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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: SEPTEMBER 30, 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 NOVEMBER 5,
2004: 28,373,912
BELL MICROPRODUCTS INC.
INDEX TO FORM 10-Q
Page
PART I - FINANCIAL INFORMATION Number
------
Item 1: Financial Statements (unaudited)
Condensed Consolidated Balance Sheets - September 30, 2004 and
December 31, 2003 3
Condensed Consolidated Statements of Operations - Three months and
nine months ended September 30, 2004 and 2003 4
Condensed Consolidated Statements of Cash Flows - Nine months ended
September 30, 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 17
Item 3: Quantitative and Qualitative Disclosure about Market Risk 24
Item 4: Controls and Procedures 25
PART II - OTHER INFORMATION
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds 26
Item 6: Exhibits 26
Signatures 27
2
PART I - FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS (UNAUDITED)
BELL MICROPRODUCTS INC.
Condensed Consolidated Balance Sheets
(in thousands, except per share data)
(unaudited)
September 30, December 31,
2004 2003
-------- --------
ASSETS
Current assets:
Cash and cash equivalents $ 8,247 $ 4,904
Accounts receivable, net 361,387 309,905
Inventories 262,363 256,992
Prepaid expenses and other current assets 25,097 23,595
-------- --------
Total current assets 657,094 595,396
Property and equipment, net 41,550 43,545
Goodwill 86,349 60,236
Intangibles, net 12,141 6,544
Deferred debt issuance costs and other assets 11,442 7,278
-------- --------
Total assets $808,576 $712,999
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $249,758 $250,494
Borrowings under lines of credit 220 3,009
Short-term note payable and current portion
of long-term notes payable 8,607 11,848
Other accrued liabilities 57,336 46,411
-------- --------
Total current liabilities 315,921 311,762
Borrowings under lines of credit 119,573 127,416
Long-term notes payable 164,308 77,608
Other long-term liabilities 4,116 2,803
-------- --------
Total liabilities 603,918 519,589
-------- --------
Commitments and contingencies (Note 9)
Shareholders' equity:
Common Stock, $0.01 par value, 80,000 shares
authorized; 28,210 and 26,907 issued and outstanding
162,627 157,251
Retained earnings 26,374 20,837
Accumulated other comprehensive income 15,657 15,322
-------- --------
Total shareholders' equity 204,658 193,410
-------- --------
Total liabilities and shareholders' equity $808,576 $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 Nine months ended
September 30, September 30,
------------------------- --------------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------
Net sales $ 728,731 $ 555,476 $ 2,019,350 $ 1,590,767
Cost of sales 670,023 512,391 1,862,287 1,470,848
----------- ----------- ----------- -----------
Gross profit 58,708 43,085 157,063 119,919
Operating expenses:
Selling, general and administrative expenses 49,266 37,990 135,188 115,232
Restructuring costs and special charges -- -- -- 1,383
----------- ----------- ----------- -----------
Total operating expenses 49,266 37,990 135,188 116,615
Operating income 9,442 5,095 21,875 3,304
Interest expense (4,493) (4,208) (12,161) (12,412)
----------- ----------- ----------- -----------
Income (loss) before income taxes 4,949 887 9,714 (9,108)
Provision for (benefit from) income taxes 2,175 513 4,177 (2,186)
----------- ----------- ----------- -----------
Net income (loss) $ 2,774 $ 374 $ 5,537 $ (6,922)
=========== =========== =========== ===========
Income (loss) per share
Basic $ 0.10 $ 0.02 $ 0.20 $ (0.33)
=========== =========== =========== ===========
Diluted $ 0.10 $ 0.02 $ 0.20 $ (0.33)
=========== =========== =========== ===========
Shares used in per share calculation
Basic 27,990 22,471 27,418 20,913
=========== =========== =========== ===========
Diluted 28,553 23,098 28,097 20,913
=========== =========== =========== ===========
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)
Nine months ended
September 30,
2004 2003
--------- ---------
Cash flows from operating activities:
Net income (loss): $ 5,537 $ (6,922)
Adjustments to reconcile net income (loss) to net
cash (used in) provided by operating activities:
Depreciation and amortization 10,589 9,234
Provision for bad debts 6,048 6,262
Loss on disposal of property, equipment and other 33 125
Deferred income taxes (666) 541
