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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, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ____________
COMMISSION FILE NUMBER 0-21528
BELL MICROPRODUCTS INC.
- --------------------------------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CALIFORNIA 94-3057566
- ------------------------------- --------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1941 RINGWOOD AVENUE, SAN JOSE, CALIFORNIA 95131-1721
- --------------------------------------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(408) 451-9400
- --------------------------------------------------------------------------------
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
N/A
- --------------------------------------------------------------------------------
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST
REPORT.)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS.
YES [X] NO [ ]
INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS AN ACCELERATED FILER (AS
DEFINED IN RULE 12b-2 OF THE EXCHANGE ACT).
YES [X] NO [ ]
COMMON STOCK, $.01 PAR VALUE -- NUMBER OF SHARES OUTSTANDING AT MAY 5, 2004:
27,168,136
1
BELL MICROPRODUCTS INC.
INDEX TO FORM 10-Q
Page
Number
------
PART I - FINANCIAL INFORMATION
Item 1: Financial Statements (unaudited)
Condensed Consolidated Balance Sheets - March 31, 2004 and December
31, 2003 3
Condensed Consolidated Statements of Operations - Three months
ended March 31, 2004 and 2003 4
Condensed Consolidated Statements of Cash Flows - Three months
ended March 31, 2004 and 2003 5
Notes to Condensed Consolidated Financial Statements 6
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
Item 3: Quantitative and Qualitative Disclosure about Market Risk 18
Item 4: Controls and Procedures 19
PART II - OTHER INFORMATION
Item 2: Changes in Securities, Use of Proceeds and Issuer Purchases of
Equity Securities 20
Item 6: Exhibits and Reports 20
Signatures 21
2
PART I - FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS (UNAUDITED)
BELL MICROPRODUCTS INC.
Condensed Consolidated Balance Sheets
(in thousands, except per share data)
(unaudited)
March 31, December 31,
2004 2003
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 3,441 $ 4,904
Accounts receivable, net 301,068 309,905
Inventories 235,981 256,992
Prepaid expenses and other current assets 23,390 23,595
------------- -------------
Total current assets 563,880 595,396
Property and equipment, net 42,679 43,545
Goodwill 60,843 60,236
Intangibles 6,482 6,544
Deferred debt issuance costs and other assets 11,429 7,278
------------- -------------
Total assets $ 685,313 $ 712,999
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 199,930 $ 250,494
Borrowings under lines of credit 1,652 3,009
Short-term note payable and current portion
of long-term notes payable 8,349 11,848
Other accrued liabilities 48,204 46,411
------------- -------------
Total current liabilities 258,135 311,762
Borrowings under lines of credit 57,438 127,416
Long-term notes payable 167,626 77,608
Other long-term liabilities 3,578 2,803
------------- -------------
Total liabilities 486,777 519,589
------------- -------------
Commitments and contingencies
Shareholders' equity:
Common Stock, $0.01 par value, 40,000 shares
authorized; 27,129 and 26,907 issued and outstanding 157,909 157,251
Retained earnings 22,549 20,837
Accumulated other comprehensive income 18,078 15,322
------------- -------------
Total shareholders' equity 198,536 193,410
------------- -------------
Total liabilities and shareholders' equity $ 685,313 $ 712,999
============= =============
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
3
BELL MICROPRODUCTS INC.
Condensed Consolidated Statements of Operations
(in thousands, except per share data)
(unaudited)
Three months ended
March 31,
------------------------------
2004 2003
------------- -------------
Net sales $ 660,331 $ 532,653
Cost of sales 611,044 495,027
------------- -------------
Gross profit 49,287 37,626
Operating expenses:
Selling, general and administrative expenses 42,731 39,274
Restructuring costs and special charges - 1,383
------------- -------------
Total operating expenses 42,731 40,657
Operating income (loss) 6,556 (3,031)
Interest expense (3,838) (4,019)
------------- -------------
Income (loss) before income taxes 2,718 (7,050)
Provision for (benefit from) income taxes 1,006 (2,115)
------------- -------------
Net income (loss) $ 1,712 $ (4,935)
============= =============
Income (loss) per share
Basic $ 0.06 $ (0.25)
============= =============
Diluted $ 0.06 $ (0.25)
============= =============
Shares used in per share calculation
Basic 27,068 20,131
============= =============
Diluted 28,079 20,131
============= =============
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
4
BELL MICROPRODUCTS INC.
