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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, 2005
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 4, 2005:
28,969,500
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, 2005 and
December 31, 2004 3
Condensed Consolidated Statements of Operations - Three months
ended March 31, 2005 and 2004 4
Condensed Consolidated Statements of Cash Flows - Three months
ended March 31, 2005 and 2004 5
Notes to Condensed Consolidated Financial Statements 6
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations 17
Item 3: Quantitative and Qualitative Disclosure about Market Risk 21
Item 4: Controls and Procedures 22
PART II - OTHER INFORMATION
Item 6: Exhibits 23
Signatures 24
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,
2005 2004
-------------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 11,380 $ 13,294
Accounts receivable, net 401,353 376,017
Inventories 282,450 271,797
Prepaid expenses and other current assets 24,201 24,676
-------------- -----------
Total current assets 719,384 685,784
Property and equipment, net 40,743 42,805
Goodwill 92,321 92,605
Intangibles, net 9,048 9,407
Deferred debt issuance costs and other assets 9,745 9,988
-------------- -----------
Total assets $ 871,241 $ 840,589
============== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 309,999 $ 307,373
Borrowings under lines of credit 32,465 17,577
Short-term note payable and current portion
of long-term notes payable 8,830 12,183
Other accrued liabilities 63,008 72,164
-------------- -----------
Total current liabilities 414,302 409,297
Borrowings under lines of credit 65,825 42,686
Long-term notes payable 159,927 160,905
Other long-term liabilities 5,432 5,011
-------------- -----------
Total liabilities 645,486 617,899
-------------- -----------
Commitments and contingencies
Shareholders' equity:
Common Stock, $0.01 par value, 80,000 shares
authorized; 28,914 and 28,672 issued and outstanding 168,702 167,705
Retained earnings 36,550 32,174
Accumulated other comprehensive income 20,503 22,811
-------------- -----------
Total shareholders' equity 225,755 222,690
-------------- -----------
Total liabilities and shareholders' equity $ 871,241 $ 840,589
============== ===========
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,
---------------------------------
2005 2004
------------- -----------
Net sales $ 803,948 $ 660,331
Cost of sales 746,649 611,044
------------- -----------
Gross profit 57,299 49,287
Selling, general and administrative expenses 45,445 42,731
------------- -----------
Operating income 11,854 6,556
Interest expense and other income, net (4,818) (3,838)
------------- -----------
Income before income taxes 7,036 2,718
Provision for income taxes 2,660 1,006
------------- -----------
Net income $ 4,376 $ 1,712
============= ===========
Income per share
Basic $ 0.15 $ 0.06
============= ===========
Diluted $ 0.15 $ 0.06
============= ===========
Shares used in per share calculation
Basic 28,795 27,068
============= ===========
Diluted 29,635 28,079
============= ===========
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,
-----------------------------
2005 2004
----------- -----------
Cash flows from operating activities:
Net income: $ 4,376 $ 1,712
Adjustments to reconcile net income to net
cash (used in) provided by operating activities:
Depreciation and amortization 2,772 3,026
Provision for bad debts 230 2,064
Loss on disposal of property, equipment and other - 26
Deferred income taxes 29 31
Changes in assets and liabilities:
Accounts receivable (29,644) 8,915
Inventories (12,588) 22,682
Prepaid expenses 569 292
Other assets 229 (3,402)
Accounts payable (27,447) (56,239)
Other accrued liabilities (8,445) 1,172
----------- -----------
Net cash used in operating activities (69,919) (19,721)
----------- -----------
Cash flows from investing activities:
Acquisition of property, equipment and other (754) (669)
Proceeds from sale of property, equipment and other 1 25
----------- -----------
Net cash used in investing activities (753) (644)
----------- -----------
Cash flows from financing activities:
Net borrowings (repayments) under line of credit agreements 38,676 (71,716)
Changes in book overdraft 33,364 3,956
Repayment of long-term notes payable to RSA (3,500) (23,500)
Borrowings of notes and leases payable 108 110,000
Repayments of notes and leases payable (493) (285)
Proceeds from issuance of Common Stock 684 401
----------- -----------
Net cash provided by financing activities 68,839 18,856
----------- -----------
Effect of exchange rate changes on cash (81) 46
----------- -----------
Net decrease in cash (1,914) (1,463)
Cash at beginning of period 13,294 4,904
----------- -----------
Cash at end of period $ 11,380 $ 3,441
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 6,956 $ 6,997
Income taxes $ 3,204 $ 17
Supplemental non-cash financing activities:
Issuance of restricted stock $ - $ 400
Change in fair value of interest rate swap $ (438) $ -
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 1 - Basis of Presentation:
The accompanying interim 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, 2004. 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 sales return reserve; and the recognition and measurement of income
tax assets and liabilities. Interim results are subject to significant
variations and the results of operations for the three months ended March 31,
2005 are not necessarily indicative of the results to be expected for the full
year.
Year end condensed balance sheet data included in this interim report is
derived from 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, 2004.
Cash book overdrafts of $65.2 million and $17.6 million as of March 31,
2005 and March 31, 2004, respectively, are included in accounts payable.
The Company operates in one business segment as a distributor of storage
products and systems as well as semiconductor and computer products and
peripherals to original equipment manufacturers (OEMs), value-added resellers
(VARs) and dealers in the United States, Canada, Europe and Latin America. The
Company is one of the world's largest storage-centric value-added distributors
and a specialist in storage products and solutions. The Company's concentration
on data storage systems and products allows it to provide greater technical
expertise to its customers, form strategic relationships with key manufacturers
and provide complete storage solutions to its customers at many levels of
integration. The Company's storage products include:
- high-end computer and storage subsystems;
- Fibre Channel connectivity products;
- complete storage systems such as storage area networks (SAN),
network attached storage (NAS) and direct attached storage (DAS);
- storage management software;
- disk, tape and optical drives; and
- a broad selection of value-added services.
In addition, the Company has developed a proprietary LDI software
licensing system, which facilitates the sale and administration of software
licenses.
Note 2 - Acquisitions:
All acquisitions below have been accounted for using the purchase method.
Accordingly, the results
6
of operations of the acquired businesses are included in the consolidated
financial statements from the dates of acquisition.
OpenPSL Holdings Limited Acquisition
On June 22, 2004, the Company acquired all of the outstanding capital
stock of OpenPSL Holdings Limited ("OpenPSL"), a privately held Company
headquartered in Manchester, United Kingdom, with branch offices in Dublin,
Ireland and Leeds, Bracknell and Nottingham, United Kingdom. The acquisition of
OpenPSL allows the Company to broaden its product offerings in a strategic
geography. OpenPSL is a leading value added distributor of enterprise, storage
and security products and related professional services to VARs, system
integrators and software companies in the UK and Ireland. Their line card of
franchised suppliers includes Hewlett Packard, IBM, Oracle, Veritas, Allied
Telesyn, Microsoft and others.
