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: JUNE 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
BELL MICROPRODUCTS INC.
- --------------------------------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CALIFORNIA 94-3057566
- ------------------------------------ ----------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1941 RINGWOOD AVENUE, SAN JOSE, CALIFORNIA 95131-1721
- --------------------------------------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(408) 451-9400
- --------------------------------------------------------------------------------
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
N/A
- --------------------------------------------------------------------------------
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE
LAST REPORT.)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS.
YES X NO
----- -----
INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS AN ACCELERATED FILER (AS
DEFINED IN RULE 12B-2 OF THE EXCHANGE ACT).
YES X NO
----- -----
COMMON STOCK, $.01 PAR VALUE -- NUMBER OF SHARES OUTSTANDING AT AUGUST 8,
2003: 20,442,183
1
BELL MICROPRODUCTS INC.
INDEX TO FORM 10-Q
Page
PART I - FINANCIAL INFORMATION Number
------
Item 1: Financial Statements (unaudited)
Condensed Consolidated Balance Sheets - June 30, 2003 and
December 31, 2002 3
Condensed Consolidated Statements of Income - Three months and six
months ended June 30, 2003 and 2002 4
Condensed Consolidated Statements of Cash Flows - Six months ended
June 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 14
Item 3: Quantitative and Qualitative Disclosure about Market Risk 19
Item 4: Controls and Procedures 19
PART II - OTHER INFORMATION
Item 4: Submission of Matters to a Vote of Security Holders 20
Item 6: Exhibits and Reports 20
Signatures 21
2
PART I - FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS (unaudited)
BELL MICROPRODUCTS INC.
Condensed Consolidated Balance Sheets
(in thousands, except per share data)
(unaudited)
JUNE 30, DECEMBER 31,
2003 2002
-------------------- -----------------------
ASSETS
Current assets:
Cash and cash equivalents $ 1,077 $ 12,025
Accounts receivable, net 273,788 277,305
Inventories 203,031 182,775
Prepaid expenses and other current assets 25,174 23,786
-------------------- -----------------------
Total current assets 503,070 495,891
Property and equipment, net 44,290 50,761
Goodwill 54,573 53,803
Intangibles 5,733 6,006
Deferred debt issuance costs and other assets 7,322 7,730
-------------------- -----------------------
Total assets $614,988 $614,191
==================== =======================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $217,980 $211,881
Borrowings under lines of credit 3,455 7,919
Short-term note payable and current portion
of long-term notes payable 11,952 23,458
Other accrued liabilities 39,268 45,847
-------------------- -----------------------
Total current liabilities 272,655 289,105
Borrowings under lines of credit 115,898 100,555
Long-term notes payable 80,942 75,500
Other long-term liabilities 3,021 3,182
-------------------- -----------------------
Total liabilities 472,516 468,342
-------------------- -----------------------
Commitments and contingencies
Shareholders' equity:
Common Stock, $0.01 par value, 40,000 shares
authorized; 20,393 and 20,127 issued and outstanding 117,450 115,888
Retained earnings 18,015 25,311
Accumulated other comprehensive income 7,007 4,650
-------------------- -----------------------
Total shareholders' equity 142,472 145,849
-------------------- -----------------------
Total liabilities and shareholders' equity $614,988 $614,191
==================== =======================
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)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------------- --------------------------------
2003 2002 2003 2002
--------------- --------------- ---------------- ------------
Net sales $ 502,638 $ 497,713 $ 1,035,291 $ 1,020,641
Cost of sales 463,430 457,715 958,457 933,222
--------------- --------------- ---------------- -----------
Gross profit 39,208 39,998 76,834 87,419
Operating expenses:
Selling, general and administrative expenses 37,968 42,096 77,242 84,792
Restructuring costs and special charges - 2,283 1,383 2,283
--------------- --------------- ---------------- -----------
Total operating expenses 37,968 44,379 78,625 87,075
Income (loss) from operations 1,240 (4,381) (1,791) 344
Interest expense (4,185) (4,408) (8,204) (8,471)
--------------- --------------- ---------------- -----------
Loss before income tax benefit (2,945) (8,789) (9,995) (8,127)
Income tax benefit (584) (2,716) (2,699) (2,438)
--------------- --------------- ---------------- -----------
Net loss $ (2,361) $ (6,073) $ (7,296) $ (5,689)
=============== =============== ================ ===========
Loss per share
Basic $ (0.12) $ (0.31) $ (0.36) $ (0.30)
=============== =============== ================ ===========
Diluted $ (0.12) $ (0.31) $ (0.36) $ (0.30)
=============== =============== ================ ===========
Shares used in per share calculation
Basic 20,137 19,327 20,134 18,713
=============== =============== ================ ===========
Diluted 20,137 19,327 20,134 18,713
=============== =============== ================ ===========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
BELL MICROPRODUCTS INC.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
