ITEM 1. BUSINESS
FORWARD-LOOKING DISCLOSURE
This Annual Report on Form 10-K ("Report") contains " forward-looking statements" within the meaning of the Private Litigation Reform Act of 1995 regarding future events and the future results of Bell Microproducts Inc. that are based on current expectations, estimates, forecasts, and projects as well as the beliefs and assumptions of Bell Microproducts Inc. management. Words such as "outlook", "believes", "expects", "appears", "may", "will", "should", "anticipates" or the negative thereof or comparable terminology, are intended to identify such forward looking statements. These forward-looking statements are only predictions and are subject to risks, uncertainties and assumptions that are difficult to predict. Therefore actual results may differ materially and adversely from those expressed in any forward-looking statements. Factors that might cause or contribute to such differences include, but are not limited to, those discussed in this Report under the section entitled "Risk Factors" and elsewhere, and in other reports Bell Microproducts Inc. files with the Securities and Exchange Commission, specifically the most recent reports on Form 8-K and Form 10-Q. You should not place undue reliance on these forward-looking statements, which speak only as of the date of this Annual Report on Form 10-K. Bell Microproducts Inc. undertakes no obligation to revise or update publicly any forward-looking statements for any reason.
GENERAL
Founded in 1987, Bell Microproducts Inc. together with its subsidiaries, is a leading value-added distributor of storage products and systems, semiconductors and computer products and peripherals. We market and distribute our products at various levels of integration, from raw components to fully integrated, tested and certified systems. We carry over 140 brand name product lines as well as our own proprietary Rorke Data storage products and Markvision memory modules. Across our product lines, we emphasize our ability to combine our extensive product portfolio with comprehensive value-added services.
We offer components that include disk drives, semiconductors, flat panel displays and related products, and other storage products and custom-configured computer products. Our products also include value-added services such as system design, integration, installation, maintenance and other consulting services combined with a variety of storage and computer hardware and software products. In addition, we offer network attached storage (NAS), storage area network (SAN) and other storage systems, computer platforms, tape drives and libraries and related software. Our selection of products and technologies, together with our independence, allows us to offer the best available hardware, software and service solutions for each customer. Customers can purchase our components as stand-alone products or in combination with certain value-added services.
AVAILABLE INFORMATION
All reports filed electronically by Bell with the Securities and Exchange Commission ("SEC"), including its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and proxy statements, and other information and amendments to those reports filed (if applicable), are accessible at no cost on the Company's web site at www.bellmicro.com, and they are available by contacting our Investor Relations department at ir@bellmicro.com or 408-451-9400. These filings are also accessible on the SEC's web site at www.sec.gov. The public may read and copy at prescribed rates any materials filed by the Company with the SEC at the SEC's Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information for the Public Reference Room by calling the SEC at 1-800-SEC-0330.
INDUSTRY
The storage, semiconductor and computer industries have experienced significant growth over the past decade, due to rapid growth in Internet usage and e-commerce; enterprise applications such as enterprise resource planning and data mining; server, desktop and laptop computers; and wireless communications as well as a variety of emerging consumer products and applications.
Traditionally, manufacturers have sold storage, semiconductor and computer products directly to end users and through both direct and indirect distribution channels. The use of distribution channels is growing rapidly as manufacturers focus on core activities such as product design, development and marketing and begin to divest or outsource other functions. The growth of the indirect channel reflects the need for manufacturers to increasingly use distributors for servicing OEMs, VARs, CEMs and system integrators. Customers are also driving the trend toward indirect distribution due to the value-added services that distributors often provide. The rapid growth of storage requirements and the need for sophisticated networked storage systems, such as NAS and SAN, have also increased enterprise customers' dependence on value-added service suppliers that can design, integrate, service and support their storage needs.
Network Attached Storage. NAS appliances are advanced storage systems that attach directly to a local area network. A NAS appliance can be thought of as a thin file server with built-in storage. Similar to general-purpose servers, NAS appliances include a central processing unit, an operating system and internal hard disk drive storage.
Storage Area Networks. A SAN is an architecture that directly connects multiple independent servers and storage subsystems through a network dedicated to storage. A SAN consists of a variety of heterogeneous networking equipment such as switches, hubs and routers; storage products such as disk subsystems, tape libraries and optical drives; and storage management software. A SAN is often connected using a protocol known as Fibre Channel.
Both the NAS and SAN markets are projected to grow rapidly over the next few years. The complexity of sophisticated data storage solutions such as NAS and SAN combined with a shortage of qualified information technology personnel often requires companies to outsource the research, design, implementation and support of their networked storage solutions. Accordingly, significant growth in SAN and NAS is expected to be through indirect distribution channels.
In recent years, a growing number of manufacturers began to reduce the number of distributors they use. Distributors themselves are also choosing to consolidate because of the competitive advantages that arise from expanded product offerings and economies of scale. The rapidly changing nature of the storage, semiconductor and computer industries has required distributors to significantly expand both their customer base and product and service offerings, to compete effectively. To be successful within these areas, we believe distributors must emphasize time-to-market and total cost reductions and focus on markets in which they have advantages in service, flexibility and component content. Distributors also need to distinguish themselves through a combination of value-added services such as consulting, design, integration, implementation and maintenance as well as more knowledgeable service and technical support.
OUR STRATEGY
Our goal is to expand our position as a leading distributor of storage solutions and systems and computer products and peripherals. We intend to achieve this goal by leveraging our strengths and implementing the following strategies:
Continue to Focus on the Storage Market. We plan to continue to take advantage of the market
opportunities in the storage industry by maintaining our strategic focus on providing complete storage solutions. For example, we have devoted significant resources to broadening our range of value-added services, expanding our marketing efforts, deepening the expertise of our sales force and offering an extensive range of technologically-advanced products. We believe that we are well positioned to benefit from the strong growth and favorable market dynamics of the storage industry.
Expand our Storage and Complementary Product Lines. We believe that our ability to offer customers an extensive line of leading storage products across technologies and manufacturers will continue to be a strong competitive advantage for us, particularly as it relates to SAN and NAS solutions. Our selection of products and technologies, together with our independence, allows us to reliably deliver the optimal package of appropriate hardware, software and services for each project.
Expand our International Presence. We intend to deepen our presence in the United States, and expand our coverage in the major international markets we serve, including Canada, Latin America and Europe, through internal growth and strategic acquisitions. Increasingly, multinational companies, including our manufacturers and customers, require products and solutions that are able to address local operational and reporting requirements, but which are also heterogeneous and interoperable among countries, regions and offices. As we expand our global presence, we believe that we will be better able to address the demands of multinational customers, gain more access to multinational manufacturers and leverage our expertise.
Deepen Relationships with Industry Leaders. We intend to leverage our position as a leading distributor of storage solutions to broaden our existing strategic relationships with industry leaders and to create new strategic relationships. We believe that distribution channels will continue to consolidate and leading manufacturers will align with those distributors that are best able to offer value-added services and access new customers. We believe being aligned with leading manufacturers will allow us to identify innovative products, exchange critical information, gain access to new technologies and create cross-marketing opportunities. We have developed strategic relationships with a number of vendors, including AMD, Brocade, EMC, Emulex, Hitachi, HP, IBM, Intel, Legato, LG Electronics, Maxtor, Microsoft, Network Associates, Qlogic, Seagate, StorageTek, Symantec, Veritas and Western Digital.
Continue Cost Structure and Profitability Improvements. We intend to continue to improve our cost structure by maximizing the efficiency of personnel and resources throughout our global organization. During the past few years, we have undertaken various performance improvement initiatives such as realigning and streamlining operations. We have also made significant progress in reducing non-personnel related expenditures. We will continue to review our business and take advantage of opportunities to improve cost efficiencies. We also intend to continue to optimize our profitability by managing our assets and working capital through actions such as maximizing early payment discounts and other profit enhancement opportunities offered by vendors.
Pursue Selective Acquisitions. We intend to pursue opportunities to acquire businesses that help us achieve our various strategic goals including further developing our solutions offerings, expanding key vertical product offerings and broadening our geographic footprint.
PRODUCTS AND SERVICES
We market and distribute more than 140 brand name product lines, as well as our own Rorke Data storage products and Markvision memory modules. We offer the following products as discrete components or as part of our solutions offering.
Storage Products and Related Software
Our storage products include network attached storage, storage area network products, fibre channel networking products and systems, tape libraries and disk drives, as well as storage-related software products. We partner with the best-in-class storage providers in the industry to provide the most comprehensive cost effective solutions to enterprise customers worldwide. We offer a comprehensive set of products and services, supported through a network of worldwide integration and solution centers with more than 400 dedicated storage professionals available to serve our customer's enterprise needs. Our customer base includes leading Var2000 and vertical solution providers worldwide.
Semiconductor and Other Components
We distribute a variety of semiconductor components, including DRAM and Flash memory components and modules, microprocessors, microcontrollers, fiber optics, power management components, application-specific integrated circuits (ASICs), graphics and video devices, communications and power supplies.
Computer Products and Software
Our computer products include disk drives, a variety of standard and custom-configured motherboards, flat panel displays and related components, monitors, keyboards, chassis, scanners, servers, board level products and network interface controller (NIC) cards. Our software offering includes operating systems, middleware, database, replication, storage management and systems management. Among the computer products we offer are our own proprietary Markvision memory modules that complement the other products and technologies we provide.
Value-Added Services
We offer our customers a variety of value-added services as described below. Many of our value-added services are product focused, while others provide our customers assistance with a variety of product management activities.
Storage System Consulting Services. We work with customers to determine data storage needs to make decisions regarding their storage strategies and to design storage systems to address these needs. Our consulting services draw from our core competencies in enterprise storage integration solutions. We perform tasks such as storage audit or feasibility studies, supplement specialist elements of a pre-defined project or provide full project management and implementation.
NAS and SAN Solutions. We offer a broad range of professional services including design and consultation, installation, training and on-site service programs relating to NAS and SAN solutions. We have established a dedicated enterprise storage systems team that can address the challenges associated with enterprise storage systems. Our service programs also offer customers fibre channel interoperability testing and fully integrated turnkey storage solutions. For example, we integrate SANs with fibre channel-based technology including switches, bridges, archive libraries and network software.
Storage Subsystems. We provide standard and custom subsystem products to our customers. We integrate standard products for our Rorke Data brand storage products. We also configure custom products to meet the needs of customers that cannot be served by industry-standard product offerings.
Component Product Services. We provide value-added services to a full range of storage and computer products, including semiconductor device programming, tape and reeling, special labeling for disk drives. We provide image duplication, firmware modification, software downloading, special labeling and other hardware modification services. For other computer product components we provide kitting, testing and various configuration services.
Flat Panel Integration. We offer a comprehensive portfolio of Flat Panel Displays, technologies and integration services that include off-the-shelf solutions for Kiosk, point-of-sale (POS), Digital Display Signage, Medical Instrumentation, KVM (keyboard, video, mouse) and many other OEM applications. We also offer fully custom designs to support applications such as full sunlight readability and harsh environmental deployment.
Board and Blade Level Building Blocks. We provide both standard and custom configured Board and Blade offerings geared for applications to include computers, servers, medical equipment, video/graphics, security, test and measurement and networking products offered in a variety of industry standard form factors including ATX, Micro-ATX, PCI and Compact PCI. We also provide complete integration services, manufacturing assembly, interoperability testing and application support.
Application Support Services. Our application support services provide design support and product recommendations, training programs, maintenance options and testing, technical advice and prompt incident detection and resolution.
Supply Chain Management. We provide a variety of materials-management solutions, including e-procurement services, Internet-enabled, real-time pricing and delivery quotations, electronic data interface programs, just-in-time inventory programs, bonded inventories, on-site consignment inventory and kitting.
Retail Packaging and Software Duplication. We provide a value-added service to storage manufacturers, retailers and software/game customers, which combines the strengths of our hard drive value capabilities with custom third-party packaging. Our retail packaging programs deliver end consumer-ready storage products. These products are produced in high volume and require high quality software duplication, testing and drive assembly to meet demanding retail launch and release dates. The core materials planning and logistics capabilities of our distribution operations enable us to deliver retail-ready product to our customers' distribution centers or directly to their retail outlets.
SALES AND MARKETING
Our customer base primarily consists of OEMs, VARs, system integrators, contract electronic manufacturers, storage solution customers and retailers. For customers primarily seeking our solution offerings, our sales and marketing efforts often involve proactive efforts of our sales people and field application engineers. Sales and technical personnel focusing on these customers tend to spend time at customers' facilities assessing the customers' needs, developing and providing solutions as well as providing proof of concept supported by our technical capabilities and experience. Our component offering marketing efforts involve supply chain management programs, consignment and bonded inventory programs and end-of-life programs. Sales of our component offerings are principally driven by these factors, our design services, product breadth and depth, pricing and on-time availability.
We also believe that our relationships with manufacturers provide us with significant opportunities to increase our sales and customer base. We work closely with many manufacturers to develop strategies to penetrate both targeted markets and customers. In many cases, our sales presentations to customers are a joint effort with manufacturers' sales representatives.
We believe our e-commerce program will enhance our sales and marketing efforts by:
- providing our customers with detailed product information, including availability and pricing;
- providing customers additional channels to purchase our products;
- reducing time and expenditures involved in customers' product procurement activities; and
- providing our customers with resource planning tools to more accurately manage their product requirements.
COMPETITION
In the distribution of storage, semiconductor components and computer products, we generally compete for customer relationships with numerous local, regional and national and international authorized and unauthorized distributors. We also compete for customer relationships with manufacturers, including some of our manufacturers and customers. Consistent with our sales and marketing efforts, we tend to view our competition, whether arising from the direct or indirect distribution channel, on a customer-category basis. We believe that our most significant competition for customers seeking both products and value-added services arises from Arrow Electronics, Avnet, and European value-added distributors including IN Technology, Magirus and ECT Best'Ware. We believe that our most significant competition for customers seeking commodity products comes from Ingram Micro, Tech Data and Synnex.
Another key competitive factor in the electronic component and computer product distribution industry as a whole is the need to carry a sufficient amount of inventory to meet rapid delivery requirements of customers. However, to minimize our exposure related to valuation of inventory on hand, the majority of our product lines are purchased pursuant to non-exclusive distributor agreements which provide certain protections to us for product obsolescence and price erosion in the form of rights of return and price protection. Furthermore, these agreements are generally cancelable upon 30 to 180 days notice and, in most cases, provide for inventory return privileges upon cancellation. In addition, we enhance our competitive position by offering a variety of value-added services which entail the performance of services and/or processes tailored to individual customer specifications and business needs such as point of use replenishment, testing, assembly, supply chain management and materials management.
We believe that competition for customers is based on product line breadth, depth and availability, competitive pricing, customer service, technical expertise, value-added services and e-commerce capabilities. We believe that we compete favorably with respect to each of these factors. We directly compete with numerous distributors, many of which possess superior brand recognition and financial resources. In the area of storage products and solutions, however, we believe that none of our competitors offers the full range of storage products and solutions that we provide.
