No. pages 13
index exhibit pg. none
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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
( Mark one )
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 1998
-------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to ____________
Commission file number 0-21528
Bell Microproducts Inc.
- ---------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
California 94-3057566
- -------------------------------- --------------
( State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1941 Ringwood Avenue, San Jose, California 95131-1721
- ---------------------------------------------------------------------------
(Address of principal executive offices ) (Zip Code)
(408) 451-9400
- ---------------------------------------------------------------------------
(Registrant's telephone number, including area code )
N/A
- ---------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No initial report, previously not required to file
------- -------
Common Stock, $0.01 Par Value -- Number of Shares Outstanding at June 30, 1998:
- ----------------------------- 8,778,453
1
BELL MICROPRODUCTS INC.
INDEX TO FORM 10-Q
Page
PART I - FINANCIAL INFORMATION Number
Item 1: Financial Statements
Condensed Balance Sheets - June 30, 1998 and December 31, 1997
3
Condensed Statements of Income - Three months and six months ended
June 30, 1998 and 1997 4
Condensed Statements of Cash Flows - Six months ended June 30,
1998 and 1997 5
Notes to Condensed Financial Statements 6
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
Item 3: Quantitative and Qualitative Disclosure about Market Risk 10
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 11
Item 6. Exhibits and Reports 12
Signature 13
2
PART I - FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
Bell Microproducts Inc.
Condensed Balance Sheets
(in thousands, except per share data)
(unaudited)
June 30, December 31,
1998 1997
- ----------------------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash $ 3,523 $ 6,325
Accounts receivable, net 92,969 79,389
Inventories 100,532 98,379
Deferred income taxes 2,582 2,595
Prepaid expenses 1,237 1,217
-------- --------
Total current assets 200,843 187,905
Property and equipment, net 11,066 10,733
Goodwill, net 6,216 6,372
Other assets 402 410
-------- --------
Total assets $218,527 $205,420
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 58,264 $ 45,540
Other accrued liabilities 8,550 6,025
Current portion of capitalized lease
obligations 1,916 1,728
-------- --------
Total current liabilities 68,730 53,293
Line of credit 65,400 70,000
Capitalized lease obligations, less current portion 4,252 4,460
-------- --------
Total liabilities 138,382 127,753
-------- --------
Commitments and contingencies
Shareholders' equity:
Common Stock, $0.01 par value, 20,000 shares
authorized; 8,778 and 8,696 issued and outstanding 54,420 53,495
Retained earnings 25,725 24,172
-------- --------
Total shareholders' equity 80,145 77,667
-------- --------
Total liabilities and shareholders' equity $218,527 $205,420
======== ========
<FN>
The accompanying notes are an integral part of these condensed financial statements.
</FN>
3
Bell Microproducts Inc.
Condensed Statements of Income
(in thousands, except per share data)
(unaudited)
Three Months ended June 30, Six Months ended June 30,
---------------------------- ----------------------------
1998 1997 1998 1997
--------- --------- --------- ---------
Sales $ 144,718 $ 115,136 $ 273,998 $ 256,104
Cost of sales 129,487 101,511 245,265 226,331
--------- --------- --------- ---------
Gross profit 15,231 13,625 28,733 29,773
Selling, general and
administrative expenses 11,699 9,569 23,544 20,720
--------- --------- --------- ---------
Income from operations 3,532 4,056 5,189 9,053
Interest expense (1,191) (1,178) (2,512) (2,070)
--------- --------- --------- ---------
Income before income taxes 2,341 2,878 2,677 6,983
Provision for income taxes (983) (1,209) (1,124) (2,933)
--------- --------- --------- ---------
Net income $ 1,358 $ 1,669 $ 1,553 $ 4,050
========= ========= ========= =========
Earnings per share:
Basic $ 0.15 $ 0.20 $ 0.18 $ 0.48
========= ========= ========= =========
Diluted $ 0.15 $ 0.19 $ 0.18 $ 0.45
========= ========= ========= =========
Shares used in per
share
calculation:
Basic 8,767 8,539 8,745 8,505
========= ========= ========= =========
Diluted 8,855 8,978 8,825 8,957
========= ========= ========= =========
<FN>
The accompanying notes are an integral part of these condensed financial statements.