SIX MONTHS ENDED JUNE 30,
-------------------------------
2003 2002
-------------- -------------
Cash flows from operating activities:
Net loss: $ (7,296) $ (5,689)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Depreciation and amortization 6,275 5,510
Provision for bad debts 4,251 5,830
Gain (loss) on disposal of property, equipment and other 123 (234)
Deferred income taxes (1) (753)
Changes in assets and liabilities:
Accounts receivable 6,279 11,649
Inventories (14,771) 13,732
Prepaid expenses 724 11,944
Other assets 409 272
Accounts payable 1,832 (27,171)
Other accrued liabilities (9,881) (12,626)
-------------- -------------
Net cash provided by (used in) operating activities (12,056) 2,464
-------------- -------------
Cash flows from investing activities:
Acquisition of property, equipment and other (1,731) (4,394)
Proceeds from sale of property, equipment and other 37 2,005
-------------- -------------
Net cash used in investing activities (1,694) (2,389)
-------------- -------------
Cash flows from financing activities:
Net borrowings under line of credit agreements 8,105 (13,548)
Repayment of long-term notes payable to RSA (3,500) (3,500)
Proceeds from issuance of Common Stock and warrants 976 19,428
Borrowings on notes and leases payable 9,935 9,545
Repayments of notes and leases payable (12,730) (8,188)
-------------- -------------
Net cash provided by financing activities 2,786 3,737
-------------- -------------
Effect of exchange rate changes on cash 16 2
-------------- -------------
Net increase (decrease) in cash (10,948) 3,814
Cash at beginning of period 12,025 1,308
-------------- -------------
Cash at end of period $ 1,077 $ 5,122
============== =============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 8,477 $ 10,976
Income taxes $ 423 $ 42
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 accompanying interim consolidated condensed financial statements 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; 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.
The Company recently filed with the Securities and Exchange Commission a
"shelf" registration statement for the sale of up to $35.0 million of its
securities.
We are one of the world's largest storage-centric value-added distributors
and a specialist in storage products and solutions. Our concentration on data
storage systems and products allows us to provide greater technical expertise to
our customers, form strategic relationships with key manufacturers and provide
complete storage solutions to our customers at many levels of integration. We
offer a wide range of storage products as well as semiconductors, computer
platforms and software and peripherals. Our storage products include:
o High-end computer and storage subsystems;
o Fibre Channel connectivity products;
o Complete storage systems such as storage area networks (SAN), network
attached storage (NAS) and direct attached storage (DAS);
o Storage management software;
o disk, tape and optical drives; and
o a broad selection of value-added services.
In addition, we have developed our proprietary LDI software licensing
system, which facilitates the sale and administration of software licenses. We
believe our comprehensive product and value-added service offerings have given
us a competitive advantage in both domestic and international markets.
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.
Intel 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.
6
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. The following table illustrates the effect on net
income and earnings per share if the company had applied the fair value
recognition provisions of SFAS No. 123, as amended, to options granted under the
stock option plans and rights to acquire stock granted under the company's Stock
Participation Plan, collectively called "options." For purposes of this
pro-forma disclosure, the value of the options is estimated using a
Black-Scholes option pricing model and amortized ratably to expense over the
options' vesting periods. Because the estimated value is determined as of the
date of grant, the actual value ultimately realized by the employee may be
significantly different.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- -------------------
(IN THOUSANDS, (IN THOUSANDS,
EXCEPT FOR PER EXCEPT FOR PER
SHARE AMOUNTS) SHARE AMOUNTS)
2003 2002 2003 2002
-------- -------- -------- --------
Net loss as reported $(2,361) $(6,073) $(7,296) $(5,689)
Deduct: Total stock-based employee compensation expenses
determined under fair value method for awards,
net of related tax effects 1,608 1,711 2,603 2,957
------- ------- ------- -------
Pro forma net loss $(3,969) $(7,784) $(9,899) $(8,646)
======= ======== ======= ========
Net loss per share as reported:
Basic $ (0.12) $ (0.31) $ (0.36) $(0.30)
Diluted $ (0.12) $ (0.31) $ (0.36) $(0.30)
Pro forma net loss per share:
Basic $ (0.20) $ (0.40) $ (0.49) $(0.46)
Diluted $ (0.20) $ (0.40) $ (0.49) $(0.46)
Weighted average shares used in per share calculation:
Basic and Diluted 20,137 19,327 20,134 18,713
The following weighted average assumptions were used for grants in the
second quarter ended June 30, 2003 and 2002 respectively; expected volatility of
77% and 76%, expected lives of 3.48 and risk free interest rates of 1.8% and
3.9%, 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.
