FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
(MARK ONE)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: MARCH 31, 2002
OR
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ____________
COMMISSION FILE NUMBER 0-21528
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BELL MICROPRODUCTS INC.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CALIFORNIA 94-3057566
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(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1941 RINGWOOD AVENUE, SAN JOSE, CALIFORNIA 95131-1721
- --------------------------------------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES ) (ZIP CODE )
(408) 451-9400
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(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE )
N/A
- --------------------------------------------------------------------------------
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST
REPORT.)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS.
YES |X| NO | |
COMMON STOCK, $.01 PAR VALUE -- NUMBER OF SHARES OUTSTANDING AT MAY 13, 2002:
19,316,820
1
BELL MICROPRODUCTS INC.
INDEX TO FORM 10-Q
Page
PART I - FINANCIAL INFORMATION Number
Item 1: Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets - March 31, 2002 and December
31, 2001 3
Condensed Consolidated Statements of Income - Three months ended
March 31, 2002 and 2001 4
Condensed Consolidated Statements of Cash Flows - Three months
ended March 31, 2002 and 2001 5
Notes to Condensed Consolidated Financial Statements 6
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 3: Quantitative and Qualitative Disclosure about Market Risk 15
PART II - OTHER INFORMATION
Item 2: Changes in Securities and Use of Proceeds 17
Item 6: Exhibits and Reports 17
Signatures 18
Exhibit Index 19
2
PART I - FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
BELL MICROPRODUCTS INC.
Condensed Consolidated Balance Sheets
(in thousands)
(unaudited)
March 31, December 31,
2002 2001
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 3,186 $ 1,308
Accounts receivable, net 313,464 299,108
Inventories 230,375 195,791
Prepaid expenses and other current assets 20,800 29,234
------------- -------------
Total current assets 567,825 525,441
Property and equipment, net 47,701 50,706
Goodwill 53,473 53,307
Intangibles 6,405 6,602
Deferred debt issuance costs and other assets 7,475 7,631
------------- -------------
Total assets $ 682,879 $ 643,687
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 253,149 $ 231,715
Borrowings under lines of credit 39,376 37,266
Short-term note payable and current portion
of long-term notes payable 28,600 23,431
Other accrued liabilities 43,624 49,065
------------- -------------
Total current liabilities 364,749 341,477
Borrowings under line of credit 88,379 86,650
Long-term notes payable 82,500 85,052
Other long-term liabilities 4,591 4,739
------------- -------------
Total liabilities 540,219 517,918
------------- -------------
Commitments and contingencies
Shareholders' equity:
Common Stock, $0.01 par value, 40,000 shares
authorized; 19,241 and 17,578 issued and outstanding 112,081 94,553
Retained earnings 32,749 32,365
Accumulated other comprehensive income (2,170) (1,149)
------------- -------------
Total shareholders' equity 142,660 125,769
-------------
Total liabilities and shareholders' equity $ 682,879 $ 643,687
============= =============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
BELL MICROPRODUCTS INC.
Condensed Consolidated Statements of Income
(in thousands, except per share data)
(unaudited)
-----------------------------
Three months ended March 31,
2002 2001
----------- -----------
Net sales $ 522,928 $ 535,523
Cost of sales 475,507 490,101
----------- -----------
Gross profit 47,421 45,422
Selling, general and administrative expenses 42,696 39,626
----------- -----------
Income from operations 4,725 5,796
Interest expense (4,063) (5,579)
----------- -----------
Income before income taxes 662 217
Provision for income taxes 278 91
----------- -----------
Net income $ 384 $ 126
=========== ===========
Earnings per share
Basic $ 0.02 $ 0.01
=========== ===========
Diluted $ 0.02 $ 0.01
=========== ===========
Shares used in per share calculation
Basic 18,099 15,842
=========== ===========
Diluted 19,160 17,417
=========== ===========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
BELL MICROPRODUCTS INC.
