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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|X| Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarter ended July 3, 2004
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 0-22053
GENERAL BEARING CORPORATION
---------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-2796245
- -------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
44 High Street, West Nyack, New York 10994
- ------------------------------------ -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (845) 358-6000
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock $.01 par value per share
------------------------------------
(Title of class)
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.
|X| Yes |_| No
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). |_| Yes |X| No
At August 10, 2004, the Registrant had issued 7,102,200 shares of common stock,
$.01 par value per share, and had outstanding 3,767,972 shares.
CAUTIONARY STATEMENT RELEVANT TO FORWARD-LOOKING INFORMATION
FOR THE PURPOSE OF "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.
The Private Securities Litigation Reform Act of 1995 provides a
"safe harbor" for forward-looking statements, which are statements other than
those of historical fact, including, without limitation, ones identified by the
use of the words: "anticipates," "estimates," "believes," "expects," "intends,"
"plans," "predicts," and similar expressions. In this Quarterly Report such
statements may relate, among other things, to the recoverability of deferred
taxes, likely industry trends, the continued availability of credit lines, the
suitability of facilities, access to suppliers and implementation of joint
ventures and marketing programs. Such forward-looking statements involve
important risks and uncertainties that could cause actual results to differ
materially from those expected by the Company, and such statements should be
read along with the cautionary statements accompanying them and mindful of the
following additional risks and uncertainties possibly affecting the Company: the
possibility of a general economic downturn, which is likely to have an important
impact on historically cyclical industries such as manufacturing; significant
price, quality or marketing efforts from domestic or overseas competitors; the
loss of, or substantial reduction in, orders from a major customer; the loss of,
or failure to attain additional quality certifications; changes in U.S. or
foreign government regulations and policies, including the imposition of
antidumping orders on the Company or any of its suppliers; a significant
judgment or order against the Company in a legal or administrative proceeding;
and potential delays in implementing planned sales and marketing expansion
efforts and the failure of their effectiveness upon implementation.
GENERAL BEARING CORPORATION
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JULY 3, 2004
TABLE OF CONTENTS
Page No.
--------
PART I
Item 1. Financial Statements................................................2 - 8
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition ............................................9 - 15
Item 3. Quantitative and Qualitative Disclosure about Market Risk...........15 - 16
Item 4. Controls and Procedures.............................................16 - 17
PART II
Item 1. Legal Proceedings...................................................17
Item 5. Other Events........................................................17
Item 6. Exhibits and Reports on Form 8-K....................................18
Signature ...............................................................19
Certifications ...............................................................20 - 22
1
FINANCIAL STATEMENTS OF
GENERAL BEARING CORPORATION
AND SUBSIDIARIES
Item 1. CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands - Except for Shares and Per Share Data)
July 3, January 3,
2004 2004
----------- -----------
ASSETS (Unaudited)
Current:
Cash and cash equivalents $ 4,145 $ 1,701
Accounts receivable - net of allowance for doubtful
accounts of $486 and $330 16,222 12,378
Inventories 22,993 22,637
Prepaid taxes and taxes recoverable 1,105 3,729
Prepaid expenses and other current assets 1,905 1,864
Advances to affiliates 92 95
Deferred tax assets 1,652 1,652
-------- --------
Total current assets 48,114 44,056
Fixed assets, net of accumulated depreciation 24,363 21,482
Investment in and advances to joint ventures
and affiliates 590 3,362
Other assets 3,591 1,347
-------- --------
Total Assets $ 76,658 $ 70,247
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current:
Notes payable - banks $ 10,544 $ 9,021
Accounts payable:
Trade 8,857 6,387
Affiliates 198 1,683
Accrued expenses and other current liabilities 6,897 4,844
Current maturities of long-term debt 352 412
-------- --------
Total current liabilities 26,848 22,347
-------- --------
Long-term debt, net of current maturities 11,643 15,266
Other long-term liabilities - affiliate -- 124
Deferred taxes 886 886
Minority interests 13,160 9,153
Commitments and contingencies
Stockholders' equity:
Preferred stock par value $.01 per share - 1,000,000
shares authorized, none issued and outstanding -- --
Common stock par value $.01 per share - 19,000,000
shares authorized, 7,102,200 shares issued 71 71
Additional paid-in capital 40,133 40,133
Accumulated other comprehensive loss (563) (792)
Treasury stock at cost, 3,334,228 and 3,348,228 shares (1,395) (1,438)
Accumulated deficit (14,125) (15,503)
-------- --------
