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, 2002
----------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
------------ -------------
COMMISSION FILE NUMBER 0-21528
----------------
BELL MICROPRODUCTS INC.
- -------------------------------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CALIFORNIA 94-3057566
- ------------------------------------ --------------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1941 RINGWOOD AVENUE, SAN JOSE, CALIFORNIA 95131-1721
- -------------------------------------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(408) 451-9400
- -------------------------------------------------------------------------------
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
N/A
- -------------------------------------------------------------------------------
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST
REPORT.)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS.
YES X NO
--- ---
COMMON STOCK, $.01 PAR VALUE -- NUMBER OF SHARES OUTSTANDING AT NOVEMBER 8,
2002: 19,651,273
BELL MICROPRODUCTS INC.
INDEX TO FORM 10-Q
<Table>
<Caption>
Page
Number
------
PART I - FINANCIAL INFORMATION
Item 1: Financial Statements
Condensed Consolidated Balance Sheets - September 30, 2002 and
December 31, 2001 3
Condensed Consolidated Statements of Income - Three months and nine
months ended September 30, 2002 and 2001 4
Condensed Consolidated Statements of Cash Flows - Nine months
ended September 30, 2002 and 2001 5
Notes to Condensed Consolidated Financial Statements 6
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
Item 3: Quantitative and Qualitative Disclosure about Market Risk 19
Item 4: Controls and Procedures 20
PART II - OTHER INFORMATION
Item 6: Exhibits and Reports 20
Signatures 21
</Table>
2
PART I - FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
BELL MICROPRODUCTS INC.
Condensed Consolidated Balance Sheets
(in thousands)
(unaudited)
<Table>
<Caption>
September 30, December 31,
2002 2001
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 5,527 $ 1,308
Accounts receivable, net 291,900 299,108
Inventories 168,067 195,791
Prepaid expenses and other current assets 19,211 29,234
--------- ---------
Total current assets 484,705 525,441
Property and equipment, net 49,055 50,706
Goodwill 53,852 53,307
Intangibles 6,101 6,602
Deferred debt issuance costs and other assets 8,056 7,631
--------- ---------
Total assets $ 601,769 $ 643,687
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 218,281 $ 231,715
Borrowings under lines of credit 93,655 37,266
Short-term note payable and current portion
of long-term notes payable 22,513 23,431
Other accrued liabilities 43,468 49,065
--------- ---------
Total current liabilities 377,917 341,477
Borrowings under line of credit -- 86,650
Long-term notes payable 79,000 85,052
Other long-term liabilities 4,039 4,739
--------- ---------
Total liabilities 460,956 517,918
--------- ---------
Commitments and contingencies
Shareholders' equity:
Common Stock, $0.01 par value, 40,000 shares
authorized; 19,614 and 17,578 issued and outstanding 114,030 94,553
Retained earnings 24,320 32,365
Accumulated other comprehensive income 2,463 (1,149)
--------- ---------
Total shareholders' equity 140,813 125,769
--------- ---------
Total liabilities and shareholders' equity $ 601,769 $ 643,687
========= =========
</Table>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
3
BELL MICROPRODUCTS INC.
Condensed Consolidated Statements of Income
(in thousands, except per share data)
(unaudited)
<Table>
<Caption>
Three months ended Nine months ended
September 30, September 30,
---------------------------- -----------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
Net sales $ 551,895 $ 489,089 $ 1,572,536 $ 1,480,298
Cost of sales 506,563 459,808 1,439,785 1,372,735
----------- ----------- ----------- -----------
Gross profit 45,332 29,281 132,751 107,563
Operating expenses:
Selling, general and administrative expenses 40,348 39,077 125,140 117,721
Restructuring costs and special charges 3,405 7,354 5,688 8,894
----------- ----------- ----------- -----------
Total operating expenses 43,753 46,431 130,828 126,615
Income (loss) from operations 1,579 (17,150) 1,923 (19,052)
Interest expense (4,473) (4,874) (12,944) (15,551)
----------- ----------- ----------- -----------
Loss before income tax benefit (2,894) (22,024) (11,021) (34,603)
Income tax benefit (538) (7,307) (2,976) (12,339)
----------- ----------- ----------- -----------
Net loss $ (2,356) $ (14,717) $ (8,045) $ (22,264)
=========== =========== =========== ===========
Loss per share
Basic $ (0.12) $ (0.88) $ (0.42) $ (1.37)
=========== =========== =========== ===========
Diluted $ (0.12) $ (0.88) $ (0.42) $ (1.37)
=========== =========== =========== ===========
Shares used in per share calculation
Basic 19,610 16,804 19,012 16,273
=========== =========== =========== ===========
Diluted 19,610 16,804 19,012 16,273
=========== =========== =========== ===========
</Table>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
BELL MICROPRODUCTS INC.
