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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended JuneSeptember 30, 1998
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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 ------------- --------------_________
Commission File Number 0-23486
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NN Ball & Roller, Inc.
(Exact name of registrant as specified in its charter)
Delaware 62-1096725
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
800 Tennessee Road
Erwin, Tennessee 37650
(Address of principal executive offices, including zip code)
(423) 743-9151
(Registrant's telephone number, including area code)
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
------ -------- ---
As of August 13,November 4, 1998 there were 14,804,244 shares of the registrant's common
stock, par value $0.01 per share, outstanding.
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NN Ball & Roller, Inc.
INDEX
Page No.
--------
Part I. Financial Information
Item 1. Financial Statements:
Condensed Statements of Income for the three and sixnine months
ended JuneSeptember 30, 1998 and 1997 2
Condensed Balance Sheets at JuneSeptember 30, 1998 and
December 31, 1997 3
Condensed Statements of Changes in Stockholders' Equity
for the sixnine months ended JuneSeptember 30, 1998 and 1997 4
Condensed Statements of Cash Flows for the sixnine months
ended JuneSeptember 30, 1998 and 1997 5
Notes to Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
Index To Exhibits 15
PART I. FINANCIAL INFORMATION
NN Ball & Roller, Inc.
Condensed Statements of Income
(Unaudited)
Three Months Ended SixNine Months Ended
JuneSeptember 30, JuneSeptember 30,
1998 1997 1998 1997
------------ ------------ ------------ ------------
Thousands of Dollars, Except Per Share Data 1998 1997 1998 1997
- ----------------------------------------------------------------------------------------
Net sales $ 19,67416,789 $ 20,96417,231 $ 40,56057,349 $ 41,28358,514
Cost of goods sold 13,563 14,307 27,740 28,145
---------- ---------- ---------- ----------12,162 12,386 39,902 40,531
------------ ------------ ------------ ------------
Gross profit 6,111 6,657 12,820 13,1384,627 4,845 17,447 17,983
Selling, general and administrative 1,530 1,227 2,834 2,5321,519 4,364 4,051
Depreciation 1,179 1,052 2,338 2,104
---------- ---------- ---------- ----------1,212 1,060 3,550 3,164
------------ ------------ ------------ ------------
Income from operations 3,402 4,378 7,648 8,5021,885 2,266 9,533 10,768
Interest expense 18 -- 33 19
---------- ---------- ---------- ----------22 2 55 21
------------ ------------ ------------ ------------
Income before provision for income taxes 3,384 4,378 7,615 8,4831,863 2,264 9,478 10,747
Provision for income taxes 1,060 1,646 2,624 3,112
---------- ---------- ---------- ----------738 965 3,362 4,077
------------ ------------ ------------ ------------
Net income $ 2,3241,125 $ 2,7321,299 $ 4,9916,116 $ 5,3716,670
Other comprehensive income:
Foreign currency translation 72 -- (189) --
---------- ---------- ---------- ----------392 (41) 203 (41)
------------ ------------ ------------ ------------
Other comprehensive income 72 -- (189) --
---------- ---------- ---------- ----------392 (41) 203 (41)
------------ ------------ ------------ ------------
Comprehensive income $ 2,3961,517 $ 2,7321,258 $ 4,8026,319 $ 5,371
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------6,629
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Net income per common share (Note 3):share: $ 0.160.08 $ 0.190.09 $ 0.340.41 $ 0.37
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------0.45
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Weighted average number of
shares outstanding (Note 3) 14,827,626 14,712,626 14,810,770 14,713,463
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------14,804,244 14,832,640 14,807,723 14,814,533
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
See accompanying notes.
2
NN Ball & Roller, Inc.
