No. pages 17
--
Index exhibit pg. None
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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
(Mark one)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 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
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Bell Microproducts Inc.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
California 94-3057566
- ------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1941 Ringwood Avenue, San Jose, California 95131-1721
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(408) 451-9400
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
N/A
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
-------------- ---------------
Common Stock, $.01 Par Value -- Number of Shares Outstanding at November 9,
- ---------------------------- 2001: 16,913,602
1
BELL MICROPRODUCTS INC.
INDEX TO FORM 10-Q
Page
PART I - FINANCIAL INFORMATION Number
- --------------------------------- ------
Item 1: Financial Statements
Condensed Consolidated Balance Sheets - September 30, 2001 and
December 31, 2000 3
Condensed Consolidated Statements of Income - Three months and nine
months ended September 30, 2001 and 2000 4
Condensed Consolidated Statements of Cash Flows - Nine months
ended September 30, 2001 and 2000 5
Notes to Condensed Consolidated Financial Statements 6
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 3: Quantitative and Qualitative Disclosure about Market Risk 14
PART II - OTHER INFORMATION
- -----------------------------
Item 6: Exhibits and Reports 16
Signatures 17
2
PART I - FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
BELL MICROPRODUCTS INC.
Condensed Consolidated Balance Sheets
(in thousands)
September 30,
2001 December 31,
(unaudited) 2000
----------------- -----------------
ASSETS
Current assets:
Cash and cash equivalents $ 1,733 $ 7,465
Accounts receivable, net 297,266 295,572
Inventories, net 173,530 246,671
Prepaid expenses and other current assets 27,749 11,906
---------- ---------
Total current assets 500,278 561,614
Property and equipment, net 49,403 44,436
Goodwill and other intangibles, net 55,007 46,439
Deferred debt issuance costs and other assets 8,174 8,718
---------- ---------
Total assets $ 612,862 $661,207
========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 198,937 $231,132
Borrowings under lines of credit 47,855 52,633
Short-term note payable and current portion
of long-term notes payable 9,197 90,500
Other accrued liabilities 54,915 50,539
---------- ---------
Total current liabilities 310,904 424,804
Borrowings under line of credit 79,568 249
Long-term notes payable 99,620 101,640
Other long-term liabilities 5,258 4,982
---------- ---------
Total liabilities 495,350 531,675
---------- ---------
Commitments and contingencies
Shareholders' equity:
Common Stock, $0.01 par value, 40,000 shares
authorized; 16,860 and 15,793 issued and outstanding
86,121 75,154
Retained earnings 32,208 54,472
Accumulated other comprehensive loss (817) (94)
---------- ---------
Total shareholders' equity 117,512 129,532
---------- ---------
Total liabilities and shareholders' equity $ 612,862 $661,207
========== =========
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 Nine months ended
September 30, September 30,
----------------------------------- -----------------------------------
2001 2000 2001 2000
--------------- ---------------- ---------------- ---------------
Net sales $ 489,089 $ 511,007 $ 1,480,298 $ 1,259,684
Cost of sales 459,808 463,115 1,372,735 1,147,385
--------------- ---------------- ---------------- ---------------
Gross profit 29,281 47,892 107,563 112,299
Operating expenses:
Selling, general and administrative expenses 39,077 34,967 117,721 81,794
Restructuring costs and special charges 7,354 - 8,894 -
--------------- ---------------- ---------------- ---------------
Total operating expenses 46,431 34,967 126,615 81,794
Income/(loss) from operations (17,150) 12,925 (19,052) 30,505
Interest expense (4,874) (4,624) (15,551) (9,819)
--------------- ---------------- ---------------- ---------------
Income/(loss) before income taxes (22,024) 8,301 (34,603) 20,686
Income tax (benefit)/provision (7,307) 3,486 (12,339) 8,687
--------------- ---------------- ---------------- ---------------
Net income/(loss) $ (14,717) $ 4,815 $ (22,264) $ 11,999
=============== ================ ================ ===============
Earnings/(loss) per share
Basic $ (0.88) $ 0.32 $ (1.37) $ 0.83
=============== ================ ================ ===============
Diluted $ (0.88) $ 0.28 $ (1.37) $ 0.75
=============== ================ ================ ===============
Shares used in per share calculation
Basic 16,804 14,856 16,273 14,272
=============== ================ ================ ===============
Diluted 16,804 17,275 16,273 16,002
=============== ================ ================ ===============
The accompanying notes are an integral part of these
condensed consolidated financial statements.
