No. pages 13
index exhibit pg. none
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: September 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 September 30,
1998: 8,832,665
1
Bell Microproducts Inc.
Index to Form 10-Q
Page
PART I - FINANCIAL INFORMATION Number
------
Item 1: Financial Statements
Condensed Balance Sheets - September 30, 1998 and
December 31, 1997 3
Condensed Statements of Income - Three months and
nine months ended September 30, 1998 and 1997 4
Condensed Statements of Cash Flows - Nine months
ended September 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 8
Item 3: Quantitative and Qualitative Disclosure about Market Risk 11
PART II - OTHER INFORMATION
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)
September 30, December 31,
1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash $ 7,725 $ 6,325
Accounts receivable, net 96,826 79,389
Inventories 113,653 98,379
Deferred income taxes 2,582 2,595
Prepaid expenses 1,406 1,217
-------- --------
Total current assets 222,192 187,905
Property and equipment, net 12,229 10,733
Goodwill, net 6,468 6,372
Other assets 408 410
-------- --------
Total assets $241,297 $205,420
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 68,323 $ 45,540
Other accrued liabilities 8,937 6,025
Current portion of capitalized lease
obligations 2,230 1,728
-------- --------
Total current liabilities 79,490 53,293
Line of credit 74,500 70,000
Capitalized lease obligations, less current portion 4,962 4,460
-------- --------
Total liabilities 158,952 127,753
-------- --------
Commitments and contingencies
Shareholders' equity:
Common Stock, $0.01 par value, 20,000 shares
authorized; 8,833 and 8,696 issued and outstanding 54,485 53,495
Retained earnings 27,860 24,172
-------- --------
Total shareholders' equity 82,345 77,667
-------- --------
Total liabilities and shareholders' equity $241,297 $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 September 30, Nine Months ended September 30,
-------------------------------- -------------------------------
1998 1997 1998 1997
--------- --------- --------- ---------
Sales $ 175,741 $ 138,003 $ 449,739 $ 394,107
Cost of sales 158,139 124,375 403,404 350,706
--------- --------- --------- ---------
Gross profit 17,602 13,628 46,335 43,401
Selling, general and
administrative expenses 12,403 11,587 35,947 32,307
--------- --------- --------- ---------
Income from operations 5,199 2,041 10,388 11,094
Interest expense (1,447) (1,122) (3,959) (3,192)
--------- --------- --------- ---------
Income before income taxes 3,752 919 6,429 7,902
Provision for income taxes (1,617) (386) (2,741) (3,319)
--------- --------- --------- ---------
Net income $ 2,135 $ 533 $ 3,688 $ 4,583
========= ========= ========= =========
Earnings per share:
Basic $ 0.24 $ 0.06 $ 0.42 $ 0.54
========= ========= ========= =========
Diluted $ 0.24 $ 0.06 $ 0.42 $ 0.51
========= ========= ========= =========
Shares used in per share calculation:
Basic 8,831 8,607 8,774 8,539
========= ========= ========= =========
Diluted 8,874 8,886 8,841 8,933
========= ========= ========= =========
<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)
Nine months ended September 30,
- -----------------------------------------------------------------------------------------------------------------------------------
1998 1997
-------- --------
Cash flows from operating activities:
Net income $ 3,688 $ 4,583
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization 2,608 2,096
Change in allowance for doubtful accounts 2,019 (936)
Change in deferred income taxes 13 --
Changes in assets and liabilities:
Accounts receivable (19,456) (12,986)
Inventories (15,274) (18,557)
Prepaid expenses (189) (655)
Other assets 2 (59)
Accounts payable 22,783 14,397
Other accrued liabilities 2,912 986
-------- --------
Net cash used in operating activities (894) (11,131)
-------- --------
Cash flows from investing activities:
Acquisition of property and equipment, net (1,838) (2,356)
-------- --------
Cash flows from financing activities:
Net borrowings under line of credit agreement 4,500 16,100
Proceeds from issuance of Common Stock 990 1,168
Principal payments on long term liabilities (1,358) (1,319)
-------- --------
Net cash provided by financing activities 4,132 15,949
-------- --------
Net increase in cash 1,400 2,462
Cash at beginning of period 6,325 5,682
-------- --------
Cash at end of period $ 7,725 $ 8,144
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 3,946 $ 3,178
Income taxes $ 2,118 $ 2,678
Obligations incurred under capital leases $ 2,362 $ 1,333
<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 fair 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 nine month periods
ended September 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 September 30, Nine Months ended September 30,
-------------------------------- -------------------------------
1998 1997 1998 1997
------ ------ ------ ------
Net income $2,135 $ 533 $3,688 $4,583
====== ====== ====== ======
Weighted average common shares
outstanding (Basic) 8,831 8,607 8,774 8,539
Effect of dilutive warrants and options 43 279 67 394
------ ------ ------ ------
Weighted average common shares
outstanding (Diluted) 8,874 8,886 8,841 8,933
====== ====== ====== ======
Earnings per share
Basic $ 0.24 $ 0.06 $ 0.42 $ 0.54
====== ====== ====== ======
Diluted $ 0.24 $ 0.06 $ 0.42 $ 0.51
====== ====== ====== ======
Options to purchase 779,100 shares of common stock at a weighted
average exercise price of $9.05 per share were outstanding at September 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 September 30, 1997, there were 230,700 options and
warrants outstanding to purchase common stock at a weighted average exercise
price of $10.79 per share excluded from the Diluted EPS computation due to their
anti-dilution.