Condensed Balance Sheets
JuneSeptember 30, December 31,
1998 1997
------------- ------------
(Unaudited)
Thousands of Dollars (Unaudited)
- -------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 1,216883 $ 366
Accounts receivable, net 16,82212,614 12,449
Inventories, net (Note 2) 12,24513,722 11,865
Other current assets 1,3321,587 1,505
--------- ---------------- -------
Total current assets 31,61528,806 26,185
Property, plant and equipment, net 37,37638,183 37,088
--------- ---------------- -------
Total assets $ 68,991 $ 63,273
--------- ---------
--------- ---------$66,989 $63,273
------- -------
------- -------
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 5,2133,758 $ 3,662
Revolving credit facility 2,650-- 1,480
Accrued vacation expense 643642 519
Accrued Bonus 584 --
Deferred Income 818874 458
Income taxes payable 335 --
Other current liabilities 1,4322,228 1,352
--------- ---------------- -------
Total current liabilities 10,7568,421 7,471
Deferred income taxes 2,831 2,831
--------- ---------------- -------
Total liabilities 13,58711,252 10,302
Total stockholders' equity 55,40455,737 52,971
--------- ---------------- -------
Total liabilities and stockholders' equity $ 68,991 $ 63,273
--------- ---------
--------- ---------$66,989 $63,273
------- -------
------- -------
See accompanying notes.
3
NN Ball & Roller, Inc.
Condensed Statements of Changes in Stockholders' Equity
(Unaudited)
Accumulated
Common stock Additional Retained otherOther
Number Par paid in Retained comprehensive
Of shares value capital earnings comprehensiveincome Total
------------ -------- ---------- -------- ------------- --------
Thousands of Dollars of shares Value capital (deficit) income Total
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Balance, January 1, 1997 14,629 $ 146 $26,983 $21,581$ 26,983 $ 21,581 $ -- $48,710$ 48,710
Net income 5,371 5,3716,670 6,670
Dividends (2,329) (2,329)(3,520) (3,520)
Stock options exercised 361 4 2,918 2,922
Stock repurchased (86) -- (999) -- (999)(186) (1) (2,123) (2,124)
Other comprehensive income (loss) (41) (41)
------ ------- ------- --------------- -------- -------- -------- --------
Balance, JuneSeptember 30, 1997 14,54314,804 $ 146 $25,984 $24,623149 $ -- $50,75327,778 $ 24,731 $ (41) $ 52,617
------ ------- ------- --------------- -------- -------- -------- --------
------ ------- ------- --------------- -------- -------- -------- --------
Balance, January 1, 1998 14,804 $ 149 $27,902 $25,387$ 27,902 $ 25,387 $ (467) $52,971$ 52,971
Net income 4,991 4,9916,116 6,116
Dividends (2,369) (2,369)paid (3,553) (3,553)
Other comprehensive income (189) (189)203 203
------ ------- ------- --------------- -------- -------- -------- --------
Balance, JuneSeptember 30, 1998 14,804 $ 149 $27,902 $28,009 $ (656) $55,40427,902 $ 27,950 $ (264) $ 55,737
------ ------- ------- --------------- -------- -------- -------- --------
------ ------- ------- --------------- -------- -------- -------- --------
See accompanying notes.
4
NN Ball & Roller, Inc.
Condensed Statements of Cash Flows
(Unaudited)
SixNine Months Ended
JuneSeptember 30,
1998 1997
-------- --------
Thousands of Dollars 1998 1997
- -------------------------------------------------------------------------
Operating Activities:
Net income $ 4,9916,116 $ 5,3716,670
Adjustments to reconcile net income:
Depreciation 2,338 2,1043,550 3,164
Changes in operating assets and liabilities:
Accounts receivable (4,373) 1,750(165) 3,392
Inventories (1,857) (380)
(145)
Taxes Refundable/Payable (221) 620Income taxes 335 (425)
Other current assets 394 (189)(82) (655)
Accounts payable 1,551 1,09496 866
Other liabilities 564 156
--------- ---------1,999 1,158
-------- --------
Net cash provided by operating activities 4,864 10,761
--------- ---------9,992 13,790
-------- --------
Investing Activities:
Acquisition of plant, property, and equipment (2,626) (2,407)(4,645) (6,888)
Other assets -- 44
--------- ----------------- --------
Net cash used by investing activities (2,626) (2,363)
--------- ---------(4,645) (6,844)
-------- --------
Financing Activities:
Proceeds (Payments)Payments under revolving credit facility 1,170(1,480) (2,308)
Dividends (2,369) (2,329)(3,553) (3,520)
Stock options exercised -- --2,922
Stock repurchased -- (999)(2,124)
Cumulative effect of currency translation (189) --
--------- ---------203 (41)
-------- --------
Net cash (used) by financing activities (1,388) (5,636)
--------- ---------(4,830) (5,071)
-------- --------
Net Change in Cash and Cash Equivalents 850 2,762517 1,875
Cash and Cash Equivalents at Beginning of Period 366 --
--------- ----------------- --------
Cash and Cash Equivalents at End of Period $ 1,216883 $ 2,762
--------- ---------
--------- ---------1,875
-------- --------
-------- --------
See accompanying notes.
