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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________.
COMMISSION FILE NUMBER: 0-21528
BELL MICROPRODUCTS INC.
(Exact name of registrant as specified in its charter)
CALIFORNIA 94-3057566
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
1941 RINGWOOD AVENUE, SAN JOSE, CALIFORNIA 95131-1721
(Address of principal executive office, including zip code)
Registrant's telephone number, including area code: (408) 451-9400
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None.
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $.01 par value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [ X ] No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
The aggregate market value of the voting stock held by non-affiliates
of the registrant, as of March 19, 2002, was approximately $156,031,327 based
upon the last sale price reported for such date on the Nasdaq National Market.
For purposes of this disclosure, shares of Common Stock held by officers and
directors of the Registrant have been excluded because such persons may be
deemed to be affiliates. This determination is not necessarily conclusive.
The number of shares of Registrant's Common Stock outstanding as of
March 19, 2002 was 19,241,750.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the definitive Proxy Statement for the Company's Annual Meeting of
Shareholders to be held on May 16, 2002 are incorporated by reference into Part
III of this Form 10-K.
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PART I
ITEM 1. BUSINESS
GENERAL
Founded in 1987, Bell Microproducts Inc., together with its
subsidiaries, is a leading value-added distributor of storage products and
systems, semiconductors and computer products and peripherals. We market and
distribute our products at various levels of integration, from raw components to
fully integrated, tested and certified systems. We carry over 150 brand name
product lines as well as our own proprietary BellStor and Rorke Data storage
products, Markvision memory modules and TradeMark computer products. Across our
product lines, we emphasize our ability to combine our extensive product
portfolio with comprehensive value-added services.
We offer components that include disk drives, semiconductors, flat
panel displays and related products, and other storage products and
custom-configured computer products. Our products also include value-added
services such as system design, integration, installation, maintenance and other
consulting services combined with a variety of storage and computer hardware and
software products. In addition, we offer network attached storage (NAS), storage
area network (SAN) and other storage systems, computer platforms, tape drives
and libraries and related software. Our selection of products and technologies,
together with our independence, allows us to offer the best available hardware,
software and service solutions for each customer. Customers can purchase our
components as stand-alone products or in combination with certain value-added
services.
We have made forward-looking statements in this Form 10-K and in the
documents that are incorporated by reference into this Form 10-K, within the
meaning of Section 27A under the Securities Act of 1933 and Section 21E under
the Securities Exchange Act of 1934. These forward-looking statements are
subject to risks and uncertainties and include information concerning our
possible or assumed future results of operation. Also, when we use words such as
"believe," "expect," "anticipate" or similar expressions, we are making
forward-looking statements. Our actual results and financial condition could
differ materially, and adversely, from what is anticipated in these
forward-looking statements as a result of certain factors, including those set
forth in "Risk Factors" and elsewhere in this Form 10-K. We believe it is
important to communicate our expectations to our investors. However, there may
be events in the future that we are not able to predict accurately or over which
we have no control. The risk factors described in this Form 10-K, as well as any
other cautionary language in this Form 10-K, provide examples of risks,
uncertainties and events that may cause our actual results to differ materially
from the expectations we describe in our forward-looking statements.
INDUSTRY
The storage, semiconductor and computer industries have experienced
significant growth over the past decade, due to rapid growth in Internet usage
and e-commerce; enterprise applications such as enterprise resource planning and
data mining; server, desktop and laptop computers; and wireless communications
as well as a variety of emerging consumer products and applications.
Traditionally, storage, semiconductor and computer products have been
sold through both direct and indirect distribution channels. The use of indirect
distribution channels is growing rapidly as manufacturers focus on core
activities such as product design, development and marketing and begin to divest
or outsource non-core functions. The growth of the indirect market reflects the
need for manufacturers to increasingly use distributors, particularly for
servicing OEMs, VARs, CEMs and system integrators. Customers are also driving
the trend toward indirect distribution due to the value-added services that
distributors often provide, particularly in the storage
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market. The rapid growth of storage requirements and the need for sophisticated
networked storage systems such as NAS and SAN have increased the importance of
independent storage solutions providers.
Network Attached Storage. NAS appliances are advanced storage systems
that attach directly to a local area network. A NAS appliance can be thought of
as a thin file server with built-in storage. Similar to general-purpose servers,
NAS appliances include a central processing unit, an operating system and
internal hard disk drive storage.
Storage Area Networks. A SAN is an architecture that directly connects
multiple independent servers and storage subsystems through a network dedicated
to storage. A SAN consists of a variety of heterogeneous networking equipment
such as switches, hubs and routers; storage products such as disk subsystems,
tape libraries and optical drives; and storage management software. A SAN is
often connected using a protocol known as Fibre Channel.
Both the NAS and SAN markets are projected to grow rapidly over the
next few years. The complexity of sophisticated data storage solutions such as
NAS and SAN combined with a shortage of qualified information technology
personnel often requires companies to outsource the research, design,
implementation and support of their networked storage solutions. Accordingly,
significant growth in SAN and NAS is expected to be through indirect
distribution channels.
In recent years, a growing number of manufacturers began to reduce the
number of distributors they use. Distributors themselves are also choosing to
consolidate because of the competitive advantages that arise from expanded
product offerings and economies of scale. The rapidly changing nature of the
storage, semiconductor and computer industries has required distributors to
significantly expand both their customer base and product and service offerings,
to compete effectively. To be successful within these areas, we believe
distributors must emphasize time-to-market and total cost reductions and focus
on markets in which they have advantages in service, flexibility and component
content. Distributors also need to distinguish themselves through a combination
of value-added services such as consulting, design, implementation and
maintenance as well as more knowledgeable service and technical support.
OUR STRATEGY
Our goal is to expand our leadership position as a distributor of
storage products and systems and to become one of the leading distributors of
semiconductor components and computer products and peripherals. We intend to
achieve this goal by leveraging our strengths and implementing the following
strategies:
Continue Our Focus on Storage Solutions. We plan to continue to take
advantage of the market opportunities in the storage industry by maintaining our
strategic focus on our storage solutions. For example, we have devoted
significant resources to expanding our marketing efforts, deepening the
expertise of our sales force and offering an extensive range of
technologically-advanced products. We believe that our ability to offer
value-added services will be critical for implementing storage solutions and
leveraging the opportunity in the data storage market given the increasing
complexity of storage solutions and the shift toward indirect distribution.
Expand our Storage and Semiconductor Product Lines. We believe that our
ability to offer customers an extensive line of leading storage products across
technologies and manufacturers will continue to be a strong competitive
advantage for us, particularly as it relates to SAN and NAS solutions. Our
selection of products and technologies, together with our independence, allows
us to reliably deliver the optimal package of appropriate hardware, software and
services for each project. We also believe it is important to expand our
semiconductor offerings to address customer demand. We will continue to expand
our product lines through strategic acquisitions and internal growth.
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Expand Geographically. We intend to deepen our presence in the United
States, and expand our coverage in the major markets of Canada, Latin America
and Europe through targeted internal growth and strategic acquisitions.
Increasingly, multinational companies, including our manufacturers and
customers, are requiring products and solutions that are able to address local
operational and reporting requirements, but which are also heterogeneous and
interoperable among countries, regions and offices. As we expand our global
presence, we believe that we will be better able to address the demands of
multinational customers, gain more access to multinational manufacturers and
leverage our expertise.
Align with Industry Leaders. We intend to leverage our position as a
leading storage solutions provider to create new strategic relationships with
manufacturers. We believe that distribution channels will continue to
consolidate and leading manufacturers will align with those distributors that
are best able to offer value-added services and access new customers. We believe
being aligned with leading manufacturers will allow us to identify innovative
products, exchange critical information, and gain access to new technologies and
create cross-marketing opportunities. We have entered into strategic
relationships with a number of manufacturers, including IBM, Compaq and EMC.
Expand Electronic Commerce Initiatives. We intend to expand the scope
of our electronic commerce, supply chain management and information deployment
programs. We believe that our electronic commerce initiatives will expand our
customer base, establish greater penetration with existing customers and
strengthen our position as a preferred distributor of storage, semiconductor and
computer products. We also believe that these programs will further establish
our brand name, lower our operating costs and streamline our inventory
management process.
PRODUCTS AND SERVICES
We market and distribute more than 150 brand name product lines, as
well as our own BellStor and Rorke Data storage products, Markvision memory
modules and TradeMark computers and servers. We offer the following products as
discrete components or as part of our solutions offering.
Storage Products and Related Software
Our storage products include network attached storage products, storage
area network products, Fibre Channel networking products and systems, tape
libraries and disk drives, as well as storage-related software products. Among
the storage products we offer are our own proprietary BellStor and Rorke Data
storage products, that complement the other products and technologies we
provide.
Semiconductor and Other Components
We distribute a variety of semiconductor components, including memory
components and modules, logic devices, microprocessors, microcontrollers, power
management components, analog and mixed signal circuits, application-specific
integrated circuits (ASICs), graphics and video devices, communications and
specialty components.
Computer Products and Software
Our computer products include a variety of standard and
custom-configured motherboards, flat panel displays and related components,
monitors, keyboards, chassis, scanners, personal computers and servers, board
level products and network interface controller (NIC) cards, as well as related
software. Among the computer products we offer are our own proprietary
Markvision memory modules and TradeMark computer products that complement the
other products and technologies we provide.
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Value-Added Services
We offer our customers a variety of value-added services as described
below. Many of our value-added services are product focused, while others
provide our customers assistance with a variety of product management
activities.
Storage System Consulting Services. We work with customers to determine
data storage needs to make decisions regarding their storage strategies and to
design storage systems to address these needs. Our consulting services draw from
our core competencies in enterprise storage integration solutions. We perform
tasks such as storage audit or feasibility studies, supplement specialist
elements of a pre-defined project or provide full project management and
implementation.
NAS and SAN Solutions. We offer a complete range of professional
services including design and consultation, installation, training and on-site
service programs relating to NAS and SAN solutions. We have established a
dedicated enterprise storage systems team that can address the challenges
associated with enterprise storage systems. Our service programs also offer
customers Fibre Channel interoperability and fully integrated turnkey storage
solutions. For example, we integrate SANs with Fibre Channel-based technology
including switches, bridges, archive libraries and network software.
Storage Subsystem. We provide standard and custom subsystem products to
our customers. We integrate standard products for our BellStor and Rorke Data
brand storage products. We also configure custom products to meet the needs of
customers that cannot be served by industry-standard product offerings.
Other Product Services. We provide value-added services to a full range
of semiconductor, storage and computer products, including semiconductor device
programming, tape and reeling, special labeling, disk drive image duplication,
firmware modification, software downloading and hardware modification.
Flat Panel Integration. We offer integrated flat panel display
subsystems for use in custom designs or with OEM systems.
Application Support Services. Our application support services provide
design support and product recommendations, training programs, maintenance
options and testing, technical advice and prompt incident detection and
resolution.
Supply Chain Management. We provide a variety of materials-management
solutions, including e-procurement services, Internet-enabled, real-time pricing
and delivery quotations, electronic data interface programs, just-in-time
inventory programs, bonded inventories, on-site consignment inventory and
kitting. We are implementing an end-to-end supply chain management program for
manufacturers and customers. This new program is designed to help us improve
inventory turns, service levels and sales productivity through the
implementation of demand planning and supply chain planning systems. We are also
working with several companies in order to provide software applications and
other resources to OEMs and contract electronic manufacturers for
materials-management logistic activities.
SALES AND MARKETING
Our customer base primarily consists of OEMs, VARs, system integrators,
contract electronic manufacturers, storage solution customers and retailers. For
customers primarily seeking our solution offerings, our sales and marketing
efforts often involve proactive efforts of our sales people and field
application engineers. Sales and technical personnel focusing on these customers
tend to spend time at customers' facilities assessing the customers' needs,
developing and providing solutions as well as providing proof of concept
supported by our technical capabilities and experience. Our component offering
marketing efforts involve supply chain
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management programs, consignment and bonded inventory programs and end-of-life
programs. Sales of our component offerings are principally driven by product
breadth and depth, pricing and on-time availability.
We also believe that our relationships with manufacturers provide us
with significant opportunities to increase our sales and customer base. We work
closely with many manufacturers to develop strategies to penetrate both targeted
markets and customers. In many cases, our sales presentations to customers are a
joint effort with manufacturers' sales representatives.
We believe our e-commerce program will enhance our sales and marketing
efforts by:
o providing our customers with detailed product information,
including availability and pricing;
o providing customers additional channels to purchase our
products;
o reducing time and expenditures involved in customers' product
procurement activities; and
o providing our customers with resource planning tools to more
accurately manage their product requirements.
COMPETITION
In the distribution of storage, semiconductor components and computer
products, we generally compete for customer relationships with numerous local,
regional and national authorized and unauthorized distributors. We also compete
for customer relationships with manufacturers, including some of our
manufacturers and customers. Consistent with our sales and marketing efforts, we
tend to view our competition, whether arising from the direct or indirect
distribution channel, on a customer-category basis. We believe that our most
significant competition for customers seeking both products and value-added
services arises from Arrow Electronics and Avnet. We believe that our most
significant competition for customers seeking products apart from value-added
services arises from Ingram Micro and Tech Data.
We believe that competition for customers is based on product line
breadth, depth and availability, competitive pricing, customer service,
technical expertise, value-added services and e-commerce capabilities. We
believe that we compete favorably with respect to each of these factors. We
directly compete with numerous distributors, many of which possess superior
brand recognition and financial resources. In the area of storage products and
solutions, however, we believe that none of our competitors offers the full
range of storage products and solutions that we offer.
We compete with other distributors for relationships with
manufacturers. In recent years, a growing number of manufacturers began to
reduce the number of distributors they use. We believe this consolidation is the
result of a manufacturer's need to streamline its supply chain and establish
stronger and more expansive relationships with a smaller number of distributors.
Since we believe that competition for customers is often based upon product line
breadth, depth and availability, the loss of any significant manufacturer could
harm our competitive position.
Although we believe that we are currently well positioned within our
target markets, the storage and computer product markets are rapidly evolving
and highly competitive. As technologies continue to change, we expect that
competition will increase in the future. We believe direct competition from
manufacturers is likely to increase if, as expected, the data storage industry
continues to consolidate. This consolidation would probably result in fewer
manufacturers with greater resources to devote to internal sales and marketing
efforts. In addition, manufacturers have established and will probably continue
to establish cooperative relationships with other manufacturers and data storage
solution providers. These cooperative relationships are often intended to enable
manufacturers to offer comprehensive storage solutions that compete with those
we offer.
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RECENT ACQUISITIONS
In connection with our solution offerings, we have completed a number
of strategic acquisitions. Through these acquisitions, we gained expertise in
storage solutions and greater access to international markets.
Our acquisition of Total Tec, a company headquartered in Edison, NJ,
and with sales offices in the eastern and southern United States, has
significantly expanded our ability to address challenging SAN initiatives. Total
Tec is one of Compaq's four enterprise distributors and one of the nation's
premier enterprise (computing and storage) solutions providers focused on
implementing comprehensive IT solutions to Fortune 1000 firms. Their methodology
addresses key business data concerns including availability, reliability,
performance, scalability and manageability. During the fourth quarter of 2001,
we expanded our U.K. Compaq relationship to include the U.S. market for Proliant
servers and StorageWorks enterprise storage systems. Through this distribution
agreement, Bell Microproducts will offer leading Compaq enterprise products,
services and solutions to its large customer base of VARs, resellers, OEMs and
system integrators in the U.S.
Our acquisition of Touch The Progress Group BV, a company based in the
Netherlands and with offices in Germany, Belgium and Austria, has added
enterprise storage and storage management products, technology, infrastructure,
and support services to our strategic effort. The company offers an extensive
portfolio of storage solutions from some of the world's leading manufacturers.
This portfolio allows the company and its business partners to provide a total
storage management solution for multiple heterogeneous computing platforms,
including IBM, SUN Microsystems, Hewlett-Packard, Compaq and other leading
manufacturers.
Our acquisition of Forefront Graphics, a company headquartered in
Toronto, Canada, and with offices in Ottawa, Montreal, Calgary and Vancouver,
has added high performance computer graphics, digital audio and video, storage
and multimedia products targeted at both the computer reseller marketplace and
the video production reseller marketplace.
EMPLOYEES
At December 31, 2001, we had a total of 1,476 employees, including 91
in general corporate functions, 708 in administrative functions and 677 in sales
and marketing functions. Of our total employees, 650 are located at our
facilities outside of the United States, including 441 in the United Kingdom.
None of our employees are represented by a labor union. We have not experienced
any work stoppages and consider our relations with our employees to be good.