Condensed Consolidated Statements of Cash Flows
(Increase/(decrease) in cash, in thousands)
(unaudited)
<Table>
<Caption>
Nine months ended September 30,
-------------------------------
2002 2001
-------- --------
Cash flows from operating activities:
Net loss from operations: $ (8,045) $(22,264)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Depreciation and amortization 8,340 8,018
Provision for bad debts 8,468 8,801
Gain on disposal of property, equipment and other 169 2,355
Changes in assets and liabilities:
Accounts receivable 23,291 (4,017)
Inventories 37,901 81,754
Prepaid expenses and deferred income taxes 10,138 (15,835)
Other assets (418) 546
Accounts payable (33,346) (41,796)
Other accrued liabilities (13,147) 4,118
-------- --------
Net cash provided by operating activities 33,351 21,680
-------- --------
Cash flows from investing activities:
Acquisition of property, equipment and other (6,482) (13,453)
Proceeds from sale of property, equipment and other 2,443 95
Acquisition of new businesses -- (3,415)
-------- --------
Net cash used in investing activities (4,039) (16,773)
-------- --------
Cash flows from financing activities:
Net borrowings under line of credit agreements (35,780) 71,778
Repayment of long-term notes payable to RSA (7,000) (87,000)
Proceeds from issuance of Common Stock and warrants 19,428 2,690
Borrowings on notes and leases payable 9,545 3,358
Repayments of notes and leases payable (11,288) (1,384)
-------- --------
Net cash used in financing activities (25,095) (10,558)
-------- --------
Effect of exchange rate changes on cash 2 (93)
-------- --------
Net increase (decrease) in cash 4,219 (5,732)
Cash at beginning of period 1,308 7,465
-------- --------
Cash at end of period $ 5,527 $ 1,733
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 16,638 $ 21,625
Income taxes $ 156 $ 3,366
Supplemental non-cash financing activities:
Common Stock issued for acquisition (Note 2) $ -- $ 8,277
</Table>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 1 - Basis of Presentation:
The condensed consolidated financial statements presented in this
Quarterly Report are unaudited. It is management's opinion that all adjustments,
consisting of normal recurring items, have been included for a fair basis of
statement. This Quarterly Report on Form 10-Q should be read in conjunction with
the Company's 2001 Annual Report on Form 10-K. The operating results for the
period ended September 30, 2002 are not necessarily indicative of the results
that may be expected for the fiscal year ending December 31, 2002. Certain prior
year amounts have been reclassified to conform with current presentation.
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.
Computer products include disk, tape and optical drives and subsystems, drive
controllers, computers and board-level products. Semiconductor products include
memory, logic microprocessor, peripheral and specialty components. The Company's
Total Tec division markets computer and storage systems to end user and VAR
customers in the Eastern USA. The Company also provides a variety of value-added
services to its customers, consisting of computer storage solutions and
services, including subsystem testing, software loading, mass storage and
computer systems integration, disk drive formatting and testing, and the
packaging of component kits to customer specifications.
Note 2 - Acquisitions:
The results of operations of the acquired businesses as described below
are included in the consolidated financial statements from the dates of
acquisition.
Total Tec Systems, Inc. Acquisition
On November 13, 2001, the Company acquired all the capital stock of
Total Tec Systems Inc. ("Total Tec"), a privately held company headquartered in
Edison, New Jersey, with offices in the eastern and southern United States.
Total Tec is an enterprise computing and storage solutions provider focused on
providing comprehensive IT solutions to address key business data concerns
including availability, reliability, performance, scalability and manageability.
Total Tec was acquired for a total purchase price of approximately
$14.2 million which included cash of approximately $9 million, the issuance of
400,000 shares of the Company's Common Stock that include a certain share price
guarantee and acquisition costs. The share price guarantee provides for the
issuance of additional consideration if the market value of the Company's Common
Stock is less than $12.50 per share on the first anniversary of the closing date
of the acquisition. As a result of this guarantee, the Common Stock issued as
part of the acquisition has been valued at the $12.50 guaranteed amount. In
November, 2002, the Company expects to issue cash and/or shares of the Company's
common stock for an estimated total of $2,028,000, as a result of the share
price guarantee. 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):
<Table>
Cash $ 3,014
Accounts receivable 16,229
Inventories 7,006
Equipment and other assets 2,841
Goodwill 3,124
Other intangibles 2,500
Accounts payable (7,100)
Other accrued liabilities (3,792)
Notes payable (9,630)
--------
Total consideration $ 14,192
========
</Table>
6
Other intangibles include trade name, supplier relationships and a
non-compete agreement, with estimated useful lives for amortization of 20 years,
ten years and three years, respectively.
Touch The Progress Group BV Acquisition
On May 22, 2001, the Company acquired all the capital stock of Touch
The Progress Group BV ("TTPG"), a privately held company headquartered in the
Netherlands, with offices in Belgium, Germany and Austria. TTPG designs,
manufactures, markets and supports high performance and tailor made storage
solutions, critical to success in high availability, midrange and high-end
enterprise computing environments.
TTPG was acquired for a total purchase price of approximately $10.5
million which included cash of $2.5 million, the issuance of 560,000 shares of
the Company's Common Stock valued at $7.5 million that include a one-year share
price guarantee and acquisition costs. The Common Stock issued was valued in
accordance with EITF Issue No. 99-12, "Determination of the Measurement Date for
the Market Price of Acquirer Securities Issued in a Purchase Business
Combination," using the average of the closing prices of the Company's Common
Stock for the two days prior to the acquisition date and the closing price of
the Company's Common Stock on the date of acquisition. The share price guarantee
provides for the issuance of additional consideration if the market value of the
Company's Common Stock is less than $12.50 per share on the first anniversary of
the closing date of the acquisition. This was a below-market share price
guarantee and was accounted for in accordance with ETIF Issue No. 97-15,
"Accounting for Contingency Arrangements Based on Security Prices in a Purchase
Business Combination." In June, 2002, the Company issued an additional 74,714
shares of the Company's Common Stock as a result of the share price guarantee.
The purchase price was allocated to the acquired assets and assumed liabilities
based upon management's estimate of their fair market values as of the
acquisition date, as follows (in thousands):
<Table>
Accounts receivable 6,182
Inventories 7,397
Equipment and other assets 661
Goodwill 9,293
Accounts payable (9,915)
Other accrued liabilities (1,928)
Notes payable (998)
--------
Total consideration $ 10,692
========
</Table>
Forefront Graphics Corporation Acquisition
On May 24, 2001, the Company acquired all the capital stock of
Forefront Graphics ("FFG"), a privately held company headquartered in Toronto,
Canada with offices in Ottawa, Montreal, Calgary and Vancouver. FFG is a leading
distributor of high performance computer graphics, digital audio and video,
storage and multimedia products to both the computer reseller and the video
production reseller marketplaces.
