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No. pages 16
Index exhibit pg. 17
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, 2001
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 AUGUST 9, 2001:
16,761,109
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BELL MICROPRODUCTS INC.
INDEX TO FORM 10-Q
Page
PART I - FINANCIAL INFORMATION Number
- --------------------------------- ------
Item 1: Financial Statements
Condensed Consolidated Balance Sheets - June
30, 2001 and December 31, 2000 3
Condensed Consolidated Statements of Income -
Three months and six months ended June 30, 4
2001 and 2000
Condensed Consolidated Statements of Cash
Flows - Six months ended June 30, 2001 and 5
2000
Notes to Condensed Consolidated Financial 6
Statements
Item 2: Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
Item 3: Quantitative and Qualitative Disclosure about
Market Risk 14
PART II - OTHER INFORMATION
Item 2: Changes in Securities and Use of Proceeds 15
Item 4: Submission of Matters to a Vote of
Security Holders 15
Item 6: Exhibits and Reports 15
Signatures 16
Exhibit Index 17
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Part I - FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
Bell Microproducts Inc.
Condensed Consolidated Balance Sheets
(in thousands)
June 30,
2001 December 31,
(unaudited) 2000
--------- ---------
ASSETS
Current assets:
Cash $ 1,808 $ 7,465
Accounts receivable, net 268,012 295,572
Inventories, net 206,938 246,671
Prepaid expenses and other current assets 19,708 11,906
--------- ---------
Total current assets 496,466 561,614
Property and equipment, net 48,443 44,436
Goodwill and other intangibles, net 56,040 46,439
Deferred debt issuance costs and other assets 8,306 8,718
--------- ---------
Total assets $ 609,255 $ 661,207
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 183,094 $ 231,132
Borrowings under lines of credit 46,807 52,633
Short-term note payable and current
portion of long-term notes payable 11,711 90,500
Other accrued liabilities 44,546 50,539
--------- ---------
Total current liabilities 286,158 424,804
Borrowings under line of credit 87,185 249
Long-term notes payable to RSA and
mortgage payable 99,465 101,640
Other long-term liabilities 5,450 4,982
--------- ---------
Total liabilities 478,258 531,675
--------- ---------
Commitments and contingencies Shareholders' equity:
Common Stock, $0.01 par value, 40,000
shares authorized; 16,760 and 15,793
issued and outstanding 85,525 75,154
Retained earnings 46,925 54,472
Accumulated other comprehensive income (1,453) (94)
--------- ---------
Total shareholders' equity 130,997 129,532
========= =========
Total liabilities and shareholders'
equity $ 609,255 $ 661,207
========= =========
The accompanying notes are an
integral part of these condensed consolidated financial statements.
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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,
2001 2000 2001 2000
--------- --------- --------- ---------
Net sales $ 455,686 $ 382,407 $ 991,209 $ 748,677
Cost of sales 422,826 347,258 912,927 684,270
--------- --------- --------- ---------
Gross profit 32,860 35,149 78,282 64,407
Operating expenses:
Selling, general and administrative
expenses 39,018 25,472 78,644 46,827
Restructuring costs 1,540 -- 1,540 --
--------- --------- --------- ---------
Total operating expenses 40,558 25,472 80,184 46,827
Income/(loss) from operations (7,698) 9,677 (1,902) 17,580
Interest expense (5,098) (2,826) (10,677) (5,195)
--------- --------- --------- ---------
Income/(loss) before income taxes (12,796) 6,851 (12,579) 12,385
Income tax (benefit)/provision (5,123) 2,877 (5,032) 5,201
--------- --------- --------- ---------
Net income/(loss) $ (7,673) $ 3,974 $ (7,547) $ 7,184
========= ========= ========= =========
Earnings/(loss) per share
Basic $ (0.47) $ 0.28 $ (0.47) $ 0.51
========= ========= ========= =========
Diluted $ (0.47) $ 0.25 $ (0.47) $ 0.47
========= ========= ========= =========
Shares used in per share calculation
Basic 16,173 14,267 16,008 14,115
========= ========= ========= =========
Diluted 16,173 15,752 16,008 15,366
========= ========= ========= =========
The accompanying notes are an
integral part of these condensed consolidated financial statements.
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BELL MICROPRODUCTS INC.