Condensed Consolidated Statements of Cash Flows
(Increase/(decrease) in cash, in thousands)
(unaudited)
Three months ended March 31,
-----------------------------
2004 2003
------------- -------------
Cash flows from operating activities:
Net income (loss): $ 1,712 $ (4,935)
Adjustments to reconcile net income (loss) to net
cash (used in) provided by operating activities:
Depreciation and amortization 3,026 3,180
Provision for bad debts 2,064 1,929
Loss on disposal of property, equipment and other 26 --
Deferred income taxes 31 (349)
Changes in assets and liabilities:
Accounts receivable 8,915 7,064
Inventories 22,682 (11,419)
Prepaid expenses 292 (5)
Other assets (3,402) 228
Accounts payable (52,283) 446
Other accrued liabilities 1,172 (3,588)
------------- -------------
Net cash used in operating activities (15,765) (7,449)
------------- -------------
Cash flows from investing activities:
Acquisition of property, equipment and other (669) (682)
Proceeds from sale of property, equipment and other 25 -
------------- -------------
Net cash used in investing activities (644) (682)
------------- -------------
Cash flows from financing activities:
Net borrowings (repayments) under line of credit agreements (71,716) 7,815
Repayment of long-term notes payable to RSA (23,500) (3,500)
Proceeds from issuance of Common Stock and warrants 401 38
Proceeds from issuance of convertible notes 110,000 --
Repayments of notes and leases payable (285) (3,329)
------------- -------------
Net cash provided by financing activities 14,900 1,024
------------- -------------
Effect of exchange rate changes on cash 46 (89)
------------- -------------
Net decrease in cash (1,463) (7,196)
Cash at beginning of period 4,904 12,025
------------- -------------
Cash at end of period $ 3,441 $ 4,829
============= =============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 6,997 $ 6,430
Income taxes $ 17 $ 328
Supplemental non-cash financing activities:
Issuance of restricted stock $ 400 $ 4,037
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 1 - Basis of Presentation:
The accompanying interim condensed consolidated financial statements of
Bell Microproducts Inc. ("the Company") have been prepared in conformity with
accounting principles generally accepted in the United States of America (U.S.),
consistent in all material respects with those applied in the Company's Annual
Report on Form 10-K for the year ended December 31, 2003. The preparation of
financial statements in conformity with accounting principles generally accepted
in the U.S. requires management to make estimates and judgments that affect the
amounts reported in the financial statements and accompanying notes. The
accounting estimates that require management's judgment of the most difficult
and subjective estimates include: revenue recognition; the assessment of
recoverability of goodwill and property, plant and equipment; the valuation of
inventory and accounts payable; estimates for the allowance for doubtful
accounts; and the recognition and measurement of income tax assets and
liabilities. The actual results experienced by the Company may differ materially
from management's estimates.
Year end condensed balance sheet data included in this interim report is
derived from audited financial statements. All other interim financial
information is unaudited, but reflects all normal adjustments, which are, in the
opinion of management, necessary to provide a fair statement of results for the
interim periods presented. The interim financial statements should be read in
connection with the financial statements in the Company's Annual Report on Form
10-K for the year ended December 31, 2003.
Certain prior year amounts have been reclassified to conform to the fiscal
2004 financial statement presentation. These reclassifications had no impact on
total assets, operating income/(loss) or net income/(loss).
In the quarter ended March 31, 2004, the Company completed a private
offering of $110 million aggregate principal amount of 3 3/4% convertible
subordinated notes due 2024. The notes are convertible into the Company's common
stock under certain circumstances at a conversion rate of 91.2596 shares per
$1,000 principal amount of notes, subject to adjustment, which is equivalent to
a conversion price of approximately $10.96 per share. Proceeds were used to
repay existing debt.
The Company operates in one business segment as a distributor of storage
products and systems as well as semiconductor and computer products and
peripherals to original equipment manufacturers (OEMs), value-added resellers
(VARs) and dealers in the United States, Canada, Europe and Latin America. The
Company is one of the world's largest storage-centric value-added distributors
and a specialist in storage products and solutions. The Company's concentration
on data storage systems and products allows it to provide greater technical
expertise to its customers, form strategic relationships with key manufacturers
and provide complete storage solutions to its customers at many levels of
integration. The Company's storage products include:
- high-end computer and storage subsystems;
- Fibre Channel connectivity products;
- complete storage systems such as storage area networks (SAN),
network attached storage (NAS) and direct attached storage (DAS);
- storage management software;
- disk, tape and optical drives; and
- a broad selection of value-added services.
6
In addition, the Company has developed a proprietary LDI software
licensing system, which facilitates the sale and administration of software
licenses. The Company believes its comprehensive product and value-added service
offerings have provided a competitive advantage in both domestic and
international markets.
Note 2 - Stock-Based Compensation Plans:
The following table illustrates the effect on net income (loss) and
earnings (loss) per share if the Company had applied the fair value recognition
provisions of SFAS No. 123, as amended, to options granted under the stock
option plans and rights to acquire stock granted under the Company's Stock
Participation Plan, collectively called "options." For purposes of this
pro-forma disclosure, the value of the options is estimated using a
Black-Scholes option pricing model and amortized ratably to expense over the
options' vesting periods. Because the estimated value is determined as of the
date of grant, the actual value ultimately realized by the employee may be
significantly different.
(In thousands, except per
share amounts):
---------------------------
March 31,
2004 2003
------------ ------------
Net income (loss) as reported: $ 1,712 $ (4,935)
Stock-based employee compensation expense
determined under fair value based method, net of tax
(794) (995)
------------ ------------
Pro forma net income (loss) $ 918 $ (5,930)
============ ============
Income (loss) per share:
As reported
Basic $ 0.06 $ (0.25)
Diluted $ 0.06 $ (0.25)
Pro forma
Basic $ 0.03 $ (0.29)
Diluted $ 0.03 $ (0.29)
The following weighted average assumptions were used for grants in the
first quarter ended March 31, 2004 and 2003 respectively; expected volatility of
75% and 76%, expected lives of 3.61 and 3.48 and risk free interest rates of
2.2% and 2.3%, respectively. The Company has not paid dividends and assumed no
dividend yield. The fair value of each purchase right issued under the Company's
employee stock purchase plan is estimated on the beginning of the offering
period using the Black-Scholes option-pricing model with substantially the same
assumptions as the option plans but expected lives of 0.5 years.
SFAS No. 123 requires the use of option pricing models that were not
developed for use in valuing employee stock options. The Black-Scholes
option-pricing model was developed for use in estimating the fair value of
short-lived exchange traded options that have no vesting restrictions and are
fully transferable. In addition, option-pricing models require the input of
highly subjective assumptions, including the option's expected life and the
price volatility of the underlying stock. Because the Company's employee stock
options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can materially
affect the fair value estimate, in the opinion of management, the existing
models do not necessarily provide a reliable single measure of the fair value of
employee stock options.