FFG was acquired for a total purchase price of approximately $2.2
million which included cash of $1.1 million, the issuance of 60,324 shares of
the Company's Common Stock valued at $800,000 and acquisition costs. The Common
Stock issued was valued in accordance with EITF Issue No. 99-12, "Determination
of the Measurement Date for the Market Price of Acquirer Securities Issued in a
Purchase Business Combination," using the average of the closing prices of the
Company's Common Stock for the two days prior to the acquisition date and the
closing price of the Company's Common Stock on the date of acquisition. The
Company is obligated to pay up to an additional $325,000 in cash within three
years of the closing date as a contingent incentive payment to be based upon
earnings achieved during certain periods, up to March 31, 2003. The purchase
price was allocated to the acquired
7
assets and liabilities assumed, based upon management's estimate of their fair
market values as of the acquisition date, as follows (in thousands):
<Table>
Accounts receivable $ 1,069
Inventories 1,033
Equipment and other assets 42
Goodwill and other intangibles 1,526
Accounts payable (775)
Other accrued liabilities (401)
Notes payable (294)
-------
Total consideration $ 2,200
=======
</Table>
Note 3 - Change in Accounting for Goodwill and Certain Other Intangibles:
In accordance with SFAS No. 142, goodwill amortization was discontinued
as of January 1, 2002. SFAS No. 142 prescribes a two-phase process for
impairment testing of goodwill. The first phase screens for impairment; while
the second phase (if necessary), measures the impairment. The Company completed
its first phase impairment analysis during the first quarter of 2002 and found
no instances of impairment of its recorded goodwill; accordingly, the second
testing phase, absent future indicators of impairment, is not necessary during
2002. We performed an impairment analysis of our intangible assets during the
first quarter and found no instances of impairment.
In accordance with SFAS No. 142, the effect of this accounting change
is reflected prospectively. The Company has one reporting unit and supplemental
comparative disclosure as if goodwill had not been amortized in the prior year
period is as follows (in thousands, except per share amounts):
<Table>
<Caption>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
2002 2001 2002 2001
--------- --------- --------- ---------
Reported net loss $ (2,356) $ (14,717) $ (8,045) $ (22,264)
Add back: Goodwill amortization -- 482 -- 1,246
--------- --------- --------- ---------
Adjusted net loss $ (2,356) $ (14,235) $ (8,045) $ (21,018)
========= ========= ========= =========
Basic loss per share:
Reported loss per share $ (0.12) $ (0.88) $ (0.42) $ (1.37)
Goodwill amortization -- 0.03 -- 0.08
--------- --------- --------- ---------
Adjusted net loss per share $ (0.12) $ (0.85) $ (0.42) $ (1.29)
========= ========= ========= =========
Diluted loss per share:
Reported net loss per share $ (0.12) $ (0.88) $ (0.42) $ (1.37)
Goodwill amortization -- 0.03 -- 0.08
--------- --------- --------- ---------
Adjusted net loss per share $ (0.12) $ (0.85) $ (0.42) $ (1.29)
========= ========= ========= =========
</Table>
The Company has acquired certain intangible assets through acquisitions
which include non-compete agreements, a trademark, a trade name and supplier
relationships, with estimated useful lives for amortization of three years, 40
years, 20 years and ten years, respectively. The carrying values and accumulated
amortization of these assets at September 30, 2002 are as follows (in
thousands):
8
<Table>
<Caption>
As of September 30, 2002
---------------------------------
Gross Carrying Accumulated
Amortized Intangible Assets Amount Amortization
- --------------------------- -------------- ------------
Non-compete agreements $ 2,137 $(1,092)
Trademark 3,861 (204)
Trade name 300 (11)
Supplier relationships 1,200 (90)
------- -------
Total $ 7,498 $(1,397)
======= =======
</Table>
The expected amortization of these balances over the next five fiscal
years are as follows (in thousands):
<Table>
Aggregate Amortization Expense
- ------------------------------
For year ended 12/31/01 $ 330
Estimated Amortization Expense
- ------------------------------
For year ending 12/31/02 $ 790
For year ending 12/31/03 $ 755
For year ending 12/31/04 $ 575
For year ending 12/31/05 $ 248
For year ending 12/31/06 $ 238
</Table>
Note 4 - Earnings (loss) per Share:
Basic EPS is computed by dividing net income available to common
shareholders (numerator) by the weighted average number of common shares
outstanding, excluding restricted stock subject to repurchase (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. Due to net losses incurred for the periods presented,
weighted average basic and diluted shares outstanding for the respective periods
are the same.
For the three months ended September 30, 2002 and 2001, all outstanding
options, restricted stock grants and warrants to purchase 4,754,219 and
4,730,207 shares of common stock, respectively were excluded from the
computation of diluted net loss per share because they were antidilutive.
Note 5 - Lines of Credit:
On May 14, 2001, the Company entered into a syndicated Loan and
Security Agreement arranged by First Union National Bank ("First Union
Facility"), as principal agent, to provide a $175 million revolving line of
credit facility. 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 Bank of America N.A. and Congress Financial Corporation
(Western), as co-agents and other financial institutions, as lenders. Borrowings
under the line of credit bear interest at First Union National Bank'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, 2002, was 4.4%, and the balance outstanding at September 30,
2002 was $49.9 million. Obligations of the Company under the revolving line of
credit are secured by certain assets of the Company and its North and South
American subsidiaries. The revolving line of credit requires the Company to meet
certain financial tests and to comply with certain other covenants, including
restrictions on incurrence of debt and liens, restrictions on mergers,
acquisitions, asset dispositions, capital contributions, payment of dividends,
repurchases of stock and investments. The Company was in compliance with its
bank covenants at September 30, 2002; however, there can be no assurance that
the Company will be in
9
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 First Union Facility matures May 13, 2003,
and accordingly has been reclassified as a short term liability. The Company has
initiated negotiations to renew its borrowing facility with its current lenders,
and is currently exploring additional and alternative financing arrangements to
fund the Company's working capital needs. If the Company is unable to renew its
existing line of credit, or otherwise obtain financing equivalents, the
Company's financial condition and results of operations would be materially
adversely affected.