Condensed Consolidated Statements of Cash Flows
(Increase/(decrease) in cash, in thousands)
(unaudited)
Six months ended June 30,
-------------------------
2001 2000
---- ----
Cash flows from operating activities:
Income/(loss) from operations: $ (7,547) $ 7,184
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization 5,360 1,690
Provision for bad debts 5,827 3,893
Changes in assets and liabilities:
Accounts receivable 27,869 (45,066)
Inventories 47,856 5,493
Prepaid expenses and deferred income taxes (7,794) (1,040)
Other assets 412 4
Accounts payable (57,078) (1,061)
Other accrued liabilities (6,989) (2,236)
-------- --------
Net cash provided by/(used in) operating
activities 7,916 (31,139)
-------- --------
Cash flows from investing activities:
Acquisition of property, equipment and other, net (9,372) (5,042)
Acquisition of new businesses (3,313) (4,679)
-------- --------
Net cash used in investing activities (12,685) (9,721)
-------- --------
Cash flows from financing activities:
Net borrowings under line of credit agreements 78,533 32,899
Repayment of long-term notes payable to RSA (83,500) --
Proceeds from issuance of Common Stock 2,094 1,876
Net borrowings on other long term liabilities 1,971 2,067
-------- --------
Net cash (used in)/provided by financing
activities (902) 36,842
-------- --------
Effect of exchange rate changes on cash 14 (389)
Net decrease in cash (5,657) (4,407)
Cash at beginning of period 7,465 5,103
-------- --------
Cash at end of period $ 1,808 $ 696
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 12,217 $ 6,197
Income taxes $ 3,362 $ 4,701
Supplemental non-cash financing activities:
Common Stock issued for acquisition (Note 2) $ 8,277 $ 2,508
The accompanying notes are an
integral part of these condensed consolidated financial statements.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 1 - Basis of Presentation:
The consolidated financial statements included herein have been prepared
by the Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission for reporting on Form 10-Q. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. In addition,
certain reclassifications have been made to the prior year financial statements
to conform to the current year's presentation. This Quarterly Report on Form
10-Q should be read in conjunction with the Company's 2000 Annual Report on Form
10-K. The operating results for the period ended June 30, 2001 are not
necessarily indicative of the results that may be expected for the fiscal year
ending December 31, 2001.
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
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:
All acquisitions below have been accounted for using the purchase method.
Accordingly, the results of operations of the acquired businesses are included
in the consolidated financial statements from the dates of acquisition.
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 that include a certain share price guarantee and
acquisition costs. Management is currently finalizing the valuation of assets
acquired and liabilities assumed. Accordingly, the final allocations could be
different from the amounts reflected below. The preliminary allocation of the
purchase price to acquired assets and assumed liabilities based on management
estimates are as follows (in thousands):
Cash $ 981
Accounts receivable 5,285
Inventories 7,398
Equipment and other assets 632
Goodwill 9,063
Accounts payable (8,606)
Other accrued liabilities (3,206)
Notes payable (998)
========
Total consideration $ 10,549
========
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Results of operations of TTPG were not material to the Company.
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. Forefront 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 $2.0 million
which included cash of $1.1 million, the issuance of 60,324 shares of the
Company's Common Stock and acquisition costs. 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
assets and liabilities assumed, based upon management's estimate of their fair
market values as of the acquisition date, as follows (in thousands):
Accounts receivable $ 1,069
Inventories 1,033
Equipment and other assets 42
Goodwill and other intangibles 1,348
Accounts payable (775)
Other accrued liabilities (401)
Notes payable (294)
-------
Total consideration $ 2,022
=======
Results of operations of FFG were not material to the Company.
Note 3 - 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.
On July 31, 2000 the Company declared a 3-for-2 split of its Common Stock.
The stock split was in the form of a 50% Common Stock dividend payable at the
close of business on August 31, 2000 to shareholders of record on August 11,
2000. Accordingly, the Basic and Diluted weighted average common shares
outstanding has been adjusted for all prior periods.
Following is a reconciliation of the numerators and denominators of the
Basic and Diluted EPS computations for the periods presented below (in
thousands):
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ---------------------
2001 2000 2001 2000
---- ---- ---- ----
Net income/(loss) $ (7,673) $ 3,974 $ (7,547) $ 7,184
======== ======== ======== ========
Weighted average common shares
outstanding (Basic) 16,173 14,267 16,008 14,115
Effect of dilutive options -- 1,485 -- 1,251
-------- -------- -------- --------
Weighted average common shares
outstanding (Diluted) 16,173 15,752 16,008 15,366
======== ======== ======== ========
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For the three months ended June 30, 2001, all outstanding options to
purchase 4,781,608 shares of common stock were excluded from the computation of
diluted net loss per share because they were antidilutive. For the three months
ended June 30, 2000, options to purchase 55,500 shares of common stock were not
included in the computation of diluted shares because the options' exercise
prices were greater than the average market price of the common shares.