5
NN Ball & Roller, Inc.
Notes To Condensed Financial Statements
Note 1. Interim Financial Statements
The accompanying condensed financial statements of NN Ball & Roller, Inc. have
not been audited by independent accountants, except for the balance sheet at
December 31, 1997. In the opinion of the Company's management, the financial
statements reflect all adjustments necessary to present fairly the results of
operations for the three and sixnine month periods ended JuneSeptember 30, 1998 and
1997, the Company's financial position at JuneSeptember 30, 1998 and December 31,
1997, and the cash flows for the sixnine month periods ended JuneSeptember 30, 1998 and
1997. These adjustments are of a normal recurring nature and are, in the opinion
of management, necessary for fair presentation of the financial position and
operating results for the interim periods.
In June 1997, the FASB issued Statement No. 130 "Reporting Comprehensive Income"
(FAS 130), which established standards for reporting and displaying
comprehensive income and its components within an entity's financial statements.
FAS 130, which is effective for the Company's 1998 first quarter financial
reporting, defines the components of other comprehensive income to include
foreign currency translation adjustments, unrealized gains and losses on
marketable securities and minimum pension adjustments. Currently the Company's
only component of comprehensive income is foreign currency translation which is
presented before tax due to the Company's intention to indefinitely reinvest
earnings of its subsidiary outside the United States.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted from the interim financial statements presented
in this Quarterly Report on Form 10-Q.
The results for the first and secondthree quarters of 1998 are not necessarily indicative
of future results.
Note 2. Inventories
Inventories are stated at the lower of cost or market, with cost being
determined by the first-in, first-out method.
Inventories are comprised of the following (in thousands):
JuneSeptember 30, December 31,
1998 1997
(Unaudited)
---------- ------------------------- -----------
Raw materials $ 2,4012,939 $ 2,911
Work in process 3,0582,729 2,793
Finished goods 6,8468,114 6,221
-------- --------
12,305------------- -----------
13,782 11,925
Less - Reserve for excess and obsolete inventory 60 60
-------- --------------------- -----------
------------- -----------
$ 12,245 $11,865
-------- --------
-------- --------13,722 $ 11,865
------------- -----------
------------- -----------
6
Note 3. Net Income Per Share
Three Months Ended SixNine Months Ended
JuneSeptember 30, JuneSeptember 30,
1998 1997 1998 1997
----------- ----------- ----------- -----------
Thousands of Dollars, Except Share and Per Share Data
- -------------------------------------------------------------------------------------------------------------------
Net income $ 2,3241,125 $ 2,7321,299 $ 4,9916,116 $ 5,3716,670
Adjustments to net income -- -- -- --
------------ ------------- ------------ ----------------------- ----------- ----------- -----------
Net income $ 2,3241,125 $ 2,7321,299 $ 4,9916,116 $ 5,371
------------ ------------- ------------ ------------
------------ ------------- ------------ ------------6,670
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Basic shares outstanding 14,804,244 14,543,242 14,804,244 14,543,24214,804,244 14,804,244
Effect of dilutive stock options 23,382 169,384 6,526 170,221
------------ ------------- ------------ -------------- 28,396 3,479 10,289
----------- ----------- ----------- -----------
Dilutive shares outstanding 14,827,626 14,712,626 14,810,770 14,712,638
------------ ------------- ------------ ------------
------------ ------------- ------------ ------------14,804,244 14,832,640 14,807,723 14,814,533
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Basic net income per share $ 0.160.08 $ 0.190.09 $ 0.340.41 $ 0.37
------------ ------------- ------------ ------------
------------ ------------- ------------ ------------0.45
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Diluted net income per share $ 0.160.08 $ 0.190.09 $ 0.340.41 $ 0.37
------------ ------------- ------------ ------------
------------ ------------- ------------ ------------0.45
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Excluded from the shares outstanding for the secondthird quarter ended JuneSeptember 30,
1998 and 1997 were 70,750501,375 and 452,25074,500 antidilutive options, respectively, which
had exercise prices ranging from $11.50$9.39 to $15.50.$15.50 and $12.50 to $15.50,
respectively. Excluded from the shares outstanding for the sixnine months ended
JuneSeptember 30, 1998 and 1997 were 426,500466,500 and 452,250224,500 antidilutive options,
respectively, which had exercise prices ranging from $11.13$10.44 to $15.50.$15.50 and $11.92
to $15.50, respectively.
