FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: MARCH 31, 2006
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 [ ]
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large Accelerated filer [ ] Accelerated filer [X] Non-Accelerated filer [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act.)
Yes [ ] No [X]
COMMON STOCK, $.01 PAR VALUE -- NUMBER OF SHARES OUTSTANDING AT MAY 5, 2006:
30,306,466
1
BELL MICROPRODUCTS INC.
INDEX TO FORM 10-Q
Page
Number
------
PART I - FINANCIAL INFORMATION
Item 1: Financial Statements (unaudited)
Condensed Consolidated Balance Sheets - March 31, 2006
and December 31, 2005 3
Condensed Consolidated Statements of Operations - Three
months ended March 31, 2006 and 2005 4
Condensed Consolidated Statements of Cash Flows - Three
months ended March 31, 2006 and 2005 5
Notes to Condensed Consolidated Financial Statements 6
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations 20
Item 3: Quantitative and Qualitative Disclosure about Market Risk 25
Item 4: Controls and Procedures 26
PART II - OTHER INFORMATION
Item 1A: Risk Factors 27
Item 6: Exhibits 27
Signatures 28
2
PART I - FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS (UNAUDITED)
BELL MICROPRODUCTS INC.
Condensed Consolidated Balance Sheets
(in thousands, except per share data)
(unaudited)
March 31, December 31,
2006 2005
--------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 15,382 $ 29,927
Accounts receivable, net 461,538 421,535
Inventories 345,722 318,174
Prepaid expenses and other current assets 31,775 29,039
-------- --------
Total current assets 854,417 798,675
Property and equipment, net 12,674 13,212
Goodwill 101,823 101,456
Intangibles, net 8,293 8,512
Deferred debt issuance costs and other assets 11,141 11,477
-------- --------
Total assets $988,348 $933,332
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $389,479 $346,275
Borrowings under lines of credit 64,341 28,747
Short-term note payable and current portion
of long-term notes payable 7,125 10,639
Other accrued liabilities 57,464 66,832
-------- --------
Total current liabilities 518,409 452,493
Borrowings under lines of credit 91,224 107,733
Long-term notes payable 147,265 147,353
Other long-term liabilities 6,258 5,372
-------- --------
Total liabilities 763,156 712,951
-------- --------
Commitments and contingencies (Note 9)
Shareholders' equity:
Common Stock, $0.01 par value, 80,000 shares authorized;
30,279 and 30,062 issued and outstanding 179,962 178,872
Retained earnings 35,115 32,655
Accumulated other comprehensive income 10,115 8,854
-------- --------
Total shareholders' equity 225,192 220,381
-------- --------
Total liabilities and shareholders' equity $988,348 $933,332
======== ========
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
3
BELL MICROPRODUCTS INC.
Condensed Consolidated Statements of Operations
(in thousands, except per share data)
(unaudited)
Three months ended
March 31,
-------------------
2006 2005
-------- --------
Net sales $866,515 $803,948
Cost of sales 803,240 746,649
-------- --------
Gross profit 63,275 57,299
Selling, general and administrative expenses 53,534 45,445
-------- --------
Operating income 9,741 11,854
Interest expense and other (5,986) (4,818)
-------- --------
Income before income taxes 3,755 7,036
Provision for income taxes 1,295 2,660
-------- --------
Net income $ 2,460 $ 4,376
======== ========
Income per share
Basic $ 0.08 $ 0.15
======== ========
Diluted $ 0.08 $ 0.15
======== ========
Shares used in per share calculation
Basic 30,192 28,795
======== ========
Diluted 30,547 29,635
======== ========
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
4
BELL MICROPRODUCTS INC.
Condensed Consolidated Statements of Cash Flows
(Increase/(decrease) in cash, in thousands)
(unaudited)
Three months ended
March 31,
-------------------
2006 2005
-------- --------
Cash flows from operating activities:
Net income $ 2,460 $ 4,376
Adjustments to reconcile net income to net
cash (used in) provided by operating activities:
Depreciation and amortization 2,021 2,458
Share-based compensation 684 314
Provision for bad debts 2,139 230
Loss on disposal of property and equipment 1 --
Deferred income taxes (253) 29
Changes in assets and liabilities, net of
effect of business acquisitions:
Accounts receivable (40,544) (29,644)
Inventories (26,608) (12,588)
Prepaid expenses (2,601) 569
Other assets 324 229
Accounts payable 12,197 (27,447)
Other accrued liabilities (8,606) (8,445)
-------- --------
Net cash used in operating activities (58,786) (69,919)
-------- --------
Cash flows from investing activities:
Acquisition of property, equipment and other (1,008) (754)
Proceeds from sale of property, equipment -- 1
-------- --------
Net cash used in investing activities (1,008) (753)
-------- --------
Cash flows from financing activities:
Net borrowings under line of credit agreements 18,730 38,676
Changes in book overdraft 29,664 33,364
Repayment of long-term notes payable to RSA (3,500) (3,500)
Borrowings of notes and leases payable -- 108
Repayments of notes and leases payable (86) (493)
Proceeds from issuance of Common Stock 406 684
-------- --------
Net cash provided by financing
activities 45,214 68,839
-------- --------
Effect of exchange rate changes on cash 35 (81)
-------- --------
Net decrease in cash (14,545) (1,914)
Cash at beginning of period 29,927 13,294
-------- --------
Cash at end of period $ 15,382 $ 11,380
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 7,667 $ 6,956
Income taxes $ 2,092 $ 3,204
Supplemental non-cash financing activities:
Change in fair value of interest rate swap $ (156) $ (438)
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 1 - Basis of Presentation:
The accompanying interim unaudited condensed consolidated financial
statements of Bell Microproducts Inc. ("the Company") have been prepared in
conformity with accounting principles generally accepted in the United States of
America (U.S.), consistent in all material respects with those applied in the
Company's Annual Report on Form 10-K for the year ended December 31, 2005,
except for the adoption of SFAS 123(R) on January 1, 2006 as explained in Note 3
to the Company's condensed consolidated financial statements. The preparation of
financial statements in conformity with accounting principles generally accepted
in the U.S. requires management to make estimates and judgments that affect the
amounts reported in the financial statements and accompanying notes. The
accounting estimates that require management's judgment of the most difficult
and subjective estimates include: revenue recognition; the assessment of
recoverability of goodwill and intangible assets and property, plant and
equipment; the valuation of inventory and accounts payable; estimates for the
allowance for doubtful accounts and sales return reserve; the recognition and
measurement of income tax assets and liabilities and stock-based compensation.
Interim results are subject to significant variations and the results of
operations for the three months ended March 31, 2006 are not necessarily
indicative of the results to be expected for the full year.
Year end condensed balance sheet data included in this interim report is
derived from the audited financial statements. All other interim financial
information is unaudited, but reflects all normal adjustments, which are, in the
opinion of management, necessary to provide a fair statement of results for the
interim periods presented. The interim financial statements should be read in
connection with the consolidated financial statements in the Company's Annual
Report on Form 10-K for the year ended December 31, 2005.
Cash book overdrafts of $116.1 million and $86.5 million as of March 31,
2006 and December 31, 2005, respectively, are included in accounts payable.
The Company operates in one business segment as a distributor of storage
products and systems as well as semiconductor and computer products and
peripherals to original equipment manufacturers (OEMs), value-added resellers
(VARs) and dealers in the United States, Canada, Europe and Latin America. The
Company is one of the world's largest storage-centric value-added distributors
and a specialist in storage products and solutions. The Company's concentration
on data storage systems and products allows it to provide greater technical
expertise to its customers, form strategic relationships with key manufacturers
and provide complete storage solutions to its customers at many levels of
integration. The Company's storage products include:
- high-end computer and storage subsystems;
- Fibre Channel connectivity products;
- complete storage systems such as storage area networks (SAN), network
attached storage (NAS) and direct attached storage (DAS);
- storage management software;
- disk, tape and optical drives; and
- a broad selection of value-added services.
In addition, the Company has developed a proprietary LDI software licensing
system, which facilitates the sale and administration of software licenses.
6
Note 2 - Acquisitions:
The results of operations of the acquired businesses have been included in
the Company's consolidated financial statements from their respective
acquisition dates.
MCE Group Acquisition
On December 1, 2005, the Company acquired certain assets and assumed
certain liabilities of MCE Computer Peripherie GmbH, MCE Computer Vertreibs
Products GmbH, MCE Computer Technology Inc and MCE Limited, ("MCE") based in
Munich, Germany. The acquisition of MCE allows the Company to continue to expand
its growth in value added storage products and services in the key markets in
Continental Europe and the UK and adds additional experienced management, sales
and marketing resources to the Company. MCE is a European distributor of disk
drives and components, and also has a substantial IBM enterprise business in
Germany. MCE's customer base includes Enterprise VARs, system builders and
industrial customers.
The MCE assets acquired were primarily inventories and accounts receivable.
As consideration for the assets purchased, the Company paid $1.5 million
including acquisition costs, and assumed certain liabilities, primarily notes
payable and trade accounts payable. Management is currently finalizing the
valuation of assets acquired and liabilities assumed. Accordingly, the final
allocations could be different from the amounts reflected below. The preliminary
allocation of the purchase price to acquired assets and assumed liabilities
based upon management's estimates are as follows (in thousands):
Cash $ 686
Accounts receivable 22,861
Inventories 24,307
Equipment and other assets 1,421
Goodwill 3,184
Intangibles 425
Accounts payable (22,542)
Other accrued liabilities (3,024)
Notes payable (25,829)
--------
Total consideration $ 1,489
========
Other intangibles include customer relationships and a non-compete
agreement, with estimated useful lives for amortization of eight years and three
years, respectively.
