SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(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, 1997
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
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Commission file number 0-935
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BELL NATIONAL CORPORATION
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(Exact name of registrant as specified in its charter)
California 94-1451828
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(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)
4209 Vineland Road, Suite J-1, Orlando, Florida 32811
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (407) 849-0290
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(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 [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [X] No [ ]
As of August 9, 1997, the number of shares of the registrant's common stock
outstanding is 5,934.542.
Part I - Financial Information
ITEM 1. Financial Statements.
BELL NATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
ASSETS
June 30, December 31,
1997 1996
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(Unaudited)
Cash and cash equivalents $ -- $ --
Accounts receivable, net 1,259 1,222
Inventory, net 2,669 2,740
Prepaid expenses and other current assets 106 95
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Total current assets 4,034 4,057
Property and equipment, net 130 157
Goodwill, net 653 663
Deferred sample books, net 1,068 1,242
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$ 5,885 $ 6,119
========= ========
The accompanying notes are an integral part of these consolidated financial
statements.
2
BELL NATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY
June 30, December 31,
1997 1996
------------ ------------
(Unaudited)
Current Liabilities:
Accounts payable 1,112 1,047
Current portion of long-term debt 2,220 2,225
Accrued compensation and employee benefits 533 444
Accrued expenses 486 512
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Total current liabilities 4,351 4,228
Accrued stock appreciation rights 159 268
Other liabilities 50 48
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4,560 4,544
Stockholders' equity:
Common stock, no par value; authorized
12,000,000 shares, issued and outstanding
5,934,542 shares at June 30, 1997 and
5,488,114 shares at December 31, 1996 15,849 15,815
Additional paid-in capital 10 10
Accumulated deficit (14,534) (14,250)
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Total stockholders' equity 1,325 1,575
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$ 5,885 $ 6,119
=========== =========
The accompanying notes are an integral part of these consolidated financial
statements.
3
BELL NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
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1997 1996 1997 1996
--------- --------- --------- ---------
Net sales $ 2,860 $ 3,383 $ 5,434 $ 6,550
Costs and expenses:
Cost of sales 1,649 1,978 3,008 3,661
Selling, general and administrative 1,242 1,527 2,585 3,018
--------- --------- --------- ---------
Operating income (loss) (31) (122) (159) (129)
Other expense:
Interest expense (79) (70) (133) (142)
Other 18 (17) 8 (10)
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Income (loss) before income taxes (92) (209) (284) (281)
Provision for income taxes -- -- -- (2)
--------- --------- --------- ---------
Net income (loss) $ (92) $ (209) $ (284) $ (283)
========= ========= ========= =========
Net income (loss) per common share $ (0.02) $ (0.04) $ (0.05) $ (0.05)
========= ========= ========= =========
Weighted average number of common
shares outstanding 5,561,701 5,283,114 5,525,111 5,283,114
========= ========= ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
4
BELL NATIONAL CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Dollars in Thousands)
(Unaudited)
Additional Total
Common Stock Paid-in Accumulated Stockholders'
Shares Dollars Capital Deficit Equity
--------- -------- ---------- ----------- ------------
Balance at
December 31, 1996 5,488,114 $ 15,815 $ 10 $ (14,250) $ 1,575
Exercise of SAR's 446,428 34 -- -- 34
Net income (loss) -- -- -- (284) (284)
--------- -------- ------- --------- --------
Balance at
June 30, 1997 5,934,542 $ 15,849 $ 10 $ (14,534) $ 1,325
========= ======== ======= ========= ========
The accompanying notes are an integral part of these consolidated financial
statements.
5
BELL NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Six Months Ended June 30,
-------------------------
1997 1996
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Operating activities:
Net income (loss) $ (284) $ (283)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation 27 29
Amortization of goodwill 10 10
Amortization of deferred sample books 520 607
Amortization of deferred debt commitment fee -- 8
(Increase) decrease in assets:
Accounts receivable (37) (115)
Inventory 71 1,129
Prepaid expenses and other current assets (11) 42
Increase (decrease) in liabilities:
Accounts payable 65 (248)
Accrued compensation and employee benefits 89 98
Accrued expenses (24) 71
Accrued stock appreciation rights (109) --
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Net cash provided by operating activities 317 1,348
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Investing activities:
Acquisition of property and equipment -- (2)
Purchase of deferred sample books (346) (503)
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Net cash used in investing activities (505) (505)
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Financing activities:
Net (payments) borrowings on bank debt (5) (842)
Issuance of common stock from SAR's 34 --
Principal payments on capital lease obligations -- (1)
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Net cash (used for) provided by financing activities $ 29 $ (843)
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The accompanying notes are an integral part of these consolidated financial
statements.
6
BELL NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Dollars in thousands)
(Unaudited)
Six Months Ended June 30,
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1997 1996
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Net decrease in cash and cash equivalents $ -- $ --
Cash and cash equivalents at beginning of period -- --
-------- -------
Cash and cash equivalents at end of period $ -- $ --
======== =======
Supplemental Disclosure of Cash Flow Information
Cash paid during the year for:
Interest $ 132 $ 142
Income taxes -- --
The accompanying notes are an integral part of these consolidated financial
statements.
