<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
( MARK ONE )
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: SEPTEMBER 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ____________
COMMISSION FILE NUMBER 0-21528
BELL MICROPRODUCTS INC.
-------------------------------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CALIFORNIA 94-3057566
------------------------------------ --------------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1941 RINGWOOD AVENUE, SAN JOSE, CALIFORNIA 95131-1721
-------------------------------------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(408) 451-9400
-------------------------------------------------------------------------------
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
N/A
-------------------------------------------------------------------------------
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LASTREPORT.)
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 NOVEMBER 6, 2000: 15,605,412
<PAGE> 2
BELL MICROPRODUCTS INC.
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1: Financial Statements
Condensed Consolidated Balance Sheets - September 30, 2000 and
December 31, 1999 3
Condensed Consolidated Statements of Income - Three months and nine
months ended September 30, 2000 and 1999 4
Condensed Consolidated Statements of Cash Flows - Nine months
ended September 30, 2000 and 1999 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 16
Item 6: Exhibits and Reports 16
Signature: 17
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATements
BELL MICROPRODUCTS INC.
Condensed Consolidated Balance Sheets
(in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
-------------------- -----------------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash $ 6,576 $ 5,103
Accounts receivable, net 344,932 168,857
Inventories 216,222 156,648
Deferred income taxes 5,925 4,220
Prepaid expenses and other current assets 2,505 1,238
-------------------- -----------------------
Total current assets 576,160 336,066
Property and equipment, net 17,729 7,626
Goodwill and other intangibles 45,664 16,059
Other assets 8,448 600
-------------------- -----------------------
Total assets $648,001 $360,351
==================== =======================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $251,143 $143,632
Borrowings under lines of credit 38,638 -
Short-term note payable and current portion
of long-term notes payable to RSA 87,000 -
Other accrued liabilities 51,972 9,808
-------------------- -----------------------
Total current liabilities 428,753 153,440
Borrowings under line of credit 262 110,600
Senior subordinated long-term notes payable to
RSA 93,000 -
Other long-term liabilities 4,982 38
-------------------- -----------------------
Total liabilities 526,997 264,078
-------------------- -----------------------
Commitments and contingencies
Shareholders' equity:
Common Stock, $0.01 par value, 40,000 shares
authorized; 15,572 and 13,774 issued and outstanding 72,080 58,527
Retained earnings 49,234 37,285
Accumulated other comprehensive income (310) 461
-------------------- -----------------------
Total shareholders' equity 121,004 96,273
-------------------- -----------------------
Total liabilities and shareholders' equity $648,001 $360,351
==================== =======================
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
3
<PAGE> 4
BELL MICROPRODUCTS INC.
Condensed Consolidated Statements of Income
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Nine months ended
Three months ended September 30, September 30,
----------------------------------- -----------------------------------
2000 1999 2000 1999
--------------- ---------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Net sales $ 511,007 $ 283,359 $ 1,259,684 $ 734,585
Cost of sales 463,115 259,384 1,147,385 670,387
--------------- ---------------- ---------------- ---------------
Gross profit 47,892 23,975 112,299 64,198
Selling, general and administrative expenses 34,967 18,253 81,794 49,134
--------------- ---------------- ---------------- ---------------
Operating income from continuing operations 12,925 5,722 30,505 15,064
Interest expense (4,218) (1,676) (9,543) (4,456)
Foreign exchange remeasurement gain/(loss) (406) 123 (276) 481
--------------- ---------------- ---------------- ---------------
Income from continuing operations before
income taxes 8,301 4,169 20,686 11,089
Provision for income taxes 3,486 1,813 8,687 4,719
--------------- ---------------- ---------------- ---------------
Income from continuing operations 4,815 2,356 11,999 6,370
Discontinued operations:
Loss from discontinued operations, net of
income tax benefit - - - (2,946)
Gain on sale of contract manufacturing
segment - - - 1,054
--------------- ---------------- ---------------- ---------------
Net income $ 4,815 $ 2,356 $ 11,999 $ 4,478
=============== ================ ================ ===============
Earnings per share
Basic
Continuing operations $ 0.32 $ 0.17 $ 0.83 $ 0.47
Discontinued operations - - - (0.14)
--------------- ---------------- ---------------- ---------------
Total $ 0.32 $ 0.17 $ 0.83 $ 0.33
=============== ================ ================ ===============
Earnings per share
Diluted
Continuing operations $ 0.28 $ 0.17 $ 0.75 $ 0.47
Discontinued operations - - - (0.14)
--------------- ---------------- ---------------- ---------------
Total $ 0.28 $ 0.17 $ 0.75 $ 0.33
=============== ================ ================ ===============
Shares used in per share calculation
Basic 14,856 13,644 14,272 13,487
============== ================ ================ ===============
Diluted 17,275 13,817 16,002 13,602
============== ================ ================ ===============
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
<PAGE> 5
BELL MICROPRODUCTS INC.