OpenPSL was acquired for a total purchase price of approximately $37.9
million which included cash of approximately $33.8 million, the issuance of
664,970 shares of the Company's Common Stock including Common Stock issued as
consideration for the first of two contingent incentive payments and acquisition
costs. The Company is obligated to pay up to an additional $4.3 million within
one year of the closing date as an additional contingent incentive payment to be
based upon earnings achieved during the first twelve months after acquisition
and will be recorded to goodwill. The final allocation of the purchase price to
acquired assets and assumed liabilities based upon management estimates are as
follows (in thousands):
Accounts receivable $ 30,721
Inventories 4,743
Equipment and other assets 2,419
Goodwill 31,145
Intangibles 3,671
Accounts payable (18,785)
Other accrued liabilities (9,289)
Notes payable (6,723)
----------
Total consideration $ 37,902
==========
Other intangibles include customer and supplier relationships and
non-compete agreements with estimated useful lives of 4 years, 7 years and 2
years, respectively.
Pro forma disclosure (in thousands, except per share data):
The following pro forma combined amounts give effect to the acquisition of
OpenPSL as if the acquisition had occurred on January 1, 2004. The pro forma
amounts do not purport to be indicative of what would have occurred had the
acquisition been made as of the beginning of the period or of results which may
occur in the future.
Three Months ended March
31,
------------------------
2005 2004
---------- ---------
Revenue $ 803,948 $ 720,951
Net income $ 4,376 $ 2,983
Net income per share - basic $ 0.15 $ 0.11
Shares used in per share calculation - basic 28,795 27,068
Net income per share - diluted $ 0.15 $ 0.11
Shares used in per share calculation - diluted 29,635 28,079
7
Note 3 - Stock-Based Compensation Plans:
The following table illustrates the effect on net income and earnings 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,
2005 2004
------- --------
Net income as reported: $ 4,376 $ 1,712
Add: Stock-based employee compensation expense included in
reported earnings, net of tax 195 159
Deduct: Stock-based employee compensation expense determined
under the fair value method, net of tax (794) (953)
------- --------
Pro forma net income $ 3,777 $ 918
======= ========
Income per share:
As reported
Basic $ 0.15 $ 0.06
Diluted $ 0.15 $ 0.06
Pro forma
Basic $ 0.13 $ 0.03
Diluted $ 0.13 $ 0.03
The following weighted average assumptions were used for grants in the
first quarter ended March 31, 2005 and 2004 respectively; expected volatility of
72% and 75%, expected lives of 3.67 and 3.61 and risk free interest rates of
4.0% and 2.2%, 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 2 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, 2005, or for other
future periods.
8
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 4 - Intangible Assets:
The Company has acquired certain intangible assets through acquisitions
which include non-compete agreements, trademarks, trade names and customer and
supplier relationships. The carrying values and accumulated amortization of
these assets at March 31, 2005 and December 31, 2004 are as follows (in
thousands):
As of March 31, 2005
-----------------------------------------------
Estimated Gross
Useful Life for Carrying Accumulated Net
Amortized Intangible Assets Amortization Amount Amortization Amount
--------------------------- --------------- ----------- ------------ ---------
Non-compete agreements 2-6 years $ 1,622 $ (1,254) $ 368
Trademarks 20-40 years 4,765 (480) 4,285
Trade names 20 years 400 (56) 344
Customer/supplier relationships 4-10 years 5,023 (972) 4,051
----------- ----------- ------------ ---------
Total $ 11,810 $ (2,762) $ 9,048
=========== ============ =========
As of December 31, 2004
-----------------------------------------------
Estimated Gross
Useful Life for Carrying Accumulated Net
Amortized Intangible Assets Amortization Amount Amortization Amount
--------------------------- --------------- ----------- ------------ ---------
Non-compete agreements 2-6 years $ 1,623 $ (1,207) $ 416
Trademarks 20-40 years 4,835 (449) 4,386
Trade names 20 years 400 (51) 349
Customer/supplier relationships 4-10 years 5,023 (767) 4,256
----------- ----------- ------------ ---------
Total $ 11,881 $ (2,474) $ 9,407
=========== ============ =========
The estimated amortization expense of these assets in future fiscal years
is as follows (in thousands):
Estimated Amortization Expense
April 1, 2005 to December 31, 2005 $ 863
For year ending December 31, 2006 1,084
For year ending December 31, 2007 1,008
For year ending December 31, 2008 821
For year ending December 31, 2009 638
Thereafter 4,634
-----------
Total $ 9,048
===========
Note 5 - Earnings per Share:
Basic EPS is computed by dividing net income available to common
shareholders (numerator) by the weighted average number of common shares
outstanding (denominator) during the period. Diluted EPS gives effect to all
dilutive potential common shares outstanding during the period resulting from
stock options using the treasury stock method. In computing diluted EPS, the
average stock price for the period is used in determining the number of shares
assumed to be purchased from the exercise of stock options.
Following is a reconciliation of the numerators and denominators of the
basic and diluted EPS computations for the periods presented below (in
thousands, except per share data):
Three Months Ended
March 31,
------------------------
2005 2004
---------- ----------
Net income $ 4,376 $ 1,712
========== ==========
Weighted average common shares
outstanding (Basic) 28,795 27,068
Effect of dilutive options, grants and
warrants 840 1,011
---------- ----------
Weighted average common shares
outstanding (Diluted) 29,635 28,079
========== ==========
In the three months ended March 31, 2005 and 2004, total common stock
options, grants and warrants excluded from diluted income per share calculations
because they were antidilutive were 1,010,746 and 921,623, respectively.
Note 6 - Lines of Credit and Term Debt:
March 31, December 31,
2005 2004
LINES OF CREDIT (IN THOUSANDS) ---------- ------------
Congress Facility $ 5,825 $ 686
Wachovia Facility 60,000 42,000
Bank of America Facility 32,443 17,577
IFN Financing BV 22 -
---------- ------------
98,290 60,263
Less: amounts included in current liabilities 32,465 17,577
---------- ------------
Amounts included in non-current liabilities $ 65,825 $ 42,686
========== ============
On September 13, 2004, the Company entered into an amendment to its
syndicated Loan and Security Agreement with Congress Financial Corporation
(Western) ("Congress"), an affiliate of Wachovia Bank, N.A. ("Wachovia"), as
administrative, collateral and syndication agent for the lenders of the
revolving line of credit (the "Congress Facility"). The amendment reduced the
Congress Facility from $160 million to $125 million, and extended the maturity
date to July 31, 2007. The syndicate includes Bank of America N.A. as co-agent
and other financial institutions as lenders. Borrowings under the Congress
Facility bear interest at Wachovia's prime rate plus a margin of 0.0% to 0.5%,
based on unused availability levels. At the Company's option, all or any portion
of the outstanding borrowings may be converted to a Eurodollar rate loan, which
bears interest at the adjusted Eurodollar rate plus a margin of 1.50% to 2.00%,
based on unused availability levels. The Company also pays an unused line fee
equal to 0.375% per annum of the unused portion of the facility, subject to
certain adjustments. The average interest rate on outstanding borrowings under
the Congress Facility during the quarter ended March 31, 2005 was 5.33%, and the
balance outstanding at March 31, 2005 was $5.8 million. Obligations of the
Company under the Congress
10
Facility are collateralized by certain assets of the Company and its North and
South American subsidiaries. The Congress Facility requires the Company to meet
certain financial tests and to comply with certain other covenants, including
restrictions on incurrence of debt and liens, restrictions on mergers,
acquisitions, asset dispositions, capital contributions, payment of dividends,
repurchases of stock and investments.