4
Bell Microproducts Inc.
Condensed Consolidated Statements of Cash Flows
(Increase/(decrease) in cash, in thousands)
(unaudited)
Nine months ended September 30,
-------------------------------
2001 2000
-------------- -------------
Cash flows from operating activities:
Income/(loss) from operations: $ (22,264) $ 11,999
Adjustments to reconcile net income to net
cash provided by/(used in) operating activities:
Depreciation and amortization 8,018 3,833
Provision for bad debts 8,801 6,686
Changes in assets and liabilities:
Accounts receivable (4,017) (60,326)
Inventories 81,754 (7,392)
Prepaid expenses and deferred income taxes (15,835) (1,443)
Other assets 544 86
Accounts payable (41,796) 3,926
Other accrued liabilities 4,118 6,270
-------------- -------------
Net cash provided by/(used in) operating activities 19,323 (36,361)
-------------- -------------
Cash flows from investing activities:
Acquisition of property, equipment and other (10,989) (10,487)
Acquisition of businesses, net of cash acquired (3,415) (25,683)
-------------- -------------
Net cash used in investing activities (14,404) (36,170)
-------------- -------------
Cash flows from financing activities:
Net borrowings under line of credit agreements 71,778 (109,634)
(Repayment of)/proceeds from long-term notes payable to RSA (87,000) 180,000
Proceeds from issuance of Common Stock 2,690 3,591
Other long term liabilities 1,974 728
-------------- -------------
Net cash (used in)/provided by financing activities (10,558) 74,685
-------------- -------------
Effect of exchange rate changes on cash (93) (681)
-------------- -------------
Net (decrease)/increase in cash (5,732) 1,473
Cash at beginning of period 7,465 5,103
-------------- -------------
Cash at end of period $ 1,733 $ 6,576
============== =============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 21,625 $ 9,065
Income taxes $ 3,366 $ 8,167
Supplemental non-cash financing activities:
Common Stock issued for acquisition $ 8,277 $ 2,506
Common Stock Warrant issued for subordinated debt $ - $ 7,406
Liabilities assumed on acquisition of business $ - $ 7,500
Effective stock split $ - $ 50
The accompanying notes are an integral part of these
condensed consolidated financial statements.
5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 1 - Basis of Presentation:
The condensed consolidated financial statements 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
September 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, mid-range 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. The purchase price was allocated to the acquired assets and
assumed liabilities based upon management's estimate of their fair market values
as of the acquisition date, as follows (in thousands):
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
=======
Results of operations of TTPG were not material to the Company.
6
Forefront Graphics Corporation Acquisition
On May 24, 2001, the Company acquired all the capital stock of
Forefront Graphics ("FFG"), a privately held company headquartered in Toronto,
Canada with offices in Ottawa, Montreal, Calgary and Vancouver. FFG is a leading
distributor of high performance computer graphics, digital audio and video,
storage and multimedia products to both the computer reseller and the video
production reseller marketplaces.
FFG was acquired for a total purchase price of approximately $2.1
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 1,450
Accounts payable (775)
Other accrued liabilities (401)
Notes payable (294)
------
Total consideration $2,124
======
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 Nine Months Ended
September 30, September 30,
------------------- -------- -------
2001 2000 2001 2000
-------- ------- -------- -------
Net income/(loss) $(14,717) $ 4,815 $(22,264) $11,999
======== ======= ======== =======
Weighted average common shares
outstanding (Basic) 16,804 14,856 16,273 14,272
Effect of dilutive options - 2,419 - 1,730
-------- ------- -------- -------
Weighted average common shares
outstanding (Diluted) 16,804 17,275 16,273 16,002
======== ====== ======= =======
7
For the three months ended September 30, 2001, outstanding options to
purchase 4,730,207 shares of Common Stock were excluded from the computation of
diluted net loss per share because they were antidilutive. For the three months
ended September 30, 2000, options to purchase 22,500 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 Costs, Special 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
consisting primarily of severance and benefits of $1.3 million and estimated
lease costs of $238,000 pertaining to future lease obligations for
non-cancelable lease payments for excess facilities. At September 30, 2001,
outstanding liabilities related to these charges are summarized as follows (in
thousands):
Restructuring Liabilities
Total Charge Cash Payments at September 30, 2001
------------------- -------------------- ------------------------------
Severance costs $ 1,302 $ 1,249 $ 53
Lease costs 238 91 147
------------------- -------------------- ------------------------------
Total $ 1,540 $ 1,340 $ 200
=================== ==================== ==============================
In the third quarter of 2001, the Company took additional actions and
extended its cost reduction efforts in response to the continuing economic
slowdown. The Company accrued additional restructuring costs of $3.3 million
consisting primarily of the discontinuance and non-cash write-off of certain
fixed assets valued at $2.4 million and severance and benefits of $897,000
related to involuntary employee terminations. The Company also accrued other
special charges of $4.1 million for additional accounts receivable provisions.