7
BELL NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997
(Unaudited)
Note 1. The Company
General. The information contained in this report is unaudited but, in
management's opinion, all adjustments necessary for a fair presentation have
been included and were of a normal and recurring nature. The results for the
three and six months ended June 30, 1997 are not necessarily indicative of
results to be expected for the entire year. These financial statements and notes
should be read in conjunction with Bell National Corporation's (the "Company")
Annual Report on Form 10-K for the year ended December 31, 1996.
Bell National Corporation's wholly owned subsidiary Payne Fabrics, Inc.
("Payne") is a designer and distributor of decorative drapery and upholstery
fabrics. Payne was acquired by the Company on June 15, 1990. On August 5, 1997
Payne sold substantially all of its assets and most of its liabilities related
to its business to Westgate Fabrics.
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations The Company's revenues and expenses result from the
operations of Payne Fabrics, Inc.
Six Months Ended June 30, 1997 The Company had net sales of $5,434,000, cost of
goods sold of $3,008,000, selling, general and administrative expenses of
$2,585,000 and an operating loss of $159,000 during the first six months of
1997. The operating loss was increased by interest expense of $133,000, offset
by other income of $8,000 resulting in a net loss of $284,000.
Six Months Ended June 30, 1996 The Company had net sales of $6,550,000, cost of
goods sold of $3,661,000, selling, general and administrative expenses of
$3,018,000 and an operating loss of $129,000 during the first six months of
1996. The operating loss was increased by interest expense of $142,000, other
expense of $10,000 and income taxes of $2,000, resulting in a net loss of
$283,000.
Comparison Of Six Months 1997 Results to 1996 Sales for the first six months of
1997 decreased by $1,116,000 compared to the corresponding period in 1996. All
fabric and workroom categories experienced declines.
The gross profit for the first six months of 1997 was 44.6% compared to 44.1%
for the same period in 1996. Selling, general and administrative costs for the
first six months of 1997 were $433,000 lower than the same period of 1996. The
results include a $76,000 favorable adjustment for SAR's deemed exercised on
June 15, 1997.
8
Interest expense decreased by $9,000 for the first six months of 1996 due to the
slightly lower debt balance in comparison to the same period of the prior year
offset by high rates in 1997. Other expenses were $18,000 lower in the first six
months of 1997 versus 1996. Also in the first six months of 1997 provisions for
income taxes were $2,000 lower than in 1996.
The net loss of $284,000 in the first six months of 1997 compared to a net loss
of $283,000 for the same period in 1996 resulted in a loss per share of $0.05
for the first six months of 1997 and 1996.
Quarter Ended June 30, 1997 The Company had net sales of $2,860,000, cost of
goods sold of $1,649,000, selling, general and administrative expenses of
$1,242,000 and an operating loss of $31,000 during the second quarter of 1997.
The operating loss was increased by interest expense of $79,000, offset by other
income of $18,000 resulting in a net loss of $92,000.
Quarter Ended June 30, 1996 The Company had net sales of $3,383,000, cost of
goods sold of $1,978,000, selling, general and administrative expenses of
$1,527,000 and an operating loss of $122,000 during the second quarter of 1996.
The operating loss together with interest expense of $70,000 and other expense
of $17,000 resulted in a net loss of $209,000.
Comparison of Second Quarter 1997 Results to 1996 Sales for the second quarter
of 1997 decreased by $523,000 compared to the corresponding period in 1996. All
fabric and workroom categories experienced declines.
The gross profit for the second quarter of 1997 was 42.3% compared to 41.5% for
the same period in 1996. Selling, general and administrative costs for the
second quarter of 1997 were $285,000 lower than the same period of 1996. The
results include a $56,000 favorable adjustment for SAR's deemed exercised on
June 15, 1997.
Interest expense increased by $9,000 for the second quarter of 1997 due to the
high rate charged in comparison to the same period of the prior year. Other
expenses were $35,000 lower in the second quarter of 1997 versus 1996.
The net loss of $92,000 in the second quarter of 1997 compared to the net loss
of $209,000 for the same period in 1996 resulted in a loss per share of $0.02
for the second quarter of 1997 compared to a loss per share of $0.04 for the
same period of 1996.
Liquidity and Capital Resources
Available Resources In connection with the bank loan agreement, the Company
instituted a cash management system whereby the net cash generated by operations
is immediately used to reduce bank debt. The immediate reduction of outstanding
bank debt provides the Company with a greater reduction in interest expense than
could be offset with interest income from alternative investments. A review of
the financial statements, summary data, working capital and discussion of
liquidity must take into consideration the fact that the Company does not
maintain any cash balances in any of its accounts by design. Working capital
needs, when they arise, are met by daily borrowings.
9
Future Needs For and Sources of Capital
During the first half of 1997, the Company generated $317,000 of cash from
operations compared to $1,348,000 during the first half of 1996. The dramatic
reduction of $1,129,000 of inventory during the first six months of 1996 was not
repeatable in 1996. The operating cash generated in 1997 and proceeds from the
issuance of common stock under SAR agreements of $34,000 was used to purchase
$346,000 of sample books and repay bank principal of $5,000.
