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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
( MARK ONE )
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: SEPTEMBER 30, 2003
------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
-------------- ------------
COMMISSION FILE NUMBER 0-21528
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BELL MICROPRODUCTS INC.
- --------------------------------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CALIFORNIA 94-3057566
- ------------------------------- -------------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1941 RINGWOOD AVENUE, SAN JOSE, CALIFORNIA 95131-1721
- --------------------------------------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES ) (ZIP CODE )
(408) 451-9400
- --------------------------------------------------------------------------------
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE )
N/A
- --------------------------------------------------------------------------------
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST
REPORT.)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS.
YES X NO
------------- -------------
INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS AN ACCELERATED FILER (AS
DEFINED IN RULE 12B-2 OF THE EXCHANGE ACT).
YES X NO
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COMMON STOCK, $.01 PAR VALUE -- NUMBER OF SHARES OUTSTANDING AT NOVEMBER 10,
2003: 26,561,182
BELL MICROPRODUCTS INC.
INDEX TO FORM 10-Q
Page
PART I - FINANCIAL INFORMATION Number
- --------------------------------- ------
Item 1: Financial Statements (unaudited)
Condensed Consolidated Balance Sheets -- September
30, 2003 and December 31, 2002 3
Condensed Consolidated Statements of Income - Three
months and nine months ended September 30, 2003
and 2002 4
Condensed Consolidated Statements of Cash Flows -
Nine months ended September 30, 2003 and 2002 5
Notes to Condensed Consolidated Financial Statements 6
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
Item 3: Quantitative and Qualitative Disclosure about Market Risk 19
Item 4: Controls and Procedures 20
PART II - OTHER INFORMATION
- -----------------------------
Item 6: Exhibits and Reports 21
Signatures 22
2
PART I - FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS (UNAUDITED)
BELL MICROPRODUCTS INC.
Condensed Consolidated Balance Sheets
(in thousands, except per share data)
(unaudited)
September 30, December 31,
2003 2002
-------------------- -----------------------
ASSETS
Current assets:
Cash and cash equivalents $ 169 $ 12,025
Accounts receivable, net 286,997 277,305
Inventories 229,207 182,775
Prepaid expenses and other current assets 24,619 23,786
-------------------- -----------------------
Total current assets 540,992 495,891
Property and equipment, net 42,552 50,761
Goodwill 54,657 53,803
Intangibles 5,554 6,006
Deferred debt issuance costs and other assets 7,322 7,730
-------------------- -----------------------
Total assets $651,077 $614,191
==================== =======================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $242,017 $211,881
Borrowings under lines of credit 2,718 7,919
Short-term note payable and current portion
of long-term notes payable 8,266 23,458
Other accrued liabilities 34,186 45,847
-------------------- -----------------------
Total current liabilities 287,187 289,105
Borrowings under lines of credit 100,190 100,555
Long-term notes payable 80,738 75,500
Other long-term liabilities 2,964 3,182
-------------------- -----------------------
Total liabilities 471,079 468,342
-------------------- -----------------------
Commitments and contingencies
Shareholders' equity:
Common Stock, $0.01 par value, 40,000 shares
authorized; 26,280 and 20,127 issued and
outstanding 153,470 115,888
Retained earnings 18,389 25,311
Accumulated other comprehensive income 8,139 4,650
-------------------- -----------------------
Total shareholders' equity 179,998 145,849
-------------------- -----------------------
Total liabilities and shareholders' equity $ 651,077 $ 614,191
==================== =======================
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
3
BELL MICROPRODUCTS INC.
Condensed Consolidated Statements of Income
(in thousands, except per share data)
(unaudited)
----------------------------------- -----------------------------------
Three months ended Nine months ended
September 30, September 30,
----------------------------------- -----------------------------------
2003 2002 2003 2002
--------------- ---------------- ---------------- ---------------
Net sales $ 555,476 $ 551,895 $ 1,590,767 $ 1,572,536
Cost of sales 512,391 506,563 1,470,848 1,439,785
--------------- ---------------- ---------------- ---------------
Gross profit 43,085 45,332 119,919 132,751
Operating expenses:
Selling, general and administrative expenses 37,990 40,348 115,232 125,140
Restructuring costs and special charges - 3,405 1,383 5,688
--------------- ---------------- ---------------- ---------------
Total operating expenses 37,990 43,753 116,615 130,828
Income from operations 5,095 1,579 3,304 1,923
Interest expense (4,208) (4,473) (12,412) (12,944)
--------------- ---------------- ---------------- ---------------
Income (loss) before income taxes 887 (2,894) (9,108) (11,021)
Provision for (benefit from) income taxes 513 (538) (2,186) (2,976)
--------------- ---------------- ---------------- ---------------
Net income (loss) $ 374 $ (2,356) $ (6,922) $ (8,045)
=============== ================ ================ ===============
Income (loss) per share
Basic $ 0.02 $ (0.12) $ (0.33) $ (0.42)
=============== ================ ================ ===============
Diluted $ 0.02 $ (0.12) $ (0.33) $ (0.42)
=============== ================ ================ ===============
Shares used in per share calculation
Basic 22,471 19,610 20,913 19,012
=============== ================ ================ ===============
Diluted 23,098 19,610 20,913 19,012
=============== ================ ================ ===============
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
4
BELL MICROPRODUCTS INC.
Condensed Consolidated Statements of Cash Flows
(Increase/(decrease) in cash, in thousands)
(unaudited)
Nine months ended September 30,
- ----------------------------------------------------------------------------------------------------------------
2003 2002
----------- ----------
Cash flows from operating activities:
Net loss: $ (6,922) $ (8,045)
Adjustments to reconcile net loss to net
cash (used in) provided by operating activities:
Depreciation and amortization 9,234 8,340
Provision for bad debts 6,262 8,468
Loss on disposal of property, equipment and other 125 169
Deferred income taxes 541 (1,050)
Changes in assets and liabilities:
Accounts receivable (8,435) 23,291
Inventories (40,472) 37,901
Prepaid expenses 719 11,188
Other assets 409 (418)
Accounts payable 25,009 (33,346)
Other accrued liabilities (14,012) (13,147)
----------- ----------
Net cash (used in) provided by operating activities (27,542) 33,351
----------- ----------
Cash flows from investing activities:
Acquisition of property, equipment and other (2,359) (6,482)
Proceeds from sale of property, equipment and other 38 2,443
----------- ----------
Net cash used in investing activities (2,321) (4,039)
----------- ----------
Cash flows from financing activities:
Net borrowings under line of credit agreements (8,224) (35,780)
Repayment of long-term notes payable to RSA (7,000) (7,000)
Proceeds from issuance of Common Stock and warrants 36,713 19,428
Borrowings on notes and leases payable 9,986 9,545
Repayments of notes and leases payable (13,543) (11,288)
----------- ----------
Net cash provided by (used in) financing activities 17,932 (25,095)
----------- ----------
Effect of exchange rate changes on cash 75 2
----------- ----------
Net increase (decrease) in cash (11,856) 4,219
Cash at beginning of period 12,025 1,308
----------- ----------
Cash at end of period $ 169 $ 5,527
=========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 14,481 $ 16,638
Income taxes $ 466 $ 156
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 1 -- Basis of Presentation:
The accompanying interim consolidated condensed financial statements of
Bell Microproducts Inc. ("the Company") have been prepared in conformity with
accounting principles generally accepted in the United States (U.S.), consistent
in all material respects with those applied in the Company's Annual Report on
Form 10-K for the year ended December 31, 2002. The preparation of financial
statements in conformity with accounting principles generally accepted in the
U.S. requires management to make estimates and judgments that affect the amounts
reported in the financial statements and accompanying notes. The accounting
estimates that require management's most difficult and subjective judgments
include: the assessment of recoverability of goodwill and property, plant and
equipment; the valuation of inventory; estimates for the allowance for doubtful
accounts; and the recognition and measurement of income tax assets and
liabilities. The actual results experienced by the Company may differ materially
from management's estimates.