The Company also recorded a provision for inventory of $9.6 million
related to additional excess inventory for the quarter ended September 30, 2001.
The additional provision largely resulted from the decision to discontinue
certain product lines and the impact of current market conditions. The excess
inventory charge is included within the Statement of Income under the caption
Cost of Sales.
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 September 30, 2001, was 6.2%, and the balance outstanding at
September 30, 2001 was $79 million. Obligations of the Company under the
revolving line of credit are secured by certain assets of the Company and its
North and South American subsidiaries. The revolving line of credit requires the
Company to meet certain financial tests and to comply with certain other
covenants, including restrictions on incurrence of debt and liens, restrictions
on mergers, acquisitions, asset dispositions, capital contributions, payment of
dividends, repurchases of stock and investments. The Company was in compliance
with its bank covenants at September 30, 2001; however, there can be no
assurance that the Company will be in compliance with such covenants in the
future. If the Company does
8
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 Hardware
Limited ("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 September 30,
2001, approximately $47 million was outstanding under the NatWest borrowing
facility.
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 Nine Months Ended
September 30, September 30,
------------------------------- -----------------------------------
2001 2000 2001 2000
--------------- ------------ -------------- -----------------
Net income/(loss) $(14,717) $ 4,815 $(22,264) $ 11,999
Other comprehensive income/(loss):
Foreign currency translation
adjustments 636 (363) (723) (771)
--------------- ------------ -------------- -----------------
Total comprehensive income/(loss) $(14,081) $ 4,452 $(22,987) $ 11,228
=============== ============ ============== =================
Accumulated other comprehensive income/(loss) presented in the
accompanying condensed consolidated balance sheets consists of cumulative
foreign currency translation adjustments.
Note 8 - Subsequent Events:
On November 13, 2001, the Company acquired all the capital stock of
Total Tec Systems Inc. ("Total Tec"), for cash of approximately $9 million and
400,000 shares of the Company's Common Stock. Total Tec is a privately held,
international value-added provider of high technology products, solutions and
services headquartered in Edison, New Jersey. Based on Total Tec's unaudited
financial statements, sales were approximately $107.3 million for the year ended
October 31, 2001.
Note 9 - Recently Issued Accounting Statements:
On October 3, 2001, the FASB issued Statement of Accounting Standards
No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets"
("FAS144"). FAS 144 supercedes FAS 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." FAS 144 applies
to all long-lived assets (including discontinued operations) and consequently
amends Accounting Principles
9
Board Opinion No. 30 (APB 30), Reporting Results of Operations Reporting the
Effects of Disposal of a Segment of a Business. FAS 144 develops one accounting
model for long-lived assets that are to be disposed of by sale. FAS 144 requires
that long-lived assets that are to be disposed of by sale be measured at the
lower of book value or fair value less cost to sell. Additionally, FAS 144
expands the scope of discontinued operations to include all components of an
entity with operations that (1) can be distinguished from the rest of the entity
and (2) will be eliminated from the ongoing operations of the entity in a
disposal transaction. FAS 144 is effective for the Company for all financial
statements issued in 2002.
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 September 30, 2001, amortization of
goodwill and intangibles totaled $803,000.
Note 10 - 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 71% of total sales for the nine months
ended September 30, 2001 and 2000, respectively.