Note 3 - Inventories:
A summary of inventories follows (in thousands):
September 30, 1998 December 31, 1997
--------------------------- ---------------------------
Purchased components and materials $ 99,680 $ 89,733
Work-in-process 13,973 8,646
--------------------------- ---------------------------
Total $ 113,653 $ 98,379
=========================== ===========================
Note 4 - Property and Equipment:
A summary of property and equipment follows (in thousands):
September 30, 1998 December 31, 1997
--------------------------- ---------------------------
Manufacturing and test equipment $ 12,511 $ 9,721
Computer and other equipment 4,308 4,041
Furniture and fixtures 2,170 1,950
Leasehold improvements 2,237 1,784
Warehouse equipment 594 459
--------------------------- ---------------------------
21,820 17,955
Accumulated depreciation (9,591) (7,222)
--------------------------- ---------------------------
Total $ 12,229 $ 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 California Bank &
Trust as Agent, formerly Sumitomo Bank of California. The amendment increased
the Company's $80 million revolving line of credit to $100 million and in August
1998, the agreement was further amended to extend the maturity date to May 31,
2000. At the Company's option, the borrowings under the line of credit bear
interest at California Bank & Trust's prime rate or the adjusted LIBOR rate plus
1.40%. At September 30, 1998 California Bank & Trust's prime rate was 8.25%. 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 September 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.
Note 6 - Acquisitions
On September 18, 1998 the Company signed a letter of intent to acquire
the net assets of the computer products division of Almo Corporation, a
privately held company located in Philadelphia. The division is a leading
distributor of disk drives, monitors and Trademark(R) computers. The division
reported revenues of approximately $146 million in its most recent fiscal year.
In October 1998 the Company signed another letter of intent to acquire the
assets of Tenex Data, a division of Axidata, Inc. a Toronto-based computer
products distributor. The Canadian distributor reported approximately $35
million (USD) in sales in 1997. Both acquisitions are subject to final
negotiation of the definitive agreements, satisfactory completion of due
diligence, and regulatory approval. The Company is currently negotiating with
its banks to increase its existing line of credit to fund the acquisitions and
to provide future working capital.
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,
the expected completion of the proposed acquisitions, 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 September 30, 1998 compared to three months ended September
30, 1997
Sales were $175.7 million for the quarter ended September 30, 1998,
which represented an increase of $37.7 million, or 27% compared to the same
quarter in 1997. Distribution sales increased $24.8 million to $148.8 million
and sales through the Company's contract manufacturing division (Quadrus)
increased
8
$13.0 million to $26.9 million. The increase in distribution sales was
attributable to an increase in sales of computer products which resulted from
new product lines added to the Company's product offering and the expansion of
unit sales in existing product lines. The increase in contract manufacturing
sales was primarily due to the growth of new business from recently engaged
customers.
The Company's gross profit for the third quarter of 1998 was $17.6
million, an increase of $4.0 million, or 29% from the third quarter of 1997.
Gross profit increased $2.4 million in the Company's contract manufacturing
division and $1.6 million in the distribution division. As a percentage of
sales, gross margin was 10.0% in the third quarter of 1998, compared to 9.9% in
the same quarter of 1997. Quadrus' gross profits increased as sales volume rose
above the level required to absorb overhead expenses.
Selling, general and administrative expenses increased 7% to $12.4
million in the third quarter of 1998 from $11.6 million in the third quarter of
1997, but decreased as a percentage of sales to 7.1% from 8.4%. The increase in
expenses was primarily attributable to increased sales volume and increases to
bad debt expenses due to increased sales volumes and changing market condition.
Interest expense was $1.4 million in the third quarter of 1998 as
compared to $1.1 million in the same period in 1997. This increase was primarily
due to higher bank borrowings during the quarter.
The effective income tax rate remained relatively unchanged at 43%,
during the third quarter of 1998 as compared to 42% in the same period last
year.
Nine months ended September 30, 1998 compared to nine months ended September 30,
1997
Sales were $449.7 million for the nine months ended September 30, 1998,
an increase of $55.6 million, or 14% over the same period in 1997. Distribution
sales increased $52.3 million, or 15% while manufacturing sales rose $3.3
million, or 6% compared to the same period in 1997. This increase was primarily
attributable to increased computer product sales within distribution as a result
of new product lines added to the Company's product offering and the expansion
of unit sales in existing product lines.
The Company's gross profit for the nine months ended September 30, 1998
was $46.3 million, an increase of $2.9 million, or 7% compared to the same
period in 1997. Of this increase, $4.3 million was attributable to the
distribution division, which was offset by a decrease of $1.4 million in the
Company's contract manufacturing division. The increase in distribution gross
profit was attributable to an increase in sales volume of computer products.