The interim financial information is unaudited, but reflects all
normal adjustments, which are, in the opinion of management, necessary to
provide a fair statement of results for the interim periods presented. The
interim financial statements should be read in connection with the financial
statements in the Company's Annual Report on Form 10-K for the year ended
December 31, 2002.
In the quarter ended September 30, 2003, the Company completed a
secondary registered public offering of 5,750,000 shares of Common Stock, at an
offering price to the public of $6.50 per share. Proceeds were used to repay
existing debt.
The Company operates in one business segment as a distributor of
storage products and systems as well as semiconductor and computer products and
peripherals to original equipment manufacturers (OEMs), value-added resellers
(VARs) and dealers in the United States, Canada, Europe and Latin America. The
Company is one of the world's largest storage-centric value-added distributors
and a specialist in storage products and solutions. The Company's concentration
on data storage systems and products allows it to provide greater technical
expertise to its customers, form strategic relationships with key manufacturers
and provide complete storage solutions to its customers at many levels of
integration. The Company's storage products include:
* High-end computer and storage subsystems;
* Fibre Channel connectivity products;
* Complete storage systems such as storage area networks (SAN), network
attached storage (NAS) and direct attached storage (DAS);
* Storage management software;
* disk, tape and optical drives; and
* a broad selection of value-added services.
In addition, the Company has developed a proprietary LDI software
licensing system, which facilitates the sale and administration of software
licenses. The Company believes its comprehensive product and value-added service
offerings has provided a competitive advantage in both domestic and
international markets.
6
Note 2 -- Stock-Based Compensation Plans:
In December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure, an Amendment of FASB Statement No. 123" ("SFAS No. 148"). SFAS No.
148 provides alternative methods of transition for companies making a voluntary
change to fair value-based accounting for stock-based employee compensation. The
Company continues to account for its stock option plans under the intrinsic
value recognition and measurement principles of APB Opinion No. 25, "Accounting
for Stock Issued to Employees," and related interpretations. Effective for
interim periods beginning after December 15, 2002, SFAS No. 148 also requires
disclosure of pro-forma results on a quarterly basis as if the Company had
applied the fair value recognition provisions of SFAS No. 123.
As the exercise price of all options granted under these plans was
equal to the market price of the underlying common stock on the grant date, no
stock-based employee compensation, other than acquisition-related compensation,
is recognized in net income/(loss). The following table illustrates the effect
on net income/(loss) and earnings/(loss) per share if the company had applied
the fair value recognition provisions of SFAS No. 123, as amended, to options
granted under the stock option plans and rights to acquire stock granted under
the company's Stock Participation Plan, collectively called "options." For
purposes of this pro-forma disclosure, the value of the options is estimated
using a Black-Scholes option pricing model and amortized ratably to expense over
the options' vesting periods. Because the estimated value is determined as of
the date of grant, the actual value ultimately realized by the employee may be
significantly different.
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
(In thousands except for per share amounts)
---------------------------------------------------------------
2003 2002 2003 2002
---------- --------- --------- ---------
Net income (loss) as reported $ 374 $ (2,356) $ (6,922) $ (8,045)
Deduct: Total stock-based employee
compensation expense determined
under fair value method for awards,
net of related tax effects 770 1,493 3,373 4,450
---------- --------- --------- ---------
Pro forma net loss $ (396) $ (3,849) $(10,295) $(12,495)
========== ========= ========= =========
Net income (loss) per share as reported:
Basic $ 0.02 $ (0.12) $ (0.33) $ (0.42)
Diluted $ 0.02 $ (0.12) $ (0.33) $ (0.42)
Pro forma net loss per share:
Basic $ (0.02) $ (0.20) $ (0.49) $ (0.66)
Diluted $ (0.02) $ (0.20) $ (0.49) $ (0.66)
Weighted average shares used in per share Calculation:
Basic 22,471 19,610 20,913 19,012
Diluted 23,098 19,610 20,913 19,012
The following weighted average assumptions were used for grants in the
third quarter ended September 30, 2003 and 2002 respectively; expected
volatility of 76% and 76%, expected lives of 3.41 and 3.59 and risk free
interest rates of 2.0% and 2.2%, respectively. The Company has not paid
dividends and assumed no dividend yield. The fair value of each purchase right
issued under the Company's employee stock purchase plan is estimated on the
beginning of the offering period using the Black-Scholes option-pricing model
with substantially the same assumptions as the option plans but expected lives
of 0.5 years.
7
SFAS No. 123 requires the use of option pricing models that were not
developed for use in valuing employee stock options. The Black-Scholes
option-pricing model was developed for use in estimating the fair value of
short-lived exchange traded options that have no vesting restrictions and are
fully transferable. In addition, option-pricing models require the input of
highly subjective assumptions, including the option's expected life and the
price volatility of the underlying stock. Because the Company's employee stock
options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can materially
affect the fair value estimate, in the opinion of management, the existing
models do not necessarily provide a reliable single measure of the fair value of
employee stock options.
Because additional stock options and stock purchase rights are expected
to be granted at varying times during the year, the above pro forma disclosures
are not considered by management to be representative of pro forma effects on
reported financial results for the year ended December 31, 2003, or for other
future periods.
