UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[ X ] Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended December 28, 1996
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
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(Exact name of registrant as specified in its charter)
Delaware 13-2796245
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
44 High Street, West Nyack, New York 10994
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (914) 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
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(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.
[ ] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (Section 229.405 of this chapter) is not
contained herein, and will not be contained, to the best of registrant's
knowledge, in definitive proxy or information statements incorporated
by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X]
At March 24, 1997 the aggregate market value of the Registrant's
outstanding common stock, $.01 par value per share, held by non-
affiliates, was $5,775,250, based on the closing sale price as reported
March 24, 1997 on The NASDAQ Small Cap Market.
At March 24, 1997, the Registrant had issued and outstanding 3,900,000
shares of common stock, $.01 par value per share.
DOCUMENTS INCORPORATED BY REFERENCE
None of the documents indicated on Form 10-K have been
incorporated herein by reference.
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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,"
"expects," "intends," "plans," "predicts," and similar expressions.
In this Annual Report such statements may relate 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.
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GENERAL BEARING CORPORATION
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 28, 1996
TABLE OF CONTENTS
Page No.
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PART I
Item 1. Business. . . . . . . . . . . . . . . . . . . . . . 1
Item 2. Properties. . . . . . . . . . . . . . . . . . . . . 9
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . 10
Item 4. Submission of Matters to a Vote of Security Holders 11
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters . . . . . . . . . . . . . . 12
Item 6. Selected Financial Data . . . . . . . . . . . . . . 12
Item 7. Management's Discussion and Analysis of Financial
Condition and Result of Operations . . . . . . . 13
Item 8. Financial Statements and Supplementary Data . . . . 17
Item 9. Change in and Disagreements with Accountants on
Accounting and Financial Disclosure. . . . . . . 43
PART III
Item 10. Directors and Executive Officers of the Registrant. 44
Item 11. Executive Compensation. . . . . . . . . . . . . . . 46
Item 12. Security Ownership of Certain Beneficial Owners and
Management . . . . . . . . . . . . . . . . . . . 47
Item 13. Certain Relationships and Related Transactions. . . 48
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K . . . . . . . . . . . . . . 52
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PART I
Item 1. Business.
General Bearing Corporation ("Company") manufactures, sources,
assembles and distributes a variety of bearing components and bearing
products, including ball bearings, tapered roller bearings, spherical
roller bearings and cylindrical roller bearings under the Hyatt(R) and
The General(R) trademarks. The Company supplies original equipment
manufacturers ("OEMs") and the industrial aftermarket principally in
the United States ("U.S.") and Canada. The Company's products are used
in a broad range of applications, including automobiles, railroad cars,
locomotives, trucks, office equipment, machinery and appliances.
The Company operates in two divisions: the OEM Division, which
supplies OEMs, and the Distribution Division, which serves distributors
that supply the repair and maintenance aftermarket and small OEMs.
Current OEM Division customers include automotive and locomotive
divisions of General Motors Corporation ("GM"), Gunite Corporation
("Gunite"), Strick Corporation ("Strick"), Trinity Industries, Inc.
("Trinity"), Burlington Northern Railroad Co. ("Burlington Northern")
and Xerox Corporation ("Xerox"). The Distribution Division has
customers ranging in size from Motion Industries Inc. ("Motion
Industries") and Applied Industrial Technology, each of which has more
than 400 outlets, to independent single outlet operations. The
Distribution Division's individual shipments are typically smaller in
volume but have higher gross margins.
Through flexibility in manufacturing and sourcing, as well as
attentive customer service, the Company strives to be a reliable,
innovative and cost effective provider of bearing components and
products to the approximately $5 billion per year U.S. bearing market.
The Company's strategy to accomplish this objective includes the
following:
* PROVIDE HIGH QUALITY PRODUCTS AND SUPERIOR CUSTOMER SERVICE. The
Company maintains a detailed and extensive Quality Assurance Program
and has been certified to the M 1003 standard by the Association of
American Railroads ("AAR") and the MIL-I-45208 standard by General
Dynamics, a military contractor. The Company currently is taking
steps to obtain ISO 9001 and QS 9000 registrations from the
International Standards Organization ("ISO"). The Company also
requires that both its affiliated and unaffiliated suppliers
conform to Company and customer quality and engineering standards.
Certain of the Company's products also have been specifically
certified by the AAR for use in and railroad cars. In addition, the
Company has been qualified as an authorized supplier by leading
automobile and truck trailer manufacturers (including GM, Fruehauf,
Gunite, Stoughton Trailers, Inc. ("Stoughton"), and Strick),
railroads (including Burlington Northern, the Atchison, Topeka and
Santa Fe Railway ("Santa Fe"), Missouri Pacific Railroad Company
("Missouri Pacific"), Southern Pacific Rail Corporation ("Southern
Pacific") and Norfolk Southern Corp. ("Norfolk Southern")) and
national distributors of bearings, including Motion Industries
and Bearings, Inc. These certifications and qualifications, which
often take significant time to obtain because of testing and other
requirements, enable the Company to supply large markets currently
served by a limited number of competitors and to which the Company's
access had been limited previously.
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* PRESENCE IN CHINA. In 1987, the Company formed a joint venture,
Shanghai General Bearing Co. Ltd. ("SGBC"), in the People's Republic
of China ("PRC") to establish a low cost, quality controlled source
for bearings and bearing components. The Company has formed other
joint ventures in the PRC, and it continues to investigate joint
venture opportunities. The Company believes that potential
customers in the U.S. intending to establish or expand manufacturing
and other facilities in the PRC have, and will continue to have, an
incentive to purchase bearings from the Company in order to satisfy
Chinese counterpurchasing and local content requirements. In
addition, on February 3, 1997, the U.S. Department of Commerce
("Commerce") granted the Company's joint venture, SGBC, partial
revocation of the antidumping order affecting tapered roller
bearings from the PRC. As a result of SGBC receiving zero or de
minimis antidumping margins for the periods from 1990 to 1993,
("4th, 5th and 6th Reviews" ), Commerce revoked the antidumping
order as to SGBC in the 1993-1994 period ("7th Review"). As a result
of the revocation, SGBC and the Company will no longer be required
to participate in the annual reviews of the antidumping order
conducted by Commerce. Timken has filed actions against the United
States in the Court of International Trade challenging Commerce's
final antidumping determinations of the 4th, 5th, 6th and 7th
reviews. The Company knows of no such revocations pending for other
companies and believes its own revocation provides it with a
competitive advantage.
* MANUFACTURING AND SOURCING FLEXIBILITY. The Company operates on
the principle that a flexible method of combining product and
component purchasing with its own manufacturing and assembly
capabilities can provide customers with high quality products and
cost advantages. The Company uses its manufacturing, engineering and
purchasing expertise to determine the highest quality and most cost
effective methods of production. The Company currently sources
bearing components and products from over 20 factories outside the
U.S. In order to maintain the Company's flexibility to change with
the market, the Company typically limits the term of its supply
contracts to one year.
* NICHE MARKET PRODUCTS. Since 1992, the Company increasingly has
emphasized the sale of special and niche market bearings. Special
bearings are manufactured according to the design specifications of
a particular customer, often in cooperation with the Company's
engineering staff. Niche market bearings are used in specific
industries served by a limited number of manufacturers and are often
sold at higher profit margins than standard bearings. Sales of
special and niche market bearings by the Company have increased by
approximately 40% from fiscal 1993 to fiscal 1996.
* IMPROVED FINANCIAL POSITION AND CUSTOMER CONFIDENCE. In September
1991, the Company filed for bankruptcy protection as a result of its
inability to meet its obligations under a loan it incurred to
acquire the assets of Hyatt Clark Industries ("Hyatt"), formerly a
division of GM. In connection with the Company's reorganization, the
Company took significant steps to improve its operations and
financial position and reestablish the well-known Hyatt(R) brand.
As a result of these efforts, the Company increased its sales from
approximately $27.3 million in fiscal 1993, the last year in which
the Company operated in bankruptcy, to approximately $38.3 million
in fiscal 1996, and reported operating income of $3,201,000 for
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fiscal 1996 compared to an operating loss of $387,000 for fiscal
1993. Although there cannot be any assurance that it will be the
case, and while the Company has no formal basis for determining the
effect of the product recall on customer confidence, the Company
believes that as a result of its recent initial public offering
("Offering") it may be redesignated as an approved vendor by certain
of such distributors, enabling the Company to increase its
distribution sales, and the Offering may enhance customer confidence
in the Company's ability to undertake projects requiring greater
capital commitments by the Company.
As a result of the Company's improved financial condition,
certifications and qualifications, a favorable operating environment
for its Chinese joint ventures, its manufacturing and sourcing
expertise and focus on niche markets, the Company believes it is
well positioned to increase sales and profitability.
INDUSTRY OVERVIEW
Based upon statistics published by Commerce, shipments of
antifriction bearings and components in the U.S. exceeded $5.2 billion
for 1995, an increase of 11% over 1994. There has been an approximately
5% annual rate of growth for antifriction bearings and components in
the U.S. for the past 10 years. The industry's 1995 shipments included
approximately $1.9 billion of ball bearings, $1.3 billion of tapered
roller bearings, $900 million of other types of roller bearings, $450
million of mounted units and $589 million of bearing components. Timken
dominates the tapered roller bearing market with estimated sales in
excess of $1 billion. The Company competes in segments of each of these
bearing classifications. The antifriction bearing industry historically
has been cyclical in nature. However, long-term growth prospects are
expected to continue as the demand for application products requiring
antifriction bearings increases. Antifriction bearings are used in
practically every industrial and consumer product requiring reliable,
continuous circular motion.
PRODUCTS
The Company and its joint ventures manufacture and market high
quality, precision ball and roller bearings used in a broad range of
applications including automotive and trucking (e.g., steering columns,
wheels and axles), railcar and locomotive (e.g., wheel and axle
assemblies), appliances (e.g., washing machines, fans and vacuum
cleaners), lawn and garden implements (e.g., lawn mowers), office
equipment (e.g., copiers), consumer products (e.g., bicycles), medical
equipment (e.g., wheelchairs), material handling (e.g., conveyor
assemblies and hand trucks), power tools (e.g., drills and lathes),
chemical processing and the oil industry (e.g., drilling rigs).
The Company sells approximately 2,000 products. The Company's product
line includes standard and metric precision ball bearings, double row
ball bearings, unground bearings, and special ball bearings. The
Company offers its products in standard, modified, and custom designs
where appropriate. The Company produces both special and niche market
bearings. Special bearings are specifically manufactured to the
requirements of a customer, as determined in cooperation with the
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Company's engineering staff. Examples of these products include
bearings for copier machines, automotive steering columns, postal
equipment and wheelchairs. Niche bearings are bearings used in specific
industries, and are produced by a limited number of manufacturers. The
Company produces, under the Hyatt(R) brand, selected tapered roller
bearings, spherical roller bearings and cylindrical roller bearings
which are used in railroad, truck trailer, automotive and other
industrial applications.
MANUFACTURING AND SOURCING
The Company primarily manufactures and assembles bearings at its
facilities in New York and New Jersey, and, since 1987, at the
Company's joint venture facility, SGBC, in Shanghai, PRC. Although
certain imports from various locations have been subject to antidumping
duties since 1987, requiring importing companies to post cash deposits,
SGBC, the Company's Chinese joint venture and principal source of
imported product, has not been required to pay cash deposits for
antidumping duties on tapered roller bearings imported from the PRC
since 1991, based upon Commerce's final determination as to the
fairness of SGBC's pricing that year. On February 3, 1997, Commerce
granted the Company's joint venture, SGBC, partial revocation of the
antidumping order affecting tapered roller bearings from the PRC. As a
result of SGBC receiving zero or de minimis antidumping margins for the
4th, 5th and 6th Reviews, Commerce revoked the antidumping order as to
SGBC in the 7th Review. As a result of the revocation, SGBC and the
Company will no longer be required to participate in the annual reviews
of the antidumping order conducted by Commerce. Timken has filed
actions against the United States in the Court of International Trade
challenging Commerce's final antidumping determinations of the 4th,
5th, 6th and 7th reviews.
The Company produces approximately 37% of the bearings that it sells
and obtains an additional 24% from joint ventures in which it
participates. The Company currently relies on approximately 82
unaffiliated manufacturers to produce the remaining 39% of the bearings
and components that it distributes. The Company has no long-term
contracts with its unaffiliated manufacturing sources. The Company
attempts to maintain sourcing flexibility by not engaging in any
purchasing contracts that exceed one year.
CHINESE JOINT VENTURES
The Company has entered into joint ventures with factories in the PRC
to enable it to secure a reliable source of high quality low cost
bearings and bearing components. By entering into joint ventures,
rather than long term manufacturing contracts, the Company is better
able to monitor and control production and quality assurance by having
access to the factories at both management and production levels.
Furthermore, by sourcing from joint ventures, the Company is not
required to incur inventory carrying costs, since the joint ventures
typically hold all inventory until needed by the Company. The joint
ventures also provide a far less capital intensive alternative to
building Company-owned facilities.
SGBC was established by the Company and Shanghai Roller Bearing
Factory ("SRBF") in June 1987 as a joint venture limited liability
company in accordance with PRC law for an initial term of ten years,
which was recently extended to June 2008. SGBC produces tapered roller
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and ball bearings, which the Company imports into the U.S. for further
assembly, inspection, testing and distribution. The Company contributed
25% of the initial capital of SGBC in the form of capital equipment
valued by the parties at $750,000 and the Company's joint venture
partner, SRBF, contributed 75% of the initial capital of SGBC in the
form of facilities and equipment, valued by the parties at $1,500,000
and $750,000, respectively. Subsequently, SGBC's capital was increased
by $2,500,000, with the Company contributing 25% of such amount in the
form of capital equipment and SRBF contributing 75% of such amount in
the form of additional facilities, equipment and cash. The Company is
not required, however, to contribute additional capital.