Many of our current key personnel have substantial experience in our industry
and would be difficult to replace. The labor market in which we operate is
highly competitive and, as a result, we may not be able to retain and recruit
key personnel. If we fail to recruit, retain or adequately train key personnel,
we will experience difficulty in implementing our strategy, which could
negatively affect our business, financial condition and stock price.
RISK FACTORS
You should consider carefully the risks described below together with
all of the other information included in this Form 10-K. The risks and
uncertainties described below and elsewhere in this Form 10-K are not the only
ones facing us. If any of the following risks actually occur, our business,
financial condition or results of operations would likely suffer. In that case,
the trading price of our common stock could fall, and you may lose all or part
of your investment.
THE CYCLICAL NATURE OF THE STORAGE, SEMICONDUCTOR AND COMPUTER INDUSTRIES COULD
HURT OUR OPERATING RESULTS.
The storage, semiconductor and computer industries have historically
been characterized by fluctuations in product demand and supply, and,
consequently, severe fluctuations in price. Over the past year, the industries
in
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which we operate have experienced a significant downturn in demand and excess
production levels. Although our distribution agreements with manufacturers
provide us with limited price protection and certain rights of return, the
shortfalls in demand and excess production hurt our sales and gross margins. As
such shortfalls in demand and excess production continues, our results of
operations will be adversely affected. In addition, many of our customers in the
storage and computer products industries are subject to the risks of significant
shifts in demand and severe price pressures by their customers, which may
increase the risk that we may not be able to collect accounts receivable owed by
some of our customers. If we are unable to collect our accounts receivable, our
results of operations and financial condition may suffer.
If the data storage and computer products industries experience
significant unit volume growth that, in turn, results in increased demand for
many of the products we distribute, we may experience a shortage of our
products. In such event, our operating results may depend on the amount of
product allocated to us by manufacturers and the timely receipt of such product.
WE ARE DEPENDENT ON MANUFACTURERS AND WOULD SUFFER IF WE LOST ANY SIGNIFICANT
MANUFACTURER OR FACED A PRODUCT SHORTAGE.
We are highly dependent on manufacturers for substantially all of the
products that we sell. Three manufacturers provided products that represented
41% of our sales in each of 2000 and 2001. The loss of any significant
manufacturer could harm our financial condition and results of operations. In
the past, significant manufacturers have terminated distribution arrangements
with us, and significant distribution relationships could be terminated in the
future. Our distribution agreements are cancelable on short notice. Our reliance
on manufacturers leaves us vulnerable to having an inadequate supply of required
products, price increases, late deliveries and poor product quality. From time
to time we, like other distributors in our industry, experience supply shortages
and are unable to purchase our desired volume of products. If we are unable to
enter into and maintain satisfactory distribution arrangements with leading
manufacturers and an adequate supply of products, our sales could suffer
considerably.
IF WE CANNOT EFFECTIVELY MANAGE OUR GROWTH, OUR BUSINESS MAY SUFFER.
Our growth in recent years has placed, and continues to place, a
significant strain on our management, financial and operational resources. This
growth also increases demand on our professional and technical services, sales,
information systems, marketing and customer service and support functions. We
intend to continue to pursue our growth strategy through increasing our sales
efforts for existing and new solution and component offerings, increasing
geographical sales coverage and strategic acquisitions. Continued growth will
require increased personnel, expanded information systems and additional
financial and administrative control procedures. We may not be successful in our
efforts to manage growth. If we do not properly manage our planned growth, our
financial condition and common stock price may suffer.
THERE COULD BE FLUCTUATIONS IN OUR QUARTERLY OPERATING RESULTS.
Our quarterly operating results have in the past and could in the
future fluctuate substantially. Our operating expense levels are based in part
on expectations of future sales. If sales or gross margins in a particular
quarter do not meet expectations, operating results could suffer. Factors
affecting our quarterly operating results include:
o the loss of key manufacturers or customers;
o price competition;
o problems incurred in managing inventories;
o a change in the product mix sold by us;
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o customer demand, including the timing of purchase orders from
significant customers;
o changing economic conditions in North and South America and
Europe;
o our ability to manage credit risk and collect accounts
receivable;
o our management of foreign currency exposure;
o availability of product from manufacturers; and
o the timing of expenditures in anticipation of increased sales.
Due in part to manufacturer rebate programs, a larger portion of our
gross profit has historically been reflected in the third month of each quarter
than in each of the first two months of each quarter. In addition, we often
experience increased sales volume near the end of each quarter, which also
causes us to report higher gross profit levels in the third month of each
quarter than in each of the first two months of each quarter. If we do not
receive products from manufacturers or complete sales in a timely manner at the
end of a quarter, or if rebate programs and marketing development funds are
discontinued, our operating results in a particular quarter could suffer. In
various periods in the past, our operating results have been affected by all of
these factors. In particular, price fluctuations in the disk drive and
semiconductor industries have affected our gross margins in recent periods.
OUR FINANCIAL OBLIGATIONS MAY LIMIT OUR ABILITY TO OPERATE OUR BUSINESS.
We have raised significant funding through debt, some of which bears
interest at fixed rates and some at variable rates. We are required to meet
financial tests on a quarterly basis and comply with other covenants customary
in secured financings. If we do not meet debt covenant requirements, our lenders
may demand immediate repayment of amounts outstanding. Changes in interest rates
may have a significant effect on our operating results. Furthermore, we are
dependent on credit from our manufacturers to fund our inventory purchases. If
our debt burden increases to high levels, our manufacturers may restrict our
credit. Our cash requirements will depend on numerous factors, including the
rate of growth of our sales, the timing and levels of products purchased,
payment terms and credit limits from manufacturers, the timing and level of our
accounts receivable collections and our ability to manage our business
profitably.
Our ability to satisfy our existing obligations will depend upon our
future operating performance, which may be affected by prevailing economic
conditions and financial, business and other factors described in this Form
10-K, many of which are beyond our control. If we are unable to service our debt
obligations, we may be forced to adopt one or more strategies that may include
actions such as reducing or delaying capital expenditures or otherwise slowing
our growth strategies, selling assets, restructuring or refinancing our
indebtedness or seeking additional equity capital. We do not know whether any of
these actions could be effected on satisfactory terms, if at all. Any equity
financing may be on terms that are dilutive or potentially dilutive. If we are
unable to successfully manage our debt burden, our financial condition would
suffer considerably.
WE ARE SUBJECT TO THE RISKS OF INTERNATIONAL OPERATIONS, WHICH MAY HURT OUR
PROFITABILITY.
We believe that international sales will represent a substantial and
increasing portion of our net sales for the foreseeable future. Our
international operations are subject to a number of risks, including:
o fluctuations in currency exchange rates;
o difficulty in collecting accounts receivable due to longer
payment cycles common in foreign markets;
o political and economic instability;
o difficulty in staffing and managing foreign operations;
o import and export license requirements, tariffs, taxes and
other trade barriers; and
o the burden of complying with a wide variety of foreign laws,
treaties and technical standards and changes in those
regulations.
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The majority of our revenues and expenditures in our foreign
subsidiaries are transacted in the local currency of the country where the
subsidiary operates. For each of our foreign subsidiaries, the local currency is
also the functional currency. Fluctuations in currency exchange rates could
cause our products to become relatively more expensive to customers in a
particular country, leading to a reduction in sales or profitability in that
country. To the extent our revenues and expenses are denominated in currencies
other than U.S. dollars, gains and losses on the conversion to U.S. dollars may
contribute to fluctuations in our operating results. In addition, we have
experienced foreign currency remeasurement gains and losses because a
significant amount of our foreign subsidiaries' remeasurable net assets and
liabilities are denominated in U.S. dollars rather than the subsidiaries'
functional currency. As we continue to expand globally and the amount of our
foreign subsidiaries' U.S. dollar or non-functional currency denominated
remeasurable net asset or liability position increases, our potential for
fluctuations in foreign currency remeasurement gains and losses will increase.
We have in the past, and expect in the future, to enter into forward exchange
contracts and enter into local currency borrowing facilities to reduce this
exposure, but these arrangements may not be adequate. Furthermore, payment
cycles for international customers are typically longer than those for customers
in the United States. Unpredictable sales cycles could cause us to fail to meet
or exceed the expectations of security analysts and investors for any given
period. Further, foreign markets may not continue to develop. If we are unable
to manage these risks effectively, our operating results and financial position
could be harmed.
OUR GROWTH PLANS DEPEND IN PART ON OUR ABILITY TO SUCCESSFULLY COMPLETE AND
INTEGRATE ACQUISITIONS.
An important part of our growth has been the acquisition of
complementary businesses. We may choose to continue this strategy in the future.
Our identification of suitable acquisition candidates involves risks inherent in
assessing the value, strengths, weaknesses, overall risks and profitability of
acquisition candidates. We may be unable to identify suitable acquisition
candidates. If we do not make suitable acquisitions, we may find it more
difficult to realize our growth objectives.
The process of integrating new businesses into our operations,
including our recently completed acquisitions, poses numerous risks, including
an inability to assimilate acquired operations, information systems, internal
control systems and products; diversion of management's attention; difficulties
and uncertainties in transitioning the business relationships from the acquired
entity to us; and the loss of key employees of acquired companies. In addition,
future acquisitions by us may be dilutive to our shareholders, cause us to incur
additional indebtedness and large one-time expenses or create intangible assets
that could result in significant amortization expense. If we spend significant
funds or incur additional debt, our ability to obtain necessary financing may
decline and we may be more vulnerable to economic downturns and competitive
pressures. We cannot guarantee that we will be able to successfully complete any
acquisitions, that we will be able to finance acquisitions or that we will
realize any anticipated benefits from acquisitions that we complete.
WE COULD SUFFER A SURPLUS OF OBSOLETE OR UNMARKETABLE INVENTORY.
Franchise distribution agreements often provide us with limited
inventory management protection, including price protection and inventory return
rights. While we purchase a substantial amount of inventory under franchise
distribution agreements, we also purchase significant amounts of inventory
without the limited protection that franchise distribution agreements often
provide. Without the benefit of effective price protection or inventory return
rights for our inventory purchases, we bear the sole risk of obsolescence and
price fluctuations, which could harm our operating results. Even when our
franchise distribution agreements provide us with price protection and inventory
return rights, they may be ineffective when the products in our inventory become
obsolete or unmarketable, or when the manufacturers of those products have
financial difficulty. In those events, we may be unable to return the products
to the manufacturer or to collect refunds for those products in a timely manner,
or at all.
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WE MUST BE ABLE TO MANAGE RAPID TECHNOLOGICAL CHANGE.
Many of the products we sell are used in the manufacture or
configuration of a wide variety of electronic products. These products are
characterized by rapid technological change, short product life cycles and
intense competition and pricing pressures. Our continued success depends upon
our ability to continue to identify new, emerging technologies, develop
technological expertise in these technologies and continually develop and
maintain relationships with industry leaders. If we are unsuccessful in our
efforts, our results of operations and financial condition may suffer.
ITEM 2. PROPERTIES
In the Americas, we maintain 40 sales offices in a variety of
locations, including in the U.S., Canada, Brazil and Chile. In Europe, we
maintain sales offices in Austria, Belgium, England, France, Germany, Italy, the
Netherlands and Sweden. In addition to our sales offices, we operate six
integration and service facilities and 11 warehouses. We currently operate four
significant management and distribution centers. Our corporate headquarters is
located in San Jose, California, where we currently lease office space and
distribution facilities with approximately 160,000 square feet of space. Leases
for portions of these facilities begin to expire between June and December 2002.
We believe that we will be able to negotiate extensions of such leases or find
alternative leases with acceptable terms to accommodate our needs. In
Chessington, England, we previously leased, and acquired as of October 31, 2000,
two facilities with approximately 127,000 square feet that serve as our center
for directing and managing our operations in the United Kingdom and Europe, and
in May 2001, we transferred the operations logistics center to Birmingham,
England where we lease a warehouse facility with approximately 100,000 square
feet of space. This lease expires in 2019. In Miami, Florida, we currently lease
a facility with approximately 65,000 square feet that serves as our center for
directing and managing our business in Latin America. We have options to extend
the lease for this facility through early 2008. In Montgomery, Alabama, we
currently lease a facility with approximately 53,000 square feet that serves as
our corporate technology and data center and our primary customer call center.
The lease on this facility expires in October 2007. We believe that our existing
facilities are adequate for our current operational needs.
ITEM 3. LEGAL PROCEEDINGS
We are subject to legal proceedings and claims that arise in the normal
course of business. We believe that the ultimate resolution of such matters will
not have a material adverse affect on our financial position or results of
operations. However, such litigation could in the future result in substantial
costs and diversion of management resources. Such litigation could also result
in payment of monetary damages or prohibitions against use of technologies, and
could harm our business, financial condition and results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
11
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the Nasdaq National Market
under the symbol "BELM." The following table sets forth for the periods
indicated the high and low sale prices of the Common Stock as reported by
Nasdaq. Sale prices have been restated to reflect the 3-for-2 stock split the
Company declared on July 31, 2000.
HIGH LOW
----- -----
2000
First quarter............................................................ $12.67 $5.92
Second quarter........................................................... 12.67 7.25
Third quarter............................................................ 34.00 12.00
Fourth quarter .......................................................... 31.75 11.56
2001
First quarter............................................................ $24.25 $10.69
Second quarter .......................................................... 14.24 6.80
Third quarter ........................................................... 11.13 6.68
Fourth quarter .......................................................... 14.34 7.40
2002
First quarter (through March 19, 2002)................................... $15.79 $10.58
On March 19, 2002, the last sale price of the Common Stock as reported
by Nasdaq was $10.70 per share.
As of March 19, 2002, there were approximately 438 holders of record of
the Common Stock (not including shares held in street name).
To date, the Company has paid no cash dividends to its shareholders.
The Company has no plans to pay cash dividends in the near future. The Company's
line of credit agreement prohibits the Company's payment of dividends or other
distributions on any of its shares except dividends payable in the Company's
capital stock.
On November 13, 2001, the Company issued 400,000 shares of Common Stock
to six shareholders of Total Tec Systems, Inc. in connection with the Company's
acquisition of Total Tec Systems. The closing price of a share of the Company's
Common Stock on such date was $10.79. In connection with the issuance of such
shares the Company relied on the exemption from registration provided by Section
4(2) of the Securities Act of 1933. The shareholders acknowledged that they were
acquiring the shares for investment purposes only and not with a view to the
distribution thereof and, in addition, a restrictive securities legend was
placed on the certificates representing the shares.
12
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data of the Company set forth below should be
read in conjunction with the consolidated financial statements of the Company,
including the notes thereto, and Management's Discussion and Analysis included
elsewhere herein.
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE DATA)
------------------------------------------------------------------------------
STATEMENT OF INCOME DATA: 2001(1) 2000(2) 1999(3) 1998(4) 1997
- ------------------------- ----------- ------------- ------------- ------------- -----------
Net sales $2,007,102 $ 1,804,102 $ 1,058,275 $ 575,330 $ 460,516
Cost of sales 1,854,294 1,638,802 967,491 511,476 406,301
----------- ------------- ------------- ------------- -----------
Gross profit 152,808 165,300 90,784 63,854 54,215
Selling, general and administrative expense 157,910 121,088 69,507 46,070 40,942
Restructuring and special charges 8,894 - - - -
----------- ------------- ------------- ------------- -----------
Total operating expenses 166,804 121,088 69,507 46,070 40,942
Operating income (loss) from continuing operations (13,996) 44,212 21,277 17,784 13,273
Interest expense and other income 20,362 14,495 5,766 3,168 2,451
----------- ------------- ------------- ------------- -----------
Income (loss) from continuing operations before taxes (34,358) 29,717 15,511 14,616 10,822
Provision for (benefit from) income taxes (12,251) 12,480 6,581 6,139 4,545
----------- ------------- ------------- ------------- -----------
Income (loss) from continuing operations (22,107) 17,237 8,930 8,477 6,277
Income (loss) from discontinued operations, net of
income taxes - - (2,946) (2,402) (1,588)
Gain on sale of contract manufacturing segment - - 1,054 - -
----------- ------------- ------------- ------------- -----------
Net income (loss) $ (22,107) $ 17,237 $7,038 $ 6,075 $ 4,689
=========== ============= ============= ============= ===========
Basic earnings (loss) per shares (5)
Continuing operations $ (1.34) $ 1.17 $0.66 $ 0.64 $ 0.49
Discontinued operations - - (0.14) (0.18) (0.12)
----------- ------------- ------------- ------------- -----------
Total $ (1.34) $ 1.17 $ 0.52 $ 0.46 $ 0.37
=========== ============= ============= ============= ===========
Diluted earnings (loss) per share (5)
Continuing operations $ (1.34) $ 1.05 $ 0.65 $ 0.64 $ 0.47
Discontinued operations - - (0.14) (0.18) (0.12)
----------- ------------- ------------- ------------- -----------
Total $ (1.34) $ 1.05 $ 0.51 $ 0.46 $ 0.35
=========== ============= ============= ============= ===========
Shares used in per share calculation
Basic 16,495 14,673 13,563 13,188 12,843
=========== ============= ============= ============= ===========
Diluted 16,495 16,415 13,685 13,322 13,359
=========== ============= ============= ============= ===========
AS OF DECEMBER 31,
----------------------------------------------------------------------------------
BALANCE SHEET DATA: 2001(1) 2000(2) 1999(3) 1998(4) 1997
- ------------------- -------------- ------------- -------------- ------------ ------------
Working capital $183,964 $136,810 $182,626 $167,109 $134,612
Total assets 643,687 661,207 360,351 285,580 205,420
Total long-term debt 176,441 106,871 110,638 106,963 74,460
Total shareholders' equity 125,769 129,532 96,273 86,476 77,667
- -----------------
(1) 2001 Statement of Income Data and Balance Sheet Data include the results of
operations of Touch the Progress Group BV since acquisition on May 22,
2001, Forefront Graphics on May 24, 2001 and Total Tec Systems, Inc. on
November 13, 2001. See Note 3 of Notes to Consolidated Financial
Statements.