Condensed Consolidated Statements of Cash Flows
(Increase/(decrease) in cash, in thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine months ended
September 30,
-------------------------------
2000 1999
-------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Income from continuing operations: $ 11,999 $ 6,370
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization 3,833 1,575
Change in allowance for doubtful accounts 4,658 (340)
Change in deferred income taxes (696) -
Changes in assets and liabilities:
Accounts receivable (58,298) (40,323)
Inventories (7,392) (30,528)
Prepaid expenses (747) 1,217
Other assets 86 (177)
Accounts payable 3,926 35,408
Other accrued liabilities 6,270 (1,317)
-------------- -------------
Net cash used in continuing operating activities (36,361) (28,115)
Net cash used in discontinued operations - (1,765)
-------------- -------------
Net cash used in operating activities (36,361) (29,880)
-------------- -------------
Cash flows from investing activities:
Acquisition of property, equipment and other, net (10,487) (2,602)
Acquisition of businesses (25,683) (2,196)
Proceeds from sale of business - 34,665
-------------- -------------
Net cash (used in) provided by investing activities (36,170) 29,867
-------------- -------------
Cash flows from financing activities:
Net borrowings under line of credit agreements (109,634) (2,900)
Proceeds from senior subordinated long-term notes payable to RSA 100,000 -
Proceeds from short-term notes payable to RSA 80,000 -
Repayment of other notes payable (1,501) -
Proceeds from issuance of Common Stock 3,591 1,974
Net borrowings on other long term liabilities 2,229 4
-------------- -------------
Net cash provided by (used in) financing activities 74,685 (922)
-------------- -------------
Effect of exchange rate changes on cash (681) 265
Net decrease in cash 1,473 (670)
Cash at beginning of period 5,103 4,082
-------------- -------------
Cash at end of period $ 6,576 $ 3,412
============== =============
Supplemental disclosures of cash flow information: Cash paid during the period
for:
Interest $ 9,065 $ 5,434
Income taxes $ 8,167 $ 4,087
Supplemental non-cash financing activities:
Common Stock issued for acquisition (Note 2) $ 2,506 $
-
Stock Warrant issued for subordinated debt (Note 4) $ 7,406 $
-
Liabilities assumed on acquisition of business (Note 2) $ 7,500 $
-
Effect of stock split (Note 3) $ 50 $
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
5
<PAGE> 6
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
presentation. This Quarterly Report on Form 10-Q should be read in conjunction
with the Company's 1999 Annual Report on Form 10-K. The operating results for
the period ended September 30, 2000 are not necessarily indicative of the
results that may be expected for the fiscal year ending December 31, 2000.
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 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.
Ideal Hardware Limited Acquisition
On August 3, 2000, the Company acquired all the capital stock of Ideal
Hardware Limited ("Ideal"), a wholly 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 estimated
acquisition costs of $1.5 million. The deferred purchase price is payable on
March 31, 2001.