7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Three Months Ended JuneSeptember 30, 1998 Compared to the Three Months Ended
JuneSeptember 30, 1997
Net Sales. Net sales decreased by approximately $1.3 million,$442,000, or 6.2%2.6%, from $21.0$17.3
million for the secondthird quarter of 1997 to $19.7$16.8 million for the secondthird quarter of
1998. Foreign sales decreased $600,000,$1.5 million , or 6.1%,19.5 %, from $9.8$7.7 million in the
secondthird quarter of 1997 to $9.3$6.2 million during the secondthird quarter of 1998. The
decrease in foreign sales was due primarily to the financial crisis in Asia and
the impact of the continued strengtheningrelative strength of the U.S. dollar against world currencies.
Partially offsetting this effect was
the strengthening of European economies and resulting increased sales into
this region. Domestic sales decreased $700,000,increased $1.0 million, or 6.3%10.4%, from $11.1$9.6 million in the secondthird
quarter of 1997 to $10.4$10.6 million in the secondthird quarter of 1998.
This decrease was due primarily to decreased sales to an existing customer.
Gross Profit. Gross profit decreased $546,000,$218,000, or 8.2%4.5%, from $6.6$4.8 million for
the secondthird quarter of 1997 to $6.1$4.6 million for the secondthird quarter of 1998. As a
percentage of net sales, gross profit decreased from 31.8%28.1% in the secondthird quarter
of 1997 to 31.1%27.6% for the same period in 1998. This decrease in gross profit as a
percentage of net sales was due primarily to decreased levels of volume duringin the
secondthird quarter of 1998 as compared to the secondthird quarter of 1997 and to related
capacity under-utilization.under-utilization at the Company's manufacturing facilities.
Selling, General and Administrative. Selling, general and administrative
expenses increased by $303,000 or 24.7%,slightly from $1.2$1.51 million in the secondthird quarter of 1997 to
$1.5$1.53 million in the secondthird quarter of 1998. This increase was due primarily to
increased expenses related to the Ireland facility, which began production in
the fourth quarter of 1997, as well as planned increases to implement the
Company's strategic plan. As a percentage of net sales, selling, general and
administrative expenses increased from 5.8%8.8% for the secondthird quarter of 1997 to
7.8%9.1% for the same period in 1998.
Depreciation. Depreciation expense increased from $1.1 million for the secondthird
quarter of 1997 to $1.2 million for the same period in 1998. This increase was
due primarily to purchases of capital equipment related to the new Ireland
facility start-upwhich began production in the fourth quarter of 1997. As a percentage
of net sales, depreciation expense increased from 5.0%6.2% for in the secondthird quarter
of 1997 to 6.0%7.2% in the secondthird quarter of 1998.
Net Income. Net income decreased by $408,000$174,000, or 14.9%13.4%, from $2.7$1.3 million for
the secondthird quarter of 1997 to $2.3$1.1 million for the same period in 1998. As a
percentage of net sales, net income decreased from 13.0%7.5% in the secondthird quarter of
1997 to 11.8%6.7% for the secondthird quarter of 1998.
SixNine Months Ended JuneSeptember 30, 1998 Compared to the SixNine Months Ended JuneSeptember
30, 1997
Net Sales. Net sales decreased by approximately $723,000,$1.2 million, or 1.8%2.0%, from
$41.3$58.5 million for the first sixnine months of 1997 to $40.6$57.3 million for the same
period in 1998. Foreign sales decreased $200,000,$1.7 million, or 1.0%6.2%, from $19.6$27.3
million in the first sixnine months of 1997 to $19.4$25.6 million during the same period
of 1998. The decrease in foreign sales was due primarily to the financial crisis
in Asia and the impact of the continued strengtheningrelative strength of the U.S. dollar against world
currencies. Partially offsetting this effect was
the strengthening of European economies and resulting increased sales into
this region. Domestic sales decreased $500,000,increased $503,000, or 2.3%,1.6 %, from $21.7$31.2 million in
the first sixnine months of 1997 to $21.2$31.7 million in the same period of 1998.