Pro forma results of operations have not been presented because the effect
of the acquisition was not material to the results of prior periods presented.
Net Storage Computers, LTDA. Acquisition
On July 8, 2005, the Company acquired all of the outstanding capital stock
of Net Storage Computers, LTDA. ("Net Storage"), a privately held company
headquartered in Sao Paulo, Brazil, with sales offices in Belo Horizonte, Porto
Alegre, Recife, Rio de Janeiro and Tambore, Brazil. The acquisition of Net
Storage increases the Company's presence in the Latin America marketplace and
provides the opportunity to strengthen relationships with key suppliers and
expand overall products and services offerings. Net Storage is a distributor of
storage products and peripherals to VARs and system integrators in Brazil. Their
strategic partners include Intel, Seagate, LG, Western Digital and AMD.
Net Storage was acquired for a total purchase price of approximately $3.4
million in cash, including acquisition costs. The Company is obligated to pay up
to an additional $3.0 million based upon earnings achieved during each of the
subsequent four anniversary years. The Company has also entered into a four
7
year Management Service Agreement which obligates the Company to pay an
additional $1.1 million. Management is currently finalizing the valuation of
assets acquired and liabilities assumed. Accordingly, the final allocations
could be different from the amounts reflected below. The preliminary allocation
of the purchase price to acquired assets and assumed liabilities based upon
management's estimates are as follows (in thousands):
Cash $ 267
Accounts receivable 2,123
Inventories 1,789
Equipment and other assets 408
Goodwill 3,117
Intangibles 421
Accounts payable (2,943)
Other accrued liabilities (1,792)
-------
Total consideration $ 3,390
=======
Other intangibles include customer and supplier relationships and
non-compete agreements, with estimated useful lives for amortization of seven
years and six years, respectively.
Pro forma results of operations have not been presented because the effect
of the acquisition was not material to the results of prior periods presented.
Note 3 - Stock-Based Compensation Plans:
Stock Option Plans
As of March 31, 2006, the Company had 4,557,825 shares of outstanding stock
options to employees and directors under the Company's 1998 Stock Plan (the
"Plan"). The Plan replaced the 1988 Amended and Restated Incentive Stock Plan
and the 1993 Director Stock Option Plan. The Plan provides for the grant of
stock options 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 non-qualified stock options. Under the Plan, the
Company has reserved for issuance a total of 6,964,335 shares of Common Stock.
The maximum aggregate number of shares of Common Stock which may be optioned and
sold under all Plans is 3,344,989 shares, plus an annual increase to be added on
January 1 of each year, equal to the lesser of (i) 600,000 shares, (ii) 4% of
the outstanding shares on such date, or (iii) a lesser amount determined by the
Board of Directors, subject to adjustment upon changes in capitalization of the
Company. Since inception, the Company has reserved 10,317,975 shares of Common
Stock for issuance under the aggregate of all stock option plans.
All stock options and restricted stock units generally become exercisable
over a four-year or ten-year period as determined by the Board of Directors and
if not exercised, stock options expire from five to ten years from the date of
grant. Options granted to Directors vest in full at the time they are granted.
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.
In 2003 and prior years beginning in 2000, the number of shares of Common
Stock reserved under the Plan were not sufficient to accommodate the Company's
growth through acquisitions and key employee retention efforts. To induce
certain key employees to accept employment with the Company, the Company issued
a total of 450,000, 898,000 and 520,000 nonqualified stock options outside the
provisions of the Plan in 2003, 2002 and 2001 respectively, and 380,000 of these
options were outstanding at December 31, 2005, net of forfeitures, and are
included in the table below.
8
The following table presents all stock option activity:
Options Outstanding
--------------------
Options Weighted
Available Average
for Exercise
Grant Shares Price
--------- --------- --------
Balance at December 31, 2005 898,183 3,700,351 $ 6.04
Increase in options available for grant 600,000 -- --
Options forfeited 103,903 (103,903) $ 6.56
Forfeited options not available for grant (5,000) -- $12.81
Options granted (340,000) 340,000 $ 5.16
Options exercised -- (216,459) $ 1.87
---------- ---------
Balance at March 31, 2006 1,257,086 3,719,989 $ 6.19
========== =========
At March 31, 2006, 2,115,500 options were exercisable under the plans. Upon
the adoption of the 1998 Stock Plan, canceled options under the 1988 Plan are
not available for future grants.
The total pretax intrinsic value of options exercised during the three
months ended March 31, 2006 was $998,505. The Company issues new common shares
upon the exercise of stock options. There was no income tax benefit associated
with option exercises during the three months ended March 31, 2006.
The following table summarizes information about stock options and
restricted stock units outstanding at March 31, 2006 (in thousands except for
years and per share amounts):
Options and Restricted Stock Units Outstanding Options Exercisable
------------------------------------------------------------- ------------------------------------------
Weighted-Average
Range of Remaining Weighted-Average Aggregate Weighted-Average Aggregate
Exercise Number Contractual Exercise Intrinsic Number Exercise Intrinsic
Price Outstanding Life (in Years) Price per Share Value Exercisable Price per Share Value
- --------------- ----------- ---------------- ---------------- --------- ----------- ---------------- ---------
$ 0.00 - $ 0.00 540 3.24 $ 0.00 $3,333 -- $ 0.00 $ --
$ 3.90 - $ 5.25 538 2.17 4.22 1,045 368 4.22 711
$ 5.78 - $ 6.45 715 4.03 6.31 19 176 6.27 6
$ 6.55 - $ 7.23 613 2.96 7.12 -- 289 7.13 --
$ 7.25 - $ 8.50 641 3.98 8.24 -- 610 8.27 --
$ 8.65 - $10.28 531 2.98 9.54 -- 532 9.54 --
$10.50 - $11.82 141 2.85 10.95 -- 141 10.95 --
----- ---- ------ ------ ----- ------ ----
$ 0.00 - $11.82 3,719 3.27 $ 6.19 $4,397 2,116 $ 7.74 $717
The aggregate intrinsic value in the preceding table represents the total
pretax intrinsic value, based on the Company's closing stock price of $6.16 as
of March 31, 2006, which would have been received by the option holders had all
option holders exercised their options as of that date. The total number of
in-the-money options exercisable as of March 31, 2006 was 436,385. As of
December 31, 2005, 2.3 million outstanding options were exercisable, and the
weighted average exercise price was $7.70.
9
Adoption of SFAS 123(R)
Effective Jan 1, 2006, the Company adopted SFAS 123(R), using the modified
prospective application transition method, which establishes accounting for
stock-based awards exchanged for services. Accordingly, stock-based compensation
cost is measured at grant date, based on the fair value of the award, over the
requisite service period.
Prior to the adoption of SFAS 123(R), the Company provided the disclosures
required under SFAS No. 123 "Accounting for Stock-Based Compensation," as
amended by SFAS No. 148, "Accounting for Stock-Based Compensation - Transition
and Disclosures." The Company generally did not recognize stock-based
compensation expense in its statement of operations for periods prior to the
adoption of SFAS 123(R) as most options granted had an exercise price equal to
the market value of the underlying common stock on the date of grant.
The table below illustrates the effect on income and earnings per share for
the three months ended March 31, 2006 compared with the pro forma information
for the three months ended March 31, 2005. The estimated fair value of each
option is calculated using the Black-Scholes option-pricing model and amortized
on a straight line basis to expense over the options' vesting periods. Prior to
the adoption of SFAS 123(R), the fair value was amortized ratably over the
options' vesting periods. There was no impact to cash flows.
(In thousands,
except per
share amounts):
March 31,
---------------
2006 2005
----- ------
Stock-based compensation expense by award type
Employee stock options 319 783
Restricted stock units 365 314
Purchase plan -- 183
----- ------
Total stock based compensation expense $ 684 $1,280
Tax effect on stock-based compensation expense (236) (486)
----- ------
Net effect on net income $ 448 $ 794
===== ======
Net effect on earnings per share
Basic $0.01 $ 0.03
Diluted $0.01 $ 0.03
As required by SFAS 123(R), management has made an estimate of expected
forfeitures and is recognizing compensation expense only for those equity awards
expected to vest.
During the fourth quarter of 2005, the Company accelerated certain unvested
"out-of-the-money" stock options with exercise prices equal to or greater than
$7.65 per share. The acceleration of vesting was effective for stock options
outstanding as of December 30, 2005. The purpose of the acceleration was to
enable the Company to reduce compensation expense associated with these options
in future periods. Options to purchase approximately 724,875 shares of common
stock, or approximately 33% of the Company's outstanding unvested options, of
which options to purchase approximately 76,250 shares are held by the Company's
executive officers and directors, were subject to the acceleration. The
weighted-average exercise price of the options subject to the acceleration was
approximately $8.98. As a result of accelerating the vesting for these options,
stock based compensation in periods subsequent to the acceleration are
significantly reduced.