The final purchase price is subject to adjustment in accordance with
certain provisions in the purchase agreement. Accordingly, the final purchase
price allocations could be different from the amounts reflected below. The
preliminary allocation of the purchase price over the estimated fair value of
the assets acquired and liabilities assumed and pro forma consolidated income
and revenue are as follows (in thousands):
Accounts receivable $ 115,526
Inventories 43,384
Equipment and other assets 5,476
Goodwill and other intangibles 19,159
Accounts payable (96,084)
Bank borrowings (30,102)
Other accrued liabilities (25,099)
Deferred taxes (3,360)
----------------------
Total consideration $ 28,900
======================
6
<PAGE> 7
The goodwill and other intangibles will be amortized over a period
ranging from 10 to 40 years.
Pro forma results of operations assuming the acquisition was effective
January 1, 1999 are as follows:
<TABLE>
<CAPTION>
Nine months ended September 30,
(unaudited, in thousands,
except earnings per share)
-----------------------------------------------
2000 1999
---------------------- --------------------
<S> <C> <C>
Pro forma net sales $ 1,622,877 $ 1,160,644
Pro forma net income $ 9,445 $ 8,047
Pro forma earnings per share - continuing operations
Basic $ 0.66 $ 0.57
Diluted $ 0.59 $ 0.56
Shares used in per share calculation
Basic 14,272 14,237
Diluted 16,002 14,352
</TABLE>
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 179,612 shares of
the Company's Common Stock and acquisition costs. Management has completed the
valuation of assets acquired and liabilities assumed which resulted in
adjustments to the preliminary purchase price allocations as reported on Form
10-Q for the quarter ended June 30, 2000. 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, are as follows
(in thousands):
Cash $ 546
Accounts receivable 6,764
Inventories 8,498
Equipment and other assets 3,198
Goodwill 7,254
Accounts payable (7,253)
Other accrued liabilities (2,650)
Bank borrowings (7,832)
Notes payable (1,501)
----------------------
Total consideration $ 7,024
======================
The goodwill will be amortized over 20 years.
Results of operations of RDI were not material to the Company.
7
<PAGE> 8
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. Prior to its reorganization in bankruptcy and
subsequent acquisition by the Company, FTI was a leading value-added distributor
of computer components to the markets of Latin America and the Caribbean. FTI
distributes products manufactured by AMD, Canon, Maxtor, NEC, Quantum and other
leading manufacturers.
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 be 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 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
======================
Assuming the acquisition of FTI had been made on January 1, 1999, the
unaudited pro forma net sales and net income for the nine months ended September
30, 1999 would have been $807.3 million and $1.3 million, respectively. The pro
forma basic and diluted earnings per share would have been $0.15 for the nine
months ended September 30, 1999.
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.
Note 3 - 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, and convertible preferred stock, using
the if-converted method.
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. Accordingly, the Basic and Diluted weighted average common shares
outstanding has been adjusted for all prior periods.
8
<PAGE> 9
Following is a reconciliation of the numerators and denominators of the
Basic and Diluted EPS computations for the periods presented below (in
thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------ -------------------------------
2000 1999 2000 1999
-------------- ------------ -------------- -------------
<S> <C> <C> <C> <C>
Net income $ 4,815 $ 2,356 $ 11,999 $ 4,478
============== ============ ============== =============
Weighted average common shares
outstanding (Basic) 14,856 13,644 14,272 13,487
Effect of dilutive options 2,419 173 1,730 115
-------------- ------------ -------------- -------------
Weighted average common shares
outstanding (Diluted) 17,275 13,817 16,002 13,602
============== ============ ============== =============
</TABLE>
In the nine months ended September 30, 2000 and 1999, the numbers of
common stock warrants and options excluded from diluted loss per share
calculations because they were antidilutive were 22,500 and 1,491,975,
respectively.
Note 4 - Lines of Credit:
On June 20, 2000, the Company entered into an agreement with
Transamerica Commercial Finance Corporation to provide $15 million in short-term
financing to the Company. The loan is secured by the Company's accounts
receivable, has a maturity date of June 20, 2001, and bears interest at 10.5%.
The loan does not require the Company to meet financial covenants. On July 6,
2000, the Company repaid the loan with proceeds received from the RSA facility
described below.
