on Pages 39, 40 and 41
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PART I
ITEM 1: Business
Founded in 1987, Bell Microproducts Inc. (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, microprocessors, 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 manufacturing and value-added services to its
customers, including the manufacturing of board-level and systems products to
customer specifications, as well as certain types of components and subsystem
testing services, systems integration and 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, the ability to increase gross
profit while controlling expenses, the ability to realize synergies between
contract manufacturing and distribution, 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" below.
Products and Services
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 component
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 1997 included IBM Microelectronics, Cypress
Semiconductor, Fujitsu Microelectronics, NEC Electronics, Sony Electronics,
Harris Semiconductor and OKI Semiconductor. In addition, in 1997, the Company
became a national distributor of IBM Flat Panel and Flash memory products,
Simple Technology memory/communication products, Cal-Chip passive components,
AND displays and Interfan high performance cooling fans.
Computer Products
While a substantial portion of the Company's sales of computer products
in 1997 was attributable to hard disk drives, the Company's computer product
sales also included tape drives, optical disk drives, networking products,
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
-1-
telecommunications products), as well as integrators and manufacturers of
computers based on the UNIX, DOS/Windows 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 Adaptec Inc., Exabyte Corporation, IBM, Maxtor Corporation,
Quantum Corporation, Seagate Technology, Sun Microelectronics, a division of Sun
Microsystems Inc., TEAC and Western Digital Corporation.
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.
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.
Value-Added Services
The Company provides the following value-added services:
Contract Manufacturing. The Company produces board-level products for
customers on a turnkey basis. Contract manufacturing operations involve building
board-level products to customer specifications, utilizing franchised and
non-franchised products and materials. Under these turnkey agreements, the
Company procures the required raw materials, manages the assembly and test
operations, and supplies circuit boards to the customer's delivery schedule and
quality requirements.
The capabilities of the Company's manufacturing division (Quadrus)
include automated advanced surface mount technology (SMT) and pin-through-hole
(PTH) assembly capabilities, complete with advanced in-circuit and functional
test capabilities and ISO 9002 certification. By capitalizing on its strengths
as a distributor, including its strong customer relations, expertise in
materials acquisition and inventory management, coupled with a complete in-house
kitting and turnkey manufacturing capability, the Company offers its customers
high quality products and service as well as a single source for their product,
materials, assembly and test requirements.
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 product line of disk and tape
subsystems and RAID products to OEM's, VAR's, and integrators for application in
standard interface computer environments.
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.
-2-
Distribution Operations
The majority of the products sold by the Company's distribution
division 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.
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 enables 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
successfully expanded their customer lists and line cards and consequently
achieved increased revenues.
-3-
Strategy
The Company's business strategy is designed to benefit from industry
trends toward increasing use of distributors and the outsourcing of
manufacturing requirements. 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.
Expand Operating Profit. The Company seeks to maximize its operating
profit through two aspects of its sales, marketing and product strategies: (i)
increasing distribution of relatively high gross margin products, such as
semiconductors with leading edge technology content and (ii) selling high volume
products, thereby enhancing productivity and allowing the Company to increase
gross profit while controlling operating expenses.
Provide National Major Market Distribution. The Company focuses its
marketing and sales strategy on the largest U.S. markets with the goal of
maximizing productivity per sales office. With its 20 sales locations, the
Company addresses what it believes constitutes many of the largest sectors of
the national market for semiconductor and computer products. The Company
continues to evaluate potential expansion into additional markets.
Realize Synergies Between Contract Manufacturing and Distribution. The
Company seeks to take advantage of synergies and efficiencies arising out of the
combination of distribution and contract manufacturing in a single organization.
Through its distribution arm, the Company provides its contract manufacturing
operation access to preferred component purchasing, as well as a substantial
sales force that would be difficult for a stand alone contract manufacturer of
comparable size to support.
Employees
At December 31, 1997, the Company had a total of 652 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
-4-
Company, customer demand, availability of products from suppliers, management of
growth, the percent of revenue derived from distribution versus contract
manufacturing, 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, 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 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. In addition, the Company's contract manufacturing division has
experienced lower than expected sales which, when combined with the division's
relatively fixed overhead, has adversely impacted operating results 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.
Year 2000 Compliance
Many currently installed computer systems experience problems handling
dates beyond the year 1999. Therefore, some computer hardware and software will
need to be modified prior to the year 2000 in order to remain functional. The
Company is currently assessing both the internal readiness of its computer
systems and that of its significant suppliers. The Company expects to implement
successfully the systems and programming changes necessary to address year 2000
issues, and does not believe that the cost of such actions will have a material
effect on the Company's results of operations or financial condition. There can
be no assurance, however, that there will not be a delay, or increased costs
associated with, the implementation of such changes, and the Company's inability
to implement such changes could have an adverse effect on future results of
operations.
The Company's reliance on suppliers, and therefore on the proper
functioning of their information systems and software, means that the failure to
address, by both the Company and its suppliers, year 2000 issues could have a
material impact on the Company's operations and financial results, however the
potential impact and related costs are not known at this time.
Dependence on Suppliers
A select number of suppliers represent a significant portion of the
Company's sales. One supplier provided products which represented 43% of the
Company's sales in 1997, and 37% in 1996. The Company's distribution agreement
with this supplier is 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. The loss of any significant
supplier or the shortage or loss of any significant product line could
materially adversely affect the Company. For example, in 1997 the Company's
operating results were materially and adversely affected by the bankruptcy of
one of the Company's disk drive suppliers. 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.
-5-
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
manufacturer's inventory upon cancellation. Such agreements also generally
provide the Company with price protection and limited 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. If the Company were to purchase
significant amounts of products on terms that do not include effective price
protection or inventory rotation rights, the Company would bear 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. The
personal computer industry has experienced significant unit volume growth over
the past three 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, could
adversely affect the Company's ability to continue its revenue growth. 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,
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
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.
-6-
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
value-added services including kitting and turnkey assembly. The Company
believes that it competes favorably with respect to these factors. 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.
Contract manufacturing and other 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 contract manufacturers and other 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
Company also faces significant offshore competition in turnkey manufacturing.
Although such competitors may offer lower bid prices, the Company believes that
offshore manufacturing is often less attractive due to the additional costs and
risks associated with utilizing offshore services, such as delays in shipping,
long lead items, shipping and insurance costs, inflexibility with respect to
production and engineering changes, high cancellation charges, uncertain product
quality and difficulty in communication.
Both distribution and contract manufacturing businesses are 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 would
have a material adverse effect on the Company's operating results.
Short History of Profitability in Contract Manufacturing; Dependence on Key
Customers
The Company's revenues from its contract manufacturing operations are
likely to depend on the availability of necessary components, from a single
source or otherwise, whose lack of availability could delay or curtail
production and shipment of assemblies utilizing such components. The Company's
contract manufacturing division has been dependent historically on a relatively
limited customer base. Any significant rescheduling or cancellation of orders
from these customers, or the lack of financial strength of these customers, or
loss of customers altogether could have a material adverse effect on the results
of operations of the contract manufacturing division and on the profitability of
the Company. In 1997, certain key customers of the Company's contract
manufacturing division significantly reduced their orders, which, given the
relatively fixed costs associated with the Company's contract manufacturing
operation, materially and adversely affected the Company's operating results in
1997. There can be no assurance that the Company's contract manufacturing
division will retain existing major customers, attract new contract
manufacturing customers or otherwise increase sales levels to support expanded
operations or that it will achieve profitability in future periods. Failure to
do so would have an adverse effect on the Company's operating results.