ACQUISITIONS
In connection with our solution offerings, we have completed a number of strategic acquisitions. Through these acquisitions, we gained expertise in storage solutions and greater access to international markets.
Our acquisition in December 2005 of MCE Computer Peripherie GmbH, MCE Computer Vertreibs Products GmbH, MCE Computer Technology Inc and MCE Limited, ("MCE") based in Munich, Germany has enabled us to continue to expand our growth in value added storage products and services in the key markets in Continental Europe and the UK and also has provided additional experienced management, sales and marketing resources. MCE is a European distributor of disk drives and components, and also has a substantial IBM enterprise business in Germany. MCE's customer base includes Enterprise VARs, system builders and industrial customers.
Our acquisition in July 2005 of Net Storage Computers, LTDA. ("Net Storage"), a company headquartered in Sao Paulo, Brazil, with sales offices in Belo Horizonte, Porto Alegre, Recife, Rio de Janeiro and Tambore, Brazil has enabled us to further expand our presence in the Latin America marketplace and provides the opportunity to strengthen our relationships with key suppliers and expand overall products and services offerings. Net Storage is a distributor of storage products and peripherals to VARs and system integrators in Brazil. Their strategic partners include Intel, Seagate, LG, Western Digital and AMD.
Our acquisition in June 2004 of OpenPSL Limited ("OpenPSL"), a company headquartered in Manchester, England, with offices in Dublin, Ireland, Leeds, Bracknell and Nottingham, has further enabled us to expand our
enterprise, storage solutions and service offerings in the United Kingdom and Ireland. OpenPSL is a value-added distributor of a broad range of IT products and technical services to VARs, system integrators and software companies, including server, storage, networking, technical computing, thin client, emulation, fax and security technologies. Their line card includes Hewlett Packard, IBM, Oracle, Veritas, Allied Telesyn and Microsoft.
Our acquisition in October 2003 of EBM Mayorista ("EBM"), a company headquartered in Merida, Mexico with branch locations in Cancun, Monterrey, Oaxaca, Villahermosa, Tampico, Veracruz, Tuxla, Torreon, Puebla and Aguascaliente has enabled us to expand our presence in Latin America and provided us the ability to gain additional market share in the rapidly growing market in Mexico. EBM provides a diverse product line of computer hardware and software to Mexican resellers, retail locations and system integrators, including the Intel, Samsung, Epson and U.S. Robotics lines.
Our 2001 acquisition of Total Tec, a company headquartered in Edison, NJ, and with sales offices in the eastern and southern United States, has significantly expanded our ability to address challenging SAN initiatives. Total Tec is one of Hewlett-Packard's ("HP") enterprise distributors and one of the nation's premier enterprise (computing and storage) solutions providers focused on implementing comprehensive IT solutions to Fortune 1000 firms. Bell Microproducts offers leading HP/Compaq enterprise products, services and solutions to its large customer base of VARs, resellers, OEMs and system integrators in the U.S.
Our 2001 acquisition of Touch The Progress Group BV, a company based in the Netherlands and with offices in Germany, Belgium and Austria, has added enterprise storage solutions including storage management software products, integrated storage technology, infrastructure, and support services to our strategic effort. The company offers an extensive portfolio of storage solutions from some of the world's leading manufacturers. This portfolio allows the company and its business partners to provide a total storage management solution for multiple heterogeneous computing platforms, including IBM, HPQ, Veritas and other leading manufacturers.
Our 2001 acquisition of Forefront Graphics, a company headquartered in Toronto, Canada, and with offices in Ottawa, Montreal, Calgary and Vancouver, has added high performance computer graphics, digital audio and video, storage and multimedia products targeted at both the computer reseller marketplace and the video production reseller marketplace.
EMPLOYEES
At December 31, 2005, we had a total of 1,827 employees, including 888 in sales and marketing functions, 744 in general administrative functions and 195 in technical and value-add integration functions. Of our total employees, 1,060 are located at our facilities outside of the United States, including 499 in the United Kingdom. None of our employees are represented by a labor union. We have not experienced any work stoppages and consider our relations with our employees to be good. Many of our current key personnel have substantial experience in our industry and would be difficult to replace. The labor market in which we operate is highly competitive and, as a result, we may not be able to retain and recruit key personnel. If we fail to recruit, retain or adequately train key personnel, we will experience difficulty in implementing our strategy, which could negatively affect our business, financial condition and stock price.
ITEM 1A.
ITEM 1A. RISK FACTORS
You should consider carefully the risks described below together with all of the other information included in this Form 10-K. The risks and uncertainties described below and elsewhere in this Form 10-K are not the only ones facing us. If any of the following risks actually occur, our business, financial condition or results of operations would likely suffer. In that case, the trading price of our common stock could fall, and you may lose all or part of your investment.
OUR QUARTERLY OPERATING RESULTS ARE VOLATILE AND MAY CAUSE OUR STOCK PRICE TO FLUCTUATE.
Our future revenues and operating results are likely to vary significantly from quarter to quarter due to a number of factors, many of which are outside our control. Accordingly, you should not rely on quarter-to-quarter comparisons of our operating results as an indication of future performance. It is possible that in some future periods our operating results will be below the expectations of public market analysts and investors. In this event, the price of our stock will likely decline. Factors that may cause our revenues, gross margins and operating results to fluctuate include:
- the loss of key manufacturers or customers;
- changes in vendor rebate and incentive programs;
- heightened price competition;
- problems incurred in managing inventories;
- a change in the product mix sold by us;
- customer demand (including the timing of purchases from significant customers);
- changing global economic conditions;
- our ability to manage credit risk and collect accounts receivable;
- our ability to manage foreign currency exposure;
- availability of product and adequate credit lines from manufacturers; and
- the timing of expenditures in anticipation of increased sales.
Due primarily to manufacturer rebate programs and increased sales volumes near the end of each quarter, a larger portion of our gross profit has historically been reflected in the third month of each quarter than in each of the first two months of such quarter. If we do not receive products from manufacturers or complete sales in a timely manner at the end of a quarter, or if rebate programs and marketing development funds are changed or discontinued, our operating results in a particular quarter could suffer.
As a result of intense price competition, we have narrow gross profit margins. These narrow margins magnify the impact of variations in sales and operating costs on our operating results. Because our sales in any given quarter depend substantially on sales booked in the third month of the quarter, a decrease in such sales is likely to adversely and disproportionately affect our quarterly operating results. This is because our expense levels are partially based on our expectations of future sales, and we may be unable to adjust spending in a timely manner to compensate for any unexpected revenue shortfall. Due to our narrow margins and our limited ability to quickly adjust costs, any shortfall in sales in relation to our quarterly expectations will likely have an adverse impact on our quarterly operating results.
WE RELY ON A RELATIVELY SMALL NUMBER OF KEY MANUFACTURERS FOR PRODUCTS THAT MAKE UP A SIGNIFICANT PORTION OF OUR NET SALES AND THE LOSS OF A RELATIONSHIP WITH A KEY MANUFACTURER COULD HAVE AN ADVERSE EFFECT ON OUR NET SALES.
We receive a significant portion of our net sales from products we purchase from a relatively small number of key manufacturers. In each of 2005 and 2004, five key manufacturers provided products that represented 44% and 50%, respectively, of our net sales. We believe that products from a relatively small number of manufacturers will continue to account for a significant portion of our net sales for the foreseeable future, and the portion of our net sales from products purchased from such manufacturers could continue to increase in the future. These key manufacturers have a variety of distributors to choose from and therefore can make substantial demands on us. In addition, our standard distribution agreement allows the manufacturer to terminate its relationship with us on short notice. Our ability to maintain strong relationships with our key
manufacturers, both domestically and internationally, is essential to our future performance. The loss of a relationship with a key manufacturer could have an adverse effect on our net sales.
In addition, during the years 2001 through 2003, the downturn in the economy in general, and in the technology sector of the economy in particular, has led to increased consolidation among our manufacturers and may result in some manufacturers exiting the industry. Further, manufacturers have been consolidating the number of distributors they use. These events could negatively impact our relationships with our key manufacturers and may have an adverse effect on our net sales.
WE OPERATE IN AN INDUSTRY WITH CONTINUAL PRICING AND MARGIN PRESSURE.
The nature of our industry and our business is highly price-competitive. There are several distributors of products similar to ours in each of the markets in which we operate. As a result, we face pricing and margin pressure on a continual basis. Additionally, the mix of products we sell also affects overall margins. If we increase revenue from products that are more widely distributed, these products may carry lower gross margins that can reduce our overall gross profit percentage. There can also be a negative impact on gross margins from factors such as freight costs and foreign exchange exposure. These factors, alone or in combination, can have a negative impact on our gross profit percentage.
THE FAILURE OF OUR KEY SUPPLIERS TO KEEP PACE WITH RAPID TECHNOLOGICAL CHANGES IN OUR INDUSTRY AND TO SUCCESSFULLY DEVELOP NEW PRODUCTS COULD CAUSE OUR SALES TO DECLINE AND OUR REVENUES TO DECREASE.
Our ability to generate increased revenues depends significantly upon the ability and willingness of suppliers to develop new products on a timely basis in response to rapid technological changes in our industry. Our suppliers must commit significant resources each time they develop a product. If they do not invest in the development of new products, then sales of our products to our customers may decline and our revenues may decrease. The ability and willingness of our suppliers to develop new products is based upon a number of factors beyond our control.
THE TECHNOLOGY PRODUCTS MARKETPLACE HAS BEEN MATURING WHICH MAY AFFECT DEMAND FOR OUR PRODUCTS AND IMPACT OUR PRICING AND GROSS MARGINS.
Over the past several years, the growth rate in spending on the types of technology products we distribute has decreased from the growth rates experienced prior to 2000. While there has been an increase recently in the rate of spending as compared with 2001 through mid-2003, this increase may not be sustainable at its current level and there may be declines in technology spending in the future. A reduction in spending may result in a decline in our net sales and gross margins due to decreased sales volumes and price competition.
OUR INVENTORY MAY DECLINE IN VALUE DUE TO INVENTORY SURPLUS, PRICE REDUCTIONS OR TECHNICAL OBSOLESCENCE THAT COULD HAVE AN ADVERSE EFFECT ON OUR BUSINESS.
The value of our inventory may decline as a result of surplus inventory, price reductions or technological obsolescence. Our distribution agreements typically provide us with only limited price protection and inventory return rights. In addition, we purchase significant amounts of inventory under contracts that do not provide any inventory return rights or price protection. Without price protection or inventory return rights for our inventory purchases, we bear the sole risk of obsolescence and price reductions. Even when we have price protection and inventory return rights, there can be no guarantee we will be able to return the products to the manufacturer or to collect refunds for those products in a timely manner, if at all.
SUPPLY SHORTAGES COULD ADVERSELY AFFECT OUR OPERATING RESULTS AND CASH FLOWS.
We are dependent on the supply of products from our vendors. Our industry is characterized by periods of product shortages due to vendors' difficulty in projecting demand. When such shortages occur, we typically receive an allocation of product from the vendor. There can be no assurance that vendors will be able to maintain an adequate supply of products to fulfill all of our customers' orders on a timely basis. If we are unable to enter into and maintain satisfactory distribution arrangements with leading vendors and an adequate supply of products, we may be late in shipping products, causing our customers to purchase products from our competitors which could adversely affect our net sales, operating results and customer relationships.
OUR FINANCIAL OBLIGATIONS MAY LIMIT OUR ABILITY TO OPERATE OUR BUSINESS.
The agreements governing our revolving lines of credit and our 9% senior subordinated notes contain various restrictive covenants that, among other things, require us to comply with or maintain certain financial tests and ratios that limit our ability to operate our business. If we do not comply with the covenants contained in the agreements governing our revolving lines of credit and our 9% senior subordinated notes, our lenders may demand immediate repayment of amounts outstanding. Additionally, under the terms of our 3 3/4% Convertible Subordinated Notes, Series B due 2024, holders have the right to convert their notes upon the occurrence of certain events, including but not limited to the closing price of our common stock exceeding a certain threshold for at least 20 of the last 30 days in preceding fiscal quarters and upon specified corporate transactions, all as described in more detail in the prospectus filed in connection with the exchange offer. Upon the occurrence of any such conversion event, we have an obligation to deliver, at a minimum, cash in an amount equal to the principal amount of each note tendered for conversion. Our ability to comply with these debt obligations will depend upon our future operating performance, which may be affected by prevailing economic conditions and financial, business and other factors described herein and in our other SEC filings, many of which are beyond our control. If we are unable to meet our debt obligations, we may be forced to adopt one or more strategies such as reducing or delaying capital expenditures or otherwise slowing our growth strategies, selling assets, restructuring or refinancing our indebtedness or seeking additional equity capital. We do not know whether any of these actions could be effected on satisfactory terms, if at all. Additionally, any equity financing may be on terms that are dilutive or potentially dilutive. If we are unable to successfully manage our debt burden, and the potential short-term obligation relating to our convertible notes, our financial condition would suffer considerably. Changes in interest rates may also have a significant effect on our operating results. Furthermore, we are dependent on credit from our manufacturers to fund our inventory purchases. If our debt burden increases to high levels, our manufacturers may restrict our credit. Our cash requirements will depend on numerous factors, including the rate of growth of our sales, the timing and levels of products purchased, payment terms and credit limits from manufacturers, the timing and level of our accounts receivable collections and our ability to manage our business profitably.
SUBSTANTIAL LEVERAGE AND DEBT SERVICE OBLIGATIONS MAY ADVERSELY AFFECT OUR CASH FLOW.
Our revolving lines of credit and our 9% senior subordinated notes impose significant debt service obligations on us and expose us to certain risks associated with being a substantially leveraged company. Upon the occurrence of certain events, our lenders may demand immediate repayment of amounts outstanding under our existing lines of credit and our 9% senior subordinated notes. In March 2004, we issued our 3 3/4% convertible subordinated notes (the "Old Notes"), resulting in net proceeds of $106,300,000. We used all of the net proceeds of the offering to repay a portion of amounts outstanding under our revolving lines of credit and our 9% senior subordinated notes. In December 2004, we exchanged 99.6% of the Old Notes for our 3 3/4% Convertible Subordinated Notes, Series B due 2024 (the "New Notes") pursuant to an exchange offer with holders of the Old Notes. As a result of the issuance of the notes, our leverage and debt service obligations may increase. Under the terms of the New Notes, holders have the right to convert their notes upon the occurrence of certain events, including but not limited to the closing price of our common stock exceeding a certain threshold for at least 20 of the last 30 days in preceding fiscal quarters and upon specified corporate transactions, as described in more detail in the prospectus filed in connection with the exchange offer. Upon the occurrence of any such conversion event,
we have an obligation to deliver to holders electing to convert their New Notes, at a minimum, cash in an amount equal to the principal amount of each note tendered for conversion. There is the possibility that we may be unable to generate cash sufficient to pay the principal of, interest on and other amounts due in respect of our indebtedness when due.