On July 6, 2000, the Company repaid in full its borrowings outstanding
under the California Bank and Trust line of credit (the "CBT Facility"), and
effective as of that date, the Company amended its agreement to decrease the
size of the line of credit to $50 million provided solely by California Bank &
Trust. At the Company's option, the borrowings under the amended line of credit
bear interest at California Bank & Trust's prime rate (9.5%) at September 30,
2000 or the adjusted LIBOR rate plus 1.75%. The balance outstanding on the
revolving line of credit at September 30, 2000 was $10.4 million. Obligations of
the Company under the revolving line of credit are secured by certain assets of
the Company and its subsidiaries. The revolving line of credit requires the
Company to meet certain financial tests and to comply with certain other
covenants on a quarterly basis, including restrictions on incurrence of debt and
liens, restrictions on mergers, acquisitions, asset dispositions, declaration of
dividends, repurchase of stock, making investments and profitability. The
Company was in compliance with its bank covenants at September 30, 2000;
however, there can be no assurance that the Company will be in compliance with
its bank covenants in the future. If the Company does not remain in compliance
with the covenants 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. The proceeds from the financing were used to repay
in full $123.9 million outstanding under the California Bank & Trust ("CBT")
facility and $15 million of borrowings from Transamerica Commercial Finance
Corporation. This subordinated debt financing is comprised of $80 million
bearing interest at 9.125%, due June 30, 2001, and $100 million bearing interest
at 9.0%, payable in semi-annual principal and interest installments commencing
December 31, 2000, and a final maturity date of June 30, 2010. The RSA facility
is secured by a second lien on the Company's and its
9
<PAGE> 10
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 on incurrence of debt and liens, asset
dispositions, declaration of dividends, and repurchases of stock. 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 acquisition of Ideal on August 3, 2000 included the assumption of
certain liabilities which included a $43 million borrowing facility with Lombard
NatWest Limited. The borrowing facility bears interest at NatWest's base rate
plus 1.5% and is secured by substantially all of Ideal's accounts receivable.
There are no financial covenant requirements. At September 30, 2000,
approximately $20.5 million was outstanding on this borrowing facility.
Note 5 - 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.
During 1999, the Company filed suit against American Credit Indemnity
("ACI"), its former credit insurer, for recovery of amounts due under claims
made by the Company. ACI has counter sued for rescission of the credit insurance
contract for repayment of claims previously paid. Management has reviewed and
investigated the claims, and while no assurance can be given regarding the
outcome of this matter, management believes that the final outcome of the matter
will not have a material impact on consolidated financial position or results of
operations. However, because of the nature and inherent uncertainties of
litigation, should the outcome of this matter be unfavorable, the Company may be
required to pay damages and other expenses, which could have a material adverse
effect on its financial position and results of operations.
Note 6 - 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):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------ -------------------------------
2000 1999 2000 1999
-------------- ------------ -------------- -------------
<S> <C> <C> <C> <C>
Net income $ 4,815 $ 2,356 $ 11,999 $ 4,478
Other comprehensive income/(loss):
Foreign currency translation
adjustments (363) 16 (310) 286
-------------- ------------ -------------- -------------
Total comprehensive income/(loss) $ 4,452 $ 2,372 $ 11,689 $ 4,764
============== ============ ============== =============
</TABLE>
Accumulated other comprehensive income/(loss) presented in the
accompanying consolidated condensed balance sheets consists of cumulative
foreign currency translation adjustments.
10
<PAGE> 11
Note 7 - Subsequent Events
In accordance with the terms of the Ideal acquisition agreement, on
October 16, 2000, the Company exercised the option to purchase the buildings
occupied by Ideal for approximately $24.0 million including stamp duty tax of
$0.9 million. The Company expects to finance the purchase using existing cash
resources of approximately $11.0 million and a five-year mortgage of
approximately $13.0 million bearing interest at LIBOR plus 1.5%. The mortgage is
payable in quarterly installments of approximately $290,000, plus interest, with
a balloon payment of approximately $7.2 million due November 2005.