OPTION EXCHANGE
On November 25, 2002, the Company made an exchange offer (the
"Exchange") to current officers and employees of the Company to exchange stock
options held by these employees for rights to receive shares of the Company's
Common Stock ("Restricted Units"). The offer period ended December 31, 2002 and
the Restricted Units were issued on January 3, 2003 (the "Exchange Date").
Employee stock options eligible for the Exchange had a per share exercise price
of $11.75 or greater, whether or not vested ("Eligible Options"). The offer
provided for an exchange ratio of three option shares surrendered for each
Restricted Unit to be received subject to vesting terms.
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.
Note 3 -- Intangible Assets:
Over time, the Company has acquired certain intangible assets which
include non-compete agreements, a trademark, a trade name and supplier
relationships, with estimated useful lives of three years, 40 years and ten
years, respectively. The gross carrying amount and accumulated amortization of
these assets at September 30, 2003 are as follows (in thousands):
As of September 30, 2003
---------------------------------------------------------------
Gross Carrying Accumulated Net
Amortized Intangible Assets Amount Amortization Amount
----------------------------------- ------------------- ------------------ ------------------
Non-compete agreements $ 2,154 $ (1,661) $ 493
Trademark 4,100 (303) 3,797
Tradename 300 (26) 274
Supplier relationships 1,200 (210) 990
------------------- ------------------ ------------------
Total $ 7,754 $ (2,200) $ 5,554
=================== ================== ==================
8
As of December 31, 2002
---------------------------------------------------------------
Gross Carrying Accumulated Net
Amortized Intangible Assets Amount Amortization Amount
----------------------------------- ------------------- ------------------ ------------------
Non-compete agreements $ 2,137 $ (1,233) $ 904
Trademark 3,965 (228) 3,737
Tradename 300 (15) 285
Supplier relationships 1,200 (120) 1,080
------------------- ------------------ ------------------
Total $ 7,602 $ (1,596) $ 6,006
=================== ================== ==================
The estimated amortization expense of these assets in future fiscal
years is as follows (in thousands):
Estimated Amortization Expense
------------------------------------------------------
October 1, 2003 to December 31, 2003 $ 192
------------------------------------------------------
For year ending December 31, 2004 749
For year ending December 31, 2005 248
For year ending December 31, 2006 238
For year ending December 31, 2007 229
Thereafter 3,898
-------------------------
Total $ 5,554
=========================
Note 4 -- Earnings (Loss) per Share:
Basic EPS is computed by dividing net income/(loss) available to common
shareholders (numerator) by the weighted average number of common shares
outstanding (denominator) during the period. Diluted EPS gives effect to all
dilutive potential common shares outstanding during the period resulting from
stock options using the treasury stock method. In computing diluted EPS, the
average stock price for the period is used in determining the number of shares
assumed to be purchased from the exercise of stock options.
Following is a reconciliation of the numerators and denominators of the
basic and diluted EPS computations for the periods presented below (in
thousands, except per share data):
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------ -------------------------------
2003 2002 2003 2002
-------------- ------------ -------------- -------------
Net income (loss) $ 374 $ (2,356) $ (6,922) $ (8,045)
============== ============ ============== =============
Weighted average common shares
outstanding (Basic) 22,471 19,610 20,913 19,012
Effect of dilutive options, grants and
warrants 627 - - -
-------------- ------------ -------------- -------------
Weighted average common shares
outstanding (Diluted) 23,098 19,610 20,913 19,012
============== ============ ============== =============
In the nine months ended September 30, 2003 and 2002, total common
stock options, grants and warrants excluded from diluted loss per share
calculations because they were antidilutive were 1,660,163 and 4,754,219,
respectively.
9
Note 5 -- Lines of Credit and Term Debt:
LINES OF CREDIT September 30, December 31,
2003 2002
------------- ------------
First Union Facility $ 39,905 $ 52,127
Bank of America Facility 60,285 48,428
IFN Financing BV 2,718 6,992
Other lines - 927
---------- ----------
102,908 108,474
Less: amounts included in current liabilities 2,718 7,919
---------- ----------
Amounts included in non-current liabilities $ 100,190 $ 100,555
========== ==========
On December 31, 2002, the Company entered into an amendment to its
syndicated Loan and Security Agreement with First Union National Bank ("First
Union Facility"), a subsidiary of Wachovia. The amendment reduced the credit
facility to $160 million from $175 million and extended the maturity date to May
31, 2005. The First Union Facility refinanced the Company's $50 million credit
facility with California Bank & Trust that matured May 31, 2001, and the $80
million short-term loan with the RSA that matured June 30, 2001. The syndicate
includes Congress Financial Corporation Western and Bank of America N.A. as
co-agents and other financial institutions, as lenders. Borrowings under the
line of credit bear interest at First Union's prime rate plus a margin of 0.0%
to 0.5%, based on borrowing levels. At the Company's option, all or any portion
of the outstanding borrowings may be converted to a Eurodollar rate loan, which
bears interest at the adjusted Eurodollar rate plus a margin of 2.25% to 2.75%,
based on borrowing levels. The average interest rate on outstanding borrowings
under the revolving line of credit during the quarter ended September 30, 2003,
was 3.8%, and the balance outstanding at September 30, 2003 was $39.9 million.
Obligations of the Company under the revolving line of credit are secured by
certain assets of the Company and its North and Latin American subsidiaries. The
revolving line of credit requires the Company to meet certain financial tests
and to comply with certain other covenants, including restrictions on incurrence
of debt and liens, restrictions on mergers, acquisitions, asset dispositions,
capital contributions, payment of dividends, repurchases of stock and
investments. The Company was in compliance with its bank covenants at September
30, 2003; however, there can be no assurance that the Company will be in
compliance with such covenants in the future. If the Company does not remain in
compliance with the covenants and is unable to obtain a waiver of noncompliance
from its bank, the Company's financial condition and results of operations would
be materially adversely affected.
On December 2, 2002, the Company entered into a Syndicated Credit
Agreement arranged by Bank of America, National Association ("B of A Facility"),
as principal agent, to provide a L75 million revolving line of credit facility,
or the current equivalent of $125 million. The B of A Facility refinanced the
Company's $60 million credit facility with Royal Bank of Scotland. The syndicate
includes Bank of America as agent and security trustee and other banks and
financial institutions, as lenders. Borrowings under the line of credit bear
interest at Bank of America's base rate plus a margin of 2.125% to 2.25%, 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 2.125% to 2.25%,
based on certain financial measurements. The average interest rate on the
outstanding borrowings under the revolving line of credit for the quarter ended
September 30, 2003 was 6.0%, and the balance outstanding at September 30, 2003
was $60.3 million. Obligations of the Company under the revolving line of credit
are secured by certain assets of the Company's European subsidiaries. The
revolving line of credit requires the Company to meet certain financial tests
and to comply with certain other covenants, including restrictions on incurrence
of debt and liens, restrictions on mergers, acquisitions, asset dispositions,
capital contributions, payment of dividends, repurchases of stock, repatriation
of cash and investments. The Company was in compliance with its bank covenants
at September 30, 2003; however, there can be no assurance that the
10
Company will be in compliance with such covenants in the future. If the Company
does not remain in compliance with the covenants and is unable to obtain a
waiver of noncompliance from its bank, the Company's financial condition and
results of operations would be materially adversely affected.