Because additional stock options and stock purchase rights are expected to
be granted at varying times during the year, the above pro forma disclosures are
not considered by management to be representative of pro forma effects on
reported financial results for the year ended December 31, 2004, or for other
future periods.
7
OPTION EXCHANGE
On November 25, 2002, the Company made an exchange offer (the "Exchange")
to current officers and employees of the Company to exchange stock options held
by these employees for rights to receive shares of the Company's Common Stock
("Restricted Units"). The offer period ended December 31, 2002 and the
Restricted Units were issued on January 3, 2003 (the "Exchange Date"). Employee
stock options eligible for the Exchange had a per share exercise price of $11.75
or greater, whether or not vested ("Eligible Options"). The offer provided for
an exchange ratio of three option shares surrendered for each Restricted Unit to
be received subject to vesting terms.
The Restricted Units vest in one-fourth increments. If the employment of
an employee who participated in the Exchange terminates prior to the vesting,
the employee will forfeit the unvested shares of Restricted Units. As a result
of the Exchange, the Company issued 744,802 rights to receive Restricted Units
in return for 2,234,250 stock options. The total non-cash deferred compensation
charge over the vesting period of four years is approximately $4 million
computed based on the share price at the date of approval of $5.42 per share.
Actual compensation charges will be adjusted accordingly for forfeitures of
unvested shares related to subsequent employee terminations.
Note 3 - Intangible Assets:
The Company has acquired certain intangible assets through acquisitions
which include non-compete agreements, trademarks, trade names and customer and
supplier relationships. The carrying values and accumulated amortization of
these assets at March 31, 2004 and December 31, 2003 are as follows (in
thousands):
As of March 31, 2004
---------------------------------
Estimated Gross
Useful Life for Carrying Accumulated Net
Amortized Intangible Assets Amortization Amount Amortization Amount
- ------------------------------- --------------- -------- ------------ ---------
Non-compete agreements 3-6 years $ 2,408 $ (1,879) $ 529
Trademarks 20-40 years 4,648 (360) 4,288
Trade names 20 years 400 (36) 364
Customer/supplier relationships 7-10 years 1,600 (299) 1,301
--------------- -------- ------------ ---------
Total $ 9,056 $ (2,574) $ 6,482
======== ============ =========
As of December 31, 2003
---------------------------------
Estimated Gross
Useful Life for Carrying Accumulated Net
Amortized Intangible Assets Amortization Amount Amortization Amount
- ------------------------------- --------------- -------- ------------ ---------
Non-compete agreements 3-6 years $ 2,409 $ (1,770) $ 639
Trademarks 20-40 years 4,504 (329) 4,175
Trade names 20 years 400 (30) 370
Customer/supplier relationships 7-10 years 1,600 (240) 1,360
--------------- -------- ------------ ---------
Total $ 8,913 $ (2,369) $ 6,544
======== ============ =========
The estimated amortization expense of these assets in future fiscal years
is as follows (in thousands):
Estimated Amortization Expense
- ----------------------------------
April 1, 2004 to December 31, 2004 $ 505
For year ending December 31, 2005 357
For year ending December 31, 2006 357
For year ending December 31, 2007 348
For year ending December 31, 2008 338
Thereafter 4,577
--------
Total $ 6,482
========
8
Note 4 - Earnings (Loss) per Share:
Basic EPS is computed by dividing net income (loss) available to common
shareholders (numerator) by the weighted average number of common shares
outstanding (denominator) during the period. Diluted EPS gives effect to all
dilutive potential common shares outstanding during the period resulting from
stock options using the treasury stock method. In computing diluted EPS, the
average stock price for the period is used in determining the number of shares
assumed to be purchased from the exercise of stock options.
Following is a reconciliation of the numerators and denominators of the
basic and diluted EPS computations for the periods presented below (in
thousands, except per share data):
Three Months Ended
March 31,
-----------------------------
2004 2003
------------ ------------
Net income (loss) $ 1,712 $ (4,935)
============ ============
Weighted average common shares
outstanding (Basic) 27,068 20,131
Effect of dilutive options, grants and
warrants 1,011 -
------------ ------------
Weighted average common shares
outstanding (Diluted) 28,079 20,131
============ ============
In the three months ended March 31, 2004 and 2003, total common stock
options, grants and warrants excluded from diluted income (loss) per share
calculations because they were antidilutive were 921,623 and 4,446,306,
respectively.
Note 5 - Lines of Credit and Term Debt:
LINES OF CREDIT (IN THOUSANDS)
March 31, December 31,
2004 2003
------------ ------------
Wachovia Facility $ 37,663 $ 68,007
Bank of America Facility 19,775 59,409
IFN Financing BV 1,652 3,009
------------ ------------
59,090 130,425
Less: amounts included in current liabilities 1,652 3,009
------------ ------------
Amounts included in non-current liabilities $ 57,438 $ 127,416
============ ============
On December 31, 2002, the Company entered into an amendment to its
syndicated Loan and Security Agreement with Wachovia Bank, N.A. ("Wachovia
facility"), (First Union Bank, as the original lender). The amendment reduces
the credit facility to $160 million from $175 million and extends the maturity
date to May 31, 2005. The Wachovia 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 Congress Financial Corporation (Western) and Bank of America
N.A. as co-agents and other financial institutions, as lenders. Borrowings under
the line of credit bear interest at Wachovia'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
9
average interest rate on outstanding borrowings under the revolving line of
credit during the quarter ended March 31, 2004, was 3.9%, and the balance
outstanding at March 31, 2004 was $37.7 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. On
October 9, 2003, the Company entered into a Second Amendment and Waiver, to
effectively enable the Company to complete the acquisition of EMB Mayorista, in
Mexico.