Note 8 - Recently Issued Accounting Statements
In April 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, Accounting for Certain Transactions Involving Stock
Compensation, an interpretation of APB Opinion No. 25 ("FIN 44"). Among other
issues, FIN 44 clarifies (a) the definition of employees for purposes of
applying Opinion No. 25, (b) the criteria for determining whether a plan
qualifies as a noncompensatory plan, (c) the accounting consequence of various
modifications to the terms of a previously fixed stock option or award, and (d)
the accounting for an exchange of stock compensation awards in a business
combination. FIN 44 is effective July 1, 2000, but certain conclusions in the
interpretation cover specific events that occur after either December 15, 1998
or January 12, 2000. To the extent that this interpretation covers events
occurring during the period after December 15, 1998, or January 12, 2000, but
before the effective date of July 1, 2000, the effects of applying this
interpretation are recognized on a prospective basis from July 1, 2000. The
effect of FIN 44 was not material to the Company's financial statements.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition," which provides
guidance on the recognition, presentation, and disclosure of revenue in
financial statements filed with the SEC. SAB 101 outlines the basic criteria
that must be met to recognize revenue and provides guidance for disclosures
related to revenue recognition policies. The Company believes its revenue
recognition policies comply with the requirements of SAB 101.
In June 1999, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 137 ("SFAS 137"), "Accounting
for Derivative Instruments and Hedging Activities - Deferral of the Effective
Date of FASB Statement No. 133." SFAS 137 amends Statement of Financial
Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative
Instruments and Hedging Activities," to defer its effective date to all fiscal
quarters of all fiscal years beginning after June 15, 2000. SFAS 133 establishes
accounting and reporting standards for derivative instruments including
stand-alone instruments, such as forward currency exchange contracts and
interest rate swaps or embedded derivatives and requires that these instruments
be marked-to-market on an ongoing basis. These market value adjustments are to
be included either in the income statement or stockholders' equity, depending on
the nature of the transaction. The Company is required to adopt SFAS 133 in the
first quarter of its fiscal year 2001. The effect of SFAS 133 is not expected to
be material to the Company's financial statements.
Note 9 - 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 71% and 90% of total sales for the nine months
ended September 30, 2000 and 1999, respectively.
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-----------------------------------------------
2000 1999
---------------------- ---------------------
(In thousands)
<S> <C> <C>
Geographic information consists of the following:
Net sales:
North America $ 971,532 $ 711,955
Latin America 178,294 22,630
Europe 109,858 -
---------------------- ---------------------
Total $ 1,259,684 $ 734,585
====================== =====================
September 30,
-----------------------------------------------
2000 1999
---------------------- ---------------------
Long-lived assets:
United States $ 45,972 $ 21,543
United Kingdom 23,747 -
Other foreign countries 2,122 1,771
---------------------- ---------------------
Total $ 71,841 $ 23,314
====================== =====================
</TABLE>
11
<PAGE> 12
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
Information in the following Management's Discussion and Analysis of
Financial Condition and Results of Operations and elsewhere in this quarterly
report contains forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934. Forward-looking statements provide current expectations or forecasts of
future events and can be identified by the use of terminology such as "believe,"
"estimate," "expect," "intend," "may'" "could'" "will," and similar words of
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 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, 1999. The Company assumes no obligation to update such
forward-looking statements or to update the reasons actual results could differ
materially from those anticipated in such forward-looking statements.
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1999
Sales were $511.0 million for the quarter ended September 30, 2000,
compared to sales of $283.4 million for the quarter ended September 30, 1999,
which represented an increase of $227.6 million, or 80%. The increase in sales
was primarily attributable 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.
The Company's gross profit for the quarter ended September 30, 2000 was
$47.9 million compared to $24.0 million for the quarter ended September 30,
1999, which represented an increase of $23.9 million, or 100%. 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, RDI and FTI. As
a percentage of sales, overall gross margins were 9.4% compared to 8.5% 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.