Our substantial leverage could also have significant negative consequences, including:
- increasing our vulnerability to general adverse economic and industry conditions;
- increasing our exposure to fluctuating interest rates;
- restricting our credit with our manufacturers which would limit our ability to purchase inventory;
- limiting our ability to obtain additional financing;
- requiring the dedication of a portion of our expected cash flow from operations to service our indebtedness, thereby reducing the amount of our expected cash flow available for other purposes, including capital expenditures;
- limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we compete; and
- placing us at a possible competitive disadvantage relative to less leveraged competitors and competitors that have better access to capital resources.
We are not restricted under the indenture governing the notes from incurring additional debt in the future. As a result of using the net proceeds to pay down amounts outstanding on our revolving lines of credit, we may also incur substantial additional debt under the facilities. If new debt is added to our current levels, our leverage and debt service obligations would increase and the related risks described above could intensify.
IF WE DO NOT CONTROL OUR OPERATING EXPENSES, WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY IN OUR INDUSTRY.
Our strategy involves, to a substantial degree, increasing revenues while at the same time controlling operating expenses. In furtherance of this strategy, we have engaged in ongoing, company-wide efficiency activities intended to increase productivity and reduce costs. These activities have included significant personnel reductions, reduction or elimination of non-personnel expenses and realigning and streamlining operations and consolidating business lines. We cannot assure you that our efforts will result in the increased profitability, cost savings or other benefits that we expect. Moreover, our cost reduction efforts may adversely affect the effectiveness of our financial and operational controls, our ability to distribute our products in required volumes to meet customer demand and may result in disruptions that affect our products and customer service.
OUR ABILITY TO OPERATE EFFECTIVELY COULD BE IMPAIRED IF WE WERE TO LOSE THE SERVICES OF KEY PERSONNEL, OR IF WE ARE UNABLE TO RECRUIT QUALIFIED MANAGERS AND KEY PERSONNEL IN THE FUTURE.
Our success largely depends on the continued service of our management team and key personnel. If one or more of these individuals, particularly W. Donald Bell, our Chairman, Chief Executive Officer and President, were to resign or otherwise terminate their employment with us, we could experience a loss of sales and vendor relationships and diversion of management resources. Competition for skilled employees is intense and there can be no assurance that we will be able to recruit and retain such personnel. If we are unable to retain our existing managers and employees or hire and integrate new management and employees, we could suffer material adverse effects on our business, operating results and financial condition.
OUR INTERNATIONAL OPERATIONS SUBJECT US TO RISKS WHICH MAY HURT OUR PROFITABILITY.
Our international revenues represented 60% and 62% of our revenues in 2005 and 2004, respectively. We believe that international sales will represent a potentially increasing portion of our net sales for the foreseeable future. Our international operations are subject to a number of risks, including:
- Fluctuations in currency exchange rates;
- vendor programs, terms and conditions in multiple countries;
- political and economic instability;
- longer payment cycles and unpredictable sales cycles;
- difficulty in staffing and managing foreign operations;
- import and export license requirements, tariffs, taxes and other trade barriers;
- our ability to prevent inventory theft in certain foreign jurisdictions; and
- the burden of complying with a wide variety of foreign laws, treaties and technical standards and changes in those regulations.
The majority of our revenues and expenditures in our foreign subsidiaries are transacted in the local currency of the country where the subsidiary operates. For each of our foreign subsidiaries, the local currency is also the functional currency. Fluctuations in currency exchange rates could cause our products to become relatively more expensive to customers in a particular country, leading to a reduction in sales or profitability in that country. To the extent our revenues and expenses are denominated in currencies other than U.S. dollars, gains and losses on the conversion to U.S. dollars may contribute to fluctuations in our operating results. In addition, we have experienced foreign currency remeasurement gains and losses because a significant amount of our foreign subsidiaries' remeasurable net assets and liabilities are denominated in U.S. dollars rather than the subsidiaries' functional currency. As we continue to expand globally and the amount of our foreign subsidiaries' U.S. dollar or non-functional currency denominated, remeasurable net asset or liability position increases, our potential for fluctuations in foreign currency remeasurement gains and losses will increase. We have in the past, and expect in the future, to enter into hedging arrangements and enter into local currency borrowing facilities to reduce this exposure, but these arrangements may not be adequate.
Our inability to successfully complete the restructuring of our European operations could negatively impact our results of operations.
On November 23, 2005, we announced the commencement of certain restructuring activities with respect to our European operations. In connection with the restructuring, we closed an office in Sweden, reduced headcount and consolidated certain back office support functions. We also realigned certain product lines in response to market trends and streamlined our inventory warehousing and European product distribution system. There can be no guarantee that the assumptions underlying our decision to undertake the restructuring will prove to be correct or that we will be able to effectively manage the loss of certain personnel and other European distribution infrastructure or the discontinuation of certain product lines. General economic factors and other factors beyond our control could cause the actual results of the restructuring to differ materially from those expected by management. If our assumptions prove to be incorrect or we are unable to effectively manage the restructuring, our operating income from our European operations and our consolidated results of operations could be negatively impacted. Further, even if we are able to successfully implement and manage the restructuring, there can be no guarantee that the restructuring will improve our European results of operations.
OUR INABILITY TO EFFECTIVELY MANAGE OUR ACCOUNTS RECEIVABLE COULD HAVE A SIGNIFICANT NEGATIVE IMPACT ON OUR FINANCIAL CONDITION, RESULTS OF OPERATIONS AND LIQUIDITY.
A significant portion of our working capital consists of accounts receivable from customers. If customers responsible for a significant percentage of our accounts receivable were to become insolvent or otherwise unable to pay for products and services, or were to become unwilling or unable to make payments in a
timely manner, our operating results and financial condition could be adversely affected. If there is an economic downturn which has a significant negative impact on our business, it could also have an adverse effect on the servicing of our accounts receivable, which could result in longer payment cycles, increased collection costs and defaults in excess of management's expectations. A significant deterioration in our ability to collect on accounts receivable could also impact the cost or availability of financing. Further, our revolving lines of credit enable us to borrow funds for operations based on our levels of accounts receivable and inventory and the agreement governing our senior subordinated notes restricts the amount of additional debt we can incur based on our levels of accounts receivable and inventory. If our accounts receivable and inventories are not at adequate levels, we may face liquidity problems in operating our business.
IF WE ARE UNABLE TO EFFECTIVELY COMPETE IN OUR INDUSTRY, OUR OPERATING RESULTS MAY SUFFER.
The markets in which we compete are intensely competitive. As a result, we will face a variety of significant challenges, including rapid technological advances, price erosion, changing customer preferences and evolving industry standards. Our competitors continue to offer products with improved price and performance characteristics, and we will have to do the same to remain competitive. Increased competition could result in significant price competition, reduced revenues, lower profit margins or loss of market share, any of which would have a material adverse effect on our business. We cannot be certain that we will be able to compete successfully in the future.
We compete for customer relationships with numerous local, regional, national and international distributors. We also compete for customer relationships with manufacturers, including some of our manufacturers and customers. We believe our most significant competition for customers seeking both products and services arises from Arrow Electronics, Avnet and European value-added distributors including IN Technology, Magirus and ECT Best'Ware. We believe our most significant competition for customers seeking only products arises from Ingram Micro, Tech Data and Synnex. We also compete with regionalized distributors in North America, Europe and Latin America who use their localized knowledge and expertise as a competitive advantage. Competition for customers is based on product line breadth, depth and availability, competitive pricing, customer service, technical expertise, value-added services and e-commerce capabilities. While we believe we compete favorably with respect to these factors, some of our competitors have superior brand recognition and greater financial resources than we do. If we are unable to successfully compete, our operating results may suffer.
We also compete with other distributors for relationships with manufacturers. In recent years, a growing number of manufacturers have begun consolidating the number of distributors they use. This consolidation will likely result in fewer manufacturers in our industry. As a result of this consolidation we may lose existing relationships with manufacturers. In addition, manufacturers have established and may continue to establish cooperative relationships with other manufacturers and data storage solution providers. These cooperative relationships may enable manufacturers to offer comprehensive solutions that compete with those we offer and the manufacturers may have greater resources to devote to internal sales and marketing efforts. If we are unable to maintain our existing relationships with manufacturers and establish new relationships, it could harm our competitive position and adversely affect our operating results.
IF WE ARE UNABLE TO KEEP PACE WITH RAPID TECHNOLOGICAL CHANGE, OUR RESULTS OF OPERATIONS, FINANCIAL CONDITION AND CASH FLOWS MAY SUFFER.
Many of the products we sell are used in the manufacture or configuration of a wide variety of electronic products. These products are characterized by rapid technological change, short product life cycles and intense competition and pricing pressures. Our continued success depends upon our ability to continue to identify new vendors and product lines that achieve market acceptance, emerging technologies, develop technological
expertise in these technologies and continually develop and maintain relationships with industry leaders. If we are unsuccessful in our efforts, our results of operations and financial condition may suffer.
FAILURE TO IDENTIFY ACQUISITION OPPORTUNITIES AND INTEGRATE ACQUIRED BUSINESSES INTO OUR OPERATIONS SUCCESSFULLY COULD REDUCE OUR REVENUES AND PROFITS AND MAY LIMIT OUR GROWTH.
An important part of our growth has been the acquisition of complementary businesses. We may choose to continue this strategy in the future. Our identification of suitable acquisition candidates involves risks inherent in assessing the value, strengths, weaknesses, overall risks and profitability of acquisition candidates. We may be unable to identify suitable acquisition candidates. If we do not make suitable acquisitions, we may find it more difficult to realize our growth objectives.
The process of integrating new businesses into our operations, including our recently completed acquisitions, poses numerous risks, including:
- an inability to assimilate acquired operations, information systems, and internal control systems and products;
- diversion of management's attention;
- difficulties and uncertainties in transitioning the business relationships from the acquired entity to us; and
- the loss of key employees of acquired companies.
In addition, future acquisitions by us may be dilutive to our shareholders, cause us to incur additional indebtedness and large one-time expenses or create intangible assets that could result in significant amortization expense. If we spend significant funds or incur additional debt, our ability to obtain necessary financing may decline and we may be more vulnerable to economic downturns and competitive pressures. We cannot guarantee that we will be able to successfully complete any acquisitions, that we will be able to finance acquisitions or that we will realize any anticipated benefits from acquisitions that we complete.
IF WE CANNOT EFFECTIVELY MANAGE OUR GROWTH, OUR BUSINESS MAY SUFFER.
Our growth since our initial public offering in 1993 has placed, and continues to place, a significant strain on our management, financial, operational, technical, sales and administrative resources. We intend to continue to grow by increasing our sales efforts and completing strategic acquisitions. To effectively manage our growth, we must, among other things:
- engage, train and manage a larger sales force and additional service personnel;
- expand the geographic coverage of our sales force;
- expand our information systems;
- identify and successfully integrate acquired businesses into our operations; and
- enforce appropriate financial and administrative control procedures.
Any failure to effectively manage our growth may cause our business to suffer and our stock price to decline.
WHILE WE BELIEVE THAT WE CURRENTLY HAVE ADEQUATE INTERNAL CONTROL PROCEDURES IN PLACE, WE ARE STILL EXPOSED TO POTENTIAL RISKS FROM RECENT LEGISLATION REQUIRING COMPANIES TO EVALUATE CONTROLS UNDER SECTION 404 OF THE SARBANES-OXLEY ACT OF 2002.
As directed by Section 404 of the Sarbanes-Oxley Act of 2002, the Securities and Exchange Commission adopted rules requiring public companies to include a report of management on the company's internal control
over financial reporting in their annual reports on Form 10-K that contains an assessment by management of the effectiveness of the company's internal control over financial reporting. In addition, the independent registered public accounting firm auditing the company's financial statements must attest to and report on management's assessment of the effectiveness of the company's internal control over financial reporting. We have performed the system and process evaluation and testing required in an effort to comply with the management certification and auditor attestation requirements. While we intend to conduct a rigorous review of our internal control over financial reporting in order to assure compliance with the Section 404 requirements, if our independent registered public accounting firm interprets the Section 404 requirements and the related rules and regulations differently from us or if our independent registered public accounting firm is not satisfied with our internal control over financial reporting or with the level at which it is documented, operated or reviewed, they may decline to attest to management's assessment or issue a qualified report. Additionally, if we are not able to continue to meet the requirements of Section 404 in a timely manner or with adequate compliance, we might be subject to sanctions or investigation by regulatory authorities, such as the SEC or the Nasdaq Global Market. Any such actions could result in an adverse reaction in the financial markets due to a loss of confidence in the reliability of our financial statements, which could cause the market price of our common stock to decline.
SOME OF OUR OPERATIONS ARE LOCATED IN CALIFORNIA AND, AS A RESULT, ARE SUBJECT TO NATURAL DISASTERS, WHICH COULD RESULT IN A BUSINESS STOPPAGE AND NEGATIVELY AFFECT OUR OPERATING RESULTS.
Our business operations depend on our ability to maintain and protect our facilities, computer systems and personnel. Our corporate headquarters and a significant portion of our business operations, computer systems and personnel are located in the San Francisco Bay area which is in close proximity to known earthquake fault zones. Our facilities and transportation for our employees are susceptible to damage from earthquakes and other natural disasters such as fires, floods and similar events. Should an earthquake or other catastrophes, such as fires, floods, power loss, communication failure or similar events disable our facilities, we have limited available alternative facilities from which we could conduct our business, which stoppage could have a negative effect on our operating results.
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not Applicable.
ITEM 2.
ITEM 2. PROPERTIES
In the Americas, we maintain 55 sales offices in a variety of locations, including the U.S., Canada, Argentina, Brazil, Chile and Mexico. In Europe, we maintain sales offices in Austria, Belgium, England, Ireland, France, Germany, Italy and the Netherlands. In addition to our sales offices, we operate six integration and service facilities and 18 warehouses. We currently operate five significant management and distribution centers. Our corporate headquarters is located in San Jose, California, where we currently lease office space and distribution facilities with approximately 170,000 square feet of space. The leases expire in 2007. In Chessington, England, we lease an office facility with approximately 40,000 square feet that serves as our center for directing and managing our operations in the United Kingdom and Europe. The lease expires in 2010. Our European distribution center is located in Birmingham, England where we lease a warehouse facility with approximately 78,000 square feet of space. This lease expires in 2019. In Manchester, England, we acquired a facility with approximately 23,000 square feet that serves as our center for directing and managing our value added and storage solutions services in the United Kingdom and Ireland. In Miami, Florida, we currently lease a facility with approximately 65,000 square feet that serves as our center for directing and managing our business in Latin America. The lease expires in 2010, with one 5-year option to extend. In Munich, Germany, we acquired a leased facility with approximately 49,000 square feet of space that serves as a distribution center on the European Continent. The lease expires in November
2007. In Montgomery, Alabama, we currently lease a facility with approximately 37,000 square feet that serves as our corporate technology and data center and our primary customer call center. The lease on this facility expires in October 2007. We believe that our existing facilities are adequate for our current operational needs.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
Bell and/or its subsidiaries are parties to various other legal proceedings arising from time to time in the normal course of business. While litigation is subject to inherent uncertainties, management currently believes that the ultimate outcome of these proceedings, individually and in the aggregate, will not have a material adverse effect on our financial position, cash flow or results of operations.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our Common Stock is traded on the Nasdaq Global Market under the symbol "BELM". The following table sets forth for the periods indicated the high and low sale prices of the Common Stock as reported by Nasdaq.