(2) 2000 Statement of Income Data and Balance Sheet Data include the results of
operations of Rorke Data, Inc. since acquisition on May 15, 2000 and Ideal
Hardware Limited on August 3, 2000. See Note 3 of Notes to Consolidated
13
Financial Statements.
(3) 1999 Statement of Income Data and Balance Sheet Data include the results of
operations of Future Tech, Inc. from the date of acquisition on July 21,
1999. See Note 3 of Notes to Consolidated Financial Statements.
(4) 1998 Statement of Income Data and Balance Sheet Data include the results of
operations of the Computer Products Division of Almo Corporation since
acquisition on November 13, 1998 and Tenex Data Division of Axidata Inc. on
November 19, 1998.
(5) All per share amounts have been restated in accordance with Statement of
Financial Accounting Standards No. 128 "Earnings Per Share". Earnings per
share and shares used in per share calculations have been retroactively
restated to reflect the 3-for-2 stock split the Company declared on July
31, 2000.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
For an understanding of the significant factors that influenced the
Company's performance during the past three years, the following discussion
should be read in conjunction with the consolidated financial statements and the
other information appearing elsewhere in this report.
When used in this report, the words "expects," "anticipates,"
"estimates," "intends" and similar expressions are intended to identify
forward-looking statements within the meaning of Section 27A under the
Securities Act of 1933 and Section 21E under the Securities Exchange Act of
1934. Such statements include but are not limited to statements regarding the
ability to obtain favorable product allocations and the ability to increase
gross profit while controlling expenses. These statements are subject to risks
and uncertainties that could cause actual results to differ materially,
including those risks described under "Risk Factors" in Item 1 hereof.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Our estimates, judgments and assumptions
are continually evaluated based on available information and experience, however
actual amounts could differ from those estimates. The Company's significant
accounting policies are described in Note 2 of the Notes to Consolidated
Financial Statements.
Revenue recognition
Bell's policy is to recognize revenue from sales to customers when the
rights and risks of ownership have passed to the customer, when persuasive
evidence of an arrangement exists, the price is fixed and determinable and
collection of the resulting receivable is reasonably assured. Under specific
conditions, we permit our customers to return or exchange products. The
provision for estimated returns is recorded concurrently with the recognition of
revenue based on historical sales returns and analysis of credit memo data.
We maintain an allowance for doubtful accounts for losses that we
estimate will arise from our customers' inability to make required payments. We
make our estimates of the uncollectibility of our accounts receivable by
analyzing historical bad debts, specific customer creditworthiness and current
economic trends. At December 31, 2001 the allowance for doubtful accounts was
$16.2 million and at December 31, 2000 it was $12.8 million. If the financial
condition of our customers were to deteriorate, resulting in an impairment of
their
14
ability to make payments, additional allowances may be required. In 2001, our
bad debt expense was $11.6 million compared to $10.0 million in 2000. In
addition, included in 2001 charges were $4.1 million of charges recorded in the
third quarter and included in restructuring and special charges that related to
a rapid deterioration in the financial condition of certain customers resulting
in their inability to make payments.
Valuation of Inventory
We write down our inventory for estimated obsolescence or unmarketable
inventory equal to the difference between the cost of inventory and the
estimated market value based upon assumptions about future demand, selling
prices and market conditions. Our inventories include high-technology components
that may be subject to rapid technological obsolescence and which are sold in a
highly competitive industry. During the second and third quarters of 2001 we
recorded $17.8 million of charges against inventory related to excess inventory
on hand. The additional write-down resulted from market conditions and the
decision to discontinue certain product lines. These charges were included in
the Statement of Income within the caption Cost of Sales. If actual product
demand or selling prices are less favorable than we estimate we may be required
to take additional inventory write-downs in the future. Similarly, if our
inventory is determined to be undervalued due to write-downs below market value,
we would be required to recognize such additional operating income at the time
of sale. Significant unanticipated changes in demand or technological
development could have a material and significant impact on the future value of
our inventory and reported operating results.
Valuation of Accounts Payable
Our accounts payable has been reduced by amounts claimed to vendors for
returns, price protection and other amounts related to incentive programs.
Amounts related to price protection and other incentive programs are recorded as
adjustments to product costs or selling, general and administrative expenses,
depending on the nature of the program. There is a time delay between the
submission of a claim by us and confirmation of agreement by our vendors.
Historically, our estimated claims have approximated amounts agreed to by our
vendors.
Accounting for Income Taxes
Bell has not recorded a valuation allowance to reduce its deferred tax
assets of $11.4 million as the Company considers it more likely than not that
the full balance will be realized. We consider historical levels of income,
expectations and risks associated with estimates of future taxable income and
ongoing prudent and feasible tax planning strategies in assessing the need for a
valuation allowance. Should we determine that we would not be able to realize
all or part of the net deferred tax asset in the future, an adjustment to the
deferred tax asset would be charged to income in the period such determination
was made.
Valuation of Goodwill and Intangible Assets
At December 31, 2001, goodwill amounted to $53.3 million and
identifiable intangible assets amounted to $6.6 million.
We assess the impairment of identifiable intangibles and goodwill
whenever events or changes in circumstances indicate that the carrying value may
not be recoverable. Factors we consider important which could trigger an
impairment review include the following:
o significant underperformance relative to expected historical or
projected future operating results;
o significant changes in the manner of our use of the acquired assets or
the strategy for our overall business;
o significant negative industry or economic trends;
15
o significant decline in our stock price for a sustained period; and
o our market capitalization relative to net book value.
If we were to determine that the carrying value of intangibles or
goodwill may not be recoverable based upon the existence of one or more of the
above indicators of impairment, we would measure an impairment based on a
projected discounted cash flow method using a discount rate determined by our
management to be commensurate with the risk inherent in our current business
model.
In 2002, Statement of Financial Accounting Standards ("SFAS") No. 142,
"Goodwill and Other Intangible Assets" became effective and as a result, we will
cease to amortize our goodwill. We had recorded approximately $2.8 million of
amortization on these amounts during 2001 and would have recorded approximately
$3.1 million of amortization during 2002. In lieu of amortization, we are
required to perform an initial impairment review of our goodwill in 2002 and an
annual impairment review thereafter.
We currently do not expect to record an impairment charge, however,
there can be no assurance that a material impairment charge will not be recorded
in future periods.
RESULTS OF OPERATIONS
Year Ended December 31, 2001 Compared to Year Ended December 31, 2000
Net sales were $2,007.1 million for the year ended December 31, 2001,
which represented an increase of $203.0 million, or 11% over 2000. Computer
products sales increased by $300.1 million primarily due to the expansion of the
customer base related to the acquisitions of Ideal Hardware Limited ("Ideal") in
August 2000, Touch The Progress Group BV ("TTPG") in May 2001, Total Tec
Systems, Inc. ("Total Tec") in November 2001 and Rorke Data, Inc. ("RDI"),
acquired in May 2000. Semiconductor sales decreased by $97.1 million primarily
due to the economic downturn in the Americas and overall decrease in demand.
The Company's gross profit for 2001 was $152.8 million, a decrease of
$12.5 million, or 8% from 2000. The decrease in gross profit was primarily the
result of inventory charges of $17.8 million taken in the second and third
quarters of 2001 related to the impact of current market conditions and the
Company's decision to reposition its product offerings and discontinue certain
non-strategic product lines, as discussed below. Excluding the inventory charge,
gross profit increased to $170.6 million in 2001, compared to $165.3 million in
2000, an increase of $5.3 million, or 3%. The increase in gross profit was
primarily related to the acquisition of Ideal, partially offset by a decrease in
the Americas. Excluding the inventory charge, the overall gross margin decreased
to 8.5% compared to 9.2% in the same period last year. The decrease in gross
margin percentage was primarily due to the impact of competitive market
conditions in North America and the inclusion of Ideal's lower gross margin
percentages for all of 2001.
Selling, general and administrative expenses increased to $157.9
million in 2001 from $121.1 million in 2000, an increase of $36.8 million, or
30%. As a percentage of sales, selling, general and administrative expenses
increased to 7.9% from 6.7% in 2000. The increase in expenses was attributable
to the acquisitions of Ideal, RDI, TTPG and Total Tec, and investments in
strategic programs.
Interest expense and other income increased in 2001 to $20.4 million
from $14.5 million in 2000, an increase of $5.9 million, or 41%. The increase in
interest expense and other income was primarily due to increased overall bank
borrowings during 2001 for worldwide working capital purposes, and the
acquisitions of Ideal, RDI, TTPG, Forefront Graphics ("FFG"). The average
interest rate in 2001 was 8.0%, versus 8.7% in 2000.
In 2001 the Company recorded a tax benefit at a rate of 35.6% on the
loss before taxes. In 2000 the
16
Company recorded income taxes at an effective rate of 42% on income before
taxes. The lower tax benefit rate for 2001 was primarily caused by the impact of
items related to acquisitions, which are not deductible for tax purposes.
Restructuring Plan
The Company implemented a plan in the second quarter of 2001 to reduce
costs and improve operating efficiencies by discontinuing certain non-strategic
product lines. In the third quarter of 2001, the Company took additional actions
and extended its cost reduction efforts in response to the continuing economic
slowdown.
In the second and third quarters of 2001, the Company accrued total
restructuring charges of $4.8 million consisting primarily of the discontinuance
and non-cash, write-off of certain fixed assets valued at $2.4 million,
severance and benefits of $2.2 million related to involuntary employee
terminations and lease costs of $238,000 pertaining to estimated future
obligations for non-cancelable lease payments for excess facilities in Minnesota
that were vacated due to the reductions in workforce. The Company also accrued
other special charges of $4.1 million for additional accounts receivable
provisions.
In the second and third quarters of 2001, the Company also recorded a
provision for inventory of $17.8 million related to additional excess inventory
and a $300,000 provision included in selling, general and administrative
expenses. The additional provisions resulted from the impact of current market
conditions and the decision to discontinue certain product lines. The excess
inventory charge is included within the Statement of Income under the caption
Cost of Sales.
Year Ended December 31, 2000 Compared to Year Ended December 31, 1999
Net sales were $1,804.1 million for the year ended December 31, 2000,
which represented an increase of $745.8 million, or 71% over 1999. Computer
product sales increased by $642.6 million primarily due to the expansion of the
customer base related to the acquisitions of Ideal Hardware Limited ("Ideal") in
August 2000, Future Tech International, Inc. ("FTI"), acquired in July 1999, and
Rorke Data, Inc. ("RDI"), acquired in May 2000, as well as growth in sales in
existing product lines. Semiconductor sales increased by $103.2 million
primarily due to the acquisition of FTI, growth in unit sales in existing
product lines and the addition of new lines. Ideal contributed net sales of
$280.6 million, since acquisition on August 3, 2000.
The Company's gross profit for 2000 was $165.3 million, an increase of
$74.5 million, or 82% over 1999. The increase in the dollar amount of gross
profit was primarily the result of increased sales volume in existing product
lines and the acquisitions of Ideal, FTI and RDI. As a percentage of sales,
overall gross margins were 9.2% compared to 8.6% in the same period last year.
The favorable gross margin percentage increase was primarily due to customer and
product mix in North America and the acquisition of RDI, partially offset by
lower gross margin percentages for Ideal and FTI.
Selling, general and administrative expenses increased to $121.1
million in 2000 from $69.5 million in 1999, an increase of $51.6 million, or
74%. As a percentage of sales, selling, general and administrative expenses
increased to 6.7% from 6.6% in 1999. The increase in expenses was attributable
to the acquisitions of Ideal, FTI, and RDI, increased sales volume and the
Company's continuing effort to expand its sales and marketing organization and
strengthen its financial and administrative support.
Interest expense increased in 2000 to $14.5 million from $5.8 million
in 1999, an increase of $8.7 million, or 150%. The increase in interest expense
was primarily due to increased overall bank borrowings during 2000 for worldwide
working capital purposes, and the acquisitions of Ideal and RDI. Interest rates
also increased during the year 2000 compared to interest rates in 1999. The
average interest rate in 2000 was 8.7%, versus 7.3% in 1999.
17
The Company's effective income tax rate remained unchanged at 42% in
2000.
LIQUIDITY AND CAPITAL RESOURCES
In recent years, the Company has funded its working capital
requirements principally through borrowings under subordinated term loans and
bank lines of credit, as well as proceeds from warrant 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. In addition, in March 2002, the Company
received $16.5 million from a private equity financing.
The net amount of cash provided by continuing operating activities was
$36.8 million in 2001. The net amount of cash used in investing activities in
2001 was $23.3 million, which was primarily related to the acquisition of
property and equipment and the acquisitions of FFG, TTPG and Total Tec. Net cash
used in financing activities in 2001 totaled $19.6 million, which was primarily
related to net repayments under the Company's long and short term borrowing
facilities.
The Company's accounts receivable balance at December 31, 2001 of
$299.1 million was consistent with the $295.6 million balance at December 31,
2000. Increases to accounts receivable resulting from increased sales volume
through the Company's acquisitions during the year were largely offset by an
overall decline in sales in North America. The Company's inventories decreased
to $195.8 million at December 31, 2001, from $246.7 million at December 31,
2000. This decrease was primarily due to the Company's efforts to manage its
inventory through a period of economic downturn in the U.S., and the
discontinuance of certain product lines, partially offset by acquired
inventories and increased inventory purchases resulting from the Company's
acquisitions during the year. The Company's accounts payable increased to $231.7
million in 2001 from $231.1 million in 2000. This slight increase was primarily
due to accounts payable assumed in connection with the acquisitions of FFG, TTPG
and Total Tec in 2001, offset by a decrease in the U.S. resulting from decreased
inventory purchases.
Net cash provided by financing activities in 2000 totaled $102.0
million, which was primarily related to borrowings under the RSA subordinated
term loan facility. The RSA facility was used to repay borrowings under
revolving credit facilities as described below. The net amount of cash used in
investing activities in 2000 was $64.2 million, which was primarily related to
the acquisition of property and equipment and the acquisitions of Ideal and RDI.
The net amount of cash used in continuing operating activities was $35.0 million
in 2000.
The Company's accounts receivable and inventories increased to $295.6
million and $246.7 million at December 31, 2000, respectively, from $168.9
million and $156.6 million, respectively, as of December 31, 1999. These
increases were primarily the result of the Company's increased sales volume and
the purchase of accounts receivable and inventory through the Company's
acquisitions of Ideal and RDI in 2000. The Company's accounts payable increased
to $231.1 million in 2000 from $143.6 million in 1999 due to increased inventory
purchases and the addition of accounts payable through the Company's
acquisitions in 2000.
On May 14, 2001, the Company entered into a syndicated Loan and
Security Agreement arranged by First Union National Bank ("First Union
Facility"), as principal agent, to provide a $175 million revolving line of
credit facility. The First Union Facility refinanced the Company's $50 million
credit facility with California Bank & Trust that matured May 31, 2001, and the
$80 million short-term loan with the RSA that matured June 30, 2001. The
syndicate includes Bank of America N.A. and Congress Financial Corporation
(Western), as co-agents and other financial institutions, as lenders. Borrowings
under the line of credit bear interest at First Union National Bank's prime rate
plus a margin of 0.0% to 0.5%, based on borrowing 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 2.25% to 2.75%, based on borrowing levels. The average interest rate
on outstanding borrowings under the revolving line of credit during the year
ended December 31, 2001, was 6.3%, and the balance outstanding at December 31,
2001 was $86.5 million. Obligations of the Company under the
18
revolving line of credit are secured by certain assets of the Company and its
North and South American 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 and investments. The Company was in compliance
with its bank covenants at December 31, 2001; however, there can be no assurance
that the Company will be in compliance with such covenants in the future. If the
Company does not remain in compliance with the covenants, and is unable to
obtain a waiver of noncompliance from its bank, the Company's financial
condition and results of operations would be materially adversely affected.