-7-
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 1997, the
Company expanded its corporate offices into a second building and relocated its
contract manufacturing division to expand its facilities and enable increased
manufacturing capacity. 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 or further develop
accounting and control systems and 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.
ITEM 2: Properties
Square
Location Type Principal Use Footage Ownership
- ------------------ --------------------- ------------------------ ----------- ---------------------------------
San Jose, CA Office, warehouse Headquarters, 34,000 Leased until 1999 with option
distribution center to extend one year.
(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 July 1997 to June
2002.
San Jose, CA Office, plant & Contract Manufacturing 141,520 Leased until March 1997 to
warehouse February 2006.
The Company also leases sales and/or warehouse locations in Phoenix,
Arizona; Agoura Hills, Irvine, San Diego, California; Denver, Colorado; Alamonte
Springs and Deerfield Beach, Florida; Marietta, Georgia; Chicago, Illinois;
Columbia, Maryland; Woburn, Massachusetts; Eden Prairie, Minnesota; Pine Brook,
New Jersey; Smithtown, New York; Portland, Oregon; Richardson and Austin, Texas;
Centerville, Utah; Herndon, Virginia and Redmond, Washington.
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.
ITEM 4: Submission of Matters to a Vote of Security Holders
None.
-8-
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 1996
First Quarter............................................................ $ 8.25 $ 5.88
Second Quarter........................................................... 9.88 6.63
Third Quarter............................................................ 8.13 5.75
Fourth Quarter .......................................................... 8.88 6.75
Fiscal 1997
First Quarter............................................................ $ 13.88 $ 8.63
Second Quarter .......................................................... 13.00 9.63
Third Quarter ........................................................... 11.75 8.13
Fourth Quarter .......................................................... 12.00 6.75
Fiscal 1998
First Quarter (through February 28, 1998)................................ $ 8.75 $ 7.06
On February 28, 1998, the last sale price of the Common Stock as
reported by Nasdaq was $8.00 per share.
As of February 28, 1998 there were approximately 300 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 financial statements of the Company, including the
notes thereto, and Managements's Discussion and Analysis included elsewhere
herein.
(in thousands, except earnings per share data)
Statement of Operations Data: 1997 1996 1995 1994(1) 1993(2)
--------- --------- --------- --------- ---------
Sales .................................. $ 533,736 $ 483,316 $ 346,291 $ 250,753 $ 125,303
Cost of sales ......................... 476,648 425,258 305,696 217,277 107,999
--------- --------- --------- --------- ---------
Gross profit ......................... 57,088 58,058 40,595 33,476 17,304
Marketing, general and
administrative expenses .............. 44,430 41,008 30,352 23,258 13,200
--------- --------- --------- --------- ---------
Income from operations ............... 12,658 17,050 10,243 10,218 4,104
Interest expense ....................... (4,574) (3,495) (3,473) (1,691) (501)
--------- --------- --------- --------- ---------
Income before income taxes ........... 8,084 13,555 6,770 8,527 3,603
Provision for income taxes ............. 3,395 5,693 2,768 3,471 1,549
--------- --------- --------- --------- ---------
Net income ............................. $ 4,689 $ 7,862 $ 4,002 $ 5,056 $ 2,054
========= ========= ========= ========= =========
Earnings per share (3)
Basic ............................... $ .55 $ .94 $ .49 $ .91 $ .63
========= ========= ========= ========= =========
Diluted ............................. $ .53 $ .92 $ .48 $ .86 $ .45
========= ========= ========= ========= =========
Shares used in per share calculation (3)
Basic ............................... 8,562 8,359 8,173 5,571 3,258
========= ========= ========= ========= =========
Diluted ............................. 8,906 8,511 8,350 5,878 4,515
========= ========= ========= ========= =========
As of December 31,
---------------------------------------------------------------
Balance Sheet Data: 1997 1996 1995 1994(1) 1993(2)
---------- --------- --------- -------- ---------
Working capital ........................ $134,612 $105,958 $106,914 $ 52,230 $ 17,400
Total assets ........................... 205,420 175,680 157,277 122,502 51,253
Total long-term debt ................... 74,460 50,885 59,453 6,059 1,130
Total shareholders' equity ............. 77,667 71,127 62,462 56,465 18,351
<FN>
(1) 1994 Statement of Operations Data and Balance Sheet Data reflect the effects of the purchase of
Vantage Components, Inc. on May 26, 1994.
(2) 1993 Statement of Operations Data and Balance Sheet Data reflect theeffects of the purchase of
certain assets of Adlar Turnkey Manufacturing Corporation ("ATMC") on April 7, 1993.
(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 Financial Statements.
</FN>
-10-
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 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, the ability to realize synergies between
contract manufacturing and distribution, 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
The following table sets forth certain financial data as a percentage
of total Company sales for the periods indicated:
Year Ended December 31,
---------------------------------------
1997 1996 1995
----------- ---------- ----------
Sales
Distribution ............................ 86.3% 80.9% 85.7%
Manufacturing ........................... 13.7% 19.1% 14.3%
----------- ---------- ----------
Total Company....................... 100.0% 100.0% 100.0%
----------- ---------- ----------
Cost of sales
Distribution ............................ 76.1% 71.4% 75.6%
Manufacturing ........................... 13.2% 16.6% 12.7%
----------- ---------- ----------
Total Company ...................... 89.3% 88.0% 88.3%
----------- ---------- ----------
Gross profit ................. 10.7% 12.0% 11.7%
Marketing, general and administrative expenses 8.3% 8.5% 8.8%
----------- ---------- ----------
Income from operations ...................... 2.4% 3.5% 2.9%
Interest expense ............................. (0.9%) (0.7%) (1.0%)
----------- ---------- ----------
Income before income taxes ................... 1.5% 2.8% 1.9%
Provision for income taxes ................... 0.6% 1.2% 0.8%
----------- ---------- ----------
Net income ................................... 0.9% 1.6% 1.1%
=========== ========== ==========
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Net sales were $533.7 million for the year ended December 31, 1997,
which represented an increase of $50.4 million or 10% over 1996. Distribution
sales increased by $69.3 million, while sales through the Company's contract
manufacturing division (Quadrus) decreased by approximately $18.9 million from
1996. Substantially the entire increase in distribution sales was attributable
to computer products with the expansion of unit sales in existing product lines
due to increased demand for mass storage products. Semiconductor sales decreased
slightly in 1997 from 1996 primarily due to industry-wide price declines in
memory products. The decrease in manufacturing sales in 1997 was
-11-
primarily due to unfavorable timing between new business engagements and the
termination of a major customer contract.
The Company's gross profit for 1997 was $57.1 million, a decrease of
$1.0 million or 2% from 1996. Of this total gross profit decrease, $9.0 million
was attributable to the Company's contract manufacturing division, which was
offset by an increase of approximately $8.0 million in the distribution
division. As a percentage of sales, gross margin was 10.7% in 1997 as compared
to 12.0% in 1996. The decrease in total Company gross margin was primarily the
result of decreased gross margins in the contract manufacturing division to 3.9%
in 1997, as compared to 12.9% in 1996. This decline in gross margin was
primarily due to sales volume, which fell below the level required to absorb
increased overhead expenses. In the distribution division, the gross margin in
1997 remained flat at 11.8%.
Marketing, general and administrative expenses increased 8% to $44.4
million in 1997 from $41.0 million in 1996, but decreased as a percentage of
sales to 8.3% from 8.5%. The increase in expenses was attributable to increased
sales volume and the Company's continuing effort to expand its sales and
marketing organization and strengthen its financial and administrative support.