On March 11, 2006, the last sale price of the Common Stock as reported by Nasdaq was $6.24 per share.
As of March 11, 2006, there were approximately 310 holders of record of the Common Stock (not including shares held in street name).
To date, we have paid no cash dividends to our shareholders. We have no plans to pay cash dividends in the near future. Our line of credit agreements prohibit the payment of dividends or other distributions on any of our shares except dividends payable in our capital stock.
ITEM 6.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated operations data for 2005, 2004 and 2003 and consolidated balance sheet data as of December 31, 2005 and 2004 set forth below have been derived from our consolidated financial statements and are qualified by reference to the consolidated financial statements included herein audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm. The selected consolidated operations data for 2002 and 2001 and the consolidated balance sheet data as of December 31, 2003, 2002 and 2001 have been derived from our audited consolidated financial statements not included herein. These historical results are not necessarily indicative of the results of operations to be expected for any future period.
(1) 2005 Statement of Operations data and Balance Sheet data include the results of operations of MCE Group since acquisition on December 1, 2005 and Net Storage since acquisition on July 8, 2006. See Note 4 of Notes to Consolidated Financial Statements.
(2) 2004 Statement of Operations data and Balance Sheet data include the results of operations of OpenPSL Holdings Limited since acquisition on June 22, 2004. See Note 4 of Notes to Consolidated Financial Statements.
(3) 2003 Statement of Operations data and Balance Sheet data include the results of operations of EBM Mayorista S.A. de C.V. since acquisition on October 15, 2003. See Note 4 of Notes to Consolidated Financial Statements.
(4) 2001 Statement of Operations data and Balance Sheet data include the results of operations of Touch The Progress Group BV since acquisition on May 22, 2001, Forefront Graphics on May 24, 2001 and Total Tec Systems, Inc. on November 13, 2001.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For an understanding of the significant factors that influenced our performance during the past three years, the following discussion should be read in conjunction with the consolidated financial statements and the other information appearing elsewhere in this report.
Due to the impact of weakened market conditions and competitive pressures affecting our European distribution business, and in earlier years, the downturn in the electronic component, computer product industry and in the global economy as a whole, we have recorded charges that are discussed more fully in "Restructuring Costs and Other Charges" in this MD&A. These charges have had a significant impact on our results of operations for the years ended December 31, 2005 and 2003 presented in this Form 10-K as discussed further below.
When used in this report, the words "expects," "anticipates," "estimates," "intends" and similar expressions are intended to identify forward-looking statements within the meaning of Section 27A under the Securities Act of 1933 and Section 21E under the Securities Exchange Act of 1934. Such statements include but are not limited to statements regarding our ability to obtain favorable product allocations, the annual employee expense and cost reductions related to our European restructuring, the timing of when certain restructuring and special charges liabilities will be extinguished, our plans related to the payment of dividends, our future cash requirements and our ability to increase gross profit while controlling expenses. These statements are subject to risks and uncertainties that could cause actual results to differ materially, including those risks described under "Risk Factors" in Item 1 hereof.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Our estimates, judgments and assumptions are continually evaluated based on available information and experience; however actual amounts could differ from those estimates.
The Securities and Exchange Commission defines critical accounting polices as those that are, in management's view, most important to the portrayal of our financial condition and results of operations and those that require significant judgments and estimates. Management believes our most critical accounting policies relate to the following areas:
Revenue recognition
Bell's policy is to recognize revenue from sales to customers when the rights and risks of ownership have passed to the customer, when persuasive evidence of an arrangement exists, the price is fixed and determinable and collection of the resulting receivable is reasonably assured. The provision for estimated returns is recorded concurrently with the recognition of revenue based on historical sales returns and analysis of credit memorandum data.
We maintain an allowance for doubtful accounts for losses that we estimate will arise from our customers' inability to make required payments. We make our estimates of the collectibility of our accounts receivable by analyzing historical bad debts, specific customer creditworthiness and current economic trends. At December 31, 2005 the allowance for doubtful accounts was $21.9 million and at December 31, 2004 it was $13.6 million. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. In 2005, our bad debt expense was $14.5 million compared to $9.0 million in 2004.
Vendor Programs
We receive funds from vendors for price protection, product rebates, marketing and promotions, infrastructure reimbursement and competitive pricing programs. Amounts related to price protection and other incentive programs are recorded as adjustments to inventories, cost of sales or selling, general and administrative expenses, depending on the nature of the program. Vendor receivables are generally collected through vendor authorized reductions to our accounts payable. There is a time delay between the submission of a claim by us and confirmation of agreement by our vendors. Historically, our estimated claims have approximated amounts agreed to by our vendors.
Valuation of Inventory
Inventories are recorded at the lower of cost (first in -- first out) or estimated market value. Our inventories include high-technology components, embedded systems and computing technologies sold into rapidly changing, cyclical and competitive markets whereby such inventories may be subject to early technological obsolescence. We write down our inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand, selling prices and market conditions. In the fourth quarter of 2005, we recorded inventory charges of $1.7 million related to excess inventory on hand. These additional write-downs resulted from our decision to exit certain unprofitable business lines in Europe. These charges were included in the Statement of Operations within the caption "Cost of Sales." We evaluate inventories for excess, obsolescence or other factors that may render inventories unmarketable at normal margins. Write-downs are recorded so that inventories reflect the approximate net realizable value and take into account our contractual provisions with our suppliers governing price protection, stock rotation and return privileges relating to obsolescence. Because of the large number of transactions and the complexity of managing the process around price protections and stock rotations, estimates are made regarding adjustments to the carrying amount of inventories. Additionally, assumptions about future demand, market conditions and decisions to discontinue certain product lines can impact the decision to write down inventories. If assumptions about future demand change or actual market conditions are less favorable than those projected by management, additional write-downs of inventories may be required. In any case, actual amounts could be different from those estimated.
Special and Acquisition-Related Charges
We have been subject to the financial impact of integrating acquired businesses and charges related to business reorganizations. In connection with such events, management is required to make estimates about the
financial impact of such matters that are inherently uncertain. Accrued liabilities are established to cover the cost of severance, facility consolidation and closure, lease termination fees, inventory adjustments based upon acquisition-related termination of supplier agreements and/or the evaluation of the acquired working capital assets (inventory and accounts receivable), change-in-control expenses, and write-down of other acquired assets including goodwill. Actual amounts incurred could be different from those estimated.
Accounting for Income Taxes
Management judgment is required in determining the provision for income taxes, deferred tax assets and liabilities and the valuation allowance recorded against net deferred tax assets. The carrying value of our net foreign operating loss carry-forwards is dependent upon our ability to generate sufficient future taxable income in certain tax jurisdictions. In addition, we consider historic levels of income, expectations and risk associated with estimates of future taxable income and ongoing prudent and feasible tax planning strategies in assessing a tax valuation allowance. Should we determine that we are not able to realize all or part of our deferred tax assets in the future, a valuation allowance is recorded against the deferred tax assets with a corresponding charge to income in the period such determination is made. In 2006, we expect our effective tax rate to be approximately 40%.
Valuation of Goodwill and Intangible Assets
At December 31, 2005, goodwill amounted to $101.5 million and identifiable intangible assets amounted to $8.5 million.
We regularly evaluate whether events and circumstances have occurred that indicate a possible impairment of goodwill. In determining whether there is an impairment of goodwill, we calculate the estimated fair value of our company based on the closing sales price of our common stock and projected discounted cash flows as of the date we perform the impairment tests. We then compare the resulting fair value to our respective net book value, including goodwill. If the net book value of our company exceeds its fair value, we measure the amount of the impairment loss by comparing the implied fair value of our goodwill with the carrying amount of that goodwill. To the extent that the carrying amount of our goodwill exceeds its implied fair value, we recognize a goodwill impairment loss. We perform this impairment test annually and whenever facts and circumstances indicate that there is a possible impairment of goodwill. We completed the required annual impairment test, which resulted in no impairment for fiscal year 2005. We believe the methodology we use in testing impairment of goodwill provides us with a reasonable basis in determining whether an impairment charge should be taken.
Hedge Accounting
We generate a substantial portion of our revenues in international markets, which subjects our operations and cash flows to the exposure of currency exchange fluctuations. We seek to minimize the risk associated with currency exchange fluctuations by entering into forward exchange contracts to hedge certain foreign currency denominated assets or liabilities. These derivatives do not qualify for SFAS 133 hedge accounting treatment. Accordingly, changes in the fair value of these hedges are recorded immediately in earnings on line item 'Interest Expense and Other Income' to offset the changes in the fair value of the assets or liabilities being hedged.
RESULTS OF OPERATIONS
EXECUTIVE SUMMARY
For both the year overall and the fourth quarter we achieved record revenues. Revenues for the fourth quarter of 2005 reached a record $842 million, increasing 4% compared to last year's fourth quarter revenues, and revenues for the year reached a record $3.19 billion, increasing 13% over 2004. We had strong performance in
sales and operating profit performance in North and Latin America as well as our Enterprise business units, but performed below expectation in our European distribution business. Although our overall European sales grew 5% in 2005 from the prior year, the growth was primarily driven by our OpenPSL enterprise business, which continues to be profitable, and the year-end benefit of our recent acquisition of MCE.
Our primary focus in our European distribution business during the fourth quarter was to ensure that we drove substantial cost reduction actions and repositioned these operations. We implemented a restructuring plan and made significant progress in this area through reductions in personnel and other expenses as further described below. We are currently implementing the next phase of our European plan, which is to drive revenue and margin in the Industrial market segments and we are confident that these actions will contribute to improved results and a differentiated business model in Europe.
We remain optimistic that the overall IT market will continue to grow and believe Bell Microproducts is positioned to continue to gain market share in strategic products segments and generate significant improvements in earnings as we move forward.
YEAR ENDED DECEMBER 31, 2005 COMPARED TO YEAR ENDED DECEMBER 31, 2004
Net sales were $3,193.8 million for the year ended December 31, 2005, which represented an increase of $366.1 million, or 13% over 2004. The sales increase was driven by an increase of $202.2 million in sales of Components and Peripherals as well as an increase of $163.9 million in Solutions sales. The increase in sales of Components and Peripherals was due primarily to growth in Components sales in North and South America. The Solutions sales increase was due to the growth in the North American market for these products and the acquisition of OpenPSL Limited ("OpenPSL") in June of 2004. OpenPSL contributed approximately $239 million of our Solutions sales in 2005 and $120 million in 2004.
Our gross profit for 2005 was $231.2 million, an increase of $9.8 million, or 4% from 2004. The increase in gross profit was primarily due to an increase in sales volume and the acquisition of OpenPSL in June 2004, partially offset by a decline in gross margin percentage to 7.2% from 7.8% in 2004. The acquisition of OpenPSL contributed approximately $26.1 million in 2005 and $19.3 million in 2004. The decrease in gross profit margin percentage was primarily due to the reduction in certain vendor incentives and market pressures in our European distribution operation. As part of our European restructuring plan, we also took an inventory charge of $1.7 million related to the write-down of inventory and the settlement of potential vendor claims from discontinued product lines, as discussed below.
Selling, general and administrative expenses increased to $190.6 million in 2005 from $185.2 million in 2004, an increase of $5.3 million, or 3%. The increase in expenses was primarily attributable to our acquisitions of OpenPSL and Net Storage S.A. ("Net Storage") and sales volume related expense increases in the Americas. This increase in expenses was significantly offset by cost reductions in our European distribution operation. Our acquisition of OpenPSL added approximately $19.9 million to our consolidated expenses in 2005 and $10.2 million in 2004. Net Storage added approximately $1.9 million to our consolidated expenses in 2005. As a percentage of sales, selling, general and administrative expenses decreased to 6.0% compared to 6.6% in 2004.
Interest expense and other income increased to $21.6 million from $16.9 million in 2004, an increase of approximately $4.7 million, or 28%. The increase in interest expense and other income was primarily due to overall increased bank borrowings during 2005 for worldwide working capital purposes and the acquisition of Net Storage. The average interest rate in 2005 was 5.8% versus 5.5% in 2004.
In 2005, we recorded an effective tax rate of 81% on income before taxes compared to an effective tax rate of 41% in 2004. The change in the tax rate was primarily related to the losses incurred in certain of our European jurisdictions, primarily as a result of our restructuring plan, that we could not offset against profits we earned in
North America and Latin America. Our restructuring plan is further discussed below.
Restructuring Costs and Other Charges
In the fourth quarter of 2005, we implemented a restructuring plan for our European operations and as a result we incurred restructuring costs and special charges of $9.0 million during the quarter. These costs consisted primarily of $5.9 million related to future lease obligations for excess facilities; $1.7 million for inventory costs in excess of estimated net realizability, included within the income statement line item "Cost of Goods Sold," $200,000 for estimated vendor claims both related to discontinued product lines; severance and benefits of $936,000 for involuntary employee terminations, and $338,000 related to closure of our in-country operation in Sweden. We terminated 58 employees in the UK and Europe, in sales, marketing and support functions as of December 31, 2005. We expect annual employee expense reductions of approximately $4.6 million and cost reductions related to excess facilities of approximately $3.2 million.
Also in the fourth quarter of 2005, we incurred a special charge due to a terminated components supply program in North America and provided a specific reserve for a partner account receivable balance that we believe may not be collectable as a result of the program termination. This amount has been classified as a special charge in the amount of $9.1 million, net of a $550,000 reversal of restructuring costs and special charges taken in prior years that were adjusted to reflect actual charges.
Outstanding restructuring liabilities related to the charges expected to be paid in cash are summarized as follows (in thousands):
Management expects to extinguish the restructuring and special charges liabilities of $7.3 million by December 2007.
YEAR ENDED DECEMBER 31, 2004 COMPARED TO YEAR ENDED DECEMBER 31, 2003
Net sales were $2,827.8 million for the year ended December 31, 2004, which represented an increase of $597.5 million, or 27% over 2003. The sales increase was driven by an increase of $343.8 million in Solutions sales as well as an increase of $253.7 million in sales of Components and Peripherals. The Solutions sales increase was due to the growth of this market, a growth in market share and the acquisition of OpenPSL Limited ("OpenPSL") in June of 2004. OpenPSL contributed approximately $120 million of our Solutions sales in 2004. The increase in sales of Components and Peripherals was due primarily to growth in components sales in North America.
Our gross profit for 2004 was $221.4 million, an increase of $53.3 million, or 32% from 2003. The increase in gross profit was primarily due to an increase in sales volume, product mix and the acquisition of OpenPSL in June 2004. The acquisition of OpenPSL contributed approximately $19.3 million in 2004. Our gross profit margin increased to 7.8% in 2004, compared to 7.5% in 2003.