On July 6, 2000, 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 installments commencing December 31, 2000 and in
semi-annual principal installments of $8.5 million commencing December 31, 2007,
with a final maturity date of June 30, 2010. The RSA facility is secured by a
second lien on 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 Company
is in compliance with its subordinated debt financing covenants; however, there
can be no assurance that the Company will be in compliance with such covenants
in the future. If the Company does not remain in compliance with the covenants
in the Securities Purchase Agreement and is unable to obtain a waiver of
noncompliance from its subordinated lenders, the Company's financial condition
and results of operations would be materially adversely affected. The balance
outstanding at December 31, 2001 on this long-term debt was $93 million, $10.5
million is payable in 2002, $7.0 million for each of the years 2003 through
2005, and $61.5 million thereafter.
On November 13, 2001, the Company acquired Total Tec Systems, Inc.
("Total Tec") for a combination of cash and shares of the Company's common stock
totaling approximately $14.2 million, including acquisition costs. Liabilities
assumed included a $17.5 million borrowing facility with Summit Business Capital
Corporation ("SBCC") which is secured by substantially all of Total Tec's
assets, bears interest at SBCC's base rate or LIBOR plus 2.25% and matures April
30, 2003. At December 31, 2001, approximately $5.4 million was outstanding under
the SBCC borrowing facility. The acquisition of Total Tec was funded through
borrowings under the Company's revolving line of credit.
On May 24, 2001, the Company acquired Forefront Graphics ("FFG") for
approximately $1.1 million in cash and 60,324 shares of the Company's common
stock. The acquisition was funded through borrowings under the Company's
revolving line of credit and newly issued shares of common stock.
On May 22, 2001, the Company acquired Touch The Progress Group BV
("TTPG") for approximately $2.5 million in cash and 560,000 shares of the
Company's common stock. The acquisition was funded through borrowings under the
Company's revolving line of credit and newly issued shares of common stock.
On August 3, 2000, the Company acquired Ideal Hardware Limited
("Ideal"), for a combination of cash, assumption of liabilities and notes
payable totaling approximately $28.9 million, including acquisition costs. The
acquisition of Ideal was funded through borrowings under the RSA facility.
Liabilities assumed included a $43 million borrowing facility with Lombard
NatWest Limited (the "NatWest" facility) which is secured by substantially all
of Ideal's accounts receivable and bears interest at NatWest's base rate plus
1.5%. This facility was increased to $60 million in October 2000 and as of June
2001 it was agreed that the NatWest borrowing arrangement would continue
indefinitely subject to termination by NatWest or the Company with three months
notice. There are no financial covenant requirements. At December 31, 2001,
approximately $31 million was
19
outstanding under the NatWest borrowing facility. The Company believes that if
NatWest were to terminate the facility, alternative financing could be obtained
or additional funds could be obtained under other existing lines to replace the
funding provided by NatWest. If the Company were not able to replace the
facility, the Company's liquidity and financial position may be adversely
affected.
On October 16, 2000, the Company exercised the option to purchase the
buildings occupied by Ideal for approximately $24.0 million. The purchase was
funded through existing cash resources under the NatWest borrowing facility of
approximately $11.0 million and a five-year mortgage of approximately $13.0
million bearing interest at LIBOR plus 1.5%. There are no cross default
provisions within this agreement and the NatWest facility. The mortgage is
payable in quarterly installments of approximately $290,000, plus interest, with
a balloon payment of approximately $7.5 million due November 2005. The principal
amount due in 2002 is $820,000 and amounts due in each of the years 2003 through
2004 are $1,160,000 and $8,660,000 is due in 2005. The Company has an interest
rate swap agreement that effectively converts the variable interest payable on
the mortgage to a fixed rate of 7.42% until January 2003. The balance of the
mortgage at December 31, 2001 was $11.8 million. The Company was not in
compliance with a financial ratio covenant related to this facility at December
31, 2001. The Company did receive a waiver from NatWest regarding the December
31, 2001 non-compliance, however the Company does not expect to be in compliance
with the same quarterly covenant at March 31, 2002. As a result, the balance of
the mortgage has been classified as a current liability as of December 31, 2001.
NatWest has the option to demand payment of the outstanding balance upon a
covenant default. The Company believes it has adequate financing available and
can obtain alternative financing to repay the loan if NatWest were to demand
immediate repayment.
The following table describes the Company's commitments to settle
contractual obligations in cash as of December 31, 2001 (in thousands):
Payments Due By Period
-------------------------------------------------------------------------------
2-3 4-5 After 5
Contractual Obligations Up to 1 Year Years Years Years Total
- ---------------------------------------- ------------- ------------ ------------- ------------ -------------
Notes Payable (1) $15,003 $16,320 $22,660 $54,500 $108,483
Capital leases 1,230 1,076 162 7 2,475
------------- ------------ ------------- ------------ -------------
Subtotal debt obligations 16,233 17,396 22,822 54,507 110,958
Operating leases 7,610 8,995 5,091 14,652 36,348
------------- ------------ ------------- ------------ -------------
Total contractual cash obligations $23,843 $26,391 $27,913 $69,159 $147,306
============= ============ ============= ============ =============
(1) Notes payable primarily consist of the RSA facility and the
mortgage with NatWest.
Other contractual obligations of the Company include a $175 million
revolving line of credit with First Union National Bank, scheduled to mature May
13, 2003, a $60 million borrowing facility with Lombard NatWest Limited, which
continues indefinitely until terminated by either party and a $17.5 million
borrowing facility with Summit Business Capital Corporation maturing on April
30, 2003. Amounts outstanding at December 31, 2001 under these facilities were
$86.5 million, $31.0 million and $5.4 million, respectively.
The Company believes that its current cash and cash equivalents,
short-term investments, cash generated from operations and amounts available
under its existing credit facilities will be sufficient to meet its expected
working capital needs, capital expenditures, financial commitments and other
liquidity requirements associated with its existing operations through at least
the next 12 months.
20
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 141 ("SFAS 141"), Business Combinations,
and No. 142 ("SFAS 142"), Goodwill and Other Intangible Assets, collectively
referred to as the "Standards". SFAS 141 supersedes Accounting Principles Board
Opinion (APB) No. 16, Business Combinations. The provisions of SFAS 141 require
that the purchase method of accounting be used for all business combinations
initiated after June 30, 2001 and provide specific criteria for the initial
recognition and measurement of intangible assets apart from goodwill. SFAS 141
also requires that upon adoption of SFAS 142 the Company reclassify the carrying
amounts of certain intangible assets into or out of goodwill, based on certain
criteria. SFAS 142 supersedes APB 17, Intangible Assets, and is effective for
fiscal years beginning after December 15, 2001. SFAS 142 primarily addresses the
accounting for goodwill and intangible assets subsequent to their initial
recognition. The provisions of SFAS 142 prohibit the amortization of goodwill
and indefinite-lived intangible assets, require that goodwill and
indefinite-lived intangibles assets be tested annually for impairment (and in
interim periods if certain events occur indicating that the carrying value of
goodwill and/or indefinite-lived intangible assets may be impaired), require
that reporting units be identified for the purpose of assessing potential future
impairments of goodwill, and remove the forty-year limitation on the
amortization period of intangible assets that have finite lives.
The Company will adopt the provisions of SFAS 142 in its first quarter
ended March 31, 2002. The Company is in the process of preparing for its
adoption of SFAS 142 and is making the determinations as to what its reporting
units are and what amounts of goodwill, intangible assets, other assets, and
liabilities should be allocated to those reporting units. The Company expects
that it will no longer record $3.1 million of amortization per year relating to
its existing goodwill of $59.9 million. In preparation for the adoption of FAS
142, the Company is in the process of evaluating the useful lives of its
existing intangible assets and anticipates that any changes in the useful lives
will not have a material impact on the results of its operations.
SFAS 142 requires that goodwill be tested annually for impairment using
a two-step process. The first step is to identify a potential impairment and, in
transition, this step must be measured as of the beginning of the fiscal year.
However, a company has six months from the date of adoption to complete the
first step. The Company expects to complete that first step of the goodwill
impairment test during the second quarter of 2002. The second step of the
goodwill impairment test measures the amount of the impairment loss (measured as
of the beginning of the year of adoption), if any, and must be completed by the
end of the Company's fiscal year. Intangible assets deemed to have an indefinite
life will be tested for impairment using a one-step process which compares the
fair value to the carrying amount of the asset as of the beginning of the fiscal
year, and pursuant to the requirements of SFAS 142 will be completed during the
first quarter of 2002. Any impairment loss resulting from the transitional
impairment tests will be reflected as the cumulative effect of a change in
accounting principle in the first quarter 2002. The Company does not expect that
these impairment tests will result in a material impact on the Company's
earnings and financial position.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses significant
issues relating to the implementation of SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
and develops a single accounting method under which long-lived assets that are
to be disposed of by sale are measured at the lower of book value or fair value
less cost to sell. Additionally, SFAS No. 144 expands the scope of discontinued
operations to include all components of an entity with operations that (1) can
be distinguished from the rest of the entity and (2) will be eliminated from the
ongoing operations of the entity in a disposal transaction. SFAS No. 144 is
effective for financial statements issued for fiscal years beginning after
December 15, 2001.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
21
The Company is subject to interest rate risk on its variable rate
credit facilities and could be subjected to increased interest payments if
market interest rates fluctuate. Average borrowings outstanding on the variable
rate credit facility with First Union National Bank were $80 million for the
year ended December 31, 2001 and average borrowings under Ideal's borrowing
facility with Lombard NatWest were $38 million for the year ended, 2001. The
First Union Facility and the NatWest Facility 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 the First Union Facility and the
NatWest Facility, an increase of 1% in such interest rate percentages would
increase the annual interest expense by approximately $1.2 million.
A substantial part of the Company's revenue and capital expenditures
are transacted in U.S. Dollars, but the functional currency for foreign
subsidiaries is not the U.S. dollar. As a result of the Company or its
subsidiaries entering into transactions denominated in currencies other than
their functional currency, the Company recognized a foreign currency
remeasurement loss of $140,000 during the year ended December 31, 2001. The
Company enters into foreign forward exchange contracts to hedge certain balance
sheet exposures against future movements in foreign exchange rates. The 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. To the extent the Company is unable to manage these risks,
the Company's results and financial position could be materially adversely
affected.
22
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Form 10-K
Index to Consolidated Financial Statements Page Number
- ------------------------------------------ -----------
Report of Independent Accountants 24
Consolidated Balance Sheets at December 31, 2001 and 2000 25
Consolidated Statements of Income for the years ended
December 31, 2001, 2000 and 1999 26
Consolidated Statements of Shareholders' Equity for the years
ended December 31, 2001, 2000 and 1999 27
Consolidated Statements of Cash Flows for the years ended
December 31, 2001, 2000 and 1999 28
Notes to Consolidated Financial Statements 29
23
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Bell Microproducts Inc. and Subsidiaries
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) on page 48 present fairly, in all material
respects, the financial position of Bell Microproducts Inc. and its subsidiaries
at December 31, 2000 and 2001, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 2001 in
conformity with accounting principles generally accepted in the United States of
America. In addition, in our opinion, the financial statement schedule listed in
the index appearing under Item 14(a)(2) on page 48 presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements. These financial statements
and financial statement schedule are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits. We conducted
our audits of these statements in accordance with auditing standards generally
accepted in the United States of America, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
San Jose, California
February 13, 2002, except as to Note 13 which is as of March 29, 2002
24
BELL MICROPRODUCTS INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
December 31,
----------------------
2001 2000
-------- --------
ASSETS
Current assets:
Cash $ 1,308 $ 7,465
Accounts receivable, net 299,108 295,572
Inventories 195,791 246,671
Prepaid expenses and other current assets 29,234 11,906
-------- --------
Total current assets 525,441 561,614
Property and equipment, net 50,706 44,436
Goodwill and other intangibles, net 59,909 46,439
Deferred debt issuance costs and other assets 7,631 8,718
-------- --------
Total assets $643,687 $661,207
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $231,715 $231,132
Borrowings under lines of credit 37,266 52,633
Short-term note payable and current portion of long-term 23,431 90,500
notes payable
Other accrued liabilities 49,065 50,539
-------- --------
Total current liabilities 341,477 424,804
Borrowings under lines of credit 86,650 249
Long-term notes payable 85,052 101,640
Other long-term liabilities 4,739 4,982
-------- --------
Total liabilities 517,918 531,675
-------- --------
Commitments and contingencies (Note 9)
Shareholders' equity:
Preferred Stock, $0.01 par value, 10,000 shares authorized;
none issued and outstanding -- --
Common Stock, $0.01 par value, 40,000 shares authorized; 17,578 and
15,793 shares issued and outstanding 94,553 75,154
Retained earnings 32,365 54,472
Accumulated other comprehensive income (1,149) (94)
-------- --------
Total shareholders' equity 125,769 129,532
-------- --------
Total liabilities and shareholders' equity $643,687 $661,207
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
25
BELL MICROPRODUCTS INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Year Ended December 31,
---------------------------------------
2001 2000 1999
---------- ---------- ----------
Net sales $2,007,102 $1,804,102 $1,058,275
Cost of sales 1,854,294 1,638,802 967,491
---------- ---------- ----------
Gross profit 152,808 165,300 90,784
Selling, general and administrative expenses 157,910 121,088 69,507
Restructuring and special charges 8,894 -- --
---------- ---------- ----------
Total operating expenses 166,804 121,088 69,507
Operating income (loss) from continuing operations (13,996) 44,212 21,277
Interest expense and other income 20,362 14,495 5,766
---------- ---------- ----------
Income (loss) from continuing operations before income taxes (34,358) 29,717 15,511
Provision for (benefit from) income taxes (12,251) 12,480 6,581
---------- ---------- ----------
Income (loss) from continuing operations (22,107) 17,237 8,930
Discontinued operations:
Loss from operations, net of tax
benefit of $2,132 -- -- (2,946)
benefit
Gain on sale, net of tax of $763 -- -- 1,054
---------- ---------- ----------
Discontinued operations, net -- -- (1,892)
---------- ---------- ----------
Net income (loss) $ (22,107) $ 17,237 $ 7,038
========== ========== ==========
Earnings (loss) per share (Note 2)
Basic
Continuing operations $ (1.34) $ 1.17 $ 0.66
Discontinued operations -- -- (0.14)
---------- ---------- ----------
Total $ (1.34) $ 1.17 $ 0.52
========== ========== ==========
Earnings (loss) per share
Diluted
Continuing operations $ (1.34) $ 1.05 $ 0.65
Discontinued operations -- -- (0.14)
---------- ---------- ----------
Total $ (1.34) $ 1.05 $ 0.51
========== ========== ==========
Shares used in per share calculation (Note 2)
Basic 16,495 14,673 13,563
========== ========== ==========
Diluted 16,495 16,415 13,685
========== ========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
26
BELL MICROPRODUCTS INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
Comprehensive Income
Common Stock --------------------
----------------- Retained
Shares Amount Earnings Other Total
------ ------- --------- ------- --------
Balance at December 31, 1998 13,371 $56,181 $ 30,247 $ 48 $ 86,476
Exercise of stock options, including
related tax benefit of $72 353 1,743 -- -- 1,743
Issuance of Common Stock under Stock
Purchase Plan 153 603 -- -- 603
Foreign currency translation -- -- -- 413 413
Net income -- -- 7,038 - 7,038
------ ------- -------- ------- --------
Balance at December 31, 1999 13,877 58,527 37,285 461 96,273
Exercise of stock options, including
related tax benefit of $1,933 622 5,242 -- -- 5,242
Issuance of Common Stock under Stock
Purchase Plan 278 1,421 -- -- 1,421
Stock split -- 50 (50) -- --
Issuance of Common Stock for
acquisition of Rorke Data (Note 3) 269 2,508 -- -- 2,508
Issuance of warrant to RSA 747 7,406 -- -- 7,406
Foreign currency translation -- -- -- (555) (555)
Net income -- -- 17,237 - 17,237
------ ------- -------- ------- --------
Balance at December 31, 2000 15,793 75,154 54,472 (94) 129,532
Exercise of stock options, including
related tax benefit of $1,270 446 3,947 -- -- 3,947
Issuance of Common Stock under Stock
Purchase Plan 319 2,175 -- -- 2,175
Issuance of Common Stock for
business acquisitions (Note 3) 1,020 13,277 -- -- 13,277
Foreign currency translation -- -- -- (1,055) (1,055)
Net loss -- -- (22,107) -- (22,107)
------ ------- -------- ------- --------
Balance at December 31, 2001 17,578 $94,553 $32,365 $(1,149) $125,769
====== ======= ======== ======= ========
The accompanying notes are an integral part of these consolidated financial
statements.