Condensed Consolidated Statements of Cash Flows
(Increase/(decrease) in cash, in thousands)
(unaudited)
Three months ended March 31,
-------------------------------
2002 2001
------------ ------------
Cash flows from operating activities:
Income from operations: $ 384 $ 126
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization 2,809 2,558
Provision for bad debts 3,369 2,277
Changes in assets and liabilities:
Accounts receivable (17,725) (6,359)
Inventories (34,584) 29,915
Prepaid expenses and deferred income taxes 8,433 197
Other assets 156 135
Accounts payable 21,434 (19,424)
Other accrued liabilities (5,441) (5,573)
------------ ------------
Net cash (used in) provided by operating activities (21,165) 3,852
------------ ------------
Cash flows from investing activities:
Acquisition of property, equipment and other, net (399) (3,903)
------------ ------------
Net cash used in investing activities (399) (3,903)
------------ ------------
Cash flows from financing activities:
Net borrowings under line of credit agreements 3,955 151
Repayment of long-term notes payable to RSA (3,500) (3,500)
Proceeds from issuance of Common Stock and warrants 17,528 507
Net borrowings on other long term liabilities 5,854 190
------------ ------------
Net cash provided by (used in) financing activities 23,837 (2,652)
------------ ------------
Effect of exchange rate changes on cash (395) 281
Net increase (decrease) in cash 1,878 (2,422)
Cash at beginning of period 1,308 7,465
------------ ------------
Cash at end of period $ 3,186 $ 5,043
============ ============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 7,099 $ 8,261
Income taxes $ (9,111) $ 2,275
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 1 - Basis of Presentation:
The consolidated financial statements presented in this Quarterly Report
are unaudited. It is management's opinion that all adjustments, consisting of
normal recurring items, have been included for a fair basis of statement. This
Quarterly Report on Form 10-Q should be read in conjunction with the Company's
2001 Annual Report on Form 10-K. The operating results for the period ended
March 31, 2002 are not necessarily indicative of the results that may be
expected for the fiscal year ending December 31, 2002. Prior year amounts have
been reclassified to conform with current presentation.
The Company operates in one business segment as a distributor of storage
products and systems as well as semiconductor and computer products and
peripherals to original equipment manufacturers (OEMs), value-added resellers
(VARs) and dealers in the United States, Canada, Europe and Latin America.
Computer products include disk, tape and optical drives and subsystems, drive
controllers, computers and board-level products. Semiconductor products include
memory, logic microprocessor, peripheral and specialty components. The Company
also provides a variety of value-added services to its customers, consisting of
computer storage solutions and services, including subsystem testing, software
loading, mass storage and computer systems integration, disk drive formatting
and testing, and the packaging of component kits to customer specifications.
Note 2 - Acquisitions:
The results of operations of the acquired businesses as described below
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, supplier relationships and a
non-compete agreement, with estimated useful lives for depreciation of 20 years,
ten years and three years, respectively.
Results of operations of Total Tec were not material to the Company.
6
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 $10.5
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. The purchase price was allocated to the acquired assets and
assumed liabilities based upon management's estimate of their fair market values
as of the acquisition date, 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 leading 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 $2.1 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. 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 and other intangibles 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.
Note 3 - Change in Accounting for Goodwill and Certain Other Intangibles:
In accordance with SFAS No. 142, goodwill amortization was discontinued as
of January 1, 2002. SFAS No. 142 prescribes a two-phase process for impairment
testing of goodwill. The first phase screens
7
for impairment; while the second phase (if necessary), measures the impairment.
The Company completed its first phase impairment analysis during the current
quarter and found no instances of impairment of its recorded goodwill;
accordingly, the second testing phase, absent future indicators of impairment,
is not necessary during 2002.
In accordance with SFAS No. 142, the effect of this accounting change is
reflected prospectively. Supplemental comparative disclosure as if the change
had been retroactively applied to the prior year period is as follows (in
thousands, except per share amounts):
Three Months Ended March 31,
-----------------------------
2002 2001
----------- -----------
Reported net income $ 384 $ 126
Add back: Goodwill amortization -- 362
----------- -----------
Adjusted net income $ 384 $ 488
=========== ===========
Basic earnings per share:
Reported net income per share $ 0.02 $ 0.01
Goodwill amortization -- 0.02
----------- -----------
Adjusted net income per share $ 0.02 $ 0.03
=========== ===========
Diluted earnings per share:
Reported net income per share $ 0.02 $ 0.01
Goodwill amortization -- 0.02
----------- -----------
Adjusted net income per share $ 0.02 $ 0.03
=========== ===========
The Company has acquired certain intangible assets through acquisitions.