Selling, general and administrative expenses increased to $185.2 million in 2004 from $157.1 million in 2003, an increase of $28.1 million, or 18%. As a percentage of sales, selling, general and administrative expenses decreased to 6.6% compared to 7.0% in 2003. The increase in expenses was primarily attributable to the increase in sales volume. Additionally, our acquisition of OpenPSL added approximately $10.2 million to our consolidated expenses and we incurred approximately $3.5 million related to our profitability improvement actions in Europe which included involuntary terminations, consolidation of facilities and other non-personnel costs, and $1.3 million related to Sarbanes Oxley compliance.
Interest expense and other income increased to $16.9 million from $16.1 million in 2003, an increase of approximately $800,000, or 5%. The increase in interest expense and other income was primarily due to overall increased bank borrowings during 2004 for worldwide working capital purposes and the acquisition of OpenPSL. The average interest rate in 2004 was 5.5% versus 6.8% in 2003.
In 2004, we recorded an effective tax rate of 41% on the income before taxes compared to an effective tax benefit rate of 13% on losses before taxes for 2003. The change in the tax rate was primarily related to the shift to profitability in 2004 compared to a loss in 2003 and also related to the jurisdictions in which the profits were earned. The tax benefit rate for the 2003 loss was primarily driven by deferred tax valuation allowances established related to losses incurred in certain foreign jurisdictions.
Restructuring Costs and Special Charges
In the second quarter of 2004, we were released from certain contractual obligations related to excess facilities in the U.S. for which restructuring charges had been recorded in 2002. Accordingly, we released approximately $300,000 of our restructuring reserve related to that facility. Additionally, we revised our 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, we continued to implement profit improvement and cost reduction measures, and recorded restructuring costs of $1.4 million. These charges consisted of severance and benefits of $1.3 million related to worldwide involuntary terminations and estimated lease costs of $56,300 pertaining to future lease obligations for non-cancelable lease payments for excess facilities in the U.S. We terminated 127 employees worldwide, across a wide range of functions including marketing, technical support, finance, operations and sales, and expect 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 Statement of Operations. We 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.
Outstanding restructuring liabilities related to the charges expected to be paid in cash are summarized as follows (in thousands):
Management expects to extinguish the restructuring and special charges liabilities of $709,000 by November 2007.
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 warrant 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. In March 2004, we completed a private offering of $110 million convertible subordinated notes with proceeds of $106 million, net of expenses. In August 2003, we completed a registered public offering of approximately 5.75 million shares of our common stock, with proceeds net of commissions, discounts and expenses of $34.9 million.
To date, we have paid no cash dividends to its shareholders. We have no plans to pay cash dividends in the near future. Our line of credit agreements prohibit the payment of dividends or other distributions on any of our shares except dividends payable with our capital stock.
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.
The net amount of cash used in operating activities in 2005 was $93.7 million. The net amount of cash provided by financing activities was $97.7 million which was primarily related to borrowings under our short-term borrowing facilities and the change in the book overdraft position. The net amount of cash provided in investing activities was $13.6 million in 2005, which was primarily related to the sale of property and equipment.
Our accounts receivable increased to $421.5 million at December 31, 2005, from $376.0 million at December 31, 2004. Our inventories increased to $318.2 million at December 31, 2005, from $271.8 million at December 31, 2004. This increase was primarily due to our need to support our sales growth and the inventories acquired with the asset purchase of MCE Group ("MCE") in December 2005. Our accounts payable increased to $346.3 million in 2005 from $307.4 million in 2004 as a result of a change in the timing of inventory purchases and receipts and our efforts to manage working capital and the liabilities acquired with the asset purchase of MCE.
The net amount of cash used in investing activities was $38.9 million in 2004, which was primarily related to the acquisitions of OpenPSL Limited and other property and equipment. The net amount of cash provided by financing activities was $26.5 million which was primarily related to the issuance of convertible notes and net repayments under our short and long-term borrowing facilities. The net amount of cash provided by operating activities in 2004 was $19.4 million.
Our accounts receivable increased to $376.0 million at December 31, 2004, from $309.9 million at December 31, 2003. Increases to accounts receivable resulting from increased sales were offset by our reduction in
days sales outstanding to 42 at December 31, 2004, from 44 days at December 31, 2003. Our inventories increased to $271.8 million at December 31, 2004, from $257.0 million at December 31, 2003. This increase was primarily due to our need to support sales growth. However, due to management of inventory, there was a decrease in average days in inventory to 33 days at December 31, 2004 as compared to 39 days at December 31, 2003. Our accounts payable increased to $307.4 million in 2004 from $250.5 million in 2003 as a result of a change in the timing of inventory purchases and receipts and our efforts to manage working capital.
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 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 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 their 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 the 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 13, 2004, we entered into an amendment to our 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 December 31, 2005 was 6.5%, and the balance outstanding at December 31, 2005 was $18.3 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 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"). On December 31, 2005, Bell entered into an amendment to the Wachovia Facility with Wachovia and PNC Bank, National Association ("PNC Bank"), as Lender Group Agents and Variable Funding Capital Company LLC and Market Street Funding LLC as Lenders. 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 Lender Group Agents or Lenders 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 $120 million. The interest rate on advances made by Lenders shall be the cost of Lenders' 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 Lender's commercial paper. The interest rate on advances made by Lender Group Agents 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 December 31, 2005 was 5.0%, and the balance outstanding at December 31, 2005 was $89.4 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, we entered into a Syndicated Credit Agreement arranged by Bank of America, National Association ("Bank of America facility"), as principal agent, to provide a L75 million revolving line of credit facility, or the U.S. dollar equivalent of approximately $144 million at December 31, 2004. The Bank of America facility was scheduled to mature on July 15, 2006. On October 20, 2005, the agreement was amended to extend the maturity date for a further three years and reduce the facility to L60 million, or the USD equivalent of approximately $103 million at December 31, 2005, increasing to $138 million at our option. 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 1.5% to 2.5%, 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 December 31, 2005 was 6.3%, and there was no balance outstanding at December 31, 2005. 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 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 is amortized ratably as the underlying debt is repaid. The notional amount at December 31, 2005 was $34.7 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 December 31, 2005, the fair value of the interest rate swap was ($1 million). 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 December 31, 2005 on this long-term debt was $45.0 million, $10.5 million is payable in 2006, $16.5 million is payable in 2007 and 2008 and $18 million thereafter. Net of the fair value of the interest rate swap, the balance outstanding on the RSA facility at December 31, 2005 was $44.0 million.
On May 9, 2003, we entered into a mortgage agreement with Bank of Scotland for L6 million, or the U.S. dollar equivalent of approximately $10.3 million, as converted at December 31, 2005. The mortgage agreement had a term of 10 years, bearing interest at Bank of Scotland's rate plus 1.35%, and is payable in quarterly installments of approximately L150,000, or $288,000 USD, plus interest. On December 23, 2005, we sold the property for net proceeds of L13.4 million or $23.3 million USD. The proceeds of the sale were used to repay the mortgage balance outstanding at that date of $8.3 million, and the remaining proceeds were used to reduce the outstanding balance on our Bank of America Facility.
On June 22, 2004, in connection with the acquisition of OpenPSL, we assumed a short-term financing agreement with GE Commercial Distribution Finance ("GE Facility") for up to L17.5 million or the U.S. dollar equivalent of $31.7 million. The loan was collateralized 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.
Our agreement with IFN Finance BV was amended in December 2004 to reduce our $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 balance outstanding at December 31, 2005 was $2.2 million.
On December 1, 2005, in connection with the acquisition of MCE Group ("MCE"), we entered into a short-term financing agreement with Deutschland Kreditbank GmbH ("IBM") for up to $25 million. The loan is collateralized by certain assets and cross-company guarantees of our European subsidiaries and bears interest at US Libor or Euribor plus 2.00%, depending on the currency of the advance. The facility has no maturity date but continues indefinitely until terminated by either party upon six weeks notice. The balance outstanding at
December 31, 2005 was $18.9 million. Also on December 1, 2005, we entered into another short-term financing agreement with IBM for E6.5 million or the UDS equivalent of $7.7 million at December 31, 2005. The loan is collateralized by certain assets and cross-company guarantees of our European subsidiaries and bears interest at Euribor plus 3.85%. The facility has no maturity date but continues indefinitely until terminated by either party upon six weeks notice. The balance outstanding at December 31, 2005 was $7.7 million.
On December 1, 2005, we entered into a loan agreement with Mr. Klaus Reichl for up to E4.0 million, or the USD equivalent of $4.7 million at December 31, 2005. The loan was used to finance the asset purchase of MCE. The loan is unsecured, bears interest at the fixed rate of 5.25% and matures on December 5, 2008. The balance outstanding at December 31, 2005 was $3.3 million.
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 L670,000, 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 L7,600, or $13,100 U.S. dollars. The balance on the mortgage was $692,000 at December 31, 2005.
The following table describes our commitments to settle contractual obligations in cash as of December 31, 2005 (in thousands):
(1) Notes payable primarily consist of the 3 3/4% convertible subordinated notes, the RSA facility, the mortgage with HSBC Bank and the note payable to Mr. Klaus Reichl.
Other contractual obligations of ours include a $125 million revolving line of credit with Wachovia Bank, N.A., scheduled to mature July 31, 2007, a $120 million securitization program with Wachovia Bank, N.A. scheduled to mature September 20, 2007; and a $4.7 million borrowing facility with IFN Finance BV, a $25 million borrowing facility and a $7.7 million loan with IBM all of which continue until terminated by either party and a $103 million borrowing facility with Bank of America, scheduled to mature in 2009. Amounts outstanding at December 31, 2005 under these facilities were $18.3 million, $89.4 million, $2.2 million, $18.9 million, $7.7 million and 3.3 million, respectively. There was no balance outstanding under the Bank of America facility.
In 2005, our profitability was negatively impacted by restructuring costs and special charges taken in the fourth quarter of 2005. These restructuring costs and special charges include costs related to the termination of a supplier components program in North America, future lease obligations for excess facilities, discontinued product lines and potential vendor claims, severance and benefits for involuntary employee terminations and the closure of our in-country operation in Sweden. Our net loss incurred in 2003 was related to declining product gross margins, certain restructuring initiatives including the reduction of headcount and the discontinuation of certain product lines.
We anticipate that our existing cash and our ability to borrow under our lines of credit will be sufficient to meet our anticipated cash needs for operations and capital requirements through December 31, 2006.
Our expectations as to cash flows, and as to future cash balances, are subject to a number of assumptions, including assumptions regarding anticipated revenues, customer purchasing and payment patterns, and improvements in general economic conditions, many of which are beyond our control. If revenues do not match projections and if losses exceed our expectations, we will implement cost saving initiatives. If we are unable to sustain our profitability, in order to continue operations, we may need to obtain additional debt financing or sell additional shares of our equity securities. There can be no assurance that we will be able to obtain additional debt or equity financing on terms acceptable to us or at all. Our failure to obtain sufficient funds on acceptable terms when needed could have a material adverse effect on our ability to achieve our intended business objectives.
RECENT ACCOUNTING PRONOUNCEMENTS
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs, an Amendment of ARB No. 43, Chapter 4." The amendments made by SFAS No.151 are intended to improve financial reporting by clarifying that abnormal amounts of idle facility expense, freight, handling costs, and wasted materials (spoilage) should be recognized as current-period charges and by requiring the allocation of fixed production overheads to inventory based on the normal capacity of the production facilities. The guidance is effective for inventory costs incurred after June 15, 2005. The adoption of SFAS No. 151 did not have a material impact on our condensed consolidated financial statements.
In December 2004, the FASB issued SFAS 123R (revised 2004), "Share Based Payment." SFAS 123R is a revision of FASB 123 and supersedes APB No. 25. SFAS 123R establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services or incurs liabilities in exchange for goods or services that are based on the fair market value of the entity's equity instruments. SFAS 123R focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. SFAS 123R requires an entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair market value of the award over the period during which an employee is required to provide service for the award. The grant-date fair market value of employee share options and similar instruments must be estimated using option-pricing models adjusted for the unique characteristics of those instruments unless observable market prices for the same or similar instruments are available. In addition, SFAS 123R requires a public entity to measure the cost of employee services received in exchange for an award of liability instruments based on its current fair market value and that the fair market value of that award will be remeasured subsequently at each reporting date through the settlement date. The effective date of SFAS 123R for our Company is for the first annual period beginning after June 15, 2005, i.e. fiscal year ended December 31, 2006. Adoption of this statement will have a significant impact on our consolidated financial statements as we will be required to expense the fair value of our stock option grants and stock purchases under our employee stock purchase plan rather than disclose the impact on our consolidated net income within our footnotes, as is our current practice (See "Note 2 - Summary of Significant Accounting Policies" of the notes to the condensed consolidated financial statements contained herein.)
On March 29, 2005, the SEC issued Staff Accounting Bulletin (SAB) 107 which expresses the views of the SEC regarding the interaction between SFAS No. 123R and certain SEC rules and regulations and provides the SEC's views regarding the valuation of share-based payment arrangements for public companies. In particular, SAB 107 provides guidance related to share-based payment transactions with nonemployees, the transition from nonpublic to public entity status, valuation methods (including assumptions such as expected volatility and expected term), the accounting for certain redeemable financial instrument issues under share-based payment arrangements, the classification of compensation expenses, non-GAAP financial measures, first-time adoption of SFAS No. 123R in an interim period, capitalization of compensation costs related to share-based payment arrangements, the accounting for income tax effects of share-based payments arrangements upon adoption of SFAS No. 123R, the modification of employee share options prior to adoption of SFAS No. 123R,
and disclosures in Management's Discussion and Analysis of Financial Condition and Results of Operations subsequent to adoption of SFAS No. 123R. We are currently evaluating the impact that SAB 107 will have on our results of operations and financial position when adopted in fiscal 2006.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections." SFAS No. 154 replaces APB Opinion No. 20, "Accounting Changes," and SFAS No. 3, "Reporting Accounting Changes in Interim Financial Statements," and is effective for fiscal years beginning after December 15, 2005, i.e. fiscal year ended March 31, 2007. SFAS No. 154 requires retrospective application to prior periods' financial statements of changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. We do not expect the adoption of SFAS No. 154 to have a material impact on our condensed consolidated financial statements.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES 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 year ended December 31, 2005, average borrowings outstanding on the variable rate credit facilities include $26.2 million with Congress Financial, $85.6 million with Wachovia Bank, National Association and PNC Bank, National Association, $44.8 million with Bank of America, N.A., $26.6 million with IBM and $368,000 with the IFN. 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 $1.8 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 their functional currency, Bell recognized a foreign currency loss of $1.6 million during the year ended December 31, 2005. To the extent we are unable to manage these risks, our results, financial position and cash flows could be materially adversely affected.
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 is amortized ratably as the underlying debt is repaid. The notional amount at December 31, 2005 was $34.7 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, we will be 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 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 ($1 million) at December 31, 2005.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Bell Microproducts Inc. and Subsidiaries:
We have completed integrated audits of Bell Microproducts Inc.'s 2005 and 2004 consolidated financial statements and of its internal control over financial reporting as of December 31, 2005 and an audit of its 2003 consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.