27
BELL MICROPRODUCTS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(INCREASE (DECREASE) IN CASH, IN THOUSANDS)
Year Ended December 31,
------------------------------------
2001 2000 1999
-------- -------- --------
Cash flows from operating activities:
Income (loss) from continuing activities $(22,107) $ 17,237 $ 8,930
Adjustments to reconcile net income/(loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 10,323 5,510 2,254
Provision for doubtful accounts 11,569 9,958 6,896
Deferred income taxes (3,976) (2,836) (148)
Tax benefit from stock options 1,270 1,933 72
Changes in assets and liabilities:
Accounts receivable 8,375 (16,550) (56,568)
Inventories 66,324 (38,451) (48,679)
Prepaid expenses (11,298) (3,091) 2,721
Other assets 1,133 (1) 226
Accounts payable (17,234) (16,085) 50,641
Other accrued liabilities (7,614) 7,366 1,175
-------- -------- --------
Net cash provided by (used in) continuing operating
activities 36,765 (35,010) (32,480)
Net cash used in discontinued operations -- -- (4,745)
-------- -------- --------
Net cash provided by (used in) operating activities 36,765 (35,010) (37,225)
Cash flows from investing activities:
Acquisition of property and equipment, net (12,542) (33,826) (4,412)
Acquisitions of businesses (Note 3) (10,793) (30,347) (2,808)
Proceeds from sale of business (Note 3) -- -- 34,665
-------- -------- --------
Net cash (used in) provided by investing activities (23,335) (64,173) 27,445
Cash flows from financing activities:
Net borrowings (repayments) under line of credit agreements 61,404 (95,652) 8,200
(Repayments) proceeds from long-term notes payable to RSA (7,000) 100,000 --
(Repayments) proceeds from short-term notes payable to RSA (80,000) 80,000 --
Net borrowings on other notes payable and long-term
liabilities 1,144 12,889 5
Proceeds from issuance of Common Stock 4,852 4,730 2,274
-------- -------- --------
Net cash (used in) provided by financing activities (19,600) 101,967 10,479
Effect of exchange rate changes on cash 13 (422) 322
-------- -------- --------
Net (decrease) increase in cash (6,157) 2,362 1,021
Cash at beginning of year 7,465 5,103 4,082
-------- -------- --------
Cash at end of year $ 1,308 $ 7,465 $ 5,103
======== ======== ========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 24,346 $ 10,817 $ 7,523
Income taxes $ 2,447 $ 12,106 $ 5,606
Supplemental non-cash financing activities:
Common Stock issued for acquisition (Note 3) $ 13,277 $ 2,508 $ --
Stock warrant issued for subordinated debt (Note 5) $ -- $ 7,406 $ --
Liabilities assumed on acquisition of business (Note 3) $ -- $ 7,500 $ --
Effect of stock split (Note 2) $ -- $ 50 $ --
The accompanying notes are an integral part of these consolidated financial
statements.
28
BELL MICROPRODUCTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - THE COMPANY:
The Company operates in one business segment, as a value-added
distributor of storage products and systems, computer products and
semiconductors and peripherals to original equipment manufacturers (OEMs),
value-added resellers (VARs) and dealers in the United States, Europe, Canada
and Latin America. Semiconductor products include memory, logic, microprocessor,
peripheral and specialty components. Computer products include disk, tape and
optical drives and subsystems, drive controllers, computers and board-level
products. The Company also provides a variety of value-added services to its
customers, including subsystem testing, software loading, mass storage and
computer systems integration, disk drive formatting and testing, and the
packaging of electronic component kits to customer specifications.
The Company incurred a net loss in 2001. This 2001 loss is related to
declining product gross margins, discontinuation of certain product lines,
abandonment of certain computer software, and additional bad debt provision
offset by revenue increases. These increases were primarily the result of the
Company's acquisitions in 2000 and 2001.
The Company was in violation of a foreign mortgage loan covenant, as
discussed in Note 5. This violation relates to a single financial ratio
covenant, an interest coverage ratio, related to a building mortgage with
Lombard Nat West Limited (NatWest), a U.K. bank. The balance of the debt
outstanding at December 31, 2001 was approximately $11.8 million. Upon default,
NatWest has the option to demand full and immediate payment of the debt. As of
December 31, 2001, NatWest has made no demand for repayment and a waiver of the
covenant violation at December 31, 2001 was received. The Company expects that
it will not be in compliance with the financial ratio covenant at March 31, 2002
and has reclassified the balance as current in the December 31, 2001 financial
statements.
The Company has a second agreement with NatWest that allows borrowings
on certain foreign accounts receivables. The balance of borrowings under this
agreement at December 31, 2001 was $31 million. The two agreements with NatWest
have no cross default provisions.
As is more fully discussed in Note 5, the Company has an additional
$175 million line of credit facility with a group of lenders. The Company had
approximately $40 million in unused borrowing capacity at December 31, 2001
related to this facility. This facility is limited to use for operations within
the U.S. and the funds can be used outside the U.S if permission is received by
the Company from the lenders.
In March 2002 the Company received proceeds in the amount of $16.5
million from the sale of common stock.
In opinion of management, the Company has sufficient alternative
funding available if the lender of the $11.8 million were to demand repayment.
Alternative funding includes use of the U.S. facility, proceeds from the sale of
common stock, and refinancing the existing debt with a new lender. There can be
no assurance that the Company can receive permission to use proceeds from the
U.S. facility for repayment, that the Company will be successful in refinancing
the debt or that the refinancing will be available with terms acceptable to the
Company.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION AND BASIS OF PREPARATION
The consolidated financial statements include the accounts of the
parent company and its wholly owned
29
subsidiaries. All material intercompany transactions and balances have been
eliminated on consolidation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION
Revenue is recognized when title transfers to the customer and when the
rights and risks of ownership have passed to the customer, when persuasive
evidence of an arrangement exists, the price is fixed and determinable and
collection of the resulting receivable is reasonably assured. Transactions with
sale terms of FOB shipping point are recognized when the products are shipped
and transactions with sale terms of FOB destination are recognized upon arrival.
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.
CONCENTRATION OF CREDIT AND OTHER RISKS
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of accounts receivable. The
Company performs ongoing credit evaluations of its customers and generally does
not require collateral. The Company maintains reserves for estimated collection
losses. No customer accounts for more than 10% of sales in any of the three
years ended December 31, 2001, 2000 and 1999, or accounts receivable at December
31, 2001 and 2000.
Four vendors accounted for 51% of the Company's inventory purchases
during 2001. Four vendors accounted for 39% of the Company's inventory purchases
during 2000. Three vendors accounted for 55% of the Company's inventory
purchases during 1999.
INVENTORIES
Inventories are stated at the lower of cost or market, cost being
determined by the first-in, first-out (FIFO) method. Market is based on
estimated net realizable value.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is computed
using the straight-line method based upon the estimated useful lives of computer
and other equipment, furniture and fixtures and warehouse equipment which range
from three to five years. Depreciation of buildings is based upon the estimated
useful lives of 50 years. Amortization of leasehold improvements is computed
using the straight-line method over the shorter of the estimated life of the
asset or the lease term.
INTANGIBLES
Intangible assets, including goodwill, purchased technology and other
intangible assets, are carried at cost less accumulated amortization. The
Company amortizes goodwill and other identifiable intangibles on a straight-line
basis over their estimated useful lives.
IMPAIRMENT OF INTANGIBLES AND LONG-LIVED ASSETS
The Company assesses the impairment of identifiable intangibles,
goodwill and fixed assets whenever events or changes in circumstances indicate
that the carrying value may not be recoverable. Factors considered important
which could trigger an impairment review include, but are not limited to,
significant underperformance relative to expected historical or projected future
operating results, significant changes in the manner of use of the acquired
assets or the strategy for the Company's overall business, significant negative
industry or economic trends, significant decline in the Company's stock price
for a sustained period, and the Company's market capitalization relative to net
book value. When the Company determines that the carrying value of long-lived
assets may not be recoverable based upon the existence of one or more of the
above indicators of impairment, the Company measures any impairment based on a
projected discounted cash flow method using a discount rate commensurate with
the risk inherent in the Company's current business model.
30
INCOME TAXES
The Company accounts for income taxes in accordance with the liability
method of accounting for income taxes. Under the liability method, deferred
assets and liabilities are recognized based upon anticipated future tax
consequences attributable to differences between financial statement carrying
amounts of assets and liabilities and their respective tax bases. The provision
for income taxes is comprised of the current tax liability and the change in
deferred tax assets and liabilities. The Company establishes a valuation
allowance to the extent that it is more likely than not that deferred tax assets
will not be recoverable against future taxable income.
EARNINGS PER SHARE
Basic EPS is computed by dividing net income available to common
shareholders (numerator) by the weighted average number of common shares
outstanding (denominator) during the period. Diluted EPS gives effect to all
dilutive potential common shares outstanding during the period including stock
options, using the treasury stock method. In computing diluted EPS, the average
stock price for the period is used in determining the number of shares assumed
to be purchased from the exercise of stock options.
Following is a reconciliation of the numerators and denominators of the Basic
and Diluted EPS computations for the periods presented below (in thousands,
except per share data):
Year Ended December 31,
------------------------------------------------------------
2001 2000 1999
---------------- ---------------- ----------------
Net income (loss) $ (22,107) $ 17,237 $ 7,038
================ ================ ================
Weighted average common shares outstanding (basic) 16,495 14,673 13,563
Effect of dilutive warrant and options - 1,742 122
---------------- ---------------- ----------------
Weighted average common shares outstanding (diluted) 16,495 16,415 13,685
================ ================ ================
Earnings (loss) per share:
Basic $ (1.34) $ 1.17 $ 0.52
================ ================ ================
Diluted $ (1.34) $ 1.05 $ 0.51
================ ================ ================
On July 31, 2000 the Company declared a 3-for-2 split of its Common
Stock. The stock split was in the form of a 50% Common Stock dividend payable at
the close of business on August 31, 2000 to shareholders of record on August 11,
2000. All references in the accompanying financial statements to earnings per
share, the number of common shares, warrants and options have been retroactively
restated to reflect the common stock split.
At December 31, 2001, 2000 and 1999, 1.7 million, 0.3 million and 1.6
million options to purchase common stock, respectively, were excluded from the
calculation of diluted EPS since the effect was anti-dilutive.
FOREIGN CURRENCY TRANSLATION AND TRANSACTIONS
The financial statements of the Company's foreign subsidiaries are
measured using the local currency as the functional currency. Assets and
liabilities of these subsidiaries are translated at the rates of exchange at the
balance sheet date. Income and expense items are translated at average quarterly
rates of exchange prevailing during the year. The resulting translation
adjustments are included in accumulated other comprehensive income as a separate
component of stockholders' equity. Gains and losses from foreign currency
transactions are included in the statement of income.
COMPREHENSIVE INCOME
Comprehensive income is defined as the change in equity of a business
enterprise during a period from transactions and other events and circumstances
from non-owner sources. For the Company, comprehensive income consists of its
reported net income or loss and the change in the foreign currency translation
adjustment during a period.
31
STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation using the intrinsic
value method prescribed in Accounting Principles Board Opinion (APB) No. 25,
"Accounting for Stock Issued to Employees." The Company's policy is to grant
options with an exercise price equal to the quoted market price of the Company's
stock on the date of the grant. Accordingly, no compensation cost has been
recognized in the Company's Statements of Income. The Company provides
additional proforma disclosures as required under Statement of Financial
Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based
Compensation."
SEGMENT REPORTING
Financial Accounting Standards Board Statement No.131, "Disclosure
about Segments of an Enterprise and Related Information" ("SFAS 131") requires
that companies report separately in the financial statements certain financial
and descriptive information about operating segments' profit or loss, certain
specific revenue and expense items and segment assets. Additionally, companies
are required to report information about the revenues derived from their
products and service groups, about geographic areas in which the Company earns
revenues and holds assets, and about major customers (see Note 12).
DERIVATIVE FINANCIAL INSTRUMENTS
Effective January 1, 2001, the Company adopted Statement of Financial
Accounting Standards No. 133 (SFAS 133), "Accounting for Derivative Instruments
and Hedging Activities," as amended by SFAS 137 and SFAS 138. SFAS 133
establishes new standards of accounting and reporting for derivative instruments
and hedging activities, and requires that all derivatives, including foreign
currency exchange contracts, be recognized on the balance sheet at fair value.
Changes in the fair value of derivatives that do not qualify for hedge
treatment, as well as the ineffective portion of any hedges, must be recognized
currently in earnings. All of the Company's derivative financial instruments are
recorded at their fair value in other current assets or accounts payable and
accrued expenses. The transition adjustment upon adoption of SFAS 133 was not
material.
The Company generates a substantial portion of its revenues in
international markets, which subjects its operations and cash flows to the
exposure of currency exchange fluctuations. The Company seeks to minimize the
risk associated with currency exchange fluctuations by entering into forward
exchange contracts to hedge certain foreign currency denominated assets or
liabilities. These derivatives do not qualify for SFAS 133 hedge accounting
treatment. Accordingly, changes in the fair value of these hedges are recorded
immediately in earnings to offset the changes in the fair value of the assets or
liabilities being hedged.
RECENTLY ISSUED ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 141 ("SFAS 141"), Business Combinations,
and No. 142 ("SFAS 142"), Goodwill and Other Intangible Assets, collectively
referred to as the "Standards". SFAS 141 supersedes Accounting Principles Board
Opinion (APB) No. 16, Business Combinations. The provisions of SFAS 141 require
that the purchase method of accounting be used for all business combinations
initiated after June 30, 2001 and provide specific criteria for the initial
recognition and measurement of intangible assets apart from goodwill. SFAS 141
also requires that upon adoption of SFAS 142 the Company reclassify the carrying
amounts of certain intangible assets into or out of goodwill, based on certain
criteria. SFAS 142 supersedes APB 17, Intangible Assets, and is effective for
fiscal years beginning after December 15, 2001. SFAS 142 primarily addresses the
accounting for goodwill and intangible assets subsequent to their initial
recognition. The provisions of SFAS 142 prohibit the amortization of goodwill
and indefinite-lived intangible assets, require that goodwill and
indefinite-lived intangibles assets be tested annually for impairment (and in
interim periods if certain events occur indicating that the carrying value of
goodwill and/or indefinite-lived intangible assets may be impaired), require
that reporting units be identified for the purpose of assessing potential future
impairments of goodwill, and remove the forty-year limitation on the
amortization period of intangible assets that have finite lives.
The Company will adopt the provisions of SFAS 142 in its first quarter
ended March 31, 2002. The Company is in the process of preparing for its
adoption of SFAS 142 and is making the determinations as to what its reporting
units are and what amounts of goodwill, intangible assets, other assets, and
liabilities should be allocated to those reporting units. The
32
Company expects that it will no longer record $3.1 million of amortization per
year relating to its existing goodwill of $59.9 million. In preparation for the
adoption of FAS 142, the Company is in the process of evaluating the useful
lives of its existing intangible assets and anticipates that any changes in the
useful lives will not have a material impact on the results of its operations.
SFAS 142 requires that goodwill be tested annually for impairment using
a two-step process. The first step is to identify a potential impairment and, in
transition, this step must be measured as of the beginning of the fiscal year.
However, a company has six months from the date of adoption to complete the
first step. The Company expects to complete that first step of the goodwill
impairment test during the second quarter of 2002. The second step of the
goodwill impairment test measures the amount of the impairment loss (measured as
of the beginning of the year of adoption), if any, and must be completed by the
end of the Company's fiscal year. Intangible assets deemed to have an indefinite
life will be tested for impairment using a one-step process which compares the
fair value to the carrying amount of the asset as of the beginning of the fiscal
year, and pursuant to the requirements of SFAS 142 will be completed during the
first quarter of 2002. Any impairment loss resulting from the transitional
impairment tests will be reflected as the cumulative effect of a change in
accounting principle in the first quarter 2002. The Company does not expect that
these impairment tests will result in a material impact on the Company's
earnings and financial position.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses significant
issues relating to the implementation of SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
and develops a single accounting method under which long-lived assets that are
to be disposed of by sale are measured at the lower of book value or fair value
less cost to sell. Additionally, SFAS No. 144 expands the scope of discontinued
operations to include all components of an entity with operations that (1) can
be distinguished from the rest of the entity and (2) will be eliminated from the
ongoing operations of the entity in a disposal transaction. SFAS No. 144 is
effective for financial statements issued for fiscal years beginning after
December 15, 2001.