On December 2, 2002, as amended in November 2003, the Company entered into
a Syndicated Credit Agreement arranged by Bank of America, National Association
("Bank of America facility"), as principal agent, to provide a (pound)75 million
revolving line of credit facility, or the U.S. dollar equivalent of
approximately $138 million at March 31, 2004 through December 2005. The Bank of
America facility refinanced the Company's $60 million credit facility with Royal
Bank of Scotland. The syndicate includes Bank of America as agent and security
trustee and other banks and financial institutions, as lenders. Borrowings under
the line of credit bear interest at Bank of America's base rate plus a margin of
2.375% to 2.50%, based on certain financial measurements. At the Company's
option, all or any portion of the outstanding borrowings may be converted to a
LIBOR Revolving Loan, which bears interest at the adjusted LIBOR rate plus a
margin of 2.375% to 2.50%, based on certain financial measurements. The average
interest rate on the outstanding borrowings under the revolving line of credit
during the quarter ended March 31, 2004 was 6.0%, and the balance outstanding at
March 31, 2004 was $19.8 million. Obligations of the Company under the revolving
line of credit are secured by certain assets of the Company's European
subsidiaries. The revolving line of credit requires the Company to meet certain
financial tests and to comply with certain other covenants, including
restrictions on incurrence of debt and liens, restrictions on mergers,
acquisitions, asset dispositions, capital contributions, payment of dividends,
repurchases of stock, repatriation of cash and investments.
The Company has an agreement with IFN Finance BV to provide up to $7.5
million in short-term financing to the Company. The loan is secured by certain
European accounts receivable and inventories, bears interest at 5.5%, and
continues indefinitely until terminated by either party within 90 days notice.
The loan balance outstanding was $1.7 million at March 31, 2004.
TERM LOANS (IN THOUSANDS) March 31, December 31,
2004 2003
------------ ------------
Convertible Notes $ 110,000 $ -
Note payable to RSA 55,500 79,000
Bank of Scotland 10,233 10,180
------------ ------------
175,733 89,180
Less: amounts due in current year 8,107 11,572
------------ ------------
Long-term debt due after one year $ 167,626 $ 77,608
============ ============
On March 5, 2004, the Company completed a private offering of $110 million
aggregate principal amount of 3 3/4% convertible subordinated notes due 2024.
The offering was made only to qualified institutional buyers in accordance with
Rule 144A under the Securities Act of 1933, as amended. The notes are
convertible into the Company's common stock under certain circumstances at a
conversion rate of 91.2596 shares per $1,000 principal amount of notes, subject
to adjustment, which is equivalent to a conversion price of approximately $10.96
per share. This represents a 32.5% premium over Bell Microproducts closing price
of its common stock on the Nasdaq National Market on March 1, 2004 of $8.27 per
share. The Company may redeem some or all of the notes under certain
circumstances on or after March 5, 2009 and prior to March 5, 2011, and at any
time thereafter without such circumstances, at 100% of the principal amount,
plus accrued but unpaid interest up to, but excluding, the redemption date. The
Company may be required to purchase some or all of the notes on March 5, 2011,
March 5, 2014 or March 5, 2019 or in the event of a change in control at 100% of
the principal amount, plus accrued but unpaid interest up to, but excluding, the
purchase date. Proceeds from the offering were used to repay amounts
10
outstanding under its working capital facilities with Wachovia Bank, N.A. and
Bank of America, National Association and its senior subordinated notes held by
The Retirement Systems of Alabama.
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. On August 1, 2003, the Company entered
into an interest rate swap agreement with Wachovia Bank effectively securing a
new interest rate on $40 million of the outstanding debt. The new rate is based
on the six month U.S. Libor rate plus a fixed margin of 4.99% and continues
until termination of the agreement on June 30, 2010. The 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 balance
outstanding at March 31, 2004 on this long-term debt was $55.5 million, $7.0
million is payable in 2004, $7.0 million is payable in each of the years 2005
and 2006 and $34.5 million thereafter.
On May 9, 2003, the Company entered into a mortgage agreement with Bank of
Scotland for (pound)6 million, or the U.S. dollar equivalent of approximately
$11.1 million, as converted at March 31, 2004. The new mortgage agreement fully
re-paid the borrowings outstanding under the previous mortgage agreement with
Lombard NatWest Limited, and has a term of 10 years, bears interest at Bank of
Scotland's rate plus 1.35%, and is payable in quarterly installments of
approximately (pound)150,000, or $277,000 USD, plus interest. The principal
amount due each year is approximately $1,108. The balance of the mortgage as
converted to USD at March 31, 2004 was $10.2 million. Terms of the mortgage
require the Company to meet certain financial ratios and to comply with certain
other covenants on a quarterly basis.
The Company was in compliance with its bank and subordinated debt
financing covenants at March 31, 2004; 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 lenders, the Company's financial
condition, results of operations and cash flows would be materially adversely
affected.
Note 6 - Convertible Subordinated Notes and Common Stock Issuances:
In March 2004, the Company completed a private offering of $110 million
aggregate principal amount of 3 3/4% convertible subordinated notes due 2024.
The notes are convertible into the Company's common stock under certain
circumstances at a conversion rate of 91.2596 shares per $1,000 principal amount
of notes, subject to adjustment, which is equivalent to a conversion price of
approximately $10.96 per share. Substantially all of the net proceeds of
approximately $106 million was used to repay a portion of amounts outstanding
under the Company's revolving lines of credit and 9% senior subordinated notes.