Changes in assets and liabilities:
Accounts receivable (27,341) (8,435)
Inventories (1,394) (40,472)
Prepaid expenses (568) 719
Other assets (3,490) 409
Accounts payable (19,692) 25,009
Other accrued liabilities 2,881 (14,012)
--------- ---------
Net cash used in operating activities (28,063) (27,542)
--------- ---------
Cash flows from investing activities:
Acquisition of property and equipment (2,916) (2,359)
Proceeds from sale of property and equipment 54 38
Acquisition of new business, net of cash (33,421) --
--------- ---------
Net cash used in investing activities (36,283) (2,321)
--------- ---------
Cash flows from financing activities:
Net repayments under line of credit agreements (16,578) (8,224)
Repayment of long-term notes payable to RSA (27,000) (7,000)
Proceeds from issuance of Common Stock and warrants 1,949 36,713
Proceeds from issuance of convertible notes 110,000 9,986
Repayments of notes and leases payable (677) (13,543)
--------- ---------
Net cash provided by financing activities 67,694 17,932
--------- ---------
Effect of exchange rate changes on cash (5) 75
--------- ---------
Net decrease in cash 3,343 (11,856)
Cash at beginning of period 4,904 12,025
--------- ---------
Cash at end of period $ 8,247 $ 169
========= =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 14,700 $ 14,481
Income taxes $ 1,889 $ 466
Supplemental non-cash financing activities:
Issuance of restricted stock $ 1,592 $ --
Common Stock issued for acquisition $ 2,365 $ --
Change in fair value of interest rate swap $ (282) $ --
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. Interim results are subject to significant variations and the
results of operations for the three and nine months ended September 30, 2004 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, 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:
o high-end computer and storage subsystems;
o Fibre Channel connectivity products;
o complete storage systems such as storage area networks (SAN),
network attached storage (NAS) and direct attached storage (DAS);
o storage management software;
o disk, tape and optical drives; and
o 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 - Acquisitions:
All acquisitions have been accounted for using the purchase method.
Accordingly, the results of the acquired business is included in the
consolidated financial statements from the date of 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 $35.8
million which included cash of approximately $33.1 million, the issuance of
424,964 shares of the Company's Common Stock and acquisition costs. The Company
is obligated to pay up to an additional $5.4 million within one year of the
closing date as a contingent incentive payment to be based upon earnings
achieved during certain periods up to July 2005. In the third quarter of 2004,
as payment for the first of two earnings achievement periods, the Company issued
240,006 shares of common stock valued at $750,000. Management is currently
finalizing the valuation of assets acquired and liabilities assumed.
Accordingly, the final allocations could be different from the amounts reflected
below. The preliminary allocation of the purchase price to acquired assets and
assumed liabilities based upon management estimates are as follows (in
thousands):
Accounts receivable $ 30,211
Inventories 4,504
Equipment and other assets 2,419
Goodwill and other intangibles 32,194
Accounts payable (18,785)
Other accrued liabilities (8,033)
Notes payable (6,723)
----------
Total consideration $ 35,787
==========
Pro forma Disclosure (in thousands, except per share data):
The following unaudited pro forma combined amounts give effect to the
acquisition of OpenPSL as if the acquisition had occurred on January 1, 2003.
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 Nine Months Ended
September 30, September 30,
------------------------- -------------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------
Revenue $ 728,731 $ 588,201 $ 2,128,620 $ 1,699,234
Net Income (loss) $ 2,774 $ 828 $ 6,605 $ (6,703)
Net income(loss) per share - basic $ 0.10 $ 0.04 $ 0.24 $ (0.32)
Shares used in per share calculation - basic 27,990 22,471 27,418 20,913
Net income (loss) per share - diluted $ 0.10 $ 0.04 $ 0.24 $ (0.32)
Shares used in per share calculation 28,553 23,098 28,097 20,913
7
Note 3 - 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.