12
<PAGE> 13
Selling, general and administrative expenses increased to $35.0 million
for the quarter ended September 30, 2000 from $18.3 million for the quarter
ended September 30, 1999, an increase of $16.7 million, or 92%. As a percentage
of sales, selling, general and administrative expenses increased in the third
quarter of 2000 to 6.8% from 6.4% in the third quarter of 1999. The increase in
expenses was attributable to the acquisitions of Ideal, RDI, and FTI, 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 was $4.2 million for the quarter ended September 30,
2000 as compared to $1.7 million in the same period last year. This increase was
primarily due to increased overall borrowings during the quarter for worldwide
working capital purposes and cash payments for the acquisitions of Ideal and
RDI. Interest rates also increased during the third quarter of 2000 compared to
the same quarter last year.
In the quarter ended September 30, 2000, the Company recognized
remeasurement losses of $406,000 compared to remeasurement gains of $123,000 for
the quarter ended September 30, 1999. These gains and losses were primarily
related to the remeasurement of net U.S. dollar denominated liability balances
of the Company's foreign subsidiaries to the extent the Company was unable to
hedge its balance sheet exposures with forward contracts or local currency
borrowing facilities.
The effective income tax rate was 42.0% for the quarter ended September
30, 2000 compared to 43.5% for the quarter ended September 30, 1999.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1999
Sales were $1.3 billion for the nine months ended September 30, 2000,
compared to sales of $734.6 million for the nine months ended September 30,
1999, which represented an increase of $525.1 million, or 71%. The increase in
sales was primarily attributable to the increase in the customer base related to
the acquisitions of FTI, Ideal and RDI, as well as growth in unit sales in
existing product lines.
The Company's gross profit for the nine months ended September 30, 2000
was $112.3 million, compared to gross profit of $64.2 million for the nine
months ended September 30, 1999, which represented an increase of $48.1 million
or 75%. The increase in the dollar amount of gross profit was primarily the
result of the acquisitions of FTI, Ideal and RDI and growth in existing product
lines. As a percentage of sales, gross margin increased to 8.9%, compared to
8.7% in the same period last year. This increase in gross margin on sales was
primarily due to customer and product mix in North America, including the
effects of RDI, partially offset by lower margin percentages for Ideal and FTI.
Selling, general and administrative expenses increased to $81.8 million
in the nine months ended September 30, 2000 compared to $49.1 million for the
nine months ended September 30, 1999, which represented an increase of 66%. As a
percentage of sales, selling, general and administrative expenses decreased in
the first nine months of 2000 to 6.5% from 6.6% for the same period in the prior
year. The increase in the dollar amount of expenses was attributable to the
acquisitions of FTI, Ideal and RDI, the Company's continuing effort to expand
its sales and marketing organization and strengthen its financial and
administrative support and increased sales volume.
Interest expense was $9.5 million in the nine months ended September
30, 2000 as compared to $4.5 million in the same period last year. This increase
was primarily due to increased borrowings for working capital purposes, the cash
payments for the acquisitions of Ideal, FTI and RDI and increased interest
rates.
13
<PAGE> 14
In the first nine months ended September 30, 2000, the Company
recognized remeasurement losses of $276,000 compared to remeasurement gains of
$481,000 for the nine months ended September 30, 1999. These gains and losses
were primarily related to the remeasurement of US dollar denominated liability
balances of the Company's foreign subsidiaries to the extent the Company was
unable to hedge its balance sheet exposures with forward contracts or local
currency borrowing facilities.
The effective income tax rate was 42.0% for the nine months ended
September 30, 2000, compared to 42.6% for the nine months ended September 30,
1999.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its working capital requirements principally
through borrowings under bank lines of credit. Working capital requirements have
included the financing of increases in inventory and accounts receivable
resulting from sales growth, and the financing of certain acquisitions.
Net cash used in operating activities for the nine months ended
September 30, 2000, was $36.4 million. The Company's net accounts receivable as
of September 30, 2000 increased to $344.9 million from $168.9 million as of
December 31, 1999. The Company's accounts payable increased to $251.1 million as
of September 30, 2000 from $143.6 million as of December 31, 1999, primarily due
to acquisitions of businesses and increased inventory purchases as well as
timing of inventory receipts and payments related thereto. Net cash used in
investing activities during the nine months ended September 30, 2000 totaled
$36.2 million, which was primarily related to the acquisitions of Ideal and RDI.