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.
7
OPTION EXCHANGE
In November 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:
The Company 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 June 30, 2003
are as follows (in thousands):
AS OF JUNE 30, 2003
-----------------------------
GROSS
CARRYING ACCUMULATED
AMORTIZED INTANGIBLE ASSETS AMOUNT AMORTIZATION
- --------------------------- --------- -----------
Non-compete agreements $ 2,154 $ (1,520)
Trademark 4,079 (278)
Tradename 300 (22)
Supplier relationships 1,200 (180)
--------- -----------
Total $ 7,733 $ (2,000)
========= ===========
The estimated amortization expense of these assets over the next five
fiscal years is as follows (in thousands):
ESTIMATED AMORTIZATION EXPENSE
- ---------------------------------
July 1, 2003 to December 31, 2003 $ 397
- ---------------------------------
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 $ 3,872
--------------
TOTAL $ 5,733
==============
8
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 (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 June 30, 2003 and 2002, all outstanding options,
grants and warrants to purchase 4,670,439 and 5,801,757 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 and Term Debt:
LINES OF CREDIT
June 30, December 31,
2003 2002
---------- ------------
First Union Facility $ 56,118 $ 52,127
Bank of America Facility 59,780 48,428
Royal Bank of Scotland - -
IFN Financing BV 3,455 6,992
Other lines - 927
---------- ----------
119,353 108,474
Less: amounts included in current liabilities 3,455 7,919
---------- ----------
Amounts included in non-current liabilities $ 115,898 $ 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 reduces the credit
facility to $160 million from $175 million and extends 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 June 30, 2003, was
4.0%, and the balance outstanding at June 30, 2003 was $56.1 million.
Obligations of the Company under the revolving line of credit are collateralized
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 June
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 Pound Sterling 75 million revolving line of credit
facility, or the equivalent of $115 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
9
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 June 30, 2003 was 6.1%, and the balance outstanding at June 30, 2003 was
$59.8 million. Obligations of the Company under the revolving line of credit
are collateralized by certain assets of the Company's European subsidiaries.
The revolving line of credit requires the Company to meet certain financial
tests and to comply with certain other covenants, including restrictions on
incurrence of debt and liens, restrictions on mergers, acquisitions, asset
dispositions, capital contributions, payment of dividends, repurchases of
stock, repatriation of cash and investments. The Company was in compliance with
its bank covenants at June 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.
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 collateralized 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 June 30, 2003 was $3.5 million.
TERM LOANS
June 30, December 31,
2003 2002
-------- ------------
Note payable to RSA $82,500 $86,000
Lombard NatWest Limited Mortgage -- 9,816
Bank of Scotland Mortgage 9,935 --
------- -------
92,435 95,816
Less: amounts due in current year 11,493 20,316
------- -------
Long-term debt due after one year $80,942 $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. The RSA Facility is collateralized 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. The semi-annual principal
amount due in years 2003 through 2007 is $3.5 million, with semi-annual
principal payments of $8.5 million due from 2008 to June 2010.
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 June 30, 2003 was $9.9 million.
10
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 June 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.
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 - 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.
At June 30, 2003, outstanding liabilities related to these charges are
summarized as follows (in thousands):
CHARGES RESTRUCTURING
2003 IN PRIOR TOTAL CASH LIABILITIES AT
CHARGES YEARS CHARGES PAYMENTS JUNE 30, 2003
------- ----- ------- -------- -------------
Severance costs $1,327 $3,366 $4,693 $3,885 $ 808
Lease costs 56 2,753 2,809 1,143 1,666
Other facility closure costs -- 306 306 306 --
------ ------ ------ ------ ------
Total $1,383 $6,425 $7,808 $5,334 $2,474
====== ====== ====== ====== ======
11
Note 8 - Product Warranty Liabilities:
The company accrues for known warranty if a loss is probable and can be
reasonably estimated, and accrues for estimated incurred but unidentified issues
based on historical activity. 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. A reconciliation of the changes in
the product warranty liability during the period ended June 30, 2003 is as
follows (in thousands):
Balance at March 31, 2003 $ 713
Provision based on sales during the period ended June 30, 2003 81
Foreign currency translation 9
Warranty expenses incurred during the period ended June 30, 2003 (120)
-----
Balance at June 30, 2003 $ 683
=====
Note 9 - Commitments and Contingencies:
The company is currently a party to various claims and legal proceedings,.