On September 20, 2004, and as further amended in January 2005, Bell
Microproducts, (the parent company only) ("Bell") entered into a securitization
program with Wachovia Bank, National Association ("Wachovia") and Blue Ridge
Asset Funding Corporation ("Blue Ridge"), an affiliate of Wachovia, which
expires on September 20, 2007 ("Wachovia Facility"). Under the program, Bell
will sell or contribute all of its receivables to a newly created special
purpose bankruptcy remote entity named Bell Microproducts Funding Corporation
("Funding"), a wholly-owned subsidiary of Bell. Funding will obtain financing
from Blue Ridge or Wachovia and other liquidity banks collateralized by the
receivables to pay a portion of the purchase price for the receivables. The
balance of the purchase price will be paid by advances made by Bell to Funding
under a subordinated note of Funding payable to Bell and by capital
contributions from Bell to Funding. The maximum principal amount available for
Funding's credit facility is $90 million. The interest rate on advances made by
Blue Ridge shall be the cost of Blue Ridge's commercial paper. In addition,
Funding pays a program fee in the amount of 95 basis points per annum on the
portion of the advances funded by Blue Ridge's commercial paper. The interest
rate on advances made by Wachovia and other liquidity banks shall be either an
alternate base rate (which is the higher of the "prime rate" as announced by
Wachovia, or 0.50% above the federal funds effective rate), or a rate based on
an adjusted LIBO rate plus 1.50%. Funding also pays an unused line fee ranging
from 0.20% to 0.25% per annum of the unused portion of the facility. Bell acts
as a servicer for Funding and will collect all amounts due under, and take all
action with respect to, the receivables for the benefit of Funding and its
lenders. In exchange for these services, Bell receives a servicing fee
determined on an arms-length basis. The cash flow from the collections of the
receivables will be used to purchase newly generated receivables, to pay amounts
to Funding's lenders, to pay down on the subordinated note issued to Bell and to
make dividend distributions to Bell (subject at all times to the required
capital amount being left in Funding). Including the program fee, the average
interest rate on outstanding borrowings under the securitization program for the
quarter ended March 31, 2005 was 3.49%, and the balance outstanding at March 31,
2005 was $60 million. Obligations of Funding under the Wachovia Facility are
collateralized by all of Funding's assets. The Wachovia Facility requires
Funding (and in certain circumstances, Bell) to meet certain financial tests and
to comply with certain other covenants including restrictions on changes in
structure, incurrence of debt and liens, payment of dividends and distributions,
and material modifications to contracts and credit and collections policy
On December 2, 2002, as further amended in December 2004, the Company
entered into a Syndicated Credit Agreement arranged by Bank of America, National
Association ("Bank of America facility"), as principal agent, to provide a
(pound)75 million revolving line of credit facility, or the U.S. dollar
equivalent of approximately $142 million at March 31, 2005. The Bank of America
facility matures on July 15, 2006. 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 2.25% 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 2.25% to 2.50%, based on certain
financial measurements. The average interest rate on the outstanding borrowings
under the revolving line of credit during the quarter ended March 31, 2005 was
6.4%, and the balance outstanding at March 31, 2005 was $32.4 million.
Obligations of the Company under the revolving line of credit are collateralized
by certain assets of the Company's European subsidiaries. The revolving line of
credit requires the Company to meet certain financial tests and to comply with
certain other covenants, including restrictions on incurrence of debt and liens,
restrictions on mergers, acquisitions, asset dispositions, capital
contributions, payment of dividends, repurchases of stock, repatriation of cash
and investments.
The Company's agreement with IFN Finance BV was amended in December 2004
to reduce its $7.5 million in short-term financing to $4.7 million. The loan is
collateralized by certain European accounts receivable and inventories, bears
interest at 5.5%, and continues indefinitely until terminated by either party
11
upon 90 days notice. The average interest rate on the outstanding borrowings
under this facility during the quarter ended March 31, 2005 was 5.5%, and the
balance outstanding at March 31, 2005 was $22,000.
March 31, December 31,
2005 2004
TERM LOANS (IN THOUSANDS) ------------ ------------
Convertible Notes $ 110,000 $ 110,000
Note payable to RSA, net 47,572 51,509
Bank of Scotland Mortgage 9,776 10,150
HSBC Bank plc Mortgage 847 897
------------ ------------
168,195 172,556
Less: amounts due in current year 8,268 11,651
------------ ------------
Long-term debt due after one year $ 159,927 $ 160,905
============ ============
On March 5, 2004, the Company completed a private offering of $110 million
aggregate principal amount of 3 3/4% convertible subordinated notes due 2024
(the "Old Notes"). On December 20, 2004, the Company completed its offer to
exchange its newly issued 3 3/4% Convertible Subordinated Notes, Series B due
2024 (the "New Notes") for an equal amount of its outstanding Old Notes.