On August 27, 2003 the Company completed a secondary registered public
offering of 5,000,000 shares of Common Stock, at an offering price to the public
of $6.50 per share. In connection with the offering, the Company granted to the
underwriters an option to purchase up to 750,000 shares to cover
over-allotments, and the option was exercised in full on September 18, 2003. The
Company received proceeds of $34.9 million, net of commissions, discounts and
expenses.
Note 7 - Restructuring Costs, Special Charges and Other Provisions:
In the first quarter of 2004, the Company did not record any restructuring
costs or special charges.
11
In the first quarter of 2003, as the Company continued to implement profit
improvement and cost reduction measures, restructuring costs of $1.4 million
were recorded. These charges consisted of severance and benefits of $1.3 million
related to worldwide involuntary terminations and estimated lease costs of
$56,300 pertaining to future lease obligations for non-cancelable lease payments
for excess facilities in the U.S. The Company terminated 127 employees
worldwide, across a wide range of functions including marketing, technical
support, finance, operations and sales, and expects annual savings of
approximately $8 million. Expected savings related to vacated facilities is not
material. Future expected cost reductions will be reflected in the income
statement line item "Selling, general and administrative expenses." The Company
also recorded an inventory charge of approximately $1.5 million related to
significant changes to certain vendor relationships and the discontinuance of
other non-strategic product lines.
At March 31, 2004, outstanding liabilities related to these restructuring
and special charges are summarized as follows (in thousands):
Severance Lease
Costs Costs Total
---------- ---------- ----------
Balance at January 1, 2003 $ 545 $ 2,079 $ 2,624
Restructuring and special charges 1,327 56 1,383
Cash payments (1,638) (808) (2,446)
---------- ---------- ----------
Balance at December 31, 2003 234 1,327 1,561
Restructuring and special charges - - -
Cash payments (58) (137) (195)
---------- ---------- ----------
Balance at March 31, 2004 $ 176 $ 1,190 $ 1,366
========== ========== ==========
Note 8 - Product Warranty Liabilities:
The Company accrues for known warranty claims if a loss is probable and
can be reasonably estimated, and accrues for estimated incurred but unidentified
warranty claims based on historical activity. Provisions for estimated returns
and expected warranty costs are recorded at the time of sale and are adjusted
periodically to reflect changes in experience and expected obligations. The
Company's warranty reserve relates primarily to its storage solutions and value
added businesses. Reserves for warranty items are included in other current
liabilities. The provision has had no material change from December 31, 2003.
Note 9 - Commitments and Contingencies:
The Company is currently a party to various claims and legal proceedings
arising in the normal course of business. If management believes that a loss is
probable and can reasonably be estimated, the Company records the amount of the
loss, or the minimum estimated liability when the loss is estimated using a
range and no point within the range is more probable than another. As additional
information becomes available, any potential liability related to these actions
is assessed and the estimates are revised, if necessary. Based on currently
available information, management believes that the ultimate outcome of any
actions, individually and in the aggregate, will not have a material adverse
effect on the Company's financial position or results of operations.
In August 2003, the Company entered into an interest rate swap agreement
in order to gain access to the lower borrowing rates normally available on
floating-rate debt, while avoiding prepayment and other costs that would be
associated with refinancing long-term fixed-rate debt. The swap purchased has a
notional amount of $40 million, expiring in June 2010, with a six-month
settlement period and provides for
12
variable interest at LIBOR plus a set rate spread. The notional amount does not
quantify risk or represent assets or liabilities, but rather, is used in the
determination of cash settlement under the swap agreement. As a result of
purchasing this swap, the Company will be exposed to credit losses from
counter-party non-performance; however, the Company does not anticipate any such
losses from this agreement, which is with a major financial institution. The
agreement will also expose the Company to interest rate risk should LIBOR rise
during the term of the agreement. This swap agreement is accounted for under
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). Under the provisions of SFAS
133, the Company initially recorded the interest rate swap at fair value, and
subsequently recorded any changes in fair value in "other comprehensive income."
Fair value is determined based on quoted market prices, which reflect the
difference between estimated future variable-rate payments and future fixed-rate
receipts.
Note 10 - Newly Issued or Recently Effective Accounting Pronouncements:
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51."
FIN No. 46 requires certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the equity investors in the entity do not
have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. In December 2003,
the FASB issued FIN No. 46-R, "Consolidation of Variable Interest Entities",
which represents a revision to FIN 46. FIN No. 46-R clarifies certain aspects of
FIN 46 and provides certain entities with exemptions from the requirements of
FIN 46. The variable interest model of FIN No. 46-R was only slightly modified
from that contained in FIN 46. The variable interest model looks to identify the
primary beneficiary of a variable interest entity. The primary beneficiary is
the party that is exposed to the majority of the risk or stands to benefit the
most from the variable interest entity's activities. A variable interest entity
would be required to be consolidated if certain conditions were met. The
provisions of FIN No. 46-R are effective for interests in variable interest
entities as of the first interim or annual period ending after December 15,
2003. The Company currently has no contractual relationship or other business
relationship with a variable interest entity and therefore the adoption of FIN
46 or FIN No. 46-R did not have a material effect on the Company's results of
operations, financial position or cash flows as of and for the three month
period ended March 31, 2004.