The carrying values and accumulated amortization of these assets at March 31,
2002 are as follows (in thousands):
As of March 31, 2002
--------------------------------
Gross Carrying Accumulated
Amortized Intangible Assets Amount Amortization
-------------- --------------
Non-compete agreements $ 2,137 $ (811)
Trademark 3,770 (157)
Tradename 300 (4)
Supplier relationships 1,200 (30)
---------- ----------
Total $ 7,407 $ (1,002)
========== ==========
The expected amortization of these balances over the next five fiscal
years are as follows (in thousands):
Aggregate Amortization Expense
------------------------------------------------------
For year ended 12/31/01 $ 330
------------------------------------------------------
Estimated Amortization Expense
------------------------------------------------------
For year ended 12/31/02 $ 790
For year ended 12/31/03 $ 755
For year ended 12/31/04 $ 575
For year ended 12/31/05 $ 248
For year ended 12/31/06 $ 238
8
Note 4 - Earnings per Share:
Basic EPS is computed by dividing net income available to common
shareholders (numerator) by the weighted average number of common shares
outstanding (denominator) during the period. Diluted EPS gives effect to all
dilutive potential common shares outstanding during the period resulting from
stock options using the treasury stock method.
Following is a reconciliation of the numerators and denominators of the
Basic and Diluted EPS computations for the periods presented below (in
thousands):
Three Months Ended
March 31,
----------------------------
2002 2001
---------- ----------
Net income $ 384 $ 126
========== ==========
Weighted average common shares outstanding (Basic) 18,099 15,842
Effect of dilutive options and warrants 1,061 1,575
---------- ----------
Weighted average common share outstanding (Diluted) 19,160 17,417
========== ==========
Outstanding options to purchase 1,787,111 and 852,383 shares of Common
Stock were excluded from the computation of diluted net income per share for the
three months ended March 31, 2002, and March 31, 2001, respectively, because the
options' exercise prices were greater than the average market price of the
common shares.
Note 5 - Lines of Credit and Long Term Debt:
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 quarter
ended March 31, 2002, was 4.5%, and the balance outstanding at March 31, 2002
was $88.3 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 March 31, 2002; 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,
9
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 March 31, 2002 on this long-term debt was
$89.5 million.
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 March 31, 2002, approximately $2.9 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 March 31, 2002, approximately $35.9 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 exercised the option to purchase land and
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 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 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. At March
31, 2002, the balance outstanding was $11.3 million. The Company was not in
compliance with a financial ratio covenant related to this facility at March 31,
2002, however the Company has received a waiver from NatWest regarding this
non-compliance. The Company and NatWest are currently negotiating a covenant
base more favorable to the Company. The new covenant base will be periodically
reviewed. If the Company does not remain in compliance with the bank covenants
in future periods, and is unable to obtain a waiver of noncompliance, NatWest
has the option to demand full and immediate payment of the debt. The Company has
classified the outstanding balance as a current liability pending completion of
negotiations with its bank.
Note 6 - Common Stock:
In March 2002, the Company received proceeds of approximately $16.5
million from a private placement of 1,500,000 shares of Common Stock. The
Company also issued to the purchasers warrants to purchase an additional 750,000
shares of Common Stock at an exercise price of $11.00 per share. The Company
valued the warrants at $3,858,000 using the Black-Scholes option pricing model
applying an
10
expected life of 18 months, a risk free interest rate of 6.59% and a volatility
of 69%. The warrant was recorded as a component of equity.
Note 7 - Commitments and Contingencies:
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 8 - Comprehensive Income:
Comprehensive income is defined as the change in equity of a business
enterprise during a period from transactions and other events and circumstances
from non-owner sources, including foreign currency translation adjustments.
Comprehensive income (loss) is as follows (in thousands):
Three Months Ended
March 31,
-----------------------------
2002 2001
---------- ----------
Net income $ 384 $ 126
Other comprehensive loss:
Foreign currency translation adjustments (1,021) (1,352)
---------- ----------
Total comprehensive loss $ (637) $ (1,226)
========== ==========
Note 9 - Recently Issued Accounting Statements:
On July 20, 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 141, ("SFAS 141"), Business
Combinations, and Statement of Financial Accounting Standards No. 142, ("SFAS
142"), Goodwill and Other Intangible Assets. These statements made significant
changes to the accounting for business combinations, goodwill, and intangible
assets.
SFAS 141 established new standards for accounting and reporting
requirements for business combinations and requires that the purchase method of
accounting be used for all business combinations initiated after June 30, 2001.
SFAS 142 established new standards for goodwill acquired in a business
combination, eliminates amortization of goodwill and instead sets forth methods
to periodically evaluate goodwill for impairment. Intangible assets with a
determinable useful life will continue to be amortized over that period. The
Company adopted the provisions of SFAS 142 on January 1, 2002. As a result, the
Company has ceased amortization of $53.5 million in goodwill.