Interest expense increased to $4.6 million in 1997 from $3.5 million in
1996. The increase was due to increased bank borrowings during 1997 to fund the
Company's working capital needs.
The Company's effective income tax rate remained unchanged at 42.0% in
1997.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Net sales were $483.3 million for the year ended December 31, 1996,
which represented an increase of $137.0 million or 40% over 1995. Distribution
sales increased by $94.6 million, while sales through the Company's contract
manufacturing division increased by $42.4 million over 1995. Substantially the
entire increase in distribution sales was attributable to computer products with
the expansion of unit sales in existing product lines due to increased demand
for mass storage products, a larger proportion of value-added and subsystem
sales and the expansion of the customer base due to the addition of sales and
marketing resources. Semiconductor sales decreased slightly in 1996 from 1995
primarily due to decreased DRAM unit sales, industry-wide price declines in
memory products and the discontinuation of the distribution agreement with a
supplier. Manufacturing sales growth in 1996 was primarily a result of increased
sales to existing customers, enabled by increased manufacturing equipment
capacity.
The Company's gross profit for 1996 was $58.1 million, which was $17.5
million, or 43% higher than 1995. Of the total gross profit increase, $11.4
million was attributable to the distribution division, and $6.1 million was
generated through the Company's contract manufacturing division. As a percentage
of sales, gross margin was 12.0% in 1996 as compared to 11.7% in 1995. The
increase in total Company gross margin was primarily a result of increased gross
margin in the contract manufacturing division to 13.0% in 1996, as compared to
11.8% in 1995. The increase in contract manufacturing gross margin was primarily
attributable to decreased material costs, most significantly for memory
products. In the distribution division, margins in 1996 were 11.8% compared to
11.7% in 1995.
Marketing, general and administrative expenses increased to $41.0
million in 1996 from $30.4 million in 1995, an increase of $10.6 million, or
35%, but decreased as a percentage of sales to 8.5% from 8.8%. The decline in
marketing, general and administrative expenses as a percentage of sales was
primarily attributable to the Company's successful efforts to control costs
while increasing sales, and a higher proportion of sales from large
-12-
volume orders, particularly for hard disk drives and certain semiconductor
devices, both of which resulted in lower operating expenses as a percentage of
sales. The increase in expenses was attributable to increased sales volume, the
Company's continuing effort to expand its sales and marketing organization, the
addition of operating expenses related to the contract manufacturing division
and increases to bad debt expenses due to increased sales volumes and changing
market conditions.
Interest expense remained unchanged at $3.5 million in 1996 versus
1995, despite record sales growth over the same period. This was attributable to
the Company's efforts to manage working capital by decreasing its days sales
outstanding in accounts receivable, increasing its inventory turns and
negotiating more favorable payment terms with certain suppliers.
The Company's effective income tax rate increased to 42.0% in 1996
compared to 40.9% in 1995, primarily due to the increased Federal income tax
rate.
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 June 17, 1997, and as further amended in March 1998, the Company
entered into an amendment to the Amended and Restated Syndicated Credit
Agreement arranged by Sumitomo Bank of California ("Sumitomo Bank") as Agent.
The amendment increased the Company's $80 million revolving line of credit to
$100 million. At the Company's option, the borrowings under the line of credit
will bear interest at Sumitomo Bank's prime rate or the adjusted LIBOR rate plus
1.4%. At December 31, 1997, the prime interest rate was 8.5%. The revolving line
of credit has a final payment due date of May 31, 1999. 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. Obligations of the Company under the revolving line of credit
are secured by substantially all of the Company's assets. The balance
outstanding on the revolving line of credit at December 31, 1997 was $70.0
million. The Company intends to utilize its revolving line of credit to fund
future working capital requirements. The Company was in compliance with its bank
covenants at December 31, 1997; 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 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.
The Company's accounts receivable and inventories as of December 31,
1997 have increased to $79.4 million and $98.4 million, respectively, from $70.7
million and $78.7 million, respectively, as of December 31, 1996 primarily as a
result of the Company's increased sales. The Company's accounts payable remained
unchanged at $45.5 million in 1997 compared to $45.7 million in 1996.
The net amount of cash provided by financing activities in 1997 was
$24.1 million, principally from the utilization of the Company's revolving line
of credit with its banks. The net amount of cash used in operating
-13-
activities in 1997 was $20.5 million. The net amount of cash used in investing
activities in 1997 was $3.0 million, for the acquisition of property and
equipment.
The Company's results of operations for any particular period may be
adversely affected by numerous factors, such as 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 percent of revenue derived
from distribution versus contract manufacturing, 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 timing of expenditures in anticipation of increased sales and customer
product delivery requirements and the future profitability of the contract
manufacturing division. 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. In various periods in the
past, the Company's operating results have been affected by all of these
factors. For example, in 1997 the Company's operating results were materially
and adversely affected by the bankruptcy of one of the Company's disk drive
suppliers. Additionally, price fluctuations in the disk drive and semiconductor
industries have affected the Company's gross margins in recent periods. The
Company's contract manufacturing division has experienced lower than expected
sales which, when combined with the division's relatively fixed overhead, has
adversely impacted operating results in recent periods. The Company has recently
experienced rapid sales growth and there can be no assurance that such sales
growth will continue or that such sales and profit levels will be maintained.
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.
ITEM 8: Financial Statements and Supplementary Data
The financial statements, together with the report thereon of Price
Waterhouse LLP, independent accountants, are included in Item 14 hereof.
ITEM 9: Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
-14-
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 1998 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 five executive officers:
Name Age Position
---- --- --------
W. Donald Bell.................... 60 President, Chief Executive Officer and
Chairman of the Board
Bruce M. Jaffe.................... 54 Chief Financial Officer, Senior Vice President of
Finance & Operations and Secretary
Ronald H. Mabry................... 50 Senior Vice President of Semiconductor Marketing
Philip M. Roussey................. 55 Senior Vice President of Computer Products Marketing
Robert J. Sturgeon................ 44 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.
Bruce M. Jaffe has been Chief Financial Officer
since July 1997. Mr. Jaffe has over thirty years of
experience in the electronics industry. Mr. Jaffe was
President of Bell Industries, a distributor of electronic
components, and also served as the Company's Executive Vice
President and Chief Financial Officer for more than 5 years.
-15-
Ronald H. Mabry has been Senior Vice President of
Semiconductor Marketing since October 1996. Mr. Mabry has
over thirty years experience in the electronics distribution
industry. Before joining Bell Microproducts, Mr. Mabry was
Chief Executive Officer and Chairman of the Board of Western
Micro Technology, and prior to that time, he held various
senior management positions with Avnet, Inc.
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 at
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.
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.
-16-
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) Financial Statements Form 10-K
Page Number
Report of Independent Accountants F-1
Balance Sheets at December 31, 1997
and 1996 F-2
Statements of Income for the years
ended December 31, 1997, 1996 and 1995 F-3
Statements of Shareholders' Equity for the years
ended December 31, 1997, 1996 and 1995 F-4
Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995 F-5
Notes to Financial Statements F-6
(2) Financial Statement Schedule
II - Valuation and Qualifying Accounts and Reserves S-1
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
Financial Statements or Notes to Financial Statements.