Note 4 - Restructuring Charges and Other Provisions:
In the second quarter of 2001, the Company implemented a plan to reduce
costs and improve operating efficiencies by discontinuing certain non-strategic
product lines.
The Company accrued a restructuring charge of $1.5 million. The
restructuring charge consisted primarily of severance and benefits of $1.3
million related to involuntary employee terminations and estimated lease costs
of $238,000 pertaining to future obligations for non-cancelable lease payments
for excess facilities.
The Company also recorded a provision for inventory of $8.2 million
related to additional excess inventory and a $300,000 provision included in
selling, general and administrative expenses. The additional provisions largely
resulted from the decision to discontinue certain product lines and the impact
of current market conditions.
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 credit facility with
California Bank & Trust, scheduled to mature May 31, 2001, and the $80 million
short-term loan with the RSA, scheduled to mature 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 three month
period ended June 30, 2001, was 7%, and the balance outstanding at June 30, 2001
was $87 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 June 30, 2001; however, there can be no assurance that the
Company will be in compliance with its bank 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 August 3, 2000, in connection with the acquisition of Ideal, the
Company assumed a $43 million borrowing facility with Lombard NatWest Limited
which is secured by substantially all of Ideal's accounts receivable and bears
interest at NatWest's base rate plus 1.5%. This facility was increased to $60
million in October 2000, and as of June 2001 the NatWest borrowing arrangement
will continue indefinitely until terminated by either party. There are no
financial covenant requirements. At June 30, 2001, approximately $36 million was
outstanding under the NatWest borrowing facility.
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Note 6 - 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 7 - 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,
----------------------- -----------------------
2001 2000 2001 2000
---- ---- ---- ----
Net income/(loss) $(7,673) $ 3,974 $(7,547) $ 7,184
Other comprehensive
income/(loss):
Foreign currency
translation adjustments (7) (383) (1,359) (408)
------- ------- ------- -------
Total comprehensive
income/(loss) $(7,680) $ 3,591 $(8,906) $ 6,776
======= ======= ======= =======
Accumulated other comprehensive income/(loss) presented in the
accompanying consolidated condensed balance sheets consists of cumulative
foreign currency translation adjustments.
Note 8 - Recently Issued Accounting Statements:
In July 2001, the Financial Accounting Standards Board (FASB) issued FASB
Statements Nos. 141 and 142 ("FAS 141" and "FAS 142"), "Business Combinations"
and "Goodwill and Other Intangible Assets." FAS 141 replaces APB 16 and
eliminates pooling-of-interests accounting prospectively. It also provides
guidance on purchase accounting related to the recognition of intangible assets
and accounting for negative goodwill. FAS 142 changes the accounting for
goodwill from an amortization method to an impairment-only approach. Under FAS
142, goodwill will be tested annually and whenever events or circumstances occur
indicating that goodwill might be impaired. FAS 141 and FAS 142 are effective
for all business combinations completed after June 30, 2001. Upon adoption of
FAS 142, amortization of goodwill recorded for business combinations consummated
prior to July 1, 2001 will cease, and intangible assets acquired prior to July
1, 2001 that do not meet the criteria for recognition under FAS 141 will be
reclassified to goodwill. Companies are required to adopt FAS 142 for fiscal
years beginning after December 15, 2001 and the Company will adopt FAS 142 on
January 1, 2002. In connection with the adoption of FAS 142, the Company will be
required to perform a transitional goodwill impairment assessment. During the
quarter ended June 30, 2001, amortization of goodwill and intangibles totaled
$747,000.
Note 9 - 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 45% and 76% of total sales for the six months
ended June 30, 2001 and 2000, respectively.