The Company has the exclusive right to sell the products of SGBC in
the U.S. In 1994, 1995 and 1996, the Company imported $4,900,000,
$5,500,000 and $5,800,000, respectively, in bearings from SGBC.
Purchases are made upon terms and conditions established periodically
by negotiation between the Company and SGBC and are subject to
adjustment based upon certain events, including increases in the prices
of raw materials. The Company is responsible for selecting and
purchasing equipment and materials outside of the PRC. Governance,
operations, distributions and the dissolution of SGBC are governed by
PRC law and by SGBC's joint venture contract and articles of
association. SGBC's eight-member Board of Directors, which consists of
five directors chosen by SRBF and three directors chosen by the
Company, exercises authority over the joint venture by majority vote.
Certain decisions involving annual strategy, budgeting and production
plans require the vote of at least one Director chosen by the Company.
Unanimous consent of the Board of Directors is required for all
fundamental corporate changes.
Subject to PRC law and regulations providing for the payment of
taxes, allocations to cover losses of prior years, and contributions to
special funds for enterprise expansion, employee welfare and bonuses
and general reserves, the profits of SGBC may be distributed, at the
discretion of its Board of Directors, to the Company and SRBF in
proportion to their registered capital contributions. A distribution
of 450,000 Renminbi (the legal currency of the PRC)
("RMB")(approximately $51,967 at then current exchange rates) from 1993
operating profits was made by SGBC to the Company in February 1994. A
distribution of another 740,000 RMB (approximately $89,156 at then
current exchange rates) from 1994 operating profits, was declared in
December 1995. The Company has agreed that this distribution will be
invested in the Kong Qiao General Bearing Company ("SKGBC"), a proposed
new joint venture between the Company and Shanghai Xinhua Industrial
Corp. A distribution of 650,000 RMB ($78,313 at current exchange
rates) from 1995 operating profits has been proposed by SGBC management
and approved by the Board of Directors of SGBC. The joint venture
contract and articles of association of SGBC provide that after the
Company receives $1,375,000 in profits, its right to receive any
additional dividends will terminate and all profits after that time
will be distributed exclusively to SRBF. Furthermore, after termination
of the joint venture, all equipment and machinery contributed by the
Company will be turned over to SRBF without compensation to the
Company.
Wafangdian-Hyatt Bearing Manufacturing Co. Ltd. and Hyatt-ZWZ Bearing
Corporation ("Wafangdian-Hyatt" and "Hyatt-ZWZ," respectively) were
established pursuant to a Joint Venture Contract dated as of October 9,
1990, by and between the Company and Wafangdian Bearing Factory
("WBF"), a corporation organized under the laws of the PRC.
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Wafangdian-Hyatt is a joint venture limited liability company formed in
accordance with PRC law by the Company and WBF for an initial term of
ten years. Wafangdian-Hyatt is situated in Wafangdian, PRC and
manufacturers journal boxes, traction motor bearings and components for
exclusive shipment to Hyatt- ZWZ, which prepares them for distribution
by the Company. The Company contributed 25% of the initial registered
capital of Wafangdian-Hyatt in the form of capital equipment valued by
the parties at $250,000 and WBF contributed 75% of the initial
registered capital of Wafangdian-Hyatt in the form of facilities and
capital equipment valued by the parties at $750,000. Provisions with
respect to pricing, governance, administration and distributions are
substantially similar in all material aspects to those of SGBC.
Wafangdian-Hyatt was terminated by the end of 1996 and all of its
operations were assumed by Wafangdian General Bearing Co., Ltd.
("WGBC"), a new joint venture between World and Wafangdian Bearing
Company. In its initial stage, it is proposed that WGBC will produce
rear wheel automotive bearings in the PRC with machinery purchased from
GM's Delphi plant in Bristol, Connecticut. The Company will sell the
WGBC bearings in the U.S. In its second stage, it is proposed that WGBC
will produce railroad bearings for sale in the U.S. by the Company.
World has also granted to the Company options, exercisable prior to
December 31, 1999, to purchase from World its interest in two joint
ventures, Rockland Manufacturing Company ("Rockland") and WGBC, for
$400,000 and $912,896 (subject to adjustment based on change in
accounts payable by WGBC to World), respectively, representing the
estimated capital contributions, advances for administrative expenses
and other costs paid by World with respect to such ventures; provided,
however, that if any such option is exercised after December 31, 1997,
the applicable purchase price will be adjusted, to include any
additional capital contributions made and administrative expenses
incurred on behalf of the joint venture by World after such date.
QUALITY AND CUSTOMER SERVICE PROGRAMS
In order to meet the need for quality products, the Company has
focused on the development and implementation of appropriate systems
and controls to ensure that proper levels of quality are established
and consistently maintained. These systems are documented in the
Company's Quality Assurance Manual, which is also used as part of the
operating standard of the Company's joint ventures and certain other
suppliers. The systems were designed with special requirements to meet
customers' specifications. Over the years, the Quality Assurance Manual
has been revised to keep abreast with new and revised customer and
industry requirements. The systems control not only the activities of
the Quality Assurance Department, but also receiving inspection,
in-process inspection, final audit procedures, and certain activities
of other departments of the Company. These include procedures for
design engineering, procurement, manufacturing, assembly and
distribution. The system has been audited by certain of the Company's
customers and the Company has been certified to the M1003 standard by
the AAR and the MIL-I-45208-A standard by General Dynamics, a military
contractor.
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The Company is seeking to obtain ISO 9001 and QS 9000 registrations
by December 1997. Both of these are comprehensive industry-wide quality
control systems. ISO 9001 is similar to ISO 9002, a quality standard
applicable to manufacturing companies promulgated by the ISO, but
contains specifications regarding engineering and design as well as
manufacturing. QS 9000, a standard jointly developed by GM, Ford and
Chrysler, has all the basic systems of ISO 9001 with certain additional
requirements specific to the automotive industry. GM has requested
that the Company meet the QS 9000 certification by December 1997. The
Company believes that it will meet such registrations by such date and
that, if it cannot, GM will extend the date for obtaining
registrations, although there can be no assurances that the Company's
expectations will be satisfied.
In order to obtain QS 9000 registration (which includes the
requirements for ISO 9001) the Company has retained a full time
consultant who has developed a 28 step program, which the Company
believes should result in registration by November 1997, although there
can be no assurances that the Company's expectations will be satisfied.
The benchmarking of the Company's current Quality Assurance system
disclosed the need for re-writing of certain procedures, including the
Management Responsibility section which has already been completed. In
addition, the benchmarking revealed the need to supplement the Quality
Assurance and Design Control documentation and this has also been
instituted. The next step in the registration process is the
implementation of systems which will be accomplished when and as each
respective system is developed, although delays in implementing the
program could have an adverse impact on the registration process.
SALES, MARKETING AND CUSTOMERS
The Company markets its products in the U.S. and abroad through ten
salaried sales employees as well as 28 commissioned independent sales
representative organizations, aggregating 95 sales persons. In
addition, the Company has seven customer service representatives
responsible for handling orders and providing sales support. Products
sold through the OEM Division bear The General(R) label for ball
bearings and the Hyatt(R) brand for all types of roller bearings.
The Company participates in trade shows sponsored by the Truck
Maintenance Council, Society of Automotive Engineers and the Railway
Supply Association. The Company spent $105,000 on advertising for
fiscal 1996 and it anticipates that its advertising budget for fiscal
1997 will be between $100,000 and $150,000.
Current OEM customers include automotive and locomotive divisions of
GM, Gunite (manufacturer of wheels and hubs for trucks and trailers),
Strick (truck trailer manufacturer), Trinity (freight car
manufacturer), Burlington Northern (railroad) and Xerox (office
equipment manufacturer). The OEM Division has over 150 customers. The
Distribution Division markets the same broad line of bearing products
as the OEM division. The Distribution Division has over 1,200
customers, ranging in size from Motion Industries and Applied
Industrial Technology, each of which has approximately 400 stores in
the U.S., to independent single outlet operations. Since 1992, the
Company increasingly has emphasized the sale of special and niche
market bearings including certain tapered roller bearings. The OEM
Division focuses on the transportation industry, specialty truck
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trailer manufacturers (to which the Company was the leading supplier in
1995), railroad locomotive and freight car manufacturers and automotive
manufacturers. No customer accounted for more than 10% of the Company's
consolidated revenues for fiscal 1996.
The Distribution Division generally ships product within 24 hours of
the time an order is placed. The OEM Division ships products within one
to 365 days from the date an order is placed. Actual shipments are
dependent upon production schedules of the Company's customers. The
Company's arrangements with its North American customers typically
provide that payments are due within 30 days following the date of
shipment of goods. Foreign customers are generally required to pay by
letter of credit. At December 28, 1996, in excess of 90% of accounts
receivable were current or less than 30 days past due. Approximately
2.8% of accounts receivable were over 90 days old as of December 28,
1996.
EMPLOYEES
As of December 31, 1996, the Company had 172 full-time employees, of
whom 122 were engaged in production, shipping and receiving and
maintenance, and 18 of whom were engaged in sales and marketing. 110 of
the Company's employees engaged in production, shipping and receiving,
and maintenance, are subject to collective bargaining and are
represented by the United Brotherhood of Carpenters and Joiners of
America, AFL-CIO, Local 3127 ("Union"). The current collective
bargaining agreement with the Union expires on April 30, 1997. The
Company believes that relations with its employees, including those
subject to collective bargaining, are good. The Company has a 20 year
relationship with the Union and has never experienced a Union work
stoppage.
COMPETITION
The ball and roller bearing industry is highly competitive. The
Company believes that competition within the precision ball and roller
bearing market is based principally on quality, price and the ability
to meet customer delivery requirements. The Company's primary domestic
and foreign competitors are Timken, SKF USA Inc., NSK Corporation, NTN
Bearing Corporation of America, The Torrington Company and FAG Holding
Corporation. Many of the Company's competitors have substantially
greater financial resources than the Company. Management believes that
the Company's manufacturing and sourcing capabilities and its
reputation for consistent quality and reliability have positioned the
Company for continued growth in both market share and sales.
PATENTS, TRADEMARKS AND LICENSES
Except for The General(R) trademark and the license from GM with
respect to the Hyatt(R) trademark ("Hyatt License"), the Company does
not own any U.S. or foreign patents, trademarks or licenses that are
material to its business. The Company does rely on certain data,
including costing and customer lists, and the success of its business
depends, to some extent, on such information remaining confidential.
Each employee who may have access to confidential information is
subject to a confidentiality agreement.
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Under the Hyatt License, the Company has exclusive use of the terms
"Hyatt," "Hyatt Railway," "Hyatt Railway Products," "Hyatt
Manufacturing," "Hyatt General" and most derivatives of "Hyatt" in
connection with locomotive journal boxes, traction motor bearings and
component parts thereof, and non-exclusive rights to such trademarks
with respect to other products. The term of the Hyatt License extends
until January 1, 2000, and may be renewed at the option of the Company
for an additional ten year term. The Company paid GM an initial fee of
$30,000 upon execution of the Hyatt License and has paid or will pay
an annual licensing fee to GM in an amount increasing from $20,000 in
1990 to $35,000 in 1999. The fee payable by the Company upon the
exercise of its option to renew the Hyatt License is based upon a
benchmark of $27,500 indexed for inflation as of 1999.
ENVIRONMENTAL COMPLIANCE
The Company's operations and products are subject to extensive
federal, state and local regulatory requirements relating to pollution
control and protection of the environment. Based on information
compiled to date, management believes that the Company's current
operations are in material compliance with applicable environmental
laws and regulations, the violation of which would have a material
adverse effect on the Company. There can be no assurance, however, that
currently unknown matters, new laws and regulations, or stricter
interpretations of existing laws and regulations will not materially
affect the Company's business or operations in the future. In
February, 1997, the Company and Realty preliminarily settled their
previously disclosed action against Xerox on terms which, among other
things, require the defendant to indemnify the Company for any third
party claims resulting from the defendant's conduct in violation of
applicable environmental regulations. See "Item 7. Management's
Discussion and Analysis of Results of Operations and Financial
Condition - Recent Developments".
Item 2. Properties.
The Company leases facilities located in Union, New Jersey and West
Nyack, New York, which have approximately 72,000 and 190,000 square
feet of space, respectively. Management believes that the plants are
adequate for the Company's present needs and anticipated expansion. The
West Nyack facility, which is used principally for administrative,
assembly, and distribution purposes, is owned by Realty and from
January 1 to November 1, 1996 the Company held a month-to-month tenancy
for the premises at a monthly rent of $61,885. Effective November 1,
1996, the Company and Realty entered into a lease for the West Nyack
facility ("Lease"), which provides for an initial term expiring on
October 31, 2003, and is renewable at the option of the Company for an
additional six year term. The Company pays rent of $4.81 per square
foot (or $912,840) annually, payable in monthly rent payments of
$76,070. The Lease provides for an increase in the rent every other
year, commencing in 1998, to the greater of (i) 106% of the next
preceding year's rent or (ii) the preceding years rent multiplied by a
fraction the numerator of which is the Consumer Price Index for the
area including Rockland County or, if no such index is published, for
Northern Jersey ("CPI") in effect 90 days prior to November 1 of the
new rent year and the denominator of which is the CPI in effect 90 days
prior to November 1 of the preceding year. Simultaneously, the Company
entered into a sublease with WMW Machinery Co. and World for
approximately 31,000 and 5,500 square feet of the West Nyack facility,
respectively. See "Item 13 - Certain Relationships and Related
9
<PAGE>
Transactions." The lease for the Union facility, which is used
principally for assembly, manufacturing and distribution purposes,
expires on April 1, 1998, renewable at the option of the Company for an
additional five year term. Rent expense for the Union location was
approximately $204,000, $204,000 and $216,000 in 1994, 1995 and 1996,
respectively.
Item 3. Legal Proceedings.