(3) Exhibits
Number Description of Document
2.1 Agreement and Plan of Reorganization dated as of February 2,
1994 between Registrant, Bell Microproducts Acquisition
Corporation, a New York corporation and wholly-owned
subsidiary of Registrant, Vantage Components Inc., a New
Jersey corporation, Vantage Components, Inc., a New York
corporation, Vantage Components of Maryland, Inc., a Maryland
corporation and Vantage Components of MA, Inc., a
Massachusetts corporation (1)
2.2 Amendment No. 1 to Agreement and Plan of Reorganization dated
as of February 2, 1994 between Registrant, Bell Microproducts
Acquisition Corporation, a New York corporation and
wholly-owned subsidiary of Registrant, Vantage Components,
Inc., a New Jersey corporation, Vantage Components Inc., a
New York corporation, Vantage Components of Maryland, Inc., a
Maryland corporation and Vantage Components of MA, Inc., a
Massachusetts corporation (2)
3.1 Amended and Restated Articles of Incorporation of Registrant (3)
-17-
(3) Exhibits Continued
Number Description of Document
3.2 Amended and Restated Bylaws of Registrant (4)
4.1 Specimen Common Stock Certificate of the Registrant (4)
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 Sutro & Co. Incorporated (2)
10.1 1988 Incentive Stock Plan, as amended through May 21, 1997 (11)
10.2 The form of Option Agreement used under the 1988 Incentive Stock
Plan (5)
10.3 Employee Stock Purchase Plan, as amended through May 21, 1997
(11)
10.4 The form of Option Agreement used under the Employee Stock
Purchase Plan (5)
10.5 1993 Director Stock Option Plan, as amended through May 24, 1995
(5)
10.6 The form of Option Agreement used under the 1993 Director Stock
Option Plan (5)
10.7 Registrant's 401(k) Plan (4)
10.8 Lease dated March 17, 1992 for Registrant's facilities at 1941
Ringwood Avenue, Suite 100, San Jose, California (4)
10.9 Lease dated April 15, 1993 for Registrant's facilities at 2350
Lundy Place, San Jose, California (1)
10.10 Amended and Restated Asset Purchase Agreement dated February 26,
1993 by and between Registrant, Barclay Financial Group and
Adlar Turnkey Manufacturing Company, as amended (4)
10.11 Form of Convertible Note issued by Registrant in favor of
Barclay Financial Group (4)
10.12 Amended and Restated Credit Agreement dated as of May 23, 1995
by and among the Registrant, the Banks named therein and
Sumitomo Bank of California, as Agent for the Banks, as amended
(2)
10.13 First Amendment to Second Amended and Restated Credit Agreement
dated as of June 25, 1996 by and among the Registrant, the Banks
named therein and Sumitomo Bank of California, as Agent for the
Banks (7)
10.14 Second Amendment to Second Amended and Restated Credit Agreement
dated as of September 30, 1996 by and among the Registrant, the
Banks named therein and Sumitomo Bank of California, as Agent
for the Banks (8)
10.15 Third Amendment to Second Amended and Restated Credit Agreement
dated as of June 17, 1997 by and among the Registrant, the Banks
named therein and Sumitomo Bank of California, as Agent for the
Banks (9)
-18-
(3) Exhibits Continued
Number Description of Document
10.16 Fourth Amendment to Second Amended and Restated Credit Agreement
dated as of September 1, 1997 by and among the Registrant, the
Banks named therein and Sumitomo Bank of California, as Agent
for the Banks (10)
10.17 Fifth Amendment to Second Amended and Restated Credit Agreement
dated as of November 7, 1997 by and among the Registrant, the
Banks named therein and Sumitomo Bank of California, as Agent
for the Banks
10.18 Standard Distributor Agreement dated June 1, 1990 by and between
Quantum Corporation and Registrant (4)
10.19 Form of Indemnification Agreement (4)
10.20 IBM Authorized Distributor Agreement dated May 17, 1993 between
IBM Corporation and Registrant (4)
10.21 Sublease dated November 12, 1996 for the Registrant's facilities
at 2020 South Tenth Street, San Jose, California, and related
exhibits
10.22* Employment Agreement dated as of December 10, 1996 between the
Registrant and W. Donald Bell, the Registrant's Chief Executive
Officer
10.23 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
21.1 Subsidiaries of the Registrant
23.1 Consent of Price Waterhouse 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-1 (File No. 33-79692) in the
form declared effective on November 1, 1994.
(3) 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.
(4) 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.
(5) 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.
-19-
(6) 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.
(7) Incorporated by reference to exhibit filed with the Registrant's
Report on Form 10Q for the quarter ended June 30, 1996.
(8) Incorporated by reference to exhibit filed with the Registrant's
Report on Form 10Q for the quarter ended September 30, 1996.
(9) Incorporated by reference to exhibit filed with the Registrant's
Report on Form 10Q for the quarter ended June 30, 1997.
(10) Incorporated by reference to exhibit filed with the Registrant's
Report on Form 10Q for the quarter ended September 30, 1997.
(11) Incorporated by reference to exhibit filed with the Registrant's
Registration Statement on Form S-8 (File No. 333-41179) filed on
November 26, 1997.
(b) No reports on Form 8-K were filed during the last quarter of the
fiscal year ended December 31, 1997.
(c) Exhibits. See Item 14(a) above.
(d) Financial Statements Schedules. See Item 14(a) above.
-20-
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, 1998.
BELL MICROPRODUCTS INC.
By: /s/ Bruce M. Jaffe
----------------------------------
Bruce M. Jaffe
Chief Financial Officer, Senior Vice President of Finance &
Operations and Secretary (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 Bruce M. Jaffe 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 Executive March 30, 1998
- -------------------------------
(W. Donald Bell) Officer (Principal Executive Officer)
/s/ Bruce M. Jaffe Chief Financial Officer, Senior Vice President of Finance March 30, 1998
- -------------------------------
(Bruce M. Jaffe) & Operations and Secretary (Principal Financial and
Accounting Officer)
/s/ James E. Ousley Director March 30, 1998
- -------------------------------
(James E. Ousley)
/s/ Glenn E. Penisten Director March 30, 1998
- -------------------------------
(Glenn E. Penisten)
/s/ Gordon A. Campbell Director March 30, 1998
- -------------------------------
(Gordon A. Campbell)
/s/ Edward L. Gelbach Director March 30, 1998
- -------------------------------
(Edward L. Gelbach)
-21-
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of
Bell Microproducts Inc.
In our opinion, the financial statements listed in the index appearing
under Item 14 (a) (1) and (2) on page 17 present fairly, in all material
respects, the financial position of Bell Microproducts Inc. at December 31, 1997
and 1996, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles. 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 generally accepted auditing
standards 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.
PRICE WATERHOUSE LLP
San Jose, California
February 4, 1998
F-1
BELL MICROPRODUCTS INC.
BALANCE SHEETS
(in thousands, except per share data)
December 31,
------------------------
1997 1996
-------- --------
ASSETS
Current assets:
Cash $ 6,325 $ 5,682
Accounts receivable, net of allowance for doubtful accounts of
$1,331 and $4,228 79,389 70,686
Inventories 98,379 78,659
Deferred income taxes 2,595 3,714
Prepaid expenses 1,217 885
-------- --------
Total current assets 187,905 159,626
Property and equipment, net 10,733 9,006
Goodwill, net of accumulated amortization of $1,112 and $799 6,372 6,685
Other assets 410 363
-------- --------
Total assets $205,420 $175,680
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities:
Notes payable, current portion $ -- $ 294
Accounts payable 45,540 45,725
Other accrued liabilities 6,025 6,271
Current portion of capitalized lease obligations 1,728 1,378
-------- --------
Total current liabilities 53,293 53,668
Line of credit 70,000 45,900
Capitalized lease obligations, less current portion 4,460 4,985
-------- --------
Total liabilities 127,753 104,553
-------- --------
Commitments and contingencies (Note 7)
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;
8,696 and 8,445 shares issued and outstanding 53,495 51,644
Retained earnings 24,172 19,483
-------- --------
Total shareholders' equity 77,667 71,127
-------- --------
Total liabilities and shareholders' equity $205,420 $175,680
======== ========
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
F-2
BELL MICROPRODUCTS INC.