This decrease was due primarily to decreased sales to an existing customer.
8
Gross Profit. Gross profit decreased $318,000,$536,000, or 2.4%3.0%, from $13.1$18.0 million for
the first sixnine months of 1997 to $12.8$17.4 million for the same period of 1998. As a
percentage of net sales, gross profit decreased slightly from 31.8%30.7% in the first sixnine
months of 1997 to 31.7%30.4% in the same period of 1998. ThisThe decrease in gross profit
as a percentage of net sales was due primarily to decreased levels of volume during
the first halfnine months of 1998 as compared to the first halfnine months of 1997 and
related capacity under-utilization.under-utilization at the Company's manufacturing facilities.
8
Selling, General and Administrative. Selling, general and administrative
expenses increased by $302,000,$313,000, or 11.9%7.7%, from $2.5$4.1 million in the first sixnine
months of 1997 to $2.8$4.4 million in the same period of 1998. This increase was due
primarily to increased expenses related to the Ireland facility, which began
production in the fourth quarter of 1997, as well as planned increases to
implement the Company's strategic plan. As a percentage of net sales, selling,
general and administrative expenses increased from 6.1%6.9% in the first sixnine months
of 1997 to 7.1%7.6% for the same period in 1998.
Depreciation. Depreciation expense increased from $2.1$3.2 million for the first
sixnine months of 1997 to $2.3$3.6 million for the same period in 1998. This increase
was due primarily to purchases of capital equipment related to the new Ireland
facility start-upwhich began production in the fourth quarter of 1997. As a percentage
of net sales, depreciation expense increased from 5.1%5.4% for the first sixnine months
of 1997 to 5.8%6.2% for the same period in 1998.
Net Income. Net income decreased by $380,000,$554,000, or 7.1%8.3%, from $5.4$6.7 million for the
first sixnine months of 1997 to $5.0$6.1 million for the same period for 1998. As a
percentage of net sales, net income decreased from 13.0%11.4% for the first sixnine
months of 1997 to 12.3%10.6% for the same period for 1998.
Liquidity and Capital Resources
In July 1997, the Company terminated its $10.0 million revolving credit facility
and entered into a loan agreement with First American National Bank ("First
American"). This loan agreement provides for a revolving credit facility of up
to $25 million, which will expire on June 30, 2000.
Amounts outstanding under the revolving facility are unsecured and bear interest
at a floating rate equal to, at the Company's option, either LIBOR plus 0.65% or
the Fed Funds effective rate plus 1.5%. The loan agreement contains customary
financial and operating restrictions on the Company, including covenants
restricting the Company, without First American's consent, from incurring
additional indebtedness from, or pledging any of its assets to, other lenders
and from disposing of a substantial portion of its assets. In addition, the
Company is prohibited from declaring any dividend if a default exists under the
revolving credit facility at the time of, or would occur as a result of, such
declaration. The loan agreement also contains customary financial covenants with
respect to the Company, including a covenant that the Company's earnings will
not decrease in any year by more than fifty percent of earnings in the Company's
immediately preceding fiscal year. The Company is in compliance with all such
covenants.
The Company's arrangements with its domestic customers typically provide that
payments are due within 30 days following the date of the Company's shipment of
goods, while arrangements with foreign customers (other than foreign customers
that have entered into an inventory management program with the Company)
generally provide that payments are due within either 90 or 120 days following
the date of shipment. Under the Company's inventory management program, payments
typically are due within 30 days after the product is used by the customer. Due
to the continuing expansion of the Company's foreign sales, management believes
that the Company's working capital requirements will increase as a result of
longer payment terms provided to foreign customers. The Company's net sales
historically have not been of a seasonal nature. However, as foreign sales have
increased as a percentage of total sales, seasonality has become a factor for
the Company in that many foreign customers cease production during the month of
August.
In the fourth quarter of 1997, upon commencement of production in its Kilkenny,
Ireland facility, the Company began to bill and receive payment from some of its
foreign customers in their own currency. To
9
date, the Company has not been materially adversely affected by currency
fluctuations or foreign exchange restrictions. Nonetheless, as a result of
these sales, the Company's foreign exchange risk has increased. Various strategies to manage this risk
are under development and implementation, including a hedging program. In
addition, a strengthening of the U.S. dollar against foreign currencies could impairimpairs
the ability of the Company to compete with international competitors for foreign
as well as domestic sales.