On August 25, 1986, Timken, a U.S. producer of tapered roller
bearings, filed a petition on behalf of the U.S. tapered roller bearing
industry with both the ITC and Commerce seeking the imposition of
antidumping duties on imports of tapered roller bearings from Japan,
Italy, the former Yugoslavia, Romania, Hungary and the PRC. In May
1987, Commerce found that tapered roller bearings from each of the
aforementioned countries were being sold in the U.S. at less than fair
value, as determined by Commerce based upon an estimate of the foreign
market value of tapered roller bearings (i.e. the price at which the
same or similar merchandise is sold or offered for sale in the
principal markets of the home market country). Commerce subsequently
issued an antidumping order imposing duties on the unfairly traded
tapered roller bearings equal to the percentage difference between the
selling prices in the U.S. and the foreign market value of the imported
tapered roller bearings during specified review periods. Among
others, the order named SGBC, the Company's joint venture in the PRC.
Importers subject to the antidumping order are required to post a cash
deposit with the U.S. Customs Service equal to the antidumping margin
percentage multiplied by the export price of any imported product
covered by the dumping petition. On February 3, 1997, Commerce granted
the Company's joint venture, SGBC, partial revocation of the
antidumping order affecting tapered roller bearings from the PRC. As a
result of SGBC receiving zero or de minimis antidumping margins for the
4th, 5th and 6th Reviews, Commerce revoked the antidumping order as to
SGBC in the 7th Review. As a result of the revocation, SGBC and the
Company will no longer be required to participate in the annual reviews
of the antidumping order conducted by Commerce. Timken has filed
actions against the United States in the Court of International Trade
challenging Commerce's final antidumping determinations of the 4th,
5th, 6th and 7th reviews. See "Item 7. Managements Discussion and
Analysis of Results of Operations and Financial Conditions - Recent
Developments".
In 1986 the Company entered into a joint venture with a former East
German trade agency pursuant to which the parties jointly owned,
through a holding company called Alurop, WMW. Pursuant to the joint
venture agreement, WMW was, by separate agency contract, granted the
exclusive right to distribute certain East German machine tools in the
United States. After the reunification of Germany in 1990, the
Company's joint venture partner and its successors, including WEMEX,
breached the joint venture agreement and the exclusive agency contract,
causing damage to WMW by frustrating WMW's ability to sell machine
tools and causing the rapid devaluation of its inventory. WMW could not
ensure its customers that service and parts could be supplied, or that
terms of the warranties could be met, causing its business to decline
dramatically. The Company attempted unsuccessfully for a period of
several years to amicably resolve the WMW dispute.
10
<PAGE>
In February 1995, however, WMW and the Company commenced an action in
the U.S. District Court for the Southern District of New York against
WEMEX, Werner P. Muender, Treuhandanstalt and Bundesanstalt fuer
Vereinigungsbedingte Sonderaufgaben alleging, among other things, that:
(i) WEMEX breached a joint venture agreement with the Company and a
commercial sales agency agreement with WMW and violated its duties to
the Company and WMW arising under such agreements; (ii) the Company
relied to its detriment upon promises made by WEMEX to support WMW's
marketing efforts; and (iii) Werner P. Muender, the liquidator of
WEMEX, wrongfully converted property of WMW to his benefit. WMW also is
seeking a declaratory judgment that any indebtedness it may owe to
WEMEX be extinguished or diminished to the extent of existing value of
machine tools purchased by WMW from or through WEMEX. Defendants
answered the complaint, denying the allegations therein, and WEMEX
asserted counterclaims against: (i) WMW for goods sold and delivered in
the amount of $9,507,337; (ii) Seymour I. Gussack and WMW Machinery Co.
in the amount of $9,507,337, alleging that Seymour I. Gussack
improperly caused the sale of WMW's assets to WMW Machinery Co.; and
(iii) the Company in the amount of $9,507,337, alleging that the
Company breached its fiduciary duty to WEMEX by failing to provide the
working capital requirements of WMW. WMW, the Company, WMW Machinery
Co. and Seymour I. Gussack have denied any liability to WEMEX and
believe its counterclaims to be without merit. However, there can be no
assurance the case will be resolved in a timely manner or settled to
the satisfaction of the Company. Furthermore, the enforcement of an
award favorable to the Company may be subject to further review by
German courts. Defendants have also moved to dismiss the action based
on various grounds including, among others, the Foreign Sovereign
Immunities Act of 1976, the Act of State Doctrine, forum non
conveniens, legal insufficiency of certain claims and improper venue.
WMW, the Company, WMW Machinery Co. and Seymour I. Gussack have opposed
Defendants' motion for dismissal, and argued that, if the Court
dismisses the Company's claims, it should also dismiss the Defendants'
counterclaims. There can be no assurance, however, that if the court
dismisses the action in its entirety, the Defendants will not institute
an action in Germany, which may be a less favorable forum for the
Company. In addition, if the Defendants prevail in their counterclaim
against the Company for the amount claimed and the Company is
unsuccessful in its claims against the Defendants, there would be a
material adverse effect on the Company's financial condition.
Item 4. Submission of Matters to a Vote of Security Holders.
INAPPLICABLE
11
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters.
The Company's Common Stock has been quoted on the NASDAQ Small Cap
market under the symbol "GNRL" since the Company's initial public
offering effective February 7, 1997.
The Company has never declared or paid any cash dividends on its
capital stock. The Company currently intends to retain any earnings
for future growth and, therefore, does not anticipate declaring or
paying any cash dividends in the foreseeable future.
At March 24, 1997, the Company believes it had in excess of 300
holders of Common Stock.
Item 6. Selected Financial Data
The selected financial data set forth below is derived from the
Company's consolidated financial statements and should be read in
conjunction with the consolidated financial statements and related
notes included elsewhere in this Annual report. See Management
Discussion and Analysis of Financial Condition and Results of
Operations.
General Bearing Corporation
Selected Financial Data
(In Thousands Except for Share and Per Share Data)
Years Ended
- ---------------------------------------------------------------------------
December December December December December
26, 25, 31, 30, 28,
1992 1993 1994 1995 1996
- ---------------------------------------------------------------------------
STATEMENT OF
OPERATIONS DATA:
Sales $27,155 $27,254 $37,032 $42,070 $38,362
Operating
income (loss) $(345) $(387) $874 $354 $3,201
Income (loss)
before
extraordinary
item and
income tax
(benefit) $(1,754) $(365) $255 $(2,229) $1,998
Net income
(loss) $(9,469) $4,019 $363 $(1,729) $2,198
Net income
(loss) per
share (before
extraordinary
item)(1) $ (.39) $ (.02) $ .08 $ (.58) $ .73
Net income
(loss) per
share(1) $ (.39) $ .17 $ .12 $ (.58) $ .73
- -----------------------------------------------------------------------
Years Ended
- ------------------------------------------------------------------------
December December December December December
26, 25, 31, 30, 28,
1992 1993 1994 1995 1996
- ------------------------------------------------------------------------
BALANCE SHEET DATA:
Total Assets $15,913 $17,618 $24,143 $27,086 $24,399
Long-term
debt (excluding
current portion) $14,920 $4,512 $5,218 $4,817 $4,493
[FN]
(1) Adjusted to reflect the 3,000 for one stock split in October 1996.
Item 7. Management's Discussion and Analysis of Results of Operations
and Financial Condition
RESULTS OF OPERATIONS
Fiscal 1996 compared to Fiscal 1995
Sales. The Company's sales decreased 8.8% from approximately 42.0
million in fiscal 1995 to approximately 38.4 million in fiscal 1996.
Sales of the OEM Division and the Distribution Division represented 62%
and 38% of total sales in fiscal 1996, respectively, as compared to 66%
and 34% of total sales in fiscal 1995. The decrease in sales between
the two periods reflected a significant decline in the production of
truck trailers, which resulted in a reduction of truck trailer bearing
sales of approximately $4 million, despite an increase in the Company's
market share for such bearings. In addition, a $300,000 reduction in
sales of OEM ball bearings for various commodity applications was
attributable to the Company's strategy to de-emphasize sales of certain
low margin commodity bearings. These decreases in sales were partially
offset by an increase in fiscal 1996 of approximately $1 million in
sales of tapered journal bearings used in railroad freight cars.
Cost of Sales. The Company's cost of sales as a percentage of
sales decreased from 76.2% in fiscal 1995 to 72.8% in fiscal 1996.
The decrease was partially the result of the commencement of a program
to increase efficiency in plant operations. This program entails the
consolidation of operations between the Company's Union, New Jersey
and West Nyack, New York facilities, which will simplify tooling,
personnel and quality control functions. The consolidation of
operations began in the first quarter of 1996. To date, the cost of
consolidation has not been material and has been expensed as a
13
<PAGE>
component of cost of sales as incurred. The decrease of cost of sales
as a percentage of sales also reflects the Company's strategy to de-
emphasize sales of low margin commodity bearings. The Company
operates on the principle that a flexible method of combining product
and component purchasing with its own manufacturing and assembly
capabilities can provide high-quality products and cost advantages.
In the last several years, the Company has increased its sourcing from
joint venture partners and unaffiliated suppliers, and the Company
believes that improvements in cost of sales and gross margins reflect
in part cost savings associated with increased sourcing. The
improvement in cost of sales as a percentage of sales also reflected
the settlement with one of the Company's suppliers related to the
tapered journal bearings recall which resulted in the cancellation of
a Company payable to such supplier of approximately $220,000.
Selling, General and Administrative Expenses. Selling, general
and administrative expenses increased from $7.5 million in fiscal 1995
to $7.6 million in fiscal 1996, and as a percentage of sales, such
expenses increased from 17.8% to 19.9%, respectively, due to a
decrease in sales.
Provision for Customer Damage Claims. In April 1995, three
railroads reported to the AAR problems with eight of the Company's
bearings that were attributed to misplaced seals. The Company agreed
to recall approximately 10,000 tapered journal bearings. As a result,
the Company recorded a special provision of approximately $2.2 million
during fiscal 1995 representing an estimated liability for rework
costs and customer damage claims. In comparison, during fiscal 1996,
the Company recorded a credit of approximately $401,000, representing
recovery for customer damage claims. Since the recall and the
conditional reapproval in September 1995 of the Company's sale of
tapered journal bearings, the Company's sales of the product have not
attained previous levels, however, the recall is not expected to
affect the future operations and financial position of the Company.
Operating Income. Operating income increased to approximately
$3.2 million in fiscal 1996 from approximately $354,000 in fiscal
1995. Operating income for fiscal 1995 reflects a customer damage
claim of approximately $2.2 million recorded in that year. For fiscal
1996 the Company had recovery of approximately $621,000 relating to
the recall.
Other Income (Expense). Other expenses decreased by 53.5% from
approximately $2.6 million in fiscal 1995 to $1.2 million in fiscal
1996. Fiscal 1995 included write-offs of the balance of the Company's
(i) equity investment in a subsidiary ($960,000) and (ii) goodwill
($93,333) due to uncertainty surrounding the future recovery of cash
flows against these assets.
Income Tax (Benefit). For fiscal 1996, the Company accrued an
additional $200,000 benefit as compared to the benefit recorded in
fiscal 1995, of $500,000, relating to the anticipated use of net
operating loss carry-forwards. As of December 28, 1996, the Company
has a deferred tax asset valuation reserve of $3.3 million which could
be further reduced in the future.
Net Income (Loss). As a result of the factors discussed above,
net income increased to $2.2 million in fiscal 1996 from a net loss of
approximately $1.7 million in fiscal 1995.
14
<PAGE>
FISCAL 1995 COMPARED TO FISCAL 1994
Sales. The Company's sales increased 13.6% to approximately
$42.1 million in fiscal 1995 from approximately $37.0 million in
fiscal 1994. This increase in sales was attributable to increased
penetration into the truck trailer bearing market, as well as the
market for special bearings, locomotive journal boxes and ball
bearings. Sales of the OEM Division increased 16.5% from
approximately $23.8 million in fiscal 1994 to approximately $27.7
million in fiscal 1995 and represented 66% of total sales in fiscal
1995 as compared to 64% of total sales in fiscal 1994. Sales of the
Distribution Division increased 8.5% to approximately $14.4 million in
fiscal 1995 from approximately $13.3 million in fiscal 1994 and
represented 34% of sales in fiscal 1995 as compared to 36% of sales in
fiscal 1994.
Cost of Sales. Cost of sales increased by 12.6% to approximately
$32.1 million in fiscal 1995 from approximately $28.5 million in
fiscal 1994, reflecting increased sales. However, cost of sales as a
percentage of net sales declined from 76.9% in fiscal 1994 to 76.2% in
fiscal 1995.
Selling, General and Administrative Expenses. Selling, general
and administrative expenses remained stable at approximately $7.5
million in fiscal 1995 compared to approximately $7.7 million in
fiscal 1994. However, such expenses decreased as a percentage of
sales to 17.8% in fiscal 1995 from 20.7% in fiscal 1994, reflecting
the increase in sales and measures to control selling, general and
administrative expenses.
Provision for Customer Damage Claims. In April 1995, three
railroads reported to the AAR problems with eight of the Company's
bearings that were attributed to misplaced seals. The Company agreed
to recall approximately 10,000 tapered journal bearings. As a result,
the Company recorded a special provision of approximately $2.2 million
in fiscal 1995 representing estimated liability for rework costs and
customer damage claims.
Operating Income. As a result of the factors described above,
operating income decreased 59.5% to approximately $354,000 in fiscal
1995 from approximately $874,000 in fiscal 1994.
Other Income (Expense). Other expenses increased 317% to
approximately $2.6 million in fiscal 1995 from approximately $0.6
million in fiscal 1994. This increase reflected a 44.2% increase in
interest expense to $1.4 million in fiscal 1995 from $1.0 million in
fiscal 1994, primarily as a result of an increase in average
borrowings under the Revolving Credit Facility to fund working capital
requirements related to the increase in sales. Interest expense
during fiscal 1995 also included $180,000 of interest accrued with
respect to a Secured Note and 6% loans due December 1995 in the
aggregate principal amount of $1,000,000 owed to World. In fiscal
1995, the Company had equity in income of an affiliate of
approximately $79,000 compared to equity in the income of affiliates
of approximately $403,000 during fiscal 1994. During fiscal 1995 the
Company had other expenses of approximately $1.2 million compared to
other expenses of approximately $32,000 in fiscal 1994 due to the
write down of an investment in its Alurop subsidiary.