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.
11
Note 10 - Restructuring Costs:
In the second and third quarters of 2001, the Company accrued
restructuring costs of $4.8 million in response to the economic slowdown. These
costs consisted 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 estimated lease costs
of $238,000 pertaining to future lease obligations for non-cancelable lease
payments for excess facilities. At March 31, 2002, outstanding liabilities
related to these charges are summarized as follows (in thousands):
Restructuring
Liabilities
Total Charge Cash Payments at March 31, 2002
------------ ------------- -----------------
Severance costs $ 2,199 $ 2,159 $ 40
Lease costs 238 181 57
--------- --------- ---------
Total $ 2,437 $ 2,340 $ 97
========= ========= =========
Note 11 - 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 47% and 41% of total sales for the three months
ended March 31, 2002 and 2001, respectively.
(In thousands)
Three Months Ended March 31,
--------------------------------
Geographic information consists of the following: 2002 2001
------------ ------------
Net sales:
North America $ 270,497 $ 276,755
Latin America 52,808 68,684
Europe 199,623 190,084
------------ ------------
Total $ 522,928 $ 535,523
============ ============
March 31,
--------------------------------
Long-lived assets: 2002 2001
------------ ------------
United States $ 50,488 $ 49,792
United Kingdom 50,339 49,029
Other foreign countries 14,227 349
------------ ------------
Total $ 115,054 $ 99,170
============ ============
Note 12 - Derivative Financial Instruments:
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.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
Information in the following Management's Discussion and Analysis of
Financial Condition and Results of Operations and elsewhere in this quarterly
report contains forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
12
1934. Forward-looking statements provide current expectations or forecasts of
future events and can be identified by the use of terminology such as "believe,"
"estimate," "expect," "intend," "may'" "could'" "will," and similar words or
expressions. This forward-looking information generally relates to growth,
financial results, and financing and acquisition activities, among others.
Actual results could differ materially from those projected in the
forward-looking statements as a result of a number of factors, including but not
limited to the timing of delivery of products from suppliers, the product mix
sold by the Company, the integration of acquired businesses, customer demand,
the Company's dependence on a small number of customers that account for a
significant portion of revenues, availability of products from suppliers,
cyclicality in the storage disk drive and other industries, price competition
for products sold by the Company, management of growth, the Company's ability to
collect accounts receivable, price decreases on inventory that is not price
protected, ability to negotiate a new senior credit facility, potential interest
rate fluctuations as described below and the other risk factors detailed in the
Company's filings with the SEC, including its Annual Report on Form 10-K for the
year ended December 31, 2001. The Company assumes no obligation to update such
forward-looking statements or to update the reasons actual results could differ
materially from those anticipated in such forward-looking statements. Because
many factors are unforeseeable, the foregoing should not be considered an
exhaustive list.
THREE MONTHS ENDED MARCH 31, 2002 COMPARED TO THREE MONTHS ENDED MARCH 31, 2001
Sales were $522.9 million for the quarter ended March 31, 2002, compared
to sales of $535.5 million for the quarter ended March 31, 2001, which
represented a decrease of $12.6 million, or 2%. The decrease in sales was
primarily attributable to a decrease in sales in the Americas, partially offset
by sales expansion related to the acquisitions of Touch The Progress Group BV
("TTPG") in May 2001 and Total Tec Systems, Inc. ("Total Tec") in November 2001.
The Company's gross profit for the quarter ended March 31, 2002 was $47.4
million compared to $45.4 million for the quarter ended March 31, 2001, which
represented an increase of $2.0 million, or 4%. The increase in the dollar
amount of gross profit was primarily the result of the acquisitions of TTPG and
Total Tec and overall gross margin improvement. As a percentage of sales, gross
margins were 9.1% compared to 8.5% in the same period last year. The gross
margin percentage increase was primarily due to margin improvement in several
product categories, a favorable shift in the product mix sold and increased
supplier rebate programs.
Selling, general and administrative expenses increased to $42.7 million
for the quarter ended March 31, 2002 from $39.6 million for the quarter ended
March 31, 2001, an increase of $3.1 million, or 8%. As a percentage of sales,
selling, general and administrative expenses increased in the first quarter of
2002 to 8.2% from 7.4% in the first quarter of 2001. The increase in expenses
was attributable to the acquisitions of TTPG and Total Tec and investments in
strategic programs.