Consolidated Financial statements and financial statement schedule
In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Bell Microproducts Inc. and its subsidiaries at December 31, 2005 and 2004, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2005 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
Internal control over financial reporting
Also, in our opinion, management's assessment, included in "Management's Report on Internal Control Over Financial Reporting" appearing under Item 9A, that the Company maintained effective internal control over financial reporting as of December 31, 2005 based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control - Integrated Framework issued by the COSO. The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management's assessment and on the effectiveness of the Company's internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and
procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
As described in "Management's Report on Internal Control Over Financial Reporting", management has excluded MCE Germany and Net Storage from its assessment of internal control over financial reporting as of December 31, 2005 because they were acquired by the Company in a purchase business combination during 2005. We have also excluded MCE Germany and Net Storage from our audit of internal control over financial reporting. MCE Germany and Net Storage are wholly-owned subsidiaries whose total assets and total revenues represent 4% and 1%, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2005.
PricewaterhouseCoopers LLP San Jose, CA March 16, 2006
BELL MICROPRODUCTS INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE DATA)
The accompanying notes are an integral part of these consolidated financial statements.
BELL MICROPRODUCTS INC. CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (IN THOUSANDS, EXCEPT PER SHARE DATA)
The accompanying notes are an integral part of these consolidated financial statements.
BELL MICROPRODUCTS INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (IN THOUSANDS)
The accompanying notes are an integral part of these consolidated financial statements.
BELL MICROPRODUCTS INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (INCREASE (DECREASE) IN CASH, IN THOUSANDS)
The accompanying notes are an integral part of these consolidated financial statements.
BELL MICROPRODUCTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - THE COMPANY:
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 offers a wide range of storage products as well as semiconductors, computer platforms and software and peripherals. 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 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION AND BASIS OF PREPARATION
The consolidated financial statements include the accounts of the parent company and its wholly owned subsidiaries. All material intercompany transactions and balances have been eliminated in consolidation.
The preparation of financial statements in accordance with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the amounts reported in the Company's consolidated financial statements and accompanying notes. Management bases its estimates on historical experience and various other assumptions believed to be reasonable. Although these estimates are based on management's best knowledge of current events and actions that may impact the Company in the future, actual results may be different from the estimates. The Company's critical accounting policies are those that affect its financial statements materially and involve difficult, subjective or complex judgments by management.
REVENUE RECOGNITION
Revenue is recognized when title transfers to the customer and when the rights and risks of ownership have passed to the customer, when persuasive evidence of an arrangement exists, the price is fixed and determinable and collection of the resulting receivable is reasonably assured. Transactions with sale terms of FOB shipping point are recognized when the products are shipped and transactions with sale terms of FOB destination are recognized upon arrival. Shipping and handling costs charged to customers are included in net sales and the associated expense is recorded in cost of sales for all periods presented. 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 accrued liabilities. A reconciliation of the changes in the product warranty liability during 2005 and 2004 is as follows (in thousands):
VENDOR PROGRAMS
The Company receives funds from it's vendors for price protection, product rebates, marketing and promotions, infrastructure reimbursement and competitive pricing programs. Amounts related to price protection and other incentive programs are recorded as adjustments to inventories, cost of sales or selling, general and administrative expenses, depending on the nature of the program. Vendor receivables are generally collected through vendor authorized reductions to accounts payable. There is a time delay between the submission of a claim by the Company and confirmation of agreement by its vendors. Historically, the Company's claims have approximated amounts agreed to by its vendors.
CONCENTRATION OF CREDIT AND OTHER RISKS
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of accounts receivable. The Company performs ongoing credit evaluations of its customers and generally does not require collateral. The Company maintains allowances for estimated collection losses. No customer accounts for more than 10% of sales in any of the three years ended December 31, 2005, 2004 and 2003, or accounts receivable at December 31, 2005 and 2004.
Five vendors accounted for 45% of the Company's inventory purchases during 2005 and four vendors accounted for 50% and 45% of the Company's inventory purchases during 2004 and 2003, respectively.
In the fourth quarter of 2005, the Company incurred a special charge due to a terminated components supply program in North America and provided a specific reserve for a partner account receivable balance that the Company believes may not be collectable as a result of the program termination. This amount has been classified as a special charge in the amount of $9.1 million, net of a $550,000 reversal of restructuring costs and special charges taken in prior years that were adjusted to reflect actual charges.
INVENTORIES
Inventories are stated at the lower of cost or market, cost being determined by the first-in, first-out (FIFO) method. Market is based on estimated net realizable value. The Company assesses the valuation of its inventory on a quarterly basis and periodically writes down the value for estimated excess and obsolete inventory based on estimates about future demand, actual usage and current market value.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is computed using the straight-line method based upon the estimated useful lives of computer and other equipment, furniture and fixtures and warehouse equipment that range from three to five years. Amortization of leasehold improvements is computed using the straight-line method over the shorter of the estimated life of the asset or the lease term.
GOODWILL
In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets," the Company is required to perform an annual impairment test for goodwill. SFAS No. 142 requires the Company to compare the fair value of the Company to its carrying amount on an annual basis to determine if there is potential impairment. If the fair value of the Company is less than its carrying value, an impairment loss is recorded to the extent that the fair value of the goodwill is less than the
carrying value. The fair value for goodwill is determined based on discounted cash flows. The Company performs this impairment test annually and whenever facts and circumstances indicate that there is a possible impairment of goodwill. The Company completed the required annual impairment test, which resulted in no impairment for fiscal year 2005.
LONG-LIVED ASSETS
Long-lived assets and certain identifiable intangible assets to be held and used are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. Measurement of any impairment loss for long-lived assets and certain identifiable intangible assets that management expects to hold and use is based on the fair value of the asset. Other intangible assets are recorded at cost and amortized over periods ranging from 2 to 40 years.
INCOME TAXES
The Company accounts for income taxes in accordance with the liability method of accounting for income taxes. Under the liability method, deferred assets and liabilities are recognized based upon anticipated future tax consequences attributable to differences between financial statement carrying amounts of assets and liabilities and their respective tax bases. The provision for income taxes is comprised of the current tax liability and the change in deferred tax assets and liabilities. The Company establishes a valuation allowance to the extent that it is more likely than not that deferred tax assets will not be recoverable against future taxable income.
EARNINGS PER SHARE
Basic EPS is computed by dividing net income available to common shareholders (numerator) by the weighted average number of common shares outstanding (denominator) during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period including stock options, using the treasury stock method.
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):
Respectively, at December 31, 2005 and 2004, 1,137,599 and 888,430 restricted stock grants and options to purchase shares of common stock were excluded from the calculation of diluted EPS because they were anti-dilutive. At December 31, 2003, all outstanding restricted stock grants and options to purchase 4,772,575 shares of common stock were excluded from the computation of diluted net loss per share because they were anti-dilutive.
FOREIGN CURRENCY TRANSLATION AND TRANSACTIONS
The financial statements of the Company's foreign subsidiaries are measured using the local currency as the functional currency. Assets and liabilities of these subsidiaries are translated at the rates of exchange at the balance sheet date. Income and expense items are translated at average monthly rates of exchange prevailing during the year. The resulting translation adjustments are included in accumulated other comprehensive income as a separate component of stockholders' equity. Gains and losses from foreign currency transactions are included in the Statements of Operations, and have not been significant for any of the periods presented.
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. For the Company, comprehensive income consists of its reported net income or loss and the change in the foreign currency translation adjustment.
STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued to Employees." The Company's policy is to grant options with an exercise price equal to the quoted market price of the Company's stock on the date of the grant. Accordingly, no compensation cost has been recognized in the Company's Statements of Operations. The Company provides additional pro forma disclosures as required under Statement of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation."
The following table illustrates the effect on income from continuing operations and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based compensation. The estimated fair value of each option is calculated using the Black-Scholes option-pricing model.
On November 16, 2005, the Compensation Committee (the "Committee") of the board of directors of the Company approved the acceleration of vesting of unvested and "out-of-the-money" stock options with exercise prices equal to or greater than $7.74 per share previously awarded to its employees, including its executive officers, and directors, under the Company's 1998 Stock Plan. The acceleration of vesting was effective for stock options outstanding as of December 30, 2005. The closing stock price on the Nasdaq Global Market at the effective date of the acceleration was $7.65. Options to purchase approximately 724,875 shares of common stock, or approximately 33% of the Company's outstanding unvested options, of which options to purchase approximately 76,250 shares are held by the Company's executive officers and directors, were subject to the acceleration. The weighted-average exercise price of the options subject to the acceleration was approximately $8.98.
The purpose of the acceleration is to enable the Company to reduce compensation expense associated with these options in future periods on its consolidated statements of operations, upon adoption of FASB Statement No. 123R - -- Share-Based Payment in 2006. The pre-tax charges to be avoided amount to approximately $2.4 million, which is included in the pro forma results of operations above for 2005, over the course of the original vesting periods, which on average is approximately three years from the effective date of the acceleration. The Company also believes that because the options to be accelerated have exercise prices substantially in excess of the current market value of the Company's common stock,
the options have limited economic value and are not fully achieving their original objective of incentive compensation and employee retention. The vesting acceleration of these stock options did not result in a compensation charge to fourth quarter results based on accounting principles generally accepted in the United States.
Weighted average basic and diluted shares outstanding are the same for the periods in which net losses were incurred, in the accompanying consolidated statement of operations.
Because additional stock options and stock purchase rights are expected to be granted each year, the above pro forma disclosures are not considered by management to be representative of actual effects on reported financial results for future years.
SEGMENT REPORTING
Financial Accounting Standards Board Statement No. 131, "Disclosure about Segments of an Enterprise and Related Information" ("SFAS 131") requires that companies report separately in the financial statements certain financial and descriptive information about operating segments' profit or loss, certain specific revenue and expense items and segment assets. Additionally, companies are required to report information about the revenues derived from their products and service groups, about geographic areas in which the Company earns revenues and holds assets, and about major customers (see Note 14).
DERIVATIVE FINANCIAL INSTRUMENTS
Effective January 1, 2001, the Company adopted Statement of Financial Accounting Standards No. 133 (SFAS 133), "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS 137 and SFAS 138. SFAS 133 establishes new standards of accounting and reporting for derivative instruments and hedging activities, and requires that all derivatives, including foreign currency exchange contracts, be recognized on the balance sheet at fair value. Changes in the fair value of derivatives that do not qualify for hedge treatment, as well as the ineffective portion of any hedges, must be recognized currently in earnings. All of the Company's derivative financial instruments are recorded at their fair value in other current assets or accounts payable and accrued expenses. The transition adjustment upon adoption of SFAS 133 was not material.
The Company generates a substantial portion of its revenues in international markets, which subjects its operations and cash flows to the exposure of currency exchange fluctuations. The Company seeks to minimize the risk associated with currency exchange fluctuations by entering into forward exchange contracts to hedge certain foreign currency denominated assets or liabilities. These derivatives do not qualify for SFAS 133 hedge accounting treatment. Accordingly, changes in the fair value of these hedges are recorded immediately in earnings on line item 'Interest Expense and Other Income' to offset the changes in the fair value of the assets or liabilities being hedged.
RECENTLY ISSUED ACCOUNTING STANDARDS
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs, an Amendment of ARB No. 43, Chapter 4." The amendments made by SFAS No.151 are intended to improve financial reporting by clarifying that abnormal amounts of idle facility expense, freight, handling costs, and wasted materials (spoilage) should be recognized as current-period charges and by requiring the allocation of fixed production overheads to inventory based on the normal capacity of the production facilities. The guidance is effective for inventory costs incurred after June 15, 2005. The adoption of SFAS No. 151 did not have a material impact on the Company's condensed consolidated financial statements.
In December 2004, the FASB issued SFAS 123R (revised 2004), "Share Based Payment." SFAS 123R is a revision of FASB 123 and supersedes APB No. 25. SFAS 123R establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services or incurs liabilities in exchange for goods or services that are based on the fair market value of the entity's equity instruments. SFAS 123R focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. SFAS 123R requires an entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair market value of the award over the period during which an employee is required to provide service for the award. The grant-date fair market value of employee share options and similar instruments must be estimated using option-pricing models adjusted for the unique characteristics of those instruments unless observable market prices for the same or similar instruments are available. In addition, SFAS 123R requires a public entity to measure the cost of employee services
received in exchange for an award of liability instruments based on its current fair market value and that the fair market value of that award will be remeasured subsequently at each reporting date through the settlement date. The effective date of SFAS 123R for our Company is for the first annual period beginning after June 15, 2005, i.e. fiscal year ended December 31, 2006. Adoption of this statement will have a significant impact on our consolidated financial statements as we will be required to expense the fair value of our stock option grants and stock purchases under our employee stock purchase plan rather than disclose the impact on our consolidated net income within our footnotes, as is our current practice (See "Note 2 - Summary of Significant Accounting Policies" of the notes to the condensed consolidated financial statements contained herein.)
On March 29, 2005, the SEC issued Staff Accounting Bulletin (SAB) 107 which expresses the views of the SEC regarding the interaction between SFAS No. 123R and certain SEC rules and regulations and provides the SEC's views regarding the valuation of share-based payment arrangements for public companies. In particular, SAB 107 provides guidance related to share-based payment transactions with non-employees, the transition from nonpublic to public entity status, valuation methods (including assumptions such as expected volatility and expected term), the accounting for certain redeemable financial instrument issues under share-based payment arrangements, the classification of compensation expenses, non-GAAP financial measures, first-time adoption of SFAS No. 123R in an interim period, capitalization of compensation costs related to share-based payment arrangements, the accounting for income tax effects of share-based payments arrangements upon adoption of SFAS No. 123R, the modification of employee share options prior to adoption of SFAS No. 123R, and disclosures in Management's Discussion and Analysis of Financial Condition and Results of Operations subsequent to adoption of SFAS No. 123R. The Company is currently evaluating the impact that SAB 107 will have on its results of operations and financial position when adopted in fiscal 2006.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections." SFAS No. 154 replaces APB Opinion No. 20, "Accounting Changes," and SFAS No. 3, "Reporting Accounting Changes in Interim Financial Statements," and is effective for fiscal years beginning after December 15, 2005, i.e. fiscal year ended March 31, 2007. SFAS No. 154 requires retrospective application to prior periods' financial statements of changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. The Company does not expect the adoption of SFAS No. 154 to have a material impact on its condensed consolidated financial statements.
NOTE 3 - ACCOUNTING FOR GOODWILL AND CERTAIN OTHER INTANGIBLES:
The Company performs an impairment test annually and whenever facts and circumstances indicate that there is a possible impairment of goodwill. The Company completed the required annual impairment test, which resulted in no impairment for fiscal year 2005.
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 December 31, 2005 and 2004 are as follows (in thousands):
The expected amortization of these balances over the next five fiscal years are as follows (in thousands):
NOTE 4 - ACQUISITIONS:
All acquisitions below have been accounted for using the purchase method. Accordingly, the results of operations of the acquired businesses are included in the consolidated financial statements from the dates of acquisition.