Income Tax (Benefit). For fiscal 1995, the Company accrued a
$500,000 benefit for anticipated use of net-operating loss carry-
forwards, compared to no provision for income tax in fiscal 1994.
15
<PAGE>
Net Income (Loss). Due to the provision for customer damage
claims and the write down of an investment in a subsidiary, the
Company had a net loss in fiscal 1995 of approximately $1.7 million.
For fiscal 1994, the Company had net income of $363,237.
LIQUIDITY AND CAPITAL RESOURCES
During the three years ended December 28, 1996, the Company's
primary sources of capital have been net cash provided by operating
activities, bank borrowings and financing from affiliates. Working
capital requirements also have been financed through revolving credit
borrowings. The primary demands on the Company's capital resources
have been the need to fund inventory and receivables growth created in
normal business expansion. In 1996 there was an additional
requirement for capital to fund expenses associated with the tapered
journal bearing recall, as well as the absorption of the carrying
costs of the build-up of inventory as the result of temporarily being
prohibited from shipping tapered journal bearings during the recall
until the conditional reapproval by the AAR in September 1995. These
demands have been met through cash from operations and borrowings
under the Revolving Credit Facility.
On February 7, 1997, the Company successfully sold 900,000 shares
of common stock to the public at $7 per share. The Company recognized
net proceeds of approximately $5.1 million after expenses from the
offering. The Company has used a portion of these proceeds as working
capital and to pay down debts.
At December 30, 1995, and December 28, 1996, the Company had
working capital of approximately $2.8 million and $ 3.9 million
respectively. Cash flow from operations for 1996 was $2.9 million as
compared to $194,000 during 1995. The improvement in the Company's
cash flow from operations primarily reflects an increase in results of
operations in 1996.
Historically, the Company has used cash provided by operations to
fund a portion of its operating requirements and capital expenditures.
The Company also has relied on borrowings under its $15.0 million
Revolving Credit Facility with Bank of New York Commercial Corporation
("BNYCC")to fund operations. As of March 26, 1997, $2.5 million was
available under the Revolving Credit Facility, which sums are secured
by the Company's accounts receivable, inventory and various other
assets. Upon receipt of the proceeds of the Company's recent initial
public offering, the Company paid down $5.1 million of the Revolving
Credit Facility. The Revolving Credit Facility currently terminates
in June 1998 and will remain available through that date. The
Revolving Credit Facility allows for borrowings, from time to time,
not to exceed the lesser of $15.0 million or an amount equal to the
sum of (i) 85% of eligible receivables, as defined, (ii) 50% of
eligible inventory, as defined, consisting of raw materials, (iii) 50%
of eligible inventory, as defined, consisting of finished goods, and
(iv) 50% of eligible inventory, as defined, in transit under letters
of credit less the sum of the (x) the aggregate amount of outstanding
letters of credit and (y) such reserves as the lender may reasonably
deem proper and necessary from time to time. Based upon the Company's
performance and 20 year relationship with BNYCC, the Company has
requested and believes it may be able to obtain more favorable terms
on the Revolving Credit Facility, although there can be no assurances
it will be able to do so. The Revolving Credit Facility contains
covenants that, among other things, limit the Company's ability to
incur additional indebtedness and requires the Company to maintain
certain levels of working capital and satisfy other financial tests.
16
<PAGE>
As of December 28, 1996, the Company was in compliance with all other
covenants under the Revolving Credit Facility.
The Company anticipates that capital expenditures for the current
fiscal year and the foreseeable future will be approximately $750,000
to $1.0 million per year. However, the Company, from time to time,
may consider the implementation of programs to expand its operations,
which could increase capital expenditures above such level.
In June 1995, the Company obtained $1.56 million interim financing
from BNYCC, bearing interest at the bank's base rate from time to time
(8.25% at December 11, 1996) plus 2%. The term loan provides for 35
consecutive monthly payments of principal of $18,570, with the final
payment due on July 1, 1998. Proceeds of the term loan were primarily
used to reduce debt owed to World.
The Company believes that funds generated from continuing
operations, the net proceeds of the recently completed Offering and
borrowings under the Revolving Credit Facility will be sufficient to
finance the Company's anticipated working capital needs and capital
expenditure requirements for at least the next 24 months.
INFLATION
The effect of inflation on the Company has not been significant during
the last two fiscal years.
17
<PAGE>
Item 8. Financial Statements and Supplementary Data
Index to Consolidated Financial Statements
18
<PAGE>
GENERAL BEARING CORPORATION
AND SUBSIDIARIES
THREE YEARS ENDED DECEMBER 28, 1996
TABLE OF CONTENTS
Page
----
Report of Independent Certified Public Accountants . . . . 20 - 21
Consolidated Balance Sheets, December 30, 1995
and December 28, 1996 . . . . . . . . . . . . . . . . . 22
Consolidated Statements of Operations for the Years
Ended December 30, 1995 and December 28, 1996. . . . . . 23
Consolidated Statements of Stockholders' Equity for
the Years Ended December 30, 1995 and
December 28, 1996. . . . . . . . . . . . . . . . . . . . 24
Consolidated Statements of Cash Flows for the Years
Ended December 30, 1995 and December 28, 1996 . . . . . 25
Notes to Consolidated Financial Statements . . . . . . . . 29 - 39
19
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
General Bearing Corporation
West Nyack, New York
We have audited the accompanying consolidated balance sheets of
General Bearing Corporation and subsidiaries as of December 30,
1995 and December 28, 1996, and the related consolidated statements
of operations, changes in stockholder's equity and cash flows for
the years then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
General Bearing Corporation and subsidiaries as of December 30, 1995
and December 28, 1996, and the results of their operations and their
cash flows for the years then ended, in conformity with generally
accepted accounting principles.
/s/ BDO Seidman, LLP
BDO Seidman, LLP
New York, New York
March 21, 1997
20
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
General Bearing Corporation
West Nyack, New York
We have audited the consolidated statements of operations, changes in
stockholder's equity and cash flows of General Bearing Corporation and
subsidiaries for the year then ended December 31, 1994. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of operations and
cash flows of General Bearing Corporation and subsidiaries for the year
ended December 31, 1994, in conformity with generally accepted accounting
principles.
/s/ Ferro, Berdon & Company, LLP
Ferro, Berdon & Company, LLP
New York, New York
March 24, 1995
21
<PAGE>
GENERAL BEARING CORPORATION
---------------------------
AND SUBSIDIARIES
----------------
CONSOLIDATED BALANCE SHEETS
---------------------------
December 30, December 28,
1995 1996
------------ ------------
ASSETS
Current:
Cash $ 50,735 $ 12,969
Accounts receivable - trade, less
allowance for doubtful accounts of
$255,000 and $235,000 6,044,042 4,575,493
Inventories 16,626,234 13,898,595
Prepaid expenses and other current
assets 184,139 467,081
Advances to parent and affiliates 215,350 710,397
------- -------
Total current assets 23,120,500 19,664,535
---------- ----------
Fixed assets, net 2,480,170 2,604,670
--------- ---------
Investments and advances:
Investments in affiliates 687,454 687,454
Advances to affiliate 255,824 255,824
------- -------
943,278 943,278
------- -------
Deferred tax asset, net 500,000 700,000
------- -------
Other assets 42,460 486,182
------ -------
Total Assets $ 27,086,408 $ 24,398,665
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current:
Note payable - bank $ 10,862,894 $ 9,526,484
Accounts payable:
Trade 4,811,677 1,998,361
Affiliates 1,398,525 1,774,013
Accrued expenses and other current
liabilities 1,467,563 2,245,386
Accrued customer damage claims 1,564,742 -
Current maturities of long-term debt 222,840 222,840
------- -------
Total current liabilities 20,328,241 15,767,084
---------- ----------
Long-term debt, less current maturities:
Bank 1,225,740 1,002,900
Parent 2,875,142 2,750,142
Affiliate 716,422 739,588
------- -------
Total long-term liabilities 4,817,304 4,492,630
--------- ---------
Commitments and contingencies
Stockholder's equity:
Preferred stock par value $.01 per share
- shares authorized 1,000,000 none
issued and outstanding - -
Common stock par value $.01 per share
- shares authorized 19,000,000, issued
and outstanding 3,000,000 30,000 30,000
Additional paid-in capital 23,654,524 23,654,524
Deficit (21,743,661) (19,545,573)
----------- -----------
Total stockholder's equity 1,940,863 4,138,951
--------- ---------
Total liabilities and stockholder's
equity $ 27,086,408 $ 24,398,665
============ ============
SEE ACCOMPANYING SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
AND NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
22
<PAGE>
GENERAL BEARING CORPORATION
---------------------------
AND SUBSIDIARIES
----------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
Years Ended
-----------------------------------------
December 31, December 30, December 28,
1994 1995 1996
----------- ----------- -----------
Sales $37,031,669 $42,070,000 $38,362,128
Cost of sales 28,483,348 32,068,789 27,926,232
---------- ---------- ----------
Gross profit 8,548,321 10,001,211 10,435,896
Selling, general and
administrative expenses 7,674,250 7,495,208 7,635,824
Provision (recovery) - customer
damage claims - 2,152,000 (400,959)
--- --------- --------
Operating income 874,071 354,003 3,201,031
------- ------- ---------
Other (income) expense:
Interest, net, including $210,000,
$180,000, $54,261 to parent 989,912 1,428,451 1,223,143
Equity in income of affiliate (403,071) (78,587) -
Other 32,268 1,233,039 (20,200)
------ --------- ------
619,109 2,582,903 1,202,943
------- --------- ---------
Income (loss) before income
tax benefit and extraordinary
income 254,962 (2,228,900) 1,998,088
Income tax benefit - (500,000) (200,000)
--- -------- --------
Income(loss) before extraordinary
income 254,962 (1,728,900) 2,198,088
Extraordinary income - settlement of
debts at a discount 108,275 - -
------- --- ---
Net income (loss) $ 363,237 $(1,728,900) $2,198,088
========== =========== ==========
Income (loss) per common share:
Income(loss) before
extraordinary income $ .08 $ (.58) $ .73
Extraordinary income .04 - -
--- --- ---
Net income (loss) $ .12 $ (.58) $ .73
===== ======== ======
Weighted average number of
common shares 3,000,000 3,000,000 3,000,000
SEE ACCOMPANYING SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
AND NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
23
<PAGE>
GENERAL BEARING CORPORATION
---------------------------
AND SUBSIDIARIES
----------------
CONSOLIDATED STATEMENTS OF CHANGES
----------------------------------
IN STOCKHOLDERS' EQUITY
-----------------------
Preferred Stock Common Stock
-------------------- ----------------------
Shares Amount Shares Amount
------ ------ ------ ------
Balance,
December 25, 1993 $ 3,000,000 $ 30,000
Net income - - - -
--- --- --- ---
Balance,
December 31, 1994 3,000,000 30,000
Net loss - - - -
--- --- --- ---
Balance,
December 30, 1995 3,000,000 30,000
Net income - - - -
--- --- --- ---
Balance,
December 28, 1996 - $ - 3,000,000 $ 30,000
=== ======= ========= ========
Additional
paid-in
capital Deficit
------------ ------------
Balance,
December 25, 1993 $ 23,654,524 $(20,377,998)
Net income - 363,237
--- -------
Balance,
December 31, 1994 23,654,524 (20,014,761)
Net income - (1,728,900)
--- ----------
Balance,
December 30, 1995 23,654,524 (21,743,661)
New income - 2,198,088
--- ---------
Balance,
December 28, 1996 $ 23,654,524 $(19,545,573)
============ ============
SEE ACCOMPANYING SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
AND NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
24
<PAGE>
GENERAL BEARING CORPORATION
---------------------------
AND SUBSIDIARIES
----------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
Year ended
------------------------------------------
December 31, December 30, December 28,
1994 1995 1996
------------ ------------ -----------
Cash flows from operating
activities:
Net income (loss) $ 363,237 $ (1,728,900) $ 2,198,088
Add (deduct) noncash items
charged (credited) to income:
Extraordinary income (108,275) - -
Deferred income taxes - (500,000) (200,000)
Depreciation and amortization 505,447 520,082 557,208
Equity in (income) loss of
affiliate (403,071) (78,587) -
Revaluation of equity
investment - 960,000 -
Revaluation of goodwill - 93,333 -
(Gain) loss on disposal of
equipment and improvements (24,073) 144,967 (17,838)
Other (9,787) 64,928 -
Add (deduct) changes in operating
assets and liabilities:
Accounts receivable (1,345,403) (457,381) 1,468,549
Inventories (4,757,159) (2,963,603) 2,727,639
Prepaid expenses and other
assets (183,484) 169,234 (730,093)
Due to (from) affiliates (399,601) 617,296 497,782
Accounts payable and accrued
expenses 1,665,002 1,788,263 (2,035,493)
Accrued customer damage claims - 1,564,742 (1,564,742)
--- --------- ----------
Net cash provided by
(used in) operating
activities (4,697,167) 194,374 2,901,100
---------- ------- ---------
Cash flows from investing activities:
Equipment purchases (253,892) (1,111,653) (681,641)
Sale of machinery 86,000 - 21,200
Net cash used in
investing activities (167,892) (1,111,653) (660,441)
-------- ---------- --------
Cash flows from financing activities:
Proceeds from long-term debt - bank - 1,560,000 -
Repayment of long-term debt - bank - (111,420) (222,840)
Increase (decrease) in note
payable-bank 4,158,002 892,785 (1,336,410)
Proceeds from long-term debt and
other balances - parent 500,000 - -
Repayment of long-term debt and
other balances - parent (50,918) (1,440,304) (719,175)
------- ---------- --------
Net cash provided by
(used in) financing
activities 4,607,084 901,061 (2,278,425)
--------- ------- ----------
Net decrease in cash (257,975) (16,218) (37,766)
Cash, beginning of year 324,928 66,953 50,735
Cash, end of year $ 66,953 $ 50,735 $ 12,969
= ====== = ====== = ======
SEE ACCOMPANYING SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
AND NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
25
<PAGE>
GENERAL BEARING CORPORATION
---------------------------
AND SUBSIDIARIES
----------------
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
THE COMPANY General Bearing Corporation ("General") and
subsidiaries (collectively, the "Company")
manufactures, sources, assembles and distributes
ball bearings, including standard radial, electric
motor quality, tapered roller and traction motor
ball bearings, used in a broad range of industrial
applications. The Company supplies bearings to
original equipment manufacturers and to
manufacturing industries, railroad companies and the
industrial aftermarket primarily in the United
States and Canada. The Company also markets bearings
for freight cars and locomotives worldwide. The
Company is a wholly-owned subsidiary of World
Machinery Company ("World" or "Parent").