Stock Options: During the three months ended March 31, 2006, the Company
granted approximately 275,000 stock options with an estimated total grant-date
fair value of $852,000. Of this amount, the Company estimated that the
stock-based compensation for the awards not expected to vest was $64,240. During
the three
10
months ended March 31, 2006, the Company recorded stock-based compensation
related to stock options of $319,000 for all vested options granted prior and
after the adoption of SFAS 123(R).
Restricted Stock Units: In connection with restricted stock units granted,
the Company recorded deferred stock compensation which presented the difference
between the exercise price of the options and the fair market value of the
Company's common shares on the dates the awards were granted. The deferred
compensation was amortized on a straight-line basis over the vesting periods of
the underlying stock units. Through March 31, 2006, the Company has amortized
approximately $4.5 million of such compensation expense, with approximately
$365,000 and 314,000 recorded in the three months ended March 31, 2006 and 2005,
respectively. As of March 31, 2006, there was $2.8 million of total stock-based
compensation related to non-vested restricted stock units. That costs is
expected to be recognized over an estimated amortization period of 1.30 years.
Valuation Assumptions
The Company estimated the fair value of stock options on the date of grant
using the Black-Scholes option valuation model and the straight-line attribution
approach with the following weighted average assumptions:
Employee Stock Option Plan
March 31,
--------------------------
2006 2005
---- ----
Expected term (in years) 3.61 3.67
Volatility 0.62 0.72
Risk-free interest rate 4.81 3.96
Dividend yield 0.00 0.00
Expected Term: The Company's expected term represents the period that the
Company's stock-based awards are expected to be outstanding and was determined
based on historical experience of similar awards, giving consideration to the
contractual terms of the stock-based awards and vesting schedules.
Expected Volatility: The fair value of stock based payments made through the
quarter ended March 31, 2005, were valued using the Black-Scholes valuation
method with a volatility factor based on the Company's historical stock prices
over the expected term of the option.
Expected Dividend: The Company has not issued any dividends. The Company has no
plans to issue dividends in the future.
Risk-Free Interest Rate: The Company bases the risk-free interest rate on the
implied yield currently available on U.S. Treasury zero-coupon issues with an
equivalent remaining term.
Estimated Pre-vesting Forfeitures: The Company has estimated forfeitures based
on historical forfeiture behavior over a ten-year period.
OPTION EXCHANGE
On November 25, 2002, the Company made an exchange offer (the "Exchange")
to current officers and employees of the Company to exchange stock options held
by these employees for rights to receive shares of the Company's Common Stock
("Restricted Units"). The offer period ended December 31, 2002 and the
Restricted Units were issued on January 3, 2003 (the "Exchange Date"). Employee
stock options eligible for the Exchange had a per share exercise price of $11.75
or greater, whether or not vested ("Eligible Options"). The offer provided for
an exchange ratio of three option shares surrendered for each Restricted Unit to
be received subject to vesting terms.
11
In order to be eligible to participate in the Exchange ("Eligible
Participant"), the employee may not receive stock options or other equity awards
in the six months following the Exchange Date. In order to participate in the
Exchange, an Eligible Participant could tender all Eligible Options held, or any
selected Eligible Options granted by different stock option agreements. If an
Eligible Participant chose to participate, all options granted on or after May
26, 2002 were tendered regardless of the exercise price of such options. The
Units of restricted stock will vest in one-fourth increments on each of the
first, second, third and fourth annual anniversary dates of the Exchange Date.
If the employment of an employee who participated in the Exchange terminates
prior to the vesting, the employee will forfeit the unvested shares of
Restricted Units. As a result of the Exchange, the Company issued 744,802 rights
to receive Restricted Units in return for 2,234,250 stock options. The total
non-cash compensation charge to be recognized over the vesting period of four
years is approximately $4 million computed based on the share price at the date
of approval of $5.42 per share. The compensation charge is unaffected by future
changes in the price of the common stock.
Note 4 - Intangible Assets:
The Company has acquired certain intangible assets through acquisitions
which include non-compete agreements, trademarks, trade names and customer and
supplier relationships. The carrying values and accumulated amortization of
these assets at March 31, 2006 and December 31, 2005 are as follows (in
thousands):
As of March 31, 2006
--------------------------------
Estimated Gross
Useful Life Carrying Accumulated Net
Amortized Intangible Assets for Amortization Amount Amortization Amount
- --------------------------- ---------------- -------- ------------ ------
Non-compete agreements 2-6 years $ 1,776 $(1,467) $ 309
Trademarks 20-40 years 4,381 (596) 3,785
Trade names 20 years 400 (76) 324
Customer/supplier relationships 4-10 years 5,719 (1,844) 3,875
------ ------- ------
Total $12,276 $(3,983) $8,293
======= ======= ======
As of December 31, 2005
--------------------------------
Estimated Gross
Useful Life Carrying Accumulated Net
Amortized Intangible Assets for Amortization Amount Amortization Amount
- --------------------------- ---------------- -------- ------------ ------
Non-compete agreements 2-6 years $1,763 $(1,409) $ 354
Trademarks 20-40 years 4,340 (568) 3,772
Trade names 20 years 400 (71) 329
Customer/supplier relationships 4-10 years 5,669 (1,612) 4,057
------- ------- ------
Total $12,172 $(3,660) $8,512
======= ======= ======
The estimated amortization expense of these assets in future fiscal years
is as follows (in thousands):
Estimated Amortization Expense
April 1 to December 31, 2006 $ 887
For year ending December 31, 2007 1,140
For year ending December 31, 2008 953
For year ending December 31, 2009 758
For year ending December 31, 2010 654
Thereafter 3,901
------
Total $8,293
======
12
Note 5 - Earnings per Share:
Basic EPS is computed by dividing net income available to common
shareholders (numerator) by the weighted average number of common shares
outstanding (denominator) during the period. Diluted EPS gives effect to all
dilutive potential common shares outstanding during the period resulting from
stock options using the treasury stock method. In computing diluted EPS, the
average stock price for the period is used in determining the number of shares
assumed to be purchased from the exercise of stock options.
Following is a reconciliation of the numerators and denominators of the
basic and diluted EPS computations for the periods presented below (in
thousands, except per share data):
Three Months
Ended March 31,
-----------------
2006 2005
------- -------
Net income $ 2,460 $ 4,376
Weighted average common shares
outstanding (Basic) 30,192 28,795
Effect of dilutive options, restricted
stock grants and warrants 355 840
------- -------
Weighted average common shares
outstanding (Diluted) 30,547 29,635
======= =======
In the three months ended March 31, 2006 and 2005, total common stock
options, restricted stock grants and warrants excluded from diluted income per
share calculations because they were antidilutive were 2,434,111 and 1,010,746,
respectively.
Note 6 - Lines of Credit and Term Debt:
March 31, December 31,
2006 2005
--------- ------------
LINES OF CREDIT (IN THOUSANDS)
Congress Facility $ 22,729 $ 18,319
Wachovia Facility 68,496 89,414
IBM 24,247 26,558
Bank of America Facility 37,843 --
Working Capital Facility 2,250 --
IFN Financing BV -- 2,189
-------- --------
155,565 136,480
Less: amounts included in current liabilities (64,341) (28,747)
-------- --------
Amounts included in non-current liabilities $ 91,224 $107,733
======== ========
On September 13, 2004, the Company entered into an amendment to its
syndicated Loan and Security Agreement with Congress Financial Corporation
(Western) ("Congress"), an affiliate of Wachovia Bank, N.A. ("Wachovia"), as
administrative, collateral and syndication agent for the lenders of the
revolving line of credit (the "Congress Facility"). The amendment reduced the
Congress Facility from $160 million to $125 million, and extended the maturity
date to July 31, 2007. The syndicate includes Bank of America N.A. as co-agent
and other financial institutions as lenders. Borrowings under the Congress
Facility bear interest at Wachovia's prime rate plus a margin of 0.0% to 0.5%,
based on unused availability levels. At the Company's option, all or any portion
of the outstanding borrowings may be converted to a Eurodollar rate loan, which
bears interest at the adjusted Eurodollar rate plus a margin of 1.50% to 2.00%,
based on unused availability levels. The Company also pays an unused line fee
equal to 0.375% per annum of the unused portion of the facility, subject to
certain adjustments. The average interest rate on outstanding
13
borrowings under the Congress Facility during the quarter ended March 31, 2006
was 6.78%, and the balance outstanding at March 31, 2006 was $22.7 million.
Obligations of the Company under the Congress Facility are collateralized by
certain assets of the Company and its North and South American subsidiaries. The
Congress Facility requires the Company to meet certain financial tests and to
comply with certain other covenants, including restrictions on incurrence of
debt and liens, restrictions on mergers, acquisitions, asset dispositions,
capital contributions, payment of dividends, repurchases of stock and
investments.