Net cash provided by financing activities during the nine months ended September
30, 2000 totaled $74.7 million, which was primarily related to the borrowings
under the RSA facility. 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 June 20, 2000, the Company entered into an agreement with
Transamerica Commercial Finance Corporation to provide $15 million in short-term
financing to the Company. The loan is secured by the Company's accounts
receivable, has a maturity date of June 20, 2001, and bears interest at 10.5%.
The loan does not require the Company to meet financial covenants. On July 6,
2000, the Company repaid the loan with proceeds received from the RSA facility
described below. At September 30, 2000, there were no borrowings outstanding.
On July 6, 2000, the Company repaid in full its borrowings outstanding
under the California Bank and Trust line of credit (the "CBT Facility"), and
effective as of that date, the Company amended its agreement to decrease the
size of the line of credit to $50 million provided solely by California Bank &
Trust. At the Company's option, the borrowings under the amended line of credit
bear interest at California Bank & Trust's prime rate 9.5% at September 30, 2000
or the adjusted LIBOR rate plus 1.75%. The balance outstanding on the revolving
line of credit at September 30, 2000 was $10.4 million. Obligations of the
Company under the revolving line of credit are secured by certain assets of the
Company and its subsidiaries. The revolving line of credit requires the Company
to meet certain financial tests and to comply with certain other covenants on a
quarterly basis, including restrictions on incurrence of debt and liens,
restrictions on mergers, acquisitions, asset dispositions, declaration of
dividends, repurchase of stock, making investments and profitability. The
Company was in compliance with its bank covenants at September 30, 2000;
however, there can be no assurance that the Company will be in compliance with
its bank covenants in the future. If the Company does not remain in compliance
with the covenants 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. The proceeds from the financing were used to repay
14
<PAGE> 15
in full $123.9 million outstanding under the CBT facility and $15 million of
borrowings from Transamerica Commercial Finance Corporation. This subordinated
debt financing is comprised of $80 million bearing interest at 9.125%, due June
30, 2001, and $100 million bearing interest at 9.0%, payable in semi-annual
principal installments of $7 million plus interest installments commencing
December 31, 2000, and 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 on incurrence of debt and liens, restrictions on asset
dispositions, declaration of dividends, and repurchase of stock. 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.
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.
Liabilities assumed included a $43 million borrowing facility with Lombard
NatWest Limited which is secured by substantially all of Ideal's accounts
receivable and bears interest at NatWest's base rate plus 1.5%. There are no
financial covenant requirements. At September 30, 2000, approximately $20.5
million was outstanding on the NatWest borrowing facility. The acquisition of
Ideal was funded through borrowings under the RSA facility.
On May 15, 2000, the Company acquired Rorke Data, Inc. ("RDI") and its
European subsidiaries for a purchase price of approximately $3.8 million in cash
and 179,612 shares of the Company's common stock. RDI option holders received
approximately $335,000, and the minority shareholders of RDI's European
subsidiaries received approximately $1.3 million in cash. The acquisition was
funded through borrowings under the Company's revolving line of credit and newly
issued shares of common stock.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Effective July 6, 2000, the Company borrowed $100 million at a fixed
interest rate of 9% per annum; the borrowing is payable over ten years. An
additional $80 million, payable June 30, 2001, was borrowed at a fixed rate of
9.125% but will need to be paid and/or refinanced at or before its due date, and
any such refinancing may be at a different interest rate, including a
fluctuating rate. Concurrent with these financings, the Company amended its
existing revolving line of credit facility with California Bank & Trust (the
"CBT Facility"), reducing the facility to $50 million. At September 30, 2000,
$10.4 million was outstanding under the CBT Facility. On August 3, with the
acquisition of Ideal, the Company assumed a borrowing facility of $43 million
with Lombard NatWest Limited (the "NatWest Facility"). At September 30, 2000,
approximately $20.5 million was outstanding under the NatWest Facility. The CBT
Facility and the NatWest Facility have interest rates that are based on
associated rates such as LIBOR and base or prime rates that may fluctuate over
time based on changes in the economic environment. The Company is subject to
interest rate risk, and could be subjected to increased interest payments if
market interest rates fluctuate. Assuming refinancing of the Company's
short-term borrowing and maximum borrowing under the CBT Facility and NatWest
Facility, an increase of 1% in such interest rate percentages would increase the
quarterly interest expense by approximately $485,000.