In July 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. The RSA facility is secured by a second
lien on the Company's and its subsidiaries' North American and South American
assets. The Company must meet certain financial tests on a quarterly basis, and
comply with certain other covenants, including restrictions of incurrence of
debt and liens, restrictions on asset dispositions, payment of dividends, and
repurchase of stock. The Company is also required to be in compliance with the
covenants of certain other borrowing agreements. The 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. The balance outstanding at
September 30, 2002 was $86.0 million.
On November 13, 2001, in connection with the acquisition of Total Tec,
the Company assumed a $17.5 million short-term borrowing facility with Summit
Business Capital Corporation ("SBCC"). On July 29, 2002, the borrowing capacity
on the line of credit was reduced to $10.0 million. This facility is secured by
substantially all of Total Tec's assets, bears interest at SBCC's base rate or
LIBOR plus 2.25% and matures April 30, 2003. At September 30, 2002, there were
no borrowings outstanding under the SBCC facility.
On August 3, 2000, in connection with the acquisition of Ideal, the
Company assumed a $43 million borrowing facility with Lombard NatWest Limited.
In October 2000, the facility was increased to $60 million and in January 2001,
the commercial services sector of Lombard NatWest merged into Royal Bank of
Scotland ("RBS"). This facility is secured by substantially all of Ideal's
accounts receivable, bears interest at RBS's base rate plus 1.5% and continues
indefinitely subject to termination by RBS or the Company with three months
notice. There are no financial covenant requirements. At September 30, 2002,
approximately $43.7 million was outstanding under the RBS borrowing facility. In
recent months, as agreed with RBS, the Company has explored alternative
financing arrangements with a number of European financial institutions to
provide an increased line of credit that will enable the Company to fund its
forecasted growth. On October 31, 2002, the Company signed a letter of
commitment with a U.K financing institution to provide a senior credit facility
of approximately $115 million. The Company expects to finalize the lending
agreement and repay borrowings outstanding under the RBS facility in early
December, 2002.
On October 16, 2000, the Company exercised the option to purchase land
and buildings occupied by Ideal for approximately $24.0 million. The purchase
was funded through existing cash resources of approximately $11.0 million and a
five-year mortgage with NatWest, a subsidiary of Royal Bank of Scotland of
approximately $13.0 million. There are no cross default provisions within this
agreement and the RBS facility. The mortgage has a term of five years, bears
interest at LIBOR plus 1.5% and is payable in quarterly installments of
approximately $290,000, plus interest, with a balloon payment of approximately
$7.5 million due November 2005. The Company has an interest rate swap agreement
that effectively
10
converts the variable interest payable on the mortgage to a fixed rate of 7.42%
until January 2003. In the first quarter of 2002, the Company sold a portion of
the property for $1.7 million, and recorded a net gain on the sale of
approximately $270,000. Proceeds were used to reduce the balance on the
mortgage. At September 30, 2002, the balance outstanding was $9.9 million. The
Company was in compliance with the financial ratio covenant related to this
facility at September 30, 2002. On October 17, 2002, the Company signed a
commitment letter with a U.K. financing institution to re-mortgage the property
under a new 15 year term loan facility of approximately $10 million. The Company
expects to finalize the new facility and repay borrowings outstanding under the
NatWest facility by December 31, 2002. As a result, the balance of the mortgage
continues its classification as a current liability.
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.
Note 7 - Commitments and Contingencies:
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 or results of operations.
Note 8 - Comprehensive Income:
Comprehensive income is defined as the change in equity of a business
enterprise during a period from transactions and other events and circumstances
from non-owner sources, including foreign currency translation adjustments.
Accumulated other comprehensive income (loss) presented in the accompanying
consolidated condensed balance sheets consists of cumulative foreign currency
translation adjustments.
Comprehensive income (loss) is as follows (in thousands):
<Table>
<Caption>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
2002 2001 2002 2001
-------- -------- -------- --------
Net loss $ (2,356) $(14,717) $ (8,045) $(22,264)
Other comprehensive income (loss):
Foreign currency translation
adjustments 417 636 3,612 (723)
-------- -------- -------- --------
Total comprehensive loss $ (1,939) $(14,081) $ (4,433) $(22,987)
======== ======== ======== ========
</Table>
Note 9 - Recently Issued Accounting Statements:
On July 20, 2001, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 141, ("SFAS 141"),
"Business Combinations", and Statement of Financial Accounting Standards No.
142, ("SFAS 142"), "Goodwill and Other Intangible Assets." These statements made
significant changes to the accounting for business combinations, goodwill, and
intangible assets.
SFAS 141 established new standards for accounting and reporting
requirements for business combinations and requires that the purchase method of
accounting be used for all business combinations
11
initiated after June 30, 2001. SFAS 142 established new standards for goodwill
acquired in a business combination, eliminates amortization of goodwill and
instead sets forth methods to periodically evaluate goodwill for impairment.
Intangible assets with a determinable useful life will continue to be amortized
over that period. The Company adopted the provisions of SFAS 142 on January 1,
2002. As a result, the Company has ceased amortization of $53.3 million in
goodwill.