(In thousands)
Nine Months Ended September 30,
-----------------------------------------------
Geographic information consists of the following: 2001 2000
---------------------- ---------------------
Net sales:
North America $ 741,436 $ 971,532
Latin America 186,419 178,294
Europe 552,443 109,858
---------------------- ---------------------
Total $ 1,480,298 $ 1,259,684
====================== =====================
September 30,
-----------------------------------------------
Long-lived assets: 2001 2000
---------------------- ---------------------
United States $ 46,546 $ 45,972
United Kingdom 61,961 23,747
Other foreign countries 4,077 2,122
---------------------- ---------------------
Total $ 112,584 $ 71,841
====================== =====================
Note 11 - 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
10
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 and maintain compliance with 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, 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 SEPTEMBER 30, 2001 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2000
Sales were $489.1 million for the quarter ended September 30, 2001,
compared to sales of $511.0 million for the quarter ended September 30, 2000,
which represented a decrease of $21.9 million, or 4%. The decrease in sales was
primarily attributable to a decrease in sales in the Americas, partially offset
by sales expansion related to the acquisitions of Touch The Progress Group BV
("TTPG") in May 2001 and Ideal Hardware Limited ("Ideal") in August 2000.
The Company's gross profit for the quarter ended September 30, 2001 was
$29.3 million compared to $47.9 million for the quarter ended September 30,
2000, which represented a decrease of $18.6 million, or 39%. The decrease in the
dollar amount of gross profit was primarily the result of the Company's decision
to record a $9.6 million provision for excess inventory as discussed below.
Excluding the inventory charge, gross profit decreased to $38.9 million compared
to $47.9 million for the quarter ended September 30, 2000, a decrease of $9.0
million, or 19%. Excluding the inventory charge, the overall gross margin was
8.0% compared to 9.4% in the same period last year. The decrease in gross margin
percentage was primarily due to the impact of competitive market conditions in
North America and lower gross margin percentages for Ideal.
11
Selling, general and administrative expenses increased to $39.0 million
for the quarter ended September 30, 2001 from $35.0 million for the quarter
ended September 30, 2000, an increase of $4.0 million, or 11%. As a percentage
of sales, selling, general and administrative expenses increased in the third
quarter of 2001 to 8.0% from 6.8% in the third quarter of 2000. The increase in
expenses was primarily attributable to the acquisition of Ideal and investments
in strategic programs.
Interest expense was $4.9 million for the quarter ended September 30,
2001 as compared to $4.6 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, TTPG
and FFG.
The effective income tax rate decreased to 33.2% for the quarter ended
September 30, 2001, as compared to 42.0% for the quarter ended September 30,
2000.
Restructuring Plan
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. In the third quarter of 2001, the Company took additional actions
and extended its cost reduction efforts in response to the continuing economic
slowdown.
In the third quarter, the Company accrued restructuring costs of $3.3
million consisting primarily of the discontinuance and non-cash write-off of
certain fixed assets valued at $2.4 million and severance and benefits of
$897,000 related to involuntary employee terminations. The Company also accrued
other special charges of $4.1 million for additional accounts receivable
provisions.
The Company also recorded a provision for inventory of $9.6 million
related to additional excess inventory for the quarter ended September 30, 2001.
The additional provision largely resulted from the decision to discontinue
certain product lines and the impact of current market conditions. The excess
inventory charge is included within the Statement of Income under the caption
Cost of Sales.
NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2000
Sales were $1,480.3 million for the nine months ended September 30,
2001, compared to sales of $1,259.7 million for the nine months ended September
30, 2000, which represented an increase of $220.6 million, or 18%. The increase
in sales was primarily attributable to the increase in the customer base related
to the acquisitions of Ideal, Rorke Data, Inc. ("RDI") and TTPG, offset by a
decrease in sales in the Americas.
The Company's gross profit for the nine months ended September 30, 2001
was $107.6 million compared to $112.3 million for the nine months ended
September 30, 2000, which represented a decrease of $4.7 million, or 4%. The
decrease in gross profit was primarily the result of inventory charges of $17.8
million taken in the second and third quarters of 2001 related to the impact of
current market conditions and the Company's decision to reposition its product
offerings and discontinue certain non-strategic product lines, as discussed
below. Excluding the inventory charge, gross profit increased to $125.4 million
for the nine months ended September 30, 2001, compared to $112.3 million for the
nine months ended September 30, 2000, an increase of $13.1 million, or 12%. The
increase in gross profit was primarily related to the acquisition of Ideal.