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.
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 December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148 ("SFAS 148"), "Accounting for Stock-Based Compensation -
Transition and Disclosure - An Amendment of FASB Statement No. 123." SFAS 148
requires companies to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. SFAS 148 amends the disclosure requirements of SFAS 123,
"Accounting for Stock-Based Compensation" to require prominent disclosures both
in annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. The Company has included the disclosures required by SFAS 148 in Note
15 - "Common Stock, Stock Options and Warrants" in the Annual Report on Form
10-K for the year ended December 31, 2002. The Company does not intend to adopt
the accounting provisions of FAS 123 for employee compensation.
12
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 Company believes that adoption of this standard will
not have a material impact on the financial statements.
In May 2003, the FASB issued Statement of Financial Accounting Standards
No. 150 ("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.
Restatement is not permitted. We do not expect the adoption of SFAS 150 to have
a material impact upon our financial position, cash flows or results of
operations.
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 Company believes
that the adoption of this standard will have no material impact on its 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
Company believes that the adoption of this standard will have no material impact
on its financial statements.
Note 11 - Comprehensive Income:
Comprehensive income is defined as the change in equity of a business
enterprise during a period from transactions and other events and circumstances
from non-owner sources, including foreign currency translation adjustments.
Comprehensive income (loss) is as follows (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ------------------
2003 2002 2003 2002
------- ------- ------- -------
Net loss $(2,361) $(6,073) $(7,296) $(5,689)
Other comprehensive income:
Foreign currency translation
adjustments 3,176 4,216 2,357 3,195
------- ------- ------- -------
Total comprehensive income (loss) $ 815 $(1,857) $(4,939) $(2,494)
======= ======= ======= =======
13
Accumulated other comprehensive income (loss) 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 45% of total sales for the six months
ended June 30, 2003 and 2002, respectively.
(IN THOUSANDS)
SIX MONTHS ENDED JUNE 30,
-------------------------------
Geographic information
consists of the following: 2003 2002
---------- ----------
Net sales:
North America $ 477,949 $ 509,200
Latin America 82,241 104,665
Europe 475,101 406,776
---------- ----------
Total $1,035,291 $1,020,641
========== ==========
June 30, December 31,
LONG-LIVED ASSETS: 2003 2002
---------- ------------
United States $ 45,428 $ 49,934
United Kingdom 52,524 53,189
Other foreign countries 13,966 15,177
---------- ------------
Total $ 111,918 $ 118,300
========== ============
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.
14
THREE MONTHS ENDED JUNE 30, 2003 COMPARED TO THREE MONTHS ENDED JUNE 30, 2002
Net sales were $502.6 million for the quarter ended June 30, 2003, compared
to sales of $497.7 million for the quarter ended June 30, 2002, which
represented an increase of $4.9 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 June 30, 2003 was $39.2
million compared to $40.0 million for the quarter ended June 30, 2002, which
represented a decrease of $800,000, or 2%. Gross margin decreased to 7.8% in the
current quarter from 8.0% in the same period last year. The decrease was
primarily due to the slowdown in information technology spending which resulted
in intense price competition in the industry.
Selling, general and administrative expenses decreased to $38.0 million for
the quarter ended June, 30, 2003 from $42.1 million for the quarter ended June
30, 2002, a decrease of $4.1 million, or 10%. 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 second quarter of 2003 to 7.6% from
8.5% in the second quarter of 2002.
Interest expense decreased slightly to $4.2 million for the quarter ended
June 30, 2003 from $4.4 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 remained
flat at 6.8% in the second quarters of 2003 and 2002.
The effective tax benefit rate was 20% for the quarter ended June 30, 2003
compared to an effective tax benefit rate of 31% for the quarter ended June 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 quarter ended June 30, 2003 the company did not record additional
restructuring costs or special charges.