Working capital, which consists principally of cash and cash equivalents,
accounts receivable and inventories was $20.9$20.4 million at JuneSeptember 30, 1998 as
compared to $18.7 million at December 31, 1997. The ratio of current assets to
current liabilities decreased slightly from 3.5:1 at December 31, 1997 to 2.9:3.4:1
9
at JuneSeptember 30, 1998. Cash flow from operations decreased from $10.8$13.8 million
during the first halfnine months 1997 to $4.9$10.0 million during the first halfnine months
of 1998. This decrease was primarily attributed to the increaseincreases in accounts
receivable and inventories of $4.4$165,000 and $1.9 million therespectively and a
decrease in net income of $380,000, the increase in
inventories of $380,000 and the increase in taxes refundable of $221,000.$554,000.
During 1998, the Company plans to spend approximately $6.0 million on capital
expenditures (of which $2.6$4.6 million hashad been spent through JuneSeptember 30, 1998)
including the purchase of machinery and equipment for all four of the Company's
facilities. The Company intends to finance these activities with cash generated
from operations and funds available under the credit facility described above.
The Company believes that funds generated from operations and borrowings from
the credit facility will be sufficient to finance the Company's working capital
needs and projected capital expenditure requirements through December 1998.
During September 1998, the Company experienced a fire at their Walterboro, South
Carolina facility. Although production schedules were not significantly
affected, damage to certain equipment and inventory and a portion of one
building did occur. Initial estimates of the fire related damages totaled
approximately $390,000. The Company believes this amount, less the applicable
deductible, will be recovered from its insurance carrier prior to December 31,
1998 and the funds received will be used to repair all damaged assets to their
original state. As a result, the Company has included in its September 30, 1998
balance sheet a receivable from its insurance carrier and a liability for
planned fixed asset repairs in an amount equal to the anticipated insurance
proceeds.
On August 4, 1998 the Company's Board of Directors authorized the repurchase of
up to 740,213 shares of its Common Stock, equaling 5% of the Company's issued
and outstanding shares as of August 4, 1998. The program may be extended or
discontinued at any time, and there is no assurance that the Company will
purchase any or all of the full amount authorized. As of November 4, 1998, the
Company had not repurchased any shares under this program.
Year 2000
The Year 2000 issue is the result of computer programs written using two digits
rather than four digits to define the applicableidentify a particular year. Without corrective
action, programs with time-sensitive software could potentially recognizeact as if a date
ending in "00" asis the year 1900 rather than the year 2000, causing many2000. This could cause
computer applications to fail or create erroneous results.results or cause a system failure.
The Company has conducted a comprehensive evaluation of both its information
technology systems and non-information technology systems to determine if there
would be a Year 2000 problem with these systems. Prior to that evaluation,
however, the Company had decided to upgrade its information technology systems.
The systems the Company intends to install have been certified by the vendor to
be Year 2000 compliant. The Company also evaluated its current computernon-information
technology systems in lightand received certification by the manufacturers of that
equipment that they are Year 2000 compliant.
The Company expects that it will have implemented these system upgrades by
mid-1999. The Company has also developed contingency plans that it believes
would permit it to continue operating without causing any material harm to the
results of operations.
The Company expects to spend approximately $800,000 to replace its information
technology systems and train personnel. As of November 1, 1998, the Company had
spent approximately $600,000 on this project. The Company's expenditures for
evaluating the Year 2000 issue and
has chosen to implement a new company-wide system rather than modify and
upgrade existing systems. This implementation process, which is expected to
cause the Company to incur costs of approximately $1 million, is expected to
be completed by mid- 1999.have not been material. The Company has also identifiedassigned
one employee to coordinate its Year 2000 efforts, and is inhas relied on existing
personnel to evaluate its Year 2000 readiness.
The Company relies on third party suppliers for raw materials and a variety of
goods and services. Among its most important suppliers are those that provide
the processsteel necessary to make quality balls and rollers. The Company has obtained
written representation from approximately 70 percent of contacting key customersits suppliers and
vendors
10
and expects to receive responses from its remaining suppliers to determine if these
entities have an effective plan in place to addressand
vendors by the end of the year. So far, no supplier or vendor has indicated that
the Year 2000 issue.issue will affect its ability to provide goods and services to the
Company. Despite these assurances, if the Company's suppliers are unable to meet
its needs, there could be a material adverse effect on the results of
operations, liquidity and financial condition of the Company.