Approximately $109,600,000 aggregate principal amount of the Old Notes,
representing approximately 99.6 percent of the total principal amount of Old
Notes outstanding, were tendered in exchange for an equal principal amount of
New Notes. The New Notes mature on March 5, 2024 and bear interest at the rate
of 3 3/4% per year on the principal amount, payable semi-annually on March 5 and
September 5, beginning on March 5, 2005. Holders of the New Notes may convert
the New Notes any time on or before the maturity date if certain conversion
conditions are satisfied. Upon conversion of the New Notes, the Company will be
required to deliver, in respect of each $1,000 principal of New Notes, cash in
an amount equal to the lesser of (i) the principal amount of each New Note to be
converted and (ii) the conversion value, which is equal to (a) the applicable
conversion rate, multiplied by (b) the applicable stock price. The initial
conversion rate is 91.2596 shares of common stock per New Note with a principal
amount of $1,000 and is equivalent to an initial conversion price of
approximately $10.958 per share. The conversion rate is subject to adjustment
upon the occurrence of certain events. The applicable stock price is the average
of the closing sales prices of the Company's common stock over the five trading
day period starting the third trading day following the date the New Notes are
tendered for conversion. If the conversion value is greater than the principal
amount of each New Note, the Company will be required to deliver to holders upon
conversion, at its option, (i) a number of shares of the Company's common stock,
(ii) cash, or (iii) a combination of cash and shares of the Company's common
stock in an amount calculated as described in the prospectus filed by the
Company in connection with the exchange offer. In lieu of paying cash and shares
of the Company's common stock upon conversion, the Company may direct its
conversion agent to surrender any New Notes tendered for conversion to a
financial institution designated by the Company for exchange in lieu of
conversion. The designated financial institution must agree to deliver, in
exchange for the New Notes, (i) a number of shares of the Company's common stock
equal to the applicable conversion rate, plus cash for any fractional shares, or
(ii) cash or (iii) a combination of cash and shares of the Company's common
stock. Any New Notes exchanged by the designated institution will remain
outstanding. The Company may redeem some or all of the New Notes for cash on or
after March 5, 2009 and before March 5, 2011 at a redemption price of 100% of
the principal amount of the New Notes, plus accrued and unpaid interest up to,
but excluding, the redemption date, but only if the closing price of the
Company's common stock has exceeded 130% of the conversion price then in effect
for at least 20 trading days within a 30 consecutive trading day period ending
on the trading day before the date the redemption notice is mailed. The Company
may redeem some or all of the New Notes for cash at any time on or after March
5, 2011 at a redemption price equal to 100% of the principal amount of the New
Notes, plus accrued and unpaid interest up to, but excluding, the redemption
date. The Company may be required to purchase for cash all or a potion of the
New Notes on March 5, 2011, March 5, 2014 or March 5, 2019, or upon a change of
control, at a purchase price equal to 100% of the principal amount of the new
notes being purchased, plus accrued and unpaid interest up to, but excluding,
the purchase date.
12
On July 6, 2000, and as amended on May 3, 2004, the Company entered into a
Securities Purchase Agreement with The Retirement Systems of Alabama and certain
of its affiliated funds (the "RSA facility"), under which the Company borrowed
$180 million of subordinated debt financing. This subordinated debt financing
was comprised of $80 million bearing interest at 9.125%, repaid in May 2001; and
$100 million bearing interest at 9.0%, payable in semi-annual principal
installments of $3.5 million plus interest and in semi-annual principal
installments of $8.5 million commencing December 31, 2007, with a final maturity
date of June 30, 2010. On August 1, 2003, the Company entered into an interest
rate swap agreement with Wachovia Bank effectively securing a new interest rate
on $40 million of the outstanding debt. The new rate is based on the six month
U.S. Libor rate plus a fixed margin of 4.99% and continues until termination of
the agreement on June 30, 2010. The notional amount of the interest rate swap
decreases ratably as the underlying debt is repaid. The notional amount at March
31, 2005 was $36.5 million. The Company initially recorded the interest rate
swap at fair value, and subsequently recorded changes in fair value as an offset
to the related liability. At March 31, 2005, the fair value of the interest rate
swap was ($928,000). The RSA facility is collateralized by a second lien on
certain of the Company's and its subsidiaries' North American and South American
assets. The Company must meet certain financial tests on a quarterly basis, and
comply with certain other covenants, including restrictions of incurrence of
debt and liens, restrictions on asset dispositions, payment of dividends, and
repurchase of stock. The Company is also required to be in compliance with the
covenants of certain other borrowing agreements. The balance outstanding at
March 31, 2005 on this long-term debt was $48.5 million, $7 million is payable
in years 2005 and 2006, $7.9 million is payable in 2007 and $26.6 million
thereafter. Net of the fair value of the interest rate swap, the balance
outstanding on the RSA facility at March 31, 2005 was $47.6 million.
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
$11.3 million, as converted at March 31, 2005. The new mortgage agreement fully
repaid the borrowings outstanding under the previous mortgage agreement with
Lombard NatWest Limited, 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 $284,000 USD, plus interest. The principal
amount due each year is approximately $1.1 million. The balance of the mortgage
as converted to USD at March 31, 2005 was $9.8 million. Terms of the mortgage
require the Company to meet certain financial ratios and to comply with certain
other covenants on a quarterly basis.
On June 22, 2004, in connection with the acquisition of OpenPSL, the
Company assumed a mortgage with HSBC Bank plc ("HSBC") for an original amount of
(pound)670,000, or the U.S. dollar equivalent of approximately $1.3 million. The
mortgage has a term of ten years, bears interest at HSBC's rate plus 1.25% and
is payable in monthly installments of approximately (pound)7,600, or $14,400
U.S. dollars. The balance on the mortgage was $847,000 at March 31, 2005.
The Company was in compliance with its bank and subordinated debt
financing covenants at March 31, 2005; 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 7 - Restructuring Costs and Special Charges:
In the second quarter of 2004, the Company was released from certain
contractual obligations related to excess facilities in the U.S. for which
restructuring charges had been recorded in 2002. Accordingly, the Company
released approximately $300,000 of its restructuring reserve related to that
facility. Additionally, the Company revised its estimates for future lease
obligations for non-cancelable lease payments for excess facilities in Europe
and recorded an additional $300,000 of restructuring charges.
In 2001 and continuing through 2003, the Company implemented a profit
improvement plan which included a worldwide workforce reduction, consolidation
of excess facilities, and restructuring of certain
13
vendor relationships and product offerings. The liability for restructuring
costs is recorded in other accrued liabilities in the Consolidated Balance
Sheets.
At March 31, 2005, outstanding liabilities related to these restructuring
and special charges are summarized as follows (in thousands):
Severance Lease
Costs Costs Total
--------- ---------- ----------
Balance at January 1, 2004 $ 234 $ 1,327 $ 1,561
Restructuring and special - 300 300
charges
Restructuring reserve release - (300) (300)
Cash payments (234) (618) (852)
--------- ---------- ----------
Balance at December 31, 2004 - 709 709
Restructuring and special - - -
charges
Cash payments - (83) (83)
--------- ---------- ----------
Balance at March 31, 2005 $ - $ 626 $ 626
========= ========== ==========
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. At March 31, 2005 product warranty liabilities were approximately
$1.3 million. The provision has had no material change from December 31, 2004.
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, results of operations and cash
flows.