On September 20, 2004, Bell Microproducts, (the parent company only)
("Bell") entered into a securitization program with Wachovia Bank, National
Association ("Wachovia") and Blue Ridge Asset Funding Corporation ("Blue
Ridge"), an affiliate of Wachovia, which expires on September 20, 2007
("Wachovia Facility"). On December 31, 2005, Bell entered into an amendment to
the Wachovia Facility with Wachovia and PNC Bank, National Association ("PNC
Bank"), as Lender Group Agents and Variable Funding Capital Company LLC and
Market Street Funding LLC as Lenders. Under the program, Bell will sell or
contribute all of its receivables to a newly created special purpose bankruptcy
remote entity named Bell Microproducts Funding Corporation ("Funding"), a
wholly-owned subsidiary of Bell. Funding will obtain financing from Lender Group
Agents or Lenders and other liquidity banks collateralized by the receivables to
pay a portion of the purchase price for the receivables. The balance of the
purchase price will be paid by advances made by Bell to Funding under a
subordinated note of Funding payable to Bell and by capital contributions from
Bell to Funding. The maximum principal amount available for Funding's credit
facility is $120 million. The interest rate on advances made by Lenders shall be
the cost of Lenders' commercial paper. In addition, Funding pays a program fee
in the amount of 95 basis points per annum on the portion of the advances funded
by Lenders' commercial paper. The interest rate on advances made by Lender Group
Agents and other liquidity banks shall be either an alternate base rate (which
is the higher of the "prime rate" as announced by Wachovia, or 0.50% above the
federal funds effective rate), or a rate based on an adjusted LIBO rate plus
1.50%. Funding also pays an unused line fee ranging from 0.20% to 0.25% per
annum of the unused portion of the facility. Bell acts as a servicer for Funding
and will collect all amounts due under, and take all action with respect to, the
receivables for the benefit of Funding and its lenders. In exchange for these
services, Bell receives a servicing fee determined on an arms-length basis. The
cash flow from the collections of the receivables will be used to purchase newly
generated receivables, to pay amounts to Funding's lenders, to pay down on the
subordinated note issued to Bell and to make dividend distributions to Bell
(subject at all times to the required capital amount being left in Funding).
Including the program fee, the average interest rate on outstanding borrowings
under the securitization program for the quarter ended March 31, 2006 was 5.48%
and the balance outstanding at March 31, 2006 was $68.5 million. Obligations of
Funding under the Wachovia Facility are collateralized by all of Funding's
assets. The Wachovia Facility requires Funding (and in certain circumstances,
Bell) to meet certain financial tests and to comply with certain other covenants
including restrictions on changes in structure, incurrence of debt and liens,
payment of dividends and distributions, and material modifications to contracts
and credit and collections policy.
On December 1, 2005, in connection with the acquisition of MCE Group
("MCE"), the Company entered into a short-term financing agreement with IBM
Deutschland Kreditbank GmbH ("IBM") for up to $25 million. In March 2006, the
limit was increased to $30 million. The loan is collateralized by certain assets
and cross-company guarantees of the Company's European subsidiaries and bears
interest at the US Libor or Euribor plus 2.00%, depending on the currency of the
advance. The facility has no maturity date but continues indefinitely until
terminated by either party upon six weeks notice. The balance outstanding at
March 31, 2006 was $16.4 million. Also on December 1, 2005, the Company entered
into another short-term financing agreement with IBM for E6.5 million or the USD
equivalent of $7.7 million at March 31, 2006. The loan is collateralized by
certain assets and cross-company guarantees of the Company's European
subsidiaries and bears interest at Euribor plus 3.85%. The facility has no
maturity date but continues indefinitely until terminated by either party upon
six weeks notice. The balance outstanding at March 31, 2006 was $7.9 million
including interest payable.
On December 2, 2002, as further amended in December 2004, the Company
entered into a Syndicated Credit Agreement arranged by Bank of America, National
Association ("Bank of America facility"), as principal agent, to provide a L75
million revolving line of credit facility. The Bank of America facility was
14
scheduled to mature on July 15, 2006. On October 20, 2005, the agreement was
amended to extend the maturity date for a further three years and reduce the
facility to L60 million or the USD equivalent of approximately $104
million increasing to $139 million at the Company's option. The syndicate
includes Bank of America as agent and security trustee and other banks and
financial institutions, as lenders. Borrowings under the line of credit bear
interest at Bank of America's base rate plus a margin of 1.5% to 2.5%, based on
certain financial measurements. At the Company's option, all or any portion of
the outstanding borrowings may be converted to a LIBOR Revolving Loan, which
bears interest at the adjusted LIBOR rate plus a margin of 2.25% to 2.50%, based
on certain financial measurements. The average interest rate on the outstanding
borrowings under the revolving line of credit during the quarter ended March 31,
2006 was 5.59%, and the balance outstanding at March 31, 2006 was $37.8 million.
Obligations of the Company under the revolving line of credit are collateralized
by certain assets of the Company's European subsidiaries. The revolving line of
credit requires the Company to meet certain financial tests and to comply with
certain other covenants, including restrictions on incurrence of debt and liens,
restrictions on mergers, acquisitions, asset dispositions, capital
contributions, payment of dividends, repurchases of stock, repatriation of cash
and investments.
On March 30, 2006, the Company entered into a North America Working Capital
Program (the "Working Capital Facility") with Intel Corporation to provide a
line of credit up to $3.0 million. The Working Capital Facility is non-interest
bearing and has a one-year term with subsequent annual renewals, but may be
terminated by Intel at any time. The Company is required to meet certain program
eligibility requirements including compliance with its distribution agreement
with Intel. The balance outstanding at March 30, 2006 was $2.3 million.
The Company's agreement with IFN Finance BV was amended in December 2004 to
reduce its $7.5 million borrowing facility to $4.7 million. The loan is
collateralized by certain European accounts receivable and inventories, bears
interest at 5.5%, and continues indefinitely until terminated by either party
upon 90 days notice. The average interest rate on the outstanding borrowings
under this facility during the quarter ended March 31, 2006 was 4.5%, and there
was no balance outstanding at March 31, 2006.
March 31, December 31,
2006 2005
--------- ------------
TERM LOANS (IN THOUSANDS)
Convertible Notes $110,000 $110,000
Note payable to RSA, net 40,329 43,985
HSBC Bank plc Mortgage 667 692
Note payable - Klaus Reichl 3,394 3,315
-------- --------
154,390 157,992
Less: amounts due in current year (7,125) (10,639)
-------- --------
Long-term debt due after one year $147,265 $147,353
======== ========
On March 5, 2004, the Company completed a private offering of $110 million
aggregate principal amount of 3 3/4% convertible subordinated notes due 2024
(the "Old Notes"). On December 20, 2004, the Company completed its offer to
exchange its newly issued 3 3/4% Convertible Subordinated Notes, Series B due
2024 (the "New Notes") for an equal amount of its outstanding Old Notes.
Approximately $109,600,000 aggregate principal amount of the Old Notes,
representing approximately 99.6%of the total principal amount of Old Notes
outstanding, were tendered in exchange for an equal principal amount of New
Notes. The New Notes mature on March 5, 2024 and bear interest at the rate of 3
3/4% per year on the principal amount, payable semi-annually on March 5 and
September 5, beginning on March 5, 2005. Holders of the New Notes may convert
the New Notes any time on or before the maturity date if certain conversion
conditions are satisfied. Upon conversion of the New Notes, the Company will be
required to deliver, in respect of each $1,000 principal of New Notes, cash in
an amount equal to the lesser of (i) the principal amount of each New Note to be
converted and (ii) the conversion value, which is equal to (a) the applicable
conversion rate, multiplied by (b) the applicable stock price. The initial
conversion rate is 91.2596 shares of common stock per New Note with a principal
amount of $1,000 and is equivalent to an initial conversion price of
approximately $10.958 per share. The conversion rate is subject to adjustment
15
upon the occurrence of certain events. The applicable stock price is the average
of the closing sales prices of the Company's common stock over the five trading
day period starting the third trading day following the date the New Notes are
tendered for conversion. If the conversion value is greater than the principal
amount of each New Note, the Company will be required to deliver to holders upon
conversion, at its option, (i) a number of shares of the Company's common stock,
(ii) cash, or (iii) a combination of cash and shares of the Company's common
stock in an amount calculated as described in the prospectus filed by the
Company in connection with the exchange offer. In lieu of paying cash and shares
of the Company's common stock upon conversion, the Company may direct its
conversion agent to surrender any New Notes tendered for conversion to a
financial institution designated by the Company for exchange in lieu of
conversion. The designated financial institution must agree to deliver, in
exchange for the New Notes, (i) a number of shares of the Company's common stock
equal to the applicable conversion rate, plus cash for any fractional shares, or
(ii) cash or (iii) a combination of cash and shares of the Company's common
stock. Any New Notes exchanged by the designated institution will remain
outstanding. The Company may redeem some or all of the New Notes for cash on or
after March 5, 2009 and before March 5, 2011 at a redemption price of 100% of
the principal amount of the New Notes, plus accrued and unpaid interest up to,
but excluding, the redemption date, but only if the closing price of the
Company's common stock has exceeded 130% of the conversion price then in effect
for at least 20 trading days within a 30 consecutive trading day period ending
on the trading day before the date the redemption notice is mailed. The Company
may redeem some or all of the New Notes for cash at any time on or after March
5, 2011 at a redemption price equal to 100% of the principal amount of the New
Notes, plus accrued and unpaid interest up to, but excluding, the redemption
date. The Company may be required to purchase for cash all or a portion of the
New Notes on March 5, 2011, March 5, 2014 or March 5, 2019, or upon a change of
control, at a purchase price equal to 100% of the principal amount of the new
notes being purchased, plus accrued and unpaid interest up to, but excluding,
the purchase date.