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
(in thousands except for per share amounts)
------------------------------------------
2004 2003 2004 2003
-------- -------- -------- --------
Net income (loss) as reported $ 2,774 $ 374 $ 5,537 $ (6,922)
Deduct: Total stock-based employee
compensation expense determined
under fair value method for awards,
net of related tax effects 438 770 2,165 3,373
-------- -------- -------- --------
Pro forma net income (loss) 2,336 $ (396) $ 3,372 $(10,295)
======== ======== ======== ========
Net income (loss) per share as reported:
Basic $ 0.10 $ 0.02 $ 0.20 $ (0.33)
Diluted $ 0.10 $ 0.02 $ 0.20 $ (0.33)
Pro forma net income (loss) per share:
Basic $ 0.08 $ (0.02) $ 0.12 $ (0.49)
Diluted $ 0.08 $ (0.02) $ 0.12 $ (0.49)
Weighted average shares used in per share Calculation:
Basic 27,990 22,471 27,418 20,913
Diluted 28,553 23,098 28,097 20,913
The following weighted average assumptions were used for grants in the
third quarter ended September 30, 2004 and 2003 respectively; expected
volatility of 74% and 76%, expected lives of 3.64 and 3.41 and risk free
interest rates of 3.0% and 2.0%, 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.
8
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.
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 following table is subject to revision based on the
finalization of the OpenPSL valuation as discussed in Note 2. The carrying
values and accumulated amortization of intangible assets at September 30, 2004
and December 31, 2003 are as follows (in thousands):
As of September 30, 2004
------------------------------------
Estimated Gross
Useful Life for Carrying Accumulated Net
Amortized Intangible Assets Amortization Amount Amortization Amount
--------------------------- --------------- -------- ----------- ---------
Non-compete agreements 3-6 years $ 1,369 $ (1,038) $ 331
Trademarks 20-40 years 4,569 (418) 4,151
Trade names 20 years 400 (46) 354
Customer/supplier relationships 7-10 years 8,059 (754) 7,305
------------ -------- --------- --------
Total $ 14,397 $ (2,256) $ 12,141
======== ========= ========
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):
9
Estimated Amortization Expense
------------------------------------------------------
October 1, 2004 to December 31, 2004 $ 507
------------------------------------------------------
For year ending December 31, 2005 1,703
For year ending December 31, 2006 1,703
For year ending December 31, 2007 1,694
For year ending December 31, 2008 1,149
Thereafter 5,385
--------
Total $ 12,141
========
Note 5 - 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 Nine Months Ended
September 30, 2004, September 30, 2004,
------------------- -------------------
2004 2003 2004 2003
-------- -------- -------- --------
Net income (loss) $ 2,774 $ 374 $ 5,537 $ (6,922)
Weighted average common shares
outstanding (Basic) 27,990 22,471 27,418 20,913
Effect of dilutive options, grants
and warrants 563 627 679 --
Weighted average common shares
outstanding (Diluted) 28,553 23,098 28,097 20,913
In the three months ended September 30, 2004 and 2003, total common stock
options, grants and warrants excluded from diluted income per share calculations
because they were antidilutive, were 2,261,439 and 1,660,163, respectively.
Note 6 - Lines of Credit and Term Debt:
LINES OF CREDIT (IN THOUSANDS) September 30, December 31,
2004 2003
-------- --------
Congress Facility $ 8,771 $ 68,007
Wachovia Facility 55,000 --
Bank of America Facility 55,802 59,409
IFN Financing BV 220 3,009
-------- --------
119,793 130,425
Less: amounts included in current liabilities 220 3,009
-------- --------
Amounts included in non-current liabilities $119,573 $127,416
======== ========
10
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 September 30, 2004 was 4.33%, and
the balance outstanding at September 30, 2004 was $8.8 million. Obligations of
the Company under the Congress Facility are secured 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,
mergers, acquisitions, asset dispositions, capital contributions, payment of
dividends, repurchases of stock and investments.
On September 20, 2004, Bell (the parent company only) 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 secured 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 $75 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 during the
initial period ending September 30, 2004 was 2.74%, and the balance outstanding
at September 30, 2004 was $55 million. Obligations of Funding under the Wachovia
Facility are secured 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.
While Bell's consolidated financial statements reflect the receivables
which were sold to Funding and Funding's debt on its balance sheet, the
receivables are solely owned by Funding. Bell has no interest in the
receivables, and Funding is solely obligated with respect to the outstanding
borrowings under the securitization program.
11
On December 2, 2002, as further amended in September 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 $136 million at September 30, 2004. The Bank of
America facility matures in December 2005. 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 September
30, 2004 was 5.7%, and the balance outstanding at September 30, 2004 was $55.8
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 upon 90 days notice. The
loan balance outstanding was $220,000 at September 30, 2004.