</FN>
4
Bell Microproducts Inc.
Condensed Statements of Cash Flows
(Increase/(decrease) in cash, in thousands)
(unaudited)
Six months ended June 30,
- ----------------------------------------------------------------------------------------------------------------------
1998 1997
-------- --------
Cash flows from operating activities:
Net income $ 1,553 $ 4,050
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization 1,666 1,562
Change in allowance for doubtful accounts 1,357 (949)
Change in deferred income taxes 13 --
Changes in assets and liabilities:
Accounts receivable (14,937) (3,655)
Inventories (2,153) (16,132)
Prepaid expenses (20) (336)
Other assets 8 (55)
Accounts payable 12,724 5,635
Other accrued liabilities 2,525 534
-------- --------
Net cash provided by (used in) operating activities 2,736 (9,346)
-------- --------
Cash flows from investing activities:
Acquisition of property and equipment, net (1,011) (2,007)
-------- --------
Cash flows from financing activities:
Net borrowings/(repayments) under line of credit agreement (4,600) 8,100
Proceeds from issuance of Common Stock 925 677
Principal payments on long term liabilities (852) (866)
-------- --------
--------
Net cash provided by (used in) financing activities (4,527) 7,911
-------- --------
Net decrease in cash (2,802) (3,442)
Cash at beginning of period 6,325 5,682
-------- --------
Cash at end of period $ 3,523 $ 2,240
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 2,514 $ 2,051
Income taxes $ 36 $ 2,083
Obligations incurred under capital leases $ 832 $ 1,205
<FN>
The accompanying notes are an integral part of these condensed financial statements.
</FN>
5
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
Note 1 - Basis of Presentation:
The condensed financial statements presented in this Quarterly Report
are unaudited. It is management's opinion that all adjustments, consisting of
normal recurring items, have been included for a fair basis of presentation.
This Quarterly Report on Form 10-Q should be read in conjunction with the
Company's 1997 Annual Report on Form 10-K. The operating results for the three
and six month periods ended June 30, 1998 are not necessarily indicative of the
results that may be expected for the fiscal year ending December 31, 1998.
Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133"). FAS 133 establishes a new model
for accounting for derivatives and hedging activities and supersedes and amends
a number of existing accounting standards. SFAS 133 requires that all
derivatives be recognized in the balance sheet at their fair market value, and
the corresponding derivative gains or losses be either reported in the statement
of operations or a deferred item depending on the type of hedge relationship
that exists with respect to such derivative. Adopting the provisions of SFAS 133
are not expected to have a material effect on the Company's financial
statements. The standard is effective for the Company in fiscal 2000.
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information," ("SFAS 131"). SFAS 131 establishes
standards for reporting information about operating segments in annual and
interim financial statements. This Statement also establishes standards for
related disclosures about products and services, geographic areas and major
customers. SFAS 131 is effective for financial statements for periods beginning
after December 15, 1997. The Company will adopt SFAS 131 as of the year ending
December 31, 1998 and is currently studying its provisions.
Note 2 - 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. 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.