On July 6, 2000, and as amended on May 3, 2004, the Company entered into a
Securities Purchase Agreement with The Retirement Systems of Alabama and certain
of its affiliated funds (the "RSA facility"), under which the Company borrowed
$180 million of subordinated debt financing. This subordinated debt financing
was comprised of $80 million bearing interest at 9.125%, repaid in May 2001; and
$100 million bearing interest at 9.0%, payable in semi-annual principal
installments of $3.5 million plus interest and in semi-annual principal
installments of $8.5 million commencing December 31, 2007, with a final maturity
date of June 30, 2010. On August 1, 2003, the Company entered into an interest
rate swap agreement with Wachovia Bank effectively securing a new interest rate
on $40 million of the outstanding debt. The new rate is based on the six month
U.S. Libor rate plus a fixed margin of 4.99% and continues until termination of
the agreement on June 30, 2010. The notional amount of the interest rate swap
decreases ratably as the underlying debt is repaid. The notional amount at March
31, 2006 was $32.9 million. The Company initially recorded the interest rate
swap at fair value, and subsequently records changes in fair value as an offset
to the related liability. At March 31, 2006, the fair value of the interest rate
swap was ($1.2 million). The RSA facility is collateralized by a second lien on
certain of the Company's and its subsidiaries' North American and South American
assets. The Company must meet certain financial tests on a quarterly basis, and
comply with certain other covenants, including restrictions of incurrence of
debt and liens, restrictions on asset dispositions, payment of dividends, and
repurchase of stock. The Company is also required to be in compliance with the
covenants of certain other borrowing agreements. The balance outstanding at
March 31, 2006 on this long-term debt was $41.5 million, $7 million is payable
in 2006, $16.5 million is payable in 2007 and 2008 and $18 million thereafter.
Net of the fair value of the interest rate swap, the balance outstanding on the
RSA facility at March 31, 2006 was $40.3 million.
On June 22, 2004, in connection with the acquisition of OpenPSL, the
Company assumed a mortgage with HSBC Bank plc ("HSBC") for an original amount of
L670,000, or the U.S. dollar equivalent of approximately $1.2 million. The
mortgage has a term of ten years, bears interest at HSBC's rate plus 1.25% and
is payable in monthly installments of approximately L7,600, or $13,200 U.S.
dollars. The balance on the mortgage was $667,000 at March 31, 2006.
16
On December 1, 2005, the Company entered into a loan agreement with Mr.
Klaus Reichl for up to E4.0 million, or the USD equivalent of $4.7 million at
March 31, 2006. The loan was used to finance the asset purchase of MCE. The loan
is unsecured, bears interest at the fixed rate of 5.25% and matures on December
5, 2008. The balance outstanding at March 31, 2006 was $3.4 million.
Note 7 - Restructuring Costs and Special Charges:
In the fourth quarter of 2005, the Company implemented a restructuring plan
for its European operations and as a result the Company incurred restructuring
costs and special charges of $9.0 million during the quarter. These costs
consisted primarily of $5.9 million related to future lease obligations for
excess facilities; $1.7 million for inventory costs in excess of estimated net
realizability, included within the income statement line item "Cost of Goods
Sold," and $200,000 for estimated vendor claims both related to discontinued
product lines; severance and benefits of $936,000 for involuntary employee
terminations and severance costs of $338,000 related to closure of the Company's
in-country operation in Sweden. The Company terminated 58 employees in the UK
and Europe, in sales, marketing and support functions as of December 31, 2005.
In the fourth quarter of 2005, the Company incurred a special charge due to
a terminated components supply program in North America and provided a specific
reserve for a partner account receivable balance that the Company believes may
not be collectable as a result of the program termination. This amount has been
classified as a special charge in the amount of $9.1 million, net of a $550,000
reversal of restructuring costs and special charges taken in prior years that
were adjusted to reflect actual charges.
In the second quarter of 2004, the Company was released from certain
contractual obligations related to excess facilities in the U.S. for which
restructuring charges had been recorded in 2002. Accordingly, the Company
released approximately $300,000 of its restructuring reserve related to that
facility. Additionally, the Company revised its estimates for future lease
obligations for non-cancelable lease payments for excess facilities in Europe
and recorded an additional $300,000 of restructuring charges.
In 2001 and continuing through 2003, the Company implemented a profit
improvement plan which included a worldwide workforce reduction, consolidation
of excess facilities, and restructuring of certain vendor relationships and
product offerings. The liability for restructuring costs is recorded in other
accrued liabilities in the Consolidated Balance Sheets.
At March 31, 2006, outstanding liabilities related to these restructuring
and special charges are summarized as follows (in thousands):
2005 Prior Years
Restructuring Restructuring Severance
Lease Costs Lease Costs Costs Total
------------- ------------- --------- -------
Balance at January 1, 2005 $ -- $ 709 $ -- $ 709
Restructuring and special charges 5,921 -- 1,275 7,196
Restructuring reserve release -- (82) -- (82)
Cash payments (197) (224) -- (421)
Exchange rate changes (81) -- (19) (100)
------ ----- ------- -------
Balance at December 31, 2005 5,643 403 1,256 7,302
Restructuring and special charges -- -- -- --
Cash payments (527) (53) (1,230) (1,810)
Exchange rate changes 52 -- 1 53
------ ----- ------- -------
Balance at March 31, 2006 $5,168 $ 350 $ 27 $ 5,545
====== ===== ======= =======
17
Management expects to extinguish the restructuring and special charges
liabilities of $5.5 million by the year ended 2016.
Note 8 - Product Warranty Liabilities:
The Company accrues for known warranty claims if a loss is probable and can
be reasonably estimated, and accrues for estimated incurred but unidentified
warranty claims based on historical activity. Provisions for estimated returns
and expected warranty costs are recorded at the time of sale and are adjusted
periodically to reflect changes in experience and expected obligations. The
Company's warranty reserve relates primarily to its storage solutions and value
added businesses. Reserves for warranty items are included in other accrued
liabilities. At March 31, 2006 product warranty liabilities were approximately
$1.3 million. Neither the liability or the provision has had a material change
from December 31, 2005 or the quarter ended December 31, 2005, respectively.
Note 9 - Commitments and Contingencies:
The Company is currently a party to various claims and legal proceedings
arising in the normal course of business. If management believes that a loss is
probable and can reasonably be estimated, the Company records the amount of the
loss, or the minimum estimated liability when the loss is estimated using a
range and no point within the range is more probable than another. As additional
information becomes available, any potential liability related to these actions
is assessed and the estimates are revised, if necessary. As of March 31, 2006,
the Company has not accrued any liabilities for any exposure related to these
legal proceedings. Based on currently available information, management believes
that the ultimate outcome of any actions, individually and in the aggregate,
will not have a material adverse effect on the Company's financial position,
results of operations and cash flows.
In August 2003, the Company entered into an interest rate swap agreement in
order to gain access to the lower borrowing rates normally available on
floating-rate debt, while avoiding prepayment and other costs that would be
associated with refinancing long-term fixed-rate debt. The swap purchased has a
notional amount of $40 million, expiring in June 2010, with a six-month
settlement period and provides for variable interest at LIBOR plus a set rate
spread. The notional amount decreases ratably as the underlying debt is repaid.
The notional amount at March 31, 2006 was $32.9 million. The notional amount
does not quantify risk or represent assets or liabilities, but rather, is used
in the determination of cash settlement under the swap agreement. As a result of
entering into this swap, the Company is exposed to credit losses from
counter-party non-performance; however, the Company does not anticipate any such
losses from this agreement, which is with a major financial institution. The
agreement will also expose the Company to interest rate risk should LIBOR rise
during the term of the agreement. This swap agreement is accounted for as a fair
value hedge under Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133").
Under the provisions of SFAS 133, the interest rate swap was initially recorded
at fair value, and subsequently any changes in fair value were recorded as an
offset to the related liability. Fair value is determined based on quoted market
prices, which reflect the difference between estimated future variable-rate
payments and future fixed-rate receipts. The fair value of the interest rate
swap was ($1.2 million) at March 31, 2006.
Note 10 - Newly Issued or Recently Effective Accounting Pronouncements:
Effective January 1, 2006, the Company adopted Statement of Financial
Accounting Standard No. 123, "Share-Based Payment (Revised 2004)" ("SFAS123(R)")
on a modified prospective basis. As a result, the Company has included
stock-based compensation costs in its results of operations for the quarter
ended March 31, 2006, as more fully described in Note 3 to the Company's
condensed consolidated financial statements.
18
On March 29, 2005, the SEC issued Staff Accounting Bulletin (SAB) 107 which
expresses the views of the SEC regarding the interaction between SFAS No. 123R
and certain SEC rules and regulations and provides the SEC's views regarding the
valuation of share-based payment arrangements for public companies. In
particular, SAB 107 provides guidance related to share-based payment
transactions with non-employees, the transition from nonpublic to public entity
status, valuation methods (including assumptions such as expected volatility and
expected term), the accounting for certain redeemable financial instrument
issues under share-based payment arrangements, the classification of
compensation expenses, non-GAAP financial measures, first-time adoption of SFAS
No. 123R in an interim period, capitalization of compensation costs related to
share-based payment arrangements, the accounting for income tax effects of
share-based payments arrangements upon adoption of SFAS No. 123R, the
modification of employee share options prior to adoption of SFAS No. 123R, and
disclosures in Management's Discussion and Analysis of Financial Condition and
Results of Operations subsequent to adoption of SFAS No. 123R. The adoption of
SAB 107 did not have a material impact on the Company's condensed consolidated
financial statements.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections." SFAS No. 154 replaces APB Opinion No. 20, "Accounting Changes,"
and SFAS No. 3, "Reporting Accounting Changes in Interim Financial Statements,"
and is effective for fiscal years beginning after December 15, 2005. SFAS No.