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(In thousands)
Six Months Ended June 30,
-------------------------
Geographic information consists of the following: 2001 2000
-------- --------
Net sales:
North America $499,935 $616,652
Latin America 130,684 129,784
Europe 360,590 2,241
-------- --------
Total $991,209 $748,677
======== ========
June 30,
------------------------
Long-lived assets: 2001 2000
-------- --------
United States $ 49,615 $ 35,179
United Kingdom 59,162 --
Other foreign countries 4,012 2,513
-------- --------
Total $112,789 $ 37,692
======== ========
Note 10 - Derivative Financial Instruments:
Effective January 1, 2001, the Company adopted Statement of Financial
Accounting Standards No. 133 (SFAS 133), "Accounting for Derivative Instruments
and Hedging Activities," as amended by SFAS 137 and SFAS 138. SFAS 133
establishes new standards of accounting and reporting for derivative instruments
and hedging activities, and requires that all derivatives, including foreign
currency exchange contracts, be recognized on the balance sheet at fair value.
Changes in the fair value of derivatives that do not qualify for hedge
treatment, as well as the ineffective portion of any hedges, must be recognized
currently in earnings. All of the Company's derivative financial instruments are
recorded at their fair value in other current assets or accounts payable and
accrued expenses. The transition adjustment upon adoption of SFAS 133 was not
material.
The Company generates a substantial portion of its revenues in
international markets, which subjects its operations and cash flows to the
exposure of currency exchange fluctuations. The Company seeks to minimize the
risk associated with currency exchange fluctuations by entering into forward
exchange contracts to hedge certain foreign currency denominated assets or
liabilities. These derivatives do not qualify for SFAS 133 hedge accounting
treatment. Accordingly, changes in the fair value of these hedges are recorded
immediately in earnings 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
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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, 2000. 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 JUNE 30, 2001 COMPARED TO THREE MONTHS ENDED JUNE 30, 2000
Sales were $455.7 million for the quarter ended June 30, 2001, compared to
sales of $382.4 million for the quarter ended June 30, 2000, which represented
an increase of $73.3 million, or 19%. The increase in sales was primarily
attributable to the expansion of the customer base related to the acquisitions
of Touch The Progress Group BV ("TTPG") in May 2001, Ideal Hardware Limited
("Ideal") in August 2000, and Rorke Data, Inc. ("RDI"), acquired in May 2000,
offset by a decrease in sales in the Americas.
The Company's gross profit for the quarter ended June 30, 2001 was $32.9
million compared to $35.1 million for the quarter ended June 30, 2000, which
represented a decrease of $2.2 million, or 6%. The decrease in the dollar amount
of gross profit was primarily the result of an inventory charge of $8.2 million
related to the Company's decision to reposition its product offerings and
discontinue certain non-strategic product lines, as discussed below. Excluding
the non-recurring inventory charge, gross profit increased to $41.1 million
compared to $35.1 million for the quarter ended June 30, 2000, an increase of
$6.0 million, or 17%. Excluding the non-recurring inventory charge, the overall
gross margin was 9.0% compared to 9.2% in the same period last year. The
decrease in gross margin percentage was primarily due to lower gross margin
percentages for Ideal.
Selling, general and administrative expenses increased to $39.0 million
for the quarter ended June 30, 2001 from $25.5 million for the quarter ended
June 30, 2000, an increase of $13.5 million, or 53%. As a percentage of sales,
selling, general and administrative expenses increased in the first quarter of
2001 to 8.6% from 6.6% in the first quarter of 2000. The increase in expenses
was primarily attributable to the acquisitions of Ideal and RDI, investments in
strategic programs and increases to bad debt expense due to increased sales
volumes and changing market conditions.
Interest expense was $5.1 million for the quarter ended June 30, 2001 as
compared to $2.8 million in the same period last year. This increase was
primarily due to increased overall borrowings during the quarter for worldwide
working capital purposes and cash payments for the acquisitions of Ideal, RDI,
TTPG and (Forefront Graphics Corporation ("FFG"). Interest rates on combined
borrowings were also higher during the second quarter of 2001 compared to the
same quarter last year.
The effective income tax rate decreased to 40.0% for the quarter ended
June 30, 2001, as compared to 42.0% for the quarter ended June 30, 2000.
Restructuring Plan
In response to the continuing economic slowdown, the Company implemented a
plan in the second quarter of 2001 to reduce costs and improve operating
efficiencies by discontinuing certain non-strategic product lines. The Company
accrued a restructuring charge of $1.5 million consisting primarily of severance
and benefits of $1.3 million related to involuntary employee terminations and
lease costs of $238,000 pertaining to estimated future obligations for
non-cancelable lease payments for excess facilities in Minnesota that were
vacated due to the reductions in workforce.