MCE Group Acquisition
On December 1, 2005, the Company acquired certain assets and assumed certain liabilities of MCE Computer Peripherie GmbH, MCE Computer Vertreibs Products GmbH, MCE Computer Technology Inc and MCE Limited, ("MCE") based in Munich, Germany. The acquisition of MCE allows the Company to continue to expand its growth in value added storage products and services in the key markets in Continental Europe and the UK and adds additional experienced management, sales and marketing resources to the Company. MCE is a European distributor of disk drives and components, and also has a substantial IBM enterprise business in Germany. MCE's customer base includes Enterprise VARs, system builders and industrial customers.
The MCE assets acquired were primarily inventories and accounts receivable. As consideration for the assets purchased, the Company paid $1.3 million including acquisition costs, and assumed certain liabilities, primarily notes payable and trade accounts payable. 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's estimates are as follows (in thousands):
Other intangibles include customer and supplier relationships and non-compete agreements, with estimated useful lives for amortization of four years, seven years and three years, respectively.
Pro forma results of operations have not been presented because the effect of the acquisition was not material to the results of prior periods presented.
Net Storage Computers, LTDA. Acquisition
On July 8, 2005, the Company acquired all of the outstanding capital stock of Net Storage Computers, LTDA. ("Net Storage"), a privately held company headquartered in Sao Paulo, Brazil, with sales offices in Belo Horizonte, Porto Alegre, Recife, Rio de Janeiro and Tambore, Brazil. The acquisition of Net Storage increases the Company's presence in the Latin America marketplace and provides the opportunity to strengthen relationships with key suppliers and expand overall products and services offerings. Net Storage is a distributor of storage products and peripherals to VARs and system integrators in Brazil. Their strategic partners include Intel, Seagate, LG, Western Digital and AMD.
Net Storage was acquired for a total purchase price of approximately $3.4 million in cash, including acquisition costs. The Company is obligated to pay up to an additional $3.0 million based upon earnings achieved during each of the subsequent four anniversary years. The Company has also entered into a four year Management Service Agreement which obligates the Company to pay an additional $1.1 million. 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's estimates are as follows (in thousands):
Other intangibles include customer and supplier relationships and non-compete agreements, with estimated useful lives for amortization of seven years and six years, respectively.
Pro forma results of operations have not been presented because the effect of the acquisition was not material to the results of prior periods presented.
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 $42.0 million which included cash of approximately $34.8 million, the issuance of 1,025,029 shares of the Company's Common Stock including consideration for all contingent incentive payments and acquisition costs. Total consideration paid in cash and stock for contingent incentives during 2005 was $4.1 million. The final allocation of the purchase price to acquired assets and assumed liabilities based upon management estimates are as follows (in thousands):
Other intangibles include customer and supplier relationships and non-compete agreements with estimated useful lives of four years, seven years and two 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.
EBM Mayorista, S.A. de C.V. Acquisition
On October 15, 2003, the Company acquired certain assets and assumed certain liabilities of EBM Mayorista, S.A. de C.V. ("EBM"), a privately held company headquartered in Merida, Mexico, with branch locations in Cancun, Monterrey, Oaxaca, Villahermosa, Tampico, Veracruz, Tuxtla, Torreon, Puebla and Aguascaliente. EBM distributes a diverse product line of computer hardware and software to Mexican resellers, retail locations and system integrators including the Intel, Samsung, Epson and U.S. Robotics lines.
EBM was acquired for a total purchase price of approximately $7.1 million which included cash of approximately $6.2 million and acquisition costs. The Company is obligated to pay 35% of EBM's earnings before taxes as a contingent incentive payment based upon meeting minimum earnings targets during each of the subsequent four anniversary years. EBM met its earnings target for the second anniversary years and accordingly, the Company has paid additional cash and recorded $761,000 as additional consideration at December 31, 2005. The purchase price was allocated to the acquired assets and liabilities assumed, based upon management's estimate of their fair market values as of the acquisition date, as follows (in thousands):
Other intangibles include customer and supplier relationships, trade name, and non-compete agreements, with estimated useful lives for amortization of 7 years, 20 years and 6 years, respectively.
Pro forma results of operations have not been presented because the effect of the acquisition was not material to the results of prior periods presented.
NOTE 5 - BALANCE SHEET COMPONENTS:
Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is the Company's best estimate of the amount of probable credit losses in its existing accounts receivable. The Company determines the allowance based on historical write-off experience by industry and regional economic data. The Company reviews its allowance for doubtful accounts monthly. Past due balances over 90 days and over a specified amount are reviewed individually for collectibility. All other balances are reviewed on a pooled basis by type of receivable. Account balances are charged off against the allowance when the Company's management believes it is probable the receivable will not be recovered. The Company does not have any off-balance-sheet credit exposure related to its customers.
In the fourth quarter of 2005, the Company terminated a components supply program in North America and provided a specific reserve for a partner balance that the Company believes may not be collectable as a result of the program termination. This amount has been included as a special charge in the amount of $9.1 million, net of a $550,000 reversal of restructuring costs and special charges taken in prior years that were adjusted to reflect actual charges.
On December 23, 2005, the Company sold certain of its property located in the United Kingdom for net proceeds of L13.4 million or $23.3 million USD.
Total depreciation expense on the Company's property and equipment was $8.1 million in 2005, $11.1 million in 2004 and $10.3 million in 2003.
NOTE 6 - LINES OF CREDIT AND TERM LOANS:
LINES OF CREDIT
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 December 31, 2005 was 6.5%, and the balance outstanding at December 31, 2005 was $18.3 million. Obligations of the Company under the Congress 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, 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"). On December 31, 2005, Bell entered into an amendment to the Wachovia Facility with Wachovia and PNC Bank, National Association ("PNC Bank"), as Lender Group Agents and Variable Funding Capital Company LLC and Market Street Funding LLC as Lenders. 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 Lender Group Agents or Lenders 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 $120 million. The interest rate on advances made by Lenders shall be the cost of Lenders' 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 Lenders' commercial paper. The interest rate on advances made by Lender Group Agents 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 December 31, 2005 was 5.0%, and the balance outstanding at December 31, 2005 was $89.4 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 L75 million revolving line of credit facility, or the U.S. dollar equivalent of approximately $144 million at December 31, 2004. The Bank of America facility was scheduled to mature on July 15, 2006. On October 20, 2005, the agreement was amended to extend the maturity date for a further three years and reduce the facility to L60 million, or the USD equivalent of approximately $103 million at December 31, 2005, increasing to $138 million at the Company's option. 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 1.5% to 2.5%, 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 December 31, 2005 was 6.3%, and there was no balance outstanding at December 31, 2005. 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.
On December 1, 2005, in connection with the acquisition of MCE Group ("MCE"), the Company entered into a short-term financing agreement with Deutschland Kreditbank GmbH ("IBM") for up to $25 million. The loan is collateralized by certain assets and cross-company guarantees of the Company's European subsidiaries and bears interest at US Libor or Euribor plus 2.00%, depending on the currency of the advance. The facility has no maturity date but continues indefinitely until terminated by either party upon six weeks notice. The balance outstanding at December 31, 2005 was $18.9 million. Also on December 1, 2005, the Company entered into another short-term financing agreement with IBM for E6.5 million or the UDS equivalent of $7.7 million at December 31, 2005. The loan is collateralized by certain assets and cross-company guarantees of the Company's European subsidiaries and bears interest at Euribor plus 3.85%. The facility has no maturity date but continues indefinitely until terminated by either party upon six weeks notice. The balance outstanding at December 31, 2005 was $7.7 million.
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 upon 90 days notice. The balance outstanding at December 31, 2005 was $2.2 million.
TERM LOANS
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.
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 December 31, 2005 was $34.7 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 December 31, 2005, the fair value of the interest rate swap was ($1 million). 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 December 31, 2005 on this long-term debt was $45.0 million, $10.5 million is payable in 2006, $16.5 million is payable in 2007 and 2008 and $18 million thereafter. Net of the fair value of the interest rate swap, the balance outstanding on the RSA facility at December 31, 2005 was $44.0 million.
On May 9, 2003, the Company entered into a mortgage agreement with Bank of Scotland for L6 million, or the U.S. dollar equivalent of approximately $10.3 million, as converted at December 31, 2003. The Mortgage agreement had a term of 10 years, bears interest at Bank of Scotland's rate plus 1.35%, and was payable in quarterly installments of approximately L150,000, or $288,000 USD, plus interest. On December 23, 2005, the Company sold the property for net proceeds of L13.4
million or $23.3 million USD. The proceeds of the sale were used to repay the mortgage balance outstanding at that date of $8.3 million, and the remaining proceeds were used to reduce the outstanding balance on our Bank of America Facility.
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 L670,000, 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 L7,600, or $14,600 U.S. dollars. The balance on the mortgage was $692,000 at December 31, 2005.
On December 1, 2005, the Company entered into a loan agreement with Mr. Klaus Reichl for up to E4.0 million, or the USD equivalent of $4.7 million at December 31, 2005. The loan was used to finance the asset purchase of MCE. The loan is unsecured, bears interest at the fixed rate of 5.25% and matures on December 5, 2008. The balance outstanding at December 31, 2005 was $3.3 million.
NOTE 7 - COMMON STOCK:
On August 27, 2003, the Company completed a secondary registered public offering of 5,000,000 shares of Common Stock, at an offering price to the public of $6.50 per share. In connection with the offering, the Company granted to the underwriters an option to purchase up to 750,000 shares to cover over allotments, and the option was exercised in full on September 18, 2003. The Company received proceeds of $34.9 million, net of commissions, discounts and expenses.
NOTE 8 - RESTRUCTURING COSTS, SPECIAL CHARGES AND OTHER PROVISIONS:
In the fourth quarter of 2005, the Company implemented a restructuring plan for its European operations and as a result the Company incurred restructuring costs and special charges of $9.0 million during the quarter. These costs consisted primarily of $5.9 million related to future lease obligations for excess facilities; $1.7 million for inventory costs in excess of estimatd net realizability, included within the income statement line item "Cost of Goods Sold," $200,000 for estimated vendor claims both related to discontinued product lines; severance and benefits of $936,000 for involuntary employee terminations and $338,000 related to closure of the Company's in-country operation in Sweden. The Company terminated 58 employees in the UK and Europe, in sales, marketing and support functions as of December 31, 2005.
In the fourth quarter of 2005, the Company incurred a special charge due to a terminated components supply program in North America and provided a specific reserve for a partner account receivable balance that the Company believes may not be collectable as a result of the program termination. This amount has been classified as a special charge in the amount of $9.1 million, net of a $550,000 reversal of restructuring costs and special charges taken in prior years that were adjusted to reflect actual 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 first quarter of 2003, the Company continued to implement profit improvement and cost reduction measures, and recorded restructuring costs of $1.4 million. These charges consisted of severance and benefits of $1.3 million related to worldwide involuntary terminations and estimated lease costs of $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. Future savings expected from restructuring related cost reductions will be reflected as a decrease in 'Selling, General and Administrative expenses' on the Statement of Operations. 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, recorded in 'Cost of Sales'.
In the second and third quarters of 2002, as part of the Company's plan to reduce costs and improve operating efficiencies, the Company recorded special charges of $5.7 million. These costs consisted primarily of estimated lease costs of $2.3 million pertaining to future lease obligations for non-cancelable lease payments for excess facilities in the U.S. and costs of $583,000 related to the closure of the Rorke Data Europe facilities, whose operations were consolidated into the
Company's TTP division in Almere, Netherlands. These special charges also included provisions for certain Latin American receivables of $1.7 million, and severance and benefits of $1.1 million related to worldwide involuntary terminations. The Company terminated 78 employees, predominately in sales and marketing functions and eliminated two executive management positions in the U.S. Future expected costs reductions will be reflected in the Statement of Operations line item 'Selling, General and Administrative expenses.'
Outstanding restructuring liabilities related to the charges expected to be paid in cash are summarized as follows (in thousands):
NOTE 9 - STOCK-BASED COMPENSATION PLANS:
STOCK OPTION PLANS
In May of 1998, the Company adopted the 1998 Stock Plan (the "Plan") which replaced the 1988 Amended and Restated Incentive Stock Plan (the "1988 Plan") and the 1993 Director Stock Option Plan (the "Director Plan").
The Plan provides for the grant of stock options and stock purchase rights to employees, directors and consultants of the Company at prices not less than the fair value of the Company"s Common Stock at the date of grant for incentive stock options and prices not less than 85% of the fair value of the Company"s Common Stock for nonstatutory stock options and stock purchase rights. Under the Plan, the Company has reserved for issuance a total of 6,039,327 shares of Common Stock plus 272,508 shares of Common Stock which were reserved but unissued under the 1988 Plan and 52,500 shares of Common Stock which were reserved but unissued under the Director Plan. The maximum aggregate number of shares of Common Stock which may be optioned and sold under the Plan is 3,323,351 shares, plus an annual increase to be added on January 1 of each year, equal to the lesser of (i) 600,000 shares, (ii) 4% of the outstanding shares on such date, or (iii) a lesser amount determined by the Board of Directors, subject to adjustment upon changes in capitalization of the Company. Since inception, the Company has reserved 9,717,975shares of Common Stock for issuance under the aggregate of all stock option plans.
All stock options become exercisable over a vesting period as determined by the Board of Directors and expire over terms not exceeding ten years from the date of grant. If an optionee ceases to be employed by the Company, the optionee may, within one month (or such other period of time, as determined by the Board of Directors, but not exceeding three months) exercise options to the extent vested.
As part of the Plan, the Board of Directors adopted a Management Incentive Program (the "Program") for key employees. Under this Program, options for 193,500 shares of Common Stock were granted in 2000 and no options were
granted in years 2003, 2004 or 2005. The Program provides for ten-year option terms with vesting at the rate of one tenth per year, with potential for accelerated vesting based upon attainment of certain performance objectives. The options lapse ten years after the date of grant or such shorter period as may be provided for in the stock option agreement.
Options granted under the Director Plan prior to May 1998 and outstanding at December 31, 2004 total 60,000. Under the Director Plan, 112,500 options were granted in 1993 at an exercise price of $5.33 per share, and 30,000 options were granted in 1996 at an exercise price of $4.67 per share. In 1997, 30,000 options were granted at an exercise price of $8.42 per share. In 1998, 22,500 options were granted at an exercise price of $5.00 per share. On August 5, 1999, the Board of Directors approved the vesting in full of all options currently held by the Directors and modified the Plan to immediately vest all future Board of Directors options at the time they are granted.
In 2003 and prior years beginning in 2000, the number of shares of Common Stock reserved under the Plan were not sufficient to accommodate the Company's growth through acquisitions and key employee retention efforts. To induce certain key employees to accept employment with the Company, the Company issued a total of 450,000, 898,000 and 520,000 nonqualified stock options outside the provisions of the Plan in 2003, 2002 and 2001 respectively, and 380,000 of these options were outstanding at December 31, 2005, net of cancellations, and are included in the table below.