STATEMENTS OF INCOME
(in thousands, except per share data)
Year Ended December 31,
-------------------------------------------
1997 1996 1995
--------- --------- ---------
Sales $ 533,736 $ 483,316 $ 346,291
Cost of sales 476,648 425,258 305,696
--------- --------- ---------
Gross profit 57,088 58,058 40,595
Marketing, general and administrative expenses 44,430 41,008 30,352
--------- --------- ---------
Income from operations 12,658 17,050 10,243
Interest expense (4,574) (3,495) (3,473)
--------- --------- ---------
Income before income taxes 8,084 13,555 6,770
Provision for income taxes 3,395 5,693 2,768
--------- --------- ---------
Net income $ 4,689 $ 7,862 $ 4,002
========= ========= =========
Earnings per share (Note 2)
Basic $ 0.55 $ 0.94 $ 0.49
========= ========= =========
Diluted $ 0.53 $ 0.92 $ 0.48
========= ========= =========
Shares used in per share calculation (Note 2)
Basic 8,562 8,359 8,173
========= ========= =========
Diluted 8,906 8,511 8,350
========= ========= =========
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
F-3
BELL MICROPRODUCTS INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands)
Common Stock
--------------------- Retained
Shares Amount Earnings Total
------- ------- ------- -------
Balance at December 31, 1994 8,047 $ 48,846 $ 7,619 $ 56,465
Exercise of Stock options, including related tax benefit of
$181 103 749 -- 749
Issuance of Common Stock under Stock Purchase Plan 66 473 -- 473
Conversion of note payable to Common Stock 107 773 -- 773
Net Income -- -- 4,002 4,002
------- ------- ------- -------
Balance at December 31, 1995 8,323 50,841 11,621 62,462
Exercise of stock options, including related tax benefit of
$159 26 202 -- 202
Issuance of Common Stock under Stock Purchase Plan 96 601 -- 601
Net Income -- -- 7,862 7,862
------- ------- ------- -------
Balance at December 31, 1996 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
======= ======= ======= =======
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
F-4
BELL MICROPRODUCTS INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands)
Year Ended December 31,
----------------------------------------------
1997 1996 1995
--------- --------- --------
Cash flows from operating activities:
Net income $ 4,689 $ 7,862 $4,002
Adjustments to reconcile net income to
net cash provided by (used in) operating activities:
Depreciation and amortization 2,917 2,569 1,659
Change in allowance for doubtful accounts (2,897) 928 1,220
Change in deferred and refundable income taxes 1,119 (296) (2,020)
Changes in assets and liabilities:
Accounts Receivable (5,806) (6,348) (14,651)
Inventories (19,720) (8,397) (13,236)
Prepaid Expenses (332) (44) (294)
Other assets (47) (210) 49
Accounts payable (185) 14,129 (3,483)
Other accrued liabilities (246) 3,566 795
--------- --------- --------
Net cash provided by (used in) operating activities (20,508) 13,759 (25,959)
--------- --------- --------
Cash flows from investing activities:
Acquisition of property and equipment, net (2,998) (1,120) (1,160)
--------- --------- --------
Cash flows from financing activities:
Net borrowings/(repayments) under line of credit
agreement 24,100 8,600 33,000
Net repayments on current portion of long-term liabilities (294) -- (5,000)
Proceeds from issuance of Common Stock 1,851 803 1,222
Principal payments on long-term liabilities (1,508) (1,649) (1,016)
--------- --------- --------
Net cash provided by (used in) financing activities 24,149 (9,446) 28,206
--------- --------- --------
Net increase in cash 643 3,193 1,087
Cash at beginning of period 5,682 2,489 1,402
--------- --------- --------
Cash at end of period $ 6,325 $ 5,682 $ 2,489
========= ========= ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 4,641 $ 3,355 $ 3,380
Income taxes $ 2,695 $ 5,744 $ 4,282
Supplemental non-cash financing activities:
Obligations incurred under capital leases $ 1,333 $ 2,392 $ 5,254
Conversion of note payable to Common Stock -- $ -- $ 773
<FN>
The accompanying notes are integral part of these financial statement
</FN>
F-5
BELL MICROPRODUCTS INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - THE COMPANY:
The Company operates in two industry segments: as a distributor of
semiconductor and computer products to original equipment manufacturers (OEMs),
value-added resellers (VARs) and dealers, and as a contract manufacturer.
Semiconductor products include memory, logic, microprocessors, 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 manufacturing and value-added services to its
customers, including the manufacturing of board-level and systems products to
customer specifications, as well as certain types of components and subsystem
testing services, systems integration and disk drive formatting and testing, and
the packaging of electronic component kits to customer specifications.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
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.
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.
Two vendors accounted for 57%, 53% and 40% of the Company's
distribution inventory purchases during 1997, 1996 and 1995, respectively. One
such vendor has obtained a second priority lien against the Company's
inventories to secure payment on the Company's purchase of goods.
Inventories
Inventories are stated at the lower of cost or market, cost being
determined by the first-in, first-out (FIFO) method.
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 amortized on a straight-line basis over a twenty-five
year period. The Company periodically reviews the recoverability of goodwill
based on estimated future cash flows.
F-6
Income Taxes
The Company accounts for income taxes in accordance with the provisions
of Statement of Financial Accounting Standards No. 109 (SFAS 109). SFAS 109
requires, among other things, that deferred income taxes be 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.
Disclosures About Fair Value of Financial Instruments
Financial instruments that are subject to fair value disclosure
requirements are carried in the financial statements at amounts that approximate
fair value.
Earnings Per Share
The Company adopted Statement of Financial Accounting Standards No.
128, "Earnings Per Share" ("SFAS 128") during the fourth quarter of 1997. This
statement simplifies the standards for computing earnings per share (EPS)
previously defined in Accounting Principles Board Opinion No. 15 "Earnings Per
Share". All prior-period earnings per share data has been restated in accordance
with SFAS 128. SFAS 128 requires presentation of both Basic EPS and Diluted EPS
on the face of the Statement of Income. 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:
Year Ended December 31,
--------------------------------
1997 1996 1995
------ ------ ------
Net income $4,689 $7,862 $4,002
====== ====== ======
Weighted average common shares outstanding (basic) 8,562 8,359 8,173
Effect of dilutive warrants and options 344 152 177
------ ------ ------
Weighted average common shares outstanding (diluted) 8,906 8,511 8,350
====== ====== ======
Earnings Per Share:
Basic $ 0.55 $ 0.94 $ 0.49
====== ====== ======
Diluted $ 0.53 $ 0.92 $ 0.48
====== ====== ======
Options and warrants to purchase 478,200 shares of common stock at a
weighted average price of $9.98 per share were outstanding at December 31, 1997
but were not included in the computation of Diluted EPS because the options'
exercise price was greater than the average market price of the common shares.
At December 31, 1996, there were 363,450 options and warrants outstanding to
purchase common stock at a weighted average price of $8.76 per share excluded
from the Diluted EPS computation due to their anti-dilution. At December 31,
1995, there were 405,450 options and warrants outstanding to purchase common
stock at a weighted average price of $11.03 per share excluded from the Diluted
EPS computation due to their anti-dilution.
F-7
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."