NOTE 3 - ACQUISITIONS AND DIVESTITURES:
All acquisitions below have been accounted for using the purchase
method. Accordingly, the results of operations of the acquired businesses are
included in the consolidated financial statements from the dates of acquisition.
Total Tec Systems, Inc. Acquisition
On November 13, 2001, the Company acquired all the capital stock of
Total Tec Systems Inc. ("Total Tec"), a privately held company headquartered in
Edison, New Jersey, with offices in the eastern and southern United States.
Total Tec is an enterprise computing and storage solutions provider focused on
providing comprehensive IT solutions to address key business data concerns
including availability, reliability, performance, scalability and manageability.
Total Tec was acquired for a total purchase price of approximately
$14.2 million which included cash of approximately $9 million, the issuance of
400,000 shares of the Company's Common Stock that include a certain share price
guarantee and acquisition costs. The purchase price was allocated to the
acquired assets and liabilities assumed, based upon management's estimate of
their fair market values as of the acquisition date, as follows (in thousands):
Cash $ 3,014
Accounts receivable 16,229
Inventories 7,006
Equipment and other assets 2,841
Goodwill 3,124
Other intangibles 2,500
Accounts payable (7,100)
Other accrued liabilities (3,792)
Notes payable (9,630)
---------
Total consideration $ 14,192
=========
Other intangibles include trade name, a non-compete agreement and
supplier relationships.
33
Results of operations of Total Tec were not material to the Company.
Touch The Progress Group BV Acquisition
On May 22, 2001, the Company acquired all the capital stock of Touch
The Progress Group BV ("TTPG"), a privately held company headquartered in the
Netherlands, with offices in Belgium, Germany and Austria. TTPG designs,
manufactures, markets and supports high performance and tailor made storage
solutions critical to success in high availability, mid-range and high-end
enterprise computing environments.
TTPG was acquired for a total purchase price of approximately $10.7
million which included cash of $2.5 million, the issuance of 560,000 shares of
the Company's Common Stock that include a certain share price guarantee and
acquisition costs. Management has finalized the valuation of assets acquired and
liabilities assumed. The allocation of the purchase price to the acquired assets
and assumed liabilities based on management's estimate of their fair market
values as of the acquisition date, are as follows (in thousands):
Accounts receivable $ 6,182
Inventories 7,397
Equipment and other assets 661
Goodwill 9,293
Accounts payable (9,915)
Other accrued liabilities (1,928)
Notes payable (998)
---------
Total consideration $ 10,692
=========
Results of operations of TTPG were not material to the Company.
Forefront Graphics Corporation Acquisition
On May 24, 2001, the Company acquired all the capital stock of
Forefront Graphics ("FFG"), a privately held company headquartered in Toronto,
Canada with offices in Ottawa, Montreal, Calgary and Vancouver. FFG is a
distributor of high performance computer graphics, digital audio and video,
storage and multimedia products to both the computer reseller and the video
production reseller marketplaces.
FFG was acquired for a total purchase price of approximately $2.2
million which included cash of $1.1 million, the issuance of 60,324 shares of
the Company's Common Stock and acquisition costs. The Company is obligated to
pay up to an additional $325,000 in cash within three years of the closing date
as a contingent incentive payment to be based upon earnings achieved during
certain periods, up to March 31, 2003. Management has finalized the valuation of
assets acquired and liabilities assumed. The purchase price was allocated to the
acquired assets and liabilities assumed, based upon management's estimate of
their fair market values as of the acquisition date, as follows (in thousands):
Accounts receivable $ 1,069
Inventories 1,033
Equipment and other assets 42
Goodwill 1,526
Accounts payable (775)
Other accrued liabilities (401)
Notes payable (294)
----------
Total consideration $ 2,200
==========
Results of operations of FFG were not material to the Company.
Ideal Hardware Limited Acquisition
On August 3, 2000, the Company acquired all the capital stock of Ideal
Hardware Limited ("Ideal"), a wholly
34
owned subsidiary of InterX plc. Ideal is a
United Kingdom-based, storage-centric distributor offering value-added programs
and services.
Ideal was acquired for a total purchase price of approximately $28.9
million which included cash paid of $19.9 million, UK tax liabilities assumed of
$4.5 million, deferred purchase price payable of $3.0 million and acquisition
costs of $1.5 million. The deferred purchase price was paid on March 31, 2001.
The purchase price was allocated to the acquired assets and liabilities assumed,
based upon management's estimate of their fair market values as of the
acquisition date, as follows (in thousands):
Accounts receivable $ 113,334
Inventories 42,882
Equipment and other assets 5,476
Goodwill and other intangibles 20,144
Accounts payable (96,084)
Bank borrowings (30,102)
Other accrued liabilities (23,390)
Deferred taxes (3,360)
------------
Total consideration $ 28,900
============
Rorke Data, Inc. Acquisition
On May 15, 2000, the Company acquired all of the outstanding capital
stock of Rorke Data, Inc. ("RDI"), a privately held company headquartered in
Minnesota, with subsidiaries in the Netherlands and Italy. RDI provides
leading-edge Fibre Channel and SAN storage solutions to vertical markets such as
digital audio/video, publishing, and medical imaging throughout the U.S. and
Europe.
RDI was acquired for a total purchase price of approximately $7.0
million, which included cash of $4.1 million, the issuance of 269,418 shares of
the Company's Common Stock and acquisition costs. The final allocation of the
purchase price to acquired assets and liabilities assumed, based upon
management's estimate of their fair market values as of the acquisition date, is
as follows (in thousands):
Cash $ 546
Accounts receivable 6,644
Inventories 8,390
Equipment and other assets 2,372
Goodwill 7,480
Accounts payable (7,253)
Other accrued liabilities (1,809)
Bank borrowings (7,832)
Notes payable (1,501)
-------------
Total consideration $ 7,037
=============
Results of operations of RDI were not material to the Company.
Future Tech International, Inc. Acquisition
On July 21, 1999, the Company acquired certain assets and assumed
certain liabilities of Future Tech International, Inc. ("FTI"), a privately held
company located in Miami which was in bankruptcy reorganization. FTI is a
leading value-added distributor of computer components to the markets of Latin
America and the Caribbean.
The FTI assets acquired were primarily accounts receivable, inventory
and fixed assets. As consideration for the assets purchased, the Company paid
$2.2 million in cash, including acquisition costs and assumed certain
liabilities, primarily trade accounts payable. The Company was obligated to pay
up to an additional $4.5 million in cash within 21 months of the closing date as
a contingent incentive payment to the bankruptcy estate based upon earnings
achieved up to the first anniversary of the acquisition. As the earnings level
was achieved in July 2000, the Company has recorded the $4.5
35
million contingent payment as an addition to goodwill.
The FTI purchase price was allocated to the acquired assets and
liabilities assumed, based upon management's estimate of their fair market
values as of the acquisition date, as follows (in thousands):
Restricted cash $ 23
Accounts receivable 12,576
Inventories 2,639
Equipment and other assets 3,947
Goodwill 8,727
Accounts payable (20,989)
Other accrued liabilities (4,704)
-------------
Total consideration $ 2,219
=============
The following unaudited pro forma combined summary of operations of the
Company give effect to the acquisitions of Ideal and FTI, as though these
acquisitions had occurred on January 1, 1999.
Year Ended December 31,
(unaudited, in thousands,
except earnings per share)
---------------------------------
2000 1999
-------------- ---------------
Net sales $2,167,295 $1,728,796
Net income $ 14,683 $ 9,110
Earnings per share
Basic $ 1.00 $ 0.64
Diluted $ 0.89 $ 0.63
Shares used in per share calculation
Basic 14,673 14,313
Diluted 16,415 14,435
Divestiture of Quadrus
On July 8, 1999, the Company completed the sale of its Contract
Manufacturing Division, Quadrus, for a total consideration of approximately
$34.7 million. The sale resulted in an after tax gain of $1.1 million or $0.08
per share. The results of Quadrus have been reported separately as discontinued
operations in the Consolidated Statements of Income.
36
NOTE 4 - BALANCE SHEET COMPONENTS:
December 31,
-------------------------------
2001 2000
------------- --------------
(in thousands)
Accounts receivable, net:
Accounts receivable $ 319,314 $ 312,403
Less: allowance for doubtful accounts and returns (20,206) (16,831)
------------- --------------
$ 299,108 $ 295,572
============= ==============
Property and equipment:
Computer and other equipment $ 23,563 $ 18,358
Land and buildings 21,055 20,986
Furniture and fixtures 9,505 7,422
Warehouse equipment 7,912 2,582
Leasehold improvements 2,351 1,747
------------- --------------
64,386 51,095
Less: accumulated depreciation (13,680) (6,659)
------------- --------------
$ 50,706 $ 44,436
============= ==============
Goodwill and other intangibles, net:
Goodwill $ 59,923 $ 45,702
Other intangibles 7,408 4,908
Less: accumulated amortization (7,422) (4,171)
------------- --------------
$ 59,909 $ 46,439
============= ==============
NOTE 5 - LINES OF CREDIT AND TERM LOAN:
On May 14, 2001, the Company entered into a syndicated Loan and
Security Agreement arranged by First Union National Bank ("First Union
Facility"), as principal agent, to provide a $175 million revolving line of
credit facility. The First Union Facility refinanced the Company's $50 million
credit facility with California Bank & Trust, scheduled to mature May 31, 2001,
and the $80 million short-term loan with the RSA, scheduled to mature June 30,
2001. The syndicate includes Bank of America N.A. and Congress Financial
Corporation (Western), as co-agents and other financial institutions, as
lenders. Borrowings under the line of credit bear interest at First Union
National Bank's prime rate plus a margin of 0.0% to 0.5%, based on borrowing
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 2.25% to 2.75%, based on borrowing
levels. The average interest rate on outstanding borrowings under the revolving
line of credit during the year ended December 31, 2001, was 6.3%, and the
balance outstanding at December 31, 2001 was $86.5 million. Obligations of the
Company under the revolving line of credit are secured by certain assets of the
Company and its North and South American 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 and investments. The
Company was in compliance with its bank covenants at December 31, 2001; however,
there can be no assurance that the Company will be in compliance with such
covenants in the future. If the Company does not remain in compliance with the
covenants, and is unable to obtain a waiver of noncompliance from its bank, the
Company's financial condition and results of operations would be materially
adversely affected.
On July 6, 2000, 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% and subsequently repaid in May 2001; and
$100 million bearing interest at 9.0%, payable in semi-annual principal
installments of
37
$3.5 million plus interest installments commencing December 31, 2000 and in
semi-annual principal installments of $8.5 million commencing December 31, 2007,
with a final maturity date of June 30, 2010. The RSA facility is secured by a
second lien on 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 Company
is in compliance with its subordinated debt financing covenants; however, there
can be no assurance that the Company will be in compliance with such covenants
in the future. If the Company does not remain in compliance with the covenants
in the Securities Purchase Agreement and is unable to obtain a waiver of
noncompliance from its subordinated lenders, the Company's financial condition
and results of operations would be materially adversely affected. The balance
outstanding at December 31, 2001 on this long term debt was $93 million, $10.5
million is payable in 2002, $7.0 million for each of the years 2003 through
2005, and $61.5 million thereafter.
On November 13, 2001, in connection with the acquisition of Total Tec,
the Company assumed a $17.5 million short-term borrowing facility with Summit
Business Capital Corporation ("SBCC"). This facility is secured by substantially
all of Total Tec's assets, bears interest at SBCC's base rate or LIBOR plus
2.25% and matures April 30, 2003. At December 31, 2001, approximately $5.4
million was outstanding under the SBCC borrowing facility. The acquisition of
Total Tec was funded through borrowings under the Company's revolving line of
credit.
On August 3, 2000, in connection with the acquisition of Ideal, the
Company assumed a $43 million borrowing facility with Lombard NatWest Limited,
which was increased to $60 million in October 2000. This facility is secured by
substantially all of Ideal's accounts receivable, bears interest at NatWest's
base rate plus 1.5% and continues indefinitely subject to termination by NatWest
or the Company with three months notice. There are no financial covenant
requirements. At December 31, 2001, approximately $31 million was outstanding
under the NatWest borrowing facility. The Company believes that if NatWest were
to terminate the facility, alternative financing could be obtained or additional
funds could be obtained under other existing lines to replace the funding
provided by NatWest. If the Company were not able to replace the facility, the
Company's liquidity and financial position may be adversely affected.
On October 16, 2000, the Company entered into a $13.3 million mortgage
agreement with Lombard NatWest Limited related to the acquisition of a building
for Ideal. The mortgage has a term of five years, bears interest at LIBOR plus
1.5% and is payable in quarterly installments of approximately $290,000, plus
interest, with a balloon payment of approximately $7.5 million due November
2005. The principal amount due in 2002 is $820,000 and amounts due in each of
the years 2003 through 2004 are $1,160,000 and $8,660,000 is due in 2005. The
Company has an interest rate swap agreement that effectively converts the
variable interest payable on the mortgage to a fixed rate of 7.42% until January
2003. The balance of the mortgage at December 31, 2001 was $11.8 million. The
Company was not in compliance with a financial ratio covenant related to this
facility at December 31, 2001. The Company did receive a waiver from NatWest
regarding the December 31, 2001 non-compliance, however the Company does not
expect to be in compliance with the same quarterly covenant at March 31, 2002.
As a result, the balance of the mortgage has been classified as a current
liability as of December 31, 2001. NatWest has the option to demand payment of
the outstanding balance upon a covenant default. The Company believes it has
adequate financing available and can obtain alternative financing to repay the
loan if NatWest were to demand immediate repayment.
NOTE 6 - RESTRUCTURING COSTS, SPECIAL CHARGES AND OTHER PROVISIONS:
In the second quarter of 2001, the Company implemented a plan to reduce
costs and improve operating efficiencies by discontinuing certain non-strategic
product lines. The Company accrued a restructuring charge of $1.5 million
consisting primarily of severance and benefits of $1.3 million and estimated
lease costs of $238,000 pertaining to future lease obligations for
non-cancelable lease payments for excess facilities.
In the third quarter of 2001, the Company took additional actions and
extended its cost reduction efforts in response to the continuing economic
slowdown. The Company accrued additional restructuring costs of $3.3 million
consisting primarily of the discontinuance and non-cash write-off of certain
fixed assets valued at $2.4 million and severance and benefits of $897,000
related to involuntary employee terminations. The Company also accrued other
special charges of $4.1 million for additional accounts receivable provisions.
38
In the second and third quarters of 2001, the Company also recorded a
provision for inventory of $17.8 million related to additional excess inventory.
The additional provision largely resulted from the decision to discontinue
certain product lines and the impact of current market conditions. The excess
inventory charge is included within the Statement of Income under the caption
Cost of Sales. At December 31, 2001, outstanding liabilities related to these
charges are summarized as follows (in thousands):
Restructuring Liabilities
Total Charge Cash Payments at December 31, 2001
------------------- -------------------- ------------------------------
Severance costs $2,199 $2,143 $56
Lease costs 238 139 99
------------------- -------------------- ------------------------------
Total $2,437 $2,282 $155
=================== ==================== ==============================
NOTE 7 - STOCK-BASED COMPENSATION PLANS:
STOCK OPTION PLANS
In May of 1998, the Company adopted the 1998 Stock Plan (the "Plan")
which replaced the 1988 Amended and Restated Incentive Stock Plan (the "1988
Plan") and the 1993 Director Stock Option Plan (the "Director Plan").
The Plan provides for the grant of stock options and stock purchase
rights to employees, directors and consultants of the Company at prices not less
than the fair value of the Company's Common Stock at the date of grant for
incentive stock options and prices not less than 85% of the fair value of the
Company's Common Stock for nonstatutory stock options and stock purchase rights.
Under the Plan, the Company has reserved for issuance a total of 3,639,327
shares of Common Stock plus 272,508 shares of Common Stock which were reserved
but unissued under the 1988 Plan and 52,500 shares of Common Stock which were
reserved but unissued under the Director Plan. The maximum aggregate number of
shares of Common Stock which may be optioned and sold under the Plan is
3,964,335 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 7,317,975 shares of Common Stock for
issuance under the aggregate of all stock option plans.
All stock options become exercisable over a vesting period as
determined by the Board of Directors and expire over terms not exceeding ten
years from the date of grant. If an optionee ceases to be employed by the
Company, the optionee may, within one month (or such other period of time, as
determined by the Board of Directors, but not exceeding three months) exercise
options to the extent vested.