154 requires retrospective application to prior periods' financial statements of
changes in accounting principle, unless it is impracticable to determine either
the period-specific effects or the cumulative effect of the change. The adoption
of SFAS No. 154 did not have a material impact on the Company's condensed
consolidated financial statements.
Note 11 - Comprehensive Income:
Comprehensive income is defined as the change in equity of a business
enterprise during a period from transactions and other events and circumstances
from non-owner sources, including foreign currency translation adjustments.
Comprehensive income is as follows (in thousands):
Three Months Ended
March 31,
------------------
2006 2005
------ -------
Net income $2,460 $ 4,376
Other comprehensive income:
Foreign currency translation
adjustments 1,261 (2,308)
------ -------
Total comprehensive income $3,721 $ 2,068
====== =======
Accumulated other comprehensive income presented in the accompanying
condensed consolidated balance sheets consists of cumulative foreign currency
translation adjustments.
Note 12 - Geographic Information:
The Company operates in one industry segment and markets its products
worldwide through its own direct sales force. The Company attributes revenues
from customers in different geographic areas based on the location of the
customer. Sales in the U.S. were 35% and 39% of total sales for the three months
ended March 31, 2006 and 2005, respectively.
19
(In thousands)
Three Months Ended March 31,
----------------------------
Geographic information consists of the following: 2006 2005
-------- --------
Net sales:
North America $350,941 $338,805
Latin America 126,522 93,570
Europe 389,052 371,573
-------- --------
Total $866,515 $803,948
======== ========
March 31, December 31,
2006 2005
--------- ------------
Long-lived assets:
United States $ 4,247 $ 4,536
United Kingdom 5,653 6,436
Other foreign countries 2,774 2,240
------- -------
Total $12,674 $13,212
======= =======
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
Information in the following Management's Discussion and Analysis of
Financial Condition and Results of Operations and elsewhere in this quarterly
report 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. Forward-looking statements provide current expectations or forecasts of
future events and can be identified by the use of terminology such as "believe,"
"estimate," "expect," "intend," "may," "could," "will," and similar words or
expressions. Any statement that is not a historical fact, including statements
regarding estimates, projections, future trends and the outcome of events that
have not yet occurred, is a forward-looking statement. Our forward-looking
statements generally relate to our expectations for improved profitability.
Actual results could differ materially from those projected in the
forward-looking statements as a result of a number of factors, including but not
limited to our ability to reduce and control costs, our ability to service our
debt, our ability to take advantage of beneficial vendor pricing and rebate
programs from time to time, the timing of delivery of products from suppliers,
the product mix sold by us, the integration of acquired businesses, customer
demand, our dependence on a small number of customers that account for a
significant portion of revenues, availability of products from suppliers,
cyclicality in the storage disk drive and other industries, price competition
for products sold by us, management of growth, our ability to collect accounts
receivable in a timely manner, price decreases on inventory that is not price
protected, our ability to negotiate credit facilities, currency exchange rates,
potential interest rate fluctuations as described below and the other risk
factors detailed in our filings with the SEC, including our Annual Report on
Form 10-K for the year ended December 31, 2005. We assume 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. Because many factors are unforeseeable, the foregoing should not be
considered an exhaustive list.
RESULTS OF OPERATIONS
EXECUTIVE SUMMARY
We are pleased to report record quarterly revenue and a significant
improvement in profitability from the fourth quarter of last year. We generated
revenue growth in all geographies and most major continuing product categories
during the quarter as compared to the same period in 2005. We made significant
progress in Europe during the quarter and returned this portion of our business
to profitability. The European
20
improvement resulted from revenue growth, higher gross margins and the benefits
of cost control. Our North American operations generated solid results during
the first quarter of 2006, and we had a record quarter in Latin America in
revenue and gross margins.
Although we made substantial progress in the first quarter, we believe the
actions taken to improve gross profit margins and to reduce the cost base in
Europe will result in further gains in profitability in this region as the year
unfolds. We have also invested in each segment of the business in North America
and Latin America and expect increased contribution to profits from these
investments in the later part of the year.
THREE MONTHS ENDED MARCH 31, 2006 COMPARED TO THREE MONTHS ENDED MARCH 31, 2005
Net sales were $866.5 million for the quarter ended March 31, 2006 compared
to net sales of $803.9 million for the quarter ended March 31, 2005, which
represented an increase of $62.6 million, or 8%. The sales increase was driven
by an increase of $48.0 million in sales of Components and Peripherals as well
as an increase of $14.6 million in Solutions sales. The increase in sales of
Components and Peripherals was due primarily to growth in Components sales in
Latin America and Europe, including $53 million in sales from the acquisition of
MCE in December 2005. The increase in Solution sales was driven by growth in
Storage Solutions, Software and Services.
Our gross profit for the quarter ended March 31, 2006 was $63.3 million
compared to $57.3 million for the quarter ended March 31, 2005, which
represented an increase of $6.0 million, or 10%. The increase in gross profit
was primarily due to increased sales volume, and an increase in gross profit
margins in Components sales in Europe. MCE contributed approximately $3.5
million in gross profit during the quarter. Overall gross margins increased to
7.3% in the current quarter from 7.1% in the same period last year.
Selling, general and administrative expenses increased to $53.5 million for
the quarter ended March 31, 2006 from $45.4 million for the quarter ended March
31, 2005, an increase of $8.1 million, or 17%. The increase in expenses was
primarily attributable to the acquisitions of MCE in December of 2005 and Net
Storage S.A. ("Net Storage") in July of 2005, and costs associated with
investments made in the North American industrial, single tier and enterprise
sales channels. MCE contributed approximately $3.7 million and Net Storage
contributed approximately $1.3 million to our consolidated expenses during the
quarter. As a percentage of sales, selling, general and administrative expenses
increased to 6.2% in the first quarter of 2006 from 5.6% in the first quarter of
2005.
Interest expense and other increased to $6.0 million for the quarter ended
March 31, 2006 from $4.8 million in the same period last year. This increase was
primarily due to an increase in average borrowings outstanding under our credit
facilities during the quarter and an increase in interest rates. The average
interest rate in the first quarter of 2006 increased to 6.1% from 5.7% in the
same period last year.
The effective tax rate was 34.5% for the quarter ended March 31, 2006
compared to an effective tax rate of 37.8% for the quarter ended March 31, 2005,
The lower effective tax rate in the first quarter of 2006 is principally due to
a shift in geographic profit mix to jurisdictions with lower tax rates.
LIQUIDITY AND CAPITAL RESOURCES
In recent years, we have funded our working capital requirements
principally through borrowings under subordinated term loans and bank lines of
credit, as well as proceeds from warrants and stock option exercises. Working
capital requirements have included the financing of increases in inventory and
accounts receivable resulting from sales growth, and the financing of certain
acquisitions. Our future cash requirements will depend on numerous factors,
including potential acquisitions and the rate of growth of our sales and our
effectiveness at controlling and reducing costs.
21
Net cash used in operating activities for the three months ended March 31,
2006 was $58.8 million. Excluding the cash book overdraft, net cash used in
operating activities was $29.1 million. Our inventories increased as of March
31, 2006 to $345.7 million from $318.2 million as of December 31, 2005, and our
accounts payable increased to $389.5 million as of March 31, 2006 from $346.3
million as of December 31, 2005. Our accounts receivable increased to $461.5
million as of March 31, 2006, from $421.5 million as of December 31, 2005.
On March 5, 2004, we completed a private offering of $110 million aggregate
principal amount of 3 3/4% convertible subordinated notes due 2024 (the "Old
Notes"). On December 20, 2004, we completed our offer to exchange newly issued 3
3/4% Convertible Subordinated Notes, Series B due 2024 (the "New Notes") for an
equal amount of our outstanding Old Notes. Approximately $109,600,000 aggregate
principal amount of the Old Notes, representing approximately 99.6 percent of
the total principal amount of Old Notes outstanding, were tendered in exchange
for an equal principal amount of New Notes. The New Notes mature on March 5,
2024 and bear interest at the rate of 3 3/4% per year on the principal amount,
payable semi-annually on March 5 and September 5, beginning on March 5, 2005.