In October 2001, the FASB issued Statement of Financial Accounting
Standards No. 144, ("SFAS No. 144"), "Accounting for the Impairment or Disposal
of Long-Lived Assets." SFAS No. 144 addresses significant issues relating to the
implementation of SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of," and develops a single
accounting method under which long-lived assets that are to be disposed of by
sale are measured at the lower of book value or fair value less cost to sell.
Additionally, SFAS No. 144 expands the scope of discontinued operations to
include all components of an entity with operations that (1) can be
distinguished from the rest of the entity and (2) will be eliminated from the
ongoing operations of the entity in a disposal transaction. The Company adopted
the provisions of SFAS No. 144 on January 1, 2002 and the adoption did not have
a material impact on its results of operations or financial position.
In April 2002, the FASB issued Statement of Financial Accounting
Standards No. 145, ("SFAS 145"), "Rescission of FAS Nos. 4, 44, and 64,
Amendment of FAS 13, and Technical Corrections." SFAS 145 rescinds FASB
Statement No. 4, "Reporting Gains and Losses from Extinguishment of Debt," and
an amendment of that Statement, FASB Statement No. 64, "Extinguishments of Debt
Made to Satisfy Sinking-Fund Requirements," as well as FASB Statement No. 44,
"Accounting for Intangible Assets of Motor Carriers." This Statement amends FASB
Statement No. 13, "Accounting for Leases," to eliminate an inconsistency between
the required accounting for sale-leaseback transactions and the required
accounting for certain lease modifications that have economic effects that are
similar to sale-leaseback transactions. This Statement also amends other
existing authoritative pronouncements to make various technical corrections,
clarify meanings, or describe their applicability under changed conditions. The
provisions of SFAS 145 will be adopted during fiscal year 2003. The Company does
not anticipate that adoption of this statement will have a material impact on
its consolidated balance sheets or consolidated statements of operations.
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 will be effective for exit or disposal
activities that are initiated after December 31, 2002. The Company does not
expect the adoption of SFAS 146 to have a material impact on its operating
results or financial position.
Note 10 - Restructuring Costs and Special Charges:
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.'
12
In the second quarter of 2002, the Company recorded special charges of
$2.3 million as part of the Company's plan to reduce costs and improve operating
efficiencies and in response to current 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
$338,000, other facility closure costs of $77,000 and severance and benefits of
$29,000 for involuntary employee terminations. The Company expects annual cost
savings from the special charges related to employee expenses and facilities
costs will be immaterial.
In the second and third quarters of 2001, the Company accrued
restructuring costs of $4.8 million. These costs consisted primarily of the
abandonment of certain inventory related computer software that had a carrying
value of $2.4 million, severance and benefits of $2.2 million related to
involuntary employee terminations and estimated lease costs of $238,000
pertaining to future lease obligations for non-cancelable lease payments for
excess facilities. The Company terminated 267 employees worldwide, predominantly
in overhead support functions. The Company expected annual employee expense
reductions of approximately $10 million, depreciation expense reduction of
$550,000, and costs reductions related to excess facilities of approximately
$800,000. To date, cost reductions have been realized as expected and have been
reflected in the income statement line item 'Selling, general and administrative
expenses.' Overall, these cost reductions have been offset by increases in
selling, general and administrative costs related to the acquisitions of Total
Tec and TTPG and other costs related to expansion of geographic sales coverage
in Europe, expansion of the Company's storage systems infrastructure and
expansion of the Company's Corporate Technology Center.
Additionally in the third quarter of 2001, the Company recorded other
special charges of $4.1 million for additional accounts receivable provisions.
Events giving rise to this provision related to the economic crisis in Argentina
and the devaluation of the peso, and a default on guaranteed debt of one of the
Company's large customers who filed for bankruptcy.
At September 30, 2002, outstanding liabilities related to these charges
are summarized as follows (in thousands):
<Table>
<Caption>
Restructuring
Liabilities
Total Cash at September 30,
Charges Payments 2002
------- -------- ----------------
Severance costs $3,367 $2,921 $ 446
Lease costs 2,842 1,152 1,690
Other facility closure costs 77 -- 77
------ ------ ------
Total $6,286 $4,073 $2,213
====== ====== ======
</Table>
Note 11 - 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 44% and 45% of total sales for the nine months
ended September 30, 2002 and 2001, respectively.
Geographic information consists of the following:
<Table>
<Caption>
(In thousands)
Nine Months Ended September 30,
--------------------------------
2002 2001
---------- ----------
Net sales:
North America $ 766,599 $ 741,436
Latin America 150,353 186,419
Europe 655,584 552,443
---------- ----------
Total $1,572,536 $1,480,298
========== ==========
</Table>
13
<Table>
<Caption>
September 30,
--------------------------------
2002 2001
---------- ----------
Long-lived assets:
United States $ 44,373 $ 46,546
United Kingdom 58,004 61,961
Other foreign countries 14,687 4,077
---------- ----------
Total $ 117,064 $ 112,584
========== ==========
</Table>
Note 12 - Derivative Financial Instruments:
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 to offset the changes in the fair value of the assets or
liabilities being hedged.
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. This forward-looking information generally relates 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 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, 2001. 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, 2002 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2001
Net sales were $551.9 million for the quarter ended September 30, 2002,
compared to sales of $489.1 million for the quarter ended September 30, 2001,
which represented an increase of $62.8 million, or 13%. Of the total increase in
sales, $60.6 million was due to growth in unit sales to existing and new
customers in Europe and North America, $14.8 million was attributable to the
expansion of the customer base related to the acquisition of Total Tec Systems,
Inc. ("Total Tec") in November 2001. These increases were offset by a decrease
in sales of $12.6 million in Latin America.