The Company has an agreement with IFN Finance BV to provide up to $7.3
million in short-term financing to the Company. The loan is secured by certain
European accounts receivable and inventories, bears interest at 5.5%, and
continues indefinitely until terminated by either party within 90 days' notice.
The balance outstanding at September 30, 2003 was $2.7 million.
TERM LOANS September 30, December 31,
2003 2002
------------- ------------
Note payable to RSA $ 79,000 $ 86,000
Lombard NatWest Limited Mortgage - 9,816
Bank of Scotland 9,736 -
---------- ----------
88,736 95,816
Less: amounts due in current year 7,999 20,316
---------- ----------
Long-term debt due after one year $ 80,737 $ 75,500
========== ==========
In 2000, the Company entered into a Securities Purchase Agreement with
The Retirement Systems of Alabama and certain of its affiliated funds (the "RSA
Facility"), under which the Company borrowed $180 million of subordinated debt
financing. This subordinated debt financing was comprised of $80 million bearing
interest at 9.125%, repaid in May 2001; and $100 million bearing interest at
9.0%, payable in semi-annual principal installments of $3.5 million plus
interest installments commencing December 31, 2000 and in semi-annual principal
installments of $8.5 million commencing December 31, 2007, with a final maturity
date of June 30, 2010. On August 1, 2003, the Company entered into an interest
rate swap agreement with Wachovia Bank effectively securing a new interest rate
on $40 million of the outstanding debt. The new rate is based on the six month
U.S. Libor rate plus a fixed margin of 4.99% and continues until termination of
the agreement on June 30, 2010. The six month U.S. Libor rate was 1.18% at
September 30, 2003. The RSA Facility is secured by a second lien on the
Company's and its subsidiaries' North American and Latin American assets. The
Company must meet certain financial tests on a quarterly basis, and comply with
certain other covenants, including restrictions on incurrence of debt and liens,
restrictions on asset dispositions, 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 Company is in compliance with its
subordinated debt financing covenants; however, there can be no assurance that
the Company will be in compliance with such covenants in the future. If the
Company does not remain in compliance with the covenants in the Securities
Purchase Agreement and is unable to obtain a waiver of noncompliance from its
subordinated lenders, the Company's financial condition and results of
operations would be materially adversely affected.
On May 9, 2003, the Company entered into a $9.9 million mortgage
agreement with Bank of Scotland and fully re-paid the borrowings outstanding
under the previous mortgage agreement with Lombard NatWest Limited. The new
mortgage has a term of 10 years, bears interest at Bank of Scotland's rate plus
1.35%, and is payable in quarterly installments of approximately $247,500, plus
interest. The principal amount due in 2003 is $495,000, and $990,000 is due for
each of the years thereafter. The balance of the mortgage at September 30, 2003
was $9.7 million. Terms of the mortgage require the Company to meet certain
financial ratios and to comply with certain other covenants on a quarterly
basis. The Company was in compliance with its covenants at September 30, 2003;
however there can be no assurance that the Company will be in compliance with
its covenants in the future. If the Company does not remain in compliance with
the covenants and is unable to obtain a waiver of noncompliance from its bank,
the Company's financial condition and results of operations would be materially
adversely affected.
11
Note 6 -- Common Stock:
In March 2002, the Company received proceeds of approximately $16.5
million from a private placement of 1,500,000 shares of Common Stock. The
Company also issued to the purchasers warrants to purchase an additional 750,000
shares of Common Stock at an exercise price of $11.00 per share. The Company
valued the warrants at $3,858,000 using the Black-Scholes option pricing model
applying an expected life of 18 months, a risk free interest rate of 6.59% and a
volatility of 69%. The warrants were recorded as a component of equity.
On August 27, 2003 the Company completed a secondary registered public
offering of 5,000,000 shares of Common Stock, at an offering price to the public
of $6.50 per share. In connection with the offering, the Company granted to the
underwriters an option to purchase up to 750,000 shares to cover
over-allotments, and the option was exercised in full on September 18, 2003. The
Company received proceeds of $34.9 million, net of commissions, discounts and
expenses.
Note 7 -- Restructuring Costs, Special Charges and Other Provisions:
In the first quarter of 2003, as the Company continued to implement
profit improvement and cost reduction measures, restructuring costs of $1.4
million were recorded. These charges consisted of severance and benefits of $1.3
million related to worldwide involuntary terminations and estimated lease costs
of $56,300 pertaining to future lease obligations for non-cancelable lease
payments for excess facilities in the U.S. The Company terminated 127 employees
worldwide, across a wide range of functions including marketing, technical
support, finance, operations and sales. 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.
In the second quarter of 2002, as part of the Company's plan to reduce
costs and improve operating efficiencies, the Company recorded special charges
of $2.3 million in response to economic conditions. These costs consisted
primarily of provisions for certain Latin American receivables of $1.7 million,
and costs related to the closure of the Rorke Data Europe facilities, whose
operations were consolidated into the Company's TTP division in Almere,
Netherlands. The special charges related to Rorke Data Europe included accrued
costs for future lease obligations for non-cancelable lease payments of
$249,000, other facility closure costs of $306,000 and severance and benefits of
$28,000 for involuntary employee terminations.
In the third quarter of 2002, the Company extended its cost reduction
plan in response to the continued economic downturn and recorded restructuring
costs of $3.4 million. These charges consisted 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 severance and benefits of $1.1 million
related to worldwide involuntary terminations. The Company terminated 78
employees, predominantly in sales and marketing functions, and eliminated two
executive management positions in the U.S. The Company expects annual savings of
approximately $700,000 related to these vacated facilities and $5.4 million
related to employee terminations. Future expected cost reductions will be
reflected in the income statement line item `Selling, general and administrative
expenses.'