Excluding the inventory charge, the overall gross margin decreased to 8.5%
compared to 8.9% in the same period last year. The decrease in gross margin
percentage was primarily due to the impact of competitive market conditions in
North America and lower gross margin percentages for Ideal.
Selling, general and administrative expenses increased to $117.7
million for the nine months ended September 30, 2001 from $81.8 million for the
nine months ended September 30, 2000, an increase of $35.9 million, or 44%. As a
percentage of sales, selling, general and administrative expenses increased in
the first
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nine months of 2001 to 8.0% from 6.5% in the first nine months of 2000. The
increase in expenses was primarily attributable to the acquisitions of Ideal,
RDI and TTPG, investments in strategic programs and increases to bad debt
expense due to increased sales volumes and changing market conditions.
Interest expense was $15.6 million in the nine months ended September
30, 2001 as compared to $9.8 million in the same period last year. This increase
was primarily due to increased overall borrowings for worldwide working capital
purposes and cash payments for the acquisitions of Ideal, RDI, TTPG and FFG.
The effective income tax rate decreased to 35.7% for the nine months
ended September 30, 2001, as compared to 42.0% for the nine months ended
September 30, 2000.
Restructuring Plan
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. In the third quarter of 2001, the Company took additional actions
and extended its cost reduction efforts in response to the continuing economic
slowdown.
In the second and third quarters of 2001, the Company accrued total
restructuring charges of $4.8 million consisting primarily of the discontinuance
and non-cash, write-off of certain fixed assets valued at $2.4 million,
severance and benefits of $2.2 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 accrued
other special charges of $4.1 million for additional accounts receivable
provisions.
In the second and third quarters of 2001, the Company also recorded a
provision for inventory of $17.8 million related to additional excess inventory
and a $300,000 provision included in selling, general and administrative
expenses. The additional provisions resulted from the impact of current market
conditions and the decision to discontinue certain product lines. The excess
inventory charge is included within the Statement of Income under the caption
Cost of Sales.
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 financing increases in inventory and accounts receivable resulting from
sales growth, and the financing of certain acquisitions.
Net cash provided by operating activities for the nine months ended
September 30, 2001, was $19.3 million. The Company's inventories decreased as of
September 30, 2001 to $173.5 million from $246.7 million as of December 31,
2000, and the Company's accounts payable decreased to $198.9 million as of
September 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 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
13
borrowing levels. The average interest rate on outstanding borrowings under the
revolving line of credit during the nine month period ended September 30, 2001,
was 7%, and the balance outstanding at September 30, 2001 was $79 million.
Obligations of the Company under the revolving line of credit are secured by
certain assets of the Company and its North and South American subsidiaries. The
revolving line of credit requires the Company to meet certain financial tests
and to comply with certain other covenants, including restrictions on incurrence
of debt and liens, restrictions on mergers, acquisitions, asset dispositions,
capital contributions, payment of dividends, repurchases of stock and
investments. The Company was in compliance with its bank covenants at September
30, 2001; 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 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 September 30, 2001, approximately $47
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, 2001, 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 was in compliance with its
subordinated debt financing covenants at September 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 not remain in compliance with such covenants,
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 facility with First Union National Bank were $82 million for the
quarter ended September 30, 2001 and average borrowings under Ideal's borrowing
facility with Lombard NatWest were $36 million for the quarter ended September
30, 2001. The First Union Facility and the NatWest Facility have interest rates
that are based on associated rates such as Eurodollar and base or prime rates
that may fluctuate over time based on changes in the economic environment. Based
on actual borrowings throughout
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the quarter under the First Union Facility and the 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 September 30, 2001.
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PART II - OTHER INFORMATION
Item 6: Exhibits and Reports
(a) Exhibits:
None
Reports on Form 8-K:
None
16
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: November 14, 2001
BELL MICROPRODUCTS INC.
BY: BENEDICTUS BORSBOOM
EXECUTIVE VICE PRESIDENT AND CFO
(PRINCIPAL FINANCIAL OFFICER)