On June 22, 2004, in connection with the acquisition of OpenPSL, the
Company assumed a short-term financing agreement with GE Commercial Distribution
Finance ("GE Facility") for up to (pound)17.5 million or the U.S. dollar
equivalent of $31.7 million. The loan was secured by certain OpenPSL accounts
receivable and bore interest at Euribor plus 2.25%. This agreement was
terminated September 22, 2004 and the balance outstanding at that date was
repaid in full.
TERM LOANS (IN THOUSANDS) September 30, December 31,
2004 2003
-------- --------
Convertible Notes $110,000 $ --
Note payable to RSA 51,718 79,000
Bank of Scotland 9,802 10,180
HSBC 875 --
-------- --------
172,395 89,180
Less: amounts due in current year 8,087 11,572
-------- --------
Long-term debt due after one year $164,308 $ 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 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 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.
12
Because the terms of the Company's convertible subordinated debentures
require settlement in shares of common stock of the full value of the debentures
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 debentures for each reporting period, as if the debentures had been
converted to common stock at the beginning of the period. For every quarter
beginning with the first quarter of 2004, when the debentures were issued, an
additional 10,036,496 shares would be included in diluted weighted average
shares outstanding, and the Company would add back to net income after-tax
interest expense of approximately $187,000 for the first quarter of 2004 and
approximately $ 550,000 for each quarter thereafter. This restatement would
reduce previously reported diluted earnings per share by $0.01 for the third
quarter of 2004 and the nine months then ended and no effect on the first and
second quarters of 2004, or the six months then ended.
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 is amortized ratably as the
underlying debt is repaid. The notional amount at September 30, 2004 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 September 30, 2004, the fair value of the interest rate swap was
($282,000). The RSA facility is secured 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 September 30,
2004 on this long-term debt was $52.0 million, $3.5 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
$10.9 million, as converted at September 30, 2004. 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 $272,000 USD, plus interest. The principal
amount due each year is approximately $1.1 million. The balance of the mortgage
as converted to USD at September 30, 2004 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 $1.2 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 $13,800
U.S. dollars. The balance on the mortgage was $875,000 at September 30, 2004.
The Company was in compliance with its bank and subordinated debt
financing covenants at September 30, 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.
13
Note 7 - Restructuring Costs, Special Charges and Other Provisions:
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 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 was not
material. 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 September 30, 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 -- 300 300
Restructuring reserve release -- (300) (300)
Cash payments (234) (569) (803)
------- ------- -------
Balance at September 30, 2004 $ -- $ 758 $ 758
======= ======= =======
Management expects to extinguish the restructuring and special charges
liabilities of $758,000 by November 2007.
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, results of operations or cash flows.
14
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 is amortized ratably as the underlying debt is
repaid. The notional amount at September 30, 2004 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 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 records changes in fair value as an offset to the
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.
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 nine month period
ended September 30, 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 nine month period ended September 30, 2004.
15
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 adoption of EITF 03-06 did not have a material effect on the Company's
earnings per share for the three month and nine month periods ended September
30, 2004, as the Company does not have participating securities.
As discussed within Note 6, 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."
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 is in the process of assessing the impact of EITF 04-10 on its
financial statement disclosures.
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 Nine Months Ended
September 30, September 30,
------------------ -----------------
2004 2003 2004 2003
------- ------- ------- -------
Net income (loss) $ 2,774 $ 374 $ 5,537 $(6,922)
Other comprehensive income:
Foreign currency translation
adjustments (137) 1,132 335 3,489
------- ------- ------- -------
Total comprehensive income (loss) $ 2,637 $ 1,506 $ 5,872 $(3,433)
======= ======= ======= =======
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 37% and 39% of total sales for the nine months
ended September 30, 2004 and 2003, respectively.