Recently Issued Accounting Standards
In June 1997, the Financial Accounting Standards Board issued two new
Statements of Financial Accounting Standards ("SFAS"). SFAS No. 130, "Reporting
Comprehensive Income," establishes standards for reporting and display of
comprehensive income within a financial statement. This Statement requires the
Company to report additional information on comprehensive income to supplement
the reporting of income. SFAS No. 130 is effective for both interim and annual
periods beginning after December 15, 1997. Comparative financial statements
provided for earlier periods are required to be reclassified so that
comprehensive income is displayed in a comparative format for all periods
presented. SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information," establishes standards for related disclosures about
products and services, geographic areas and major customers. SFAS No. 131 is
effective for financial statements for periods beginning after December 15,
1997. The Company will adopt SFAS No. 130 for the first quarter of 1998 and does
not expect its provisions to have a significant effect on the Company's
presentation of its financial statements. The Company will adopt SFAS No. 131 as
of the year ending December 31, 1998 and is currently studying its provisions.
Management Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
NOTE 3 - BALANCE SHEET COMPONENTS:
December 31,
------------------------
1997 1996
-------- --------
(in thousands)
Inventories:
Work-in-process $ 8,646 $ 9,146
Purchased components and materials 89,733 69,513
-------- --------
$ 98,379 $ 78,659
======== ========
Property and equipment:
Manufacturing and test equipment $ 9,721 $ 9,070
Computer and other equipment 4,041 3,212
Furniture and fixtures 1,950 1,147
Leasehold improvement 1,784 --
Warehouse equipment 459 195
-------- --------
17,955 13,624
Less: accumulated depreciation and amortization (7,222) (4,618)
======== ========
$ 10,733 $ 9,006
======== ========
F-8
NOTE 4 - LINE OF CREDIT AND TERM LOAN:
On June 17, 1997 and as further amended in March 1998, the Company
entered into an amendment to the Amended and Restated Syndicated Credit
Agreement, arranged by Sumitomo Bank of California ("Sumitomo Bank") as Agent.
The amendment increased the Company's $80 million revolving line of credit to
$100 million and extended the maturity date to May 31, 1999. At the Company's
option, the borrowings under the line of credit will bear interest at Sumitomo
Bank's prime rate or the adjusted LIBOR rate plus 1.40%. At December 31, 1997
the prime interest rate was 8.50%. 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, 1997; however,
there can be no assurance that the Company will be in compliance in the future.
Obligations of the Company under the revolving line of credit are secured by
substantially all of the Company's assets.
NOTE 5 - STOCK-BASED COMPENSATION PLANS:
Stock Option Plans
The Company has two fixed stock option plans; the 1988 Amended and
Restated Incentive Stock Plan (the Plan) and the 1993 Director Stock Option Plan
(the Director 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.
Since inception, the Company has reserved 2,524,104 shares of Common Stock for
issuance under the Plan.
The options lapse five years after the date of grant or such shorter
period as may be provided for in the stock option agreement. All options granted
vest over four years. 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.
As part of the Plan, in March 1993, the Board of Directors adopted a
Management Incentive Program (the "Program") for key employees. Under this
Program, options for 130,000, 339,000 and 224,000 shares of Common Stock were
granted in 1997, 1996 and 1995, respectively. The Program provides for ten-year
option terms with vesting at the rate of 1/10th 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.
On February 7, 1996, the Board of Directors offered employees with
options under the Plan the opportunity to exchange existing options for new
options at an exercise price of $6.50, the fair market value of the Company's
Common Stock on the date of the exchange. Any vesting in the canceled options
was lost, and the new options were subject to the normal four-year vesting
schedule under the Plan. Of the approximate 950,000 stock options outstanding
eligible for exchange, 640,900 stock options were exchanged for new options.
F-9
The following table presents activity under the Plan:
Options outstanding
-----------------------------
Options Weighted
available for average
grant Shares exercise price
---------- ---------- ----------
Balance at December 31, 1994 109,283 729,888 $ 8.36
Increase in options available for grant 435,000 -- --
Options granted (516,800) 516,800 $ 10.19
Options exercised -- (105,798) $ 5.44
Options canceled 181,260 (181,260) $ 9.21
---------- ---------- ----------
Balance at December 31, 1995 208,743 959,630 $ 9.50
Increase in options available for grant 300,000 -- --
Options granted (1,126,800) 1,126,800 $ 6.99
Options exercised -- (22,530) $ 1.94
Options canceled 842,900 (842,900) $ 9.88
---------- ---------- ----------
Balance at December 31, 1996 224,843 1,221,000 $ 7.06
Increase in options available for grant 300,000 -- --
Options granted (629,500) 629,500 $ 9.54
Options exercised -- (147,312) $ 6.48
Options canceled 277,729 (277,729) $ 7.08
---------- ---------- ----------
Balance at December 31, 1997 173,072 1,425,459 $ 8.21
========== ========== ==========
At December 31, 1997, 204,708 options were exercisable under this Plan.
The following table summarizes information about fixed stock options
outstanding for all plans at December 31, 1997.
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------------- -----------------------------------------
Number of
Shares Weighted Average Number of Shares
Outstanding Remaining Exercisable As
As of Contractual Life Weighted of December 31, Weighted
Range of Exercise December 31, Average 1997 Average
Prices 1997 Exercise Price Exercise Price
- --------------------- --------------- ------------------ ----------------- ------------------ ----------------
$ 6.50 - $ 6.50 450,513 5.27 years $ 6.50 55,487 $ 6.50
$ 7.00 - $ 7.88 259,021 4.53 7.53 124,446 7.42
$ 8.00 - $ 8.75 304,325 4.94 8.55 85,075 8.14
$ 9.00 - $ 9.50 261,900 5.74 9.23 10,350 9.06
$ 9.63 - $12.63 245,700 5.17 10.66 6,350 11.14
$12.75 - $12.75 4,000 1.82 12.75 3,000 12.75
--------------- ------------------ ----------------- ------------------ ----------------
$ 6.50 - $12.75 1,525,459 5.13 $ 8.24 284,708 $ 7.66
=============== ================== ================= ================== ================
The Company's Director Plan provides for the grant of an aggregate of
145,000 options for the purchase of the Company's Common Stock. 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. These options vest annually
at the rate of 1/3 and
F-10
have a ten-year life. In 1997, 20,000 options were granted at an exercise price
of $12.63. These options become vested in one year and have a ten-year life. At
December 31, 1997, 100,000 options were outstanding.
For the fixed stock option 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 1997, 1996 and 1995,
respectively; expected volatility of 35%; risk free interest rate of 5.9%, 6.0%
and 6.0% and expected lives of 3.92, 4.19 and 4.70 years. The Company has not
paid dividends and assumed no dividend yield. The weighted average fair value of
those stock options granted in 1997, 1996 and 1995 was $3.35 and $2.00 and
$3.87, per option, respectively.
Employee Stock Purchase Plan
The Company has reserved 380,000 shares of Common Stock for issuance to
all eligible employees under its Employee Stock Purchase Plan. 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. 329,114 shares
have been issued under this plan as of December 31, 1997. The fair value of each
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 1997, 1996 and 1995, respectively; expected volatility of
35%; risk free interest rate of 5.56%, 5.64% and 5.48% 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 1997, 1996 and
1995 was $2.43, $1.82 and $2.59 per right, respectively.