6
Following is a reconciliation of the numerators and denominators of the
Basic and Diluted EPS computations for the periods presented below (in
thousands, except per share data):
Three Months ended June 30, Six Months ended June 30,
--------------------- ---------------------
1998 1997 1998 1997
------ ------ ------ ------
Net income $1,358 $1,669 $1,553 $4,050
====== ====== ====== ======
Weighted average common
shares outstanding (Basic) 8,767 8,539 8,745 8,505
Effect of dilutive warrants
and options 88 439 80 452
------ ------ ------ ------
Weighted average common
shares outstanding (Diluted) 8,855 8,978 8,825 8,957
====== ====== ====== ======
Earnings per share
Basic $ 0.15 $ 0.20 $ 0.18 $ 0.48
====== ====== ====== ======
Diluted $ 0.15 $ 0.19 $ 0.18 $ 0.45
====== ====== ====== ======
Options to purchase 779,925 shares of common stock at a weighted
average price of $9.13 per share were outstanding at June 30, 1998 but were not
included in the computation of Diluted EPS because the options' exercise prices
were greater than the average market price of the common stock during the
period. At June 30, 1997, there were 72,700 options and warrants outstanding to
purchase common stock at a weighted average price of $11.93 per share excluded
from the Diluted EPS computation due to their anti-dilution.
Note 3 - Inventories:
A summary of inventories follows (in thousands):
June 30, 1998 December 31, 1997
--------------------------- ---------------------------
Purchased components and materials $ 89,349 $ 89,733
Work-in-process 11,183 8,646
--------------------------- ---------------------------
Total $ 100,532 $ 98,379
=========================== ===========================
Note 4 - Property and Equipment:
A summary of property and equipment follows (in thousands):
June 30, 1998 December 31, 1997
--------------------------- ---------------------------
Manufacturing and test equipment $ 10,910 $ 9,721
Computer and other equipment 4,057 4,041
Furniture and fixtures 2,126 1,950
Leasehold improvements 2,153 1,784
Warehouse equipment 552 459
--------------------------- ---------------------------
19,798 17,955
Accumulated depreciation (8,732) (7,222)
--------------------------- ---------------------------
Total $ 11,066 $ 10,733
=========================== ===========================
7
Note 5 - Line of Credit
On June 17, 1997, the Company entered into an amendment to the Second
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 in June 1998, the agreement
was further amended to extend the maturity date to July 31, 1999. In the third
quarter of 1998, the Company expects to extend the maturity date to May 31,
2000. At the Company's option, the borrowings under the line of credit bear
interest at Sumitomo Bank's prime rate or the adjusted LIBOR rate plus 1.40%. At
June 30, 1998 Sumitomo Bank's prime 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 June 30,
1998; 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.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Information Regarding Forward-Looking Statements
The following Management's Discussion and Analysis of Financial
Condition and Results of Operations contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Actual results could differ materially from
those projected in the forward-looking statements as a result of a number of
factors, including the timing of delivery of products from suppliers, the
product mix sold by the Company, customer demand, the Company's dependence on a
small number of customers that account for a significant portion of revenues,
availability of products from suppliers, cyclicality in the disk drive and other
industries, price competition for products sold by the Company, management of
growth, the Company's ability to collect accounts receivable, price decreases on
inventory that is not price protected, the lack of profitability of Quadrus in
recent periods, potential year 2000 costs, potential interest rate fluctuations
as described below and the other risk factors detailed in the Company's Annual
Report on Form 10-K for the year ended December 31, 1997 filed with the
Securities and Exchange Commission. The Company assumes no obligation to update
such forward-looking statements or to update the reasons actual results could
differ materially from those anticipated in such forward-looking statements.
Three months ended June 30, 1998 compared to three months ended June 30, 1997
Sales were $144.7 million for the quarter ended June 30, 1998, which
represented an increase of $29.6 million, or 26% compared to the same quarter in
1997. Distribution sales increased $30.2 million, while sales through the
Company's contract manufacturing division (Quadrus) decreased $0.6 million. The
entire increase in distribution sales was attributable to an increase in sales
of computer products. The increase resulted from new product lines which were
added to the Company's product offering and the expansion of unit sales in
existing product lines due to increased demand for the Company's mass storage
products. Semiconductor sales remained relatively unchanged from quarter to
quarter. The decrease in contract manufacturing sales in the current quarter
compared to the same period last year was primarily due to the termination of a
major customer contract and reduced demand from certain other customers.
However, compared to the first quarter of 1998, Quadrus' sales increased $7.7
million as a result of development and growth of new business from customers
recently engaged.