Geographic information consists of the following:
Nine Months Ended September 30,
2004 2003
---------- ----------
(In thousands)
Net sales:
North America $ 823,345 $ 682,643
Latin America 256,407 180,875
Europe 939,598 727,249
---------- ----------
Total $2,019,350 $1,590,767
========== ==========
September 30, December 31,
Long-lived assets: 2004 2003
---------- ----------
United States $ 37,297 $ 35,369
United Kingdom 86,581 54,707
Other foreign countries 27,604 27,527
---------- ----------
Total $ 151,482 $ 117,603
========== ==========
16
Note 13 - Income Taxes
The effective tax rate was 43% for the nine months ended September 30,
2004 compared to an effective tax benefit rate of 24% for the nine months ended
September 30, 2003. The change in the tax rate was primarily related to the
annualized affect of additional deferred tax valuation allowances established
related to losses incurred in certain foreign jurisdictions.
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 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 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 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 in a
timely manner, price decreases on inventory that is not price protected, ability
to negotiate credit facilities, currency exchange rates, 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 SEPTEMBER 30, 2004 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2003
Net sales were $728.7 million for the quarter ended September 30, 2004,
compared to net sales of $555.5 million for the quarter ended September 30,
2003, which represented an increase of $173.2 million, or 31%. The increase was
primarily due to growth in unit sales to existing and new customers, changes in
foreign currency exchange rates and the acquisitions of OpenPSL Holdings Limited
("OpenPSL") in June 2004 and EBM Mayorista, S.A. de C.V. ("EBM") in October
2003.
The Company's gross profit for the quarter ended September 30, 2004 was
$58.7 million compared to $43.1 million for the quarter ended September 30,
2003, which represented an increase of $15.6 million, or 36%. The gross margin
as a percentage of net sales was 8.1%, compared to 7.8% in the same period last
year. The increase in gross margin was primarily due to a shift in product mix
to higher margin products and service revenues.
17
Selling, general and administrative expenses increased to $49.3 million
for the quarter ended September 30, 2004, from $38.0 million for the quarter
ended September 30, 2003, an increase of $11.3 million, or 30%. The increase in
expenses was primarily attributable to the impact of sales volume increases, the
acquisitions of OpenPSL and EBM. As a percentage of sales, selling, general and
administrative expenses remained relatively flat at 6.7% in the third quarter of
2004 compared to 6.8% in the same period last year.
Interest expense increased to $4.5 million for the quarter ended September
30, 2004 from $4.2 million in the same period last year. This increase was
primarily due to overall increased borrowings during the period for worldwide
working capital purposes and the acquisitions of open PSL and EBM. The average
interest rate in the third quarter of 2004 decreased to 5.4% from 6.7% in the
same period last year.
The effective tax rate was 44% for the quarter ended September 30, 2004,
compared to an effective tax rate of 58% for the quarter ended September 30,
2003. Changes in the tax rate is primarily related to the annualized affect of
deferred tax valuation allowances related to losses incurred in certain foreign
jurisdictions.
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.
At September 30, 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 -- 300 300
Restructuring reserve release -- (300) (300)
Cash payments (234) (569) (803)
------- ------- -------
Balance at September 30, 2004 $ -- $ 758 $ 758
======= ======= =======
Management expects to extinguish the restructuring and special charges
liabilities of $758,000 by November 2007.
NINE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2003
Net sales were $2,019.4 million for the nine months ended September 30,
2004, compared to sales of $1,590.8 million for the nine months ended September
30, 2003, which represented an increase of $428.6 million, or 27%. The increase
was primarily due to growth in unit sales to existing and new customers, changes
in foreign currency exchange rates and the acquisitions of OpenPSL Holdings
Limited ("OpenPSL") in June 2004 and EBM Mayorista, S.A. de C.V. ("EBM") in
October 2003.
18
The Company's gross profit for the nine months ended September 30, 2004
was $157.1 million, compared to $119.9 million for the nine months ended
September 30, 2003, which represented an increase of $37.2 million, or 31%. The
increase was primarily attributable to the impact of sales volume increases,
changes in foreign currency exchange rates, the acquisitions of OpenPSL and EBM
and an inventory charge on $1.5 million taken in the first quarter of 2003, as
discussed below. The overall gross margin as a percentage of sales was 7.8%,
compared to 7.5% in the same period last year.
Selling, general and administrative expenses increased to $135.2 million
for the nine months ended September 30, 2004 from $115.2 million for the nine
months ended September 30, 2003, an increase of $20.0 million, or 17%. The
increase in expenses was primarily attributable to the impact of sales volume
increases, changes in foreign currency exchange rates and the acquisitions of
OpenPSL and EBM. As a percentage of sales, selling, general and administrative
expenses decreased in the first nine months of 2004 to 6.7% from 7.2% in the
first nine months of 2003.