In August 2003, we entered into an interest rate swap agreement in order
to gain access to the lower borrowing rates normally available on floating-rate
debt, while avoiding prepayment and other costs that would be associated with
refinancing long-term fixed-rate debt. The swap purchased has a notional amount
of $40 million, expiring in June 2010, with a six-month settlement period and
provides for variable interest at LIBOR plus a set rate spread. The notional
amount decreases ratably as the underlying debt is repaid. The notional
amount at March 31, 2005 was $36.5 million. The notional amount does not
quantify risk or represent assets or liabilities, but rather, is used in the
determination of cash settlement under the swap agreement. As a result of
entering into this swap, we are exposed to credit losses from counter-party
non-performance; however, we do not anticipate any such losses from this
agreement, which is with a major financial institution. The agreement will also
expose us to interest rate risk should LIBOR rise during the term of the
agreement. This swap agreement is accounted for as a fair value hedge under
Statement of
14
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). Under the provisions of SFAS 133, we
initially recorded the interest rate swap at fair value, and subsequently
recorded any changes in fair value as an offset to the related liability. Fair
value is determined based on quoted market prices, which reflect the difference
between estimated future variable-rate payments and future fixed-rate receipts.
The fair value of the interest rate swap was ($928,000) at March 31, 2005.
Note 10 - Newly Issued or Recently Effective Accounting Pronouncements:
In September 2004, the Emerging Issues Task Force issued Statement No.
04-10, "Applying Paragraph 19 of FAS 131 in Determining Whether to Aggregate
Operating Segments That Do Not Meet the Quantitative Thresholds," ("EITF
04-10"). The EITF gives guidance to companies on what to consider in determining
the aggregation criteria and guidance from paragraphs 17 and 19 of SFAS 131,
"Disclosures about Segments of an Enterprise and Related Information."
Specifically, whether operating segments must always have similar economic
characteristics and meet a majority of the remaining five aggregation criteria,
items (a)-(e), listed in paragraph 17 of SFAS 131, or whether operating segments
must meet a majority of all six aggregation criteria (that is, the five
aggregation criteria, items (a)-(e), listed in paragraph 17 and similar economic
characteristics), in determining the appropriate segment reporting disclosures.
The Company has completed its assessment of its operating segment and has
determined that EITF 04-10 has no impact on the Company's financial statement
disclosures.
On October 13, 2004 the Financial Accounting Standards Board (FASB)
ratified the consensus the EITF reached on EITF 04-8, "The Effect of
Contingently Convertible Instruments on Diluted Earnings per Share." This EITF
changes the way shares of common stock that are issuable upon conversion of
certain instruments are treated in the calculation of diluted earnings per
share. In addition to prospective application, this EITF requires retroactive
restatement of prior period earnings per share for all periods in which
securities outstanding at December 31, 2004 (the effective date of this
guidance) were outstanding. As of March 31, 2005, the Company had two series of
contingently convertible notes outstanding, including approximately $0.4 million
in aggregate principal amount of its 3 3/4% Convertible Subordinated Notes due
2024 (the "Old Notes") and approximately $109.6 million in aggregate principal
amount of its 3 3/4% Convertible Subordinated Notes, Series B due 2024 (the
"New Notes"). Because the terms of the Old Notes require settlement in shares of
common stock of the full value of the notes upon conversion, all shares
potentially issuable at the end of each reporting period would be included in
diluted weighted average shares outstanding. In addition, for purposes of
calculating diluted earnings per share, the Company would be required to add
back to net income the after-tax interest expense on the notes for each
reporting period, as if the notes had been converted to common stock at the
beginning of the period. The Company has concluded that this restatement would
have no material effect on previously reported diluted earnings per share. The
New Notes would only be included in the diluted earnings per share calculation
at such time in the future when the Company's stock price rises above the
conversion price. The dilutive impact would be equal to the number of shares
needed to satisfy the "in-the-money" value of the New Notes, assuming conversion
(see Note 6 for a discussion of the New Notes). The adoption of this consensus
did not have an impact on diluted earnings per share for the period ended March
31, 2005.
In November 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 151 ("SFAS 151"), "Inventory
Costs, an amendment of ARB No. 43, Chapter 4". This Statement amends the
guidance in ARB No. 43, Chapter 4, "Inventory Pricing," to clarify the
accounting for abnormal amounts of idle facility expense, freight, handling
costs, and wasted material (spoilage). This Statement requires those items to be
excluded from the cost of inventory and expensed when incurred. In addition,
this Statement requires that allocation of fixed production overheads to the
costs of conversion be based on the normal capacity of the production
facilities. This Statement is effective for companies at the beginning of the
first interim or annual period beginning after June 15, 2005. The Company does
not believe that the adoption of SFAS 151 will have a material effect on the
results of operations or consolidated financial position.
15
In December 2004, the FASB issued SFAS No. 123(R) ("SFAS 123(R)"),
"Share-Based Payment", which is a revision of SFAS No. 123, "Accounting for
Stock-Based Compensation". SFAS 123(R) supersedes APB Opinion No. 25 ("APB 25"),
"Accounting for Stock Issued to Employees", and its related implementation
guidance. SFAS 123(R) requires all share-based payments to employees, including
grants of employee stock options, to be recognized in the financial statements
based on their fair values. The Company currently accounts for its employee
stock options in accordance with APB 25 while disclosing the pro forma effect of
the options and restricted stock grants had they been recorded under the fair
value method. As required by the Statement as amended by the Securities and
Exchange Commission in April 2005, the Company plans to adopt the revised
Statement in its quarter ending March 31, 2006. The Company is in the process of
evaluating the impact of the adoption of this standard on their financial
statements.
Note 11 - Comprehensive Income:
Comprehensive income is defined as the change in equity of a business
enterprise during a period from transactions and other events and circumstances
from non-owner sources, including foreign currency translation adjustments.
Comprehensive income is as follows (in thousands):
Three Months Ended March 31,
----------------------------
2005 2004
--------- ---------
Net income $ 4,376 $ 1,712
Other comprehensive income:
Foreign currency translation
adjustments (2,308) 2,756
--------- ---------
Total comprehensive income $ 2,068 $ 4,468
========= =========
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 39% and 36% of total sales for the three months
ended March 31, 2005 and 2004, respectively.
(In thousands)
Three Months Ended March 31,
2005 2004
---------- ----------
Geographic information consists of the following:
Net sales:
North America $ 338,805 $ 266,450
Latin America 93,570 87,203
Europe 371,573 306,678
---------- ----------
Total $ 803,948 $ 660,331
========== ==========
March 31, December 31,
2005 2004
--------- ------------
Long-lived assets:
United States $ 34,726 $ 35,762
United Kingdom 89,867 91,709
Other foreign countries 27,264 27,334
--------- ------------
Total $ 151,857 $ 154,805
========= ============
16
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
Information in the following Management's Discussion and Analysis of
Financial Condition and Results of Operations and elsewhere in this quarterly
report contains forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934. Forward-looking statements provide current expectations or forecasts of
future events and can be identified by the use of terminology such as "believe,"
"estimate," "expect," "intend," "may," "could," "will," and similar words or
expressions. Any statement that is not a historical fact, including statements
regarding estimates, projections, future trends and the outcome of events that
have not yet occurred, is a forward-looking statement. Our forward-looking
statements generally relate to IT market growth in 2005, market share gains and
significant earnings improvements during 2005, 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 service our debt, our ability to take advantage of
beneficial vendor pricing and rebate programs from time to time, the timing of
delivery of products from suppliers, the product mix sold by us, the integration
of acquired businesses, customer demand, our dependence on a small number of
customers that account for a significant portion of revenues, availability of
products from suppliers, cyclicality in the storage disk drive and other
industries, price competition for products sold by us, management of growth, our
ability to collect accounts receivable in a timely manner, price decreases on
inventory that is not price protected, our ability to negotiate credit
facilities, currency exchange rates, potential interest rate fluctuations as
described below and the other risk factors detailed in our filings with the SEC,
including our Annual Report on Form 10-K for the year ended December 31, 2004.