The Company's gross profit for the second quarter of 1998 was $15.2
million, an increase of $1.6 million, or 12% from the second quarter of 1997. Of
this total gross profit increase, $2.1 million was attributable to the
distribution division, which was offset by a decrease of $0.5 million in the
Company's contract manufacturing division. As a percentage of sales, gross
margin was 10.5% in the second quarter of 1998, compared to 11.8% in the same
quarter of 1997. The decrease in total Company gross margin was
8
primarily the result of decreased gross margins in distribution. This decrease
was due to an increase in the proportion of computer product sales, which
typically have lower margins than semiconductor products.
Selling, general and administrative expenses increased 22% to $11.7
million in the second quarter of 1998 from $9.6 million in the second quarter of
1997, but decreased as a percentage of sales to 8.1% from 8.3%.
Interest expense remained unchanged at $1.2 million in the second
quarter of 1998 as compared to the same period last year, despite increased
average bank borrowings during the quarter. This was attributable to the
decreased Libor interest rate provided by the Company's amended credit agreement
and an increased proportion of Libor borrowings.
The effective income tax rate remained the same, 42%, during both
periods.
Six months ended June 30, 1998 compared to six months ended June 30, 1997
Sales were $274.0 million for the six months ended June 30, 1998, which
represented an increase of $17.9 million, or 7% over the same period in 1997.
This increase was attributable to higher computer product sales within
Distribution which resulted from new product lines added to the Company's
product offering and the expansion of unit sales in existing product lines as a
result of increased demand for mass storage.
The Company's gross profit for the first six months of 1998 was $28.7
million, a decrease of $1.1 million, or 4% over the first six months of 1997. Of
this total gross profit decrease, $3.8 million was attributable to the Company's
contract manufacturing division, which was offset by an increase of $2.7 million
in the distribution division. The decrease in the contract manufacturing gross
profit was attributable to sales volume, which fell below the level required to
absorb increased overhead expenses.
Selling, general and administrative expenses increased 14% to $23.5
million in the first six months of 1998 from $20.7 million in the first six
months of 1997. The increase in expenses was attributable to increased sales
volume and the Company's continuing effort to expand its sales and marketing
organization.
Interest expense was $2.5 million in the first six months of 1998 as
compared to $2.1 million in the same period in 1997. This increase was primarily
due to increased average bank borrowings during the period.
The Company's effective tax rate remained the same, 42%, during both
periods.
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 June 1998, the Company
entered into an amendment to the Second 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 June 30, 1998, Sumitomo Bank's prime rate was 8.5%. The revolving line
of credit has a final payment due date of July 1999, however in the third
quarter of 1998, the Company expects to extend the maturity date to May 31,
2000. 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 June 30, 1998
was $65.4 million.
9
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 June 30, 1998; 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.
Net cash provided by operating activities for the six months ended June
30, 1998, was $2.7 million. The Company's net accounts receivable as of June 30,
1998 increased to $92.9 million from $79.4 million as of December 31, 1997 as a
result of increased sales at the end of the current quarter. The Company's
accounts payable increased to $58.2 million as of June 30, 1998 from $45.5
million as of December 31, 1997, primarily due to increased inventory purchases
as well as timing of inventory receipts and payments related thereto. The
Company used $1.0 million for the acquisition of property and equipment during
the six months ended June 30, 1998. Net cash used in financing activities during
the six months ended June 30, 1998 totaled $4.5 million, which was primarily
related to the repayment of the Company's line of credit. The Company's future
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 capital
requirements for the next twelve months. However, the Company may, in the
future, seek additional debt or equity financing to fund continued growth.