Interest expense was $4.1 million for the quarter ended March 31, 2002 as
compared to $5.6 million in the same period last year. This decrease was
primarily due to decreased interest rates on combined borrowings during the
first quarter of 2002 and overall decreased borrowings during the quarter for
worldwide working capital purposes. Interest rates on combined borrowings were
6.8% in the first quarter of 2002 compared to 9.2% in the same period last year.
The effective income tax rate was 42.0% for the quarters ended March 31,
2002 and 2001.
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 warrants and stock option exercises. Working
capital requirements have included the financing of increases in inventory and
accounts receivable resulting from sales growth, and the financing of certain
acquisitions.
13
In March 2002, the Company received proceeds of approximately $16.5
million from a private placement of 1,500,000 shares of Common Stock. The
Company also issued to the purchasers, a warrant to purchase an additional
750,000 shares of Common Stock at an exercise price of $11.00 per share.
Net cash used in operating activities for the three months ended March 31,
2002, was $21.2 million. The Company's inventories increased as of March 31,
2002 to $230.4 million from $195.8 million as of December 31, 2001, and the
Company's accounts payable increased to $253.1 million as of March 31, 2002 from
$231.7 million as of December 31, 2001. The increases in inventories and
accounts payable are primarily a result of increased inventory purchases. The
Company's accounts receivable increased to $313.5 million as of March 31, 2002
from $299.1 million as of December 31, 2001. The increase in accounts receivable
was primarily related to a shift in the timing of sales toward the end of the
current quarter. The Company's future cash requirements will depend on numerous
factors, including potential acquisitions and the rate of growth of its sales.
The Company may, in the future, seek additional debt or equity financing to fund
continued growth.
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 for the three month
period ended March 31, 2002, was 4.5%, and the balance outstanding at March 31,
2002 was $88.3 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 March 31, 2002; 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
March 31, 2002 on this long-term debt was $89.5 million.
14
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 March 31, 2002, approximately $2.9 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, 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 March 31, 2002, approximately $35.9 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 exercised the option to purchase land and
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 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 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. At March
31, 2002, the balance outstanding was $11.3 million. The Company was not in
compliance with a financial ratio covenant related to this facility at March 31,
2002, however the Company has received a waiver from NatWest regarding this
non-compliance. The Company and NatWest are currently negotiating a covenant
base more favorable to the Company. The new covenant base will be periodically
reviewed. If the Company does not remain in compliance with the bank covenants
in future periods, and is unable to obtain a waiver of noncompliance, NatWest
has the option to demand full and immediate payment of the debt. The Company has
classified the outstanding balance as a current liability pending completion of
negotiations with its bank.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
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 $91.4 million for the
quarter ended March 31, 2002, $38.9 million under Ideal's borrowing facility
with Lombard NatWest and $2.9 million under Total Tec's borrowing facility with
SBCC. These credit facilities have interest rates that are based on associated
rates such as Eurodollar and base or prime rates that may fluctuate over time
based on changes in the economic environment. Based on actual borrowings
throughout the quarter under the First Union, NatWest and SBCC facilities, an
increase of 1% in such interest rate percentages would increase the annual
interest expense by approximately $1.3 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
15
subsidiaries entering into transactions denominated in currencies other than
their functional currency, the Company recognized foreign currency remeasurement
and transaction gains of $289,000 during the quarter ended March 31, 2002. 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.
16
PART II - OTHER INFORMATION
ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS
On March 7, 2002, the Company sold an aggregate of 1,500,000 shares
of Common Stock at a price of $11.00 per share and issued warrants to purchase,
at $11.00 per share, an aggregate of 750,000 shares of Common Stock. The
securities were sold to two accredited investors in reliance on the exemption
from registration provided by Section 4(2) of the Securities Act of 1933. A
restrictive securities legend has been placed on the certificates representing
the securities.
ITEM 6: EXHIBITS AND REPORTS
(a) Exhibits:
See Exhibit Index on page following Signatures.
Reports on Form 8-K:
None
17
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: May 15, 2002
BELL MICROPRODUCTS INC.
BY: BENEDICTUS BORSBOOM
---------------------------------
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
18
BELL MICROPRODUCTS INC.
EXHIBIT INDEX
Form 10-Q
for
Quarter Ended March 31, 2002
Exhibit Number Description
- -------------- -----------
10.1 Management Retention Agreement dated May 7, 2001, between the Company and Benedictus
Borsboom
10.2 1998 Stock Plan, as amended and restated through February 20, 2002
19