On December 17, 2003, the Staff of the Securities and Exchange Commission
issued Staff Accounting Bulletin No. 104 ("SAB 104"), "Revenue Recognition",
which supercedes SAB 101, "Revenue Recognition in Financial Statements". SAB
104's primary purpose is to rescind accounting guidance contained in SAB 101
related to multiple element revenue arrangements, superceded as a result of the
issuance of EITF 00-21, "Accounting for Revenue Arrangements with Multiple
Deliverables." While the wording of SAB 104 has changed to reflect the issuance
of EITF 00-21, the revenue recognition principles of SAB 101 remain largely
unchanged by the issuance of SAB 104. The adoption of SAB 104 did not have a
material effect on the Company's results of operations, financial position or
cash flows as of and for the three month period ended March 31, 2004.
In April 2004, the Emerging Issues Task Force issued Statement No. 03-06
"Participating Securities and the Two-Class Method Under FASB Statement No. 128,
Earnings Per Share" ("EITF 03-06"). EITF 03-06 addresses a number of questions
regarding the computation of earnings per share by companies that have issued
securities other than common stock that contractually entitle the holder to
participate in dividends and earnings of the company when, and if, it declares
dividends on its common stock. The issue also provides further guidance in
applying the two-class method of calculating earnings per share, clarifying what
constitutes a participating security and how to apply the two-class method of
computing earnings per share once it is determined that a security is
participating, including how to allocate undistributed earnings to such a
security. EITF 03-06 is effective for fiscal periods beginning after March 31,
2004. The Company is currently evaluating the effect of adopting EITF 03-06 on
its results of operations.
13
Note 11 - Comprehensive Income/(Loss):
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,
-----------------------------
2004 2003
------------ ------------
Net income (loss) $ 1,712 $ (4,935)
Other comprehensive income:
Foreign currency translation
adjustments 2,756 (819)
------------ ------------
Total comprehensive income (loss) $ 4,468 $ (5,754)
============ ============
Accumulated other comprehensive income presented in the accompanying
condensed consolidated balance sheets consists of cumulative foreign currency
translation adjustments.
Note 12 - Geographic Information:
The Company operates in one industry segment and markets its products
worldwide through its own direct sales force. The Company attributes revenues
from customers in different geographic areas based on the location of the
customer. Sales in the U.S. were 36% and 38% of total sales for the three months
ended March 31, 2004 and 2003, respectively.
(In thousands)
Three Months Ended March 31,
2004 2003
--------------- ---------------
Geographic information consists of the following:
Net sales:
North America $ 266,450 $ 217,573
Latin America 87,203 62,098
Europe 306,678 252,982
--------------- ---------------
Total $ 660,331 $ 532,653
=============== ===============
March 31, December 31,
2004 2003
--------------- ---------------
Long-lived assets:
United States $ 51,221 $ 48,041
United Kingdom 56,240 54,707
Other foreign countries 13,972 14,052
--------------- ---------------
Total $ 121,433 $ 116,800
=============== ===============
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,"
14
"will," and similar words or expressions. Any statement that is not a historical
fact, including statements regarding estimates, projections, future trends and
the outcome of events that have not yet occurred, is a forward-looking
statement. Our forward-looking statements generally relate to 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 our ability to
reduce and control costs, our ability to take advantage of beneficial vendor
pricing and rebate programs from time to time, the timing of delivery of
products from suppliers, the product mix sold by 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 credit facilities,
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, 2003. 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, 2004 COMPARED TO THREE MONTHS ENDED MARCH 31, 2003
Net sales were $660.3 million for the quarter ended March 31, 2004,
compared to net sales of $532.7 million for the quarter ended March 31, 2003,
which represented an increase of $127.6 million, or 24%. The increase was
primarily due to growth in unit sales to existing and new customers, changes in
foreign currency exchange rates and the acquisition of EBM Mayorista, S.A. de
C.V. in October 2003.
The Company's gross profit for the quarter ended March 31, 2004 was $49.3
million compared to $37.6 million for the quarter ended March 31, 2003, which
represented an increase of $11.7 million, or 31%. Gross margin increased to 7.5%
in the current quarter from 7.1% in the same period last year. The increase in
gross margin percentage was primarily due to an inventory charge of $1.5 million
taken in the first quarter of 2003, as discussed below.
Selling, general and administrative expenses increased to $42.7 million
for the quarter ended March 31, 2004, from $39.3 million for the quarter ended
March 31, 2003, an increase of $3.4 million, or 9%. The increase in expenses was
primarily attributable to changes in foreign currency exchange rates and the
impact of sales volume increases. As a percentage of sales, selling, general and
administrative expenses decreased in the first quarter of 2004 to 6.5% from 7.4%
in the first quarter of 2003.
Interest expense decreased to $3.8 million for the quarter ended March 31,
2004 from $4.0 million in the same period last year. This decrease was primarily
due to a decrease in average interest rates on combined borrowings. The average
interest rate in the first quarter of 2003 decreased to 5.9% from 7.2% in the in
the same period last year.
The effective tax rate was 37% for the quarter ended March 31, 2004,
compared to an effective tax benefit rate of 30% for the quarter ended March 31,
2003. The higher tax rate was primarily related to the annualized affect of
additional deferred tax valuation allowances established related to losses
incurred in certain foreign jurisdictions.
Restructuring Costs and Special Charges
In the first quarter of 2004, the Company did not record any restructuring
costs or special charges.
In the first quarter of 2003, the Company continued to implement profit
improvement and cost reduction measures and recorded restructuring costs of $1.4
million. These charges consisted of severance and benefits of $1.3 million
related to worldwide involuntary terminations and estimated lease costs of
15
$56,300 pertaining to future lease obligations for non-cancelable lease payments
for excess facilities in the U.S. The Company terminated 127 employees
worldwide, across a wide range of functions including marketing, technical
support, finance, operations and sales, and expects annual savings of
approximately $8 million. Expected savings related to vacated facilities is not
material. Future expected cost reductions will be reflected in the income
statement line item `Selling, general and administrative expenses.' The Company
also recorded an inventory charge of approximately $1.5 million related to
significant changes to certain vendor relationships and the discontinuance of
other non-strategic product lines.