PRINCIPLES OF The accompanying consolidated financial statements
CONSOLIDATION include the accounts of General and its majority-
owned subsidiaries. Investments in 20%- to 50%-owned
companies are accounted for on the equity method.
All significant intercompany accounts and
transactions have been eliminated.
INVENTORIES Inventories are stated at the lower of cost
(first-in, first-out method) or market.
FIXED ASSETS The cost of depreciable plant and equipment is
depreciated for financial reporting purposes over
the estimated useful lives using the straight-line
or declining balance methods. The estimated lives
for each property classification are as follows:
---------------------------------------------------
Machinery and equipment 3 to 10 years
Furniture and fixtures 10 years
Transportation equipment 3 to 5 years
Leasehold Lesser of life of lease
improvements or useful life
---------------------------------------------------
Expenditures for maintenance, repairs and minor
renewals or betterments are charged against income.
Major renewals and replacements are capitalized
26
<PAGE>
GENERAL BEARING CORPORATION
---------------------------
AND SUBSIDIARIES
----------------
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
REVENUE The Company recognizes revenue when products are
RECOGNITION shipped.
REPORTING PERIOD The reporting period for the Company is a 52-53 week
period ending on the last Saturday in December.
There were 52 weeks in the period ended December 30,
1995 and December 28, 1996 and 53 weeks in the
period ended December 31, 1994.
INCOME TAXES The Company files a consolidated Federal income tax
return with its Parent and separate state and local
tax returns. Federal income taxes are calculated as
if the Company filed its tax return on a separate
return basis.
Deferred income taxes reflect the net tax effect of
temporary differences between the carrying amounts
of assets and liabilities for financial reporting
purposes and the amounts used for income tax
purposes.
USE OF ESTIMATES The preparation of financial statements in
conformity with generally accepted accounting
principles requires management to make estimates and
assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial
statements and the reported amounts of revenues and
expenses during the reporting period. Actual results
could differ from those estimates.
ESTIMATED FAIR Statement of Financial accounting Standards
VALUE OF ("SFAS") No. 107, "Disclosure About Fair Value of
FINANCIAL Financial Instruments", requires disclosures of fair
INSTRUMENTS value information about financial instruments, for
which it is practicable to estimate the value,
whether or not recognized on the balance sheet.
The fair value of financial instruments, including
cash, accounts receivable and accounts payable,
approximate their carrying value because of the
current nature of these instruments. The carrying
amounts of the Company's note payable - bank and
long-term debt - bank approximate fair value because
the interest rates on these instruments are subject
to changes with market interest rates. It is not
practical to determine the fair value of receivables
from, payables to and long-term debt payable to the
parent and affiliates because of the nature of their
terms. The repayment terms are subject to
managements' discretion.
27
<PAGE>
GENERAL BEARING CORPORATION
---------------------------
AND SUBSIDIARIES
----------------
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
CONCENTRATIONS The Company extends credit based on an evaluation of
OF CREDIT RISK the customer's financial condition, generally
without requiring collateral. Exposure to losses on
receivables is principally dependent on each
customer's financial condition. The Company monitors
its exposure for credit losses and maintains
allowances for anticipated losses.
LONG-LIVED ASSETS Long-lived assets, such as goodwill and property and
equipment, are evaluated for impairment when events
or changes in circumstances indicate that the
carrying amount of the assets may not be recoverable
through the estimated undiscounted future cash flows
from the use of these assets. When any such
impairment exists, the related assets will be
written down to fair value. This policy is in
accordance with Statement of Financial Accounting
Standards No. 121 ("SFAS No. 121"), "Accounting for
the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," which is
effective for fiscal years beginning after
December 15, 1995. The Company elected early
adoption of this standard and has, accordingly,
written down its goodwill as of December 30, 1995
(Note 11).
STOCK-BASED In October 1995, the Financial Accounting Standards
COMPENSATION Board issued Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"). SFAS No. 123
requires entities which have arrangements under
which employees receive shares of stock or other
equity instruments of the employer or the employer
incurs liabilities to employees in amounts based on
the price of its stock to either record the fair
value of the arrangements or disclose the proforma
effects of the fair value of the arrangements. The
Company has adopted the disclosure method of SFAS
No. 123. The adoption of this method did not effect
the Company's financial position, operating results
or cash flows.
EARNINGS PER Earnings per common share are computed on the basis
COMMON SHARE of the weighted average number of common shares
outstanding during the year.
DEFERRED Costs incurred in connection with the public offering
REGISTRATION have been deferred and are included in other assets.
COSTS These costs will be offset against the proceeds of
the offering in fiscal 1997.
RECENT ACCOUNTING In February 1997, the Financial Accounting Standards
STANDARDS Board issued Statement of Financial Accounting
Standards No. 128, "Earnings Per Share" ("SFAS No.
128"). SFAS No. 128 specifies the computation,
presentation, and disclosure requirements for
earnings per share. SFAS No. 128 is effective for
periods ending after December 15, 1997. The
adoption of this statement is not expected to have
a material effect on the consolidated financial
statements.
28
<PAGE>
GENERAL BEARING CORPORATION
---------------------------
AND SUBSIDIARIES
----------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
1. INITIAL In February, 1997, the Company completed an
PUBLIC initial public offering ("IPO") in which 900,000
OFFERING shares of common stock were sold for $ 7 per share
for a total consideration of $ 6.3 million. Net
proceeds received by the Company amounted to $ 5.1
million. The Company has used a portion of these
proceeds as working capital and to pay down debt.
2. INVENTORIES Inventories consist of the following:
December 30, December 28,
1995 1996
--------------------------------------------------
Finished goods $11,134,414 $6,958,972
Raw materials,
purchased parts
and work-in-
process 5,491,820 6,939,623
--------------------------------------------------
$16,626,234 $13,898,595
==================================================
3. FIXED ASSETS Fixed assets consist of the following:
December 30, December 28,
1995 1996
--------------------------------------------------
Machinery and
equipment $6,071,074 $4,802,427
Furniture and
fixtures 608,468 393,298
Leasehold
improvements 389,729 469,587
Transportation
equipment 88,893 36,136
----------------------------------------------------
7,158,164 5,701,448
Less: Accumulated
depreciation
and
amortization 4,677,994 3,096,778
---------------------------------------------------
$2,480,170 $2,604,670
===================================================
29
<PAGE>
GENERAL BEARING CORPORATION
---------------------------
AND SUBSIDIARIES
----------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Depreciation and amortization expense was $505,447,
$518,368 and $ 553,779 for the years 1994, 1995 and
1996, respectively.
The Company purchased, through an affiliate,
$750,000 of machinery and equipment in 1995 which,
as of December 28, 1996, has not been placed into
service.
4. OTHER ASSETS Other assets consist of the following:
December 30, December 28,
1995 1996
------------------------------------------------------
Security deposits
and other $20,174 $17,325
Deferred loan
costs 22,286 8,857
Deferred registration
costs - 450,000
-----------------------------------------------------
$42,460 $486,182
=====================================================
5. INVESTMENTS AND
ADVANCES
December 30, December 28,
1995 1996
----------------------------------------------------
Investments in
affiliates:
Less than 50%-
owned - at equity:
Shanghai General
Bearing Company
Ltd. (25%-owned)
and Wafangdian
Hyatt Bearing
Manufacturing
Co. Ltd.
(25%-owned)
(a) 687,454 687,454
---------------------------------------------------
$687,454 $687,454
===================================================
Advances to Parent
and affiliates:
Current:
Parent (b) $116,222 $710,397
Shar General
Corp. 57,094 -
All others 42,034 -
---------------------------------------------------
$215,350 $710,397
===================================================
---------------------------------------------------
Long-term:
General
IKL Corp.
(see Note
12(e)) $255,824 $255,824
===================================================
30
<PAGE>
GENERAL BEARING CORPORATION
---------------------------
AND SUBSIDIARIES
----------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(a) At December 28, 1996, the Company's investment
in Shanghai General Bearing Company Ltd.,
("SGBC") was $687,454. SGBC was formed in
June 1987 for an initial term of ten years.
During 1996, the Company extended the term to
June 2008 and can further extend the term for
an additional ten year interval upon six
months notice and unanimous consent of SGBC's
board of directors. The Company is not
required to contribute additional capital.
Upon receipt of $1,375,000 in dividends, the
Company will cease to receive any further
dividends. Furthermore, after termination of
the joint venture, all equipment and machinery
contributed by the Company will be turned over
to the joint venture partner without
compensation to the Company. Condensed
financial data of SGBC are as follows:
BALANCE SHEETS
December 30, December 28,
1995 1996
--------------------------------------------------
Current assets $2,585,000 $2,414,000
Total assets 6,293,000 5,794,000
Current
liabilities 3,319,000 3,196,000
Total liabilities 3,336,000 3,212,000
Stockholder's
equity 2,957,000 2,582,000
====================================================
STATEMENTS OF OPERATIONS
Year ended
--------------------------------------
December December December
31, 30, 28,
1994 1995 1996
-----------------------------------------------------
Net sales $5,875,000 $7,321,000 $5,136,000
Gross
profit 1,352,000 1,586,000 834,000
Operating
income 521,000 438,000 68,000
Net income 456,000 384,000 2,000
=====================================================
At December 28, 1996, the Company's investment in
Wafangdian-Hyatt Bearing Manufacturing Co., Ltd.
("Wafangdian-Hyatt") had no value. Wafangdian-
Hyatt was formed in October 1990 for an initial
term of ten years; however, this joint venture was
terminated by the end of 1996. Provisions with
respect to distributions and termination are
substantially similar in all respects to those of
SGBC.
31
<PAGE>
GENERAL BEARING CORPORATION
---------------------------
AND SUBSIDIARIES
----------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(b) Includes accrued interest payable to the
Parent of $300,000 and $450,000 as of 1995 and
1996, respectively, relating to the
subordinated note (Note 8). Effective
December 31, 1995, the outstanding amounts
will bear interest at 8% and have no set
repayment terms. As of December 28, 1996,
this amount includes $95,739 of interest
receivable.
6. NOTE PAYABLE - The Company is obligated to a bank under a
BANK revolving line of credit which expires on July 1,
1998 and a term loan (see Note 8). The loan and
security agreement provides the Company with a
secured line of credit of up to $15 million for
working capital, acceptances and letters of credit.
Borrowings under the credit line are based upon
percentage formulas relating to accounts receivable
and inventories. The maximum amount available is
reduced by the term loan balance outstanding.
Interest on the outstanding obligation is payable
at the bank's prime rate plus 2%, 10.25% at
December 28, 1996. The loan is secured by all of
the Company's inventories, accounts receivable,
general intangibles, and certain machinery and
equipment. The loan and security agreement also
contains certain restrictive covenants which
include, among others, the maintenance of financial
ratios relating to working capital and net worth,
limitations on capital expenditures and payment of
dividends, and prepayment penalties.
As of December 28, 1996, borrowings under the
credit line amounted to $9,526,484.
Commitments under letters of credit amounted to
$524,792 at December 28, 1996.
7. TAXES ON The benefits for Federal, state and local income
INCOME taxes consist of the following:
Years Ended
--------------------------------------
December December December
31, 30, 28,
1994 1995 1996
-----------------------------------------------------
Deferred :
Federal $ - $(473,000) $(189,200)
State and
local - (27,000) (10,800)
-----------------------------------------------------
$ - $(500,000) $(200,000)
=====================================================
32
<PAGE>
GENERAL BEARING CORPORATION
---------------------------
AND SUBSIDIARIES
----------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
The major elements contributing to the difference
between the Federal statutory rate and the
Company's effective tax rate are as follows:
Year ended
-------------------------------------
December December December
31, 30, 28,
1994 1995 1996
--------------------------------------------------
Statutory
rate 34.0% (34.0%) 34.0%
Increase
(decrease)
in valuation
allowance
(due primarily
to non-
utilization
of net
operating
loss) (41.8) 12.5 (42.1)
Permanent and
other
differences 7.8 .9 8.1
---------------------------------------------------
0 % (22.4%) (10.0%)
===================================================
Temporary differences which give rise to a
significant portion of deferred tax assets and
liabilities are as follows:
December December
30, 28,
1995 1996
---------------------------------------------------
Gross deferred tax assets:
Accounts
receivable
allowances $ 90,000 $ 88,000
Net operating
loss carry forwards 4,693,000 4,030,000
Other 336,000 100,000
---------------------------------------------------
5,119,000 4,218,000
Gross deferred tax
liabilities:
Plant and equipment,
depreciation
differences (351,000) (265,000)
---------------------------------------------------
4,768,000 3,953,000
Valuation allowance (4,268,000) 3,253,000
---------------------------------------------------
$ 500,000 $ 700,000
===================================================
Management believes that the remaining portion of
the deferred tax asset will more likely than not be
fully realized based on the Company's historical
earnings and future expectations of adjusted
taxable income.