Total stockholders' equity 24,121 22,471
-------- --------
Total liabilities and stockholder's equity $ 76,658 $ 70,247
======== ========
See accompanying notes to condensed consolidated financial statements
2
FINANCIAL STATEMENTS OF
GENERAL BEARING CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands - Except for Shares and Per Share Data)
(Unaudited)
Twenty-six weeks ended Thirteen weeks ended
---------------------------- ----------------------------
July 3, June 28, July 3, June 28,
2004 2003 2004 2003
----------- ----------- ----------- -----------
Sales $ 39,831 $ 32,273 $ 21,526 $ 16,085
Cost of sales 29,077 22,426 15,708 11,219
----------- ----------- ----------- -----------
Gross profit 10,754 9,847 5,818 4,866
Selling, general and administrative expenses 7,469 6,332 4,016 3,247
----------- ----------- ----------- -----------
Operating income 3,285 3,515 1,802 1,619
Other expense, net 781 336 412 276
----------- ----------- ----------- -----------
Income from continuing operations before
income taxes and minority interests 2,504 3,179 1,390 1,343
Income taxes 790 1,099 405 551
----------- ----------- ----------- -----------
Income from continuing operations before
minority interests 1,714 2,080 985 792
Minority interests 336 456 294 258
----------- ----------- ----------- -----------
Income from continuing operations 1,378 1,624 691 534
----------- ----------- ----------- -----------
Loss from discontinued operations -- (37) -- (3)
Income (taxes) / benefit -- 13 -- --
----------- ----------- ----------- -----------
Loss from discontinued operations -- (24) -- (3)
----------- ----------- ----------- -----------
Net income $ 1,378 $ 1,600 $ 691 $ 531
=========== =========== =========== ===========
Income per common share from continuing
operations:
Basic $ 0.37 $ 0.42 $ 0.18 $ 0.14
----------- ----------- ----------- -----------
Diluted $ 0.37 $ 0.42 $ 0.18 $ 0.14
----------- ----------- ----------- -----------
Loss per common share from discountinued
operations:
Basic $ 0.00 $ (0.01) $ 0.00 $ (0.00)
----------- ----------- ----------- -----------
Diluted $ 0.00 $ (0.01) $ 0.00 $ (0.00)
----------- ----------- ----------- -----------
Income per common share from net income:
Basic $ 0.37 $ 0.41 $ 0.18 $ 0.14
----------- ----------- ----------- -----------
Diluted $ 0.37 $ 0.41 $ 0.18 $ 0.14
----------- ----------- ----------- -----------
Weighted average number of common shares:
Basic 3,763,049 3,865,547 3,767,972 3,870,346
----------- ----------- ----------- -----------
Diluted 3,768,396 3,866,579 3,776,646 3,872,665
----------- ----------- ----------- -----------
See accompanying notes to condensed consolidated financial statements
3
FINANCIAL STATEMENTS OF
GENERAL BEARING CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In Thousands)
(Unaudited)
Twenty-six weeks ended Thirteen weeks ended
---------------------------- ----------------------------
July 3, June 28, July 3, June 28,
2004 2003 2004 2003
----------- ----------- ----------- -----------
Net income $ 1,378 $ 1,600 $ 691 $ 531
Derivative fair market value adjustment 229 20 237 (24)
----------- ----------- ----------- -----------
Comprehensive income $ 1,607 $ 1,620 $ 928 $ 507
=========== =========== =========== ===========
See accompanying notes to condensed consolidated financial statements
4
FINANCIAL STATEMENTS OF
GENERAL BEARING CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
Twenty-six weeks ended
---------------------------
July 3, 2004 June 28, 2003
------------ -------------
Cash flows from operating activities:
Net income $ 1,378 $ 1,600
Adjustments to reconcile net income to cash provided
by operating activities:
Minority interests 336 (491)
Depreciation and amortization 1,417 1,181
Equity in income of joint ventures and affiliates (121) (185)
Other non-cash items charged to income -- 34
(Gain) / loss on sales of fixed assets (2) --
Changes in:
Accounts receivable (1,822) (1,067)
Inventories 2,470 2,250
Prepaid expenses and other assets 3,305 (340)
Due from affiliates (1,345) (1,705)
Accounts payable and accrued expenses 730 709
------- -------
Net cash provided by operating activities 6,346 1,986
------- -------
Cash flows from investing activities:
Investment in affiliate -- (281)
Acquisition of business, net of cash acquired 871 --
Fixed asset purchases (262) (1,856)
Net proceeds from sale of fixed assets 5 --
------- -------
Net cash provided by (used in) investing activities 614 (2,137)
------- -------
Cash flows from financing activities:
Purchase of treasury stock -- (33)
Net proceeds from (repayment of) note payable - banks (2,040) 495
Repayment of other long-term debt (114) (104)
Net proceeds from (repayment of) revolving credit facility (2,362) (417)
------- -------
Net cash used in financing activities (4,516) (59)
------- -------
Net increase (decrease) in cash and cash equivalents 2,444 (210)
Cash and cash equivalents, beginning of period 1,701 3,158
------- -------
Cash and cash equivalents, end of period $ 4,145 $ 2,948
======= =======
Cash paid during the period for:
Interest $ 821 $ 762
======= =======
Income taxes $ 349 $ 250
======= =======
See accompanying notes to condensed consolidated financial statements
5
GENERAL BEARING CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of The accompanying unaudited condensed consolidated
Presentation financial statements for General Bearing Corporation and
subsidiaries ("the Company") have been prepared in
accordance with generally accepted accounting principles
for interim financial information and with the
instructions to Form 10-Q and Regulation S-X.
Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting
principles for complete financial statements. In the
opinion of management, all adjustments (consisting
solely of normal recurring accruals) considered
necessary for a fair presentation have been included.
Operating results for the twenty-six weeks ended July 3,
2004 are not necessarily indicative of the results that
may be expected for the year ending January 1, 2005. For
further information, refer to the consolidated financial
statements and footnotes thereto included in the
Company's Annual Report on Form 10-K for the fiscal year
ended January 3, 2004.
2. Change in In April 2004, General Bearing Corporation ("General")
Ownership in invested $1,000,000 in Shanghai General Bearing Co. Ltd.
Joint Venture ("SGBC"), effectively increasing its ownership in SGBC
from 43.55% to 50%. SGBC is a partnership between
General of New York and Shanghai Roller Bearing Factory
of Shanghai, China. The April - June 2004 results of
SGBC have been fully consolidated in the second quarter
of 2004.
3. Discontinued The Company's Board of Directors and management adopted
Operations a plan in December 2002 to discontinue the operations of
the machine tool segment by sale of the assets during
2003. In accordance with Statement of Financial
Accounting Standards No. 144, "Accounting for the
Impairment or Disposal of Long Lived Assets", prior year
statements of operations of the Company have been
reclassified to segregate discontinued operations from
continuing operations.
In December 2003, the Company completed management's
previously adopted plan and disposed of the assets and
liabilities of General Ball & Roller, Inc. (formerly
known as WMW Machinery Company) and World Machinery
Group's ("WMG") interest in World Machinery Works, S.A.,
to two separate entities that are majority owned by an
officer of General Bearing Corporation ("General").
The other assets of WMG were not successfully disposed
of during 2003 and management currently does not
anticipate disposing of them in the foreseeable future.
While collectively immaterial, the remaining assets and
liabilities of WMG, have been reclassified back to
continuing operations in 2003.
6
GENERAL BEARING CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Inventories Inventories consist of the following: (In Thousands)
July 3, 2004 January 3, 2004
-------------------------------------------------------------------
Finished bearings $11,090 $ 9,931
Bearing raw materials, purchased
parts and work in process 11,903 12,706
------- -------
$22,993 $22,637
-------------------------------------------------------------------
5. Earnings per Basic earnings per share includes no dilution and is
Share computed by dividing net income by the weighted average
number of common shares outstanding for the period.
Diluted earnings per share reflect, in periods in which
they have a dilutive effect, the dilution which would
occur upon the exercise of stock options. A
reconciliation of the shares used in calculating basic
and diluted earnings per share follows:
Twenty-six Weeks Ended
--------------------------------
July 3, 2004 June 28, 2003
-----------------------------------------------------------------------
Diluted earnings per share
computation:
Basic weighted average common
shares outstanding 3,763,049 3,865,547
Incremental shares from assumed
exercise of dilutive options 5,347 1,032
-----------------------------------------------------------------------
3,768,396 3,866,579
-----------------------------------------------------------------------
Thirteen Weeks Ended
--------------------------------
July 3, 2004 June 28, 2003
-----------------------------------------------------------------------
Diluted earnings per share
computation:
Basic weighted average common
shares outstanding 3,767,972 3,870,346
Incremental shares from assumed
exercise of dilutive options 8,674 2,319
-----------------------------------------------------------------------
3,776,646 3,872,665
-----------------------------------------------------------------------
7
GENERAL BEARING CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the twenty-six weeks ended July 3, 2004 and June 28,
2003, 245,800 and 245,800 options outstanding,
respectively, were anti-dilutive. For the thirteen weeks
ended July 3, 2004 and June 28, 2003, 245,800 and
245,800 options outstanding, respectively, were
anti-dilutive.