Interest expense was $12.2 million in the nine months ended September 30,
2004, as compared to $12.4 million in the same period last year. Although
average borrowings increased in the current nine month period, average interest
rates on combined borrowings decreased to 5.5% in the first nine months of 2004
compared to 6.9% in the same period last year.
The effective tax rate of 43% for the nine months ended September 30, 2004
compared to an effective tax benefit rate of 24% for the nine months ended
September 30, 2003. Changes in the 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 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 the six months ended June 30, 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 savings expected from restructuring related cost reductions
will be reflected as a decrease in `Selling, general and administrative
expenses' on the income statement. 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 September 30, 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 -- 300 300
Restructuring reserve release -- (300) (300)
Cash payments (234) (569) (803)
------- ------- -------
Balance at September 30, 2004 $ -- $ 758 $ 758
======= ======= =======
Management expects to extinguish the restructuring and special charges
liabilities of $758,000 by November 2007.
19
LIQUIDITY AND CAPITAL RESOURCES
In recent years, the Company has funded its working capital requirements
principally through borrowings as well as proceeds from common stock sales and
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 nine months ended September
30, 2004, was $28.1 million. The Company's accounts receivable increased to
$361.4 million as of September 30, 2004 from $309.9 million as of December 31,
2003 as a result of increased sales volume and the acquisition of OpenPSL. The
Company's accounts payable decreased to $249.8 million as of September 30, 2004
from $250.5 million as of December 31, 2003. Excluding accounts payable of $18.8
million acquired with the purchase of OpenPSL, accounts payable decreased $19.5
million as the result of taking early payment discounts offered by certain
suppliers.
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 September 30, 2004 was 4.33%, and
the balance outstanding at September 30, 2004 was $8.8 million. Obligations of
the Company under the Congress Facility are secured 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.
20
On September 20, 2004, Bell (the parent company only) 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 secured 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 $75 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 during the
initial period ending September 30, 2004 was 2.74%, and the balance outstanding
at September 30, 2004 was $55 million. Obligations of Funding under the Wachovia
Facility are secured 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.
While Bell's consolidated financial statements reflect the receivables
which were sold to Funding and Funding's debt on its balance sheet, the
receivables are solely owned by Funding. Bell has no interest in the
receivables, and Funding is solely obligated with respect to the outstanding
borrowings under the securitization program.
On December 2, 2002, as further amended in September 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 $136 million at September 30, 2004. The Bank of
America facility matures in December 2005. 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 September
30, 2004 was 5.7%, and the balance outstanding at September 30, 2004 was $55.8
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.
21
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 is amortized ratably as the
underlying debt is repaid. The notional amount at September 30, 2004 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 September 30, 2004, the fair value of the interest rate swap was
($282,000). The RSA facility is secured 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 September 30,
2004 on this long-term debt was $52.0 million, $3.5 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
$10.9 million, as converted at September 30, 2004. 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 $272,000 USD, plus interest. The principal
amount due each year is approximately $1.1 million. The balance of the mortgage
as converted to USD at September 30, 2004 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 short-term financing agreement with GE Commercial Distribution
Finance ("GE Facility") for up to (pound)17.5 million or the U.S. dollar
equivalent of $31.7 million. The loan was secured by certain OpenPSL accounts
receivable and bore interest at Euribor plus 2.25%. This agreement was
terminated on September 22, 2004 and the balance outstanding at that date was
repaid in full.
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 upon 90 days notice. The
loan balance outstanding was $220,000 at September 30, 2004.
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 $1.2 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 $13,800
U.S. dollars. The balance on the mortgage was $875,000 at September 30, 2004.
The Company was in compliance with its bank and subordinated debt
financing covenants at September 30, 2004; however, there can be no assurance
that the Company will be in compliance with such covenants in the future.