At March 31, 2004, outstanding liabilities related to these restructuring
and special charges are summarized as follows (in thousands):
Severance Lease
Costs Costs Total
--------- ----------- ----------
Balance at January 1, 2003 $ 545 $ 2,079 $ 2,624
Restructuring and special charges 1,327 56 1,383
Cash payments (1,638) (808) (2,446)
--------- ----------- ----------
Balance at December 31, 2003 234 1,327 1,561
Restructuring and special charges - - -
Cash payments (58) (137) (195)
--------- ----------- ----------
Balance at March 31, 2004 $ 176 $ 1,190 $ 1,366
========= =========== ==========
LIQUIDITY AND CAPITAL RESOURCES
In recent years, the Company has funded its working capital requirements
principally through borrowings under 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. The Company's future cash requirements will depend on numerous
factors, including potential acquisitions and the rate of growth of its sales
and its effectiveness at controlling and reducing its costs.
On March 5, 2004, the Company completed a private offering of $110 million
aggregate principal amount of 3 3/4% convertible subordinated notes due 2024.
The offering was made only to qualified institutional buyers in accordance with
Rule 144A under the Securities Act of 1933, as amended. The notes are
convertible into the Company's common stock under certain circumstances at a
conversion rate of 91.2596 shares per $1,000 principal amount of notes, subject
to adjustment, which is equivalent to a conversion price of approximately $10.96
per share. This represents a 32.5% premium over Bell Microproducts closing price
of its common stock on the Nasdaq National Market on March 1, 2004 of $8.27 per
share. The Company may redeem some or all of the notes under certain
circumstances on or after March 5, 2009 and prior to March 5, 2011, and at any
time thereafter without such circumstances, at 100% of the principal amount,
plus accrued but unpaid interest up to, but excluding, the redemption date. The
Company may be required to purchase some or all of the notes on March 5, 2011,
March 5, 2014 or March 5, 2019 or in the event of a change in control at 100% of
the principal amount, plus accrued but unpaid interest up to, but excluding, the
purchase date. Proceeds from the offering were used to repay amounts outstanding
under its working capital facilities with Wachovia Bank, N.A. and Bank of
America, National Association and its senior subordinated notes held by The
Retirement Systems of Alabama.
Net cash used in operating activities for the three months ended March 31,
2004, was $15.8 million. The Company's inventories decreased as of March 31,
2004 to $236.0 million from $257.0 million as of December 31, 2003, and the
Company's accounts payable decreased to $199.9 million as of March 31, 2004
16
from $250.5 million as of December 31, 2003. The decrease in inventories and
accounts payable are primarily a result of decreased inventory purchases and the
timing of inventory receipts and payments related thereto. The Company's
accounts receivable decreased to $301.1 million as of March 31, 2004, from
$309.9 million as of December 31, 2003.
On December 31, 2002, the Company entered into an amendment to its
syndicated Loan and Security Agreement with Wachovia Bank, N.A. ("Wachovia
facility"), (First Union Bank, as the original lender). The amendment reduces
the credit facility to $160 million from $175 million and extends the maturity
date to May 31, 2005. The Wachovia 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 Congress Financial Corporation (Western) and Bank of America
N.A. as co-agents and other financial institutions, as lenders. Borrowings under
the line of credit bear interest at Wachovia'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, 2004, was
3.9%, and the balance outstanding at March 31, 2004 was $37.7 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. On October 9, 2003, the Company entered into a Second Amendment and
Waiver, to effectively enable the Company to complete the acquisition of EMB
Mayorista, in Mexico
On December 2, 2002, as amended in November 2003, the Company entered into
a Syndicated Credit Agreement arranged by Bank of America, National Association
("Bank of America facility"), as principal agent, to provide a (pound)75 million
revolving line of credit facility, or the U.S. dollar equivalent of
approximately $138 million at March 31, 2004 through December 2005. The Bank of
America facility refinanced the Company's $60 million credit facility with Royal
Bank of Scotland. The syndicate includes Bank of America as agent and security
trustee and other banks and financial institutions, as lenders. Borrowings under
the line of credit bear interest at Bank of America's base rate plus a margin of
2.375% to 2.50%, based on certain financial measurements. At the Company's
option, all or any portion of the outstanding borrowings may be converted to a
LIBOR Revolving Loan, which bears interest at the adjusted LIBOR rate plus a
margin of 2.375% to 2.50%, based on certain financial measurements. The average
interest rate on the outstanding borrowings under the revolving line of credit
during the quarter ended March 31, 2004 was 6.0%, and the balance outstanding at
March 31, 2004 was $19.8 million. Obligations of the Company under the revolving
line of credit are secured by certain assets of the Company's European
subsidiaries. The revolving line of credit requires the Company to meet certain
financial tests and to comply with certain other covenants, including
restrictions on incurrence of debt and liens, restrictions on mergers,
acquisitions, asset dispositions, capital contributions, payment of dividends,
repurchases of stock, repatriation of cash and investments.
On 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. On August 1, 2003, the Company entered
into an interest rate swap agreement with Wachovia Bank effectively securing a
new interest rate on $40 million of the outstanding debt. The new rate is based
on the six month U.S. Libor rate plus a fixed margin of 4.99% and continues
until termination of the agreement on June 30, 2010. The 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
17
stock. The Company is also required to be in compliance with the covenants of
certain other borrowing agreements. The balance outstanding at March 31, 2004 on
this long-term debt was $55.5 million, $7.0 million is payable in 2004, $7.0
million is payable in each of the years 2005 and 2006 and $34.5 million
thereafter.