Holders of the New Notes may convert the New Notes any time on or before the
maturity date if certain conversion conditions are satisfied. Upon conversion of
the New Notes, we will be required to deliver, in respect of each $1,000
principal of New Notes, cash in an amount equal to the lesser of (i) the
principal amount of each New Note to be converted and (ii) the conversion value,
which is equal to (a) the applicable conversion rate, multiplied by (b) the
applicable stock price. The initial conversion rate is 91.2596 shares of common
stock per New Note with a principal amount of $1,000 and is equivalent to an
initial conversion price of approximately $10.958 per share. The conversion rate
is subject to adjustment upon the occurrence of certain events. The applicable
stock price is the average of the closing sales prices of our common stock over
the five trading day period starting the third trading day following the date
the New Notes are tendered for conversion. If the conversion value is greater
than the principal amount of each New Note, we will be required to deliver to
holders upon conversion, at their option, (i) a number of shares of our common
stock, (ii) cash, or (iii) a combination of cash and shares of our common stock
in an amount calculated as described in the prospectus filed by us in connection
with the exchange offer. In lieu of paying cash and shares of our common stock
upon conversion, we may direct the conversion agent to surrender any New Notes
tendered for conversion to a financial institution designated by us for exchange
in lieu of conversion. The designated financial institution must agree to
deliver, in exchange for the New Notes, (i) a number of shares of our common
stock equal to the applicable conversion rate, plus cash for any fractional
shares, or (ii) cash or (iii) a combination of cash and shares of our common
stock. Any New Notes exchanged by the designated institution will remain
outstanding. We may redeem some or all of the New Notes for cash on or after
March 5, 2009 and before March 5, 2011 at a redemption price of 100% of the
principal amount of the New Notes, plus accrued and unpaid interest up to, but
excluding, the redemption date, but only if the closing price of our common
stock has exceeded 130% of the conversion price then in effect for at least 20
trading days within a 30 consecutive trading day period ending on the trading
day before the date the redemption notice is mailed. We may redeem some or all
of the New Notes for cash at any time on or after March 5, 2011 at a redemption
price equal to 100% of the principal amount of the New Notes, plus accrued and
unpaid interest up to, but excluding, the redemption date. We may be required to
purchase for cash all or a potion of the New Notes on March 5, 2011, March 5,
2014 or March 5, 2019, or upon a change of control, at a purchase price equal to
100% of the principal amount of the new notes being purchased, plus accrued and
unpaid interest up to, but excluding, the purchase date.
On September 20, 2004, and as further amended in January 2005, Bell
Microproducts (the parent company only) ("Bell"), entered into a securitization
program with Wachovia Bank, National Association ("Wachovia") and Blue Ridge
Asset Funding Corporation ("Blue Ridge"), an affiliate of Wachovia, which
expires on September 20, 2007 ("Wachovia Facility"). On December 31, 2005, Bell
entered into an amendment to the Wachovia Facility with Wachovia and PNC Bank,
National Association ("PNC Bank"), as Lender Group Agents and Variable Funding
Capital Company LLC and Market Street Funding LLC as Lenders. Under the program,
Bell will sell or contribute all of its receivables to a newly created special
purpose bankruptcy remote entity named Bell Microproducts Funding Corporation
("Funding"), a wholly-owned subsidiary of Bell. Funding will obtain financing
from Lender Group Agents or Lenders and other
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liquidity banks collateralized by the receivables to pay a portion of the
purchase price for the receivables. The balance of the purchase price will be
paid by advances made by Bell to Funding under a subordinated note of Funding
payable to Bell and by capital contributions from Bell to Funding. The maximum
principal amount available for Funding's credit facility is $120 million. The
interest rate on advances made by Lenders shall be the cost of Lenders'
commercial paper. In addition, Funding pays a program fee in the amount of 95
basis points per annum on the portion of the advances funded by Lender's
commercial paper. The interest rate on advances made by Lender Group Agents and
other liquidity banks shall be either an alternate base rate (which is the
higher of the "prime rate" as announced by Wachovia, or 0.50% above the federal
funds effective rate), or a rate based on an adjusted LIBO rate plus 1.50%.
Funding also pays an unused line fee ranging from 0.20% to 0.25% per annum of
the unused portion of the facility. Bell acts as a servicer for Funding and will
collect all amounts due under, and take all action with respect to, the
receivables for the benefit of Funding and its lenders. In exchange for these
services, Bell receives a servicing fee determined on an arms-length basis. The
cash flow from the collections of the receivables will be used to purchase newly
generated receivables, to pay amounts to Funding's lenders, to pay down on the
subordinated note issued to Bell and to make dividend distributions to Bell
(subject at all times to the required capital amount being left in Funding).
Including the program fee, the average interest rate on outstanding borrowings
under the securitization program for the quarter ended March 31, 2006 was 5.48%,
and the balance outstanding at March 31, 2006 was $68.5 million. Obligations of
Funding under the Wachovia Facility are collateralized by all of Funding's
assets. The Wachovia Facility requires Funding (and in certain circumstances,
Bell) to meet certain financial tests and to comply with certain other covenants
including restrictions on changes in structure, incurrence of debt and liens,
payment of dividends and distributions, and material modifications to contracts
and credit and collections policy.
On July 6, 2000, and as amended on May 3, 2004, we entered into a
Securities Purchase Agreement with The Retirement Systems of Alabama and certain
of its affiliated funds (the "RSA facility"), under which we borrowed $180
million of subordinated debt financing. This subordinated debt financing was
comprised of $80 million bearing interest at 9.125%, repaid in May 2001; and
$100 million bearing interest at 9.0%, payable in semi-annual principal
installments of $3.5 million plus interest and in semi-annual principal
installments of $8.5 million commencing December 31, 2007, with a final maturity
date of June 30, 2010. On August 1, 2003, we entered into an interest rate swap
agreement with Wachovia Bank effectively securing a new interest rate on $40
million of the outstanding debt. The new rate is based on the six month U.S.
Libor rate plus a fixed margin of 4.99% and continues until termination of the
agreement on June 30, 2010. The notional amount is amortized ratably as the
underlying debt is repaid. The notional amount at March 31, 2006 was $32.9
million. We initially recorded the interest rate swap at fair value, and
subsequently recorded changes in fair value as an offset to the related
liability. At March 31, 2006, the fair value of the interest rate swap was ($1.2
million). The RSA facility is collateralized by a second lien on certain of our
North American and South American assets. We must meet certain financial tests
on a quarterly basis, and comply with certain other covenants, including
restrictions of incurrence of debt and liens, restrictions on asset
dispositions, payment of dividends, and repurchase of stock. We are also
required to be in compliance with the covenants of certain other borrowing
agreements. The balance outstanding at March 31, 2006 on this long-term debt was
$41.5 million, $7.0 million is payable in 2006, $16.5 million is payable in 2007
and 2008 and $18 million thereafter. Net of the fair value of the interest rate
swap, the balance outstanding on the RSA facility at March 31, 2006 was $40.3
million.
On December 2, 2002, as further amended in December 2004, we entered into a
Syndicated Credit Agreement arranged by Bank of America, National Association
("Bank of America facility"), as principal agent, to provide a L75 million
revolving line of credit facility, or the U.S. dollar equivalent of
approximately $144 million at December 31, 2004. The Bank of America facility
was scheduled to mature on July 15, 2006. On October 20, 2005, the agreement was
amended to extend the maturity date for a further three years and reduce the
facility to L60 million, or the USD equivalent of approximately $104 million at
March 31, 2006, increasing to $139 million at our option. The syndicate includes
Bank of America as agent and security trustee and other banks and financial
institutions, as lenders. Borrowings under the line of credit bear interest at
Bank of America's base rate plus a margin of 1.5% to 2.5%, based on certain
financial measurements. At our option, all or any portion of the outstanding
borrowings may be converted to a LIBOR Revolving Loan, which bears
23
interest at the adjusted LIBOR rate plus a margin of 2.25% to 2.50%, based on
certain financial measurements. The average interest rate on the outstanding
borrowings under the revolving line of credit during the quarter ended March 31,
2006 was 5.59%, and the balance outstanding at March 31, 2006 was $37.8 million.
Our obligations under the revolving line of credit are collateralized by certain
assets of our European subsidiaries. The revolving line of credit requires us to
meet certain financial tests and to comply with certain other covenants,
including restrictions on incurrence of debt and liens, restrictions on mergers,
acquisitions, asset dispositions, capital contributions, payment of dividends,
repurchases of stock, repatriation of cash and investments.
On September 13, 2004, we entered into an amendment to our syndicated Loan
and Security Agreement with Congress Financial Corporation (Western)
("Congress"), an affiliate of Wachovia Bank, N.A. ("Wachovia"), as
administrative, collateral and syndication agent for the lenders of the
revolving line of credit (the "Congress Facility"). The amendment reduced the
Congress Facility from $160 million to $125 million, and extended the maturity
date to July 31, 2007. The syndicate includes Bank of America N.A. as co-agent
and other financial institutions as lenders. Borrowings under the Congress
Facility bear interest at Wachovia's prime rate plus a margin of 0.0% to 0.5%,
based on unused availability levels. At our option, all or any portion of the
outstanding borrowings may be converted to a Eurodollar rate loan, which bears
interest at the adjusted Eurodollar rate plus a margin of 1.50% to 2.00%, based
on unused availability levels. We also pay an unused line fee equal to 0.375%
per annum of the unused portion of the facility, subject to certain adjustments.
The average interest rate on outstanding borrowings under the Congress Facility
during the quarter ended March 31, 2006 was 6.78%, and the balance outstanding
at March 31, 2006 was $22.7 million. Our obligations under the Congress Facility
are collateralized by certain assets of our North and South American
subsidiaries. The Congress Facility requires us to meet certain financial tests
and to comply with certain other covenants, including restrictions on incurrence
of debt and liens, restrictions on mergers, acquisitions, asset dispositions,
capital contributions, payment of dividends, repurchases of stock and
investments.