The Company's gross profit for the quarter ended September 30, 2002 was
$45.3 million compared to $29.3 million for the quarter ended September 30,
2001, which represented an increase of
14
$16.0 million, or 55%. The increase in the dollar amount of gross profit was
primarily due to the inventory charge of $9.7 million taken in the third quarter
2001, as discussed below. Excluding the prior year inventory charge, gross
profit increased to $45.3 million from $39.0 million in the quarter ended
September 30, 2001, an increase of $6.3 million, or 16%. Excluding the inventory
charge, $3.4 million of the gross profit increase was the result of increased
sales volume and $2.9 million was contributed through the acquisition of Total
Tec. Excluding the inventory charge, the overall gross margin was 8.2% compared
to 8.0% in the same period last year.
Selling, general and administrative expenses increased to $40.3 million
for the quarter ended September 30, 2002 from $39.1 million for the quarter
ended September 30, 2001, an increase of $1.2 million, or 3%. The acquisition of
Total Tec contributed additional expenses of $3.0 million during the quarter,
which was offset by expense reductions of approximately $1.8 million
attributable to restructuring and profit improvement 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 third quarter of
2002 to 7.3% from 8.0% in the third quarter of 2001.
Interest expense was $4.5 million for the quarter ended September 30,
2002 as compared to $4.9 million in the same period last year. This decrease was
primarily due to decreased interest rates on combined borrowings during the
quarter, and overall decreased borrowings during the period for worldwide
working capital purposes. Interest rates on combined borrowings were 8.2% in
the quarter ended 2002 compared to 8.5% in the same period last year.
Our effective tax benefit rate of 18.6% for the quarter ended September
30, 2002 compared to an effective tax benefit rate of 33% for the quarter ended
September 30, 2001. The lower tax benefit rate was primarily caused by losses
incurred in certain tax jurisdictions in which tax benefits have not been
recognized.
Restructuring Costs and Special Charges
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.'
In the third quarter of 2001, the Company accrued restructuring costs
of $3.3 million consisting primarily of the abandonment of certain inventory
related computer software that had a carrying value of $2.4 million and
severance and benefits of $897,000 related to worldwide involuntary
terminations. The Company terminated 46 employees across all functional areas.
The Company expected annual savings of approximately $2.2 million related to
employee terminations and annual depreciation expense reduction of $550,000. To
date, cost reductions have been realized as expected and have been reflected in
the income statement line item 'Selling, general and administrative expenses.'
Overall, these cost reductions have been offset by increases in selling, general
and administrative costs related to the acquisitions of Total Tec and TTPG and
other costs related to expansion of geographic sales coverage in Europe,
expansion of the Company's storage systems infrastructure and expansion of the
Company's Corporate Technology Center.
In the third quarter of 2001, the Company also recorded other special
charges of $4.1 million for additional accounts receivable provisions. Events
giving rise to this provision related to the economic crisis in Argentina and
the devaluation of the peso, and a default on guaranteed debt of one of the
Company's large customers who filed for bankruptcy.
15
The Company also recorded a provision for inventory of $9.7 million
related to additional excess inventory for the quarter ended September 30, 2001.
The additional provision largely resulted from the decision to discontinue
certain product lines and the impact of current market conditions. The excess
inventory charge is included within the Statement of Income under the caption
'Cost of Sales.'
NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2001
Net sales were $1,572.5 million for the nine months ended September 30,
2002, compared to sales of $1,480.3 million for the nine months ended September
30, 2001, which represented an increase of $92.2 million, or 6%. Of the total
increase in sales, $65.6 million was attributable to the increase in the
customer base related to the acquisitions of Touch The Progress Group BV
("TTPG") and Total Tec, $84.8 million was due to growth in unit sales to
existing and new customers in Europe and these increases were offset by a
decrease of $58.2 million in sales in the Americas.
The Company's gross profit for the nine months ended September 30, 2002
was $132.8 million compared to $107.6 million for the nine months ended
September 30, 2001, which represented an increase of $25.2 million, or 23%. The
increase in the dollar amount of gross profit was primarily due to the inventory
charge of $17.8 million taken in the second and third quarters of 2001, as
discussed below. Excluding the prior year inventory charge, gross profit
increased to $132.8 million compared to $125.4 million for the nine months ended
September 30, 2001, an increase of $7.4 million, or 6%. Excluding the inventory
charge, gross profit increased $10.0 million through the acquisitions of TTPG
and Total Tec and $1.3 million through sales volume growth in Europe. These
increases were offset by a decrease of $3.9 million in the Americas. Excluding
the inventory charge, the overall gross margin was consistent at 8.4% compared
to 8.5% in the same period last year.
Selling, general and administrative expenses increased to $125.1
million for the nine months ended September 30, 2002 from $117.7 million for the
nine months ended September 30, 2001, an increase of $7.4 million, or 6%. As a
percentage of sales, selling, general and administrative expenses remained at 8%
in the first nine months of 2002 and 2001. Increased expenses of $15.5 million
attributable to the acquisitions of TTPG and Total Tec were offset by a decrease
of $8.1 million as a result of the Company's cost reduction efforts.
Interest expense was $12.9 million in the nine months ended September
30, 2002, as compared to $15.6 million in the same period last year. This
decrease was primarily due to decreased interest rates on combined borrowings
during the first nine months of 2002, and overall decreased borrowings during
the period for worldwide working capital purposes. Interest rates on combined
borrowings were 7.9% in the first nine months of 2002 compared to 8.6% in the
same period last year.
Our effective tax benefit rate of 27% for the nine months ended
September 30, 2002 compared to an effective tax benefit rate of 33% for the nine
months ended September 30, 2001. The lower tax benefit rate was primarily caused
by losses incurred in certain tax jurisdictions in which tax benefits have not
been recognized.
Restructuring Costs and Special Charges
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.'