The Company believes it is taking the necessary steps to resolve the Year 2000
issue in a comprehensive and timely manner. Nonetheless, should any unforeseen
circumstance arise that would delay the replacement of its systems, the
Company's ability to manufacture and ship its products, take orders, invoice
customers, and collect payment could be adversely affected. This could have a
material adverse effect on the Company's results of operations, liquidity and
financial condition to a degree the Company has not determined.
Recently issued accounting standards
In June 1997, the FASB issued SFAS No. 131 "Disclosures about Segments of an
Enterprise and Related Information" which requires companies to report selected
information about operating segments and related disclosures about products and
services, geographic areas and major customers. The Company will provide
disclosures in accordance with this statement effective with its December 31,
1998 financial reporting.
In February 1998, the FASB issued SFAS No. 132 "Employers' Disclosures about
Pensions and Other Postretirement Benefits" which revises the disclosure
requirements for pensions and other Postretirementpostretirement benefits and is effective for
the Company's December 31, 1998 financial reporting. The adoption of this
standard by the Company is not expected to result in significant adjustments to
existing financial reporting practices as the Company does not currently provide
pension or postretirement benefits which are subject to the disclosure
provisions of FAS 132.
10
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities" which establishes accounting and reporting
standards for derivative instruments and hedging activities and is effective for
the Company's 2000 reporting cycle. The adoption of this standard by the Company
is not expected to result in significant adjustments to existing accounting
practices as the Company does not currently hold any derivative financial
instruments or participate in hedging activities.
Cautionary Statements for Purposes of the "Safe Harbor" Provisions of the
Private Securities Litigation Reform Act of 1995
The Company wishes to caution readers that this report contains, and future
filings by the Company, press releases and oral statements made by the Company's
authorized representatives may contain, forward looking statements that involve
certain risks and uncertainties. The Company's actual results could differ
materially from those expressed in such forward looking statements due to
important factors bearing on the Company's business, many of which already have
been discussed in this fillingfiling and in the Company's prior filings.
The following paragraphs discuss the risk factors the Company regards as the
most significant, although the Company wishes to caution that other factors that
are currently not considered as significant or that currently cannot be foreseen
may in the future prove to be important in affecting the Company's results of
operations. The Company undertakes no obligation to publicly update or revise
any forward looking statements, whether as a result of new information, future
events or otherwise.
Industry Risks. The precision ball and roller industry is cyclical and tends to
decline in response to overall declines in industrial production. The Company's
sales in the past have been negatively affected, and in the future very likely
would be negatively affected, by adverse conditions in the industrial production
sector of the economy or by adverse global or national economic conditions
generally.
11
Competition. The precision ball and roller market is highly competitive, and
many of the ball and roller manufacturers in the market are larger and have
substantially greater resources than the Company. The Company's competitors are
continuously exploring and implementing improvements in technology and
manufacturing processes in order to improve product quality, and the Company's
ability to remain competitive will depend, among other things, on whether it is
able, in a cost effective manner, to keep apacepace with such quality improvements.
In addition, the Company competes with many of its customers that, in addition
to producing bearings, also internally produce balls and rollers for sale to
third parties. The Company also faces a risk that its customers will decide to
produce balls and rollers internally rather than outsourcing their needs to the
Company.
Rapid Growth. The Company has significantly expanded its production facilities
and capacity over the last several years, and is currently induring the processthird quarter of purchasing and renovating1997
purchased an additional manufacturing plant in Kilkenny, Ireland. The Company
currently is not operating at full capacity and faces risks of further
under-utilization or inefficient utilization of its production facilities in
future years. The Company also faces risks associated with start-up expenses,
inefficiencies, delays and increased depreciation costs associated with its
plant expansions.
Raw Material Shortages. Because the balls and rollers manufactured by the
Company have highly-specialized applications, their production requires the use
of very particular types of steel. Due to quality constraints, the Company
obtains the majority of its steel from overseas suppliers. Steel shortages or
transportation problems, particularly with respect to 52100 Steel, could have a
detrimental effect on the Company's business.