As of December 28, 1996, the Company has Federal
tax loss carryovers of approximately $11.5 million
expiring at various dates through the year 2010.
33
<PAGE>
GENERAL BEARING CORPORATION
---------------------------
AND SUBSIDIARIES
----------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
8. LONG-TERM DEBT
December December
30, 28,
1995 1996
---------------------------------------------------
Bank:
$1,560,000 three year
loan from the same
bank referred to in
Note 6. Interest is
calculated at the bank's
prime rate plus 2%;
10.25% at December 28,
1996; principal of
$18,570 plus interest
is payable monthly,
through June 1, 1998
with final payment of
$910,050 due July 1,
1998. $1,448,580 $1,225,740
Less:
Current
maturities 222,840 222,840
---------------------------------------------------
1,225,740 1,002,900
Parent:
6% subordinated
promissory notes
due December 1998.
Interest is accruable
but is to be paid
annually only out
of net income in
excess of $400,000.
The notes are
subordinated to the
rights of all creditors
and are secured by
machinery and equipment
having a net book value
of approximately
$810,000 At December
28, 1996 $2,500,000 $2,500,000
Noninterest-bearing
promissory note,
payable in annual
installments of
$125,000 commencing
December 1993. The
1993 and 1994
installments were
deferred until,
and paid in, 1995.
Repayment is subject
to management
discretion. 375,142 250,142
---------------------------------------------------
2,875,142 2,750,142
---------------------------------------------------
Affiliates:
General-IKL
Corp.(see
Note 12(e)) $ 716,422 $ 739,588
---------------------------------------------------
$4,817,304 $4,492,630
===================================================
34
<PAGE>
GENERAL BEARING CORPORATION
---------------------------
AND SUBSIDIARIES
----------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
At December 28, 1996, aggregate principal payments
for the long-term bank debt agreements are $222,840
in 1997 and $1,002,900 in 1998. The repayment terms
of the long-term debt - parent and affiliates are
stated above or are at the discretion of
management.
9. DISCRETIONARY The Company and certain of its affiliates maintain
PROFIT profit sharing plans covering eligible salaried and
SHARING nonunion employees. Contributions are made to the
PLAN plans at the discretion of the management of the
Company. The Company made contributions of $60,000
in 1994 and $120,000 in 1996. There were no
contributions recorded in 1995.
10. PROVISION FOR In 1995, the Company was notified that certain
CUSTOMER wheel bearings supplied to the railroad industry
DAMAGE did not meet specifications. As a result,
CLAIMS substantially all these bearings previously sold,
were recalled to be reworked. In connection with
this recall, the Company made a special provision
against earnings of $2,152,000, in the year ended
December 30, 1995, representing the estimated
liability for rework costs and customer damage
claims.
During the later part of 1996, the Company received
notice from various vendors that it will be
reimbursed for approximately $921,000 of costs
relating to this recall. The Company has included
$220,000 in cost of sales, $401,000 in operating
income and reduced interest expense by $81,000. As
of December 28, 1996, the Company has received
$421,000 and has a receivable of $281,000, net of
allowance for doubtful accounts of $219,000 which
is included in prepaid expenses and other current
assets.
11. OTHER Other (income) expense consists of:
(INCOME) EXPENSE
December December December
31, 30, 28,
1994 1995 1996
---------------------------------------------------
Revaluation
of equity
investment
(a) $ - $ 960,000 $ -
-
Revaluation
of goodwill - 93,333 -
Other (19,699) 179,706 (20,200)
---------------------------------------------------
$(19,699) $1,233,039 $(20,200)
===================================================
The Company incurred interest expense of $989,912,
$1,428,451 and $1,399,402 in 1994, 1995 and 1996
respectively.
35
<PAGE>
GENERAL BEARING CORPORATION
---------------------------
AND SUBSIDIARIES
----------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(a) During 1995 the Company revalued its equity
investment in Alurop Trading Corp. to properly
reflect share of equity to be realized from
the investment. In February 1995, the
Company brought an action against the other
50% shareholder in Alurop, since it was unable
to amicably resolve its dispute with this
party, who also had been a principal supplier
to WMW. Accordingly, the Company has written
off its investment in Alurop due to the
uncertainties relating to this litigation
(Note 13d)), the limited operations of WMW
(Alurop's only asset) and the uncertain value
of WMW's investment in preferred stock
12. TRANSACTIONS (a) The Company made purchases of approximately
WITH $6.9 million, $9.1 million and $6.6 million
AFFILIATES from affiliates in 1994, 1995 and 1996,
respectively. Accounts payable - affiliates
relate primarily to these purchases.
(b) General shares office facilities and provides
services for several affiliates. General
charged these affiliates $115,000, $120,000
and $120,000 in 1994, 1995 and 1996,
respectively.
(c) General leases property, including its
corporate headquarters, from Gussack Realty
Company ("Realty"), which is owned by the
shareholders of World. Rent and real estate
taxes paid to the affiliate were approximately
$923,000, $861,000 and $ 939,000 in 1994,
1995 and 1996, respectively (see Note 13).
(d) The Company made payments for and advances to
certain affiliates for payroll, benefits, and
other expenses. Such payments aggregated
$1,708,000 $1,742,000 and $1,691,000 for the
fiscal years ended 1994, 1995 and 1996,
respectively.
(e) The amounts receivable from and payable to
General-IKL Corp., a corporate joint venture
with a manufacturer located in the former
Republic of Yugoslavia, are restricted due to
the suspension of economic activity with that
country.
13. COMMITMENTS (a) Effective January 1996, the Company completed
AND a move to new facilities owned by Realty.
CONTINGENCIES Existing obligations under a long-term lease
for the previous facilities, also owned by
Realty, were waived. Prior to November 1,
1996, the facilities were leased on a
month-to-month basis.
The Company entered into a lease agreement
with Realty for its new premises effective
November 1, 1996 for an initial term of seven
years. Concurrently, the Company entered into
sublease agreements with World and WMW
Machinery Co., Inc., an affiliate.
Rent expense consists of the following:
36
<PAGE>
GENERAL BEARING CORPORATION
---------------------------
AND SUBSIDIARIES
----------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Year ended
-------------------------------------
December December December
31, 30, 28,
1994 1995 1996
--------------------------------------------------
Gross rent
paid
(excluding
taxes) $756,555 $748,320 $770,990
Less:
Reimbursed
from
related
companies (123,791) (224,820) (54,792)
--------------------------------------------------
$632,764 $523,500 $716,198
==================================================
Minimum annual rentals and rental income under
these agreements are as follows:
Minimum
Annual Rental
Year Rentals Income Net
---------------------------------------------------
1997 $ 912,840 ($203,200) $ 709,640
1998 921,968 (205,232) 716,736
1999 967,608 (215,392) 752,216
2000 977,284 (217,545) 759,739
2001 1,025,664 (228,315) 797,349
Thereafter
(cumulative) 1,982,944 (432,277) 1,550,667
---------------------------------------------------
$6,788,308 ($1,501,961) $5,286,347
===================================================
(b) The Company is obligated under an operating
lease for manufacturing facilities in New
Jersey through May 1999. The lease requires
payment of real estate taxes, insurance and
maintenance. Rent expense was $204,000,
$204,000 and $216,000 in 1994, 1995 and 1996
respectively.
Minimum annual rentals as of December 28,
1996, under this lease, are as follows:
Year Amount
------------------------------------------
1997 $219,500
1998 239,500
1999 105,000
------------------------------------------
$564,000
==========================================
37
<PAGE>
GENERAL BEARING CORPORATION
--------------------------
AND SUBSIDIARIES
----------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(c) The Company has a management consulting and
noncompetition agreement with a former officer
and stockholder. The agreement, which
commenced as of July 1, 1980, provides for
quarterly payments aggregating $35,000 per
annum for twenty years. As of December 28,
1996, future payments required under the
agreement total $131,250.
(d) In 1995, General and WMW Machinery of New
Jersey, Inc. (formerly WMW Machinery, Inc.)
commenced an action for damages in the United
States District Court for the Southern
District of New York against the successor to
a former East German Foreign Trade
Organization and certain other German parties.
The defendants filed an answer and
counterclaim which included a claim against
General and certain affiliates in the amount
of $9,507,337 for allegedly failing to provide
the working capital requirements of WMW
Machinery of New Jersey, Inc.
Management believes the claim against the
Company to be entirely without merit and
anticipates that the claim will have no
material impact on the Company.
Additionally, US Customs has a claim against
the Company, which the Company believes to be
without merit. The Company intends to
vigorously defend this claim and believes that
the claim will not have a material impact on
the Company.
(e) General is party to a trademark license
agreement which provides for increasing annual
fees of between $25,000 and $35,000 through
1999, and $35,000 per year plus an inflation
factor thereafter until 2009. The agreement
contains an acceleration clause which provides
for immediate payment of all remaining fees in
the event of breach of contract.
(f) The Company has guaranteed certain of Realty's
outstanding obligations of approximately
$1.2 million to a bank and other parties.
38
<PAGE>
GENERAL BEARING CORPORATION
---------------------------
AND SUBSIDIARIES
----------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
14. STOCKHOLDER'S In connection with the IPO of its common stock, the
EQUITY Company, on October 10, 1996, filed an amendment to
its Certificate of Incorporation, increasing the
authorized common shares from 10,600 to 19,000,000
and changing its $.10 par value per common share to
$.01 par value, and effecting a 3,000-for-one stock
split. All share and per share data in the
consolidated financial statements have been
adjusted to give retroactive effect to the stock
split.
15. STOCK OPTIONS In September 1996, the Company adopted the 1996
Stock Option and Performance Award Plan ("1996
Plan"), which authorizes the granting to directors,
officers and key employees of the Company of
incentive or nonqualified stock options,
performance shares, restricted shares and
performance units. The 1996 Plan covers up to
500,000 shares of common stock.
The exercise price of any incentive stock option
granted to an eligible employee may not be less
than 100% of the fair market value of the shares
underlying such option on the date of grant, unless
such employee owns more than 10% of the outstanding
common stock or stock of any subsidiary or parent
of the Company, in which case the exercise price of
any incentive stock option may not be less than
110% of such fair market value. No option may be
exercisable more than ten years after the date of
grant and, in the case of an incentive stock option
granted to an eligible employee owning more than
10% of the common stock or stock of any subsidiary
or parent of the Company, no more than five years
from its date of grant. Options are not
transferable, except upon the death of the
optionee. In general, upon termination of
employment of an optionee, all options granted to
such person which are not exercisable on the date
of such termination immediately expire, and any
options that are exercisable expire three months
following termination of employment, if such
termination is not the result of death or
retirement, two years following such termination if
such termination was because of death and one year
following such termination if such termination was
because of disability or retirement under the
provisions of any retirement plan that may be
established by the Company, or with the consent of
the Company.
As of December 28, 1996, no awards have been
granted.
16. SUPPLEMENTAL For the periods ended December 31, 1994, December
CASH FLOW 30, 1995 and December 28, 1996, the Company paid
INFORMATION interest of approximately $745,000, $1,257,000,
and $1,316,363, respectively.
39
<PAGE>
SUPPLEMENTARY FINANCIAL DATA
FURNISHED PURSUANT TO THE
REQUIREMENTS OF FORM 10-K
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
General Bearing Corporation
West Nyack, New York
The audits referred to in our report dated March 21, 1997 relating
to the consolidated financial statements of General Bearing Corporation
and subsidiaries, which is referred to in Item 8 of this Form 10-K,
includes the audits of the accompanying financial statement schedule
for the years ended December 28, 1996 and December 30, 1995. This
financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion on this
financial statement schedule based upon our audits.
In our opinion, such financial statement schedule presents fairly,
in all material respects, the information set forth therein for the
years ended December 28, 1996 and December 30, 1995.
/s/ BDO Seidman, LLP
BDO Seidman, LLP
New York, New York
March 21, 1997
40
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
General Bearing Corporation
West Nyack, New York
The audit referred to in our report date March 24, 1995 relating to
the consolidated financial statements of General Bearing Corporation
and subsidiaries, which is referred to in Item 8 of this Form 10-K,
includes the audit of the financial statement schedule for the year
ended December 31, 1994. This financial statement schedule is the
responsibility of management. Our responsibility is to express an
opinion on this financial statement schedule based upon our audits.
In our opinion, such financial statement schedule presents fairly,
in all material respects, the information set forth therein for the
year ended December 31, 1994.
/s/ Ferro, Berdon & Company, L.L.P.
FERRO, BERDON & COMPANY, L.L.P.
New York, New York
March 24, 1995
41
<PAGE>
GENERAL BEARING CORPORATION
---------------------------
AND SUBSIDIARIES
----------------
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Column A Column B Column C Column D Column E
-------- -------- -------- -------- --------
Add
----------
Balance at Charged to
Beginning of Costs and Deductions Balance at
Description Period Expenses (1) End of Period
----------- ----------- ---------- ---------- -------------
Year Ended December 31, 1994
Allowance for
doubtful Accounts.. $255,000 - - $255,000
-------- ------- ------- --------
$255,000 - - $255,000
======== ======= ======= ========
Year Ended December 30, 1995
Allowance for
doubtful Accounts... $255,000 $17,050 $17,050 $255,000
-------- ------- ------- --------
$255,000 $17,050 $17,050 $255,000
======== ======= ======= ========
Year Ended December 28, 1996
Allowance for
doubtful Accounts... $255,000 $55,762 $75,762 $235,000
-------- ------- ------- --------
$255,000 $55,762 $75,762 $235,000
======== ======= ======= ========
- --------------------
(1) Uncollectible accounts written off net of recoveries.
42
<PAGE>
Item 9. Changes in and disagreements with Accountants on Accounting
and Financial Disclosures
Since the Company's inception, there has not been any Form 8-K
filed under the Securities and Exchange Act of 1934 reporting a change
in accountants in which there was a reported disagreement on any matter
of accounting principles or practices or financial statement
disclosure.