16
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 current 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
$338,000, other facility closure costs of $77,000 and severance and benefits of
$29,000 for involuntary employee terminations. The Company expects annual cost
savings from the special charges related to employee expenses and facilities
costs will be immaterial.
In the second and third quarters of 2001, the Company accrued
restructuring costs of $4.8 million. These costs consisted primarily of the
abandonment of certain inventory related computer software that had a carrying
value of $2.4 million, severance and benefits of $2.2 million related to
involuntary employee terminations and estimated lease costs of $238,000
pertaining to future lease obligations for non-cancelable lease payments for
excess facilities. The Company terminated 267 employees worldwide, predominantly
in overhead support functions. The Company expected annual employee expense
reductions of approximately $10 million, depreciation expense reduction of
$550,000, and costs reductions related to excess facilities of approximately
$800,000. To date, cost reductions have been realized as expected and have been
reflected in the income statement line item 'Selling, general and administrative
expenses.' Overall, these cost reductions have been offset by increases in
selling, general and administrative costs related to the acquisitions of Total
Tec and TTPG and other costs related to expansion of geographic sales coverage
in Europe, expansion of the Company's storage systems infrastructure and
expansion of the Company's Corporate Technology Center.
Additionally in the third quarter of 2001, the Company recorded other
special charges of $4.1 million for additional accounts receivable provisions.
Events giving rise to this provision related to the economic crisis in Argentina
and the devaluation of the peso, and a default on guaranteed debt of one of the
Company's large customers who filed for bankruptcy.
In the second and third quarters of 2001, the Company also recorded a
provision for inventory of $17.8 million related to additional excess inventory.
The additional provision largely resulted from the decision to discontinue
certain product lines and the impact of current market conditions. The excess
inventory charge is included within the Statement of Income under the caption
'Cost of Sales.'
At September 30, 2002, outstanding liabilities related to these charges
are summarized as follows (in thousands):
<Table>
<Caption>
Restructuring
Liabilities
Total Cash at September 30,
Charges Payments 2002
------- -------- ----------------
Severance costs $3,367 $2,921 $ 446
Lease costs 2,842 1,152 1,690
Other facility closure costs 77 -- 77
------ ------ ------
Total $6,286 $4,073 $2,213
====== ====== ======
</Table>
Payment of the remaining restructuring liability will be made through
2003.
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.
17
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.
Net cash provided by operating activities for the nine months ended
September 30, 2002, was $33.4 million. The Company's inventories decreased as of
September 30, 2002 to $168.1 million from $195.8 million as of December 31,
2001, and the Company's accounts payable decreased to $218.3 million as of
September 30, 2002 from $231.7 million as of December 31, 2001. The decreases in
inventories and accounts payable are primarily a result of reduced inventory
purchases and focus on working capital management.
On May 14, 2001, the Company entered into a syndicated Loan and
Security Agreement arranged by First Union National Bank ("First Union
Facility"), as principal agent, to provide a $175 million revolving line of
credit facility. 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 Bank of America N.A. and Congress Financial Corporation
(Western), as co-agents and other financial institutions, as lenders. Borrowings
under the line of credit bear interest at First Union National Bank'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, 2002, was 4.4%, and the balance outstanding at September 30,
2002 was $49.9 million. Obligations of the Company under the revolving line of
credit are secured by certain assets of the Company and its North and South
American subsidiaries. The revolving line of credit requires the Company to meet
certain financial tests and to comply with certain other covenants, including
restrictions on incurrence of debt and liens, restrictions on mergers,
acquisitions, asset dispositions, capital contributions, payment of dividends,
repurchases of stock and investments. The Company was in compliance with its
bank covenants at September 30, 2002; 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. The
First Union Facility matures May 13, 2003, and accordingly has been reclassified
as a short term liability. The Company has initiated negotiations to renew its
borrowing facility with its current lenders, and is currently exploring
additional and alternative financing arrangements to fund the Company's working
capital needs. If the Company is unable to renew its existing line of credit, or
otherwise obtain financing equivalents, the Company's financial condition and
results of operations would be materially adversely affected.
In July 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. The RSA facility is secured by a second
lien on the Company's and its subsidiaries' North American and South American
assets. The Company must meet certain financial tests on a quarterly basis, and
comply with certain other covenants, including restrictions of incurrence of
debt and liens, restrictions on asset dispositions, payment of dividends, and
repurchase of stock. The Company is also required to be in compliance with the
covenants of certain other borrowing agreements. The 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. The balance outstanding at
September 30, 2002 was $86.0 million.
18
On November 13, 2001, in connection with the acquisition of Total Tec,
the Company assumed a $17.5 million short-term borrowing facility with Summit
Business Capital Corporation ("SBCC"). On July 29, 2002, the borrowing capacity
on the line of credit was reduced to $10.0 million. This facility is secured by
substantially all of Total Tec's assets, bears interest at SBCC's base rate or
LIBOR plus 2.25% and matures April 30, 2003. At September 30, 2002, there were
no borrowings outstanding under the SBCC facility.
On August 3, 2000, in connection with the acquisition of Ideal, the
Company assumed a $43 million borrowing facility with Lombard NatWest Limited.
In October 2000, the facility was increased to $60 million and in January 2001,
the commercial services sector of Lombard NatWest merged into Royal Bank of
Scotland ("RBS"). This facility is secured by substantially all of Ideal's
accounts receivable, bears interest at RBS's base rate plus 1.5% and continues
indefinitely subject to termination by RBS or the Company with three months
notice. There are no financial covenant requirements. At September 30, 2002,
approximately $43.7 million was outstanding under the RBS borrowing facility. In
recent months, as agreed with RBS, the Company has explored alternative
financing arrangements with a number of European financial institutions to
provide an increased line of credit that will enable the Company to fund its
forecasted growth. On October 31, 2002, the Company signed a letter of
commitment with a U.K financing institution to provide a senior credit facility
of approximately $115 million. The Company expects to finalize the lending
agreement and repay borrowings outstanding under the RBS facility in early
December, 2002.