6. Derivative The Company follows Statement of Financial Accounting
Financial Standards No. 133 ("SFAS 133") "Accounting for
Instruments Derivative Instruments and Hedging Activities", as
amended, and interpreted, which requires that all
derivative instruments be recorded on the balance sheet
at their fair value.
In order to manage it's exposure to changes in interest
rates, the Company has entered into an interest rate
swap agreement to hedge a portion of its total long-
term debt that is subject to variable interest rates.
This agreement is considered to be a hedge against
changes in the amount of future cash flows associated
with the interest payments on variable rate debt
obligations. For the twenty-six weeks ended July 3, 2004
and June 28, 2003, expenses recognized in earnings
relating to the interest rate swap totaled $186,000 and
$207,000, respectively and are included in the Statement
of Operations in "Other expenses, net". Any amounts
reported in "Comprehensive Income" will be reclassified
to earnings over the term of the agreement, through
2007.
7. Litigation Except as explained in Part II of this report, there
have been no material changes in litigation since the
events reported in the Company's 10-Q for the fiscal
quarter ended April 3, 2004.
8
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
There are no non - GAAP financial measures provided in this report.
Business Overview
Prior to 2004, General Bearing Corporation ("General") and subsidiaries
(collectively, the "Company") operated in two business segments: Bearings
("Continuing Operations") and Machine Tools ("Discontinued Operations"). Based
on several years of disappointing performance of the machine tools segment and
the Company's desire to focus its resources on its core business, the Company's
Board of Directors and management adopted a plan in December 2002 to discontinue
the operations of the machine tool segment by sale of the assets during 2003.
Accordingly, pursuant to Statement of Financial Accounting Standards No. 144,
"Accounting for the Impairment or Disposal of Long Lived Assets", the Company's
prior period financial statements have been reclassified to segregate
discontinued operations from continuing operations.
In December 2003, the Company completed management's previously adopted plan and
disposed of the assets and liabilities of General Ball & Roller, Inc. (formerly
known as WMW Machinery Company) and its interest in World Machinery Works, S.A.,
to two separate entities that are majority owned by an officer of General.
In April 2004, General increased its ownership in Shanghai General Bearing Co.
Ltd. ("SGBC") from 43.55% to 50%. Due to this increased ownership, the financial
statements of SGBC have been consolidated for the first time beginning in April
2004.
Continuing Operations
The Company manufactures and distributes a variety of bearings and bearing
components under the Hyatt(R) and The General(R) trademarks. The Company
supplies original equipment manufacturers ("OEMs") and distributors. The
Company's products, sold principally in the United States ("U.S.") and Asia, are
used in a broad range of applications, including automobiles, railroad cars,
locomotives, trucks, heavy duty trailers, office equipment, machinery and
appliances. General has entered into six joint ventures (five with manufacturers
in the Peoples Republic of China ("PRC")) to enable it to manufacture high
quality, low cost bearings and bearing components. General obtains a majority of
its bearing and component requirements from its manufacturing plants in the PRC.
Trends and Uncertainties:
General's business model is based on providing low-cost, high-precision bearing
products to predominantly North American customers. The continued cost
consciousness of this customer base is a positive trend for the Company, which
the Company believes has resulted in increased sales in 2003 - 2004 and the
increased sales volume to the automotive market over the past three years. The
Company's low-cost Chinese operations provide a competitive advantage for
high-precision bearing products. The Company believes this competitive advantage
has created opportunities for the Company to grow in 2004 and the future. The
Company has attributed the decline in sales to distributors over the past
several years to the downturn in U.S. manufacturing. The Company believes there
are indications that there will be a recovery in U.S. manufacturing and that its
sales will grow as a result of such recovery.
9
The major competition for the Company's lower cost products comes from three
evolving trends:
1. Established higher cost competitors also moving their production to low-cost
areas, such as China,
2. Customers establishing "buying" functions in China to pursue lower cost
direct purchases, and
3. Customers moving their complete assembly processes from North America to
China or other low-cost regions.
Other trends, events and areas of uncertainty which could materially affect the
Company include the following:
1. The increased global cost of steel has significantly increased the cost of
materials for manufacturing bearings. Additionally, the high demand for steel in
China has created a price increase in China that is even greater than the price
increase in North America. While the Company has been able to collect material
surcharges to offset the increased cost, to some extent, the inability to
collect such material surcharges or any significant limitation on it's ability
to collect such surcharges could materially and adversely affect the Company's
operating income and liquidity.