On June 22, 2004, in connection with the acquisition of OpenPSL, we assumed
a mortgage with HSBC Bank plc ("HSBC") for an original amount of L670,000, or
the U.S. dollar equivalent of approximately $1.2 million. The mortgage has a
term of ten years, bears interest at HSBC's rate plus 1.25% and is payable in
monthly installments of approximately L7,600, or $13,200 U.S. dollars. The
balance on the mortgage was $667,000 at March 31, 2006.
Our agreement with IFN Finance BV was amended in December 2004 to reduce
our $7.5 million in short-term financing to $4.7 million. The loan is
collateralized by certain European accounts receivable and inventories, bears
interest at 5.5%, and continues indefinitely until terminated by either party
upon 90 days notice. There was no balance outstanding at March 31, 2006.
On December 1, 2005, in connection with the acquisition of MCE Group
("MCE"), we entered into a short-term financing agreement with IBM Deutschland
Kreditbank GmbH ("IBM") for up to $25 million. In March 2006, the limit was
increased to $30 million. The loan is collateralized by certain assets and
cross-company guarentees of our European subsidiaries and bears interest at US
Libor or Euribor plus 2.00%, depending on the currency of the advance. The
facility has no maturity date but continues indefinitely until terminated by
either party upon six weeks notice. The balance outstanding at March 31, 2006
was $16.4 million. Also on December 1, 2005, we entered into another short-term
financing agreement with IBM for E6.5 million or the UDS equivalent of $7.7
million at March 31, 2006. The loan is collateralized by certain assets and
cross-company guarantees of our European subsidiaries and bears interest at
Euribor plus 3.85%. The facility has no maturity date but continues
indefinitely until terminated by either party upon six weeks notice. The
balance outstanding at March 31, 2006 was $7.9 million including interest
payable.
On December 1, 2005, we entered into a loan agreement with Mr. Klaus Reichl
for up to E4.0 million, or the USD equivalent of $4.7 million at March 31, 2006.
The loan was used to finance the asset purchase of MCE. The loan is unsecured,
bears interest at the fixed rate of 5.25% and matures on December 5, 2008. The
balance outstanding at March 31, 2006 was $3.4 million.
24
On March 30, 2006, we entered into a North America Working Capital Program
(the "Working Capital Facility") with Intel Corporation to provide a line of
credit up to $3.0 million. The Working Capital Facility is non-interest bearing
and has a one-year term with subsequent annual renewals, but may be terminated
by Intel at any time. We are required to meet certain program eligibility
requirements including compliance with our distribution agreement with Intel.
The balance outstanding at March 30, 2006 was $2.3 million.
We were in compliance with our bank and subordinated debt financing
covenants at March 31, 2006; however, there can be no assurance that we will be
in compliance with such covenants in the future. If we do not remain in
compliance with the covenants, and are unable to obtain a waiver of
noncompliance from our lenders, our financial condition, results of operations
and cash flows would be materially adversely affected.
Effective January 1, 2006, we adopted Statement of Financial Accounting
Standard No. 123, "Share-Based Payment (Revised 2004)" ("SFAS123(R)") on a
modified prospective basis. As a result, we have included stock-based
compensation costs in our results of operations for the quarter ended March 31,
2006, as more fully described in Note 3 to our condensed consolidated financial
statements.
On March 29, 2005, the SEC issued Staff Accounting Bulletin (SAB) 107 which
expresses the views of the SEC regarding the interaction between SFAS No. 123R
and certain SEC rules and regulations and provides the SEC's views regarding the
valuation of share-based payment arrangements for public companies. In
particular, SAB 107 provides guidance related to share-based payment
transactions with non-employees, the transition from nonpublic to public entity
status, valuation methods (including assumptions such as expected volatility and
expected term), the accounting for certain redeemable financial instrument
issues under share-based payment arrangements, the classification of
compensation expenses, non-GAAP financial measures, first-time adoption of SFAS
No. 123R in an interim period, capitalization of compensation costs related to
share-based payment arrangements, the accounting for income tax effects of
share-based payments arrangements upon adoption of SFAS No. 123R, the
modification of employee share options prior to adoption of SFAS No. 123R, and
disclosures in Management's Discussion and Analysis of Financial Condition and
Results of Operations subsequent to adoption of SFAS No. 123R. The adoption of
SAB 107 did not have a material impact on our condensed consolidated financial
statements.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections." SFAS No. 154 replaces APB Opinion No. 20, "Accounting Changes,"
and SFAS No. 3, "Reporting Accounting Changes in Interim Financial Statements,"
and is effective for fiscal years beginning after December 15, 2005. SFAS No.
154 requires retrospective application to prior periods' financial statements of
changes in accounting principle, unless it is impracticable to determine either
the period-specific effects or the cumulative effect of the change. The adoption
of SFAS No. 154 did not have a material impact on our condensed consolidated
financial statements.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We are subject to interest rate risk on our variable rate credit facilities
and could be subjected to increased interest payments if market interest rates
fluctuate. For the quarter ended March 31, 2006, average borrowings outstanding
on the variable rate credit facilities include $22.7 million with Congress
Financial, $68.5 million with Wachovia Bank, National Association and PNC Bank,
National Association, $37.8 million with Bank of America, N.A. and $24.2 million
with IBM. These facilities have interest rates that are based on associated
rates such as Eurodollar and base or prime rates that may fluctuate over time
based on changes in the economic environment. Based on actual borrowings
throughout the year under these borrowing facilities, an increase of 1% in such
interest rate percentages would increase the annual interest expense by
approximately $1.5 million.
A substantial part of our revenue and capital expenditures are transacted
in U.S. dollars, but the functional currency for foreign subsidiaries is not the
U.S. dollar. We enter into foreign forward exchange contracts to hedge certain
balance sheet exposures against future movements in foreign exchange rates. The
25
gains and losses on the forward exchange contracts are largely offset by gains
or losses on the underlying transactions and, consequently, a sudden or
significant change in foreign exchange rates should not have a material impact
on future net income or cash flows. As a result of Bell or its subsidiaries
entering into transactions denominated in currencies other than their functional
currency, Bell recognized a foreign currency loss of $78,000 during the quarter
ended March 31, 2006. To the extent we are unable to manage these risks, our
results, financial position and cash flows could be materially adversely
affected.
In August 2003, we entered into an interest rate swap agreement in order to
gain access to the lower borrowing rates normally available on floating-rate
debt, while avoiding prepayment and other costs that would be associated with
refinancing long-term fixed-rate debt. The swap purchased has a notional amount
of $40 million, expiring in June 2010, with a six-month settlement period and
provides for variable interest at LIBOR plus a set rate spread. The notional
amount is amortized ratably as the underlying debt is repaid. The notional
amount at March 31, 2006 was $32.9 million. The notional amount does not
quantify risk or represent assets or liabilities, but rather, is used in the
determination of cash settlement under the swap agreement. As a result of
entering into this swap, we will be exposed to credit losses from counter-party
non-performance; however, we do not anticipate any such losses from this
agreement, which is with a major financial institution. The agreement will also
expose us to interest rate risk should LIBOR rise during the term of the
agreement. This swap agreement is accounted for under Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities"("SFAS 133"). Under the provisions of SFAS 133, we initially recorded
the interest rate swap at fair value, and subsequently recorded any changes in
fair value as an offset to the related liability. Fair value is determined based
on quoted market prices, which reflect the difference between estimated future
variable-rate payments and future fixed-rate receipts. The fair value of the
interest rate swap was ($1.2 million) at March 31, 2006.
ITEM 4: CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. After evaluating the
effectiveness of the Company's disclosure controls and procedures
pursuant to Rule 13a-15(b) of the Securities Exchange Act of 1934
("the Exchange Act") as of the end of the period covered by this
quarterly report, our chief executive officer and chief financial
officer with the participation of the Company's management, have
concluded that the Company's disclosure controls and procedures are
effective to ensure that information that is required to be disclosed
by the Company in reports that it files under the Exchange Act is
recorded, processed, summarized and reported within the time periods
specified in the rules of the Securities Exchange Commission and that
such information is accumulated and communicated to management,
including our Chief Executive Officer and Chief Financial Officer, as
appropriate, to follow for timely decisions regarding required
disclosure..
(b) Changes in internal controls. There were no changes in our internal
control over financial reporting that occurred during the period
covered by this quarterly report that have materially affected, or are
reasonably likely to materially affect, the Company's internal control
over financial reporting.
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PART II - OTHER INFORMATION
Item 1A: Risk Factors
In addition to the other information set forth in this report, you should
carefully consider the factors discussed in Part I, "Item 1A. Risk Factors" in
our Annual Report on Form 10-K for the year ended December 31, 2005, which could
materially affect our business, financial condition or future results. The risks
described in our Annual Report on Form 10-K are not the only risks facing our
Company. Additional risks and uncertainties not currently known to us or that we
currently deem to be immaterial also may materially adversely affect our
business, financial condition and/or operating results.
Item 6: Exhibits
See Exhibit Index on page following Signatures.
27
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: May 10, 2006
BELL MICROPRODUCTS INC.
BY: /s/ JAMES E. ILLSON
------------------------------------
Chief Operating Officer, President
of Americas and Chief Financial
Officer
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EXHIBIT INDEX
Form 10-Q
Quarter ended March 31, 2006
EXHIBIT NO. DESCRIPTION
- ----------- -----------
31.1 Certification of Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
29