On October 16, 2000, the Company exercised the option to purchase land
and buildings occupied by Ideal for approximately $24.0 million. The purchase
was funded through existing cash resources of approximately $11.0 million and a
five-year mortgage with NatWest, a subsidiary of Royal Bank of Scotland of
approximately $13.0 million. There are no cross default provisions within this
agreement and the RBS facility. The mortgage has a term of five years, bears
interest at LIBOR plus 1.5% and is payable in quarterly installments of
approximately $290,000, plus interest, with a balloon payment of approximately
$7.5 million due November 2005. The Company has an interest rate swap agreement
that effectively converts the variable interest payable on the mortgage to a
fixed rate of 7.42% until January 2003. In the first quarter of 2002, the
Company sold a portion of the property for $1.7 million, and recorded a net gain
on the sale of approximately $270,000. Proceeds were used to reduce the balance
on the mortgage. At September 30, 2002, the balance outstanding was $9.9
million. The Company was in compliance with the financial ratio covenant related
to this facility at September 30, 2002. On October 17, 2002, the Company signed
a commitment letter with a U.K. financing institution to re-mortgage the
property under a new 15 year term loan facility of approximately $10 million.
The Company expects to finalize the new facility and repay borrowings
outstanding under the NatWest facility by December 31, 2002. As a result, the
balance of the mortgage continues its classification as a current liability.
The Company's future cash requirements will depend on numerous factors,
including potential acquisitions and the rate of growth of its sales. The
Company believes its short term borrowing facilities will be renewed, or that
alternate financing will be available to provide sufficient working capital to
conduct its current operations for the next 12 months.
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. Average borrowings outstanding on the variable
rate credit facilities with First Union National Bank were $68 million for the
quarter ended September 30, 2002 and average borrowings under Ideal's borrowing
facility with Royal Bank of Scotland were $37 million for the quarter ended
September 30, 2002. The First Union facility and the Royal Bank of Scotland
facility 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 the First Union facility and
19
Royal Bank of Scotland facility, an increase of 1% in such interest rate
percentages would increase the annual interest expense by approximately $1.1
million.
The Company purchases forward exchange contracts to hedge certain
existing and anticipated foreign currency denominated transactions expected to
occur during the year. Gains and losses on these contracts are recognized in
income when the related transactions being hedged are recognized. Because the
effect of movements in currency exchange rates on forward exchange and currency
option contracts generally offsets the related effect on the underlying items
being hedged, these financial instruments are not expected to subject the
Company to risks that would otherwise result from changes in currency exchange
rates. For the nine months ended September 30, 2002, the Company has recorded
net foreign currency losses of $363,000.
ITEM 4: CONTROLS AND PROCEDURES
Within the 90-day period prior to the filing of this report, an
evaluation was carried out under the supervision and with the participation of
the Company's management, including the Chief Executive Officer ("CEO") and
Chief Financial Officer ("CFO"), of the effectiveness of our disclosure controls
and procedures. Based on that evaluation, the CEO and CFO have concluded that
the Company's disclosure controls and procedures are effective to ensure that
information required to be disclosed by the Company in reports that it files or
submits under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in Securities and
Exchange Commission rules and forms. Subsequent to the date of their evaluation,
there were no significant changes in the Company's internal controls or in other
factors that could significantly affect the disclosure controls, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
PART II - OTHER INFORMATION
Item 6: Exhibits and Reports
(a) Exhibits:
See Exhibit Index on page following Certifications Pursuant to
Section 302 of Sarbanes-Oxley Act of 2002.
Reports on Form 8-K:
On August 13, 2002 and August 14, 2002, the Company filed
Reports on Form 8-K reporting under Item 9 the submission to the
Securities and Exchange Commission of certifications under the
Sarbanes-Oxley Act of 2002.
20
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: November 14, 2002
BELL MICROPRODUCTS INC.
BY: JAMES ILLSON
----------------------------------------------
EXECUTIVE VICE PRESIDENT OF FINANCE
AND OPERATIONS AND CFO
(PRINCIPAL FINANCIAL OFFICER)
21
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, W. Donald Bell, Chief Executive Officer of Bell Microproducts, Inc.,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of Bell
Microproducts, Inc.
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function);
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
Dated: November 14, 2002 Signature: /s/ W. DONALD BELL
------------------------------------
W. Donald Bell
Chief Executive Officer
22
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, James Illson, Chief Financial Officer of Bell Microproducts, Inc.,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of Bell
Microproducts, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function);
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Dated: November 14, 2002 Signature: /s/ JAMES ILLSON
-----------------------------
James Illson
Chief Financial Officer
23
EXHIBIT INDEX
BELL MICROPRODUCTS, INC.
FORM 10-Q FOR QUARTER ENDED SEPTEMBER 30, 2002
<Table>
<Caption>
Exhibit No. Description
- ----------- -----------
10.1 Amendment to Employment Agreement, dated July 1, 2002, between the
Registrant and W. Donald Bell
10.2 Executive Employment and Non-Compete Agreement, dated August 13,
2002, between the Registrant and James Illson
10.3 Management Retention Agreements, dated August 6, 2002, between the
Registrant and the following executive officers of the Registrant:
W. Donald Bell, Ian French, Nick Ganio, Richard J. Jacquet, Philip
M. Roussey and Robert J. Sturgeon
99.1 Certification of CEO Pursuant to Section 906 of Sarbanes-Oxley Act
of 2002
99.2 Certification of CFO Pursuant to Section 906 of Sarbanes-Oxley Act
of 2002
</Table>
24