At September 30, 2003, outstanding liabilities related to these charges
are summarized as follows (in thousands):
Restructuring
Charges Liabilities at
2003 In Prior Total Cash September 30,
Charges Years Charges Payments 2003
--------- ---------- ---------- ----------- --------------
Severance costs $ 1,327 $ 3,366 $ 4,693 $ 4,291 $ 402
Lease costs 56 2,753 2,809 1,360 1,449
Other facility closure costs - 306 306 306 -
--------- ---------- ---------- ----------- ---------------
Total $ 1,383 $ 6,425 $ 7,808 $ 5,957 $ 1,851
========= ========== ========== =========== ===============
12
Note 8 -- Product Warranty Liabilities:
The Company accrues for known warranty claims if a loss is probable and
can be reasonably estimated, and accrues for estimated incurred but unidentified
warranty claims based on historical activity. Provisions for estimated returns
and expected warranty costs are recorded at the time of sale and are adjusted
periodically to reflect changes in experience and expected obligations. The
Company's warranty reserve relates primarily to its storage solutions and value
added businesses. Reserves for warranty items are included in other current
liabilities. The provision has had no material change from December 31, 2002.
Note 9 -- Commitments and Contingencies:
The Company is currently a party to various claims and legal
proceedings arising in the normal course of business. If management believes
that a loss is probable and can reasonably be estimated, the Company records the
amount of the loss, or the minimum estimated liability when the loss is
estimated using a range and no point within the range is more probable than
another. As additional information becomes available, any potential liability
related to these actions is assessed and the estimates are revised, if
necessary. Based on currently available information, management believes that
the ultimate outcome of any actions, individually and in the aggregate, will not
have a material adverse effect on the Company's financial position or results of
operations.
In August 2003, the Company entered into an interest rate swap
agreement in order to gain access to the lower borrowing rates normally
available on floating-rate debt, while avoiding prepayment and other costs that
would be associated with refinancing long-term fixed-rate debt. The swap
purchased has a notional amount of $40 million, expiring in June 2010, with a
six-month settlement period and provides for variable interest at LIBOR plus a
set rate spread. The notional amount does not quantify risk or represent assets
or liabilities, but rather, is used in the determination of cash settlement
under the swap agreement. As a result of purchasing this swap, the Company will
be exposed to credit losses from counter-party non-performance; however, the
Company does not anticipate any such losses from this agreement, which is with a
major financial institution. The agreement will also expose the Company to
interest rate risk should LIBOR rise during the term of the agreement. This swap
agreement is accounted for under Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"). Under the provisions of SFAS 133, we initially recorded the interest rate
swap at fair value, and subsequently recorded any changes in fair value in
"other comprehensive income." Fair value is determined based on quoted market
prices, which reflect the difference between estimated future variable-rate
payments and future fixed-rate receipts.
Note 10 -- Newly Issued or Recently Effective Accounting Pronouncements:
In June 2002, the FASB issued Statement of Financial Accounting
Standards No. 146, ("SFAS No. 146"), "Accounting for Exit or Disposal
Activities." SFAS 146 addresses significant issues regarding the recognition,
measurement and reporting of costs that are associated with exit and disposal
activities, including restructuring activities that are currently accounted for
pursuant to the guidance that the EITF has set forth in Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring)." The
scope of SFAS 146 also includes (1) costs related to terminating a contract that
is not a capital lease and (2) termination benefits that employees who are
involuntarily terminated receive under the terms of a one-time benefit
arrangement that is not an ongoing benefit arrangement or an individual deferred
compensation contract. SFAS 146 was effective for exit or disposal activities
that were initiated after December 31, 2002. The Company adopted the provisions
of SFAS 146 on January 1, 2003 and the adoption did not have a material impact
on its results of operations or financial position.
In March 2003, the FASB issued Statement of Financial Accounting
Standards No. 149 ("SFAS 149"), "Amendment of Statement 133 on Derivative
Instruments and Hedging Activities." This statement amends and clarifies
financial accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities
under FASB Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities." This statement is effective for contracts and hedging relationships
entered into or modified after June 30, 2003. The provisions of this statement
will be applied prospectively. The adoption of this standard did not have a
material impact on the consolidated financial statements.
In May 2003, the FASB issued Statement of Financial Accounting
Standards No. 150 as amended ("SFAS 150"), "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). SFAS 150 is effective for
financial instruments entered into or modified after May 31, 2003, and otherwise
is effective at the beginning of the first interim period beginning after June
15, 2003. It is to be implemented by reporting the cumulative effect of a change
in an accounting principle for financial instruments created before the issuance
date of the statement and still existing at the beginning of the interim period
of adoption.
13
Restatement is not permitted. The adoption of this standard did not have a
material impact on the consolidated financial statements.
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51."
FIN 46 requires certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the equity investors in the entity do not
have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN 46 is
effective immediately for all new variable interest entities created or acquired
after January 31, 2003. For variable interest entities created or acquired prior
to February 1, 2003, the provisions of FIN 46 must be applied for the first
interim or annual period beginning after June 15, 2003. The adoption of this
standard did not have a material impact on the consolidated financial
statements.
In November 2002, the Emerging Issues Task Force, or EITF, reached a
consensus on Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables."
EITF Issue No. 00-21 provides guidance on how to account for arrangements that
involve the delivery or performance of multiple products, services and/or rights
to use assets. The provisions of EITF Issue No. 00-21 will apply to revenue
arrangements entered into in fiscal periods beginning after June 15, 2003. The
adoption of this standard did not have a material impact on the consolidated
financial statements.
Note 11 -- Comprehensive Income/(loss):
Comprehensive income is defined as the change in equity of a business
enterprise during a period from transactions and other events and circumstances
from non-owner sources, including foreign currency translation adjustments.
Comprehensive income (loss) is as follows (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------- -------------------------------
2003 2002 2003 2002
--------------- ------------- -------------- -------------
Net income (loss) $ 374 $ (2,356) $ (6,922) $ (8,045)
Other comprehensive income:
Foreign currency translation
adjustments 1,132 417 3,489 3,612
--------------- ------------- -------------- -------------
Total comprehensive income (loss) $ 1,506 $ (1,939) $ (3,433) $ (4,433)
=============== ============= ============== =============
Accumulated other comprehensive income presented in the accompanying
consolidated condensed balance sheets consists of cumulative foreign currency
translation adjustments.
Note 12 -- Geographic Information:
The Company operates in one industry segment and markets its products
worldwide through its own direct sales force. The Company attributes revenues
from customers in different geographic areas based on the location of the
customer. Sales in the U.S. were 42% and 44% of total sales for the nine months
ended September 30, 2003 and 2002, respectively.