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. The Company expects that annual
cost savings from these special charges related to employee expenses and
facilities costs will be immaterial.
At June 30, 2003, outstanding liabilities related to these charges are
summarized as follows (in thousands):
CHARGES RESTRUCTURING
2003 IN PRIOR TOTAL CASH LIABILITIES AT
CHARGES YEARS CHARGES PAYMENTS JUNE 30, 2003
------- ----- ------- -------- -------------
Severance costs $1,327 $3,366 $4,693 $3,885 $ 808
Lease costs 56 2,753 2,809 1,143 1,666
Other facility closure costs -- 306 306 306 --
------ ------ ------ ------ ------
Total $1,383 $6,425 $7,808 $5,334 $2,474
====== ====== ====== ====== ======
15
SIX MONTHS ENDED JUNE 30, 2003 COMPARED TO SIX MONTHS ENDED JUNE 30, 2002
Net sales were $1,035.3 million for the six months ended June 30, 2003,
compared to sales of $1,020.6 million for the six months ended June 30, 2002,
which represented an increase of $14.7 million, or 1%. Of the total increase in
sales, $68.3 million was due to growth in unit sales to existing and new
customers in Europe and these increases were offset by a decrease of $53.6
million in sales in the Americas.
The Company's gross profit for the six months ended June 30, 2003 was
$76.8 million, including a $1.5 million inventory charge taken in the first
quarter of 2003, compared to $87.4 million for the six months ended June 30,
2002, which represented a decrease of $10.6 million, or 12%. The decrease was
primarily due to the slowdown in information technology spending which resulted
in intense price competition in the industry, and the inventory charge taken in
the first quarter of 2003, as discussed below. The overall gross margin was
7.4%, including the effect of the $1.5 million inventory charge, compared to
8.7% in the same period last year.
Selling, general and administrative expenses decrease to $77.2 million for
the six months ended June 30, 2003 from $84.8 million for the six months ended
June 30, 2002, a decrease of $7.6 million, or 9%. 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 six months of 2003 to 7.5% from
8.3% in the first six months of 2002.
Interest expense was $8.2 million in the six months ended June 30, 2003, as
compared to $8.5 million in the same period last year. This decrease was
primarily due to overall decreased borrowings during the period for worldwide
working capital purposes. Interest rates on combined borrowings were 7.0% in the
first six months of 2002 compared to 6.8% in the same period last year.
The effective tax benefit rate of 27% for the six months ended June 30,
2003 compared to an effective tax benefit rate of 30% for the six months ended
June 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 six months ended June 30, 2003, as the Company continued to
implement profit improvement and cost reduction measures, restructuring costs of
$1.4 million were recorded. These charges consisted of severance and benefits of
$1.3 million related to worldwide involuntary terminations and estimated lease
costs of $56,300 pertaining to future lease obligations for non-cancelable lease
payments for excess facilities in the U.S. The Company terminated 127 employees
worldwide, across a wide range of functions including marketing, technical
support, finance, operations and sales, and expects annual savings of
approximately $8 million. Expected savings related to vacated facilities is not
material. Future savings expected from restructuring related cost reductions
will be reflected as a decrease in 'Selling, general and administrative
expenses' on the income statement. The Company also recorded an inventory charge
of approximately $1.5 million related to significant changes to certain vendor
relationships and the discontinuance of other non-strategic product lines.
In the six months ended June 30, 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. The Company expects that annual
cost savings from these special charges related to employee expenses and
facilities costs will be immaterial.
16
At June 30, 2003, outstanding liabilities related to these charges are
summarized as follows (in thousands):
CHARGES RESTRUCTURING
2003 IN PRIOR TOTAL CASH LIABILITIES AT
CHARGES YEARS CHARGES PAYMENTS JUNE 30, 2003
------- ----- ------- -------- -------------
Severance costs $1,327 $3,366 $4,693 $3,885 $ 808
Lease costs 56 2,753 2,809 1,143 1,666
Other facility closure costs -- 306 306 306 --
------ ------ ------ ------ ------
Total $1,383 $6,425 $7,808 $5,334 $2,474
====== ====== ====== ====== ======
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.