Risks Associated with International Trade. Because the Company obtains a
majority of its raw materials from overseas suppliers and sells to a large
number of international customers, the Company faces risks associated with (i)
adverse foreign currency fluctuations, (ii) changes in trade, monetary and
fiscal policies, laws and regulations, and other activities of governments,
agencies and similar organizations, (iii) 11
the imposition of trade restrictions
or prohibitions, (iv) the imposition of import or other changesduties or taxes, and (v)
unstable governments or legal systems in countries in which the Company's
suppliers and customers are located. An increase in the value of the United
States dollar relative to foreign currencies may adversely affectaffects the ability of
the Company to compete with its foreign-based competitors for international as
well as domestic sales.
Dependence on Major Customers. During 1997, the Company's ten largest customers
accounted for approximately 77% of its net sales. Sales to various US and
foreign divisions of SKF, which is one of the largest bearing manufacturers in
the world, accounted for approximately 37% of net sales in 1997, and sales to
FAG accounted for approximately 10% of net sales. None of the Company's other
customers accounted for more than 10% of its net sales in 1997, but sales to
three of its customers each represented more than 5% of the Company's 1997 net
sales. The loss of all or a substantial portion of sales to these customers
would have a material adverse effect on the Company's business.
12
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
The Company's Annual Meeting of Stockholders was held on May 7, 1998. As of
March 25, 1998, the record date for the meeting, there were 14,804,271 shares
of common stock outstanding and entitled to vote at the meeting. There were
present at said meeting, in person or by proxy, stockholders holding
9,930,845 shares of common stock, constituting approximately 67% of the
shares of common stock outstanding and entitled to vote, which constituted a
quorum.
The first matter voted upon at the meeting was the election of Michael D.
Huff and Michael E. Werner as Class I Directors to serve for three-year
terms. The results of the voting in connection with such elections were as
follows:
FOR WITHHELD
Michael D. Huff 9,655,126 275,719
Michael E. Werner 9,465,635 465,210
Accordingly, all nominees were elected to serve until the 2001 Annual Meeting
of Stockholders and until their successors are duly elected and qualified.
In addition to the foregoing directors, G. Ronald Morris and Steven T.
Warshaw aew serving terms to expire at the 1999 Annual Meeting of
Stockholders, and Richard D. Ennen and Roderick R. Baty are serving terms
which are to expire at the 2000 Annual Meeting of Stockholders. Deborah
Ennen Bagierek resigned from her position as a director of the Company
effective May 7, 1998. Mr. Ennen, the Company's founder, continues in his
position as Chairman of the Company's Board of Directors.
The second matter voted upon at the 1998 Annual Meeting of Stockholders was
the ratification of Price Waterhouse, LLP as independent public accountants
to audit the Company's accounts for the fiscal year ending December 31, 1998.
The vote was 9,921,343 For and 4,052 Against, and there were 5,450
Abstentions.
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits Required by Item 601 of Regulation S-K
27 EDGAR Financial Data Schedules
(for information of SEC only)
(b) No reportsReports on Form 8-K were filed during the quarter ending JuneWere Filed During The Quarter Ending September 30,
1997.1998
13
INDEX TO EXHIBITS
Exhibit
Number Description
---------- ---------------
10.13 Loan Agreement, dated as of July 25, 1997, between the Company and
First American National Bank (filed herewith)
27 Financial Data Schedules (for information of SEC only)
15
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.
NN Ball & Roller, Inc.
---------------------------------------------------------------
(Registrant)
Date: August 13,November 5, 1998 /s/ Roderick R. Baty
----------------- ------------------------------------------------------ ----------------------------------
Roderick R. Baty,
President and Chief Executive
Officer
(Duly Authorized Officer)
Date: August 13,November 5, 1998 /s/ David Dyckman
----------------- ------------------------------------------------------ ----------------------------------
David Dyckman
Chief Financial Officer
(Principal Financial Officer)
(Duly Authorized Officer)
Date: August 13,November 5, 1998 /s/ William C. Kelly, Jr.
----------------- --------------------------------------------------------- ----------------------------------
William C. Kelly, Jr.,
Treasurer, Assistant Secretary and
Chief Accounting Officer
(Principal Accounting Officer)
(Duly Authorized Officer)
14