22
The Company believes that borrowings available under its credit
facilities will be sufficient to fund its working and other capital
requirements, including potential investments in other companies and other
assets to support the strategic growth of its business, over the next twelve
months. In the ordinary course of business, the Company evaluates opportunities
to acquire businesses, products and technologies and expects to use its cash to
fund these types of activities in the future. In the event additional needs for
cash arise, the Company may raise additional funds from a combination of sources
including the potential issuance of debt or equity securities. Additional
financing might not be available on terms favorable to the Company, or at all,
particularly in light of the recent decline in the capital markets. If adequate
funds were not available or were not available on acceptable terms, the
Company's ability to take advantage of unanticipated opportunities or respond to
competitive pressures could be limited.
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 nine month period
ended September 30, 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 nine month period
ended September 30, 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 adoption of EITF 03-06 did not have a material effect on the Company's
earnings per share for the three month and nine month periods ended September
30, 2004, as the Company does not have participating securities.
As more fully discussed within Note 6, 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.
23
Because the terms of the Company's convertible subordinated debentures
require settlement in shares of common stock of the full value of the debentures
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 debentures for each reporting period, as if the debentures had been
converted to common stock at the beginning of the period. For every quarter
beginning with the first quarter of 2004, when the debentures were issued, an
additional 10,036,496 shares would be included in diluted weighted average
shares outstanding, and the Company would add back to net income after-tax
interest expense of approximately $187,000 for the first quarter of 2004 and
approximately $ 550,000 for each quarter thereafter. This restatement would
reduce previously reported diluted earnings per share by $0.01 for the third
quarter of 2004 and the nine months then ended and no effect on the first and
second quarters of 2004, or the six months then ended.
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 increase. For the nine months ended September 30 2004, average
borrowings outstanding on the variable rate credit facility with Congress
Financial Corporation (Western) were $62.0 million, average borrowings with
Wachovia Bank, National Association and Blue Ridge Asset Funding Corporation
were $7.4 million and average borrowings with Bank of America, N.A. were $47.4
million. Wachovia, Blue Ridge 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 $1.2 million.
A substantial part of the Company's revenue and capital expenditures are
transacted in U.S. dollars, but the functional currency for foreign subsidiaries
is not the U.S. dollar. The Company enters into foreign forward exchange
contracts to hedge certain transactions and 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 a foreign currency gain of $909,000 during the quarter ended
September 30, 2004. To the extent the Company is unable to manage these risks,
the Company's results of operations, 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 is amortized ratably as the underlying debt is
repaid. The notional amount at September 30, 2004 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 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, we initially recorded the interest rate swap at fair
value, and subsequently recorded 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.
24
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.
25
PART II - OTHER INFORMATION
ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
In connection with the acquisition of OpenPSL Holdings Limited on
June 22, 2004 described in Note 2 to the financial statements
herein, the Company issued an aggregate 240,006 shares to five
individuals on September 7, 2004 as a contingent payment in partial
consideration for the acquisition. The Company relied upon Section
4(2) of the Securities Act, which provides an exemption for
transactions not involving a public offering, and Regulation S of
the Securities Act, which provides an exemption for offers and sales
made outside the United States.
ITEM 6: EXHIBITS
See Exhibit Index on page following Signatures.
26
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: November 9, 2004
BELL MICROPRODUCTS INC.
BY: /s/ JAMES E. ILLSON
--------------------------------
CHIEF FINANCIAL OFFICER AND
EXECUTIVE VICE PRESIDENT OF
FINANCE AND OPERATIONS
27
EXHIBIT INDEX
BELL MICROPRODUCTS INC.
Form 10-Q
Quarter ended September 30, 2004
EXHIBIT
NO. DESCRIPTION
10.1 First Amendment to Securities Purchase Agreement dated May 3, 2004
between the Registrant and The Retirement Systems of Alabama.
10.2 Third Amendment to Loan and Security Agreement dated September 13,
2004 between the Registrant and Congress Financial Corporation.
10.3 Credit and Security Agreement dated September 20, 2004 by and among
Bell Microproducts Funding Corporation, the Registrant, Blue Ridge
Asset Funding Corporation, certain Liquidity Banks and Wachovia
Bank.
10.4 Receivables Sales Agreement dated September 20, 2004 between the
Registrant and Bell Microproducts Funding Corporation.
10.5 Supplemental Agreement to Syndicated Credit Agreement dated
September 22, 2004 by and among Ideal Hardware Limited, Bell
Microproducts Europe Export Limited, BM Europe Partners C.V., Bell
Microproducts Europe B.V., Bank of America, N.A. and certain banks
and financial institutions.
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.
28