Net cash used operating activities for the six months ended June 30, 2003,
was $12.1 million. The Company's inventories increased as of June 30, 2003 to
$203.0 million from $182.8 million as of December 31, 2002, and the Company's
accounts payable increased to $218.0 million as of June 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 decreased to $273.8 million as of June 30, 2003, from $277.3
million as of December 31, 2002, primarily as a result of decreased 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 reduces the credit
facility to $160 million from $175 million and extends 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 June 30, 2003, was
4.0%, and the balance outstanding at June 30, 2003 was $56.1 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 June 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 Pound Sterling 75 million revolving line of credit
facility, or the equivalent of $115 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
17
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
June 30, 2003 was 6.1%, and the balance outstanding at June 30, 2003 was $59.8
million. Obligations of the Company under the revolving line of credit are
secured by certain assets of the Company's European subsidiaries. The revolving
line of credit requires the Company to meet certain financial tests and to
comply with certain other covenants, including restrictions on incurrence of
debt and liens, restrictions on mergers, acquisitions, asset dispositions,
capital contributions, payment of dividends, repurchases of stock, repatriation
of cash and investments. The Company was in compliance with its bank covenants
at June 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. 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. The semi-annual principal
amount due in years 2003 through 2007 is $3.5 million, with semi-annual
principal payments of $8.5 million due from 2008 to June 2010.
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 June 30, 2003 was
$9.9 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 June 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 June 30, 2003 was $3.5 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. The Company recently filed
with the Securities and Exchange Commission a "shelf" registration statement for
the sale of up to $35.0 million of its securities. Under a shelf registration
process, we may, over time, sell any combination of the securities described in
the registration statement in one or more offerings. The Company believes that
the net proceeds received from the sale of such securities, if any, together
with its existing capital resources, will be sufficient to fund the Company's
operations for the next twelve months.
18
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 June 30, 2003, average
borrowings outstanding on the variable rate credit facility with First Union
National Bank were $68.6 million and average borrowings with Bank of America,
N.A. was $59.3 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 $1.3 million.
A substantial part of the Company's revenue and capital expenditures
are transacted in U.S. Dollars, but the functional currency for foreign
subsidiaries is not the U.S. Dollar. 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
$452,000 during the quarter ended June 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.
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.
19
PART II - OTHER INFORMATION
Item 4: Submission of Matters to a Vote of Security Holders
Registrant held its Annual Meeting of Shareholders on May 22, 2003.
At the meeting the following matters were voted upon, and the number of
votes cast for or against, as well as the number of abstentions and
broker nonvotes, as to each such matter, along with a separate
tabulation with respect to each nominee for office, is set forth below:
1. Election of directors to serve for the ensuing year and until their
successors are duly elected and qualified.
FOR AGAINST WITHHELD NONVOTES
---------- ------- ---------- --------
W. Donald Bell 17,707,698 -- 245,118 --
Gordon A. Campbell 12,806,743 -- 5,146,073 --
Glenn E. Penisten 17,712,902 -- 239,914 --
Edward L. Gelbach 17,301,449 -- 651,367 --
James Ousley 17,714,152 -- 238,664 --
Eugene B. Chaiken 17,718,037 -- 234,779 --
David M. Ernsberger 12,882,886 5,069,930
2. Approval of an amendment to the Company's Employee Stock Purchase Plan.
FOR AGAINST ABSTENTION NONVOTES
----------- --------- ---------- ---------
11,021,759 2,417,135 1,287,074 3,226,848
3. Ratification of the appointment of PricewaterhouseCoopers LLP as the
Company's independent accountants for the current fiscal year ending
December 31, 2003.
FOR AGAINST ABSTENTION NONVOTES
---------- ------- ---------- ---------
17,646,116 276,460 30,240 --
ITEM 6: EXHIBITS AND REPORTS
(a) Exhibits:
See Exhibit Index on page following Signatures.
(b) Reports on Form 8-K:
1. On April 14, 2003, a Form 8-K was filed to announce certain
profit improvement initiatives and expectations for the financial
performance of the first quarter of fiscal 2003.
2. On April 28, 2003, a Form 8-K was filed to announce the financial
results for the first quarter of 2003.
3. On June 5, 2003, a Form 8-K was filed for announcing certain
estimates regarding the Company's financial results for the three
month period ended June 30, 2003.
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: August 12, 2003
BELL MICROPRODUCTS INC.
BY: /s/ JAMES E. ILLSON
-------------------------------
CHIEF FINANCIAL OFFICER AND
EXECUTIVE VICE PRESIDENT OF
FINANCE AND OPERATIONS
21
EXHIBIT INDEX
Form 10-Q
Quarter ended June 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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