2. The Company's business is based on low-cost, high-quality products from its
Chinese operations. The Company's cost of goods is based in part on the
valuation of the Chinese RMB versus the U.S. Dollar. Should there be an adverse
change in the exchange rate of the RMB against the U.S. Dollar, GBC's
competitive position, operating income and cash flow will be adversely impacted.
3. Several major North American customers have slowed their payments over the
past year or two. Should a significant portion of the Company's current customer
base also move to slow payments, there could be a material adverse impact on the
Company's liquidity.
4. The Company's dependence on Chinese products for the supply of bearings and
bearing components creates an uncertainty and concentration risk. If for any
reason the Company was unable, or limited in its ability to continue to ship
products from China, it could experience a material disruption in supply, which
would materially adversely affect the Company's operations and liquidity.
5. Expected increases in sales volume may not result in a proportional increase
in cash flow as the Company may be required to use cash for working capital
associated with the growth in sales.
10
Results of Operations
Sales. Sales for the second fiscal quarter ended July 3, 2004 ("Q-2 2004")
of $21,526,000 represents a 33.8% increase compared to the second fiscal quarter
ended June 28, 2003 ("Q-2 2003"). A large portion of the sales increase is due
to the consolidation of SGBC's sales. Additionally, the Company experienced
increases in sales of tapered roller bearings for heavy duty truck trailers,
drive line components to the automotive industry, precision balls, tapered
journal bearings to the railroad industry, heavy duty aftermarket, and
distribution.
Sales for the twenty-six weeks ended July 3, 2004 ("2004") of $39,831,000
represents a 23.4% increase compared to the twenty-six weeks ended June 28, 2003
("2003"). A large portion of the sales increase is due to the consolidation of
SGBC's sales. Additionally, there were increases in sales of drive line
components to the automotive industry, tapered roller bearings for heavy duty
truck trailers, precision balls, and distribution.
Gross Profit. Gross profit for Q-2 2004 of $5,818,000 represents a 19.6%
increase compared to Q-2 2003. As a percentage of sales, gross profit (GP%) was
27.0% for Q-2 2004 compared to 30.3% for Q-2 2003. The decrease in GP% was
mainly due to material cost increases as a result of higher steel costs, the
effect of the Chinese government reducing the Value Added Tax credit for exports
by 4%, $308,000 in increased inventory provisions, and changes in product mix.
Gross profit for 2004 of $10,754,000 represents a 9.2% increase compared
to 2003. As a percentage of sales, GP% was 27.0% for 2004 compared to 30.5% for
2003. The decrease in GP% was mainly due to material cost increases as a result
of higher steel costs, the effect of the Chinese government reducing the Value
Added Tax credit for exports by 4%, $450,000 in increased inventory provisions,
and changes in product mix.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses (S,G&A) as a percentage of sales were 18.7% in Q-2 2004
compared to 20.2% in Q-2 2003. S,G&A increased by $769,000 mainly due to the
consolidation of SGBC's expenses, increases in salaries, bad debts, professional
fees and travel expenses.
S,G&A as a percentage of sales were 18.8% in 2004 compared to 19.6% in
2003. S,G&A increased by $1,137,000 mainly due to the consolidation of SGBC's
expenses, increases in salaries, bad debts, professional fees, and travel
expenses.
Operating Income. Operating income for Q-2 2004 of $1,802,000 represents
an 11.3% increase compared to Q-2 2003 due to higher sales volume, partially
offset by lower GP% and higher S,G&A.
Operating income for 2004 of $3,285,000 represents a 6.5% decrease
compared to 2003 due to higher S,G&A and lower GP%, partially offset by higher
sales volume.