Fair Value Disclosures
At December 31, 1997, the Company had three 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. Had
compensation cost for the Company's three stock-based compensation plans been
determined based on the fair value at the grant dates for awards in 1997, 1996
and 1995 under those plans consistent with the provisions of Financial
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:
1997 1996 1995
--------- --------- ----------
Net income:
As reported $ 4,689 $ 7,862 $ 4,002
Pro forma 4,015 7,206 3,696
Earnings per share
As reported
Basic 0.55 0.94 0.49
Diluted 0.53 0.92 0.48
Pro forma
Basic 0.47 0.86 0.45
Diluted 0.47 0.85 0.44
Because additional stock options and stock purchase rights are expected
to be granted each year and this proforma presentation includes only the effect
of options granted subsequent to December 31, 1994, the above pro forma
disclosures are not representative of pro forma effects on reported financial
results for future years.
F-11
NOTE 6 - INCOME TAXES:
The provision for income taxes consists of the following (in
thousands):
1997 1996 1995
------- ------- -------
Current:
Federal $ 1,880 $ 5,893 $ 2,716
State 396 1,495 424
------- ------- -------
2,276 7,388 3,140
Deferred:
Federal 968 (1,382) (284)
State 151 (313) (88)
======= ======= =======
$ 3,395 $ 5,693 $ 2,768
======= ======= =======
Deferred tax (liabilities) assets comprise the following (in
thousands):
1997 1996 1995
------- ------- -------
Basis differential in assets $ (98) $ (110) $ (118)
Depreciation (678) (621) (201)
------- ------- -------
Gross deferred tax liabilities (776) (731) (319)
------- ------- -------
Bad debt, sales and warranty reserves 637 1,922 1,351
Inventory reserves and basis differences 1,605 1,756 495
Compensation accruals and reserves 254 128 110
State taxes, net of federal benefit 70 391 67
Other 805 248 66
------- ------- -------
Gross deferred tax assets 3,371 4,445 2,089
------- ------- -------
Net deferred tax asset $ 2,595 $ 3,714 $ 1,770
======= ======= =======
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.
A reconciliation of the Federal statutory tax rate to the effective tax
rate follows:
1997 1996 1995
--------- --------- --------
Federal statutory rate 34.0% 35.0% 34.0%
State income taxes, net of
Federal tax 4.2% 5.7% 3.3%
benefit and credits
Other 3.8% 1.3% 3.6%
--------- --------- --------
42.0% 42.0% 40.9%
========= ========= ========
NOTE 7 - 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.
F-12
The Company leases certain equipment under capitalized leases with such
equipment amounting to $10,042,000 less accumulated depreciation of $3,512,000
at December 31, 1997 and $8,698,000 less accumulated depreciation of $2,335,000
at December 31, 1996. Amortization expense on assets subject to capitalized
leases was $1,177,000, $1,307,000, and $696,000 for the years ended December 31,
1997, 1996 and 1995, respectively. The capitalized lease terms range from three
to five years.
The following is a summary of commitments under leases:
Capitalized Operating
Year ending December 31, leases leases
- ----------------------------------------- ------- -------
(in thousands)
1998 $ 2,179 $ 2,392
1999 2,132 2,040
2000 1,907 1,746
2001 692 1,632
2002 216 1,629
2003 and beyond -- 3,549
------- -------
Total minimum lease payments 7,126 $12,988
=======
Less: imputed interest (938)
-------
Present value of minimum lease payments $ 6,188
=======
Total operating lease expense was $2,508,000, $1,272,000 and $1,167,000
for the years ended December 31, 1997, 1996 and 1995, 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 affect on the Company's
financial position or results of operations.
NOTE 8 - TRANSACTIONS WITH RELATED PARTIES:
The Company has entered into a manufacturing agreement with Pinnacle
Systems, Inc. ("Pinnacle") providing for the performance by the Company's
manufacturing division of value-added turnkey services for Pinnacle. The
agreement term is automatically renewed for successive one-year periods unless
terminated by either party on 90 days' written notice. Company sales to Pinnacle
totaled $2,840,000, $9,692,000, and $13,461,000, for the years ended December
31, 1997, 1996, and 1995, respectively. The accounts receivable balance from
Pinnacle was $132,000 at December 31, 1997 and $202,000 at December 31, 1996.
The Company has purchased approximately $1,532,000, $350,000, and $576,000, of
inventory from Pinnacle in 1997, 1996 and 1995, respectively. Inventory on hand,
purchased under contract with Pinnacle, totaled $393,000 and $914,000 at
December 31, 1997 and December 31, 1996, respectively. Glenn E. Penisten, a
director of the Company, is a director of Pinnacle. The agreement was entered
into in the ordinary course of business and the Company believes that it has
terms no less favorable than reasonably could be expected to be obtained from
unaffiliated parties.
In May 1994, the Company entered into a manufacturing agreement with
Reply Corporation ("Reply") providing for the performance by the Company's
manufacturing division of value-added turnkey services for Reply. The Company
terminated the agreement in 1997. Sales to Reply totaled approximately $262,000,
$2,594,000 and $3,144,000 during 1997, 1996, and 1995, respectively. The
accounts receivable balance from Reply was $54,000
F-13
at December 31, 1997 and $413,000 at December 31, 1996. The Company has
purchased approximately $123,000, $167,000 and $66,000 of inventory from Reply
in 1997, 1996, and 1995, respectively. Glenn E. Penisten and Gordon A. Campbell,
directors of the Company, are directors of Reply. The agreement was entered into
in the ordinary course of business and the Company believes that it has terms no
less favorable than reasonably could be expected to be obtained from
unaffiliated parties.
NOTE 9 - 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.
NOTE 10 - BUSINESS SEGMENT INFORMATION:
Operating results and other financial data are presented for the
principal business segments of the Company for the years ended December 31,
1997, 1996 and 1995 as follows:
Distribution Manufacturing Eliminations Consolidated
------------ -------- ---- ------------ ------------
1997
Sales to customers $460,516 $ 73,220 $ -- $533,736
Intersegment sales 7,650 631 (8,281) --
-------- -------- -------- --------
Revenue 468,166 73,851 (8,281) 533,736
Operating profit (loss) 13,240 (582) -- 12,658
Identifiable assets 206,203 36,245 (37,028) 205,420
Depreciation and amortization 779 2,138 -- 2,917
Capital asset additions 1,490 2,841 -- 4,331
1996
Sales to customers $391,187 $ 92,129 $ -- $483,316
Intersegment sales 4,855 282 (5,137) --
-------- -------- -------- --------
Revenue 396,042 92,411 (5,137) 483,316
Operating profit 11,556 5,494 -- 17,050
Identifiable assets 172,755 39,326 (36,401) 175,680
Depreciation and amortization 683 1,886 -- 2,569
Capital asset additions 487 2,925 -- 3,412
1995
Sales to customers $296,633 $ 49,658 $ -- $346,291
Intersegmentsales 7,090 495 (7,585) --
-------- -------- -------- --------
Revenue 303,723 50,153 (7,585) 346,291
Operating profit 7,559 2,684 10,243
Identifiable assets 152,584 39,316 (34,623) 157,277
Depreciation and amortization 605 1,054 -- 1,659
Capital asset additions 402 6,012 -- 6,414
Revenue and operating profit by business segment includes both sales to
customers, as reported in the Company's Statements of Income, and intersegment
sales, which are transferred at cost.