During the first six months of 1996, the Company generated $1,348,000 of cash
from operations compared to $481,000 during the first six months of 1995.
Greater cash was generated from operations in 1996 primarily as a result of a
significant decrease in working capital during the first six months of 1995.
Accounts receivable, inventory, prepaid expenses and other current assets
decreased in net by $1,056,000 in 1996 due to efforts in reducing inventory
levels. The decrease in current assets was slightly offset by a decrease in
current liabilities (excluding the current portion of debt and capital lease
obligations) of $79,000 in 1996. The operating cash generated in the first six
months of 1996 was used to purchase $503,000 of sample book inventory, purchase
$2,000 of equipment and to pay down bank debt by $842,000.
During 1996 and continuing in 1997, the Company and its Payne Fabrics, Inc.
("PFI") subsidiary did not meet certain of their covenants under its revolving
credit agreement (the "Credit Agreement") with Bank One, N.A. (formerly Bank
One, Dayton, National Association) (the "Bank"). In addition, the quarterly
principal installments due after September 1, 1996 had not been made although
interest payments were kept current. The Company has therefore classified all
amounts owing to the Bank as current liabilities, reflecting the Bank's right
under the Credit Agreement to demand immediate and full payment of its loans.
On May 12, 1997 the Bank formally notified PFI that it was in default under the
Credit Agreement. This notice included a demand for payment of all outstanding
amounts by May 30, 1997. Subsequently, the Company and PFI entered into a
Revolving Credit Modification Agreement (the "Credit Modification Agreement')
with the Bank, under which the: (i) maturity date of the amounts outstanding
under the Credit Agreement was extended to July 31, 1997, (ii) the interest
charged was increased to prime-plus-2.0% for revolving loans and
prime-plus-4.25% for the term loan, and (iii) the Company and PFI agreed to pay
the Bank a $30,000 fee. The Bank further agreed to forebear from accelerating
the loans under the Credit Agreement and enforcing its rights against the
collateral security therefor until the extended maturity date, which allowed the
Company the opportunity to secure the means of extinguishing the Bank debt.
ITEM 5. Other Information
The following information contains disclosures required under item 2 of
Securities and Exchange Commission ("SEC") Form 8-K Current Report ("Form 8-K"),
and is included herein in lieu of filing such information in a separate Form
8-K.
10
On July 17, 1997, the Company and PFI entered into an Asset Purchase Agreement
dated as of July 17, 1997 (as amended, the "Asset Agreement"), with Westgate
Fabrics, Inc. ("Westgate"), and on August 5, 1997 the transactions contemplated
by the Asset Agreement were consummated. Under the Asset Purchase, PFI sold
substantially all of its properties and assets (excluding cash) to Westgate, and
Westgate assumed specified liabilities of PFI. The purchase price paid by
Westgate to PFI was $3,850,000 in cash, $150,000 of which was deposited into
escrow to secure certain post-closing working capital-based purchase price
adjustments called for under the Asset Agreement. Such purchase price was
arrived at through arm's-length negotiations between the Company/PFI and
Westgate. The assets sold included PFI's name and trademark, and PFI is in the
process of changing its name to "PFI National Corporation".
Among the liabilities retained by PFI under the Asset Agreement were Credit
Agreement indebtedness, payroll compensation and commissions due through the
closing date, liabilities for taxes, the PFI pension plan and 401(k) plan and
certain lease obligations. Approximately $2.26 million of the cash received
under the Asset Agreement was applied to satisfy in full all amounts owed to the
Bank under the Credit Agreement and Credit Modification Agreement. In connection
with the closing of the Asset Agreement, PFI entered into an agreement with the
landlord of its Dayton facility whereby the relevant lease would be terminated
in 90 days (as opposed to its September 2000 termination date) in exchange for a
one-time payment of $100,000 and prepayment of the remaining three months' rent.
PFI faces substantial cash requirements to extinguish all remaining retained
liabilities, and the amount of cash it will net from the sale may not be
determined for some time.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports
(a) Exhibits
2.2 Asset Purchase Agreement, dated as of July 17, 1997, by and among
Payne Fabrics, Inc., Bell National Corporation and Westgate
Fabrics, Inc.
2.3 Amendment No. 1 to the Asset Purchase Agreement, dated as of
August 5, 1997, by and between Payne Fabrics, Inc., Bell National
Corporation and Westgate Fabrics, Inc.
2.4 Post-Closing Escrow Agreement, dated as of August 5, 1997, by and
between Westgate Fabrics, Inc., Payne Fabrics, Inc. and Crouch &
Hallett, L.L.P.
27.0 Financial Data Schedule
11
SIGNATURES
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.
BELL NATIONAL CORPORATION
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(Registrant)
Date: August 12, 1997 /s/ Alexander M. Milley
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Alexander M. Milley, Chairman of the Board
and Secretary
Date: August 12, 1997 /s/ Thomas R. Druggish
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Thomas R. Druggish, Chief Financial Officer
(Principal Financial Officer and Accounting
Officer)