(In thousands)
Nine Months Ended September 30,
-----------------------------------------------
Geographic information consists of the following: 2003 2002
---------------------- ---------------------
Net sales:
North America $ 736,981 $ 766,600
Latin America 126,537 150,353
Europe 727,249 655,584
---------------------- ---------------------
Total $ 1,590,767 $ 1,572,537
====================== =====================
September 30, December 31,
---------------------- ---------------------
Long-lived assets: 2003 2002
---------------------- ---------------------
United States $ 44,473 $ 49,934
United Kingdom 51,687 53,189
Other foreign countries 13,925 15,177
---------------------- ---------------------
Total $ 110,085 $ 118,300
====================== =====================
14
Note 13 -- Subsequent Events:
On October 10, 2003, the Company acquired certain assets and assumed
certain liabilities of EBM Mayorista, S.A. de C.V. ("EBM"), for cash of
approximately $5.1 million. EBM is a privately held computer components
distributor, headquartered in Merida, Mexico, with branch locations in Cancun,
Monterrey, Oaxaca, Villahermosa, Tampico, Veracruz and Tuxla. Based on EBM's
unaudited financial statements, sales were approximately $33.8 million for the
year ended December 31, 2002.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
Information in the following Management's Discussion and Analysis of
Financial Condition and Results of Operations and elsewhere in this quarterly
report contains forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934. Forward-looking statements provide current expectations or forecasts of
future events and can be identified by the use of terminology such as "believe,"
"estimate," "expect," "intend," "may," "could," "will," and similar words or
expressions. Any statement that is not a historical fact, including statements
regarding estimates, projections, future trends and the outcome of events that
have not yet occurred, is a forward-looking statement. Our forward-looking
statements generally relate to growth, financial results, and financing and
acquisition activities, among others. Actual results could differ materially
from those projected in the forward-looking statements as a result of a number
of factors, including but not limited to our ability to reduce and control
costs, our ability to take advantage of beneficial vendor pricing and rebate
programs from time to time, the timing of delivery of products from suppliers,
the product mix sold by the Company, the integration of acquired businesses,
customer demand, the Company's dependence on a small number of customers that
account for a significant portion of revenues, availability of products from
suppliers, cyclicality in the storage disk drive and other industries, price
competition for products sold by the Company, management of growth, the
Company's ability to collect accounts receivable, price decreases on inventory
that is not price protected, ability to negotiate credit facilities, potential
interest rate fluctuations as described below and the other risk factors
detailed in the Company's filings with the SEC, including its Annual Report on
Form 10-K for the year ended December 31, 2002. The Company assumes no
obligation to update such forward-looking statements or to update the reasons
actual results could differ materially from those anticipated in such
forward-looking statements. Because many factors are unforeseeable, the
foregoing should not be considered an exhaustive list.
THREE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2002
Net sales were $555.5 million for the quarter ended September 30, 2003,
compared to net sales of $551.9 million for the quarter ended September 30,
2002, which represented an increase of $3.6 million, or 1%. The increase was
primarily due to growth in unit sales to existing and new customers.
The Company's gross profit for the quarter ended September 30, 2003 was
$43.1 million compared to $45.3 million for the quarter ended September 30,
2002, which represented a decrease of $2.2 million, or
15
5%. Gross margin decreased to 7.8% in the current quarter from 8.2% in the same
period last year. The decrease was primarily due to a shift in product
mix, with faster growth occurring in 2003 in sales of products carrying a lower
margin percentage.
Selling, general and administrative expenses decreased to $38.0 million
for the quarter ended September 30, 2003 from $40.3 million for the quarter
ended September 30, 2002, a decrease of $2.3 million, or 6%. The decrease in
expenses was primarily attributable to the realization of savings from
continuing cost reduction and prior restructuring activity undertaken by the
Company, net of the impact of volume increases. As a percentage of sales,
selling, general and administrative expenses decreased in the third quarter of
2003 to 6.8% from 7.3% in the third quarter of 2002.
Interest expense decreased to $4.2 million for the quarter ended
September 30, 2003 from $4.5 million in the same period last year. This decrease
was primarily due to overall decreased borrowings during the period for
worldwide working capital purposes. Average interest rates on combined
borrowings decreased to 6.7% in the third quarter of 2003, from 7.0% in the in
the same period last year.
The effective tax rate was 58% for the quarter ended September 30, 2003
compared to an effective tax benefit rate of 19% for the quarter ended September
30, 2002. The higher tax rate was primarily related to the annualized affect of
additional deferred tax valuation allowances established related to losses
incurred in certain foreign jurisdictions.
Restructuring Costs and Special Charges
In the third quarter of 2003, the Company did not record additional
restructuring costs or special charges.
In the third quarter of 2002, the Company continued its cost reduction
activities in response to the continued economic downturn and recorded
restructuring costs of $3.4 million. These charges consisted 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 severance and benefits of
$1.1 million related to worldwide involuntary terminations. The Company
terminated 78 employees, predominantly in sales and marketing functions, and
eliminated two executive management positions in the U.S. Future expected cost
reductions will be reflected in the income statement line item `Selling, general
and administrative expenses.'
At September 30, 2003, outstanding liabilities related to these charges
are summarized as follows (in thousands):
Restructuring
Charges Liabilities at
2003 In Prior Total Cash September 30,
Charges Years Charges Payments 2003
--------- ---------- ---------- ----------- ---------------
Severance costs $ 1,327 $ 3,366 $ 4,693 $ 4,291 $ 402
Lease costs 56 2,753 2,809 1,360 1,449
Other facility closure costs - 306 306 306 -
--------- ---------- ---------- ----------- ---------------
Total $ 1,383 $ 6,425 $ 7,808 $ 5,957 $ 1,851
========= ========== ========== =========== ===============
NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2002
Net sales were $1,590.8 million for the nine months ended September 30,
2003, compared to net sales of $1,572.5 million for the nine months ended
September 30, 2002, which represented an increase of $18.3 million, or 1%. Of
the total increase in sales, $71.7 million was due to growth in unit sales to
existing and new customers in Europe and these increases were offset by a
decrease of $53.4 million in sales in the Americas.
16
The Company's gross profit for the nine months ended September 30, 2003
was $119.9 million, compared to $132.8 million for the nine months ended
September 30, 2002, which represented a decrease of $12.8 million, or 10%. The
decrease was primarily due to the slowdown in information technology spending
which resulted in intense price competition in the industry in the first half of
the year; a shift in product mix, with faster growth in sales of products
carrying a lower margin percentage, and a special charge of $1.5 million to
write down inventory in the first quarter of 2003, as discussed below. The
overall gross margin was 7.5%, including the effect of the $1.5 million
inventory write-down, compared to 8.4% in the same period last year.
Selling, general and administrative expenses decreased to $115.2
million for the nine months ended September 30, 2003 from $125.1 million for the
nine months ended September 30, 2002, a decrease of $9.9 million, or 8%. The
decrease in expenses was primarily attributable to the realization of savings
from prior restructuring activity and other cost reduction measures undertaken
by the Company, net of the impact of volume increases. As a percentage of sales,
selling, general and administrative expenses decreased in the first nine months
of 2003 to 7.2% from 8.0% in the first nine months of 2002.