We assume no obligation to update such forward-looking statements or to update
the reasons actual results could differ materially from those anticipated in
such forward-looking statements. Because many factors are unforeseeable, the
foregoing should not be considered an exhaustive list.
RESULTS OF OPERATIONS
EXECUTIVE SUMMARY
The first quarter of 2005 was another excellent quarter for our Company.
We grew sales by 22% as compared to last year, nearly $150 million, and posted a
very good improvement in profitability. The first quarter ended on a strong note
as March 2005 was the best sales month in the history of the Company. Although
there were signs during the first quarter that market conditions have become
more challenging in certain product segments and geographies, we remain
optimistic that the overall IT market will grow in 2005 and we believe that we
are positioned to continue to gain market share and generate significant
improvements in earnings as the year unfolds.
THREE MONTHS ENDED MARCH 31, 2005 COMPARED TO THREE MONTHS ENDED MARCH 31, 2004
Net sales were $803.9 million for the quarter ended March 31, 2005,
compared to net sales of $660.3 million for the quarter ended March 31, 2004,
which represented an increase of $143.6 million, or 22%. The sales increase was
driven by an increase of $79.5 million in Components and Peripherals sales as
well as an increase of $64.1 million in sales of Solutions sales. The increase
in sales of Components and Peripherals was due primarily to growth in Components
sales in North America. The Solutions sales increase was due to the acquisition
of OpenPSL Limited ("OpenPSL") in June of 2004, the growth of this market and a
growth in market share. OpenPSL contributed approximately $60 million of our
Solutions sales in the quarter ended March 31, 2005 and none in the quarter
ended March 31, 2004.
17
Our gross profit for the quarter ended March 31, 2005 was $57.3 million
compared to $49.3 million for the quarter ended March 31, 2004, which
represented an increase of $8.0 million, or 16%. The increase in gross profit
was primarily due to the acquisition of OpenPSL in June 2004, an increase in
sales volume and a shift in product mix. The acquisition of OpenPSL contributed
approximately $7.0 million in the quarter ended March 31, 2005. Gross margin
decreased to 7.1% in the current quarter from 7.5% in the same period last year,
primarily due to margin declines in our European distribution business resulting
from competitive market conditions.
Selling, general and administrative expenses increased to $45.4 million
for the quarter ended March 31, 2005, from $42.7 million for the quarter ended
March 31, 2004, an increase of $2.7 million, or 6%. The increase in expenses was
primarily attributable to our acquisition of OpenPSL which added approximately
$4.4 million to our consolidated expenses. Excluding the OpenPSL expenses in the
first quarter of 2005, expenses decreased $1.7 million as compared to last year.
As a percentage of sales, selling, general and administrative expenses decreased
in the first quarter of 2005 to 5.6% from 6.5% in the first quarter of 2004.
Interest expense increased to $4.8 million for the quarter ended March 31,
2005 from $3.8 million in the same period last year. This increase was primarily
due to an increase in average borrowings outstanding under our credit facilities
during the quarter. The average interest rate in the first quarter of 2005
decreased to 5.7% from 5.9% in the same period last year.
The effective tax rate was 38% in the quarter ended March 31, 2005,
compared to 37% for the quarter ended March 31, 2004 and the actual effective
tax rate of 41.3% at the year ended December 31, 2004. The decrease in the
effective rate in the first quarter of 2005 from the actual 2004 rate was
primarily related to the implementation of tax planning strategies and a shift
to profitability in certain foreign jurisdictions with valuation allowances.
LIQUIDITY AND CAPITAL RESOURCES
In recent years, we have funded our working capital requirements
principally through borrowings under subordinated term loans and bank lines of
credit, as well as proceeds from warrants and stock option exercises. Working
capital requirements have included the financing of increases in inventory and
accounts receivable resulting from sales growth, and the financing of certain
acquisitions. Our future cash requirements will depend on numerous factors,
including potential acquisitions and the rate of growth of our sales and our
effectiveness at controlling and reducing costs.
Net cash used in operating activities for the three months ended March 31,
2005, was $69.9 million. Our inventories increased as of March 31, 2005 to
$282.5 million from $271.8 million as of December 31, 2004, and our accounts
payable increased to $310.0 million as of March 31, 2005 from $307.4 million as
of December 31, 2004. The increase in inventories and accounts payable are
primarily a result of increased inventory purchases and the timing of inventory
receipts and payments related thereto. Our accounts receivable increased to
$401.4 million as of March 31, 2005, from $376.0 million as of December 31,
2004, primarily attributable to a high concentration of sales in the latter part
of the first quarter.