As part of the Plan, the Board of Directors adopted a Management
Incentive Program (the "Program") for key employees. Under this Program, options
for 193,500 and 210,000 shares of Common Stock were granted in 2000 and 1999,
respectively. No options were granted in 2001. The Program provides for ten-year
option terms with vesting at the rate of one tenth per year, with potential for
accelerated vesting based upon attainment of certain performance objectives. The
options lapse ten years after the date of grant or such shorter period as may be
provided for in the stock option agreement.
Options granted under the Director Plan prior to May 1998 and
outstanding at December 31, 2001 total 112,500. Under the Director Plan, 112,500
options were granted in 1993 at an exercise price of $5.33 per share, and 30,000
options were granted in 1996 at an exercise price of $4.67 per share. In 1997,
30,000 options were granted at an exercise price of $8.42 per share. In 1998,
22,500 options were granted at an exercise price of $5.00 per share. On August
5, 1999, the Board of Directors approved the vesting in full of all options
currently held by the Directors and modified the Plan to immediately vest all
future Board of Directors options at the time they are granted.
In 2001 and 2000, the number of shares of Common Stock reserved under
the Plan were not sufficient to accommodate the Company's recent growth through
acquisitions and related key employee retention efforts. To induce certain key
employees to accept employment with the Company, the Company issued a total of
520,000 and 763,536 nonqualified stock options outside the provisions of the
Plan in 2001 and 2000 respectively, and 857,125 of these options were
outstanding at December 31, 2001, net of cancellations, and are included in the
table below.
39
The following table presents all stock option activity:
Options Outstanding
--------------------------------------
Options Weighted
Available for Average
Grant Shares Exercise Price
------------------ ---------------- -----------------
Balance at December 31, 1998 597,483 2,541,620 $ 5.49
Increase in options available for grant 534,854 - -
Options canceled 666,882 (666,882) $ 5.61
Canceled options not available for grant (612,357) - $ 5.58
Options granted (1,072,800) 1,072,800 $ 4.66
Options exercised - (352,331) $ 4.74
------------------ ---------------- -----------------
Balance at December 31, 1999 114,062 2,595,207 $ 5.50
================== ================ =================
Increase in options available for grant 1,754,474 - -
Options canceled 261,732 (482,250) $ 6.83
Canceled options not available for grant (67,500) - $ 5.67
Options granted (2,182,464) 2,946,000 $12.87
Options exercised - (621,840) $ 5.29
------------------ ---------------- -----------------
Balance at December 31, 2000 (119,696) 4,437,117 $10.11
================== ================ =================
Increase in options available for grant 600,000 - -
Options canceled 478,547 (652,535) $ 9.92
Canceled options not available for grant (10,875) - $ 4.59
Options granted (631,000) 1,151,000 $11.71
Options exercised - (446,029) $ 5.98
------------------ ---------------- -----------------
Balance at December 31, 2001 316,976 4,489,553 $10.96
================== ================ =================
At December 31, 2001, 1,317,963 options were exercisable under these
Plans. Upon the adoption of the 1998 Stock Plan, canceled options under the 1988
Plan are not available for future grants.
The following table summarizes information about stock options
outstanding for all plans at December 31, 2001:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------------------- ---------------------------------------
Number of
Options Weighted Number of
Outstanding Average Shares
As of Remaining Weighted Exercisable As Weighted
Range of Exercise December 31, Contractual Life Average of December 31, Average
Prices 2001 In Years Exercise Price 2001 Exercise Price
- ----------------------- --------------- ----------------- ---------------- ------------------- ----------------
$4.29-$4.83 729,548 3.53 $ 4.56 315,592 $ 4.52
$5.00-$7.25 868,130 2.96 6.20 504,045 6.02
$7.42-$9.37 819,750 4.82 8.64 80,378 8.66
$9.59-$13.81 934,750 3.99 12.10 180,064 12.12
$15.00-$21.00 768,875 3.73 17.21 145,384 16.01
$21.92-$24.13 365,500 3.79 24.08 91,750 24.08
$24.38-$24.38 3,000 3.83 24.38 750 24.38
--------------- -------------------
4,489,553 3.80 10.96 1,317,963 9.02
=============== ===================
40
EMPLOYEE STOCK PURCHASE PLAN
The Employee Stock Purchase Plan ("ESPP") provides for automatic annual
increases in the number of shares reserved for issuance on January 1 of each
year by a number of shares equal to the lesser of (i) 225,000 shares, (ii) 1.5%
of the outstanding shares on such date, or (iii) a lesser amount determined by
the Board of Directors, subject to adjustment upon changes in capitalization of
the Company.
The Company has reserved 1,578,498 shares of Common Stock for issuance
to all eligible employees under its ESPP. Sales made through this plan will be
at the lower of 85% of market price at the date of purchase or on the first day
of each six-month offering period in the prior two years. A total of 1,404,540
shares have been issued under this plan as of December 31, 2001.
FAIR VALUE DISCLOSURES
The Company applies APB Opinion 25 and related interpretations in
accounting for its plans. Accordingly, no compensation cost has been recognized
for its plans, all of which are fixed plans. To determine the additional pro
forma disclosures required by SFAS 123 for the stock option plans, the fair
value of each option grant used for calculating pro forma net income is
estimated on the date of grant using the Black-Scholes multiple option-pricing
model. The following weighted average assumptions were used for grants in 2001,
2000 and 1999, respectively, expected volatility of 73%, 68% and 35%; risk free
interest rate of 4.9%, 5.8% and 4.9% and expected lives of 3.50, 3.69 and 3.85
years. The Company has not paid dividends and assumed no dividend yield. The
weighted average fair value of those stock options granted in 2001, 2000 and
1999 was $5.47, $6.68 and $2.26 per option, respectively. The fair value of each
ESPP purchase right is estimated on the beginning of the offering period using
the Black-Scholes option-pricing model with substantially the same assumptions
as the option plans but expected lives of 0.5 years. The weighted average fair
value of those purchase rights granted in 2001, 2000 and 1999 was $4.22, $3.56
and $2.04 per right, respectively. Had compensation cost for the Company's two
stock-based compensation plans been determined based on the fair value at the
grant dates for awards in 2001, 2000 and 1999 under those plans consistent with
the provisions of SFAS 123, the Company's net income and earnings per share
would have been reduced as presented below (in thousands, except per share
data):
2001 2000 1999
----------------- ---------------- -----------------
Net income:
As reported $(22,107) $17,237 $8,930
Pro forma $(27,834) $14,603 $8,126
2001 2000 1999
----------------- ---------------- -----------------
Earnings per share:
As reported
Basic $ (1.34) $ 1.17 $ 0.66
Diluted $ (1.34) $ 1.05 $ 0.65
Pro forma
Basic $ (1.69) $ 1.00 $ 0.60
Diluted $ (1.69) $ 0.89 $ 0.60
Because additional stock options and stock purchase rights are expected
to be granted each year, the above pro forma disclosures are not considered by
management to be representative of pro forma effects on reported financial
results for future years.
41
NOTE 8 - INCOME TAXES:
The provision for/(benefit from) income taxes consists of the following
(in thousands):
2001 2000 1999
---------------- --------------- ------------------
Current:
Federal $(7,214) $10,904 $4,264
State 34 2,422 747
Foreign (1,095) 1,990 349
---------------- --------------- ------------------
(8,275) 15,316 5,360
Deferred:
Federal (2,046) (2,268) (697)
State (1,971) (510) 256
Foreign 41 (58) 293
---------------- --------------- ------------------
(3,976) (2,836) (148)
---------------- --------------- ------------------
$(12,251) $12,480 $5,212
================ =============== ==================
Deferred tax assets (liabilities) comprise the following (in
thousands):
2001 2000 1999
----------------- -------------- -----------------
Bad debt, sales and warranty reserves $ 4,689 $ 4,151 $ 1,914
Inventory and other reserves 5,676 2,342 1,860
Compensation accruals and reserves 224 305 228
State taxes, net of federal benefit 2 409 265
State net operating losses 982 - -
Other 755 688 322
----------------- -------------- -----------------
Gross deferred tax assets 12,328 7,895 4,589
----------------- -------------- -----------------
Unrealized foreign exchange gain (288) (275) (298)
Depreciation (684) (564) (71)
----------------- -------------- -----------------
Gross deferred tax liabilities (972) (839) (369)
----------------- -------------- -----------------
Net deferred tax asset $ 11,356 $ 7,056 $ 4,220
================= ============== =================
The net deferred tax asset represents temporary differences for future
tax deductions which can generally be realized by carryback to taxable income in
prior years. Net deferred tax assets are included in prepaid expenses and other
assets at December 31, 2001, 2000 and 1999.
As of December 31, 2001, the Company had state net operating loss
carryforwards of approximately $19,609,000 available to offset future state
taxable income. The state net operating loss carryforwards will expire in
varying amounts beginning 2006 through 2021
The tax benefit associated with dispositions from employee stock plans
for 2001 is approximately $1,270,000, which was recorded as an addition to
paid-in capital and a reduction to taxes payable.
A reconciliation of the Federal statutory tax rate to the effective tax
(benefit) follows:
2001 2000 1999
---------------- ------------ ------------
Federal statutory rate (35.0)% 35.0% 35.0%
State income taxes, net of Federal tax
benefit and credits (3.8)% 4.2% 4.6%
Foreign taxes, net of foreign tax credits (0.1)% 0.2% 0.5%
Other 3.2% 2.6% 2.3%
---------------- ------------ ------------
Total (35.7)% 42.0% 42.4%
================ ============ ============
42
NOTE 9 - COMMITMENTS AND CONTINGENCIES:
The Company leases its facilities under cancelable and non-cancelable
operating lease agreements. The leases expire at various times through 2019 and
contain renewal options. Certain of the leases require the Company to pay
property taxes, insurance, and maintenance costs.
The Company leases certain equipment under capitalized leases with such
equipment amounting to $3,609,000 less accumulated depreciation of $798,000 at
December 31, 2001. Amortization expense on assets subject to capitalized leases
was $678,000 for the year ended December 31, 2001. The capitalized lease terms
range from 33 months to 60 months.
The following is a summary of commitments under non-cancelable leases:
CAPITALIZED OPERATING LEASES
YEAR ENDING DECEMBER 31, LEASES
- ------------------------------------------------- ------------------- -------------------
(in thousands)
------------------------------------------
2002 $ 1,230 $ 7,610
2003 908 4,974
2004 168 4,021
2005 81 2,895
2006 81 2,196
2007 and beyond 7 14,652
------------------- -------------------
Total minimum lease payments 2,475 $ 36,348
===================
Less: imputed interest (323)
-------------------
Present value of minimum lease payments $ 2,152
===================
Total operating lease expense was $7,370,000, $4,718,000 and $2,797,000
for the years ended December 31, 2001, 2000 and 1999, respectively.
The Company is subject to legal proceedings and claims that arise in
the normal course of business. Management believes that the ultimate resolution
of such matters will not have a material adverse effect on the Company's
financial position or results of operations.
NOTE 10 - TRANSACTIONS WITH RELATED PARTIES:
A director of the Company, is a director of two of the Company's
customers/vendors, Company A and Company B. Another director of the Company, is
a director of one of the Company's vendors, Company C. A third director of the
Company, is a director one of the Company's customers, Company D. Sales to these
parties and purchases of inventory from these parties for the three years ended
December 31, 2001 and accounts receivable at December 31, 2001 and 2000 are
summarized below:
(In thousands)
-----------------------------------------------------
SALES: 2001 2000 1999
--------------- ---------------- ------------------
Company A $1,718 $3,345 $3,645
Company B - - 1,446
Company D 431 - -
ACCOUNTS RECEIVABLE:
Company A 127 355 -
Company D 21 - -
INVENTORY PURCHASED:
Company A - 199 1,150
Company C 111 364 -
43
The Company believes that terms of these transactions were no less
favorable than reasonably could be expected to be obtained from unaffiliated
parties.
NOTE 11 - SALARY SAVINGS PLAN:
The Company has a Section 401(k) Plan (the "Plan") which provides
participating employees an opportunity to accumulate funds for retirement and
hardship. Participants may contribute up to 15% of their eligible earnings to
the Plan. The Company may elect to make matching contributions equal to a
discretionary percentage of participants' contributions up to the statutory
maximum of participants' eligible earnings. The Company has not made any
contributions to the Plan.
NOTE 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 45%, 57% and 82% of total sales for the years
ended December 31, 2001, 2000 and 1999, respectively.
Geographic information consists of the following:
(in thousands)
------------------------------------------------------------------------
2001 2000 1999
--------------------- ---------------------- ---------------------
Net sales:
North America $ 998,347 $ 1,281,967 $ 996,424
Latin America 239,537 231,915 61,851
Europe 769,218 290,220 -
--------------------- ---------------------- ---------------------
Total $ 2,007,102 $ 1,804,102 $ 1,058,275
===================== ====================== =====================
The following table presents long-lived assets located in the Company's
country of domicile and located in all foreign countries.
December 31,
-----------------------------------------------
Long -lived assets: 2001 2000
---------------------- ---------------------
United States $ 51,982 $ 47,519
United Kingdom 53,231 49,758
Other foreign countries 13,033 2,316
---------------------- ---------------------
Total $ 118,246 $ 99,593
====================== =====================
NOTE 13 - SUBSEQUENT EVENTS:
In March 2002, the Company issued 1,500,000 shares of common stock and
750,000 warrants. The net proceeds from the stock and warrant offering were
approximately $16.5 million.
44
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED):
(in thousands, except per share amounts)
Quarter Ended
----------------------------------------------------------------------------------------------
Mar. 31, June 30, Sept. 30, Dec. 31, Mar. June 30, Sept. 30, Dec. 31,
2000 2000 2000 2000 31, 2001 2001 2001 2001
----------- ---------- ---------- ---------- --------- ---------- ---------- ----------
Net sales.................. $ 366,270 $ 382,407 $ 511,007 $ 544,418 $ 535,523 $ 455,686 $ 489,089 $ 526,804
Cost of sales.............. 337,012 347,258 463,115 491,417 490,101 422,826 459,808 481,559
--------- --------- --------- --------- --------- --------- --------- ---------
Gross profit............... 29,258 35,149 47,892 53,001 45,422 32,860 29,281 45,245
Operating expenses:
Selling, general
and administrative
expenses................... 21,355 25,472 34,760 39,501 39,626 39,018 39,077 40,189
Restructuring costs and
special charges............ -- -- -- -- -- 1,540 7,354 --
--------- --------- --------- --------- --------- --------- --------- ---------
Total operating expenses... 21,355 25,472 34,760 39,501 39,626 40,558 46,431 40,189
Income (loss) from
operations................. 7,903 9,677 13,132 13,500 5,796 (7,698) (17,150) 5,056
Interest expense and other
income..................... 2,369 2,826 4,831 4,469 5,579 5,098 4,874 4,811
--------- --------- --------- --------- --------- --------- --------- ---------
Income (loss) before income
taxes...................... 5,534 6,851 8,301 9,031 217 (12,796) (22,024) 245
Income tax provision
(benefit).................. 2,324 2,877 3,486 3,793 91 (5,123) (7,307) 88
--------- --------- --------- --------- --------- --------- --------- ---------
Net income (loss).......... $ 3,210 $ 3,974 $ 4,815 $ 5,238 $ 126 $ (7,673) $ (14,717) $ 157
========= ========= ========= ========= ========= ========= ========= =========
Earnings (loss) per share
Basic...................... $ 0.23 $ 0.28 $ 0.32 $ 0.34 $ 0.01 $ (0.47) $ (0.88) $ 0.01
Diluted.................... $ 0.21 $ 0.25 $ 0.28 $ 0.30 $ 0.01 $ (0.47) $ (0.88) $ 0.01
========= ========= ========= ========= ========= ========= ========= =========
Shares used in per share
calculation
Basic...................... 13,964 14,267 14,856 15,604 15,842 16,173 16,804 17,160
========= ========= ========= ========= ========= ========= ========= =========
Diluted.................... 14,981 15,752 17,275 17,652 17,417 16,173 16,804 18,041
========= ========= ========= ========= ========= ========= ========= =========
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
45
PART III
Pursuant to Paragraph G(3) of the General Instructions to Form 10-K,
portions of the information required by Part III of Form 10-K are incorporated
by reference from the Company's Proxy Statement to be filed with the Commission
in connection with the 2002 Annual Meeting of Shareholders (the "Proxy
Statement").
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Information concerning directors of the Company appears in
the Company's Proxy Statement, under Item 1 "Election of
Directors." This portion of the Proxy Statement is
incorporated herein by reference.