RISK FACTORS
The Company faces certain risk factors as detailed in the Company's
Annual Report on Form 10-K for the year ended December 31, 1997 filed with the
Securities and Exchange Commission and as described below:
Year 2000 Issues
There is a risk to the Company from unforeseen problems related to the
"Year 2000 issue". The "Year 2000" issue arises because most computer systems
and programs were designed to handle only a two-digit year, not a four-digit
year. When Year 2000 begins, these computers may interpret "00" as the year 1900
and could either stop processing date related computations or could process them
incorrectly. The Company has completed an assessment of its information systems
and does not anticipate any significant internal Year 2000 issues from its own
information systems, databases or programs. Certain software packages are
currently being changed to upgraded versions that are Year 2000 compliant. The
costs incurred to date and expected to be incurred in the future are not
expected to be material to the Company's financial condition or results of
operations. There can be no assurance, however, that there will not be a delay,
or increased costs associated with, the implementation of such changes, and such
changes could have an adverse effect on the future results of operations.
The Company could be adversely impacted by Year 2000 issues faced by
major suppliers, customers, vendors, and financial organizations with which the
Company interacts. The Company is in the process of determining the impact that
third parties that are not Year 2000 compliant may have on the operations of the
Company. Non-compliance by any of the Company's major suppliers, customers,
vendors, or financial organizations could result in business disruptions that
could have a material adverse effect on the Company's results or operations,
liquidity and financial condition. Being that the Company has not completed an
assessment of significant third party compliance, contingency plans have not
been developed nor has a cost estimate been developed to address any
non-compliance. Upon completion of the assessment, a contingency plan will be
developed to minimize the Company's exposure to work slowdowns or business
disruptions and adverse effects on the Company's results of operations. The
Company anticipates the development of the contingency plan in the first quarter
of 1999.
10
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Market Risk Disclosure
The Company's line of credit has an interest rate that is based on
associated rates that may fluctuate over time based on economic changes in the
environment, such as LIBOR and the Prime Rate. The Company is subject to
interest rate risk, and could be subjected to increased interest payments if
market interest rates fluctuate. The Company does not expect any changes in such
interest rates to have a material adverse effect on the Company's results from
operations.
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
Registrant held its Annual Meeting of Shareholders on May 21, 1998.
At the meeting the following matters were voted upon, and the number of
votes cast for or against, as well as the number of abstentions and
broker nonvotes, as to each such matter, along with a separate
tabulation with respect to each nominee for office, is set forth below:
1. Election of directors to serve for the ensuing year and until their
successors are duly elected and qualified.
For Against Abstention Nonvotes
---------------- ---------------- ---------------- ---------------
W. Donald Bell 7,318,519 -- 76,371 --
Gordon A. Campbell 7,316,769 -- 78,121 --
Glenn E. Penisten 7,318,969 -- 75,921 --
Edward L. Gelbach 7,318,969 -- 79,921 --
James Ousley 7,314,719 -- 80,171 --
2. Approval of amendments to the Company's Employee Stock Purchase Plan to
increase the number of shares of Common Stock reserved for issuance
thereunder by 250,000 shares.
For Against Abstention Nonvotes
---------------- ---------------- ---------------- ---------------
5,218,031 779,391 11,432 1,386,036
3. Approval of adoption of the 1998 Stock Plan and the reservation of 500,000 shares for issuance thereunder.
For Against Abstention Nonvotes
---------------- ---------------- ---------------- ---------------
5,103,763 890,279 14,812 1,386,036
4. Ratification of the appointment of Price Waterhouse LLP as the
Company's independent accountants for the current fiscal year ending
December 31, 1998.
For Against Abstention Nonvotes
---------------- ---------------- ---------------- ---------------
7,359,983 28,850 6,057 --
11
Item 6. Exhibits and Reports
(a) Exhibits:
27. Financial Data Schedule for the six months ended
June 30, 1998.
99. Seventh Amendment to Second Amended and Restated Credit Agreement
(b) Reports on Form 8-K:
None
12
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated:
----------------
BELL MICROPRODUCTS INC.
By: Bruce M. Jaffe
-----------------------------
Sr. Vice President of Finance and Operations,
Chief Financial Officer and Secretary
(Principal Financial Officer and Accounting Officer)
13