On March 5, 2004, we completed a private offering of $110 million
aggregate principal amount of 3 3/4% convertible subordinated notes due 2024
(the "Old Notes"). On December 20, 2004, we completed our offer to exchange our
newly issued 3 3/4% Convertible Subordinated Notes, Series B due 2024 (the "New
Notes") for an equal amount of our outstanding Old Notes. Approximately
$109,600,000 aggregate principal amount of the Old Notes, representing
approximately 99.6 percent of the total principal amount of Old Notes
outstanding, were tendered in exchange for an equal principal amount of New
Notes. The New Notes mature on March 5, 2024 and bear interest at the rate of 3
3/4% per year on the principal amount, payable semi-annually on March 5 and
September 5, beginning on March 5, 2005. Holders of the New Notes may convert
the New Notes any time on or before the maturity date if certain conversion
conditions are satisfied. Upon conversion of the New Notes, we will be required
to deliver, in respect of each $1,000
18
principal of New Notes, cash in an amount equal to the lesser of (i) the
principal amount of each New Note to be converted and (ii) the conversion value,
which is equal to (a) the applicable conversion rate, multiplied by (b) the
applicable stock price. The initial conversion rate is 91.2596 shares of common
stock per New Note with a principal amount of $1,000 and is equivalent to an
initial conversion price of approximately $10.958 per share. The conversion rate
is subject to adjustment upon the occurrence of certain events. The applicable
stock price is the average of the closing sales prices of our common stock over
the five trading day period starting the third trading day following the date
the New Notes are tendered for conversion. If the conversion value is greater
than the principal amount of each New Note, we will be required to deliver to
holders upon conversion, at its option, (i) a number of shares of our common
stock, (ii) cash, or (iii) a combination of cash and shares of our common stock
in an amount calculated as described in the prospectus filed by us in connection
with the exchange offer. In lieu of paying cash and shares of our common stock
upon conversion, we may direct our conversion agent to surrender any New Notes
tendered for conversion to a financial institution designated by us for exchange
in lieu of conversion. The designated financial institution must agree to
deliver, in exchange for the New Notes, (i) a number of shares of our common
stock equal to the applicable conversion rate, plus cash for any fractional
shares, or (ii) cash or (iii) a combination of cash and shares of our common
stock. Any New Notes exchanged by the designated institution will remain
outstanding. We may redeem some or all of the New Notes for cash on or after
March 5, 2009 and before March 5, 2011 at a redemption price of 100% of the
principal amount of the New Notes, plus accrued and unpaid interest up to, but
excluding, the redemption date, but only if the closing price of our common
stock has exceeded 130% of the conversion price then in effect for at least 20
trading days within a 30 consecutive trading day period ending on the trading
day before the date the redemption notice is mailed. We may redeem some or all
of the New Notes for cash at any time on or after March 5, 2011 at a redemption
price equal to 100% of the principal amount of the New Notes, plus accrued and
unpaid interest up to, but excluding, the redemption date. We may be required to
purchase for cash all or a potion of the New Notes on March 5, 2011, March 5,
2014 or March 5, 2019, or upon a change of control, at a purchase price equal to
100% of the principal amount of the new notes being purchased, plus accrued and
unpaid interest up to, but excluding, the purchase date.
On September 20, 2004, and as further amended in January 2005, Bell
Microproducts, (the parent company only) ("Bell") entered into a securitization
program with Wachovia Bank, National Association ("Wachovia") and Blue Ridge
Asset Funding Corporation ("Blue Ridge"), an affiliate of Wachovia, which
expires on September 20, 2007 ("Wachovia Facility"). Under the program, Bell
will sell or contribute all of its receivables to a newly created special
purpose bankruptcy remote entity named Bell Microproducts Funding Corporation
("Funding"), a wholly-owned subsidiary of Bell. Funding will obtain financing
from Blue Ridge or Wachovia and other liquidity banks collateralized by the
receivables to pay a portion of the purchase price for the receivables. The
balance of the purchase price will be paid by advances made by Bell to Funding
under a subordinated note of Funding payable to Bell and by capital
contributions from Bell to Funding. The maximum principal amount available for
Funding's credit facility is $90 million. The interest rate on advances made by
Blue Ridge shall be the cost of Blue Ridge's commercial paper. In addition,
Funding pays a program fee in the amount of 95 basis points per annum on the
portion of the advances funded by Blue Ridge's commercial paper. The interest
rate on advances made by Wachovia and other liquidity banks shall be either an
alternate base rate (which is the higher of the "prime rate" as announced by
Wachovia, or 0.50% above the federal funds effective rate), or a rate based on
an adjusted LIBO rate plus 1.50%. Funding also pays an unused line fee ranging
from 0.20% to 0.25% per annum of the unused portion of the facility. Bell acts
as a servicer for Funding and will collect all amounts due under, and take all
action with respect to, the receivables for the benefit of Funding and its
lenders. In exchange for these services, Bell receives a servicing fee
determined on an arms-length basis. The cash flow from the collections of the
receivables will be used to purchase newly generated receivables, to pay amounts
to Funding's lenders, to pay down on the subordinated note issued to Bell and to
make dividend distributions to Bell (subject at all times to the required
capital amount being left in Funding). Including the program fee, the average
interest rate on outstanding borrowings under the securitization program for the
quarter ended March 31, 2005 was 3.49%, and the balance outstanding at March 31,
2005 was $60 million. Obligations of Funding under the Wachovia Facility are
collateralized by all of Funding's assets. The Wachovia Facility requires
Funding (and in certain circumstances, Bell) to meet certain financial tests and
to comply with
19
certain other covenants including restrictions on changes in structure,
incurrence of debt and liens, payment of dividends and distributions, and
material modifications to contracts and credit and collections policy.
On July 6, 2000, and as amended on May 3, 2004, we entered into a
Securities Purchase Agreement with The Retirement Systems of Alabama and certain
of its affiliated funds (the "RSA facility"), under which we borrowed $180
million of subordinated debt financing. This subordinated debt financing was
comprised of $80 million bearing interest at 9.125%, repaid in May 2001; and
$100 million bearing interest at 9.0%, payable in semi-annual principal
installments of $3.5 million plus interest and in semi-annual principal
installments of $8.5 million commencing December 31, 2007, with a final maturity
date of June 30, 2010. On August 1, 2003, we entered into an interest rate swap
agreement with Wachovia Bank effectively securing a new interest rate on $40
million of the outstanding debt. The new rate is based on the six month U.S.
Libor rate plus a fixed margin of 4.99% and continues until termination of the
agreement on June 30, 2010. The notional amount of the interest rate swap
decreases ratably as the underlying debt is repaid. The notional amount at March
31, 2005 was $36.5 million. We initially recorded the interest rate swap at fair
value, and subsequently recorded changes in fair value as an offset to the
related liability. At March 31, 2005, the fair value of the interest rate swap
was ($928,000). The RSA facility is collateralized by a second lien on certain
of our North American and South American assets. We must meet certain financial
tests on a quarterly basis, and comply with certain other covenants, including
restrictions of incurrence of debt and liens, restrictions on asset
dispositions, payment of dividends, and repurchase of stock. We are also
required to be in compliance with the covenants of certain other borrowing
agreements. The balance outstanding at March 31, 2005 on this long-term debt was
$48.5 million, $7 million is payable in years 2005 and 2006, $7.9 million is
payable in 2007 and $26.6 million thereafter. Net of the fair value of the
interest rate swap, the balance outstanding on the RSA facility at March 31,
2005 was $47.6 million.
On December 2, 2002, as further amended in December 2004, we entered into
a Syndicated Credit Agreement arranged by Bank of America, National Association
("Bank of America facility"), as principal agent, to provide a (pound)75 million
revolving line of credit facility, or the U.S. dollar equivalent of
approximately $142 million at March 31, 2005. The Bank of America facility
matures on July 15, 2006. 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 2.25% to 2.50%, based on certain financial measurements. At our
option, all or any portion of the outstanding borrowings may be converted to a
LIBOR Revolving Loan, which bears interest at the adjusted LIBOR rate plus a
margin of 2.25% to 2.50%, based on certain financial measurements. The average
interest rate on the outstanding borrowings under the revolving line of credit
during the quarter ended March 31, 2005 was 6.4%, and the balance outstanding at
March 31, 2005 was $32.4 million. Our obligations under the revolving line of
credit are collateralized by certain assets of our European subsidiaries. The
revolving line of credit requires us to meet certain financial tests and to
comply with certain other covenants, including restrictions on incurrence of
debt and liens, restrictions on mergers, acquisitions, asset dispositions,
capital contributions, payment of dividends, repurchases of stock, repatriation
of cash and investments.