The Company also recorded a provision for inventory of $8.2 million
related to additional excess inventory and a $300,000 provision included in
selling, general and administrative expenses. The additional provisions resulted
from the decision to discontinue certain product lines and the impact of current
market conditions.
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SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO SIX MONTHS ENDED JUNE 30, 2000
Sales were $991.2 million for the six months ended June 30, 2001, compared
to sales of $748.7 million for the six months ended June 30, 2000, which
represented an increase of $242.5 million, or 32%. The increase in sales was
primarily attributable to the increase in the customer base related to the
acquisitions of Ideal, RDI and TTPG, offset by a decrease in sales in the
Americas.
The Company's gross profit for the six months ended June 30, 2001 was
$78.3 million compared to $64.4 million for the six months ended June 30, 2000,
which represented an increase of $13.9 million, or 22%. The increase in the
dollar amount of gross profit was primarily the result of the acquisitions of
Ideal and RDI offset by an inventory charge of $8.2 million related to the
Company's decision to reposition its product offerings and discontinue certain
non-strategic product lines, as discussed below. Excluding the non-recurring
inventory charge, gross profit increased to $86.5 million compared to $64.4
million for the six months ended June 30, 2001, an increase of $22.1 million, or
34%. Excluding the non-recurring inventory charge, the overall gross margin was
consistent at 8.7% compared to 8.6% in the same period last year.
Selling, general and administrative expenses increased to $78.6 million
for the six months ended June 30, 2001 from $46.8 million for the six months
ended June 30, 2000, an increase of $31.8 million, or 68%. As a percentage of
sales, selling, general and administrative expenses increased in the first six
months of 2001 to 7.9% from 6.3% in the first six months of 2000. The increase
in expenses was primarily attributable to the acquisitions of Ideal and RDI,
investments in strategic programs and increases to bad debt expense due to
increased sales volumes and changing market conditions.
Interest expense was $10.7 million in the six months ended June 30,
2001 as compared to $5.2 million in the same period last year. This increase was
primarily due to increased overall borrowings during the quarter for worldwide
working capital purposes and cash payments for the acquisitions of Ideal, RDI,
TTPG and FFG. Interest rates on combined borrowings were also higher during the
first six months of 2001 compared to the same period last year.
The effective income tax rate decreased to 40.0% for the six months ended
June 30, 2001, as compared to 42.0% for the six months ended June 30, 2000.
Restructuring Plan
In response to the continuing economic slowdown, the Company implemented a
plan in the second quarter of 2001 to reduce costs and improve operating
efficiencies by discontinuing certain non-strategic product lines. The Company
accrued a restructuring charge of $1.5 million consisting primarily of severance
and benefits of $1.3 million related to involuntary employee terminations and
lease costs of $238,000 pertaining to estimated future obligations for
non-cancelable lease payments for excess facilities in Minnesota that were
vacated due to the reductions in workforce.
In the second quarter of 2001, the Company also recorded a provision for
inventory of $8.2 million related to additional excess inventory and a $300,000
provision included in selling, general and administrative expenses. The
additional provisions resulted from the decision to discontinue certain product
lines and the impact of current market conditions.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its working capital requirements principally
through borrowings under bank lines of credit. 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 provided by operating activities for the three months ended June
30, 2001, was $7.9 million. The Company's inventories decreased as of June 30,
2001 to $206.9 million from $246.7 million as
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of December 31, 2000, and the Company's accounts payable decreased to $183.1
million as of June 30, 2001 from $231.1 million as of December 31, 2000. The
decreases in inventories and accounts payable are primarily a result of reduced
inventory purchases. The Company's accounts receivable decreased as of June 30,
2001 to $268.0 million from $295.6 million primarily as a result of decreased
sales volume as compared to fourth quarter levels. The Company's future cash
requirements will depend on numerous factors, including potential acquisitions
and the rate of growth of its sales. The Company may, in the future, seek
additional debt or equity financing to fund continued growth.
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 credit facility with
California Bank & Trust, scheduled to mature May 31, 2001, and the $80 million
short-term loan with the RSA, scheduled to mature 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 three month
period ended June 30, 2001, was 7%, and the balance outstanding at June 30, 2001
was $87 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 June 30, 2001; however, there can be no assurance that the
Company will be in compliance with its bank 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 October 16, 2000, the Company entered into a $13.3 million mortgage
agreement with Lombard NatWest Limited related to the acquisition of a building
for Ideal. The mortgage has a term of five years and bears interest at LIBOR
plus 1.5%. 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%
for a two-year period.