43
<PAGE>
PART III
Item 10. Directors and Executive Officers
The directors and executive officers of the Company are as
follows:
NAME AGE POSITION
---- --- --------
Seymour I. Gussack . 73 Chairman of the Board of Directors
David L. Gussack . . 39 President and Director
Jerome Johnson . . . 85 Director
Robert E. Baruc. . . 45 Director
Harold S. Geneen . . 86 Director
Nina M. Gussack. . . 41 Director
Lester M. White . . 37 Vice President -- Administration/MIS
Eugene Passariello . 65 Vice President -- Manufacturing
William F. Kurtz . . 38 Vice President -- Technical Services
Christopher Moore. . 40 Vice President -- Finance, Secretary
and Treasurer
Joseph J. Hoo. . . . 62 Vice President -- Advanced Technology
and China Affairs
Set forth below is certain additional information with
respect to the Directors and executive officers.
SEYMOUR I. GUSSACK founded the Company in 1958 and has served as
Chairman of the Board of Directors and a Director of the Company
since its formation. Seymour I. Gussack is also the Chairman of the
Board of Directors and a Director of World and a partner of Realty.
See "Certain Relationships and Related Transactions" and "Principal
Stockholder." Seymour I. Gussack's son is David L. Gussack, President
of the Company and a Director.
DAVID L. GUSSACK became President of the Company in 1993 and
has been a Director of the Company since 1987. David L. Gussack has
held various positions with the Company since 1983, including
Executive Vice President from 1991 to 1992, General Manager of the
OEM Division from 1988 to 1990, Supervisor and Coordinator, Hyatt
Absorption Project from 1987 to 1988, Plant Manager from 1986 to 1987,
Office Facilities Manager from 1985 to 1986, and Manager of Special
Projects from 1983 to 1985. David L. Gussack is a Secretary and a
Director of SGBC and Hyatt-ZWZ, respectively. He also is a partner of
Realty. See "Certain Relationships and Related Transactions." David
L. Gussack is a graduate of the University of Pennsylvania. David L.
Gussack's father is Seymour I. Gussack, Chairman of the Board of
Directors of the Company.
LESTER M. WHITE has served as Vice President --
Administration/Management Information Systems of the Company since
1989. Mr. White is a graduate of University of Massachusetts, Boston
(B.S. in Management and Economics).
44
<PAGE>
EUGENE PASSARIELLO has served as Vice President --
Manufacturing of the Company since 1989. Mr. Passariello was a Plant
Manager of the Company from 1989 to 1991. He is a graduate of Fairleigh
Dickenson University (B.S. in Industrial Engineering) and has
undertaken graduate studies at Brooklyn Technical College
(Metallurgy) and Rockland College (Business Administration).
WILLIAM F. KURTZ has served as Vice President -- Technical
Services of the Company since 1993. Mr. Kurtz was also a Chief Engineer
of the Company from 1989 to 1993 and Senior Project Engineer of the
Company from 1988-89. He is a graduate of Manhattan College (B.E.
and M.E. in Mechanical Engineering) and a licensed professional
engineer.
CHRISTOPHER MOORE has served as Vice President -- Finance of
the Company since 1995 and as Secretary and Treasurer since 1993.
Prior to that time, Mr. Moore held various positions in the Company,
including Controller from 1986 to 1995 and Assistant Controller
from 1984 to 1986. Mr. Moore is a graduate of Seton Hall University
(B.S. in Accounting) and has been a certified public accountant
since 1982.
JOSEPH I. HOO has served as Vice President -- Advanced Technology
and China Affairs of the Company since August 1995. Mr. Hoo served
as General Manager, Industrial Products Division, from 1991 to 1995
and as Chief Metallurgist from 1987 to 1991. Mr. Hoo is a graduate of
the National University of Japan (B.S. in Engineering) and University
of Michigan (M.S.E. in Metallurgy and Engineering).
JEROME JOHNSON has been a director of the Company since September
1987. Mr. Johnson has been an attorney in private practice for more
than 50 years. He also serves on the Board of Directors of
Presidential Life Insurance Company. Mr. Johnson is a graduate of
DePaul University (J.D. and L.L.B) and is a member of the Illinois
and New York bars.
ROBERT E. BARUC has been a Director of the Company since
February 1997. Since April 1994, Mr. Baruc has been an Executive Vice
President of Unapix Entertainment, Inc., an independent distributor of
film and television programming. Since August 1993, he has been the
President and Chief Executive Officer of A Pix Entertainment, Inc.
From December 1992 to August 1993, Mr. Baruc was President of Triboro
Entertainment Group, a company engaged principally in home video
distribution. From January 1991 to December 1992, Mr. Baruc
primarily acted as an independent consultant to the
entertainment industry. He is the son-in-law of Seymour I. Gussack
and the brother-in-law of David L. Gussack and Nina M. Gussack.
HAROLD S. GENEEN has been a Director of the Company since
February 1997. Mr. Geneen served as Chief Executive Officer of ITT
Corporation ("ITT") from 1959 until 1977, and as Chairman of the
Board of Directors of ITT from 1965 until 1979. He has been
Chairman Emeritus of ITT since 1983. Mr. Geneen is also a Director of
IVAX Corporation, a pharmaceutical company and Gunther International,
Ltd., a document assembly company.
NINA M. GUSSACK has been a Director of the Company since February
1997. Ms. Gussack has been litigation partner at the law firm of
Pepper, Hamilton, & Scheetz in Philadelphia, Pennsylvania since
45
<PAGE>
1986. She is a graduate of the University of Pennsylvania (B.S. in
History and M.S. in Secondary Education) and Villanova University
School of Law (J.D.). She is a member of the Pennsylvania bar. She
is the daughter of Seymour I. Gussack and the sister of David L.
Gussack.
Seymour I. Gussack, David L. Gussack and Eugene Passariello
were each officers of the Company at the time the Company filed
for protection from creditors under Chapter 11 of the U.S.
Bankruptcy Code in 1991.
Directors hold office until the next annual meeting of
stockholders following their election, or until their successors are
elected and qualified. Officers are elected annually by the Board
of Directors and serve at the discretion of the Board of Directors.
The standing committees of the Board of Directors are the Audit
Committee and the Compensation/ Stock Option Committee.
The Audit Committee of the Board of Directors consists of
three directors, David L. Gussack, Robert E. Baruc and Jerome
Johnson. The Audit Committee's function is to review and report to
the Board of Directors with respect to the selection and the
terms of engagement of the Company's independent public
accountants, and to maintain communications among the Board of
Directors, such independent public accountants, and the Company's
internal accounting staff with respect to accounting and audit
procedures, the implementation of recommendations by such independent
public accountants, the adequacy of the Company's internal
controls and related matters. The Audit Committee also reviews
certain related party transactions and any potential conflict of
interest situations involving officers, directors or stockholders
beneficially owning more than 10% of an equity security of the Company.
The Compensation/Stock Option Committee consists of Messrs.
Harold S. Geneen and Robert E. Baruc, each of whom is an
independent Director. The Compensation/Stock Option Committee's
function is to review and approve annual salaries and bonuses for all
employees with salaries in excess of $100,000 and review, approve and
recommend to the Board of Directors the terms and conditions of all
employee benefit plans or changes thereto, including the granting
of stock options pursuant to the Company's 1996 Option Plan.
Item 11. Executive Compensation
The following table sets forth the aggregate compensation paid
for services rendered in all capacities to the Company's executive
officer who received compensation of $100,000 or more during the
fiscal year ended December 28, 1996:
46
<PAGE>
ANNUAL COMPENSATION(1) LONG-TERM COMPENSATION
------------------------ --------------------------------
Name and Restricted
Principal Fiscal Stock Stock All Other
Position Year Salary Bonus Awards Options# Compensation
- -------- ------ ------ ----- ---------- -------- ------------
David L. Gussack,
President 1996 165,675 1,624 10,147
(1) Perquisites and other personal benefits are not included
because they do not exceed the lesser of $50,000 or 10% of the total
base salary and annual bonus for the named executive officer.
(2) Represents deferred compensation.
Item 12. Security Ownership of Certain Beneficial Owners and
Management.
The following table sets forth, as of the date of this Report
certain information concerning the beneficial ownership of Common Stock
as to each director and current executive officer of the Company,
and each person who, to the Company's knowledge, beneficially owns more
than 5% of the outstanding Common Stock.
NUMBER OF
SHARES
NAME AND ADDRESS OF BENEFICIALLY PERCENTAGE OF SHARES
BENEFICIAL OWNER OWNED (1) BENEFICIALLY OWNED(1)
- ------------------- --------- ---------------------
World Machinery Company ...... 3,000,000(2) 76.9%
44 High Street
West Nyack, New York 10994
Seymour Gussack............... 3,009,000(3)(4) 77%
David Gussack................. 3,007,000(3)(4) 77%
Nina M. Gussack............... 5,000(4) *
Robert E. Baruc............... 500 *
All Directors and Executive
Officers as a Group.......... 3,011,500(4) 77%
* Less than 1%
47
<PAGE>
(1) Pursuant to Rule 13d-3 under the U.S. Securities Exchange Act of
1934, as amended, beneficial ownership of a security consists of sole
or shared voting power (including the power to vote or direct the
voting) and/or sole or shared investment power (including the power to
dispose or direct the disposition) with respect to a security whether
through a contract, arrangement, understanding, relationship or
otherwise.
(2) Seymour I. Gussack, the Company's Chairman of the Board, David L.
Gussack, the Company's President and Nina Gussack, a Director of the
Company own or control approximately 19.6% and 17.6% and 17.6%,
respectively, of the Common Stock of World. The remaining children of
Seymour I. Gussack and his spouse own or control an additional
approximately 23.5% of the stock of World. Harold S. Geneen, a Director
of the Company, and Joseph J. Hoo, Vice President -- Advanced
Technology and China Affairs of the Company, own approximately 19.6%
and 2.0% of the Common Stock of World, respectively.
(3) Includes for each of Seymour I. Gussack and David L. Gussack,
3,000,000 shares beneficially owned by World. Seymour I. Gussack and
David L. Gussack are the two directors of World and each may be deemed
to share with the other the power to vote and dispose of the shares
owned by that corporation. Seymour I. Gussack and David L. Gussack
disclaim beneficial ownership of the shares of Common Stock owned by
World.
(4) Includes 5,000 shares of Common Stock owned by Realty over which
Seymour I. Gussack, David L. Gussack and Nina M. Gussack, as general
partners of Realty, may be deemed to share the power to vote and
dispose of. Each of Seymour I. Gussack, David L. Gussack and Nina M.
Gussack disclaim beneficial ownership of the shares of Common Stock
owned by Realty.
Item 13. Certain Relationships and Related Transactions
BANKRUPTCY AND RESULTING OBLIGATIONS TO WORLD
In connection with the Plan of Reorganization, the Company issued
to World, which prior to this Offering owned all of the Company's
Common Stock, a Secured Note for $2.5 million, an Installment Note
for $750,142, and 1,000 shares of Common Stock (3,000,000 shares after
giving effect to the 3000-for-one stock split effective October 10,
1996) in exchange for discharge of an obligation World acquired for
approximately $2.0 million from Wells Fargo, which provided
financing for the purchase by the Company in March 1987 of Hyatt and
for working capital. The Secured Note is secured by a subordinated
lien in certain machinery and equipment having a net book value of
approximately $810,000 at December 28, 1996. Interest on the Secured
Note accrues annually but is only payable with respect to any fiscal
year to the extent the Company's net income exceeds $400,000. The
Company has never made any payments of principal or interest with
respect to the Secured Note, and it has accrued $450,000 in
interest thereon. The Installment Note does not bear interest.
48
<PAGE>
LEASES WITH REALTY
From January 1 to November 1, 1996, the Company held a
month-to-month tenancy for the premises located at West Nyack, New
York comprising 189,833 square feet owned by Realty, whose partners
include Seymour I. Gussack, David L. Gussack and Nina M. Gussack, each
a member of the Board of Directors of the Company. The Company and
Realty entered into the Lease effective as of November 1, 1996, which
provides for an initial term expiring on October 31, 2003, renewable
at the option of the Company for an additional six year term. The
Company pays rent of $4.81 per square foot (or $912,840)
annually, payable in monthly rent payments of $76,070. Although the
Company has not obtained a formal appraisal, based upon an informal
survey conducted by a real estate broker, the Company believes
that the rent charged it by Realty approximates fair market rents in
the area. The Lease provides for an increase every other year,
commencing in 1998, to the greater of: (i) 106% of the next preceding
year's rent; or (ii) the preceding year's rent multiplied by a
fraction the numerator of which is the CPI for the area including
Rockland County or if no such index is published, for Northern New
Jersey in effect 90 days prior to November 1 of the new rent year and
the denominator of which is the CPI in effect 90 days prior to
November 1 of the preceding year.
During 1994 and 1995, the Company leased facilities from
Realty in Blauvelt, New York at which the Company located its
headquarters and operations. The Company is the guarantor with respect
to a mortgage loan currently in the principal amount of $650,470
from the Job Development Authority of Rockland County and a mortgage
loan currently in the principal amount of $506,250 from the
Industrial Development Authority of Rockland County on the
property in Blauvelt, New York. The Company did not receive any
consideration from Realty for its guarantee of such mortgage loans.
The Company incurred rent and real estate taxes with respect to the
facilities leased from Realty in Blauvelt, New York for 1994 and 1995
of approximately $923,000 and $861,000, respectively.
SUBLEASES TO WMW MACHINERY CO. AND WORLD
The Company currently subleases 30,949 square feet and 5,500
square feet at the West Nyack facility to WMW Machinery Co., a
subsidiary of World, and World, respectively, pursuant to subleases in
each case effective November 1, 1996. The subleases are coterminous
with the Lease. The sublease with WMW Machinery Co. provides for rent
of $5.50 square feet or $170,220 per year until November 1998, payable
to the Company in equal monthly installments. The sublease with
World provides for rent of $33,000 per year until November 1998,
payable to the Company in equal monthly installments. Each sublease
provides for an increase in rent every other year, commencing in 1998,
to the greater of: (i) 106% of the next preceding year's rent; or
(ii) the preceding year's rent multiplied by a fraction the numerator
of which is the CPI in effect 90 days prior to November 1 of the next
rent year and the denominator of which is the CPI in effect 90 days
prior to November 1 of the preceding year.