The following table presents all stock option activity:
At December 31, 2005, 2,257,588 options were exercisable under these Plans. Upon the adoption of the 1998 Stock Plan, canceled options under the 1988 Plan are not available for future grants.
The following table summarizes information about stock options and restricted stock outstanding for all plans at December 31, 2005:
EMPLOYEE STOCK PURCHASE PLAN
The Employee Stock Purchase Plan ("ESPP"), as amended in 2004, provides for automatic annual increases in the number of shares reserved for issuance on January 1 of each year by a number of shares equal to the lesser of (i) 400,000 shares, (ii) 2.0% of the outstanding shares on such date, or (iii) a lesser amount determined by the Board of Directors, subject to adjustment upon changes in capitalization of the Company. Effective January 1, 2006, the Company terminated the ESPP in order to reduce compensation expense associated with the plan in future periods on its consolidated statements of operations, upon adoption of FASB Statement No. 123R -- Share-Based Payment in 2006.
FAIR VALUE DISCLOSURES
The Company applies APB Opinion 25 and related interpretations in accounting for its plans. Accordingly, no compensation cost has been recognized for its plans, all of which are fixed plans. To determine the additional pro forma disclosures required by SFAS 123 for the stock option plans, the fair value of each option grant used for calculating pro forma net income is estimated on the date of grant using the Black-Scholes option-pricing model. The following weighted average assumptions were used for grants in 2005, 2004 and 2003 respectively, expected volatility of 72%, 74% and 76%; risk free interest rate of 4.1%, 3.0% and 2.0% and expected lives of 3.61, 3.60 and 3.45 years. The Company has not paid dividends and assumed no dividend yield. The weighted average fair value of those stock options granted in 2005, 2004 and 2003 was $4.74, $4.09 and $3.46 per option, respectively. The fair value of each ESPP purchase right 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 .5 years. The weighted average fair value of those purchase rights granted in 2005, 2004 and 2003 was $3.31 $2.86 and $3.62 per right, respectively. Had compensation cost for the Company's two stock-based compensation plans been determined based on the fair value at the grant dates for awards in 2005, 2004 and 2003 under those plans consistent with the provisions of SFAS 123, the Company's net income and earnings per share would have been reduced as presented in the disclosure in Note 2 Stock-Based Compensation.
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.
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.
In order to be eligible to participate in the Exchange ("Eligible Participant"), the employee may not receive stock options or other equity awards in the six months following the Exchange Date. In order to participate in the Exchange, an Eligible Participant could tender all Eligible Options held, or any selected Eligible Options granted by different stock option agreements. If an Eligible Participant chose to participate, all options granted on or after May 26, 2002 were tendered regardless of the exercise price of such options. The Units of restricted stock will vest in one-fourth increments on each of the first, second, third and fourth annual anniversary dates of the Exchange Date. 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. The deferred compensation charge is unaffected by future changes in the price of the common stock.
NOTE 10 - INCOME TAXES:
The provision for (benefit from) income taxes consists of the following (in thousands):
Deferred tax assets (liabilities) comprise the following (in thousands):
Valuation allowances reduce the deferred tax assets to the amount that, based upon all available evidence, is more likely than not to be realized. The deferred tax assets valuation allowance at December 31, 2005 and 2004 is attributed to certain foreign net operating loss carryovers that do not meet the more likely than not standard of realizability.
As of December 31, 2005, the Company had state net operating loss carryforwards of approximately $17,246,262 available to offset future state taxable income. The state net operating loss carryforwards will expire in varying amounts beginning 2006 through 2023.
As of December 31, 2005, the Company also has foreign net operating loss carryforwards for the United Kingdom of approximately $4,817,000, for the Netherlands of approximately $6,476,000 and for Germany of approximately $4,433,900. The foreign net operating loss carryforwards for these three countries will not expire and can be carried forward indefinitely.
As of December 31, 2005, the Company also has a foreign tax credit carryover in the amount of $1,987,153. The foreign tax credit will begin to expire in various amounts beginning in 2012 through 2016.
The tax benefit associated with dispositions from employee stock plans for 2005 is approximately $1,406,730, which was recorded as an addition to paid-in capital and a reduction to taxes payable.
A reconciliation of the Federal statutory tax rate to the effective tax (benefit) follows:
NOTE 11 - COMMITMENTS AND CONTINGENCIES:
The Company leases its facilities under cancelable and non-cancelable operating lease agreements. The leases expire at various times through 2019 and contain renewal options. Certain of the leases require the Company to pay property taxes, insurance, and maintenance costs.
The Company leases certain equipment under capital leases with such equipment amounting to $2,405,000 less accumulated depreciation of $1,068,000 at December 31, 2005. Depreciation expense on assets subject to capital leases was $422,000 for the year ended December 31, 2005. The capital lease terms range from 24 months to 60 months.
The following is a summary of commitments under non-cancelable leases:
Total operating lease expense was $9,446,000, $9,068,000 and $8,343,000 for the years ended December 31, 2005, 2004 and 2003, respectively.
The Company is subject to legal proceedings and claims that arise in the normal course of business. Management believes that the ultimate resolution of such matters will not have a material adverse effect on the Company's financial position, results of operations or cash flows.
NOTE 12 - TRANSACTIONS WITH RELATED PARTIES:
One director of the Company is a director of one of the Company's customers, Company A. Another director of the Company is a director of one of the Company's customers/vendors, Company B. A third director of the Company is a director of one of the Company's customers, Company F. A fourth director of the Company is the President of one of the Company's consulting providers, Company D. A fifth director of the Company is the President of one of the Company's customers/vendors, Company E. A former president of one of the Company's subsidiaries was a co-owner of one of the Company's customers in 2003, Company G. The Company also leased a facility from Company G. Sales to these parties and purchases of inventory and other services from these parties for the three years ended December 31, 2005 and accounts receivable at December 31, 2005 and 2004 are summarized below:
NOTE 13 - SALARY SAVINGS PLAN:
The Company has a Section 401(k) Plan (the "Plan") which provides participating employees an opportunity to accumulate funds for retirement and hardship. Participants may contribute up to 15% of their eligible earnings to the Plan. Beginning in 2006, the Company will provide a matching contribution of 25% of the employee's contribution to the Plan up to $2,500 per year.
NOTE 14 - 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 40%, 38% and 38% of total sales for the years ended December 31, 2005, 2004 and 2003, respectively.
Geographic information consists of the following:
(1) North America sales include sales in the United States of America of $1,287,000, $1,075,000 and $848,000 for the years ended December 31, 2005, 2004 and 2003, respectively.
(2) Europe sales include sales in the United Kingdom of $866,000, $843,000, and $664,000 for the years ended December 31, 2005, 2004 and 2003, respectively.
The following table presents long-lived assets located in the Company's country of domicile and located in all foreign countries.
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED):
(in thousands, except per share amounts)
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
After evaluating the effectiveness of our 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 annual report, our Chief Executive Officer and Chief Financial Officer, with the participation of our management, have concluded that our disclosure controls and procedures are effective to ensure that information that is required to be disclosed by us in reports that we file under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules of the Securities Exchange Commission.
Management's Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Our internal control system was designed to ensure that material information regarding our consolidated operations is made available to management and the board of directors to provide them reasonable assurance that the published financial statements are fairly presented. There are limitations inherent in any internal control. As a result, even effective internal controls can provide only reasonable assurance with respect to financial statement preparation but may not prevent or detect misstatements. And, as conditions change over time so to may the effectiveness of internal controls.
Under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control--Integrated Framework issued by the Committee of the Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control--Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2005. Management has excluded MCE Germany and Net Storage from its assessment of internal control over financial reporting as of December 31, 2005 because they were acquired by the Company in purchase business combinations during 2005.
Our management's assessment of the effectiveness of internal control over financial reporting as of December 31, 2005 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which is included herein.
Changes in Internal Controls
There were no changes in our internal control over financial reporting that occurred during the period covered by this annual report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B.
ITEM 9B. OTHER INFORMATION
In the fourth quarter of 2005, the Board of Directors, acting on the advice of the Company's Chief Executive Officer and Chief Financial Officer, concluded that a material charge was required in connection with the termination of a components supply program in North America. We incurred a charge of $9.1 million, net of a $550,000 reversal of restructuring costs and special charges taken in prior years that were adjusted to reflect actual charges.
The impairment will not result in any future material cash expenditures.
PART III
Pursuant to Paragraph G(3) of the General Instructions to Form 10-K, portions of the information required by Part III of Form 10-K are incorporated by reference from the Company's Proxy Statement to be filed with the Commission in connection with the 2006 Annual Meeting of Shareholders (the "Proxy Statement").
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Information concerning directors of Bell Microproducts Inc. appears in our Proxy Statement, under the captions "Corporate Governance" and "Election of Directors." This portion of the Proxy Statement is incorporated herein by reference.
(b) EXECUTIVE OFFICERS OF THE REGISTRANT
The following table and descriptions identify and set forth information regarding the Company's six executive officers:
W. Donald Bell has been President, Chief Executive Officer and Chairman of the Board of Bell Microproducts since its inception in 1987. Mr. Bell has over thirty years of experience in the electronics industry. Mr. Bell was formerly the President of Ducommun Inc. and its subsidiary, Kierulff Electronics Inc., as well as Electronic Arrays Inc. He has also held senior management positions at Texas Instruments Incorporated, American Microsystems and other electronics companies.
James E. Illson has been our Chief Operating Officer and President of Americas since November 2005 and our Chief Financial Officer since September 2002. From March 2000 to April 2002, Mr. Illson was Chief Executive Officer and President of Wareforce Inc. a value added reseller. Mr. Illson was with Merisel Inc. from August 1996 to January 2000, serving in the position of Chief Financial Officer until March 1998, when he became President/Chief Operating Officer. Mr. Illson holds a Bachelors degree in Business Administration and a Masters degree in Industrial Administration. Mr. Illson has over 25 years experience in financial and operational fields.
Richard J. Jacquet has been our Vice President of Human Resources since May 2000. From 1988 to May 2000, Mr. Jacquet served as Vice President of Administration of Ampex Corporation, an electronics manufacturing company. Prior to 1988, Mr. Jacquet served in various senior human resource positions with Harris Corporation and FMC Corporation.
Philip M. Roussey has been our Executive Vice President of our Enterprise Marketing since February 2002, prior to which he served as our Executive Vice President of Computer Products Marketing from April 2000 until February 2002 and as our Senior Vice President of Marketing for Computer Products and Vice President of Marketing from the inception of our Company in 1987 until April 2000. Prior to joining Bell Microproducts in 1987, Mr. Roussey served in management positions with Kierulff Electronics, most recently as Corporate Vice President of Marketing.
Robert J. Sturgeon has been our Vice President of Information Technology since July 2000, prior to which, he served as our Vice President of Operations since joining the Company in 1992. From January 1991 to February 1992, Mr. Sturgeon was Director of Information Services for Disney Home Video. Prior to that time, Mr. Sturgeon served as Management Information Services ("MIS") Director for Paramount Pictures' Home Video Division from June 1989 to January 1991 and as a Marketing Manager for MTI Systems, a division of Arrow Electronics Inc., from January 1988 to June 1989. Other positions Mr. Sturgeon has held include Executive Director of MIS for Ducommun where he was responsible for ten divisions, including Kierulff Electronics.
Graeme Watt has been our President of Bell Microproducts, Europe since April 2004. From 1988 through 2003 he held a number of positions in IT distribution with Frontline Distribution, Computer 2000 and Tech Data as the companies were acquired. His most recent roles were Managing Director, United Kingdom for Computer 2000, Northern Region Managing Director for Tech Data Europe, and European President for Tech Data from 2000 to 2003. Mr Watt holds a Bachelor of Sciences Degree in Biological Science from Edinburgh University and is a qualified Chartered Accountant.
(c) Information concerning our Code of Ethics appears in our Proxy Statement, under the caption "Corporate Governance." This portion of the Proxy Statement is incorporated herein by reference.
(d) Information concerning compliance with Section 16(a) of the Securities Exchange Act of 1934 appears in our Proxy Statement, under the heading "Section 16(a) Beneficial Ownership Reporting Compliance," and is incorporated herein by reference.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Information concerning executive compensation appears in our Proxy Statement, under the captions "Corporate Governance," "Executive Compensation," "Additional Information Relating to Directors and Officers of the Company," and "Stock Performance Graph" is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning the security ownership of certain beneficial owners and management appears in the Proxy Statement, under the caption "Security Ownership of Certain Beneficial Owners and Management," and is incorporated herein by reference.
The following table provides information concerning our equity compensation plans as of December 31, 2005:
Equity Compensation Plan Information
(1) Weighted-average exercise price excludes 643,304 shares for restricted stock units with zero exercise price.
(2) Includes shares under our 1998 Stock Plan, which plan provides for the automatic increase of shares on January 1 of each year of a number of shares equal to the lesser of (i) 600,000 shares, (ii) 4% of the outstanding shares on such date, or (iii) a lesser amount determined by the Board, subject to adjustment upon changes in our capitalization.
(3) Represents stock options that have been granted to employees outside of the Company's 1998 Stock Plan, which options are represented by agreements substantially the same as agreements with respect to options under the 1998 Stock Plan and generally provide for a vesting period as determined by the Board of Directors and expire over terms not exceeding ten years from the date of grant.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and related transactions appears in our Proxy Statement, under the caption "Additional Information Relating to Directors and Officers of the Company," and is incorporated herein by reference.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information concerning principal accountant fees and services appears in our Proxy Statement under the caption "Ratification of Appointment of Independent Registered Public Accounting Firm" and is incorporated herein by reference.
PART IV
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Form 10-K:
(1) Consolidated Financial Statements
The financial statements (including the notes thereto) listed in the Index to Consolidated Financial Statements (set forth in Item 8 of this Form 10-K) are filed as part of this Annual Report on Form 10-K.
(2) Consolidated Financial Statement Schedule II - Valuation and Qualifying Accounts and Reserves page 66
Schedules not listed above have been omitted because they are not required or the information required to be set forth therein is included in the Consolidated Financial Statements or Notes to Consolidated Financial Statements.
(3) Exhibits - See Exhibit Index following signature page
(b) Exhibits. See Item 15(a) above.
(c) Financial Statements and Schedule. See Item 15(a) above.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 on March 16, 2006.
BELL MICROPRODUCTS INC.
By: /s/ James E. Illson ------------------------------------ James E. Illson Chief Operating Officer, President of Americas and Chief Financial Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints W. Donald Bell and James E. Illson and each of them, jointly and severally, his attorneys-in-fact, each with full power of substitution, for him in any and all capacities, to sign any and all amendments to this Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report on Form 10-K has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES (IN THOUSANDS)
(1) Balance consists of allowance for doubtful accounts and inventory provisions related to the acquisitions of subsidiaries and the effects of cumulative translation adjustments.
INDEX TO EXHIBITS
* Management contract or compensatory plan, contract or arrangement required to be filed as an exhibit to this Form 10-K.