(b) EXECUTIVE OFFICERS OF THE REGISTRANT
The following table and descriptions identify and set forth
information regarding the Company's six executive officers:
Name Age Position
---- --- --------
W. Donald Bell....................... 64 President, Chief Executive Officer and Chairman of the Board
Benedictus Borsboom............... 43 Executive Vice President of Finance and Chief Financial Officer
Brian J. Clark......................... 48 Executive Vice President of Industrial Sales
Gary Gammon........................ 37 Senior Vice President of Commercial Sales
Philip M. Roussey.................... 59 Executive Vice President of Computer Products Marketing
Robert J. Sturgeon.................... 48 Vice President of Information Technology
W. Donald Bell has been President, Chief Executive Officer and
Chairman of the Board of the Company since its inception in 1987. Mr.
Bell has over thirty years of experience in the electronics industry.
Mr. Bell was formerly the President of Ducommun Inc. and its
subsidiary, Kierulff Electronics Inc., as well as Electronic Arrays
Inc. He has also held senior management positions at Texas Instruments
Incorporated, American Microsystems and other electronics companies.
Benedictus Borsboom was our Executive Vice President of
Finance and Mergers & Acquisitions from March 2001 until July 2001,
when he became Executive Vice President of Finance and Chief Financial
Officer. Prior to joining Bell Microproducts Inc. Mr. Borsboom was Vice
President, Group Chief Financial Officer and Board Director of VEBA
Electronics LLC. Before coming to the United States in 1998, he was
Director of Corporate Audit at Raab Karcher AG. He also held various
management positions with Deloitte & Touche and KPMG. Mr. Borsboom
holds a Masters Degree in economics, and the Dutch and German
equivalent of Chartered Accountant.
46
Brian J. Clark has been our Executive Vice President of
Industrial Sales since September 1997. Mr. Clark was the Vice President
of the Northern California Region of Arrow Electronics from January
1988 to June 1997. Mr. Clark also held senior management positions at
Kierulff Electronics and sales positions at Wyle Electronics prior to
that. Mr. Clark has over 28 years in the electronics business.
Gary Gammon has been our Senior Vice President of Commercial
Sales since June 1999. From 1994 to 1999, Mr. Gammon was Vice President
of Sales for Gates/Arrow Distributing, a distributor of computer
systems, peripherals and software. While at Gates/Arrow, Mr. Gammon
also served as Vice President for the enterprise computing business and
Vice President of technical sales. Prior to that time, Mr. Gammon was a
sales executive with Data General.
Philip M. Roussey was our Senior Vice President of Computer
Products Marketing from April 2000 until February 2002, at which time
he became Executive Vice President of our Enterprise Products Division.
Prior to that time, Mr. Roussey was Senior Vice President of Marketing
for Computer Products and Vice President of Marketing since inception
of our Company in 1987. Prior to joining Bell Microproducts, Mr.
Roussey was Corporate Vice President of Marketing of Kierulff
Electronics during 1987, and from 1982 to 1986, Mr. Roussey held the
position of Vice President of Computer Products at Kierulff
Electronics.
Robert J. Sturgeon has been our Vice President of Information
Technology since July 2000. Prior to that time, Mr. Sturgeon was our
Vice President of Operations since 1992. Mr. Sturgeon was formerly
Director of Information Services for Disney Home Video from January
1991 to February 1992. Prior to that time, Mr. Sturgeon served as
Management Information Services ("MIS") Director for Paramount
Pictures' Home Video Division from June 1989 to January 1991 and as a
Marketing Manager for MTI Systems, a division of Arrow Electronics
Inc., from January 1988 to June 1989. Other positions Mr. Sturgeon has
held include Executive Director of MIS for Ducommun where he was
responsible for 10 divisions, including Kierulff Electronics.
(c) Information concerning Compliance with Section 16(a) of the
Securities Exchange Act of 1934 appears in the Company's
Proxy Statement, under the heading "Compliance with Section
16(a) of the Securities Exchange Act of 1934," and is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information concerning executive compensation appears in the Company's
Proxy Statement, under the caption "Executive Compensation," and is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning the security ownership of certain beneficial
owners and management appears in the Company's Proxy Statement, under Item 1
"Election of Directors," and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and related transactions
appears in the Company's Proxy Statement, under Item 1 "Election of Directors,"
and is incorporated herein by reference.
47
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS OF FORM 8-K
(a) The following documents are filed as part of this Form 10-K:
(1) Consolidated Financial Statements
The financial statements (including the notes thereto) listed in the
Index to Consolidated Financial Statement Schedule (set forth in Item 8 of Part
II of this form 10-K) are filed as part of this Annual Report on Form 10-K.
(2) Consolidated Financial Statement Schedule
II - Valuation and Qualifying Accounts and Reserves page 50
Schedules not listed above have been omitted because they are not
required or the information required to be set forth therein is included in the
Consolidated Financial Statements or Notes to Consolidated Financial Statements.
(3) Exhibits - See Exhibit Index on page following signatures
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended December 31,
2001
(c) Exhibits. See Item 14(a) above.
(d) Financial Statements Schedules. See Item 14(a) above.
48
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized on March 29, 2001.
BELL MICROPRODUCTS INC.
By: /s/ Benedictus Borsboom
-------------------------------------------------
Benedictus Borsboom
Executive Vice President and Chief Financial Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints W. Donald Bell and Benedictus Borsboom
and each of them, jointly and severally, his attorneys-in-fact, each with full
power of substitution, for him in any and all capacities, to sign any and all
amendments to this Report on Form 10-K, and to file the same, with exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that each of said
attorneys-in-fact, or his substitute or substitutes, may do or cause to be done
by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report on Form 10-K has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the dates indicated:
SIGNATURE TITLE DATE
- ------------------------------- ---------------------------------------------------- --------------
/s/ W. Donald Bell Chairman of the Board, President and Chief Executive March 29, 2001
- ------------------------------- Officer (Principal Executive Officer)
(W. Donald Bell)
/s/ Benedictus Borsboom Executive Vice President and Chief Financial Officer March 29, 2001
------------------------------ (Principal Financial and Accounting Officer)
(Benedictus Borsboom)
/s/ Gordon A. Campbell Director March 29, 2001
- -------------------------------
(Gordon A. Campbell)
/s/ Eugene Chaiken Director March 29, 2001
- -------------------------------
(Eugene Chaiken)
/s/ Edward L. Gelbach Director March 29, 2001
- -------------------------------
(Edward L. Gelbach)
/s/ James E. Ousley Director March 29, 2001
- -------------------------------
(James E. Ousley)
/s/ Glenn E. Penisten Director March 29, 2001
- -------------------------------
(Glenn E. Penisten)
49
SCHEDULE II
BELL MICROPRODUCTS INC.
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
ALLOWANCE FOR DOUBTFUL ACCOUNTS
(IN THOUSANDS)
Additions
Balance at Restructuring Charged to Balance at
Beginning and Costs and Deductions- End of
Year Ended December 31, of Period Other(1) Special Charges Expenses Write-offs Period
- ----------------------------- ------------ ------------- ---------------- ------------- -------------- -----------
2001 $ 12,831 $1,630 $ 4,038 $ 11,569 $ (13,862) $ 16,206
2000 4,986 1,991 9,958 (4,104) 12,831
1999 3,486 - 6,896 (5,396) 4,986
(1) Balance consists of allowance for doubtful accounts related to the
acquisitions of subsidiaries
50
INDEX TO EXHIBITS
NUMBER DESCRIPTION OF DOCUMENT
- ------ -----------------------
3.1 Amended and Restated Articles of Incorporation of Registrant -
incorporated by reference to exhibit filed with the Registrant's
Report on Form 10-Q for the quarter ended September 30, 2000.
3.2 Amended and Restated Bylaws of Registrant - incorporated by reference
to exhibit filed with the Registrant's Registration Statement on Form
S-1 (File No. 33-60954) filed on April 14, 1993 and which became
effective on June 14, 1993.
4.1 Specimen Common Stock Certificate of the Registrant - incorporated by
reference to exhibit filed with the Registrant's Registration
Statement on Form S-1 (File No. 33-60954) filed on April 14, 1993 and
which became effective on June 14, 1993.
4.2 Amended and Restated Registration Rights Agreement dated June 11, 1992
between Registrant and certain investors named therein, as amended -
incorporated by reference to exhibit filed with the Registrant's
Report on Form 10-K for the fiscal year ended December 31, 1993.
10.1* 1998 Stock Plan - incorporated by reference to exhibit filed with the
Registrant's Report on Form S-8 (File No. 333-58053).
10.2* The form of Option Agreement used under the 1998 Stock Plan -
incorporated by reference to exhibit filed with the Registrant's
Report on Form S-8 (File No. 333-58053).
10.3 Employee Stock Purchase Plan, as amended through May 21, 1998 -
incorporated by reference to exhibit filed with the Registrant's
Report on Form S-8 (File No. 333-58053).
10.4 The form of Option Agreement used under the Employee Stock Purchase
Plan - incorporated by reference to exhibit filed with the
Registrant's Registration Statement on Form S-8 (File No. 33-83398).
10.5 Registrant's 401(k) Plan - incorporated by reference to exhibit filed
with the Registrant's Registration Statement on Form S-1 (File No.
33-60954).
10.6 Lease dated March 17, 1992 for Registrant's facilities at 1941
Ringwood Avenue; Suite 100, San Jose, California - incorporated by
reference to exhibit filed with the Registrant's Registration
Statement on Form S-1 (File No. 33-60954).
10.7 Second Amendment to Third Amended and Restated Credit Agreement dated
as of July 21, 1999 - incorporated by reference to exhibit filed with
the Registrant's Report on Form 10-Q for the quarter ended June 30,
1999.
10.8 Third Amended and Restated Credit Agreement dated as of November 12,
1998, conformed to include the First Amendment thereto, effective May
14, 1999 - incorporated by reference to exhibit filed with the
Registrant's Report on Form 10-Q for the quarter ended June 30, 1999.
10.9 Form of Indemnification Agreement - incorporated by reference to
exhibit filed with the Registrant's Registration Statement on Form S-1
(File No. 33-60954).
10.10 IBM Authorized Distributor Agreement dated May 17, 1993 between IBM
Corporation and Registrant - incorporated by reference to exhibit
filed with the Registrant's Registration Statement on Form S-1 (File
No. 33-60954).
10.11 Lease dated February 17, 1999 for Registrant's facilities at 4048
Castle Avenue, New
51
Castle, Delaware - incorporated by reference to exhibit filed with the
Registrant's Report on Form 10-Q for the quarter ended March 31, 1999.
10.12 Third Amendment and Restated Credit Agreement dated as of November 12,
1998 by and among the Registrant, the Banks named therein and
California Bank & Trust, as Agent for the Banks - incorporated by
reference to exhibit filed with the Registrant's Report on Form 8-K
filed on November 30, 1998, as amended on Form 8-K/A filed on December
11, 1998.
10.13 Asset Purchase Agreement dated as of November 5, 1998 by and between
the Company, Almo Corporation, Almo Distributing Pennsylvania, Inc.,
Almo Distributing Maryland, Inc., Almo Distributing Minnesota, Inc.,
Almo Distributing Wisconsin, Inc. and Almo Distributing, Inc. -
incorporated by reference to exhibit filed with the Registrant's
Report on Form 8-K filed on November 30, 1998, as amended on Form
8-K/A filed on December 11, 1998.
10.14 Fourth Amendment to Third Amended and Restated Credit Agreement dated
December 8, 1999 by and among the Registrant, the Banks named therein
and California Bank & Trust, as agent for the Banks - incorporated by
reference to exhibit filed with the Registrant's Report on Form 10-K
for the fiscal year ended December 31, 1999.
10.15 Fifth Amendment to Third Amended and Restated Credit Agreement dated
December 31, 1999 by and among the Registrant, the Banks named therein
and California Bank & Trust, as agent for the Banks - incorporated by
reference to exhibit filed with the Registrant's Report on Form 10-K
for the fiscal year ended December 31, 1999.
10.16 Lease dated August 1, 1999 for Registrant's facilities at 1941
Ringwood Avenue, Suite 200, San Jose, California - incorporated by
reference to exhibit filed with the Registrant's Report on Form 10-K
for the fiscal year ended December 31, 1999.
10.17 Asset Purchase Agreement between Bell Microproducts, Inc. and Pemstar
Inc. April 30, 1999 - incorporated by reference to exhibit filed with
the Registrant's Report on Form 8-K filed on June 23, 1999.
10.18 Amendment to Asset Purchase Agreement between Bell Microproducts, Inc.
and Pemstar Inc. June 4, 1999 - incorporated by reference to exhibit
filed with the Registrant's Report on Form 8-K filed on June 23, 1999.
10.19 Asset Purchase Agreement between Bell Microproducts - Future Tech,
Inc., Future Tech International, Inc., Bell Microproducts, and Leonard
Keller, dated May 14, 1999, as amended June 1, 1999 - incorporated by
reference to exhibit filed with the Registrant's Report on Form 8-K
filed on August 4, 1999.
10.20* Management Retention Agreements between the Registrant and the
following executive officers of the Registrant: W. Donald Bell and
Remo E. Canessa - incorporated by reference to exhibit filed with the
Registrant's Report on Form 10-Q for the quarter ended September 30,
1999.
10.21 Waiver and Third Amendment to Third Amended and Restated Credit
Agreement dated as of October 15, 1999 - incorporated by reference to
exhibit filed with the Registrant's Report on Form 10-Q for the
quarter ended September 30, 1999.
10.22 Distribution Agreement dated as of January 11, 2000 between the
Registrant and International Business Machines Corporation -
incorporated by reference to exhibit filed with the Registrant's form
10-Q/A for the quarter ended September 30, 1999.
10.23* Employment Agreement dated as of July 1, 1999 between the Registrant
and W. Donald Bell, the Registrant's Chief Executive Officer -
incorporated by reference to exhibit filed with the Registrant's
52
Report on Form 8-K filed on January 13, 2000.
10.24 Office and warehouse lease, dated March 21, 1991, as amended by
Amendment No. 1, Amendment No. 2, Amendment No. 3, Amendment No. 4 and
Amendment No. 5 relating to Rorke Data facilities in Eden Prairie,
Minnesota - incorporated by reference to exhibit filed with the
Registrant's Report on Form 10-Q for the quarter ended June 30, 2000.
10.25 Lease, dated June 16, 2000, relating to Bell Microproducts - Future
Tech facilities in Miami, Florida - incorporated by reference to
exhibit filed with the Registrant's Report on Form 10-Q for the
quarter ended June 30, 2000.
10.26* Management Retention Agreement dated March 20, 2000, between the
Company and Lawrence Leong - incorporated by reference to exhibit
filed with the Registrant's Report on Form 10-Q for the quarter ended
June 30, 2000.
10.27 Sixth Amendment to Third Amended and Restated Credit Agreement dated
May 15, 2000 by among the Registrant, the Banks named therein and
California Bank & Trust, as agent for the Banks - incorporated by
reference to exhibit filed with the Registrant's Report on Form 10-Q
for the quarter ended June 30, 2000.
10.28 Seventh Amendment to Third Amended and Restated Credit Agreement dated
June 22, 2000 by and among the Registrant, the Banks named therein and
California Bank & Trust, as Agent for the Banks - incorporated by
reference to exhibit filed with the Registrant's Report on Form 10-Q
for the quarter ended June 30, 2000.
10.29 Securities Purchase Agreement dated July 6, 2000 between the
Registrant and The Retirement Systems of Alabama - incorporated by
reference to exhibit filed with the Registrant's Report on Form 10-Q
for the quarter ended September 30, 2000.
10.30 Stock Purchase Agreement dated July 17, 2000 between the Registrant
and Interx Media PLC - incorporated by reference to exhibit filed with
the Registrant's Report on Form 10-Q for the quarter ended September
30, 2000.
10.31 Fourth Amended and Restated Credit Agreement dated as of October 10,
2000, among Bell Microproducts, the listed financial institutions and
California Bank & Trust, as agent - incorporated by reference to
exhibit filed with the Registrant's Report on Form 10-Q for the
quarter ended September 30, 2000.
10.32* Management Retention Agreements between the Registrant and the
following executive officers of the Registrant: Philip M. Roussey,
Brian J. Clark, Gary Gammon and Robert J. Sturgeon - incorporated by
reference to Exhibit 10.32 to the Registrant's Annual Report on Form
10K for the year ended December 31, 2000.
10.33* Employment Agreement dated as of October 18, 2000, between the
Registrant and James E. Ousley - incorporated by reference to Exhibit
10.33 to the Registrant's Annual Report on Form 10K for the year ended
December 31, 2000.
21.1 Subsidiaries of the Registrant
23.1 Consent of PricewaterhouseCoopers LLP, independent accountants
24.1 Power of Attorney (Contained on Signature page of this Form 10-K).
- -----------------
* Management contract or compensatory plan, contract or arrangement
required to be filed as an exhibit to this Form 10-K.
53