On May 9, 2003, the Company entered into a mortgage agreement with Bank of
Scotland for (pound)6 million, or the U.S. dollar equivalent of approximately
$11.1 million, as converted at March 31, 2004. The new mortgage agreement fully
re-paid the borrowings outstanding under the previous mortgage agreement with
Lombard NatWest Limited, and has a term of 10 years, bears interest at Bank of
Scotland's rate plus 1.35%, and is payable in quarterly installments of
approximately (pound)150,000, or $277,000 USD, plus interest. The principal
amount due each year is approximately $1,108. The balance of the mortgage as
converted to USD at March 31, 2004 was $10.2 million. Terms of the mortgage
require the Company to meet certain financial ratios and to comply with certain
other covenants on a quarterly basis.
The Company has an agreement with IFN Finance BV to provide up to $7.5
million in short-term financing to the Company. The loan is secured by certain
European accounts receivable and inventories, bears interest at 5.5%, and
continues indefinitely until terminated by either party within 90 days notice.
The loan balance outstanding was $1.7 million at March 31, 2004.
The Company was in compliance with its bank and subordinated debt
financing covenants at March 31, 2004; 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 lenders, the Company's financial
condition, results of operations and cash flows would be materially adversely
affected.
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. For the quarter ended March 2004, average borrowings
outstanding on the variable rate credit facility with Wachovia Bank were $77.9
million and average borrowings with Bank of America, N.A. was $55.6 million.
Wachovia and Bank of America have interest rates that are based on associated
rates such as Eurodollar and base or prime rates that may fluctuate over time
based on changes in the economic environment. Based on actual borrowings
throughout the year under these borrowing facilities, an increase of 1% in such
interest rate percentages would increase the annual interest expense by
approximately $1.3 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. 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. As a result of
the Company or its subsidiaries entering into transactions denominated in
currencies other than their functional currency, the Company recognized no
material foreign currency gain or loss during the quarter ended March 31, 2004.
To the extent the Company is unable to manage these risks, the Company's
results, financial position and cash flows could be materially adversely
affected.
In August 2003, the Company entered into an interest rate swap agreement
in order to gain access to the lower borrowing rates normally available on
floating-rate debt, while avoiding prepayment and other costs that would be
associated with refinancing long-term fixed-rate debt. The swap purchased has a
notional amount of $40 million, expiring in June 2010, with a six-month
settlement period and provides for variable interest at LIBOR plus a set rate
spread. The notional amount does not quantify risk or represent assets or
liabilities, but rather, is used in the determination of cash settlement under
the swap agreement. As a result of purchasing this swap, the Company will be
exposed to credit losses from counter-party non-
18
performance; however, the Company does not anticipate any such losses from this
agreement, which is with a major financial institution. The agreement will also
expose the Company to interest rate risk should LIBOR rise during the term of
the agreement. This swap agreement is accounted for under Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS 133"). Under the provisions of SFAS 133, we initially
recorded the interest rate swap at fair value, and subsequently recorded any
changes in fair value in "other comprehensive income." Fair value is determined
based on quoted market prices, which reflect the difference between estimated
future variable-rate payments and future fixed-rate receipts.
ITEM 4: CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. After evaluating
the effectiveness of the Company's disclosure controls and
procedures pursuant to Rule 13a-15(b) of the Securities Exchange Act
of 1934 ("the Exchange Act") as of the end of the period covered by
this quarterly report, our chief executive officer and chief
financial officer with the participation of the Company's
management, have concluded that the Company's disclosure controls
and procedures are effective to ensure that information that is
required to be disclosed by the Company in reports that it files
under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the rules of the
Securities Exchange Commission.
(b) Changes in internal controls. There were no changes in our internal
control over financial reporting that occurred during the period
covered by this quarterly report that have materially affected, or
are reasonably likely to materially affect, the Company's internal
control over financial reporting.
19
PART II - OTHER INFORMATION
ITEM 2: CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES
On March 5, 2004, the Company issued 3 3/4% convertible subordinated notes
due 2024 in the aggregate principal amount of $110 million to two purchasers.
The notes are convertible into the Company's common stock under certain
circumstances at a conversion rate of 91.2596 shares per $1,000 principal amount
of notes, subject to adjustment, which is equivalent to a conversion price of
approximately $10.96 per share. The Company relied upon Rule 506 of Regulation D
for an exemption from registration requirements.
ITEM 6: EXHIBITS AND REPORTS
(a) Exhibits:
See Exhibit Index on page following Signatures.
(b) Reports on Form 8-K:
During the first quarter of 2004, the Company filed the
following:
Form 8-K dated January 12, 2004 to announce updated 2003
fourth quarter guidance.
Form 8-K dated February 17, 2004 to announce 2003 fourth
quarter and year end financial results.
Form 8-K dated March 1, 2004 to announce the proposed
convertible note offering.
Form 8-K dated March 2, 2004 to announce the pricing of the
proposed convertible note offering.
20
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: May 10, 2004
BELL MICROPRODUCTS INC.
BY: /s/ JAMES E. ILLSON
---------------------------------
CHIEF FINANCIAL OFFICER AND EXECUTIVE VICE
PRESIDENT OF FINANCE AND OPERATIONS
21
EXHIBIT INDEX
Form 10-Q
Quarter ended March 31, 2004
EXHIBIT NO. DESCRIPTION
- ----------- -----------
10.1* Employee Stock Purchase Plan, as Amended and Restated Through February 19, 2004.
31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
*Management agreement or compensatory plan or arrangement.
22