Selling, general and administrative expenses increased 11% to $35.9
million in the first nine months of 1998 from $32.3 million in the first nine
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 $4.0 million in the first nine months of 1998 as
compared to $3.2 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 relatively unchanged at 43%
for the first nine months of 1998 as compared to 42% for the same period last
year.
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.
9
On June 17, 1997, and as further amended in August 1998, the Company
entered into an amendment to the Second Amended and Restated Syndicated Credit
Agreement arranged by California Bank & Trust as Agent, formerly Sumitomo Bank
of California. 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 California Bank & Trust's prime rate or the
adjusted LIBOR rate plus 1.40%. At September 30, 1998, California Bank & Trust's
prime rate was 8.25%. The revolving line of credit has a final payment due date
of 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 September 30, 1998 was $74.5 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 September
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.
At September 30, 1998, the Company had $7.7 million of cash and cash
equivalents. Net cash used in operating activities for the nine months ended
September 30, 1998 was $0.9 million. The Company's net accounts receivable as of
September 30, 1998 increased to $96.8 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 inventories as of September 30, 1998 increased to $113.7 million from
$98.4 million as of December 31, 1997, primarily as a result of the Company's
need to support anticipated future sales requirements. The Company's accounts
payable as of September 30, 1998 increased to $68.3 million from $45.5 million
as of December 31, 1997, due to increased inventory purchases as well as timing
of inventory receipts and payments related thereto. The Company used $1.8
million for the acquisition of property and equipment during the nine months
ended September 30, 1998. Net cash provided by financing activities during the
nine months ended September 30, 1998 totaled $4.1 million, which was primarily
related to borrowings under the Company's line of credit. The Company's future
cash requirements will depend on numerous factors, including potential
acquisitions and the rate of growth of its sales. The Company is currently
negotiating with its banks to increase its line of credit to meet the Company's
short term capital requirements. However, the Company may, in the future, seek
additional debt or equity financing to fund continued growth.
Year 2000 Compliance
The Year 2000 issue relates to the way computer systems and programs
define calendar dates; they could fail or make miscalculations due to
interpreting a date including "00" to mean 1900, not 2000. Also, many systems
and equipment that are not typically thought of as "computer-related" (referred
to as "non-IT) contain imbedded hardware or software that may have a time
element.
The Company's plan to address the Year 2000 issue includes three
phases: identification of all systems and equipment, both information technology
("IT") and non-IT that may be affected by the Year
10
2000 issue; evaluation and development of strategies to address affected systems
and equipment; and remediation of affected systems and equipment.
The Company has identified all affected systems and equipment, both IT
and non-IT and has completed its Year 2000 compliance evaluation. The Company
has determined that the majority of its affected systems (both software and
hardware) require upgrades versus replacements in order to become Year 2000
compliant. Estimated costs to complete the implementation including
installation/upgrade, testing and training is approximately $100,000. As of
September 30, 1998, the Company has incurred expenses totaling approximately
$40,000. The Company expects to be 100% Year 2000 compliant in the first quarter
of 1999.
The Company has identified and contacted its critical suppliers,
service providers and contractors to determine the extent to which the Company's
interface systems are vulnerable to those third parties' failure to remedy their
own Year 2000 issues. To the extent that responses to Year 2000 readiness are
unsatisfactory, the Company intends to change suppliers, service providers and
contractors to those who have demonstrated Year 2000 readiness but cannot be
assured that it will be successful in finding such alternative suppliers,
service providers and contractors. The Company does not currently have any
formal information concerning the Year 2000 compliance status of its customers
but has received indications that most of its customers are working on Year 2000
compliance. In the event that any of the Company's significant customers and
suppliers do not successfully and timely achieve Year 2000 compliance, and the
Company is unable to replace them with new customers or alternate suppliers, the
Company's business or operations could be adversely affected. The Company has no
contingency plan regarding the most reasonably likely case scenario in the event
it does not adequately address the Year 2000 issue. The Company plans to develop
a contingency plan before April 1, 1999.
RECENT DEVELOPMENTS
The Company announced that it signed non-binding letters of intent to
acquire certain assets and assume certain liabilities comprising the computer
products division of Almo Corporation and the Tenex Data division of Axidata,
Inc. of Ontario, Canada. The Company is also negotiating to expand its line of
credit with California Bank & Trust to secure financing for these transactions
if they are consummated. Both acquisitions are subject to final negotiation of
the definitive agreements, satisfactory completion of due diligence, and
regulatory approval. If these transactions are consummated, the Company will
need to integrate these operations with the other operations of the Company to
maintain uniform standards, controls, procedures, and policies. The Company will
need to avoid the impairment of relationships with employees, customers, and
suppliers that could result from poor integration of the acquired divisions.
There can be no assurances in this regard.
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.
11
Item 6. Exhibits and Reports
(a) Exhibits:
27. Financial Data Schedule for the nine months ended
September 30, 1998.
99. Eighth 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: November 14, 1998
---------------------------
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