On September 13, 2004, we entered into an amendment to its syndicated Loan
and Security Agreement with Congress Financial Corporation (Western)
("Congress"), an affiliate of Wachovia Bank, N.A. ("Wachovia"), as
administrative, collateral and syndication agent for the lenders of the
revolving line of credit (the "Congress Facility"). The amendment reduced the
Congress Facility from $160 million to $125 million, and extended the maturity
date to July 31, 2007. The syndicate includes Bank of America N.A. as co-agent
and other financial institutions as lenders. Borrowings under the Congress
Facility bear interest at Wachovia's prime rate plus a margin of 0.0% to 0.5%,
based on unused availability levels. At our option, all or any portion of the
outstanding borrowings may be converted to a Eurodollar rate loan, which bears
interest at the adjusted Eurodollar rate plus a margin of 1.50% to 2.00%, based
on unused availability levels. We also pay an unused line fee equal to 0.375%
per annum of the unused portion of the facility, subject to certain adjustments.
The average interest rate on outstanding borrowings under the Congress Facility
during the quarter ended March 31, 2005 was 5.33%, and the balance outstanding
at March 31, 2005 was $5.8 million Our obligations under the Congress Facility
are collateralized by certain assets of our North and South American
subsidiaries. The Congress Facility requires us to meet certain
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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 May 9, 2003, we entered into a mortgage agreement with Bank of Scotland
for (pound)6 million, or the U.S. dollar equivalent of approximately $11.3
million, as converted at March 31, 2005. The new mortgage agreement fully repaid
the borrowings outstanding under the previous mortgage agreement with Lombard
NatWest Limited, 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 $284,000 USD, plus interest. The principal amount due each
year is approximately $1.1 million. The balance of the mortgage as converted to
USD at March 31, 2005 was $9.8 million. Terms of the mortgage require us to meet
certain financial ratios and to comply with certain other covenants on a
quarterly basis.
On June 22, 2004, in connection with the acquisition of OpenPSL, we
assumed a mortgage with HSBC Bank plc ("HSBC") for an original amount of
(pound)670,000, or the U.S. dollar equivalent of approximately $1.3 million. The
mortgage has a term of ten years, bears interest at HSBC's rate plus 1.25% and
is payable in monthly installments of approximately (pound)7,600, or $14,400
U.S. dollars. The balance on the mortgage was $847,000 at March 31, 2005.
Our agreement with IFN Finance BV was amended in December 2004 to reduce
its $7.5 million in short-term financing to $4.7 million. The loan is
collateralized by certain European accounts receivable and inventories, bears
interest at 5.5%, and continues indefinitely until terminated by either party
upon 90 days notice. The average interest rate on the outstanding borrowings
under this facility during the quarter ended March 31, 2005 was 5.5%, and the
balance outstanding at March 31, 2005 was $22,000.
We were in compliance with our bank and subordinated debt financing
covenants at March 31, 2005; however, there can be no assurance that we will be
in compliance with such covenants in the future. If the we do not remain in
compliance with the covenants, and are unable to obtain a waiver of
noncompliance from our lenders, our financial condition, results of operations
and cash flows would be materially adversely affected.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We are subject to interest rate risk on our variable rate credit
facilities and could be subjected to increased interest payments if market
interest rates fluctuate. For the quarter ended March 31, 2005, average
borrowings outstanding on the variable rate credit facility with Congress
Financial Corporation (Western) were $9 million, average borrowings with
Wachovia Bank, National Association and Blue Ridge Asset Funding Corporation
were $80 million and average borrowings with Bank of America, N.A. were $55
million. These facilities have interest rates that are based on associated rates
such as Eurodollar and base or prime rates that may fluctuate over time based on
changes in the economic environment. Based on actual borrowings throughout the
year under these borrowing facilities, an increase of 1% in such interest rate
percentages would increase the annual interest expense by approximately $1.4
million.
A substantial part of our revenue and capital expenditures are transacted
in U.S. dollars, but the functional currency for foreign subsidiaries is not the
U.S. dollar. We enter into foreign forward exchange contracts to hedge certain
balance sheet exposures against future movements in foreign exchange rates. The
gains and losses on the forward exchange contracts are largely offset by gains
or losses on the underlying transactions and, consequently, a sudden or
significant change in foreign exchange rates should not have a material impact
on future net income or cash flows. As a result of Bell or its subsidiaries
entering into transactions denominated in currencies other than the functional
currency, we recognized a foreign currency loss of $1.1 million during the
quarter ended March 31, 2005 and no material gain or loss in the quarter ended
March 31, 2004. To the extent we are unable to manage these risks, our results,
financial position and cash flows could be materially adversely affected.
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In August 2003, we entered into an interest rate swap agreement in order
to gain access to the lower borrowing rates normally available on floating-rate
debt, while avoiding prepayment and other costs that would be associated with
refinancing long-term fixed-rate debt. The swap purchased has a notional amount
of $40 million, expiring in June 2010, with a six-month settlement period and
provides for variable interest at LIBOR plus a set rate spread. The notional
amount decreases ratably as the underlying debt is repaid. The notional
amount at March 31, 2005 was $36.5 million. The notional amount does not
quantify risk or represent assets or liabilities, but rather, is used in the
determination of cash settlement under the swap agreement. As a result of
entering into this swap, we are exposed to credit losses from counter-party
non-performance; however, we do not anticipate any such losses from this
agreement, which is with a major financial institution. The agreement will also
expose us to interest rate risk should LIBOR rise during the term of the
agreement. This swap agreement is accounted for as a fair value hedge under
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). Under the provisions of SFAS
133, we initially recorded the interest rate swap at fair value, and
subsequently recorded any changes in fair value as an offset to the related
liability. Fair value is determined based on quoted market prices, which reflect
the difference between estimated future variable-rate payments and future
fixed-rate receipts. The fair value of the interest rate swap was ($928,000) at
March 31, 2005.
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.
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PART II - OTHER INFORMATION
Item 6: Exhibits
See Exhibit Index on page following Signatures.
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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, 2005
BELL MICROPRODUCTS INC.
BY:/s/ JAMES E. ILLSON
----------------------------------------------------
CHIEF FINANCIAL OFFICER AND EXECUTIVE VICE PRESIDENT OF
FINANCE AND OPERATIONS
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EXHIBIT INDEX
Form 10-Q
Quarter ended March 31, 2005
EXHIBIT NO. DESCRIPTION
- ----------- -----------
31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
32.1 Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
32.2 Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
*Management agreement or compensatory plan or arrangement.
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