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 $406,000 during the quarter ended September 30, 2000. The
Company is likely to be subject to increased foreign currency transactions and
associated risks of depreciation of value and volatility of cashflows following
the acquisitions of Ideal, RDI, FTI and Tenex Data. To the extent the Company is
unable to manage these risks, the Company's results and financial position could
be materially adversely affected.
15
<PAGE> 16
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
On May 15, 2000, the Company issued 179,612 shares of Common Stock to
the shareholders of Rorke Data, Inc. in connection with its acquisition of all
of the outstanding stock of Rorke Data. The number of shares issued was based on
$13.96 per share, being the average market value of the Company's Common Stock
during the 10 trading days preceding May 1, 2000. The Company relied on Rule 505
of Regulation D under the Securities Act of 1933 for an exemption from
registration of the shares. A restrictive securities legend was placed on the
certificates representing the shares.
On August 29, 2000, the Company issued 332,487 shares of Common Stock
to one accredited investor upon the cashless exercise of a Warrant to purchase
525,000 shares at $8 per share dated November 13, 1998. The number of shares
issued was based on a market price of $21.817 on the date of issuance. The
Company relied on the exemption from registration provided by Section 4(2) of
the Securities Act of 1933 for the issuance of such shares. A restrictive
securities legend was placed on the certificate representing the shares.
On September 13, 2000, the Company issued 414,309 shares of Common
Stock to six accredited investors upon the cashless exercise of Warrants to
purchase an aggregate of 750,000 shares at $12 per share. The number of shares
issued was based on a market price of $26.81042 on the date of issuance. The
Company relied on the exemption from registration provided by Section 4(2) of
the Securities Act of 1933 for the issuance of such shares. A restrictive
securities legend was placed on the certificates representing the shares.
Item 6. Exhibits and Reports
(a) Exhibits:
See Exhibit Index on page following Signatures.
(b) Reports on Form 8-K:
The following reports on Form 8-K were filed during the quarter ended
September 30, 2000:
Date Filed Item No. Description
7/11/00 5 Press Release re subordinated debt financing
7/21/00 5 Securities Purchase Agreement with The
Retirement Systems of Alabama
7/21/00 5 Press Release re agreement to acquire Ideal
Hardware, Limited
8/18/00 2 Acquisition of Ideal Hardware, Limited
16
<PAGE> 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: November 14, 2000
BELL MICROPRODUCTS INC.
BY: /s/ LAWRENCE S. LEONG
---------------------------------
EXECUTIVE VICE PRESIDENT OF
FINANCE AND OPERATIONS
(PRINCIPAL FINANCIAL OFFICER)
BY: /s/ REMO E. CANESSA
---------------------------------
VICE PRESIDENT OF FINANCE,
CHIEF FINANCIAL OFFICER
(PRINCIPAL ACCOUNTING OFFICER)
17
<PAGE> 18
BELL MICROPRODUCTS INC.
EXHIBIT INDEX
Form 10-Q
for
Quarter Ended September 30, 2000
<TABLE>
<CAPTION>
Exhibit Number Description
-------------- -----------
<S> <C>
3.1 Amended and Restated Articles of Incorporation
10.1 Securities Purchase Agreement dated July 6, 2000 between the Registrant and The Retirement
Systems of Alabama--incorporated by reference to Exhibit 10.1 to the Registrant's Form 8-K
Report filed July 21, 2000
10.2 Stock Purchase Agreement dated July 17, 2000 between the Registrant and Interx Media
PLC--incorporated by reference to Exhibit 10.1 to the Registrant's Form 8-K Report filed August
18, 2000
10.3 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
27 Financial Data Schedule for the nine months ended September 30, 2000
</TABLE>
18