Interest expense was $12.4 million in the nine months ended
September 30, 2003, as compared to $12.9 million in the same period last year.
This decrease was primarily due to overall decreased borrowings during the
period for worldwide working capital purposes. Interest rates on combined
borrowings were 6.9% in the first nine months of 2003 compared to 6.8% in the
same period last year.
The effective tax benefit rate of 24% for the nine months ended
September 30, 2003 compared to an effective tax benefit rate of 27% for the nine
months ended September 30, 2002. The lower tax benefit rate was primarily
related to deferred tax valuation allowances established related to losses
incurred in certain foreign jurisdictions.
Restructuring Costs and Special Charges
In the nine months ended September 30, 2003, as the Company continued
to implement profit improvement and cost reduction measures, restructuring costs
of $1.4 million were recorded in the first quarter. These charges consisted of
severance and benefits of $1.3 million related to worldwide involuntary
terminations and estimated lease costs of $56,300 pertaining to future lease
obligations for non-cancelable lease payments for excess facilities in the U.S.
The Company terminated 127 employees worldwide, across a wide range of functions
including marketing, technical support, finance, operations and sales, and
expects annual savings of approximately $8 million. Expected savings related to
vacated facilities is not material. Future savings expected from restructuring
related cost reductions will be reflected as a decrease in `Selling, general and
administrative expenses' on the income statement. The Company also recorded an
inventory charge of approximately $1.5 million related to significant changes to
certain vendor relationships and the discontinuance of other non-strategic
product lines.
In the nine months ended September 30, 2002, as part of the Company's
plan to reduce costs and improve operating efficiencies, the Company recorded
special charges of $5.7 million in the second and third quarters. 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, predominantly in sales and marketing functions
and eliminated two executive management positions in the U.S. Future expected
cost reductions will be reflected in the income statement line item `Selling,
general and administrative expenses.'
17
LIQUIDITY AND CAPITAL RESOURCES
In recent years, the Company has funded its working capital
requirements principally through borrowings under term loans and bank lines of
credit as well as proceeds from warrants and stock option exercises. Working
capital requirements have included the financing of increases in inventory and
accounts receivable resulting from sales growth, and the financing of certain
acquisitions. In August 2003, the Company completed a registered public offering
of approximately 5.75 million shares of its common stock, with proceeds to the
Company net of commissions, discounts and expenses of $34.9 million. The
Company's future cash requirements will depend on numerous factors, including
potential acquisitions and the rate of growth of its sales and its effectiveness
at controlling and reducing its costs.
Net cash used operating activities for the nine months ended September
30, 2003, was $27.5 million. The Company's inventories increased as of September
30, 2003 to $229.2 million from $182.8 million as of December 31, 2002, and the
Company's accounts payable increased to $242.0 million as of September 30, 2003
from $211.9 million as of December 31, 2002. The increase in inventories and
accounts payable are primarily a result of increased inventory purchases. The
Company's accounts receivable increased to $287.0 million as of September 30,
2003, from $277.3 million as of December 31, 2002, primarily as a result of
increased revenues. The Company's future cash requirements will depend on
numerous factors, including potential acquisitions and the rate of growth of its
sales.
On December 31, 2002, the Company entered into an amendment to its
syndicated Loan and Security Agreement with First Union National Bank ("First
Union Facility"), a subsidiary of Wachovia. The amendment reduced the credit
facility to $160 million from $175 million and extended the maturity date to May
31, 2005. The First Union Facility refinanced the Company's $50 million credit
facility with California Bank & Trust that matured May 31, 2001, and the $80
million short-term loan with the RSA that matured June 30, 2001. The syndicate
includes Congress Financial Corporation Western and Bank of America N.A. as
co-agents and other financial institutions, as lenders. Borrowings under the
line of credit bear interest at First Union's prime rate plus a margin of 0.0%
to 0.5%, based on borrowing levels. At the Company's option, all or any portion
of the outstanding borrowings may be converted to a Eurodollar rate loan, which
bears interest at the adjusted Eurodollar rate plus a margin of 2.25% to 2.75%,
based on borrowing levels. The average interest rate on outstanding borrowings
under the revolving line of credit during the quarter ended September 30, 2003,
was 3.8%, and the balance outstanding at September 30, 2003 was $39.9 million.
Obligations of the Company under the revolving line of credit are secured by
certain assets of the Company and its North and Latin American subsidiaries. The
revolving line of credit requires the Company to meet certain financial tests
and to comply with certain other covenants, including restrictions on incurrence
of debt and liens, restrictions on mergers, acquisitions, asset dispositions,
capital contributions, payment of dividends, repurchases of stock and
investments. The Company was in compliance with its bank covenants at September
30, 2003; however, there can be no assurance that the Company will be in
compliance with such covenants in the future. If the Company does not remain in
compliance with the covenants and is unable to obtain a waiver of noncompliance
from its bank, the Company's financial condition and results of operations would
be materially adversely affected.
On December 2, 2002, the Company entered into a Syndicated Credit
Agreement arranged by Bank of America, National Association ("B of A Facility"),
as principal agent, to provide a L75 million revolving line of credit facility,
or the current equivalent of $125 million. The B of A Facility refinanced the
Company's $60 million credit facility with Royal Bank of Scotland. The syndicate
includes Bank of America as agent and security trustee and other banks and
financial institutions, as lenders. Borrowings under the line of credit bear
interest at Bank of America's base rate plus a margin of 2.125% to 2.25%, 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 2.125% to 2.25%,
based on certain financial measurements. The average interest rate on the
outstanding borrowings under the revolving line of credit for the quarter ended
September 30, 2003 was 6.0%, and the balance outstanding at September 30, 2003
was $60.3 million. Obligations of the Company under the revolving line of credit
are secured by certain assets of the Company's European subsidiaries. The
revolving line of credit requires the Company to meet certain financial tests
and to comply with certain other covenants, including restrictions on incurrence
of debt and liens, restrictions on mergers, acquisitions, asset dispositions,
capital contributions,
18
payment of dividends, repurchases of stock, repatriation of cash and
investments. The Company was in compliance with its bank covenants at September
30, 2003; however, there can be no assurance that the Company will be in
compliance with such covenants in the future. If the Company does not remain in
compliance with the covenants and is unable to obtain a waiver of noncompliance
from its bank, the Company's financial condition and results of operations would
be materially adversely affected.