On August 3, 2000, in connection with the acquisition of Ideal, the
Company assumed a $43 million borrowing facility with Lombard NatWest Limited
which is secured by substantially all of Ideal's accounts receivable and bears
interest at NatWest's base rate plus 1.5%. This facility was increased to $60
million in October 2000, and as of June 2001 the NatWest borrowing arrangement
will continue indefinitely until terminated by either party. There are no
financial covenant requirements. At June 30, 2001, approximately $36 million was
outstanding under the NatWest borrowing facility.
On July 6, 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. On May 14, the Company repaid in full, the $80 million term loan
portion of the debt financing, scheduled to mature June 30, 2001. The $100
million subordinated debt financing bears interest at 9.0%, payable in
semi-annual principal installments of $3.5 million plus interest commencing
December 31, 2000, and in semi-annual principal installments of $8.5 million
commencing December 31, 2007. 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 on incurrence of debt and
liens, asset dispositions, payment of dividends, and repurchases of stock. The
Company is also required to be in compliance with the covenants of all other
borrowing agreements. The Company is in compliance with its subordinated debt
financing covenants at June 30, 2001; however, there can be no assurance that
the Company will be in compliance with such covenants in the future. If the
Company does
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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 Company's future cash requirements will depend on numerous factors,
including potential acquisitions and the rate of growth of its sales. The
Company believes these facilities will be sufficient 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 and California Bank & Trust
were $85 million for the quarter ended June 30, 2001 and average borrowings
under Ideal's borrowing facility with Lombard NatWest were $39 million for the
quarter ended June 30, 2001. The First Union facility, the CBT Facility and the
NatWest Facility have interest rates that are based on associated rates such as
Eurodollar, LIBOR 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, the CBT Facility and NatWest Facility,
an increase of 1% in such interest rate percentages would increase the annual
interest expense by approximately $1.2 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. Net
foreign currency gains and losses were not material for the three months ended
June 30, 2001.
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PART II - OTHER INFORMATION
Item 2: Changes in Securities and Use of Proceeds
In May 2001 the Registrant issued an aggregate of 560,000 shares of
Common Stock to two Netherlands entities in consideration of the
acquisition of all of the capital stock of Touch The Progress Group BV.
The Registrant relied on the exemption from registration provided by
Regulation S under the Securities Act of 1933. The certificates
representing the shares contain a restrictive securities legend and stock
transfer restrictions were contained in the acquisition agreement among
the parties.
In May 2001 the Registrant issued an aggregate of 60,324 shares of
Common Stock to two individuals resident in Canada in consideration of
the acquisition of all of the capital stock of Forefront Graphics
Corporation. The Registrant relied on the exemption from registration
provided by Regulation S under the Securities Act of 1933. The
certificates representing the shares contain a restrictive securities
legend and stock transfer restrictions were contained in the acquisition
agreement among the parties.
Item 4: Submission of Matters to a Vote of Security
Registrant held its Annual Meeting of Shareholders on May 10, 2001.
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 12,259,214 -- 1,850,144 --
Gordon A. Campbell 14,002,613 -- 106,745 --
Glenn E. Penisten 14,002,583 -- 106,775 --
Edward L. Gelbach 14,037,231 -- 72,127 --
James Ousley 12,240,373 -- 1,868,985 --
Eugene B. Chaiken 14,036,481 -- 72,877 --
2. Ratification of the appointment of PricewaterhouseCoopers LLP as the
Company's independent accountants for the current fiscal year ending
December 31, 2001.
For Against Withheld Nonvotes
---------- ----------- ---------- ----------
13,971,691 130,475 7,192 --
Item 6: Exhibits and Reports
(a) Exhibits:
See Exhibit Index on page following Signatures.
Reports on Form 8-K:
None
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: August 14, 2001
BELL MICROPRODUCTS INC.
BY: BENEDICTUS BORSBOOM
---------------------------------
EXECUTIVE VICE PRESIDENT AND CFO
(PRINCIPAL FINANCIAL OFFICER)
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BELL MICROPRODUCTS INC.
EXHIBIT INDEX
Form 10-Q
for
Quarter Ended June 30, 2001
Exhibit Number Description
- -------------- -----------
10.1 First Union National Bank Loan and Security Agreement dated May 14, 2001
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