11
Other Expense, net. Other expense, net was $412,000 in Q-2 2004 compared
to $276,000 in Q-2 2003 and is comprised of miscellaneous non-operating income
and expenses, interest expense and equity in income of affiliates ("equity
income") as follows: (In thousands)
Second Quarter
2004 2003
----------------------
Other non-operating (income) expenses, net $ 12 $ (35)
Interest expense, net 462 392
Equity (income) in affiliates (62) (81)
----- -----
$ 412 $ 276
Other expense, net was $781,000 in 2004 compared to $336,000 in 2003 as
follows: (in thousands)
Six Months
2004 2003
----------------------
Other non-operating (income) expenses, net $ 43 $ (41)
Interest expense, net 859 562
Equity (income) in affiliates (121) (185)
----- -----
$ 781 $ 336
Pursuant to requirements imposed in 1993 by the United States Office of Foreign
Assets Control ("OFAC"), at the end of 2002 the Company carried a net payable
("IKL payable") to General IKL Corp., an affiliate. The requirement arose out of
sanctions imposed by the U.S. government on the countries comprising the former
Republic of Yugoslavia, "freezing" certain assets in the United States. In
February 2003, OFAC "unfroze" assets affected by the sanctions and the Company
reduced a significant portion of the IKL payable which the Company disputed
resulting in a $238,000 reduction in interest expense as of March 29, 2003.
Income Tax. The Company recorded income tax expense of $405,000 in Q-2
2004 compared to $551,000 in Q-2 2003. The effective income tax rate was 29.1%
in Q-2 2004 compared to 41.0% in Q-2 2003. The Company's effective income tax
rate was 31.5% in 2004 compared to 34.6% in 2003.
Net Income. Net income for Q-2 2004 increased by 29.4% to $691,000 or $.18
per basic and diluted share, from $531,000 or $.14 per basic and diluted share
in Q-2 2003. The increase is primarily due to higher sales volume, partially
offset by lower GP% and higher S,G&A. Net income for 2004 decreased 13.9% from
2003 to $1,378,000 or $.37 per basic and diluted share, from $1,600,000 or $.41
per basic and diluted share in 2003 mainly due to higher S,G&A, higher Other
expenses, net, and lower GP%, partially offset by increased sales volume.
12
Financial Condition, Liquidity and Capital Resources
During the periods presented, the Company's primary sources of
capital have been net cash provided by operating activities and a Revolving
Credit Facility with KeyBank National Association ("Revolving Credit Facility").
The primary demands on the Company's capital resources have been investments in,
and advances to, affiliates (joint ventures) and fixed asset purchases made to
broaden the Company's product offering and improve operations. At July 3, 2004
and January 3, 2004, the Company had working capital of $21,266,000 and
$21,709,000, respectively.
Cash provided by operating activities in 2004 was $6,346,000. Cash
provided by net income before depreciation and amortization, reduced inventory,
and reduced prepaid expenses and other assets primarily due to the collection of
taxes, was partially offset by increased accounts receivable and due from
affiliates.
Cash provided by investing activities in 2004 was $614,000. The
Company invested cash of $807,000 in SGBC as part of the investment required to
increase General's ownership from 43.55% to 50%. As a result, $1,678,000 of cash
was added to the Company's Consolidated Balance Sheet. During the six months
ended July 3, 2004, the Company used cash of $262,000 for capital expenditures.
Cash used in financing activities in 2004 was $4,516,000. During
2004, the Company had net decreases in debt under its Revolving Credit Facility
of $2,362,000, net decreases in Notes payable - banks of $2,040,000 and made
$114,000 in payments under its capital lease facility.
At July 3, 2004, the Company had outstanding debt of $6,819,000
under its Revolving Credit Facility, which expires on July 31, 2006, and had
further availability of approximately $14.5 million. The Company is in
compliance with all of its loan covenants.
The Company has not repurchased any shares of it's common stock in
2004. The Company has purchased 410,228 shares of it's common stock for a cost
of $1,472,000 since the inception of the Company's Stock Repurchase Program
("the Program") on January 11, 2000. Of the 410,228 shares repurchased, 26,000
have been reissued, primarily to the Board of Directors as part of their annual
compensation.
The Company believes that funds generated from continuing
operations, capital lease financing and borrowing under the existing and any
future revolving credit facilities will be sufficient to finance the Company's
investment commitments, anticipated working capital and capital expenditure
requirements for at least the next 24 months. The Company's operating cash flow
could be adversely affected if there was a decrease in demand for the Company's
products.
13
The table and notes below describe the Company's contractual obligations related
to its liquidity.
(In Thousands)
Payments Due by Period
-----------------------------------------------------------
Less
than 1 1 - 3 4 - 5 After 5
Total year years years years
------- ------- ------- ------- -------
Contractual Obligations:
Bank revolving line of credit $ 6,819 $ -- $ 6,819 $ -- $ --
Notes payable - banks 12,453 10,544 1,909 -- --
Capital lease obligations 182 152 26 4 --
Other long - term liabilities - affiliate 180 -- 180 -- --
Note payable - other 2,905 200 2,705 -- --
------- ------- ------- ------- -------
Total obligations - per Balance Sheet 22,539 10,896 11,639 4 --
Off Balance Sheet items:
Operating leases 12,299 1,346 3,651 1,281 6,021
Equity investment obligations 250 250 -- -- --
------- ------- ------- ------- -------
Total contractual cash obligations $35,088 $12,492 $15,290 $ 1,285 $ 6,021
======= ======= ======= ======= =======
The amount outstanding under General's revolving line of credit decreased by
$2,711,000 to $6,819,000 during the second quarter primarily as a result of cash
generated by operating activities as well as the receipt of dividends.