F-14
NOTE 11 - SELECTED QUARTERLY FINANCIAL DATA (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,
1996 1996 1996 1996 1997 1997 1997 1997
---------- ---------- ---------- --------- ---------- ---------- ---------- ---------
Sales .................... $ 115,431 $ 113,644 $ 118,018 $ 136,222 $ 140,968 $ 115,136 $ 138,003 $ 139,629
Cost of sales ............ 101,809 99,020 103,855 120,574 124,820 101,511 124,375 125,942
--------- --------- --------- --------- --------- --------- --------- ---------
Gross profit ............. 13,622 14,624 14,163 15,648 16,148 13,625 13,628 13,687
Marketing, general and
administrative expenses .. 9,759 10,518 9,896 10,835 11,151 9,569 11,587 12,123
--------- --------- --------- --------- --------- --------- --------- ---------
Income from operations ... 3,863 4,106 4,267 4,813 4,997 4,056 2,041 1,564
Interest expense ......... (995) (909) (767) (822) (892) (1,178) (1,122) (1,382
--------- --------- --------- --------- --------- --------- --------- ---------
Income before income
Taxes .................... 2,868 3,197 3,500 3,991 4,105 2,878 919 182
Provision for income taxes 1,205 1,343 1,470 1,676 1,724 1,209 386 76
--------- --------- --------- --------- --------- --------- --------- ---------
Net income ............... $ 1,663 $ 1,854 $ 2,030 $ 2,315 $ 2,381 $ 1,669 $ 533 $ 106
========= ========= ========= ========= ========= ========= ========= =========
Earnings per share
Basic ................... $ 0.20 $ 0.22 $ 0.24 $ 0.28 $ 0.28 $ 0.20 $ 0.06 $ 0.01
========= ========= ========= ========= ========= ========= ========= =========
Diluted .................. $ 0.20 $ 0.22 $ 0.24 $ 0.27 $ 0.27 $ 0.19 $ 0.06 $ 0.01
========= ========= ========= ========= ========= ========= ========= =========
Shares used in per share
calculation
Basic .................. 8,324 8,331 8,387 8,394 8,471 8,539 8,607 8,632
========= ========= ========= ========= ========= ========= ========= =========
Diluted ................ 8,423 8,539 8,531 8,552 8,935 8,978 8,886 8,825
========= ========= ========= ========= ========= ========= ========= =========
During the fourth quarter of 1996, the Company began capitalizing
certain labor overhead costs related to its manufacturing activities. The impact
was an increase to net income in the fourth quarter of 1996, of approximately
$217,000. During the fourth quarter of 1997, the Company was adversely affected
by the bankruptcy of one of its suppliers. The impact was a decrease to net
income of approximately $421,000, or five cents per share.
F-15
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
Year Ended December 31, Period Expenses Write-offs End of Period
------------------------------ ----------------- ---------------- ---------------- -----------------
1997 $ 4,228 $ 1,763 $ (4,660) $ 1,331
1996 3,300 5,035 (4,107) 4,228
1995 1,550 2,427 (677) 3,300
S-1
INDEX TO EXHIBITS
Number Description of Document Sequential
Page Number
2.1 Agreement and Plan of Reorganization dated as of February 2,
1994 between Registrant, Bell Microproducts Acquisition
Corporation, a New York corporation and wholly-owned subsidiary
of Registrant, Vantage Components Inc., a New Jersey
corporation, Vantage Components, Inc., a New York corporation,
Vantage Components of Maryland, Inc., a Maryland corporation and
Vantage Components of MA, Inc., a Massachusetts corporation (1)
2.2 Amendment No. 1 to Agreement and Plan of Reorganization dated as
of February 2, 1994 between Registrant, Bell Microproducts
Acquisition Corporation, a New York corporation and wholly-owned
subsidiary of Registrant, Vantage Components, Inc., a New Jersey
corporation, Vantage Components Inc., a New York corporation,
Vantage Components of Maryland, Inc., a Maryland corporation and
Vantage Components of MA, Inc., a Massachusetts corporation (2)
3.1 Amended and Restated Articles of Incorporation of Registrant (3)
3.2 Amended and Restated Bylaws of Registrant (4)
4.1 Specimen Common Stock Certificate of the Registrant (4)
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 Sutro & Co. Incorporated (2)
10.1 1988 Incentive Stock Plan, as amended through May 23, 1996 (6)
10.2 The form of Option Agreement used under the 1988 Incentive Stock
Plan (5)
10.3 Employee Stock Purchase Plan, as amended through May 21, 1997
(11)
10.4 The form of Option Agreement used under the Employee Stock
Purchase Plan (5)
10.5 1993 Director Stock Option Plan, as amended through May 24, 1995
(5)
10.6 The form of Option Agreement used under the 1993 Director Stock
Option Plan (5)
10.7 Registrant's 401(k) Plan (4)
10.8 Lease dated March 17, 1992 for Registrant's facilities at 1941
Ringwood Avenue, Suite 100, San Jose, California (4)
10.9 Lease dated April 15, 1993 for Registrant's facilities at 2350
Lundy Place, San Jose, California (1)
10.10 Amended and Restated Asset Purchase Agreement dated February 26,
1993 by and between Registrant, Barclay Financial Group and
Adlar Turnkey Manufacturing Company, as amended (4)
10.11 Form of Convertible Note issued by Registrant in favor of
Barclay Financial Group (4)
Number Description of Document Sequential
Page Number
10.12 Amended and Restated Credit Agreement dated as of May 23, 1995
by and among the Registrant, the Banks named therein and
Sumitomo Bank of California, as Agent for the Banks, as amended
(2)
10.13 First Amendment to Second Amended and Restated Credit Agreement
dated as of June 25, 1996 by and among the Registrant, the Banks
named therein and Sumitomo Bank of California, as Agent for the
Banks (7)
10.14 Second Amendment to Second Amended and Restated Credit Agreement
dated as of September 30, 1996 by and among the Registrant, the
Banks named therein and Sumitomo Bank of California, as Agent
for the Banks (8)
10.15 Third Amendment to Second Amended and Restated Credit Agreement
dated as of June 17, 1997 by and among the Registrant, the Banks
named therein and Sumitomo Bank of California, as Agent for the
Banks (9)
10.16 Fourth Amendment to Second Amended and Restated Credit Agreement
dated as of September 1, 1997 by and among the Registrant, the
Banks named therein and Sumitomo Bank of California, as Agent
for the Banks (10)
10.17 Fifth Amendment to Second Amended and Restated Credit Agreement
dated as of November 7, 1997 by and among the Registrant, the
Banks named therein and Sumitomo Bank of California, as Agent
for the Banks
10.18 Standard Distributor Agreement dated June 1, 1990 by and between
Quantum Corporation and Registrant (4)
10.19 Form of Indemnification Agreement (4)
10.20 IBM Authorized Distributor Agreement dated May 17, 1993 between
IBM Corporation and Registrant (4)
10.21 Sublease dated November 12, 1996 for the Registrant's facilities
at 2020 South Tenth Street, San Jose, California, and related
exhibits.
10.22* Employment Agreement dated as of December 10, 1996 between the
Registrant and W. Donald Bell, the Registrant's Chief Executive
Officer
10.23 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.
21.1 Subsidiaries of the Registrant
23.1 Consent of Price Waterhouse 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-1 (File No. 33-79692) in the
form declared effective on November 1, 1994.
(3) 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.
(4) 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.
(5) 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.
(6) 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.
(7) Incorporated by reference to exhibit filed with the Registrant's
Report on Form 10Q for the quarter ended June 30,
1996.
(8) Incorporated by reference to exhibit filed with the Registrant's
Report on Form 10Q for the quarter ended September 30, 1996.
(9) Incorporated by reference to exhibit filed with the Registrant's
Report on Form 10Q for the quarter ended June 30, 1997.
(10) Incorporated by reference to exhibit filed with the Registrant's
Report on Form 10Q for the quarter ended September 30, 1997.
(11) Incorporated by reference to exhibit filed with the Registrant's
Registration Statement on Form S-8 (File No. 333-41179) filed on
November 26, 1997.