OTHER TRANSACTIONS WITH WORLD AND WORLD AFFILIATES
The Company made payments for and advances to World, World
subsidiaries and joint ventures and certain affiliates for payroll,
benefits and other expenses. Such payments aggregated approximately
$1,708,000, $1,742,000 and $1,691,000 for 1994, 1995 and 1996
49
<PAGE>
respectively. The advances bear interest at the rate of 8% per annum
which is accrued monthly. In certain cases, the obligation to repay
advances made by the Company were satisfied by offsetting the
price of bearings or bearing products purchased from joint ventures
obligated to the Company. The Company has purchased bearings from
four joint ventures and machinery from another joint venture in
which World has interests. Such purchases aggregated $600,000,
$2,650,000 and $675,000 for 1994, 1995 and 1996 respectively. The
Company anticipates that it will continue to purchase bearings
from joint ventures in which World has an interest and to make advances
to or for the benefit of World and such joint ventures for the payment
of their expenses related to the supply of products to the Company.
These advances either will be repaid by World or the joint venture or
will be offset against the price of bearings purchased by the Company.
World has also granted to the Company options, exercisable prior
to December 31, 1999, to purchase from World its interest in two joint
ventures, Rockland and WGBC, for $400,000 and $912,896 (subject to
adjustment based on change in accounts payable by WGBC to World),
respectively, representing the estimated capital contributions,
advances for administrative expenses and other costs paid by World with
respect to such ventures; provided, however, that if any such
option is exercised after December 31, 1997, the applicable purchase
price shall be adjusted, to include any additional capital
contributions made and administrative expenses incurred on behalf
of the joint venture by World after such date.
TAX SHARING AGREEMENT
The Company has been, and will be, included in the
consolidated federal income tax returns filed by World during all
periods in which it has been or, will be, a wholly-owned subsidiary
of World ("Affiliation Years"). Upon the completion of the Initial
Public Offering, the Company ceased to be included in the
consolidated federal income tax returns filed by World, and will
file on a separate basis. As a result, the Company and World
have entered into an agreement ("Tax Sharing Agreement") providing
for the manner of determining payments with respect to federal income
tax liabilities and benefits arising during the Affiliation Years.
Under the Tax Sharing Agreement, the Company has paid, or will pay,
to World an amount equal to the Company's share of World's
consolidated federal income tax liability, generally determined on a
separate return basis, for the tax years which have ended and the
portion of the tax year preceding consummation of the Offering, and
World will pay the Company for the use of the Company's losses, and
credits arising in such periods, in each case net of any amounts
theretofore paid or credited by World or the Company to the other with
respect thereto. In the event that World's consolidated federal
income tax liability for any Affiliation Year is adjusted upon
audit or otherwise, the Company will bear any additional liability or
receive any refund which is attributable to adjustments of items of
income, deduction, gain, loss or credit of the Company. World shall
permit the Company to participate in any audits or litigation with
respect to Affiliation Years, at the Company's expense, to the
extent that such audit or litigation could result in an
indemnification payment from the Company to World.
50
<PAGE>
REGISTRATION RIGHTS AGREEMENT
World has certain rights with respect to the registration under
the Security Act 1933, as amended (the "Act")of shares of Common Stock
owned by it as of the date hereof ("Registrable Shares"). Such rights
will be exercisable by any person or entity (together with World,
"Holders") acquiring Registrable Shares from World, including any
options, warrant to purchase, or other security exchangeable for or
convertible into Registrable Shares other than pursuant to an
effective registration statement under the Act. If the Company
proposes to register any securities under the Act (other than a
registration on Form S-4 or Form S-8), whether or not for its own
account, the Holders are entitled to include Registrable Shares,
subject to the right of the managing underwriter of any such
offering to exclude, due to market conditions, some or all of such
Registrable Shares from such registration. In addition, commencing
February 7, 1998, the Holders will have the right to require the
Company to prepare and file registration statements under the Act
with respect to the Registrable Shares. The right may be requested by
any Holder holding Registrable Shares aggregating at least 50,000
shares of the Company's Common Stock outstanding at the date of the
Company's Initial Public Offering. The Company generally is
required to bear the expenses (except underwriting discounts and
commissions and fees and expenses of separate counsel) of all such
registrations, whether or not initiated by any Holder.
51
<PAGE>
PART IV
ITEM 14. FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES, EXHIBITS
AND REPORTS ON FORM 8-K
(a) 1. Financial Statements (included in Part II of this report):
Reports of Independent Certified Public Accountants dated
March 21, 1997 and March 24, 1997
Consolidated Balance Sheets for years ended December 30, 1995
and December 28, 1996
Consolidated Statements of Operations for years ended
December 31, 1994, December 30, 1995 and December 28, 1996.
Consolidated Statement of Changes in Stockholder's Equity at
December 25, 1993, December 31, 1994, December 30, 1995 and
December 28, 1996.
Consolidated Statement of Cash Flows for year ended December
31, 1994, December 30, 1995 and December 28, 1996.
Summary of Significant Accounting Policies and Notes to
Consolidated Financial Statements.
(a) 2. Financial Statement Schedules (included pursuant to Item 14(d)
at page 42 of this report):
Schedule II - Valuation and Qualifying Accounts
(a) 3. Exhibits:
Reference is made to the Exhibit Index commencing on page 54,
filed pursuant to Item 14(c). The Exhibits include the
following management contract or compensatory plan or
arrangement required to be filed as an exhibit to this
report: 1996 Stock Option and Performance Award Plan.
(b) Reports on Form 8-K:
NONE
52
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Annual Report
on Form 10-K to be signed on its behalf by the undersigned, thereunto
duly authorized, on March 26, 1997.
GENERAL BEARING CORPORATION
By: /s/ David L. Gussack
------------------------------
David L. Gussack, President
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Annual Report on Form 10-K has been signed below by the following
persons on behalf of the registrant and in the capacities indicated, on
March 26, 1997.
Signatures Title Date
---------- ----- ----
/s/ Seymour I. Gussack Chairman of the Board of March 26, 1997
------------------------- Directors
Seymour I. Gussack
/s/ David L. Gussack President and Director March 26, 1997
------------------------- (Principal Executive Officer)
David L. Gussack
/s/ Christopher Moore Vice President Finance March 26, 1997
------------------------- (Principal Financial and
Christopher Moore Accounting Officer)
/s/ Jerome Johnson Director March 26, 1997
-------------------------
Jerome Johnson
/s/ Nina Gussack Director March 26, 1997
-------------------------
Nina Gussack
/s/ Harold S. Geneen Director March 26, 1997
-------------------------
Harold S. Geneen
/s/ Robert E. Baruc Director March 26, 1997
-------------------------
Robert E. Baruc
53
<PAGE>
EXHIBIT INDEX
NOTE: Except as to those items marked with an "*", which are filed
herewith, all Exhibits have been previously filed with the Company's
Registration Statement on Form S-1 effective February 7, 1997
(Registration No. 333-15477).
Exhibit No. Description of Exhibit
- ----------- ----------------------
3.1 Second Restated Certificate of Incorporation
3.2 By-Laws of the Company
4.1 Specimen Stock Certificate
10.1 Loan and Security Agreement dated December 20, 1993 by
and among the Bank of New York Commercial Corporation,
the Company and Hyatt Railway Products Corp.,
including amendments 1 through 8 thereto
10.2 Contract dated June 1988 by and between Shanghai
Rolling Bearing Factory and the Company, including
Agreement for the Revision and Amendment to the
Contract
10.3 Lease Agreement dated November 1, 1996 by and between
Gussack Realty Company and the Company relating to
West Nyack, New York premises
10.4 Lease dated March 15, 1988 by and between Lamington
Associates II and the Company relating to the Union,
New Jersey premise
10.5 Sublease Agreement dated November 1, 1996 between the
Company and World Machinery Company
10.6 Sublease Agreement dated November 1, 1996 between the
Company and WMW Machinery Co.
10.9 1996 Stock Option and Performance Award Plan
10.10 Form of Representative's Warrant
10.11 Form of Registration Rights Agreement between the
Company and World (previously filed exhibit as 4.2)
10.12 Form of Tax Sharing and Indemnification Agreement
between the Company and World Machinery Company
10.13 Amendment Letter dated March 7, 1997 between the
Company and Bank of New York Commercial Corporation*
21 List of Subsidiaries of the Company
27 Financial Data Schedule*
54
EXHIBIT 10.13
THE BANK OF NEW YORK COMMERCIAL CORPORATION
1290 Avenue of the Americas
New York, New York 10104
March 7, 1997
General Bearing Corporation
Hyatt Railway Products Corp.
44 High Street
West Nyack, New York 10994
Attention: David Gussack
Gentleman:
Reference is made to that certain Loan and Security
Agreement dated December 20, 1993 (as same has been
amended by (i) Amendment No. 1 to Loan and Security
Agreement dated as of April ____, 1994, (ii) Amendment
No. 2 to Loan and Security Agreement dated as of May
31, 1994, (iii) Amendment No. 3 to Loan and Security
Agreement dated as of November 14, 1994, (iv) Amendment
No. 4 to Loan and Security Agreement dated as of June
19, 1995, (v) Amendment No. 5 to Loan and Security
Agreement dated as of March 1, 1996, (vi) Waiver and
Amendment No. 6 to Loan and Security Agreement dated as
of March 22, 1996, (vii) Waiver and Amendment No. 7 to
Loan and Security Agreement dated as of September 25,
1996, (vii) Amendment No. 8 to Loan and Security
Agreement dated as of October 30, 1996 and as may be
further amended, restated, supplemented or otherwise
modified from time to time, the "Loan Agreement") by
and among GENERAL BEARING CORPORATION ("General
Bearing"), a Delaware corporation, HYATT RAILWAY
PRODUCTS CORP. ("Hyatt"), a New York corporation, each
having its principal place of business at 44 High
Street, West Nyack, New York (General Bearing and Hyatt
each a "Borrower" and jointly and severally referred to
as "Borrowers") and THE BANK OF NEW YORK COMMERCIAL
CORPORATION having its principal place of business at
1290 Avenue of the Americas, New York, New York 10104
("Lender"). Unless otherwise defined herein, all
capitalized terms used herein shall have the meanings
set forth in the Loan Agreement.
Borrowers have requested that Lender release each
of David Gussack, Realty and World from certain of its
obligations under its respective guaranty and/or
security document, as applicable, and Lender is willing
to do so on the terms and conditions set forth below.
Subject to the receipt by Lender of a copy of this
letter executed and agrees to by the Borrowers,
Guarantors and World, Lender hereby proposes to: (A)
amend (i) Section 1 of the Loan Agreement by deleting
the term "Overadvance Amount" in its entirety and
inserting "Internationally Omitted" in its entirely and
inserting "Internationally Omitted" in its place and
stead and (ii) Section 2 of the Loan Agreement by
deleting subsection (a) (y) in its entirety and
inserting the following in its place and stead:
(y) an amount equal to the sum of:
(i) Receivables Availability; plus
(ii) Inventory Availability; minus
(iii) the aggregate amount of outstanding
Letters of Credit; minus
-----
(iv) Such reserves as Lender may reasonably
deem proper and necessary from time to time.
The sum of 2(a) (y) (i) plus (ii) minus (iv) shall
be referred to as the "Formula Amount"; and
(B) release (i) Gussack from his obligations under the
Overadvance Guaranty, (ii) Realty from its obligations
under the Mortgage and that certain Guaranty dated as
of __________ ___, 1996 executed by Realty in favor of
Lender (the "Realty Guaranty") and (iii) World from its
obligations under the CD Pledge.
If Borrowers are in agreement with the foregoing
proposed amendment and releases, kindly execute, and
have each Guarantor execute, a copy of this letter in
the space provided for below and return same to Lender.
Upon receipt of a fully executed original of this
letter, (i) Lender shall deliver to Realty a mortgage
satisfaction with respect to the Real Property and
return the proceeds of the CD Pledge to World and (ii)
the Overadvance Guaranty and the Realty Guaranty shall
be terminated and no further force and effect.
Except as specifically amended herein, the Loan
Agreement, and all other documents, instruments and
agreements executed and/or delivered in connection
therewith, shall remain in full force and effect, and
are hereby ratified and confirmed. Except as expressly
provided herewith, the execution, delivery and
effectiveness of this letter shall not operate as a
wavier of any right, power or remedy of Lender, nor
constitute a wavier of any provision of the Loan
Agreement, or any other documents, instruments or
agreements executed and/or delivered thereunder or in
connection therewith.
This letter may be executed by the parties hereto
in one or more counterparts, each of which shall be
deemed an original and all of which taken together
shall constitute one and the same agreement. Any
signature delivered by a party by facsimile
transmission shall be deemed to be an original
signature hereto.
Very truly yours,
THE BANK OF NEW YORK COMMERCIAL
CORPORATION
By: /s/Robert Nuytkens
Its: V.P.
CONSENTED AND AGREED TO:
GENERAL BEARING CORPORATION, as a
Borrower and a Guarantor
By: /s/David Gussack
Its: President
HYATT RAILWAY PRODUCTS CORP., as a
Borrower and a Guarantor
By: /s/David Gussack
Its: V.P.
FISCO INDUSTRIES, LTD., as a Guarantor
By: /s/David Gussack
Its: President
/s/ David Gussack
--------------------------------
David Gussack, Limited Guarantor
WORLD MACHINERY COMPANY, as Pledgor
By: /s/David Gussack
Its: Treasures, Director
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<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-28-1996
<PERIOD-END> DEC-28-1996
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