Notes payable - banks increased by $2,713,000 to $12,453,000 and represents
debts of the Company's joint ventures, for which General is not liable. The
increase in Notes payable - banks is mainly due to the consolidation of SGBC. It
is anticipated that these debts will be paid by the joint ventures, to the
extent possible, from funds generated from their operations and the balance, if
any, refinanced with new bank debt.
14
Off Balance Sheet Arrangements
The Company believes that all material off balance sheet arrangements have been
included in the tabular disclosure of contractual obligations.
Item 3. Quantitative and Qualitative Disclosure about Market Risk
The Company is subject to market risk primarily associated with changes in
interest rates and foreign currency exchange rates. In order to manage the
volatility relating to interest rates, the Company has entered into an interest
rate swap agreement. In order to manage the volatility relating to foreign
currency exchange rates the Company denominates substantially all purchase and
sale transactions in U.S. dollars. The Company does not anticipate any material
changes in its primary market risk exposures in the near future.
The Company does not execute transactions or hold derivative financial
instruments for trading purposes.
Interest Rate Risk
The Company's primary market risks are fluctuations in interest
rates and variability in interest rate spread relationships (i.e., prime to
LIBOR spreads) on its bank debt and interest rate swap. As of July 3, 2004, the
Company had $5,850,000 outstanding subject to an interest rate swap. This swap
is used to convert floating rate debt relating to the Company's revolving credit
agreement to fixed rate debt to reduce the Company's exposure to interest rate
fluctuations. The net result was to substitute a fixed interest rate of 9.17%
for the variable rate. The swap amortizes by $75,000 per month and terminates in
December 2007. Under the interest rate environment during the twenty-six weeks
ended July 3, 2004, the Company's interest rate swap agreement resulted in
additional expense of approximately $186,000.
The following table provides information about the Company's
interest rate swap agreement that is sensitive to changes in interest rates. The
table presents average notional amounts and weighted average interest rates by
fiscal year. Notional amounts are used to calculate the contractual cash flows
to be exchanged under the swap contract.
Fair
2004 2005 2006 2007 Total Value
In Thousands
Interest Rate Swaps
Variable to Fixed (US$) 5,812 4,912 4,012 3,112 5,850 563
Average Pay Rate 9.17% 9.17% 9.17% 9.17% 9.17%
Average Receive Rate 3.40% 3.90% 4.50% 5.00%
15
The following table provides information about the Company's variable rate debt.
Fair
2004 2005 2006 2007 2008 Total Value
In Thousands
Debt:
Variable Rate (US$) 11,000 10,850 10,750 10,500 10,000 6,819 6,819
Average Interest Rate 3.50% 4.00% 4.60% 5.10% 6.00% 3.25%
The Company's management believes that fluctuations in interest rates in the
near term would not materially affect the Company's consolidated operating
results, financial position or cash flows as the Company has limited risks
related to interest rate fluctuations.
Foreign Currency Risk
The Company does not use foreign currency forward exchange contracts
or purchased currency options to hedge local currency cash flows or for trading
purposes. All sales arrangements from domestic companies with international
customers are denominated in U.S. dollars. Only a small fraction of the
Company's purchases are denominated in foreign currency. General purchases
approximately $2,500,000 of product monthly from its Chinese joint ventures,
which use proceeds thereof, to satisfy locally incurred liabilities in Renminbi
(RMB). Had there been an adverse 10% fluctuation between the exchange rate of
the U.S. dollar and the RMB, it would have resulted in a potential loss of
earnings of approximately $1,500,000 for the twenty-six weeks ended July 3,
2004.