In 2000, the Company entered into a Securities Purchase Agreement with
The Retirement Systems of Alabama and certain of its affiliated funds (the "RSA
Facility"), under which the Company borrowed $180 million of subordinated debt
financing. This subordinated debt financing was comprised of $80 million bearing
interest at 9.125%, repaid in May 2001; and $100 million bearing interest at
9.0%, payable in semi-annual principal installments of $3.5 million plus
interest installments commencing December 31, 2000 and in semi-annual principal
installments of $8.5 million commencing December 31, 2007, with a final maturity
date of June 30, 2010. On August 1, 2003, the Company entered into an interest
rate swap agreement with Wachovia Bank effectively securing a new interest rate
on $40 million of the outstanding debt. The new rate is based on the six month
U.S. Libor rate plus a fixed margin of 4.99% and continues until termination of
the agreement on June 30, 2010. The six month U.S. Libor rate was 1.18% at
September 30, 2003. The RSA Facility is secured by a second lien on the
Company's and its subsidiaries' North American and Latin American assets. The
Company must meet certain financial tests on a quarterly basis, and comply with
certain other covenants, including restrictions on incurrence of debt and liens,
restrictions on asset dispositions, 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 Company is in compliance with its
subordinated debt financing covenants; however, there can be no assurance that
the Company will be in compliance with such covenants in the future. If the
Company does not remain in compliance with the covenants in the Securities
Purchase Agreement and is unable to obtain a waiver of noncompliance from its
subordinated lenders, the Company's financial condition and results of
operations would be materially adversely affected.
On May 9, 2003, the Company entered into a $9.9 million mortgage
agreement with Bank of Scotland and fully re-paid the borrowings outstanding
under the previous mortgage agreement with Lombard NatWest Limited. The new
mortgage has a term of 10 years, bears interest at Bank of Scotland's rate plus
1.35%, and is payable in quarterly installments of approximately $247,500, plus
interest. The principal amount due in 2003 is $495,000 and $990,000 is due for
each of the years thereafter. The balance of the mortgage at September 30, 2003
was $9.7 million. Terms of the mortgage require the Company to meet certain
financial ratios and to comply with certain other covenants on a quarterly
basis. The Company was in compliance with its covenants at September 30, 2003;
however there can be no assurance that the Company will be in compliance with
its covenants in the future. If the Company does not remain in compliance with
the covenants and is unable to obtain a waiver of noncompliance from its bank,
the Company's financial condition and results of operations would be materially
adversely affected.
The Company has an agreement with IFN Finance BV to provide up to $7.3
million in short-term financing to the Company. The loan is secured by certain
European accounts receivable and inventories, bears interest at 5.5%, and
continues indefinitely until terminated by either party within 90 days' notice.
The balance outstanding at September 30, 2003 was $2.7 million.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company is subject to interest rate risk on its variable rate
credit facilities and could be subjected to increased interest payments if
market interest rates fluctuate. For the quarter ended September 30, 2003,
average borrowings outstanding on the variable rate credit facility with First
Union National Bank were $72.7 million and average borrowings with Bank of
America, N.A. was $64.3 million. First Union and Bank of America have interest
rates that are based on associated rates such as Eurodollar and base or prime
rates that may fluctuate over time based on changes in the economic environment.
Based on actual borrowings throughout the quarter under these borrowing
facilities, an increase of 1% in such interest rate percentages would increase
the annual interest expense by approximately $1.4 million.
19
A substantial part of the Company's revenue and capital expenditures
are transacted in U.S. Dollars, but the functional currency for foreign
subsidiaries is not the U.S. Dollar. As a result of the Company or its
subsidiaries entering into transactions denominated in currencies other than
their functional currency, the Company recognized a foreign currency gain of
$160,000 during the quarter ended September 30, 2003. The Company enters into
foreign forward exchange contracts to hedge certain balance sheet exposures
against future movements in foreign exchange rates. The gains and losses on the
forward exchange contracts are largely offset by gains or losses on the
underlying transactions and, consequently, a sudden or significant change in
foreign exchange rates should not have a material impact on future net income or
cash flows. To the extent the Company is unable to manage these risks, the
Company's results and financial position could be materially adversely affected.
In August 2003, the Company entered into an interest rate swap
agreement in order to gain access to the lower borrowing rates normally
available on floating-rate debt, while avoiding prepayment and other costs that
would be associated with refinancing long-term fixed-rate debt. The swap
purchased has a notional amount of $40 million, expiring in June 2010, with a
six-month settlement period and provides for variable interest at LIBOR plus a
set rate spread. The notional amount does not quantify risk or represent assets
or liabilities, but rather, is used in the determination of cash settlement
under the swap agreement. As a result of purchasing this swap, the Company will
be exposed to credit losses from counter-party non-performance; however, the
Company does not anticipate any such losses from this agreement, which is with a
major financial institution. The agreement will also expose the Company to
interest rate risk should LIBOR rise during the term of the agreement. This swap
agreement is accounted for under Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"). Under the provisions of SFAS 133, we initially recorded the interest rate
swap at fair value, and subsequently recorded any changes in fair value in
"other comprehensive income." Fair value is determined based on quoted market
prices, which reflect the difference between estimated future variable-rate
payments and future fixed-rate receipts.
ITEM 4: CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. After evaluating
the effectiveness of the Company's disclosure controls and
procedures pursuant to Rule 13a-15(b) of the Securities Exchange
Act of 1934 ("the Exchange Act") as of the end of the period
covered by this quarterly report, our chief executive officer and
chief financial officer with the participation of the Company's
management, have concluded that the Company's disclosure controls
and procedures are effective to ensure that information that is
required to be disclosed by the Company in reports that it files
under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the rules of the
Securities Exchange Commission.
(b) Changes in internal controls. There were no changes in our
internal control over financial reporting that occurred during the
period covered by this quarterly report that have materially
affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
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PART II - OTHER INFORMATION
ITEM 6: EXHIBITS AND REPORTS
(a) Exhibits:
See Exhibit Index on page following Signatures.
(b) Reports on Form 8-K:
1. A Form 8-K dated July 29, 2003 was filed by the
Company to announce its intention to file a shelf
registration statement and to announce financial
results for the second quarter of 2003.
2. A Form 8-K dated August 12, 2003 was filed by the
Company to announce plans to file a preliminary
prospectus supplement to its shelf registration
statement.
3. A Form 8-K dated August 21, 2003 was filed by the
Company to announce entering into an underwriting
agreement.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: November 14, 2003
BELL MICROPRODUCTS INC.
BY: /s/ JAMES E. ILLSON
-----------------------------------------
CHIEF FINANCIAL OFFICER AND EXECUTIVE VICE
PRESIDENT OF FINANCE AND OPERATIONS
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EXHIBIT INDEX
Form 10-Q
Quarter ended September 30, 2003
EXHIBIT NO. DESCRIPTION
31.1 Certification of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
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