Item 4. Controls and Procedures
As of the end of the period covered by this Report, the Company has
evaluated the effectiveness of the design and operation of its "disclosure
controls and procedures" ("Disclosure Controls"). This evaluation ("Controls
Evaluation") was done under the supervision and with the participation of
management, including the Chief Executive Officer ("CEO") and Controller. The
Company's management, including the CEO and Controller, does not expect that its
Disclosure Controls or its "internal control over financial reporting"
("Internal Controls") will prevent all error and all fraud. A control system, no
matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are met. Further,
the design of a control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative to their
costs. Because of the inherent limitations in all control systems, no evaluation
of controls can provide absolute assurance that all control issues and instances
of fraud, if any, within the Company have been detected. These inherent
limitations include the realities that judgments in decision-making can be
faulty, and that breakdowns can occur because of simple error or mistake.
Additionally, controls can be circumvented by the individual acts of some
persons, by collusion of two or more people, or by management override of the
control. The design of any system of controls also is based in part upon certain
assumptions about the likelihood of future events, and there can be no assurance
that any design will succeed in achieving its stated goals under all potential
future conditions; over time, control may become inadequate because of changes
in conditions, or the degree of compliance with the policies or procedures may
deteriorate. Because of the inherent limitations in a cost effective control
system, misstatements due to error or fraud may occur and not be detected. The
Company conducts periodic evaluations of its Internal Controls to enhance, where
necessary, its procedures and controls.
16
Conclusions: Based upon the Controls Evaluation, the CEO and Controller have
concluded that, subject to the limitations noted above, the Disclosure Controls
are effective in reaching a reasonable level of assurance that management is
timely alerted to material information relating to the Company during the period
when its periodic reports are being prepared. In accordance with SEC
requirements, the CEO and Controller note that, since the date of the Controls
Evaluation to the date of this report, there have been no significant changes in
Internal Controls or in other factors that could significantly affect Internal
Controls, including any corrective actions with regard to significant
deficiencies and material weaknesses, except as follows:
Following the Company's discovery of the conduct at SGBC which formed the basis
of the lawsuit and arbitration proceeding described in the Company's Annual
Report on Form 10-K dated April 19, 2004, the Company has taken the following
measures: (a) replacement of the individuals who it determined were involved in
the wrongful conduct; (b) implementation of a dual signature requirement for
certain SGBC expenditures, and (c) the hiring of a Financial Controller, in
China, responsible for financial oversight and reporting of the joint ventures.
PART II
Item 1. Legal Proceedings
There have been no material developments in any of the Company's
legal matters subsequent to the events reported in the Company's 10-Q filed May
18, 2004.
Item 5. Other Events
On April 28, 2004, the Company reported that it received a letter
from a group of managers and current stockholders led by Seymour I. Gussack,
Chairman of the Company's Board of Directors, David L. Gussack, Chief Executive
Officer and Director, and Directors Robert E. Baruc and Nina M. Gussack (the
"Management Group"), expressing the Management Group's consideration of taking
the Company private through a tender offer for all of the outstanding shares of
the Company not owned by the Management Group.
On July 16, 2004, the Company announced that GBC Acquisition Corp.,
a company controlled by Seymour Gussack and David Gussack, was commencing a cash
tender offer to acquire all of the outstanding common stock of the Company not
owned by the Management Group, at an offer price of $4.00 per share.
On August 16, 2004, GBC Acquisition Corp. announced that the cash
tender offer expired in accordance with its terms. The tender offer was subject
to a number of conditions, including the tender of a sufficient number of shares
such that, GBC Acquisition Corp. would own at least 90% of the outstanding
shares. This condition was not satisfied and no shares were purchased in the
tender offer.
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
31.1 Certification of the Chief Executive Officer required by Rule
13a - 14(a) or 15d - 14(a), as adopted pursuant to Section 302 of
the Sarbanes Oxley Act of 2002.
31.2 Certification of the Controller required by Rule 13a - 14(a) or
15d - 14(a), as adopted pursuant to Section 302 of the Sarbanes
Oxley Act of 2002.
32. Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes Oxley Act of 2002.
(b) Current reports on Form 8-K
On April 28, 2004, the Company filed a Form 8-K reporting that it
received a letter from a group of managers and current stockholders
led by Seymour I. Gussack, Chairman of the Company's Board of
Directors, David L. Gussack, Chief Executive Officer and Director,
and Directors Robert E. Baruc and Nina M. Gussack, expressing the
group's consideration of taking the Company private through a tender
offer for all of the outstanding shares of the Company not owned by
the group.
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Quarterly Report on Form 10-Q to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: August 17, 2004.
GENERAL BEARING CORPORATION
- ---------------------------
(Registrant)
/s/ David L. Gussack
- ------------------------------------
David L. Gussack
Chief Executive Officer
/s/ Rocky Cambrea
- ------------------------------------
Rocky Cambrea
Controller
19